Registration Nos. 33-88792
811-8960
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 5 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 7 [X]
(Check appropriate box or boxes.)
LPT VARIABLE INSURANCE SERIES TRUST
__________________________________________________
(Exact name of registrant as specified in charter)
1755 Creekside Oaks Drive
Sacramento, CA 95833
________________________________________ __________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (916) 641-4200
George Nicholson
London Pacific Life and Annuity Company
3109 Poplarwood Court
Raleigh, North Carolina 27604
(Name and Address of Agent For Service)
Copies to:
Raymond A. O'Hara III, Esq.
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
It is proposed that this filing will become effective (Check appropriate
space):
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
__X__ on May 1, 1998 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
_____ This post-effective amendment designates a new effective date
for a previously filed post-effective amendment
Title of Securities Being Registered:
Investment Company Shares
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LPT VARIABLE INSURANCE SERIES TRUST
CROSS REFERENCE SHEET
(as required by rule 404(c))
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PART A
N-1A
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Item No. Location
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1. Cover Page......................... Cover Page
2. Synopsis........................... Not Applicable
3. Condensed Financial Information.... Financial Highlights
4. General Description of Registrant.. Cover Page; Investment
Objectives and Policies;
Additional Information
5. Management of the Fund............. Management of the Trust;
Additional Information
6. Capital Stock and Other Securities. Sales and Redemptions;
Net Asset Value; Tax Status,
Dividends and Distributions;
Additional Information
7. Purchase of Securities Being
Offered....................... Net Asset Value; Sales and
Redemptions
8. Redemption or Repurchase........... Sales and Redemptions;
Net Asset Value
9. Pending Legal Proceedings.......... Not Applicable
PART B
10. Cover Page......................... Cover Page
11. Table of Contents.................. Cover Page
12. General Information and History.... Not Applicable
13. Investment Objectives and Policies. Investment Objectives and
Policies of the Trust;
Investment Restrictions;
Portfolio Turnover
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CROSS REFERENCE SHEET (cont'd)
(as required by rule 404(c))
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N-1A
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Item No. Location
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14. Management of the Fund............. Management of the Trust
15. Control Persons and Principal
Holders of Securities......... Management of the Trust
16. Investment Advisory and Other
Services...................... Management of the Trust;
Independent Accountants;
Custodian
17. Brokerage Allocation and
Other Practices.............. Management of the Trust
(Brokerage and Research
Services)
18. Capital Stock and Other Securities. Sales and Redemptions (Part A);
Net Asset Value (Part A); Tax
Status, Dividends and Distribu-
tions (Part A); Organization and
Capitalization; Additional
Information (Part A)
19. Purchase, Redemption and Pricing of
Securities Being Offered...... Determination of Net Asset
Value; Sales and Redemptions
(Part A)
20. Tax Status......................... Taxes; Dividends and
Distributions
21. Underwriters....................... Not Applicable
22. Calculation of Performance Data.... Performance Information
23. Financial Statements............... Financial Statements
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PART C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of the Registration Statement.
PART A
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
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PAGE
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FINANCIAL HIGHLIGHTS......................................................................... 1
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS....................................... 2
Investment Objectives 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.......................................... 4
Securities Loans and Repuredose Agreements............................................... 5
Borrowing................................................................................ 5
Defensive Strategies..................................................................... 5
MANAGEMENT OF THE TRUST...................................................................... 5
Investment Adviser....................................................................... 5
Expense Reimbursement.................................................................... 6
Sub-Adviser.............................................................................. 6
Sub-Advisory Fees........................................................................ 6
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 (a) (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
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TOTAL RETURN ++ 19.12% 2.42%
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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 for the period February 9, 1996 (effective date) to December 31,
1996, respectively. The total return would have been lower if certain expenses
had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid on
shares traded.
(a) Based on the average of the 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.
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See Notes to Financial Statements
INVESTMENT OBJECTIVE, POLICIES AND RISK CONSIDERATIONS
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Robertson Stephens Diversified Growth Portfolio is not fundamental and
may be changed without the approval of a majority of the outstanding shares of
the Portfolio. 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.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO ADVISORY FEE
- --------- ------------
Robertson Stephens Diversified Growth Portfolio .95% of first $10 million of average daily
net assets
.90% of the next $25 million of average
daily net assets
.85% of the next $165 million of average
daily net assets
.80% of average daily net assets over and
above $200 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
- --------- ----------------
Robertson Stephens Diversified Growth Portfolio .70% of first $10 million of average daily
net assets
.65% of the next $25 million of average
daily net assets
.60% of the next $165 million of average
daily net assets
.55% of average daily net assets over and
above $200 million
</TABLE>
ALLOCATION OF PORTFOLIO TRANSACTIONS. Neither the Adviser nor the Sub-Adviser
has any agreement or commitment to place orders with any particular securities
dealer or dealers with respect to the Portfolio. In placing orders for the
Portfolio's investment transactions, the Sub-Adviser seeks the best net results,
analyzing such factors as price, size of order, difficulty of execution and the
operational capabilities of the firm involved. Prior to making an investment,
the Sub-Adviser performs considerable research on the specified company and
country. In underwritten offerings, securities are usually purchased at a fixed
price which includes an amount of compensation to the underwriter. On occasion,
securities may be purchased directly from an issuer, in which case there are no
commissions or discounts. Dealers may receive commissions on futures, currency
and options transactions. Commissions on trades made through foreign securities
exchanges or OTC markets typically are fixed and generally are higher than those
made through United States securities exchanges or OTC markets.
Consistent with its obligation to obtain the best net results, the Sub-Adviser
may consider research and brokerage services provided by the securities
broker-dealer as a factor in considering through whom portfolio transactions
will be effected. The Portfolio may pay to those securities broker-dealers who
provide brokerage and research services to the Sub-Adviser a higher commission
than that charged by other securities broker-dealers if the Sub-Adviser
determines in good faith that the amount of the commission is reasonable in
relation to the value of those services in terms either of the particular
transaction, or in terms of the overall responsibility of the Sub-Adviser to the
Portfolio and to any other accounts over which the Sub-Adviser exercises
investment discretion.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Sub-Adviser. If a purchase or sale
of securities consistent with the investment policies of the Portfolio and one
or more of these other clients served by the Sub-Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Sub-Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Sub-Adviser, and the results of such
allocations, are subject to periodic review by the Trust's Trustees.
PORTFOLIO TURNOVER. The length of time the Portfolio has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the Portfolio may lead to frequent changes in the
Portfolio's investments, particularly in periods of volatile market movements. A
change in the securities held by the Portfolio is known as "portfolio turnover."
Portfolio turnover generally involves some expense to the Portfolio, including
brokerage commissions or dealer mark-ups and other transaction costs on the sale
of securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains. High rates of portfolio turnover
necessarily result in correspondingly greater brokerage and portfolio trading
costs, which are paid by the Portfolio. The portfolio turnover rate for the
Portfolio for the 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 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 DECEMBER 31, 1997
<S> <C>
FEBRUARY 9, 1996 TO
PORTFOLIO ONE YEAR DECEMBER 31,1997
--------- --------------- ----------------
Robertson Stephens Diversified Growth Portfolio,
formerly Berkeley Smaller Companies Portfolio 19.12% 11.07%
Standard & Poor's 500 Stock Index 33.36% 25.42%
Russel1 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.
COMPARABLE PUBLIC FUND PERFORMANCE. The Robertson Stephens Diversified Portfolio
has a substantially similar investment objective and follows substantially the
same investment strategies as The Robertson Stephens Diversified Growth Fund of
the Robertson Stephens Mutual Funds, a mutual fund whose shares are sold to the
public. The Sub-Adviser for the Robertson Stephens Diversified Growth Portfolio
is the investment adviser of The Robertson Stephens Diversified Growth Fund of
the Robertson Stephens Mutual Funds.
Set forth below is the historical performance of The Robertson Stephens
Diversified Growth Fund. Investors should not consider this performance data as
an indication of the future performance of the Robertson Stephens Diversified
Growth Portfolio. The performance figures shown below reflect the deduction of
the historical fees and expenses paid by The Robertson Stephens Diversified
Growth Fund, and not those to be paid by the Portfolio. The figures also do not
reflect the deduction of any insurance fees or charges which are imposed by the
Life Company in connection with its sale of VA Contracts. Investors should refer
to the separate account prospectus describing the VA Contracts for information
pertaining to these insurance fees and charges. The insurance separate account
fees will have a detrimental effect on the performance of the Portfolio.
Additionally, although it is anticipated that the Portfolio and its
corresponding public fund series will hold similar securities, their investment
results are expected to differ. In particular, differences in asset size and in
cash flow resulting from purchases and redemptions of Portfolio shares may
result in different security selections, differences in the relative weightings
of securities or differences in the price paid for particular portfolio
holdings. The results shown reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by the
Robertson Stephens Diversified Growth Portfolio to calculate its own
performance.
The following table shows the average annualized total return for the one year
period 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 Russel1 2000 Small Company Index, an unmanaged index of
2000 small company stocks.
<TABLE>
<CAPTION>
<S> <C> <C>
Fund One Year Since Inception
- ---------------------------------- --------- ---------------
The Robertson Stephens Diversified 29.55% 39.82%
Growth Fund
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. 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
<S> <C>
Page
----
FINANCIAL HIGHLIGHTS......................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES............................................................ 2
COMMON TYPES OF SECURITIES AND MANAGEMENT PRACTICES.......................................... 3
Asset Backed Securites................................................................... 3
Borrowing................................................................................ 3
Lending.................................................................................. 3
Cash Position............................................................................ 4
Fixed Income Securities.................................................................. 4
Foregin Securities....................................................................... 4
Futures and Options...................................................................... 4
Illiquid Securites....................................................................... 4
Hybird Instruments....................................................................... 4
Mortgage - Backed Securites ............................................................. 4
Adjustable Rate Mortgage Securities...................................................... 5
Privately -Issued Mortgage Securities.................................................... 5
Collateralized Mortgage Obligations...................................................... 5
Mortgage Rolls........................................................................... 6
Portfolio Turnover....................................................................... 6
Repurchase Agreements and Reverse Repurchase Agreements.................................. 6
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......................................... 7
Hybrid Instruments........................................................................ 8
When-Issued Securities.................................................................... 8
MANAGEMENT OF THE TRUST...................................................................... 8
Investment Adviser........................................................................ 8
Expense Reimbursement..................................................................... 9
Sub-Adviser............................................................................... 9
Sub-Advisory Fees......................................................................... 9
SALES AND REDEMPTIONS........................................................................ 10
NET ASSET VALUE.............................................................................. 10
PERFORMANCE INFORMATION...................................................................... 10
Performance of the Portfolio.............................................................. 11
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS..................................................... 11
ADDITIONAL INFORMATION....................................................................... 12
APPENDIX A - RATINGS OF INVESTMENTS.......................................................... A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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 (a) 0.58 0.49
Net realized and unrealized gain (loss) on
Investments 0.34 (0.25)
-------- --------
Total from investment operations 0.92 0.24
-------- --------
LESS DISTRIBUTIONS:
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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(a) Based on the average of the 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>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Berkeley U.S. Quality Bond Portfolio is not fundamental and may be
changed without the approval of a majority of the outstanding shares of the
Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that, under normal circumstances, at least 65% of
such Portfolio's assets will be invested as indicated. A description of the
ratings systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in Appendix A: Moody's Investors Service,
Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"). New instruments,
strategies and techniques, however, are evolving continually and the Portfolio
reserves authority to invest in or implement them to the extent consistent with
its investment objectives and policies. If new instruments, strategies or
techniques would involve a material change to the information contained herein,
they will not be purchased or implemented until this Prospectus is appropriately
supplemented.
The investment objective of the Portfolio is to obtain a high level of current
income. It is a diversified Portfolio that seeks to attain its objective by
investing primarily in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities including
collateralized mortgage obligations backed by such securities. The Portfolio may
also invest a portion of its assets in investment grade bonds.
At least 65% of the total assets of the Portfolio will be invested in:
(1) U.S. Treasury obligations;
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government which are backed by their own credit and may not be backed
by the full faith and credit of the U.S. Government;
(3) mortgage-backed securities guaranteed by the Government National Mortgage
Association that are supported by the full faith and credit of the U.S.
Government and mortgage-backed securities guaranteed by agencies or
instrumentalities of the U.S. Government which are supported by their own
credit but not the full faith and credit of the U.S. Government, such as
the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association; and
(4) collateralized mortgage obligations issued by private issuers for which the
underlying mortgage-backed securities serving as collateral are backed (i)
by the credit alone of the U.S. Government agency or instrumentality which
issues or guarantees the mortgage-backed securities, or (ii) by the full
faith and credit of the U.S. Government.
Any guarantee of these types of securities in which the Portfolio invests runs
only to the principal and interest payments on the securities and not to the
market value of such securities or to the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the Portfolio and not to the purchase of shares of the
Portfolio.
From time to time, a significant portion of the Portfolio's assets may be
invested in mortgage-backed securities. The mortgage-backed securities in which
the Portfolio invests represent participating interests in pools of fixed rate
and adjustable rate residential mortgage loans issued or guaranteed by agencies
or instrumentalities of the U.S. Government. Mortgage-backed securities are
issued by lenders such as mortgage bankers, commercial banks and savings and
loan associations. Mortgage-backed securities generally provide monthly payments
which are, in effect, a "pass-through" of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans. Principal prepayments result from the sale of the
underlying property or the refinancing or foreclosure of underlying mortgages.
The yield of mortgage-backed securities is based upon the prepayment rates of
the underlying pool of mortgage loans. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestment by the Portfolio of scheduled
principal payments and unscheduled prepayments may occur at higher or lower
rates than the original investment, thus affecting the yield of the Portfolio.
Monthly interest payments received by the Portfolio have a compounding effect
which will increase the yield to shareholders as compared to debt obligations
that pay interest semi-annually.
While the Portfolio seeks a high level of current income, it cannot invest in
instruments such as lower grade corporate obligations which offer higher yields
but are subject to greater credit risks. The Portfolio will not knowingly invest
in a high risk mortgage security. The term "high risk mortgage security" is
defined generally as any mortgage security that exhibits significantly greater
price volatility than a benchmark security, the Federal National Mortgage
Association current coupon 30-year mortgage-backed pass through security. Shares
of the Portfolio are neither insured nor guaranteed by the U.S. Government, its
agencies or instrumentalities. Neither the issuance by nor the guarantee of a
U.S. Government agency for a security constitutes assurance that the security
will not significantly fluctuate in value or that the Portfolio will receive the
originally anticipated yield on the security.
The Portfolio may also invest up to 35% of its assets in U.S. dollar-denominated
securities rated AAA, AA, A or BBB by S&P or Aaa, Aa, A or Baa by Moody's, or if
unrated, determined to be of comparable quality to securities in those ratings
categories by the Sub-Adviser. The Portfolio may not invest more than 10% of
total assets in obligations of foreign issuers. Investments in foreign
securities will subject the Portfolio to special considerations related to
political, economic and legal conditions outside of the U.S., as discussed under
the "Investment Risks" section. These considerations include the possibility of
expropriation, nationalization, withholding taxes on income and difficulties in
enforcing judgments. Foreign securities may be less liquid and more volatile
than comparable U.S. securities.
The Portfolio may enter into repurchase and reverse repurchase agreements,
purchase securities on a firm commitment basis, including when-issued
securities, and lend portfolio securities. The Portfolio may also enter into
mortgage "dollar rolls." For a description of these investment practices and the
risks associated with them, see "Common Types of Securities and Management
Practices" and "Investment Risks."
COMMON TYPES OF SECURITIES AND MANAGEMENT PRACTICES
This section takes a detailed look at some of the types of securities the
Portfolio may hold in its portfolio and the various kinds of investment
practices that may be used in day-to-day portfolio management. The Portfolio's
investment program is subject to further restrictions described in the SAI.
ASSET-BACKED SECURITIES. The Portfolio may invest in asset-backed securities.
These securities are subject to prepayment risk, that is, the possibility that
prepayments on the underlying loans will cause the principal and interest on the
asset-backed securities to be paid prior to their stated maturities. The
Sub-Adviser will consider estimated prepayment rates in calculating the average
weighted maturities of the Portfolio. Unscheduled prepayments are more likely to
accelerate during periods of declining long-term interest rates. In the event of
a prepayment during a period of declining interest rates, the Portfolio may be
required to invest the unanticipated proceeds at a lower interest rate.
Prepayments during such periods will also limit the Portfolio's ability to
participate in as large a market gain as may be experienced with a comparable
security not subject to prepayment.
BORROWING. The Portfolio may borrow money from banks for temporary or emergency
purposes and engage in certain transactions, such as reverse repurchase
agreements or mortgage "dollar rolls", which may be considered borrowings, in
amounts up to 25% of its total assets. To secure borrowings the Portfolio may
mortgage or pledge securities in amounts up to 15% of its net assets. Borrowing
creates an opportunity for increased return, but, at the same time, creates
special risks. For example, borrowing may exaggerate changes in the net asset
value of the Portfolio's shares and in the return on the Portfolio's
investments. Although the principal of any borrowing will be fixed, the
Portfolio's assets may change in value during the time the borrowing is
outstanding. The Portfolio may be required to liquidate portfolio securities at
a time when it would be disadvantageous to do so in order to make payments with
respect to any borrowing, which could affect the Sub-Adviser's strategy and the
ability of the Portfolio to comply with certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in order to provide "pass-through"
tax treatment to shareholders. Furthermore, if the Portfolio were to engage in
borrowing, an increase in interest rates could reduce the value of the
Portfolio's shares by increasing the Portfolio's interest expense.
LENDING. In addition, the Portfolio may from time to time lend portfolio
securities to attempt to increase income through the receipt of interest on the
loan of portfolio securities. Loans of portfolio securities involve certain
risks, including the risk that the Portfolio could experience delays in
recovering the securities it lent in the event of the bankruptcy of the
borrower. As a fundamental policy, the Portfolio will not lend securities or
other assets if, as a result, more than 25% of its total assets would be lent to
other parties.
CASH POSITION. The Portfolio may hold a certain portion of its assets in money
market securities, including short-term U.S. Government securities, commercial
paper, bank obligations and repurchase agreements with a counterparty rated in
one of the two highest rating categories by an NRSRO, maturing in one year or
less. For temporary, defensive purposes, the Portfolio may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments, and serves as
a short-term defense during periods of unusual market volatility.
FIXED INCOME SECURITIES. The Portfolio may invest in fixed income securities.
Such securities would be purchased in companies which meet the investment
criteria for the Portfolio. The market value of fixed-income obligations held by
the Portfolio and, consequently, the net asset value per share of the Portfolio
can be expected to vary inversely to changes in prevailing interest rates.
Investors should also recognize that, in periods of declining interest rates,
the yields of the fixed-income Portfolio will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, the
fixed-income Portfolio's yields will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to the Portfolio from
the continuous sales of shares will likely be invested in instruments producing
lower yields than the balance of the Portfolio's assets, thereby reducing
current yields. In periods of rising interest rates, the opposite can be
expected to occur. Prices of longer-term securities generally increase or
decrease more sharply than those of shorter-term securities in response to
interest rate changes. In addition, obligations purchased by the Portfolio that
are rated in the lower of the top four ratings (Baa by Moody's or BBB by S&P)
are considered to have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher-grade
securities.
FOREIGN SECURITIES. The Portfolio, subject to its investment restrictions, may
invest in foreign securities. Such investments increase the Portfolio's
diversification and may enhance return, but they also involve some special risks
such as exposure to potentially adverse local political and economic
developments; nationalization and exchange controls; potentially lower liquidity
and higher volatility; and possible problems arising from accounting,
disclosure, settlement, and regulatory practices that differ from U.S.
standards.
FUTURES AND OPTIONS. Futures are often used to manage risk, because they enable
the investor to buy or sell an asset in the future at an agreed upon price.
Options give the investor the right, but not the obligation, to buy or sell an
asset at a predetermined price in the future. The Portfolio may buy and sell
futures contracts (and options on such contracts) to manage its exposure to
changes in securities prices and as a means of adjusting overall exposure to
certain markets. Subject to certain limits described in the SAI, the Portfolio
may purchase, sell, or write call and put options on securities and financial
indices and may invest in futures contracts on financial indices, including
interest rates or an index of U.S. Government securities, foreign government
securities or fixed income securities.
Futures contracts and options may not always be successful hedges; their prices
can be highly volatile; using them could lower the Portfolio's total return; and
the potential loss from the use of futures can exceed the Portfolio's initial
investment in such contracts. These instruments may also be used for non-hedging
purposes such as increasing the Portfolio's income.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net assets in
securities that are considered illiquid because of the absence of a readily
available market or due to legal or contractual restrictions. However, certain
restricted securities that are not registered for sale to the general public but
that can be resold to institutional investors ("Rule 144A Securities") may not
be considered illiquid, provided that a dealer or institutional trading market
exists. The institutional trading market is relatively new and liquidity of the
Portfolio's investment could be impaired if trading does not further develop or
declines. The Portfolio will determine the liquidity of Rule 144A Securities
under guidelines approved by the Trustees.
HYBRID INSTRUMENTS. These instruments can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency or securities index. Such securities may bear interest or
pay dividends at below market (or even relatively nominal) rates. Under certain
conditions, the redemption value of such an investment could be zero. Hybrids
can have volatile prices and limited liquidity and their use by the Portfolio
may not be successful.
MORTGAGE-BACKED SECURITIES. The yield characteristics of the mortgage-backed
securities in which the Portfolio may invest differ from those of traditional
debt securities. Among the major differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans generally may be prepaid at any time. As a result, if these
securities are purchased at a premium, faster than expected prepayments will
reduce yield to maturity, while slower than expected prepayments will increase
yield to maturity. Conversely, if these securities are purchased at a discount,
faster than expected prepayments will increase yield to maturity, while slower
than expected prepayments will reduce yield to maturity. Accelerated prepayments
on securities purchased at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full. Because of the reinvestment of prepayments of principal at
current rates, mortgage-backed securities may be less effective than Treasury
bonds of similar maturity at maintaining yields during periods of declining
interest rates. When interest rates rise, the value and liquidity of
mortgage-backed securities may decline sharply and generally will decline more
than would be the case with other fixed-income securities; however, when
interest rates decline, the value of mortgage-backed securities may not increase
as much as other fixed-income securities due to the prepayment feature. Certain
market conditions may result in greater than expected volatility in the prices
of mortgage-backed securities. For example, in periods of supply and demand
imbalances in the market for such securities and/or in periods of sharp interest
rate movements, the prices of mortgage-backed securities may fluctuate to a
greater extent than would be expected from interest rate movements alone. For a
description of multiple class mortgage pass-through securities, see
"Collateralized Mortgage Obligations and Multiclass Pass-Through Securities"
below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent interests
in mortgage loans with variable rates of interest. These variable rates of
interest reset periodically to align themselves with market rates. The Portfolio
will not benefit from increases in interest rates to the extent that interest
rates rise to the point where they cause the current coupon of the underlying
adjustable rate mortgages to exceed any maximum allowable annual or lifetime
reset limits (or "cap rates") for a particular mortgage. In this event, the
value of the mortgage securities in the Portfolio would likely decrease. Also,
the Portfolio's net asset value could vary to the extent that current yields on
adjustable rate mortgage securities are different than market yields during
interim periods between coupon reset dates or if the timing of changes to the
index upon which the rate for the underlying mortgages is based lags behind
changes in market rates. During periods of declining interest rates, income to
the Portfolio derived from adjustable rate mortgages which remain in a mortgage
pool will decrease in contrast to the income on fixed rate mortgages, which will
remain constant. Adjustable rate mortgages also have less potential for
appreciation in value as interest rates decline than do fixed rate investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES. The Portfolio may also purchase
mortgage-backed securities issued by private issuers which may entail greater
risk than mortgage-backed securities that are guaranteed by the U.S. Government,
its agencies or instrumentalities. Privately-issued mortgage securities are
issued by private originators of, or investors in, mortgage loans, including
mortgage bankers, commercial banks, investment banks, savings and loan
associations and special purpose subsidiaries of the foregoing. Since
privately-issued mortgage certificates are not guaranteed by an entity having
the credit status of GNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected. There can be no assurance
that the private issuers or credit enhancers of mortgage-backed securities can
meet their obligations under the relevant policies or other forms of credit
enhancement. Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class securities
with one or more classes subordinate to other classes as to the payment of
principal thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class),
creation of "reserve funds" (where cash or investments sometimes funded from a
portion of the payments on the underlying assets are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
COLLATERALIZED MORTGAGE OBLIGATIONS. 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>
<S> <C>
PORTFOLIO ADVISORY FEE
- --------- ------------
Berkeley U.S. Quality Bond Portfolio .55% of first $50 million of average daily
net assets
.525% of next $100 million of average
daily net assets
.50% of next $150 million of average daily
net assets
.45% of next $200 million of average daily
net assets
.425% of average daily net assets over and
above $500 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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, 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 (ranging from small capitalization to large
capitalization companies), a full range of fixed income securities, and asset
allocation strategies. The Sub-Adviser is a wholly-owned subsidiary of the
London Pacific Group Limited, a corporation listed on the London Stock Exchange
and the NASDAQ market system with a market valuation of approximately $210
million. The London Pacific Group, 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 manager for the Portfolio is William F. Cox who has been a
portfolio manager with the Sub-Adviser since 1992. From 1988 to July 1992, he
was employed as Manager, Financial Analysis Unit of the Office of Thrift and
Supervision.
SUB-ADVISORY FEES. Under the terms of the Sub-Advisory Agreement, the Adviser
shall pay to the Sub-Adviser, as full compensation for services rendered under
the Sub-Advisory Agreement with respect to the Portfolio, monthly fees at the
following annual rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
- --------- ----------------
Berkeley U.S. Quality Bond Portfolio .30% of first $50 million of average daily
net assets
.275% of next $100 million of average
daily net assets
.25% of next $150 million of average daily
net assets
.20% of next $200 million of average daily
net assets
.175% of average daily net assets over and
above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of the Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. Eastern Standard
time, such purchases and redemptions of shares of each Portfolio are effected at
the respective net asset values per share determined as of 4:00 p.m. New York
time on that day. See "Net Asset Value", below and "Determination of Net Asset
Value" in the Trust's SAI. Payment for redemptions will be made within seven
days after receipt of a redemption request in good order. No fee is charged the
separate account of the Life Company when it redeems Portfolio shares. The Trust
may suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of the Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
The Portfolio calculates the net asset value of its shares by dividing the total
value of its assets (the securities held by the Portfolio, plus any cash or
other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of the close of trading on the New York Stock Exchange (usually
considered 4:00 p.m. Eastern Time) each day the New York Stock Exchange is open
("Business Days"). Portfolio securities for which market quotations are readily
available are stated at market value. Short-term investments that will mature in
60 days or less are valued using amortized cost, which the Trust's Board of
Trustees has determined approximates market value. Amortized cost valuation
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. All
other securities and assets are valued at their fair value following procedures
approved by the Trust's Board of Trustees. See "Determination of Net Asset
Value" in the SAI for a description of the special valuation procedures for
options and futures contracts.
Certain Portfolios of the Trust are expected to invest in foreign securities
listed on foreign stock exchanges or debt securities of the United States and
foreign governments and corporations. Some of these securities trade on days
other than Business Days, as defined above.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closing of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the Portfolio. If an event materially
affecting the value of such foreign securities occurs during such period of
which a Sub-Adviser becomes aware, then such securities will be valued at fair
value as determined in good faith, or in accordance with procedures adopted, by
the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for the Portfolio may be presented from time to time in
advertisements and sales literature. The Portfolio may advertise several types
of performance information. These are the "yield," "average annual total return"
and "aggregate total return". Each of these figures is based upon historical
results and is not necessarily representative of the future performance of the
Portfolio.
The yield of the Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in the
value of an investment in the Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one, five and ten
year periods ending on a recent calendar quarter (or if such periods have not
yet elapsed, at the end of a shorter period corresponding to the life of the
Portfolio). Average annual total return figures are annualized and, therefore,
represent the average annual percentage change over the period in question.
Total return figures are not annualized and represent the aggregate percentage
or dollar value change over the period in question. For more information
regarding the computation of yield, average annual total return and aggregate
total return, see "Performance Information" in the SAI.
The Portfolio's performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust which
will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned the Portfolio or its Sub-Adviser
by various publications and statistical services, including, for example, SEI,
Lipper Analytical Services Mutual Funds Survey, Lipper Variable Insurance
Products Performance Analysis Service, Morningstar, Intersec Research Survey of
Non-U.S. Equity Fund Returns, Frank Russell International Universe, Kiplinger's
Personal Finance, and Financial Services Week. Any such comparisons or rankings
are based on past performance and the statistical computation performed by
publications and services, and are not necessarily indications of future
performance. Because the Portfolios are managed investment vehicles investing in
a wide variety of securities, the securities owned by a Portfolio will not match
those making up an index.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return 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 DECEMBER 31, 1997
FEBRUARY 9, 1996 TO
PORTFOLIO ONE YEAR DECEMBER 31, 1997
--------- ------------------ ------------------------------
<S> <C> <C>
Berkeley U.S. Quality Bond Portfolio 9.45% 6.14%
(formerly, Salomon U.S. Quality Bond
Portfolio)
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.
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.
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 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
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS........................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES........................................................... 2
INVESTMENT LIMITATIONS...................................................................... 4
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS........................................... 5
Bank Obligations......................................................................... 5
Repurchase Agreements.................................................................... 5
Firm Commitments and When-Issued Securities.............................................. 5
Restricted Securities and Securities with Limited Trading Markets........................ 5
Foreign Securities....................................................................... 5
Borrowing................................................................................ 6
Portfolio Turnover....................................................................... 6
MANAGEMENT OF THE TRUST..................................................................... 6
Investment Adviser....................................................................... 6
Expense Reimbursement.................................................................... 7
Sub-Adviser.............................................................................. 7
Sub-Advisory Fees........................................................................ 7
SALES AND REDEMPTIONS....................................................................... 8
NET ASSET VALUE............................................................................. 8
PERFORMANCE INFORMATION..................................................................... 8
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS.................................................... 9
ADDITIONAL INFORMATION...................................................................... 9
APPENDIX A - RATINGS OF INVESTMENTS......................................................... A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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 (a) 0.05 0.04
Net realized and unrealized gain (loss) on
Investments 0.00 0.00
------------- ------------
Total from investment operations 0.05 0.04
------------- ------------
LESS DISTRIBUTIONS:
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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(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>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Berkeley Money Market Portfolio is not fundamental and may be changed
without the approval of a majority of the outstanding shares of the Portfolio.
All other investment policies or limitations, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. There is no assurance that the Portfolio
will achieve its objective. A complete list of investment restrictions,
including those restrictions which cannot be changed without shareholder
approval, is contained in the SAI. United States Treasury Regulations applicable
to portfolios that serve as the funding vehicles for variable annuity and
variable life insurance contracts generally require that such portfolios invest
no more than 55% of the value of their assets in one investment, 70% in two
investments, 80% in three investments, and 90% in four investments. The
Portfolio intends to comply with the requirements of these Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. A description of the ratings systems used by the following
nationally recognized statistical rating organizations ("NRSROs") is contained
in Appendix A: Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P"). New instruments, strategies and techniques, however, are
evolving continually and the Portfolio reserves authority to invest in or
implement them to the extent consistent with its investment objectives and
policies. If new instruments, strategies or techniques would involve a material
change to the information contained herein, they will not be purchased or
implemented until this Prospectus is appropriately supplemented. The investment
objective of the Portfolio is to seek as high a level of current income as is
consistent with liquidity and the stability of principal. The Portfolio invests
in high-quality, short-term U.S. dollar-denominated money market instruments
which are deemed to mature in thirteen months or less, and is managed so that
the average portfolio maturity of all portfolio instruments (on a
dollar-weighted basis) will not exceed 90 days. The Portfolio will be
"diversified" within the meaning of the Investment Company Act of 1940 ("1940
Act"), and will seek to maintain a stable net asset value of $1.00 per share.
The types of obligations in which the Portfolio may invest include the
following:
- - Securities issued or guaranteed by the U.S. Government or by agencies or
instrumentalities thereof;
- - Obligations issued or guaranteed by U.S. and foreign banks ("Bank
Obligations");
- - Commercial paper;
- - Corporate debt obligations, including variable rate obligations;
- - Short-term credit facilities;
- - Asset-backed securities; and
- - Other money market instruments;
The Portfolio will limit its portfolio investments to securities that are
determined by the Sub-Adviser to present minimal credit risks pursuant to
guidelines established by the Portfolio's Board of Trustees and which are
"Eligible Securities" at the time of acquisition by the Portfolio. The term
"Eligible Securities" includes securities rated by the "Requisite NRSROs" in one
of the two highest short-term rating categories, securities of issuers that have
received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (a) any two NRSROs that
have issued a rating with respect to a security or class of debt obligations of
an issuer, or (b) one NRSRO, if only one NRSRO has issued such a rating at the
time that the Portfolio acquires the security. The Portfolio may not invest more
than 5% of its total assets in Eligible Securities that have not received the
highest rating from the Requisite NRSROs and comparable unrated securities
("Second Tier Securities") and may not invest more than the greater of 1% of its
total assets or $1 million in the Second Tier Securities of any one issuer.
The Portfolio may also enter into repurchase agreements with respect to the
obligations identified above. While the maturity of the underlying securities in
a repurchase agreement transaction may be more than thirteen months, the term of
the repurchase agreement will always be less than thirteen months. For a
description of repurchase agreements and their associated risks, see "Additional
Investment Activities and Risk Factors - Repurchase Agreements."
Securities issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
Government agencies and instrumentalities are debt securities issued by agencies
or instrumentalities established or sponsored by the U.S. Government and may be
backed only by the credit of the issuing agency or instrumentality. The
Portfolio will invest in such obligations only where the Sub-Adviser is
satisfied that the credit risk with respect to the issuer is minimal.
Bank Obligations that may be purchased by the Portfolio include certificates of
deposit, commercial paper, bankers' acceptances and fixed time deposits. Fixed
time deposits are obligations of branches of U.S. banks or foreign banks which
are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. For a discussion of the risks associated with investing in bank
obligations, see "Additional Investment Activities and Risk Factors - Bank
Obligations."
The Portfolio's investments in corporate debt securities will consist of
non-convertible corporate debt securities such as bonds and debentures of
domestic issuers that have thirteen months or less remaining to maturity.
The Portfolio may invest in U.S. dollar-denominated securities of non-U.S.
issuers, including obligations of non-U.S. banks or non-U.S. branches of U.S.
banks and commercial paper and other corporate debt securities of non-U.S.
issuers, where the Sub-Adviser deems the instrument to present minimal credit
risks. Investments in non-U.S. banks and non-U.S. issuers present certain risks.
See "Additional Investment Activities and Risk Factors - Foreign Securities."
The Portfolio may also invest in high quality, short-term municipal obligations
that carry yields that are competitive with those of other types of money market
instruments in which the Portfolio may invest.
The Portfolio may invest in floating and variable rate obligations with stated
maturities in excess of thirteen months upon compliance with certain conditions
contained in Rule 2a-7 promulgated under the 1940 Act, in which case such
obligations will be treated, in accordance with Rule 2a-7, as having maturities
not exceeding thirteen months. Floating or variable rate obligations bear
interest at rates that are not fixed, but vary with changes in specified market
rates or indices, such as the prime rate, and at specified intervals. Certain of
the floating or variable rate obligations that may be purchased by the Portfolio
may carry a demand feature that would permit the holder to tender them back to
the issuer at par value prior to maturity. Such obligations include variable
rate master demand notes, which are unsecured instruments issued pursuant to an
agreement between the issuer and the holder that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate.
The Portfolio will limit its purchases of floating and variable rate obligations
to those of the same quality as it otherwise is allowed to purchase. The
Sub-Adviser will monitor on an ongoing basis the ability of an issuer of a
demand instrument to pay principal and interest on demand.
The Portfolio may also invest in variable amount master demand notes. A variable
amount master demand note differs from ordinary commercial paper in that it is
issued pursuant to a written agreement between the issuer and the holder, its
amount may from time to time be increased by the holder (subject to an agreed
maximum) or decreased by the holder or the issuer, it is payable on demand, the
rate of interest payable on it varies with an agreed formula and it is not
typically rated by a rating agency.
The Portfolio may enter into, or acquire participations in, short-term borrowing
arrangements with corporations, consisting of either a short-term revolving
credit facility or a master note agreement payable upon demand. Under these
arrangements, the borrower may reborrow funds during the term of the facility.
The Portfolio treats any commitment to provide such advances as a standby
commitment to purchase the borrower's notes.
The Portfolio may also purchase asset-backed securities. Asset-backed securities
represent defined interests in an underlying pool of assets. Such securities may
be issued as pass-through certificates, which represent undivided fractional
interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral, subordinate
certificates, cash reserve accounts, letters of credit or other enhancements.
Any asset-backed securities held by the Portfolio must comply with its portfolio
maturity and credit quality requirements.
Among the municipal obligations that the Portfolio may invest in are
participation certificates in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively called "lease obligations")
entered into by a State or a political subdivision to finance the acquisition or
construction of equipment, land or facilities. Although lease obligations do not
constitute general obligations of the issuer for which the lessee's unlimited
taxing power is pledged, a lease obligation is frequently backed by the lessee's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "nonappropriation"
clauses which provide that the lessee has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. These securities represent a relatively new
type of financing that has not yet developed the depth of marketability
associated with more conventional securities. Certain investments in lease
obligations may be illiquid. The Portfolio may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 10% of the Portfolio's net assets. The Portfolio may, however,
invest without regard to such limitations in lease obligations which the
Sub-Adviser, pursuant to guidelines which have been adopted by the Board of
Trustees and subject to the supervision of the Board, determines to be liquid.
The Portfolio may purchase securities on a firm commitment basis, including
when-issued securities. See "Additional Investment Activities and Risk Factors -
Firm Commitments and When-Issued Securities" for a description of such
securities and their associated risks.
The foregoing investment policies and activities are not fundamental and may be
changed by the Board of Trustees of the Trust without the approval of
shareholders.
INVESTMENT LIMITATIONS
The following investment restrictions and those described in the SAI are
fundamental policies applicable to the Portfolio which may be changed only when
permitted by law and approved by the holders of a majority of the Portfolio's
outstanding voting securities, as defined in the 1940 Act. Except for the
investment restrictions set forth below and in the SAI, the other policies and
percentage limitations referred to in this Prospectus and in the SAI are not
fundamental policies of the Portfolio and may be changed by the Board of
Trustees of the Trust without shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
The Portfolio may not:
(1) purchase the securities of any one issuer, other than the U.S. Government,
its agencies or instrumentalities, if immediately after such purchase, more
than 5% of the value of the Portfolio's total assets would be invested in
such issuer; provided, however, that such 5% limitation shall not apply to
repurchase agreements collateralized by obligations of the U.S. Government,
its agencies or instrumentalities; and provided, further, that the
Portfolio may invest more than 5% (but no more than 25%) of the value of
the Portfolio's total assets in the securities of a single issuer;
(2) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 15% of the value of its
total assets, except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings (the Portfolio will not purchase any securities at
any time while such borrowings exceed 5% of the value of its total assets);
(3) invest more than 10% of the value of its net assets in securities which are
illiquid, including repurchase agreements having notice periods of more
than seven days, fixed time deposits subject to withdrawal penalties and
having notice periods of more than seven days and receivables-backed
obligations and variable amount master demand notes that are not readily
saleable in the secondary market and with respect to which principal and
interest may not be received within seven days.
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
20% of the value of its total assets, and then only to secure borrowings
permitted by (2) above.
With respect to investment limitation (1), the Portfolio intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) to not more than 5% of the Portfolio's total
assets at the time of purchase, provided that the Portfolio may invest up to 25%
of its total assets in the securities of a single issuer for a period of up to
three business days.
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
BANK OBLIGATIONS. Banks are subject to extensive governmental regulations which
may limit both the amounts and types of loans and other financial commitments
which may be made and interest rates and fees which may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See "Foreign Securities" below. The Portfolio will not purchase
bank obligations which the Sub-Adviser believes, at the time of purchase, will
be subject to exchange controls or foreign withholding taxes; however, there can
be no assurance that such laws may not become applicable to certain of the
Portfolio's investments. In the event unforeseen exchange controls or foreign
withholding taxes are imposed with respect to the Portfolio's investments, the
effect may be to reduce the income received by the Portfolio on such
investments.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements for
cash management purposes. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed upon time and price. Repurchase
agreements may be characterized as loans which are collateralized by the
underlying securities. The Portfolio will enter into repurchase agreements only
with respect to obligations that could otherwise be purchased by the Portfolio.
The Portfolio will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of the
Sub-Adviser based on guidelines established by the Trust's Board of Trustees,
are deemed creditworthy. The Sub-Adviser will monitor the value of the
securities underlying the repurchase agreement at the time the transaction is
entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always equals or exceeds the repurchase
price. The Portfolio requires that additional securities be deposited if the
value of the securities purchased decreases below their resale price and does
not bear the risk of a decline in the value of the underlying security unless
the seller defaults under the repurchase obligation. In the event of default by
the seller under the repurchase agreement, the Portfolio could experience losses
that include: (i) possible decline in the value of the underlying security
during the period which the Portfolio seeks to enforce its rights thereto; (ii)
additional expenses to the Portfolio for enforcing those rights; (iii) possible
loss of all or part of the income or proceeds of the repurchase agreement; and
(iv) possible delay in the disposition of the underlying security pending court
action or possible loss of rights in such securities. Repurchase agreements with
maturities of more than seven days will be treated as illiquid securities by the
Portfolio.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. The Portfolio may purchase
securities on a firm commitment basis, including when-issued securities.
Securities purchased on a firm commitment basis are purchased for delivery
beyond the normal settlement date at a stated price and yield. No income accrues
to the purchaser of a security on a firm commitment basis prior to delivery.
Such securities are recorded as an asset and are subject to changes in value
based upon changes in the general level of interest rates. Purchasing a security
on a firm commitment basis can involve a risk that the market price at the time
of delivery may be lower than the agreed upon purchase price, in which case
there could be an unrealized loss at the time of delivery. The Portfolio will
only make commitments to purchase securities on a firm commitment basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. The Portfolio will establish a
segregated account in which it will maintain liquid assets in an amount at least
equal in value to the Portfolio's commitments to purchase securities on a firm
commitment basis. If the value of these assets declines, the Portfolio will
place additional liquid assets in the account on a daily basis so that the value
of the assets in the account is equal to the amount of such commitments.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. The Portfolio
may purchase securities for which there is a limited trading market or which are
subject to restrictions on resale to the public. Investments in securities which
are "restricted" may involve added expenses to the Portfolio should the
Portfolio be required to bear registration costs with respect to such securities
and could involve delays in disposing of such securities which might have an
adverse effect upon the price and timing of sales of such securities and the
liquidity of the Portfolio with respect to redemptions. Restricted securities
and securities for which there is a limited trading market may be significantly
more difficult to value due to the unavailability of reliable market quotations
for such securities, and investment in such securities may have an adverse
impact on net asset value.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers involves special considerations which are not typically
associated with investing in the securities of U.S. issuers. Investments in
securities of foreign issuers may involve risks arising from restrictions on
foreign investment and repatriation of capital, from differences between U.S.
and foreign securities markets, including less volume, much greater price
volatility in and relative illiquidity of foreign securities markets, different
trading and settlement practices and less governmental supervision and
regulation, from changes in currency exchange rates, from high and volatile
rates of inflation, from economic, social and political conditions and, as with
domestic multinational corporations, from fluctuating interest rates. Other
investment risks include the possible imposition of foreign withholding taxes on
certain amounts of the Portfolio's income, the possible seizure or
nationalization of foreign assets and the possible establishment of exchange
controls, expropriation, confiscatory taxation, other foreign governmental laws
or restrictions which might affect adversely payments due on securities held by
the Portfolio, the lack of extensive operating experience of eligible foreign
subcustodians and legal limitations on the ability of the Portfolio to recover
assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. In addition, there may be less publicly-available
information about a foreign issuer than about a U.S. issuer, and foreign issuers
may not be subject to the same accounting, auditing and financial record-keeping
standards and requirements as U.S. issuers. Finally, in the event of a default
in any such foreign obligations, it may be more difficult for the Portfolio to
obtain or enforce a judgment against the issuers of such obligations.
BORROWING. The Portfolio may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased return,
but, at the same time, creates special risks. For example, borrowing may
exaggerate changes in the net asset value of the Portfolio's shares and in the
return on the Portfolio's investments. Although the principal of any borrowing
will be fixed, the Portfolio's assets may change in value during the time the
borrowing is outstanding. The Portfolio may be required to liquidate portfolio
securities at a time when it would be disadvantageous to do so in order to make
payments with respect to any borrowing, which could affect the Sub-Adviser's
strategy and the ability of the Portfolio to comply with certain provisions of
the Internal Revenue Code of 1986, as amended (the "Code") in order to provide
"pass-through" tax treatment to shareholders. Furthermore, if the Portfolio were
to engage in borrowing, an increase in interest rates could increase the
Portfolio's interest expense.
PORTFOLIO TURNOVER. Purchases and sales of portfolio securities may be made as
considered advisable by the Portfolio's Sub-Adviser in the best interests of the
shareholders. The Portfolio intends to limit portfolio trading to the extent
practicable and consistent with its investment objectives. The Portfolio's
portfolio turnover rate may vary from year to year, as well as within a year.
The Sub-Adviser seeks to enhance the Portfolio's yield by taking advantage of
yield disparities or other factors that occur in the money market. For example,
market conditions frequently result in similar securities trading at different
prices. The Portfolio may dispose of any portfolio security prior to its
maturity if such disposition and reinvestment of the proceeds are expected to
enhance yield consistent with the Sub-Adviser's judgment as to a desirable
portfolio maturity structure or if such disposition is believed to be advisable
due to other circumstances or considerations. Subsequent to its purchase, a
portfolio security may be assigned a lower rating or cease to be rated. Such an
event would not require the disposition of the instrument, but the Sub-Adviser
will consider such an event in determining whether the Portfolio should continue
to hold the security. The policy of the Portfolio regarding dispositions of
portfolio securities and its policy of investing in securities deemed to have
maturities of thirteen months or less will result in high portfolio turnover. A
higher rate of portfolio turnover results in increased transaction costs to the
Portfolio in the form of dealer spreads.
MANAGEMENT OF THE TRUST
INVESTMENT ADVISER:
Under an Investment Advisory Agreement dated January 9, 1996 ("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>
<S> <C>
PORTFOLIO ADVISORY FEE
- --------- ------------
Berkeley Money Market Portfolio .45% of first $50 million of average daily
net assets
.425% of next $100 million of average
daily net assets
.40% of next $150 million of average daily
net assets
.35% of next $200 million of average daily
net assets
.325% of average daily net assets over and
above $500 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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, 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 (ranging from small capitalization to large
capitalization companies), a full range of fixed income securities, and asset
allocation strategies. The Sub-Adviser is a wholly-owned subsidiary of the
London Pacific Group Limited, a corporation listed on the London Stock Exchange
and the NASDAQ market system with a market valuation of approximately $210
million. The London Pacific Group, which manages or administers funds valued at
approximately $7.3 billion (including the assets managed by Berkeley) as of
December 31, 1997, maintains offices in Jersey (Channel Islands), Sacramento,
Raleigh, San Francisco and San Diego.
The portfolio manager for the Portfolio is William F. Cox who has been a
portfolio manager with the Sub-Adviser since 1992. From 1988 to July 1992, he
was employed as Manager, Financial Analysis Unit of the Office of Thrift and
Supervision.
SUB-ADVISORY FEES. Under the terms of the Sub-Advisory Agreement, the Adviser
shall pay to the Sub-Adviser, as full compensation for services rendered under
the Sub-Advisory Agreement with respect to the Portfolio, monthly fees at the
following annual rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
- --------- ----------------
Berkeley Money Market Portfolio .20% of first $50 million of average daily
net assets
.175% of next $100 million of average
daily net assets
.15% of next $150 million of average daily
net assets
.10% of next $200 million of average daily
net assets
.075% of average daily net assets over and
above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. Eastern Standard
time, such purchases and redemptions of shares of each Portfolio are effected at
the respective net asset values per share determined as of 4:00 p.m. New York
time on that day. See "Net Asset Value", below and "Determination of Net Asset
Value" in the Trust's SAI. Payment for redemptions will be made within seven
days after receipt of a redemption request in good order. No fee is charged the
separate account of the Life Company when it redeems Portfolio shares. The Trust
may suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of the Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
The Portfolio calculates the net asset value of its shares by dividing the total
value of its assets (the securities held by the Portfolio, plus any cash or
other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of 12:00 noon (Eastern Time) each day the New York Stock Exchange
is open. The Portfolio uses the amortized cost method to value its portfolio
securities and seeks to maintain a stable net asset value of $1.00 per share.
The amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the impact
of fluctuating interest rates on the market value of the security. See the SAI
for a more complete description of the amortized cost method.
PERFORMANCE INFORMATION
From time to time the Berkeley Money Market Portfolio may make available
information as to its "yield" and "effective yield." The "yield" of the Berkeley
Money Market Portfolio refers to the income generated by an investment in the
Portfolio over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Berkeley Money Market Portfolio is
assumed to be reinvested. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust which
will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of the Portfolio to various indices. Advertisements may also contain
the performance rankings assigned the Portfolio or its Sub-Adviser by various
publications and statistical services, including, for example, SEI, Lipper
Analytical Services Mutual Funds Survey, Lipper Variable Insurance Products
Performance Analysis Service, Morningstar, Intersec Research Survey of Non-U.S.
Equity Fund Returns, Frank Russell International Universe, Kiplinger's Personal
Finance, and Financial Services Week. Any such comparisons or rankings are based
on past performance and the statistical computation performed by publications
and services, and are not necessarily indications of future performance. Because
the Portfolio is a managed investment vehicle investing in a wide variety of
securities, the securities owned by the Portfolio will not match those making up
an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
The Portfolio intends to qualify and elect to be treated as a regulated
investment company that is taxed under the rules of Subchapter M of the Internal
Revenue Code. As such an electing regulated investment company, the Portfolio
will not be subject to federal income tax on its net ordinary income and net
realized capital gains to the extent that at least 90% of net ordinary income
and net short term capital gains are distributed to the separate account of the
Life Company which holds its shares. For further information concerning federal
income tax consequences for the holders of the VA Contracts of the Life Company,
investors should consult the prospectus used in connection with the issuance of
their VA Contracts.
The Portfolio intends to declare as a dividend substantially all of its net
investment income at the close of each business day to the Portfolio's
shareholders of record at 12:00 noon (Eastern Time) on that day, and will pay
such dividends monthly. Net realized short-term capital gains of the Portfolio,
if any, will be distributed whenever the Trustees determine that such
distributions would be in the best interest of shareholders, but in any event at
least once a year. The Portfolio does not expect to realize any long-term
capital gains. Distributions of ordinary income and capital gains will be made
in shares of the Portfolio unless an election is made on behalf of a separate
account to receive distributions in cash. The Life Company will be informed at
least annually about the amount and character of distributions from the Trust
for federal income tax purposes.
ADDITIONAL INFORMATION
The Trust was established as a Massachusetts business trust under the laws of
Massachusetts by a Declaration of Trust dated January 23, 1995, as amended (the
"Declaration of Trust"). Under Massachusetts law, shareholders of such a trust
may, under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with Trust property or the
acts, obligations, or affairs of the Trust. The Declaration of Trust also
provides for indemnification out of a Portfolio's property of any shareholder of
that Portfolio held personally liable for the claims and liabilities to which a
shareholder may become subject by reason of being or having been a shareholder.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Portfolio itself
would be unable to meet its obligations. A copy of the Declaration of Trust is
on file with the Secretary of State of The Commonwealth of Massachusetts.
The Trust has an unlimited authorized number of shares of beneficial interest.
Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) and are freely transferable, and, in liquidation of a
Portfolio, shareholders of the Portfolio are entitled to receive pro rata the
net assets of the Portfolio. Although no Portfolio is required to hold annual
meetings of its shareholders, shareholders have the right to call a meeting to
elect or remove Trustees or to take other actions as provided in the Declaration
of Trust. Shareholders have no preemptive rights.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and Class
B. Each class of shares of a Portfolio is entitled to the same rights and
privileges as all other classes of the Portfolio, provided however, that each
class bears the expenses related to its distribution arrangements, as well as
any other expenses attributable to the class and unrelated to managing the
Portfolio's portfolio securities. Any matter that affects only the holders of a
particular class of shares may be voted on only by such shareholders. Through
this Prospectus, the Trust offers Class A shares in the Portfolio. To date, the
Trust has never offered Class B shares for sale.
The Trust's custodian is State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
APPENDIX A - RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS:
PRIME-1 - Issuers (or related supporting institutions) rated "Prime-1"
have a superior ability for repayment of senior short-term debt
obligations. "Prime-1" repayment ability will often be evidenced
by many of the following characteristics: leading market
positions in well-established industries, high rates of return on
funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad
margins in earnings coverage of fixed financial charges and high
internal cash generation, and well-established access to a range
of financial markets and assured sources of alternate liquidity.
PRIME-2 - Issuers (or related supporting institutions) rated "Prime-2"
have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS:
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The two highest categories are as
follows:
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES:
MIG-1/VMIG-1 - Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior
liquidity support or broad-based access to the market for
refinancing.
MIG-2/VMIG-2 - Notes which are rated MIG-2/VMIG-2 are of high quality.
Margins of protection are ample though not so large as in the
preceding group.
STANDARD & POOR'S RATINGS OF STATE AND MUNICIPAL NOTES:
SP-1 - Notes which are rated SP-1 have a very strong or strong
capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 - Notes which are rated SP-2 have a satisfactory capacity to
pay principal and interest.
FITCH SHORT-TERM RATINGS:
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner. Fitch's short-term ratings are as follows:
F-1+ - Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
F-1 - Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2 - Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not
as great as for issues assigned F-1+ and F-1 ratings.
LOC - The symbol LOC indicates that the rating is based on a
letter of credit issued by a commercial bank.
HARRIS ASSOCIATES VALUE PORTFOLIO
LPT VARIABLE INSURANCE SERIES TRUST
1755 CREEKSIDE OAKS DRIVE
SACRAMENTO, CALIFORNIA 95833
CLASS A SHARES
LPT Variable Insurance Series Trust (the "Trust") is an open-end, series
management investment company which currently offers shares of beneficial
interest of eight series (referred to as the "Portfolios" or individually as the
"Portfolio"), each of which has a different investment objective and represents
the entire interest in a separate portfolio of investments. THIS PROSPECTUS
CONTAINS INFORMATION PERTAINING TO THE HARRIS ASSOCIATES VALUE PORTFOLIO ONLY.
This Portfolio is currently available to the public only through variable
annuity contracts ("VA Contracts") issued by London Pacific Life and Annuity
Company ("Life Company").
Please read this Prospectus carefully before investing in the Harris Associates
Value Portfolio and keep it for future reference. The Prospectus contains
information about the Harris Associates Value Portfolio that a prospective
investor should know before investing.
A Statement of Additional Information ("SAI") dated 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 OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
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..................................................................................... 4
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................................................................................. 7
PERFORMANCE INFORMATION......................................................................... 8
Performance of the Portfolio................................................................ 8
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.
<TABLE>
<CAPTION>
LPT VARIABLE INSURANCE SERIES TRUST
HARRIS ASSOCIATES 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 (a) 0.08 0.10
Net realized and unrealized gain (loss) on
Investments 2.94 2.13
------------ ------------
Total from investment operations 3.02 2.23
------------ ------------
LESS DISTRIBUTIONS:
Dividends from net investment income (0.05) (0.10)
Distributions from net realized capital gains (1.38) (0.27)
------------ ------------
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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(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>
</TABLE>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Harris Associates Value Portfolio is not fundamental and may be changed
without the approval of a majority of the outstanding shares of the Portfolio.
All other investment policies and limitations, unless otherwise specifically
stated, are non-fundamental and may be changed by the Trustees of the Trust
without a vote of the shareholders. There is no assurance that the Portfolio
will achieve its objective. Prior to May 1, 1997, the Harris Associates Value
Portfolio had different investment objectives, policies and restrictions and a
different sub-adviser. A complete list of investment restrictions, including
those restrictions which cannot be changed without shareholder approval, is
contained in the SAI. United States Treasury Regulations applicable to
portfolios that serve as the funding vehicles for variable annuity and variable
life insurance contracts generally require that such portfolios invest no more
than 55% of the value of their assets in one investment, 70% in two investments,
80% in three investments, and 90% in four investments. The Portfolio intends to
comply with the requirements of these Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that under normal circumstances, at least 65% of such
Portfolio's assets will be invested as indicated. A description of the ratings
systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA
Limited and IBCA Inc. New instruments, strategies and techniques, however, are
evolving continually and the Portfolio reserves authority to invest in or
implement them to the extent consistent with its investment objectives and
policies. If new instruments, strategies or techniques would involve a material
change to the information contained herein, they will not be purchased or
implemented until this Prospectus is appropriately supplemented.
HARRIS ASSOCIATES VALUE PORTFOLIO:
OBJECTIVE. To seek long-term capital appreciation by investing primarily in
equity securities. Although income is considered in the selection of securities,
the Portfolio is not designed for investors whose primary investment objective
is income.
HOW THE PORTFOLIO INVESTS. The Portfolio invests principally in securities of
U.S. issuers. However, it may invest up to 25% of its total assets (valued at
the time of investment) in securities of non-U.S. issuers, including foreign
government obligations and foreign equity and debt securities that are traded
over-the-counter or on foreign exchanges. There are no geographic limits on the
Portfolio's foreign investments, but the Portfolio does not expect to invest
more than 5% of its assets in securities of issuers based in emerging markets.
See "Risk Factors - International Investing" below.
INVESTMENT TECHNIQUES
EQUITY SECURITIES. The equity securities in which the Portfolio may invest
include common and preferred stocks and warrants or other similar rights and
convertible securities. The chief consideration in the selection of equity
securities for the Portfolio is the size of the discount of market price
relative to the economic value of the security as determined by the Sub-Adviser.
The Sub-Adviser's investment philosophy for those investments is predicated on
the belief that over time market price and value converge and that investment in
securities priced significantly below long-term value presents the best
opportunity to achieve long-term capital appreciation.
The Sub-Adviser uses several qualitative and quantitative methods in analyzing
economic value, but considers the primary determinant of value to be the
enterprise's long-run ability to generate cash for its owners. Once the
Sub-Adviser has determined that a security is undervalued, the Sub-Adviser will
consider it for purchase by the Portfolio, taking into account the quality and
motivation of the management, the firm's market position within its industry and
its degree of pricing power. The Sub-Adviser believes that the risks of equity
investing are often reduced if management's interests are strongly aligned with
the interests of its stockholders.
DEBT SECURITIES. The Portfolio may invest in debt securities of both
governmental and corporate issuers. The Portfolio may invest up to 25% of its
assets (valued at the time of investment), in debt securities that are rated
below investment grade, without a minimum rating requirement. Lower-grade debt
securities (commonly called "junk bonds") are obligations of issuers rated BB or
lower by S&P or Ba or lower by Moody's. Lower-grade debt securities are
considered speculative and may be in poor standing or actually in default.
Medium-grade debt securities are those rated BBB by S&P or Baa by Moody's.
Securities so rated are considered to have speculative characteristics. See
"Risk Factors." A description of the ratings used by S&P and Moody's is included
as an appendix to the SAI.
SHORT SALES. 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.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
Harris Associates Value Portfolio 1.00% of first $25 million of average
daily net assets
.85% of next $75 million of average daily
net assets
.75% of average daily net assets over and
above $100 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
Harris Associates Value Portfolio .75% of first $25 million of average daily
net assets
.60% of next $75 million of average daily
net assets
.50% of average daily net assets over and
above $100 million
</TABLE>
PORTFOLIO TRANSACTIONS. The Sub-Advisory Agreement authorizes the Sub-Adviser to
select the brokers or dealers that will execute the purchases and sales of
investment securities for the Portfolio and directs the Sub-Adviser to use its
best efforts to obtain the best execution with respect to all transactions for
the Portfolio. In doing so, the Portfolio may pay higher commission rates than
the lowest available when the Sub-Adviser believes it is reasonable to do so in
light of the value of the research, statistical, and pricing services provided
by the broker effecting the transaction.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Sub-Adviser. If a purchase or sale
of securities consistent with the investment policies of the Portfolio and one
or more of these other clients served by the Sub-Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Sub-Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Sub-Adviser, and the results of such
allocations, are subject to periodic review by the Trust's Trustees.
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. Eastern Standard
time, such purchases and redemptions of shares of each Portfolio are effected at
the respective net asset values per share determined as of 4:00 p.m. New York
time on that day. See "Net Asset Value", below and "Determination of Net Asset
Value" in the Trust's SAI. Payment for redemptions will be made within seven
days after receipt of a redemption request in good order. No fee is charged the
separate account of the Life Company when it redeems Portfolio shares. The Trust
may suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of the close of trading on the New York Stock Exchange (usually
considered 4:00 p.m. Eastern Time) each day the New York Stock Exchange is open
("Business Days"). Portfolio securities for which market quotations are readily
available are stated at market value. Short-term investments that will mature in
60 days or less are valued using amortized cost, which the Trust's Board of
Trustees has determined approximates market value. Amortized cost valuation
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. All
other securities and assets are valued at their fair value following procedures
approved by the Trust's Board of Trustees. See "Determination of Net Asset
Value" in the SAI for a description of the special valuation procedures for
options and futures contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other than
Business Days, as defined above. Foreign securities quoted in foreign currencies
are translated into United States dollars at the exchange rates at 1:00 p.m.
Eastern Time or at such other rates as a Sub-Adviser may determine to be
appropriate in computing net asset value. As a result, fluctuations in the value
of such currencies in relation to the United States dollar will affect the net
asset value of a Portfolio's shares even though there has not been any change in
the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closing of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the Portfolios. If an event materially
affecting the value of such foreign securities occurs during such period of
which a Sub-Adviser becomes aware, then such securities will be valued at fair
value as determined in good faith, or in accordance with procedures adopted, by
the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in the
value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one, five and ten
year periods ending on a recent calendar quarter (or if such periods have not
yet elapsed, at the end of a shorter period corresponding to the life of the
Portfolio). Average annual total return figures are annualized and, therefore,
represent the average annual percentage change over the period in question.
Total return figures are not annualized and represent the aggregate percentage
or dollar value change over the period in question. For more information
regarding the computation of yield, average annual total return and aggregate
total return, see "Performance Information" in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust which
will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
and Financial Services Week. Any such comparisons or rankings are based on past
performance and the statistical computation performed by publications and
services, and are not necessarily indications of future performance. Because the
Portfolios are managed investment vehicles investing in a wide variety of
securities, the securities owned by a Portfolio will not match those making up
an index.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the 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 DECEMBER 31, 1997
<S> <C> <C>
FEBRUARY 9, 1996 TO
PORTFOLIO ONE YEAR DECEMBER 31, 1997
- --------- -------- --------------------
Harris Associates Value,
(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>
<S> <C> <C> <C> <C>
SINCE INCEPTION
FUND 1 YEAR 5 YEAR INCEPTION DATE
---- ------ ------ --------- ----
The Oakmark Fund of the Harris
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
<S> <C>
PAGE
FINANCIAL HIGHLIGHTS........................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES........................................................... 2
Temporary Investments.................................................................... 4
Investment Restrictions.................................................................. 4
Repurchase Agreements.................................................................... 5
Investment Risks......................................................................... 5
Portfolio Turnover....................................................................... 5
MANAGEMENT OF THE TRUST..................................................................... 5
Investment Adviser....................................................................... 5
Expense Reimbursement.................................................................... 6
Sub-Adviser.............................................................................. 6
Sub-Advisory Fees........................................................................ 6
SALES AND REDEMPTIONS....................................................................... 7
NET ASSET VALUE............................................................................. 7
PERFORMANCE INFORMATION..................................................................... 8
Performance of the Portfolio............................................................. 8
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 (a) 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 capital gains (0.80) (0.00)
----------- ----------
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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(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>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Lexington Corporate Leaders Portfolio is not fundamental and may be
changed without the approval of a majority of the outstanding shares of the
Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that under normal circumstances, at least 65% of such
Portfolio's assets will be invested as indicated. A description of the ratings
systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), Thomson Bankwatch, Inc., IBCA
Limited and IBCA Inc. New instruments, strategies and techniques, however, are
evolving continually and the Portfolio reserves authority to invest in or
implement them to the extent consistent with its investment objectives and
policies. If new instruments, strategies or techniques would involve a material
change to the information contained herein, they will not be purchased or
implemented until this Prospectus is appropriately supplemented.
The Portfolio's investment objective is to seek long-term capital growth and
income through investment in the common stocks of large, well-established
companies. The Portfolio will seek to maintain an equal number of shares in each
of the companies in which it invests. The companies in which the Portfolio will
invest have a large market capitalization (in excess of $1.0 billion), an
established history of earnings and dividend payments, a large number of
publicly held shares and high trading volume and a high degree of liquidity. The
Portfolio's portfolio will consist substantially of the companies listed in the
Dow Jones Industrial Average (DJIA)*, but the Portfolio is not limited in its
investments to securities in the DJIA and will purchase securities of other
issuers that meet its capitalization, earnings and other criteria for
investment.
The Portfolio's common stock investments will be selected from a list of
approximately 100 "corporate leaders" of commerce and industry, as determined by
the Sub-Adviser. It is expected that all of the common stock held by the
Portfolio will trade on the New York Stock Exchange and will represent dominant
firms in their respective industries.
- ---------------------
* Dow Jones Industrial Average and DJIA are trademarks of Dow Jones &
Company, Inc. The Portfolio is neither sponsored by, nor affiliated with
Dow Jones and Company, Inc.
The current list of "corporate leaders" which may be modified throughout
the year is as follows:
<TABLE>
<CAPTION>
<S>
<C> <C>
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
- -----------------
Fortune 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.
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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
Lexington Corporate Leaders Portfolio .65% of first $10 million of average daily
net assets
.60% of next $90 million of average daily
net assets
.55% of average daily net assets over and
above $100 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
Lexington Corporate Leaders Portfolio .40% of first $10 million of average daily
net assets
.35% of the next $90 million of average
daily net assets
.30% over and above $100 million of
average daily net assets
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. New York time, such
purchases and redemptions of shares of each Portfolio are effected at the
respective net asset values per share determined as of 4:00 p.m. New York time
on that day. See "Net Asset Value", below and "Determination of Net Asset Value"
in the Trust's SAI. Payment for redemptions will be made within seven days after
receipt of a redemption request in good order. No fee is charged the separate
account of the Life Company when it redeems Portfolio shares. The Trust may
suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of the close of trading on the New York Stock Exchange (usually
considered 4:00 p.m. Eastern Time) each day the New York Stock Exchange is open
("Business Days"). Portfolio securities for which market quotations are readily
available are stated at market value. Short-term investments that will mature in
60 days or less are valued using amortized cost, which the Trust's Board of
Trustees has determined approximates market value. Amortized Cost Valuation
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. All
other securities and assets are valued at their fair value following procedures
approved by the Trust's Board of Trustees. See "Determination of Net Asset
Value" in the SAI for a description of the special valuation procedures for
options and futures contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other than
Business Days, as defined above. Foreign securities quoted in foreign currencies
are translated into United States dollars at the exchange rates at 1:00 p.m.
Eastern Time or at such other rates as a Sub-Adviser may determine to be
appropriate in computing net asset value. As a result, fluctuations in the value
of such currencies in relation to the United States dollar will affect the net
asset value of a Portfolio's shares even though there has not been any change in
the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closing of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the Portfolios. If an event materially
affecting the value of such foreign securities occurs during such period of
which a Sub-Adviser becomes aware, then such securities will be valued at fair
value as determined in good faith, or in accordance with procedures adopted, by
the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return." Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in the
value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one, five and ten
year periods ending on a recent calendar quarter (or if such periods have not
yet elapsed, at the end of a shorter period corresponding to the life of the
Portfolio). Average annual total return figures are annualized and, therefore,
represent the average annual percentage change over the period in question.
Total return figures are not annualized and represent the aggregate percentage
or dollar value change over the period in question. For more information
regarding the computation of yield, average annual total return and aggregate
total return, see "Performance Information" in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust which
will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
Kiplinger's Personal Finance, and Financial Services Week. Any such comparisons
or rankings are based on past performance and the statistical computation
performed by publications and services, and are not necessarily indications of
future performance. Because the Portfolios are managed investment vehicles
investing in a wide variety of securities, the securities owned by a Portfolio
will not match those making up an index.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the 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 DECEMBER 31,1997
<S> <C> <C>
FEBRUARY 9, 1996 TO
PORTFOLIO 1 YEAR DECEMBER 31, 1997
--------- ------- ---------------------
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.
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>
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TABLE OF CONTENTS
<S> <C>
PAGE
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FINANCIAL HIGHLIGHTS.......................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES............................................................. 2
IMPLEMENTATION OF POLICIES AND RISKS.......................................................... 3
Foreign Securities and Currencies.......................................................... 3
Foreign Investment Companies............................................................... 4
Derivative Instruments..................................................................... 4
Illiquid Securities........................................................................ 4
Small Companies............................................................................ 4
Debt Obligations........................................................................... 5
Government Securities...................................................................... 5
When-Issued Securities..................................................................... 6
Portfolio Turnover......................................................................... 6
MANAGEMENT OF THE TRUST....................................................................... 6
Investment Adviser......................................................................... 6
Expense Reimbursement...................................................................... 7
Sub-Adviser................................................................................ 7
Sub-Advisory Fees.......................................................................... 7
SALES AND REDEMPTIONS......................................................................... 7
NET ASSET VALUE............................................................................... 8
PERFORMANCE INFORMATION....................................................................... 8
Performance of the Portfolio............................................................... 9
Comparable Public Fund Performance......................................................... 9
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................... 10
ADDITIONAL INFORMATION........................................................................ 10
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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 (a) (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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(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>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Strong Growth Portfolio is not fundamental and may be changed without the
approval of a majority of the outstanding shares of the Portfolio. All other
investment policies or limitations, unless otherwise specifically stated, are
non-fundamental and may be changed by the Trustees of the Trust without a vote
of the shareholders. There is no assurance that the Portfolio will achieve its
objective. A complete list of investment restrictions, including those
restrictions which cannot be changed without shareholder approval, is contained
in the SAI. United States Treasury Regulations applicable to portfolios that
serve as the funding vehicles for variable annuity and variable life insurance
contracts generally require that such portfolios invest no more than 55% of the
value of their assets in one investment, 70% in two investments, 80% in three
investments, and 90% in four investments. The Portfolio intends to comply with
the requirements of these Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that under normal circumstances, at least 65% of such
Portfolio's assets will be invested as indicated. A description of the ratings
systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch 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 against the box, in which the Portfolio sells a security it
owns for delivery at a future date; swaps, in which the two parties agree to
exchange a series of cash flows in the future, such as interest-rate payments;
interest-rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates exceed a specified
rate, or "cap"; and interest-rate floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level, or "floor." Derivative transactions may also
include forward currency contracts and foreign currency exchange-related
securities.
Derivative instruments may be exchange-traded or traded in over-the-counter
transactions between private parties. Over-the-counter transactions are subject
to 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 instruments 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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
Strong Growth Portfolio .75% of first $150 million of average
daily net assets
.70% of next $350 million of average daily
net assets
.65% of average daily net assets over and
above $500 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, would have been 4.44% for the year ended
ending 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>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
Strong Growth Portfolio .50% of first $150 million of average
daily net assets
.45% of the next $350 million of average
daily net assets
.40% of average daily net assets over and
above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. New York time, such
purchases and redemptions of shares of each Portfolio are effected at the
respective net asset values per share determined as of 4:00 p.m. New York time
on that day. See "Net Asset Value", below and "Determination of Net Asset Value"
in the Trust's SAI. Payment for redemptions will be made within seven days after
receipt of a redemption request in good order. No fee is charged the separate
account of the Life Company when it redeems Portfolio shares. The Trust may
suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of the close of trading on the New York Stock Exchange (usually
considered 4:00 p.m. Eastern Time) each day the New York Stock Exchange is open
("Business Days"). Portfolio securities for which market quotations are readily
available are stated at market value. Short-term investments that will mature in
60 days or less are valued using amortized cost, which the Trust's Board of
Trustees has determined approximates market value. Amortized cost valuation
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. All
other securities and assets are valued at their fair value following procedures
approved by the Trust's Board of Trustees. See "Determination of Net Asset
Value" in the SAI for a description of the special valuation procedures for
options and futures contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other than
Business Days, as defined above. Foreign securities quoted in foreign currencies
are translated into United States dollars at the exchange rates at 1:00 p.m.
Eastern Time or at such other rates as a Sub-Adviser may determine to be
appropriate in computing net asset value. As a result, fluctuations in the value
of such currencies in relation to the United States dollar will affect the net
asset value of a Portfolio's shares even though there has not been any change in
the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closing of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the Portfolios. If an event materially
affecting the value of such foreign securities occurs during such period of
which a Sub-Adviser becomes aware, then such securities will be valued at fair
value as determined in good faith, or in accordance with procedures adopted, by
the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return". Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in the
value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one, five and ten
year periods ending on a recent calendar quarter (or if such periods have not
yet elapsed, at the end of a shorter period corresponding to the life of the
Portfolio). Average annual total return figures are annualized and, therefore,
represent the average annual percentage change over the period in question.
Total return figures are not annualized and represent the aggregate percentage
or dollar value change over the period in question. For more information
regarding the computation of yield, average annual total return and aggregate
total return, see "Performance Information" in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust which
will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
Kiplinger's Personal Finance, and Financial Services Week. Any such comparisons
or rankings are based on past performance and the statistical computation
performed by publications and services, and are not necessarily indications of
future performance. Because the Portfolios are managed investment vehicles
investing in a wide variety of securities, the securities owned by a Portfolio
will not match those making up an index.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the 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 DECEMBER 31, 1997
<S> <C> <C>
FEBRUARY 9, 1996 TO
PORTFOLIO ONE YEAR DECEMBER 31, 1997
--------- -------- --------------------
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>
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 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 carefully before investing in the Strong
International Stock Portfolio and keep it for future reference. The
Prospectus contains information about the Strong International Stock Portfolio
that a prospective investor should know before investing.
A Statement of Additional Information ("SAI") dated 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 OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS............................................................................ 1
INVESTMENT OBJECTIVE AND POLICIES............................................................... 2
IMPLEMENTATION OF POLICIES AND RISKS............................................................ 3
Foreign Securities and Currencies........................................................... 3
Foreign Investment Companies................................................................ 4
Derivative Instruments...................................................................... 4
Illiquid Securities......................................................................... 5
Small Companies............................................................................. 5
Debt Obligations............................................................................ 5
Government Securities....................................................................... 6
When-Issued Securities...................................................................... 6
Mortgage Dollar Rolls and Reverse Repurchase Agreements..................................... 6
Portfolio Turnover.......................................................................... 7
MANAGEMENT OF THE TRUST......................................................................... 7
Investment Adviser.......................................................................... 7
Expense Reimbursement....................................................................... 7
Sub-Adviser................................................................................. 7
Sub-Advisory Fees........................................................................... 8
SALES AND REDEMPTIONS........................................................................... 8
NET ASSET VALUE................................................................................. 8
PERFORMANCE INFORMATION......................................................................... 9
Performance of the Portfolio................................................................ 9
Comparable Public Fund Performance.......................................................... 10
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS........................................................ 11
ADDITIONAL INFORMATION.......................................................................... 11
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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 (a) 0.07 0.03
Net realized and unrealized gain (loss) on
Investments (1.30) 0.61
----------- -----------
Total from investment operations (1.23) 0.64
----------- -----------
LESS DISTRIBUTIONS:
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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(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>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objective
of the Strong International Stock Portfolio is not fundamental and may be
changed without the approval of a majority of the outstanding shares of the
Portfolio. All other investment policies or limitations, unless otherwise
specifically stated, are non-fundamental and may be changed by the Trustees of
the Trust without a vote of the shareholders. There is no assurance that the
Portfolio will achieve its objective. A complete list of investment
restrictions, including those restrictions which cannot be changed without
shareholder approval, is contained in the SAI. United States Treasury
Regulations applicable to portfolios that serve as the funding vehicles for
variable annuity and variable life insurance contracts generally require that
such portfolios invest no more than 55% of the value of their assets in one
investment, 70% in two investments, 80% in three investments, and 90% in four
investments. The Portfolio intends to comply with the requirements of these
Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that under normal circumstances, at least 65% of such
Portfolio's assets will be invested as indicated. A description of the ratings
systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in the SAI: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch 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 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 fluctuation
of the value of the derivative instruments 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 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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
Strong International Stock Portfolio .75% of first $150 million of average
daily net assets
.70% of next $350 million of average daily
net assets
.65% of average daily net assets over and
above $500 million
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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 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.
Anthony L.T. Cragg is the portfolio manager of the Sub-Adviser for the
Portfolio. Mr. Cragg joined the Sub-Adviser in April, 1993 to develop the
Sub-Adviser's international investment activities. During the prior seven years,
he helped establish Dillon, Read International Asset Management, where he was in
charge of Japanese, Asian, and Australian investments. A graduate of Christ
Church, Oxford University, Mr. Cragg began his investment career in 1980 at
Gartmore, Ltd., as an international investment manager, where his tenure
included assignments in London, Hong Kong, and Tokyo.
SUB-ADVISORY FEES. Under the terms of the Sub-Advisory Agreement, the Adviser
shall pay to the Sub-Adviser, as full compensation for services rendered under
the Sub-Advisory Agreement with respect to the Portfolio, monthly fees at the
following annual rates based on the average daily net assets of the Portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO SUB-ADVISORY FEE
--------- ----------------
Strong International Stock Portfolio .50% of first $150 million of average
daily net assets
.45% of the next $350 million of average
daily net assets
.40% of average daily net assets over and
above $500 million
</TABLE>
SALES AND REDEMPTIONS
The Trust sells shares only to the separate accounts of the Life Company as a
funding vehicle for the VA Contracts offered by the Life Company. No fee is
charged upon the sale or redemption of the Trust's shares. Expenses of the Trust
will be passed through to the separate accounts of the Life Company, and
therefore, will be ultimately borne by VA Contract owners. In addition, other
fees and expenses will be assessed by the Life Company at the separate account
level. (See the Prospectus for the VA Contract for a description of all fees and
charges relating to the VA Contract.)
The separate account of the Life Company places orders to purchase and redeem
shares of each Portfolio based on, among other things, the amount of
contributions to be invested and surrender and transfer requests to be effected
on that day pursuant to the VA Contracts issued by the Life Company. Orders
received by the Trust are effected on days on which the New York Stock Exchange
is open for trading, at the net asset value per share next determined after
receipt of the order. For orders received before 4:00 p.m. Eastern Standard
time, such purchases and redemptions of shares of each Portfolio are effected at
the respective net asset values per share determined as of 4:00 p.m. New York
time on that day. See "Net Asset Value", below and "Determination of Net Asset
Value" in the Trust's SAI. Payment for redemptions will be made within seven
days after receipt of a redemption request in good order. No fee is charged the
separate account of the Life Company when it redeems Portfolio shares. The Trust
may suspend the sale of shares at any time and may refuse any order to purchase
shares.
The Trust may suspend the right of redemption of shares of any Portfolio and may
postpone payment for any period: (i) during which the New York Stock Exchange is
closed other than for customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the Securities
and Exchange Commission determines that a state of emergency exists which makes
the sale of portfolio securities or the determination of net asset value not
reasonably practicable; (iii) as the Securities and Exchange Commission may by
order permit for the protection of the security holders of the Trust; or (iv) at
any time when the Trust may, under applicable laws and regulations, suspend
payment on the redemption of its shares.
NET ASSET VALUE
Each Portfolio calculates the net asset value of its shares by dividing the
total value of its assets (the securities held by the Portfolio, plus any cash
or other assets, including interest and dividends accrued but not yet received),
less its total liabilities, by the total number of shares outstanding. Shares
are valued as of the close of trading on the New York Stock Exchange (usually
considered 4:00 p.m. Eastern Time) each day the New York Stock Exchange is open
("Business Days"). Portfolio securities for which market quotations are readily
available are stated at market value. Short-term investments that will mature in
60 days or less are valued using amortized cost, which the Trust's Board of
Trustees has determined approximates market value. Amortized cost valuation
involves valuing a portfolio security initially at its cost, and, thereafter,
assuming a constant amortization to maturity of any discount or premium. All
other securities and assets are valued at their fair value following procedures
approved by the Trust's Board of Trustees. See "Determination of Net Asset
Value" in the SAI for a description of the special valuation procedures for
options and futures contracts.
Certain Portfolios are expected to invest in foreign securities listed on
foreign stock exchanges or debt securities of the United States and foreign
governments and corporations. Some of these securities trade on days other than
Business Days, as defined above. Foreign securities quoted in foreign currencies
are translated into United States dollars at the exchange rates at 1:00 p.m.
Eastern Time or at such other rates as a Sub-Adviser may determine to be
appropriate in computing net asset value. As a result, fluctuations in the value
of such currencies in relation to the United States dollar will affect the net
asset value of a Portfolio's shares even though there has not been any change in
the market values of such securities.
Because of time zone differences, foreign exchanges and securities markets will
usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the earlier closing of such exchanges and securities markets. However,
events affecting the values of such foreign securities may occasionally occur
between the earlier closing of such exchanges and securities markets and the
closing of the New York Stock Exchange which will not be reflected in the
computation of the net asset value of the Portfolios. If an event materially
affecting the value of such foreign securities occurs during such period of
which a Sub-Adviser becomes aware, then such securities will be valued at fair
value as determined in good faith, or in accordance with procedures adopted, by
the Trust's Board of Trustees.
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may also be presented from
time to time in advertisements and sales literature. The Portfolios may
advertise several types of performance information. These are the "yield,"
"average annual total return" and "aggregate total return." Each of these
figures is based upon historical results and is not necessarily representative
of the future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty days)
and dividing the result by the net asset value per share at the end of the
valuation period. The average annual total return and aggregate total return
figures measure both the net investment income generated by, and the effect of
any realized or unrealized appreciation or depreciation of the underlying
investments in, the Portfolio's portfolio for the period in question, assuming
the reinvestment of all dividends. Thus, these figures reflect the change in the
value of an investment in a Portfolio's shares during a specified period.
Average annual total return will be quoted for at least the one, five and ten
year periods ending on a recent calendar quarter (or if such periods have not
yet elapsed, at the end of a shorter period corresponding to the life of the
Portfolio). Average annual total return figures are annualized and, therefore,
represent the average annual percentage change over the period in question.
Total return figures are not annualized and represent the aggregate percentage
or dollar value change over the period in question. For more information
regarding the computation of yield, average annual total return and aggregate
total return, see "Performance Information" in the SAI.
Any Portfolio performance information presented will also include performance
information for the Life Company separate accounts investing in the Trust which
will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Trust may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or their
Sub-Advisers by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec Research
Survey of Non-U.S. Equity Fund Returns, Frank Russell International Universe,
Kiplinger's Personal Finance, and Financial Services Week. Any such comparisons
or rankings are based on past performance and the statistical computation
performed by publications and services, and are not necessarily indications of
future performance. Because the Portfolios are managed investment vehicles
investing in a wide variety of securities, the securities owned by a Portfolio
will not match those making up an index.
PERFORMANCE OF THE PORTFOLIO. The following table shows the average annualized
total return for the 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 DECEMBER 31, 1997
<S> <C> <C>
FEBRUARY 9, 1996 TO
PORTFOLIO ONE YEAR DECEMBER 31, 1997
--------- -------- --------------------
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>
<S> <C> <C> <C>
SINCE INCEPTION
FUND ONE YEAR INCEPTION DATE
---- -------- --------- ---------
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.
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 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
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS.......................................................................... 1
INVESTMENT OBJECTIVE AND POLICIES............................................................. 2
Investment Objective...................................................................... 2
Investment Policies....................................................................... 2
U.S. Government Securities................................................................. 2
Mortgage Pass-Through Securities.......................................................... 3
Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds................................... 3
Foreign Securities........................................................................ 3
Emerging Market Securities................................................................ 3
Brady Bonds............................................................................... 3
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 Indebtedness................................................
Swaps and Related Transactions............................................................ 5
Restricted Securities..................................................................... 5
Corporate Asset-Backed Securities......................................................... 5
Options on Securities..................................................................... 6
Options on Stock Indices................................................................. 6
Options on Foreign Currencies............................................................ 6
Future Contracts.......................................................................... 6
Options on Futures Contracts............................................................... 7
Forward Contracts......................................................................... 7
Risk Factors.............................................................................. 7
Lower Rated Bonds......................................................................... 7
Options, Futures and Forward Contracts.................................................... 8
Emerging Markets Securities............................................................... 8
Portfolio Trading.......................................................................... 8
MANAGEMENT OF THE TRUST....................................................................... 9
Investment Adviser........................................................................ 9
Expense Reimbursement..................................................................... 9
Sub-Adviser............................................................................... 9
Sub-Advisory Fees......................................................................... 10
Loan Participation and other Direct In debtedness........................................ 10
SALES AND REDEMPTIONS......................................................................... 11
NET ASSET VALUE............................................................................... 11
PERFORMANCE INFORMATION....................................................................... 11
Performance of the Portfolio.............................................................. 12
Comparable Public Fund Performance........................................................ 12
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS...................................................... 13
ADDITIONAL INFORMATION........................................................................ 13
APPENDIX A....................................................................................A-1
Description of Bond Ratings...............................................................A-1
</TABLE>
FINANCIAL HIGHLIGHTS
The following information 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 (a) 0.35 0.25
Net realized and unrealized gain (loss) on
Investments 1.95 0.85
----------- -----------
Total from investment operations 2.30 1.10
----------- -----------
LESS DISTRIBUTIONS:
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 for the period February 9, 1996 (effective date) to December
31, 1996, respectively. The total return would have been lower if certain
expenses had not been reimbursed by London Pacific.
+++ Average commission rate paid per share on equity securities purchased and
sold by the Portfolio. Amount excludes mark-ups, mark-downs or spreads paid
on shares traded.
(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>
See Notes to Financial Statements
INVESTMENT OBJECTIVE AND POLICIES
Each Portfolio of the Trust has a different investment objective or objectives
which it pursues through separate investment policies. The investment objectives
and policies of the MFS Total Return Portfolio described below, including
Options, Options on Foreign Currency, Futures Contracts, Options on Futures
Contracts and Forward Contracts, are not fundamental and may be changed without
shareholder approval. A change in the Portfolio's investment objectives may
result in the Portfolio having investment objectives different from the
objectives which the shareholder considered appropriate at the time of
investment in the Portfolio. The SAI includes a discussion of other investment
policies and a listing of specific investment restrictions, which govern the
Portfolio's investment policies. The specific investment restrictions listed in
the SAI may not be changed without shareholder approval (see "Investment
Restrictions" in the SAI). The Portfolio's investment limitations, policies and
rating standards are adhered to at the time of purchase or utilization of
assets; a subsequent change in circumstances will not be considered to result in
a violation of policy. United States Treasury Regulations applicable to
portfolios that serve as the funding vehicles for variable annuity and variable
life insurance contracts generally require that such portfolios invest no more
than 55% of the value of their assets in one investment, 70% in two investments,
80% in three investments, and 90% in four investments. The Portfolio intends to
comply with the requirements of these Regulations.
In order to comply with regulations which may be issued by the U.S. Treasury,
the Trust may be required to limit the availability or change the investment
policies of one or more Portfolios or to take steps to liquidate one or more
Portfolios. The Trust will not change any fundamental investment policy of a
Portfolio without a vote of shareholders of that Portfolio.
Except as otherwise noted herein, if the securities rating of a debt security
held by the Portfolio declines below the minimum rating for securities in which
the Portfolio may invest, the Portfolio will not be required to dispose of the
security, but the Portfolio's Sub-Adviser will consider whether continued
investment in the security is consistent with the Portfolio's investment
objective.
In implementing its investment objective and policies, the Portfolio uses a
variety of instruments, strategies and techniques which are described in more
detail in the SAI. With respect to the Portfolio's investment policies, use of
the term "primarily" means that under normal circumstances, at least 65% of such
Portfolio's assets will be invested as indicated. A description of the ratings
systems used by the following nationally recognized statistical rating
organizations ("NRSROs") is contained in Appendix A: Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), and Fitch Investors
Service, Inc. ("Fitch"). New instruments, strategies and techniques, however,
are evolving continually and the Portfolio reserves authority to invest in or
implement them to the extent consistent with its investment objectives and
policies. If new instruments, strategies or techniques would involve a material
change to the information contained herein, they will not be purchased or
implemented until this Prospectus is appropriately supplemented.
INVESTMENT OBJECTIVE. The Portfolio's investment objective is to seek total
return by investment in securities which will provide above-average income
(compared to a portfolio entirely invested in equity securities) and
opportunities for growth of capital and income, consistent with the prudent
employment of capital. Under normal market conditions, at least 25% of the
Portfolio's assets will be invested in fixed income securities and at least 40%
and no more than 75% of the Portfolio's assets will be invested in equity
securities. Any investment involves risk and there can be no assurance that the
Portfolio will achieve its investment objective.
INVESTMENT POLICIES. The Portfolio's policy is to invest in a broad list of
securities, including short-term obligations. The list may be diversified not
only by companies and industries, but also by type of security. Fixed income
securities and equity securities (which include: common and preferred stocks;
securities such as bonds, warrants or rights that are convertible into stock;
and depositary receipts for those securities) may be held by the Portfolio. Some
fixed income securities may also have a call on common stock by means of a
conversion privilege or attached warrants. The Portfolio may vary the percentage
of assets invested in any one type of security in accordance with the
Sub-Adviser's interpretation of economic and money market conditions, fiscal and
monetary policy and underlying security values. The Portfolio's debt investments
may consist of both "investment grade" securities (rated Baa or better by
Moody's or BBB or better by S&P or Fitch) and securities that are unrated or are
in the lower rating categories (rated Ba or lower by Moody's or BB or lower by
S&P or Fitch) (commonly known as "junk bonds" ) including up to 20% of its net
assets in nonconvertible fixed income securities that are in these lower rating
categories and comparable unrated securities (see "Risk Factors - Lower Rated
Bonds" below). Generally, most of the Portfolio's long-term debt investments
will consist of "investment grade" securities. See Appendix A to this Prospectus
for a description of these ratings. It is not the Portfolio's policy to rely
exclusively on ratings issued by established credit rating agencies but rather
to supplement such ratings with the Sub-Adviser's own independent and ongoing
review of credit quality.
U.S. GOVERNMENT SECURITIES. The Portfolio may also invest in U.S. Government
securities, including: (1) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance; U.S. Treasury bills
(maturities of one year or less); U.S. Treasury notes (maturities of one to ten
years); and U.S. Treasury bonds (generally maturities of greater than ten
years), all of which are backed by the full faith and credit of the U.S.
Government; and (2) obligations issued or guaranteed by U.S. Government agencies
or instrumentalities, some of which are backed by the full faith and credit of
the U.S. Treasury, e.g., direct pass-through certificates of the Government
National Mortgage Association ("GNMA"); some of which are supported by the right
of the issuer to borrow from the U.S. Government, e.g., obligations of Federal
Home Loan Banks; and some of which are backed only by the credit of the issuer
itself, e.g., obligations of the Student Loan Marketing Association.
MORTGAGE PASS-THROUGH SECURITIES. The Portfolio may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by U.S. Government-sponsored
corporations (such as the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation, which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities may also be issued by non-governmental issuers (such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers). See the SAI for
a further discussion of these securities.
ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS. Fixed income
securities that the Portfolio may invest in also include zero coupon bonds,
deferred interest bonds and bonds on which the interest is payable in kind ("PIK
bonds"). Zero coupon and deferred interest bonds are debt obligations which are
issued or purchased at a significant discount from face value. The discount
approximates the total amount of interest the bonds will accrue and compound
over the period until maturity or the first interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the regular payment
of interest begins. PIK bonds are debt obligations which provide that the issuer
thereof may, at its option, pay interest on such bonds in cash or in the form of
additional debt obligations. Such investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return
to attract investors who are willing to defer receipt of such cash. Such
investments may experience greater volatility in market value due to changes in
interest rates than debt obligations which make regular payments of interest.
The Portfolio will accrue income on such investments for tax and accounting
purposes, as required, which is distributable to shareholders and which, because
no cash is received at the time of accrual, may require the liquidation of other
portfolio securities to satisfy the Portfolio's distribution obligations.
FOREIGN SECURITIES. The Portfolio may invest up to 20% (and generally expects to
invest between 5% and 20%) of its total assets in foreign securities which are
not traded on a U.S. exchange (not including American Depositary Receipts
("ADRs")). Investing in securities of foreign issuers generally involves risks
not ordinarily associated with investing in securities of domestic issuers.
These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the United States
or abroad) or circumstances in dealings between nations. Costs may be incurred
in connection with conversions between various currencies. Special
considerations may also include more limited information about foreign issuers,
higher brokerage costs, different accounting standards and thinner trading
markets. Foreign securities markets may also be less liquid, more volatile and
less subject to government supervision than in the United States. Investments in
foreign countries could be affected by other factors including expropriation,
confiscatory taxation and potential difficulties in enforcing contractual
obligations and could be subject to extended settlement periods. The Portfolio
may hold foreign currency received in connection with investments in foreign
securities when, in the judgment of the Sub-Adviser, it would be beneficial to
convert such currency into U.S. dollars at a later date, based on anticipated
changes in the relevant exchange rate. The Portfolio may also hold foreign
currency in anticipation of purchasing foreign securities. See the SAI for
further discussion of foreign securities and the holding of foreign currency, as
well as the associated risks.
EMERGING MARKET SECURITIES. Consistent with the Portfolio's objective and
policies, the Portfolio may invest in securities of issuers whose principal
activities are located in emerging market countries. Emerging market countries
include any country determined by the Adviser to have an emerging market
economy, taking into account a number of factors, including whether the country
has a low-to middle-income economy according to the International Bank for
Reconstruction and Development, the country's foreign currency debt rating, its
political and economic stability and the development of its financial and
capital markets. The Adviser determines whether an issuer's principal activities
are located in an emerging market country by considering such factors as its
country of organization, the principal trading market for its securities and the
source of its revenues and assets. The issuer's principal activities generally
are deemed to be located in a particular country if: (a) the security is issued
or guaranteed by the government of that country or any of its agencies,
authorities or instrumentalities; (b) the issuer is organized under the laws of,
and maintains a principal office in, that country; (c) the issuer has its
principal securities trading market in that country; (d) the issuer derives 50%
or more of its total revenues from goods sold or services performed in that
country; or (e) the issuer has 50% or more of its assets in that country.
BRADY BONDS. The Portfolio may invest in Brady Bonds, which are securities
created through the exchange of existing commercial bank loans to public and
private entities in certain emerging markets for new bonds in connection with
debt restructuring under a debt restructuring plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt
restructurings have been implemented to date in Argentina, Brazil, Bulgaria,
Crotia, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, Panama, Peru, the Philippines, Poland, Slovenia, 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>
<S> <C>
PORTFOLIO ADVISORY FEE
--------- ------------
MFS Total Return Portfolio .75% of first $200 million of average
daily net assets
.70% of the next $1.1 billion of average
daily net assets
.65% of average daily net assets over and
above $1.3 billion
</TABLE>
EXPENSE REIMBURSEMENT. The Life Company has voluntarily agreed through December
31, 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, on an annualized basis, 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 Services Holdings, Inc., which
in turn is an indirect wholly-owned subsidiary of Sun Life Assurance Company of
Canada ("Sun Life"). The Directors of the Sub-Adviser are Jeffrey L. Shames,
Arnold D. Scott, John W. Ballen, 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. Messrs. 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, Costantinos 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, and has been employed by the
Sub-Adviser as a portfolio manager since 1990. He 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.
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PORTFOLIO SUB-ADVISORY FEES
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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>
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AVERAGE ANNUAL TOTAL RETURN
FOR THE PERIODS ENDED DECEMBER 31, 1997
<S> <C> <C>
FEBRUARY 9, 1996 TO
PORTFOLIO ONE YEAR DECEMBER 31, 1997
--------- -------- ------------------
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>
<S> <C> <C> <C> <C> <C>
SINCE INCEPTION
FUND 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE
---- ------ ------ ------- --------- ---------
MFS Total Return Fund 25.27% 14.52% 11.80% 12.08% 10-6-70
Standard & Poor's 500 Stock Index 40.45% 20.71% 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.
PART B
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
This Statement of Additional Information (this "SAI") contains information which
may be of interest to investors but which is not included in the Prospectus of
LPT Variable Insurance Series Trust (the "Trust"). This SAI is not a prospectus
and is only authorized for distribution when accompanied or preceded by the
Prospectus of the Trust dated May 1, 1998. This SAI should be read together
with the Prospectus. Investors may obtain a free copy of the Prospectus by
calling London Pacific Life and Annuity Company ("Life Company") at (800)
852-3152.
THIS SAI CONTAINS INFORMATION RELATING TO ALL PORTFOLIOS OF THE TRUST.
TABLE OF CONTENTS
PAGE
DEFINITIONS
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
DESCRIPTION OF SECURITIES, INVESTMENT POLICIES AND RISK FACTORS
Repurchase Agreements
Mortgage Dollar Rolls and Reverse Repurchase Agreements
Illiquid or Restricted Securities
Mortgage- and Asset-Backed Securities
Stripped Mortgage Securities
Collateralized Mortgage Obligations (CMOs)
Foreign Securities
Depositary Receipts
Lending of Portfolio Securities
Borrowing
High-Yield (High Risk) Securities
In General
Effect of Interest Rates and Economic Changes
Payment Expectations
Credit Ratings
Liquidity and Valuation
Legislation
U.S. Government Obligations
U.S. Government Agency Securities
Bank Obligations
Savings and Loan Obligations
Debt Obligations
Price Volatility
Maturity
Credit Quality
Temporary Defensive Position
Short-Term Corporate Debt Instruments
Municipal Obligations
Municipal Lease Obligations
Eurodollar and Yankee Obligations
Brady Bonds
When Issued Securities and Forward Commitment Contracts
Warrants
Zero-Coupon, Step-Coupon and Pay-in-Kind Securities
Floating and Variable Rate Instruments
Short Sales
Inverse Floating Rate Obligations
Loan Participations and Other Direct Indebtedness
Indexed Securities
Other Investment Companies
Foreign Investment Companies
Swaps and Related Transactions
Derivative Instruments
General Description
Special Risks of These Instruments
General Limitations on Certain Derivative Transactions
Options
Yield Curve Options
Spread Transactions
Futures Contracts
Foreign Currency-Related Derivative Strategies-Special Considerations
Forward Currency Contracts
Foreign Currency Transactions
Hybrid Instruments
Combined Transactions
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Strong International Stock Portfolio and Strong Growth Portfolio
Berkeley U.S. Quality Bond Portfolio
Berkeley Money Market Portfolio
Harris Associates Value Portfolio
Lexington Corporate Leaders Portfolio
Robertson Stephens Diversified Growth Portfolio
MFS Total Return Portfolio
Non-Fundamental Investment Restrictions
Strong International Stock Portfolio and Strong Growth Portfolio
Berkeley U.S. Quality Bond Portfolio
Harris Associates Value Portfolio
Lexington Corporate Leaders Portfolio
Robertson Stephens Diversified Growth Portfolio
MFS Total Return Portfolio
MANAGEMENT OF THE TRUST
Sub-Advisers
Code of Ethics
Brokerage and Research Services
Investment Decisions
DETERMINATION OF NET ASSET VALUE
TAXES
DIVIDENDS AND DISTRIBUTIONS
PERFORMANCE INFORMATION
SHAREHOLDER COMMUNICATIONS
ORGANIZATION AND CAPITALIZATION
PORTFOLIO TURNOVER
CUSTODIAN
LEGAL COUNSEL
INDEPENDENT ACCOUNTANTS
SHAREHOLDER LIABILITY
DESCRIPTION OF NRSRO RATINGS
FINANCIAL STATEMENTS
LPT VARIABLE INSURANCE SERIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
DEFINITIONS
The "Trust" -- LPT Variable Insurance Series Trust.
"Adviser" -- LPIMC Insurance Marketing Services,
the Trust's investment adviser.
INVESTMENT OBJECTIVES AND POLICIES OF THE TRUST
The Trust currently offers shares of beneficial interest of eight series (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Trust are described in
the Prospectus. This SAI contains additional information concerning certain
investment practices and investment restrictions of the Trust.
Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this SAI are not
fundamental, and the Trustees may change the investment objectives and policies
of a Portfolio without an affirmative vote of shareholders of the Portfolio.
DESCRIPTION OF SECURITIES, INVESTMENT POLICIES AND RISK FACTORS
The Prospectus for each Portfolio indicates the extent to which each Portfolio
may purchase the instruments or engage in the investment activities described
below. The discussion below supplements the information set forth in the
Portfolio Prospectuses.
REPURCHASE AGREEMENTS
The Portfolios may enter into repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, the Portfolio buys a security at
one price, and at the time of sale, the seller agrees to repurchase the
obligation at a mutually agreed upon time and price (usually within seven days).
The repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. Repurchase agreements permit a Portfolio to
keep all its assets at work while retaining "overnight" flexibility in pursuit
of investments of a longer-term nature. The Sub-Adviser for each Portfolio will
monitor, on an ongoing basis, the value of the underlying securities to ensure
that the value always equals or exceeds the repurchase price plus accrued
interest. Repurchase agreements could involve certain risks in the event of a
default or insolvency of the other party to the agreement, including possible
delays or restrictions upon a Portfolio's ability to dispose of the underlying
securities. Each Portfolio will enter into repurchase agreements only with banks
or dealers, which in the opinion of each Portfolio's Sub-Adviser based on
guidelines established by the Trust's Board of Trustees, are deemed
creditworthy. A Portfolio may, under certain circumstances, deem repurchase
agreements collateralized by U.S. Government securities to be investments in
U.S. Government securities. Repurchase agreements with maturities of more than
seven days will be treated as illiquid securities by the Portfolios.
The Berkeley U.S. Quality Bond Portfolio may invest in open repurchase
agreements which vary from the typical agreement in the following respects: (1)
the agreement has no set maturity, but instead matures upon 24 hours' notice to
the seller; and (2) the repurchase price is not determined at the time the
agreement is entered into, but is instead based on a variable interest rate and
the duration of the agreement.
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
A Portfolio may engage in reverse repurchase agreements to facilitate portfolio
liquidity, a practice common in the mutual fund industry; to earn additional
income on portfolio securities, such as Treasury bills and notes; or, with
respect to the Strong International Stock Portfolio and the Strong Growth
Portfolio, for arbitrage transactions discussed below. In a reverse repurchase
agreement, a Portfolio temporarily transfers possession of a security to another
party, such as a bank, in return for cash, and agrees to buy the security back
at a future date and price. In a reverse repurchase agreement, the Portfolio
generally retains the right to interest and principal payments on the security.
Since a Portfolio receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing and therefore is subject to the
overall percentage limitations on borrowings and the restrictions on the
purposes of borrowing described therein. (See "Borrowing" and "Investment
Restrictions.") When required by guidelines of the Securities and Exchange
Commission ("SEC"), a Portfolio will set aside permissible liquid assets in a
segregated account to secure its obligations to repurchase the security.
A Portfolio may also enter into mortgage dollar rolls, in which the Portfolio
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Portfolio would forego principal and interest
paid on the mortgage-backed securities during the roll period, the Portfolio
would be compensated by the difference between the current sales price and the
lower price for the future purchase as well as by any interest earned on the
proceeds of the initial sale. The Portfolio also could be compensated through
the receipt of fee income equivalent to a lower forward price. At the time the
Portfolio would enter into a mortgage dollar roll, it would set aside
permissible liquid assets in a segregated account to secure its obligation for
the forward commitment to buy mortgage-backed securities. Mortgage dollar roll
transactions may be considered a borrowing by the Portfolio. (See "Borrowing.")
The mortgage dollar rolls and reverse repurchase agreements entered into by the
Strong International Stock and Strong Growth Portfolios may be used as arbitrage
transactions in which a Portfolio will maintain an offsetting position in
investment grade debt obligations or repurchase agreements that mature on or
before the settlement date on the related mortgage dollar roll or reverse
repurchase agreement. Since a Portfolio will receive interest on the securities
or repurchase agreements in which it invests the transaction proceeds, such
transactions may involve leverage. However, since such securities or repurchase
agreements will be high quality and will mature on or before the settlement date
of the mortgage dollar roll or reverse repurchase agreement, the Sub-Adviser
believes that such arbitrage transactions do not present the risks to the
Portfolios that are associated with other types of leverage.
ILLIQUID OR RESTRICTED SECURITIES
A Portfolio may invest in securities that are considered illiquid because of the
absence of a readily available market or due to legal or contractual
restrictions. Each Portfolio may invest up to 15% of its net assets in such
securities or, with respect to the Strong International Stock Portfolio and
Strong Growth Portfolio, such other amounts as may be permitted under the
Investment Company Act of 1940 ("1940 Act"), (except 10% with respect to the
Berkeley Money Market Portfolio). The Board of Trustees of the Trust has the
ultimate authority to determine, to the extent permissible under the federal
securities laws, which securities are illiquid for purposes of these
limitations. Certain securities exempt from registration or issued in
transactions exempt from registration under the Securities Act of 1933, as
amended (the "1933 Act"), including securities that may be resold pursuant to
Rule 144A under the 1933 Act, may be considered liquid. The Board of Trustees
has adopted guidelines and delegated to the Sub-Advisers the daily function of
determining and monitoring the liquidity of Rule 144A securities, although it
has retained oversight and ultimate responsibility for such determinations.
Although no definitive liquidity criteria are used, the Board of Trustees has
directed the Sub-Advisers to look to such factors as (i) the nature of the
market for a security (including the institutional private resale market), (ii)
the terms of certain securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), (iii) the availability of market quotations
(e.g. for securities quoted in the PORTAL system), and (iv) other permissible
relevant factors.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in effect
under the 1933 Act. Where registration is required, a Portfolio may be obligated
to pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Portfolio may
be permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a Portfolio
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in good faith
by the Board of Trustees of the Trust. If through the appreciation of restricted
securities or the depreciation of unrestricted securities, a Portfolio should be
in a position where it has exceeded its maximum percentage limitation with
respect to its net assets which are invested in illiquid assets, including
restricted securities which are not readily marketable, the Portfolio will take
such steps as is deemed advisable, if any, to protect liquidity.
A Portfolio may sell over-the-counter ("OTC") options and, in connection
therewith, segregate assets or cover its obligations with respect to OTC options
written by the Portfolio. The assets used as cover for OTC options written by
the Portfolio will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Portfolio may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
Notwithstanding the above, the Sub-Adviser for the Strong International Stock
Portfolio and the Strong Growth Portfolio intends, as a matter of internal
policy, to limit each of such Portfolio's investments in illiquid securities to
10% of its net assets.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
Government agencies or instrumentalities, such as the Government National
Mortgage Association and the Federal National Mortgage Association, or by
private issuers, generally originators and investors in mortgage loans,
including savings associations, mortgage bankers, commercial banks, investment
bankers, and special purpose entities (collectively, "private lenders").
Mortgage-backed securities issued by private lenders may be supported by pools
of mortgage loans or other mortgage-backed securities that are guaranteed,
directly or indirectly, by the U.S. Government or one of its agencies or
instrumentalities, or they may be issued without any governmental guarantee of
the underlying mortgage assets but with some form of non-governmental credit
enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ from
those of traditional debt securities. Among the principal differences are that
interest and principal payments are made more frequently on mortgage- and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Portfolio purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Portfolio
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Amounts available for reinvestment
by the Portfolio are likely to be greater during a period of declining interest
rates and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates. Accelerated prepayments on securities
purchased by a Portfolio at a premium also impose a risk of loss of principal
because the premium may not have been fully amortized at the time the principal
is prepaid in full. The market for privately issued mortgage- and asset-backed
securities is smaller and less liquid than the market for government-sponsored
mortgage-backed securities.
A Portfolio may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such market
value may be extremely volatile. With respect to certain stripped securities,
such as interest only and principal only classes, a rate of prepayment that is
faster or slower than anticipated may result in a Portfolio failing to recover
all or a portion of its investment, even though the securities are rated
investment grade.
STRIPPED MORTGAGE SECURITIES. A Portfolio may purchase stripped mortgage
securities which are derivative multiclass mortgage securities. Stripped
mortgage securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. Stripped
mortgage securities have greater volatility than other types of mortgage
securities. Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid and
to such extent, together with any other illiquid investments, will be subject to
the Portfolio's applicable restriction on investments in illiquid securities.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
pre-payments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organization
("NRSRO").
In addition to the stripped mortgage securities described above, a
Portfolio may invest in similar securities such as Super POs and Levered IOs
which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar in
nature to those associated with IOs. The Portfolio may also invest in other
similar instruments developed in the future that are deemed consistent with its
investment objective, policies and restrictions. POs may generate taxable income
from the current accrual of original issue discount, without a corresponding
distribution of cash to the Portfolio.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
CMOs are bonds that are collateralized by whole loan mortgages or mortgage
pass-through securities. The bonds issued in a CMO transaction are divided into
groups, and each group of bonds is referred to as a "tranche." Under the
traditional CMO structure, the cash flows generated by the mortgages or mortgage
pass-through securities in the collateral pool are used to first pay interest
and then pay principal to the CMO bondholders. The bonds issued under a CMO
structure are retired sequentially as opposed to the pro rata return of
principal found in traditional pass-through obligations. Subject to the various
provisions of individual CMO issues the cash flow generated by the underlying
collateral (to the extent it exceeds the amount required to pay the stated
interest) is used to retire the bonds. Under the CMO structure, the repayment of
principal among the different tranches is prioritized in accordance with the
terms of the particular CMO issuance. The "fastest-pay" tranche of bonds, as
specified in the prospectus for the issue, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or tranches,
in the sequence, as specified in the prospectus, receive all of the principal
payments until they are retired. The sequential retirement of bonds groups
continues until the last tranche, or group of bonds, is retired. Accordingly,
the CMO structure allows the issuer to use cash flows of long maturity,
monthly-pay collateral to formulate securities with short, intermediate and long
final maturities and expected average lives.
In recent years, new types of CMO structures have evolved. These include
floating rate CMOs, planned amortization classes, accrual bonds, and CMO
residuals. These newer structures affect the amount and timing of principal and
interest received by each tranche from the underlying collateral. Under certain
of these new structures, given classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Portfolio invests, the investment may be subject to
a greater or lesser risk of prepayment than other types of mortgage-related
securities.
The primary risk of any mortgage security is the uncertainty of the timing of
cash flows. For CMOs, the primary risk results from the rate of prepayments on
the underlying mortgages serving as collateral. An increase or decrease in
prepayment rates (resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life, and price of CMOs. The prices of
certain CMOs, depending on their structure and the rate of prepayments, can be
volatile. Some CMOs may also not be as liquid as other securities.
FOREIGN SECURITIES
Investment by a Portfolio in securities issued by companies or other issuers
whose principal activities are outside the United States involves significant
risks not present in U.S. investments. The value of securities denominated in
foreign currencies and of dividends and interest paid with respect to such
securities will fluctuate based on the relative strength of the U.S. dollar. In
addition, less publicly available information is generally available about
foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign companies are not
bound by uniform accounting, auditing, and financial reporting requirements and
standards of practice comparable to those applicable to U.S. companies.
Investments in foreign securities also involve the risk of possible adverse
changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the repatriation of monies or other assets
of a Portfolio, political or financial instability or diplomatic and other
developments which could affect such investments. Further, the economies of
particular countries or areas of the world may perform less favorably than the
economy of the U.S. and the U.S. dollar value of securities denominated in
currencies other than the U.S. dollar may be affected unfavorably by exchange
rate movements. Each of these factors could influence the value of a Portfolio's
shares, as well as the value of dividends and interest earned by a Portfolio and
the gains and losses which it realizes. It is anticipated that in most cases the
best available market for foreign securities will be on exchanges or in
over-the-counter markets located outside of the U.S. However, foreign securities
markets, while growing in volume and sophistication, are generally not as
developed as those in the U.S., and securities of some foreign companies
(particularly those located in developing countries) are generally less liquid
and more volatile than securities of comparable U.S. companies. Foreign security
trading practices, including those involving securities settlement where
Portfolio assets may be released prior to receipt of payment, may expose a
Portfolio to increased risk in the event of a failed trade or the insolvency of
a foreign broker-dealer. In addition, foreign brokerage commissions and other
fees are generally higher than on securities traded in the U.S. and may be
non-negotiable. These is less overall governmental supervision and regulation of
securities exchanges, securities dealers, and listed companies than in the U.S.
The Portfolios may invest in foreign securities that are restricted against
transfer within the U.S. or to U.S. persons. Although securities subject to such
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
DEPOSITARY RECEIPTS
A Portfolio may invest in foreign securities by purchasing depositary receipts,
including American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"), or other securities convertible into securities or issuers based in
foreign countries. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. Generally,
ADRs, in registered form, are denominated in U.S. dollars and are designed for
use in the U.S. securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for use in European securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs are European receipts
evidencing a similar arrangement. For purposes of a Portfolio's investment
policies, ADRs and EDRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR or EDR representing ownership
of common stock will be treated as common stock.
ADR facilities may be established as either "unsponsored" or "sponsored." While
ADRs issued under these two types of facilities are in some respects similar,
there are distinctions between them relating to the rights and obligations of
ADR holders and the practices of market participants. A depositary may establish
an unsponsored facility without participation by (or even necessarily the
acquiescence of) the issuer of the deposited securities, although typically the
depositary requests a letter of non-objection from such issuer prior to the
establishment of the facility. Holders of unsponsored ADRs generally bear all
the costs of such facilities. The depositary usually charges fees upon the
deposit and withdrawal of the deposited securities, the conversion of dividends
into U.S. dollars, the disposition of non-cash distributions, and the
performance of other services. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders in respect of the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depositary. The deposit agreement sets out the rights and
responsibilities of the issuer, the depositary and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depositary), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities.
LENDING OF PORTFOLIO SECURITIES
Except with respect to the Harris Associates Value Portfolio and the Berkeley
Money Market Portfolio, each Portfolio is authorized to lend its portfolio
securities to broker-dealers or institutional investors that the Sub-Adviser
deems qualified, but only when the borrower maintains with the Portfolio's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus accrued
interest and dividends, determined on a daily basis and adjusted accordingly.
However, the Portfolios do not presently intend to engage in such lending. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, the Sub-Adviser will consider, and during the period of
the loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. A Portfolio will retain authority to terminate
any loans at any time. The Portfolios may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or money market instruments held as collateral to
the borrower or placing broker. The Portfolios will receive reasonable interest
on the loan or a flat fee from the borrower and amounts equivalent to any
dividends, interest or other distributions on the securities loaned. The
Portfolios will retain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when retaining such rights is
considered to be in a Portfolio's interest.
Other than the Berkeley Money Market Portfolio and the Harris Associates Value
Portfolio, each of the Portfolios may lend up to 33 1/3% of the total value of
its securities (except 30% with respect to the MFS Total Return Portfolio and
25% with respect to the Berkeley U.S. Quality Bond Portfolio).
BORROWING
The Portfolios may borrow money from banks, limited by each Portfolio's
investment restriction as to the percentage of its total assets that it may
borrow, and may engage in mortgage dollar roll transactions and reverse
repurchase agreements which may be considered a form of borrowing. (See
"Mortgage Dollar Rolls and Reverse Repurchase Agreements," above.) In addition,
the Strong International Stock Portfolio and the Strong Growth Portfolio may
borrow up to an additional 5% of their respective total assets from banks for
temporary or emergency purposes. A Portfolio will not purchase securities when
bank borrowings exceed 5% of the Portfolio's total assets.
HIGH-YIELD (HIGH RISK) SECURITIES
IN GENERAL. Certain Portfolios have the authority to invest in non-investment
grade debt securities (up to 5% of its net assets with respect to the Strong
International Stock and Strong Growth Portfolios). Non-investment grade debt
securities (hereinafter referred to as "lower-quality securities") include (i)
bonds rated as low as C by Moody's Investors Service, Inc. ("Moody's"), Standard
& Poor's Ratings Group "(S&P"), or Fitch IBCA, Inc. ("Fitch"), or CCC by Duff &
Phelps, Inc. ("D&P"); (ii) commercial paper rated as low as C by S&P, Not Prime
by Moody's or Fitch 4 by Fitch; and (iii) unrated debt obligations of comparable
quality. Lower-quality securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with
investments in these securities are discussed below. Refer to "Description of
NRSRO Ratings" for a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and comparable
unrated securities market is relatively new and its growth has paralleled a long
economic expansion. As a result, it is not clear how this market may withstand a
prolonged recession or economic downturn. Such an economic downturn could
severely disrupt the market for and adversely affect the value of such
securities.
All interest-bearing securities typically experience appreciation when interest
rates decline and depreciation when interest rates rise. The market values of
lower-quality and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality and comparable unrated securities also tend to be more sensitive
to economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of lower-quality and comparable unrated
securities may experience financial stress and may not have sufficient revenues
to meet their payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss due to default by an
issuer of these securities is significantly greater than issuers of higher-rated
securities because such securities are generally unsecured and are often
subordinated to other creditors. Further, if the issuer of a lower-quality or
comparable unrated security defaulted, a Portfolio might incur additional
expenses to seek recovery. Periods of economic uncertainty and changes would
also generally result in increased volatility in the market prices of these
securities and thus in the Portfolio's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market, and accordingly so will
a Portfolio's net asset value. If a Portfolio experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities (discussed
below), a Portfolio may be forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the Portfolio's asset base over
which expenses could be allocated and could result in a reduced rate of return
for the Portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities typically
contain redemption, call or prepayment provisions which permit the issuer of
such securities containing such provisions to, at its discretion, redeem the
securities. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them with
debt securities with a lower interest rate. To the extent an issuer is able to
refinance the securities, or otherwise redeem them, a Portfolio may have to
replace the securities with a lower yielding security, which would result in a
lower return for the Portfolio.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of lower-quality securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the condition of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in lower-quality and
comparable unrated securities will be more dependent on the Sub-Adviser's credit
analysis than would be the case with investments in investment-grade debt
securities. The Sub-Advisers employ their own credit research and analysis,
which includes a study of existing debt, capital structure, ability to service
debt and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Sub-Advisers
continually monitor the investments in each Portfolio's portfolio and carefully
evaluate whether to dispose of or to retain lower-quality and comparable unrated
securities whose credit ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. A Portfolio may have difficulty disposing of certain
lower-quality and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all lower-quality and comparable unrated securities, there is no established
retail secondary market for many of these securities. The Portfolios anticipate
that such securities could be sold only to a limited number of dealers or
institutional investors. To the extent a secondary trading market does exist, it
is generally not as liquid as the secondary market for higher-rated securities.
The lack of a liquid secondary market may have an adverse impact on the market
price of the security. As a result, the Portfolio's asset value and ability to
dispose of particular securities, when necessary to meet the Portfolio's
liquidity needs or in response to a specific economic event, may be impacted.
The lack of a liquid secondary market for certain securities may also make it
more difficult for a Portfolio to obtain accurate market quotations for purposes
of valuing the Portfolio's investments. Market quotations are generally
available on many lower-quality and comparable unrated issues only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales. During periods of thin trading, the spread
between bid and asked prices is likely to increase significantly. In addition,
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-quality and comparable
unrated securities, especially in a thinly traded market.
LEGISLATION. legislation has been adopted, and from time to time proposals have
been discussed, regarding new legislation designed to limit the use of certain
lower-quality and comparable unrated securities by certain issuers. An example
of legislation is a law which requires federally insured savings and loan
associations to divest their investments in these securities over time. It is
not currently possible to determine the impact of any proposed legislation on
the lower-quality and comparable unrated securities market. However, it is
anticipated that if additional legislation is enacted or proposed, it could have
a material affect on the value of these securities and the existence of a
secondary trading market for the securities.
U.S. GOVERNMENT OBLIGATIONS
U.S. Government Obligations include bills, notes, bonds, and other debt
securities issued by the U.S. Treasury. These are direct obligations of the U.S.
Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES
Securities issued or guaranteed by Federal agencies and U.S. Government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitment.
Agencies which are backed by the full faith and credit of the United States
include the Export Import Bank, Farmers Home Administration, Federal Financing
Bank, and others. Certain debt issued by Resolution Funding Corporation has both
its principal and interest backed by the full faith and credit of the U.S.
Treasury in that its principal is defeased by U.S. Treasury zero coupon issues,
while the U.S. Treasury is explicitly required to advance funds sufficient to
pay interest on it, if needed. Certain agencies and instrumentalities, such as
the Government National Mortgage Association, are, in effect, backed by the full
faith and credit of the United States through provisions in their charters that
they may make "indefinite and unlimited" drawings on the Treasury, if needed to
service its debt. Debt from certain other agencies and instrumentalities,
including the Federal Home Loan Bank and Federal National Mortgage Association,
are not guaranteed by the United States, but those institutions are protected by
the discretionary authority of the U.S. Treasury to purchase certain amounts of
their securities to assist the institution in meeting its debt obligations.
Finally, other agencies and instrumentalities, such as the Farm Credit System
and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the credit worthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration and The Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized under
Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks and the Federal National Mortgage Association.
BANK OBLIGATIONS
Bank obligations include, but are not limited to, negotiable certificates of
deposit, bankers' acceptances and fixed time deposits.
Fixed time deposits are obligations of U.S. banks, of foreign branches of U.S.
banks, or of foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Generally, fixed time deposits may be withdrawn on
demand by the investor, but they may be subject to early withdrawal penalties
which vary depending upon market conditions and the remaining maturity of the
obligation. Although fixed time deposits do not have a market, there are no
contractual restrictions on a Portfolio's right to transfer a beneficial
interest in the deposit to a third party.
Obligations of foreign banks and foreign branches of United States banks involve
somewhat different investment risks from those affecting obligations of United
States banks, including the possibilities that liquidity could be impaired
because of future political and economic developments, that the obligations may
be less marketable than comparable obligations of United States banks, that a
foreign jurisdiction might impose withholding taxes on interest income payable
on those obligations, that foreign deposits may be seized or nationalized, that
foreign governmental restrictions (such as foreign exchange controls) may be
adopted which might adversely affect the payment of principal and interest on
those obligations and that the selection of those obligations may be more
difficult because there may be less publicly available information concerning
foreign banks, or the accounting, auditing and financial reporting standards,
practices and requirements applicable to foreign banks differ from those
applicable to United States banks. In that connection, foreign banks are not
subject to examination by any United States Government agency or
instrumentality.
SAVINGS AND LOAN OBLIGATIONS
The Portfolios may invest in savings and loan obligations which are negotiable
certificates of deposit and other short-term debt obligations of savings and
loan associations.
DEBT OBLIGATIONS
A Portfolio may invest a portion of its assets in debt obligations. Issuers of
debt obligations have a contractual obligation to pay interest at a specified
rate on specified dates and to repay principal on a specified maturity date.
Certain debt obligations (usually intermediate- and long-term bonds) have
provisions that allow the issuer to redeem or "call" a bond before its maturity.
Issuers are most likely to call such securities during periods of falling
interest rates.
PRICE VOLATILITY. The market value of debt obligations is affected by changes in
prevailing interest rates. The market value of a debt obligation generally
reacts inversely to interest-rate changes, meaning, when prevailing interest
rates decline, an obligation's price usually rises, and when prevailing interest
rates rise, an obligation's price usually declines. A fund portfolio consisting
primarily of debt obligations will react similarly to changes in interest rates.
MATURITY. In general, the longer the maturity of a debt obligation, the higher
its yield and the greater its sensitivity to changes in interest rates.
Conversely, the shorter the maturity, the lower the yield but the greater the
price stability. Commercial paper is generally considered the shortest form of
debt obligation. The term "bond" generally refers to securities with maturities
longer than two years. Bonds with maturities of three years or less are
considered short-term, bonds with maturities between three and seven years are
considered intermediate-term, and bonds with maturities greater than seven years
are considered long-term.
CREDIT QUALITY. The values of debt obligations may also be affected by changes
in the credit rating or financial condition of their issuers. Generally, the
lower the quality rating of a security, the higher the degree of risk as to the
payment of interest and return of principal. To compensate investors for taking
on such increased risk, those issuers deemed to be less creditworthy generally
must offer their investors higher interest rates than do issuers with better
credit ratings.
In conducting their credit research and analysis, the Sub-Advisers consider both
qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Sub-Advisers also rely, in part, on credit ratings
compiled by a number of NRSROs. See the Appendix for additional information.
TEMPORARY DEFENSIVE POSITION. When a Sub-Adviser determines that market
conditions warrant a temporary defensive position, the Portfolios may invest
without limitation in cash and short-term fixed income securities, including
U.S. Government securities, commercial paper, banker's acceptances, certificates
of deposit, and time deposits.
SHORT-TERM CORPORATE DEBT INSTRUMENTS
A Portfolio may invest in commercial paper, which refers to short-term,
unsecured promissory notes issued by U.S. and foreign corporations to finance
short-term credit needs. Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months.
A Portfolio may also invest in non-convertible corporate debt securities (e.g.,
bonds and debentures) with no more than one year remaining to maturity at the
date of settlement. Corporate debt securities with a remaining maturity of less
than one year tend to become extremely liquid and are traded as money market
securities.
MUNICIPAL OBLIGATIONS
Municipal Obligations include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Obligations may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses, and obtaining funds to loan to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included with the term Municipal Obligations if the interest paid thereon
qualifies as exempt from federal income tax.
Other types of industrial development bonds, the proceeds of which are used for
the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Obligations,
although the current federal tax laws place substantial limitations on the size
of such issues.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are secured by revenues derived from the lease of
property to state and local government units. The underlying leases typically
are renewable annually by the governmental user, although the lease may have a
term longer than one year. If the governmental user does not appropriate
sufficient funds for the following year's lease payments, the lease will
terminate, with the possibility of default on the lease obligations and
significant loss to a Portfolio. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit and
time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain to
domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
BRADY BONDS
A portion of a Portfolio's fixed -income investments may be invested in certain
debt obligations customarily referred to as "Brady Bonds", which are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are
dollar-denominated) and they are actively traded in the over-the-counter
secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to Collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of default with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
Brady Plan debt restructurings have been implemented to date in various
countries including Argentina, Brazil, Bulgaria, Costa Rica, Dominican Republic,
Ecuador, Jordan, Mexico, Nigeria, Panama, the Philippines, Poland, Uruguay and
Venezuela. There can be no assurance that the circumstances regarding the
issuance of Brady Bonds by these countries will not change.
WHEN ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS
A Portfolio may from time to time purchase securities on a "when-issued" basis.
The price of debt obligations purchased on a when-issued basis, which may be
expressed in yield terms, is fixed at the time the commitment to purchase is
made, but delivery and payment for the securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase. During
the period between the purchase and settlement, no payment is made by a
Portfolio to the issuer and no interest on the debt obligations accrues to the
Portfolio. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of a Portfolio's other assets. While
when-issued securities may be sold prior to the settlement date, the Portfolios
intend to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time a Portfolio
makes the commitment to purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. The Portfolios do not believe that their respective net asset
values will be adversely affected by purchases of securities on a when-issued
basis.
The Portfolios will maintain cash and marketable securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. When the time
comes to pay for when-issued securities, a Portfolio will meet its obligations
from then-available cash flow, sale of the securities held in the separate
account, described above, sale of other securities or, although it would not
normally expect to do so, from the sale of the when-issued securities themselves
(which may have a market value greater or less than the Portfolio's payment
obligation).
WARRANTS
A Portfolio may acquire warrants. Warrants are securities giving the holder the
right, but not the obligation, to buy the stock of an issuer at a given price
(generally higher than the value of the stock at the time of issuance) during a
specified period or perpetually. Warrants may be acquired separately or in
connection with the acquisition of securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES
A Portfolio may invest in zero-coupon, step-coupon, and pay-in-kind securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon and step-coupon securities are sold at a deep discount to
their face value. Pay-in-kind securities pay interest through the issuance of
additional securities. Because such securities do not pay current cash income,
the price of these securities can be volatile when interest rates fluctuate.
While these securities do not pay current cash income, federal income tax law
requires the holders of zero-coupon, step-coupon, and pay-in-kind securities to
include in income each year the portion of the original issue discount (or
deemed discount) and other non-cash income on such securities accruing that
year. The Berkeley U.S. Quality Bond Portfolio may invest up to 10% of its
assets in zero coupon bonds or strips. Strips are debt securities that are
stripped of their interest after the securities are issued, but otherwise are
comparable to zero coupon bonds.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain of the floating or variable rate obligations that may be purchased by a
Portfolio may carry a demand feature that would permit the holder to tender them
back to the issuer of the instrument or to a third party at par value prior to
maturity. Some of the demand instruments purchased by a Portfolio are not traded
in a secondary market and derive their liquidity solely from the ability of the
holder to demand repayment from the issuer or third party providing credit
support. If a demand instrument is not traded in a secondary market, a Portfolio
will nonetheless treat the instrument as "readily marketable" for the purposes
of its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days; if the notice
period is greater than seven days, the demand instrument will be characterized
as "not readily marketable" for such purpose.
A Portfolio's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Portfolio elects to demand
payment and the date payment is due that may affect the ability of the issuer of
the instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than the Trust's custodian subject to a sub-custodian agreement
approved by the Trust between that bank and the Trust's custodian.
SHORT SALES
A Portfolio may sell securities short to hedge unrealized gains on portfolio
securities. Selling securities short involves selling a security that a
Portfolio owns or has the right to acquire, for delivery at a specified date in
the future. If a Portfolio sells securities short, it may protect unrealized
gains, but will lose the opportunity to profit on such securities if the price
rises. All short sales must be fully collateralized and marked to market daily.
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. A Portfolio also
will incur transaction costs in effecting short sales. Proposed legislation
would require recognition of unrealized gains from short sales and other
constructive sales.
INVERSE FLOATING RATE OBLIGATIONS
Certain Portfolios may invest in inverse floating rate obligations, or "inverse
floaters." Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the "reference rate"). Inverse floaters may constitute a class of CMOs
with a coupon rate that moves inversely to a designated index, such as LIBOR
(London Inter-Bank Offered Rate) or COFI (Cost of Funds Index). Any rise in the
reference rate of an inverse floater (as a consequence of an increase in
interest rates) causes a drop in the coupon rate while any drop in the reference
rate of an inverse floater causes an increase in the coupon rate. In addition,
like most other fixed income securities, the value of inverse floaters will
generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed rate
obligations having similar credit quality, redemption provisions and maturity,
and inverse floater CMOs exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates but also to changes in prepayment rates on the related underlying mortgage
assets.
LOAN PARTICIPATIONS AND OTHER DIRECT INDEBTEDNESS
A Portfolio may purchase loan participations and other direct claims against a
borrower. In purchasing a loan participation, a Portfolio acquires some or all
of the interest of a bank or other lending institution in a loan to a corporate
borrower. Many such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans that are fully secured
offer the Portfolio more protection than an unsecured loan in the event of
non-payment of scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would satisfy the
corporate borrower's obligation, or that the collateral can be liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which a
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan either directly from
the lender or through an intermediary. A Portfolio may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loan participations acquired by a Portfolio may involve revolving
credit facilities or other standby financing commitments which obligate a
Portfolio to pay additional cash on a certain date or on demand. These
commitments may have the effect of requiring a Portfolio to increase its
investment in a company at a time when a Portfolio might not otherwise decide to
do so (including at a time when the company's financial condition makes it
unlikely that such amounts will be repaid). To the extent that a Portfolio is
committed to advance additional funds, it will at all times hold and maintain in
a segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments.
A Portfolio's ability to receive payments of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loan participations and
other direct investments which a Portfolio will purchase, the Sub-Adviser will
rely upon its (and not that of the original lending institutions) own credit
analysis of the borrower. As a Portfolio may be required to rely upon another
lending institution to collect and pass on to the Portfolio amounts payable with
respect to the loan and to enforce a Portfolio's rights under the loan, an
insolvency, bankruptcy or reorganization of the lending institution may delay or
prevent a Portfolio from receiving such amounts. In such cases, a Portfolio will
evaluate as well the creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an "issuer" of the loan
participation for purposes of certain investment restrictions pertaining to the
diversification of a Portfolio's investments. The highly leveraged nature of
many such loans may make such loans especially vulnerable to adverse changes in
economic or market conditions. Investments in such loans may involve additional
risks to a Portfolio. For example, if a loan is foreclosed, a Portfolio could
become part owner of any collateral, and would bear the costs and liabilities
associated with owning and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender liability, a Portfolio
could be held liable as a co-lender. It is unclear whether loans and other forms
of direct indebtedness offer securities law protections against fraud and
misrepresentation. In the absence of definitive regulatory guidance, a Portfolio
relies on the Sub-Adviser's research in an attempt to avoid situations where
fraud or misrepresentation could adversely affect the Portfolio. In addition,
loan participations and other direct investments may not be in the form of
securities or may be subject to restrictions on transfer, and only limited
opportunities may exist to resell such instruments. As a result, a Portfolio may
be unable to sell such investments at an opportune time or may have to resell
them at less than fair market value. To the extent that the Sub-Adviser
determines that any such investments are illiquid, a Portfolio will include them
in the investment limitations described below.
INDEXED SECURITIES
A Portfolio may purchase securities whose prices are indexed to the prices of
other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Index securities may include
securities that have embedded swaps (see "Swaps and Related Transactions") and
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
OTHER INVESTMENT COMPANIES
As indicated under "Investment Restrictions", a Portfolio may from time to time
invest in securities of other investment companies. The return on such
investments will be reduced by the operating expenses, including investment
advisory and administration fees, of such investment funds, and will be further
reduced by the Portfolio expenses, including management fees; that is, there
will be a layering of certain fees and expenses.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which a Portfolio may invest may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the 1940 Act, a Portfolio may
invest up to 10% of its assets in shares of investment companies and up to 5% of
its assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
SWAPS AND RELATED TRANSACTIONS
A Portfolio may enter into interest rate swaps, currency swaps and other types
of available swap agreements, such as caps, collars and floors.
Swap agreements may be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease a
Portfolio's exposure to long or short-term interest rates (in the U.S. or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as securities prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names. A
Portfolio is not limited to any particular form or variety of swap agreement if
the Sub-Adviser determines it is consistent with the Portfolio's investment
objective and policies.
A Portfolio will maintain cash or appropriate liquid assets with its custodian
to cover its current obligations under swap transactions. If a Portfolio enters
into a swap agreement on a net basis (i.e., the two payment streams are netted
out, with the Portfolio receiving or paying as the case may be, only the net
amount of the two payments), the Portfolio will maintain cash or liquid assets
with its Custodian with a daily value at least equal to the excess, if any, of
the Portfolio's accrued obligations under the swap agreement over the accrued
amount the Portfolio is entitled to receive under the agreement. If the
Portfolio enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of the
Portfolio's accrued obligations under the agreement.
The most significant factor in the performance of swaps, caps, floors and
collars is the change in the specific interest rate, currency or other factor
that determines the amount of payments to be made under the arrangement. If a
Sub-Adviser is incorrect in its forecasts of such factors, the investment
performance of the Portfolio would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Portfolio, the Portfolio must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses. If
the counterparty defaults, the Portfolio's risk of loss consists of the net
amount of payments that the Portfolio is contractually entitled to receive. The
Portfolio anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering into
an offsetting agreement with the same or another counterparty.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Sub-Advisers for
certain Portfolios may use a variety of derivative instruments, including
options, futures contracts (sometimes referred to as "futures"), options on
futures contracts, and forward currency contracts for any lawful purpose, such
as to hedge a Portfolio's investments, risk management, or to attempt to enhance
returns.
The use of these instruments is subject to applicable regulations of the SEC,
the several options and futures exchanges upon which they may be traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, a Portfolio's ability to use these instruments will be
limited by tax considerations.
In addition to the products, strategies and risks described below and in the
Prospectus, the Sub-Advisers expect to discover additional derivative
instruments and other hedging techniques. These new opportunities may become
available as the Sub-Advisers develop new techniques or as regulatory
authorities broaden the range of permitted transactions. The Sub-Advisers may
utilize these opportunities to the extent that they are consistent with a
Portfolio's investment objective and permitted by a Portfolio's investment
limitations and applicable regulatory authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments involves
special considerations and risks as described below. Risks pertaining to
particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon a
Sub-Adviser's ability to predict movements of the overall securities and
currency markets, which requires different skills than predicting changes in the
prices of individual securities. While the Sub-Advisers are experienced in the
use of these instruments, there can be no assurance that any particular strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of investments being
hedged. For example, if the value of an instrument used in a short hedge (such
as writing a call option, buying a put option, or selling a futures contract)
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments on indices will depend on
the degree of correlation between price movements in the index and price
movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Portfolio entered into a
short hedge because the Sub-Adviser projected a decline in the price of a
security in the Portfolio's investments, and the price of that security
increased instead, the gain from that increase might be wholly or partially
offset by a decline in the price of the instrument. Moreover, if the price of
the instrument declined by more than the increase in the price of the security,
a Portfolio could suffer a loss.
(4) As described below, a Portfolio might be required to maintain assets as
"cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If a Portfolio were unable to close
out its positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. The requirements might impair a Portfolio's ability to sell
a portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that a Portfolio sell a portfolio security at a
disadvantageous time. A Portfolio's ability to close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counter party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to a Portfolio.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The Trust will file a
notice of eligibility for exclusion from the definition of the term "commodity
pool operator" with the CFTC and the National Futures Association, which
regulate trading in the futures markets. Pursuant to Rule 4.5 of the regulations
under the Commodity Exchange Act (the "CEA"), the notice of eligibility will
include representations that the Trust will use futures contracts and related
options solely for bona fide hedging purposes within the meaning of CFTC
regulations, provided that the Trust may hold other positions in futures
contracts and related options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and premiums required to
establish these positions, less the amount by which any such options positions
are "in the money," do not exceed 5% of the Trust's net assets. Adoption of
these guidelines does not limit the percentage of the Trust's assets at risk to
5%.
In addition, (i) the aggregate value of securities underlying call options on
securities written by a Portfolio or obligations underlying put options on
securities written by a Portfolio determined as of the date the options are
written will not exceed 50% of the Portfolio's net assets; (ii) the aggregate
premiums paid on all options purchased by a Portfolio and which are being held
will not exceed 20% of the Portfolio's net assets; (iii) a Portfolio will not
purchase put or call options, other than hedging positions, if, as a result
thereof, more than 5% of its total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and options on futures
transactions being held will not exceed 5% of a Portfolio's total assets.
The foregoing limitations are not fundamental policies of the Portfolios and may
be changed by the Trust's Board of Trustees without shareholder approval as
regulatory agencies permit.
Transactions using options (other than purchased options) expose a Portfolio to
counter-party risk. To the extent required by SEC guidelines, a Portfolio will
not enter into any such transactions unless it owns either (1) an offsetting
("covered") position in securities, other options, or futures or (2) cash and
liquid high grade debt securities with a value sufficient at all times to cover
its potential obligations to the extent not covered as provided in (1) above. A
Portfolio will also set aside cash and/or appropriate liquid assets in a
segregated custodial account if required to do so by the SEC and CFTC
regulations. Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding option or futures contract is open,
unless they are replaced with similar assets. As a result, the commitment of a
large portion of a Portfolio's assets to segregated accounts as a cover could
impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
OPTIONS. A Portfolio may purchase and write put and call options on securities,
on indices of securities, and foreign currency, and enter into closing
transactions with respect to such options to terminate an existing position. The
purchase of call options serves as a long hedge, and the purchase of put options
serves as a short hedge. Writing put or call options can enable a Portfolio to
enhance income by reason of the premiums paid by the purchaser of such options.
Writing call options serves as a limited short hedge because declines in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the Portfolio will be obligated to sell the
security at less than its market value or will be obligated to purchase the
security at a price greater than that at which the security must be sold under
the option. All or a portion of any assets used as cover for OTC options written
by a Portfolio would be considered illiquid to the extent described under
"Illiquid or Restricted Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the put option will be exercised and the
Portfolio will be obligated to purchase the security at more than its market
value.
The value of an option position will reflect, among other things, the historical
price volatility of the underlying investment, the current market value of the
underlying investment, the time remaining until expiration, the relationship of
the exercise price to the market price of the underlying investment, and general
market conditions. Options that expire unexercised have no value. Options used
by a Portfolio may include European-style options. This means that the option is
only exercisable at its expiration. This is in contrast to American-style
options which are exercisable at any time prior to the expiration date of the
option.
A Portfolio may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Portfolio may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, a Portfolio may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit a Portfolio to realize the profit
or limit the loss on an option position prior to its exercise or expiration.
A Portfolio may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between a Portfolio and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Portfolio purchases or writes an OTC option, it relies
on the counter party to make or take delivery of the underlying investment upon
exercise of the option. Failure by the counter party to do so would result in
the loss of any premium paid by a Portfolio as well as the loss of any expected
benefit of the transaction.
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Portfolios intend to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counter party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with counter parties that are
expected to be capable of entering into closing transactions with the Portfolio,
there is no assurance that the Portfolio will in fact be able to close out an
OTC option at a favorable price prior to expiration. In the event of insolvency
of the counter party, a Portfolio might be unable to close out an OTC option
position at any time prior to its expiration.
If a Portfolio were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Portfolio could cause material losses because the Portfolio would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
A Portfolio may engage in options transactions on indices in much the same
manner as the options on securities discussed above, except the index options
may serve as a hedge against overall fluctuations in the securities markets in
general.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of attempted
hedging.
YIELD CURVE OPTIONS: A Portfolio may also enter into options on the "spread," or
yield differential, between two fixed income securities, in transactions
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. Specifically, a Portfolio may purchase or write such options for
hedging purposes. For example, a Portfolio may purchase a call option on the
yield spread between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge against an adverse
change in the yield spread between the two securities. A Portfolio may also
purchase or write yield curve options for other than hedging purposes (i.e., in
an effort to increase its current income) if, in the judgment of the
Sub-Adviser, a Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss even
if the yield of one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated. Yield curve
options written by a Portfolio will be "covered". A call (or put) option is
covered if the Portfolio holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or cash equivalents sufficient to cover the Portfolio's net
liability under the two options. Therefore, a Portfolio's liability for such a
covered option is generally limited to the difference between the amount of the
Portfolio's liability under the option written by the Portfolio less the value
of the option held by the Portfolio. Yield curve options may also be covered in
such other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter and because they
have been only recently introduced, established trading markets for these
securities have not yet developed.
The staff of the SEC has taken the position that purchased over-the-counter
options and assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities, cannot exceed a certain
percentage of the Portfolio's assets (the "SEC illiquidity ceiling"). The
Sub-Advisers intend to limit a Portfolio's writing of over-the-counter options
in accordance with the following procedure. Except as provided below, the
Portfolios intend to write over-the-counter options only with primary U.S.
government securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts which a Portfolio will have in place with such primary
dealers will provide that the Portfolio has the absolute right to repurchase an
option it writes at any time at a price which represents the fair market value,
as determined in good faith through negotiation between the parties, but which
in no event will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between contracts with
different primary dealers, the formula will generally be based on a multiple of
the premium received by the Portfolio for writing the option, plus the amount,
if any, of the option's intrinsic value (i.e., the amount that the option is
in-the-money). The formula may also include a factor to account for the
difference between the price of the security and the strike price of the option
if the option is written out-of-money. A Portfolio will treat all or a part of
the formula price as illiquid for purposes of the SEC illiquidity ceiling. A
Portfolio may also write over-the-counter options with non-primary dealers,
including foreign dealers, and will treat the assets used to cover these options
as illiquid for purposes of such SEC illiquidity ceiling.
SPREAD TRANSACTIONS. A Portfolio may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives a
Portfolio the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that a
Portfolio does not own, but which is used as a benchmark. The risk to the
Portfolio in purchasing covered spread options is the cost of the premium paid
for the spread option and any transaction costs. In addition, there is no
assurance that closing transactions will be available. The purchase of spread
options will be used to protect the Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option.
FUTURES CONTRACTS. A Portfolio may enter into futures contracts, including
interest rate, index, and foreign currency futures. A Portfolio may also
purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered call
options on futures contracts can serve as a limited short hedge, and writing
covered put options on futures contracts can serve as a limited long hedge,
using a strategy similar to that used for writing covered options in securities.
A Portfolio's hedging may include purchases of futures as an offset against the
effect of expected increases in securities prices and currency exchange rates
and sales of futures as an offset against the effect of expected declines in
securities prices and currency exchange rates. A Portfolio's futures
transactions may be entered into for any lawful purpose such as hedging
purposes, risk management, or to enhance returns. A Portfolio may also write put
options on futures contracts while at the same time purchasing call options on
the same futures contracts in order to create synthetically a long futures
contract position. Such options would have the same strike prices and expiration
dates. A Portfolio will engage in this strategy only when a Sub-Adviser believes
it is more advantageous to the Portfolio than is purchasing the futures
contract.
To the extent required by regulatory authorities, the Portfolios only enter into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce a Portfolio's exposure to market, currency, or interest rate
fluctuations, the Portfolio may be able to hedge its exposure more effectively
and perhaps at a lower cost through using futures contracts.
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.
debt security) or currency for a specified price at a designated date, time, and
place. An index futures contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
contract and the price at which the index futures contract was originally
written. Transaction costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures contract may be satisfied
by delivery or purchase, as the case may be, of the instrument, the currency, or
by payment of the change in the cash value of the index. More commonly, futures
contracts are closed out prior to delivery by entering into an offsetting
transaction in a matching futures contract. Although the value of an index might
be a function of the value of certain specified securities, no physical delivery
of those securities is made. If the offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Portfolio realizes a gain; if it is less, the
Portfolio realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that a Portfolio will be able
to enter into an offsetting transaction with respect to a particular futures
contract at a particular time. If the Portfolio is not able to enter into an
offsetting transaction, the Portfolio will continue to be required to maintain
the margin deposits on the futures contract.
No price is paid by a Portfolio upon entering into a futures contract. Instead,
at the inception of a futures contract, the Portfolio is required to deposit in
a segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash,
U.S. Government securities or other liquid, high grade debt obligations, in an
amount generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the Portfolio at the termination of the transaction if all contractual
obligations have been satisfied. Under certain circumstances, such as periods of
high volatility, the Portfolio may be required by an exchange to increase the
level of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents a
daily settlement of the Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Portfolio
purchases or sells a futures contract or writes a call or put option thereon, it
is subject to daily variation margin calls that could be substantial in the
event of adverse price movements. If a Portfolio has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing transactions by selling
or purchasing, respectively, an instrument identical to the instrument held or
written. Positions in futures and options on futures may be closed only on an
exchange or board of trade that provides a secondary market. The Portfolios
intend to enter into futures transactions only on exchanges or boards of trade
where there appears to be a liquid secondary market. However, there can be no
assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If a Portfolio were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Portfolio
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Portfolio would continue
to be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contracts positions
whose prices are moving unfavorably to avoid being subject to further calls.
These liquidations could increase price volatility of the instruments and
distort the normal price relationship between the futures or options and the
investments being hedged. Also, because initial margin deposit requirements in
the futures market are less onerous than margin requirements in the securities
markets, there might be increased participation by speculators in the future
markets. This participation also might cause temporary price distortions. In
addition, activities of large traders in both the futures and securities markets
involving arbitrage, "program trading" and other investment strategies might
result in temporary price distortions.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES-SPECIAL CONSIDERATIONS. A
Portfolio may also use options and futures on foreign currencies and forward
currency contracts to hedge against movements in the values of the foreign
currencies in which the Portfolio's securities are denominated. The Portfolio
may utilize foreign currency-related derivative instruments for any lawful
purposes such as for bona fide hedging or to seek to enhance returns through
exposure to a particular foreign currency. Such currency hedges can protect
against price movements in a security the Portfolio owns or intends to acquire
that are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in the
securities that are attributable to other causes.
A Portfolio might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Portfolio may hedge against price movements in that currency
by entering into transactions using hedging instruments on another foreign
currency or a basket of currencies, the values of which the Sub-Adviser believes
will have a high degree of positive correlation to the value of the currency
being hedged. The risk that movements in the price of the hedging instrument
will not correlate perfectly with movements in the price of the currency being
hedged is magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on the value
of the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such hedging instruments, the
Portfolio could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the derivative instruments until they reopen.
Settlement of derivative transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Portfolio will normally purchase OTC options on foreign
currency only when the Sub-Adviser believes a liquid secondary market will exist
for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an obligation
to purchase or sell a specific currency at a specified future date, which may be
any fixed number of days from the contract date agreed upon by the parties, at a
price set at the time the contract is entered into.
A Portfolio may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. Such transactions may serve as long hedges --
for example, a Portfolio may purchase a forward currency contract to lock in the
U.S. dollar price of a security denominated in a foreign currency that a
Portfolio intends to acquire. Forward currency contracts may also serve as short
hedges -- for example, the Portfolio may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency.
A Portfolio may seek to hedge against changes in the value of a particular
currency by using forward contracts on another foreign currency or a basket of
currencies, the value of which the Sub-Adviser believes will have a positive
correlation to the values of the currency being hedged. In addition, the
Portfolio may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if a Portfolio
owns securities denominated in a foreign currency and the Sub-Adviser believes
that currency will decline relative to another currency, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency. Transactions that use
two foreign currencies are sometimes referred to as "cross hedges." Use of
different foreign currency magnifies the risk that movements in the price of the
instrument will not correlate or will correlate unfavorably with the foreign
currency being hedged.
The cost to the Portfolio of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Portfolio enters into a forward currency contract, it relies on the
counter party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counter party to do so would result in
the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by selling or purchasing, respectively, an instrument
identical to the instrument held or written. Secondary markets generally do not
exist for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the counter party. Thus, there can be no assurance that the
Portfolio will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counter party, the Portfolio might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Portfolio would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in securities denominated in the
foreign currency or to maintain cash or securities in a segregated account.
The precise matching of forward currency contract amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Portfolio might need to
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
FOREIGN CURRENCY TRANSACTIONS
Although the Strong International Stock Portfolio values its assets daily in
U.S. dollars, it is not required to convert its holdings of foreign currencies
to U.S. dollars on a daily basis. The Portfolio's foreign currencies generally
will be held as "foreign currency call accounts" at foreign branches of foreign
or domestic banks. These accounts bear interest at negotiated rates and are
payable upon relatively short demand periods. If a bank became insolvent, the
Portfolio could suffer a loss of some or all of the amounts deposited. The
Portfolio may convert foreign currency to U.S. dollars from time to time.
Although foreign exchange dealers generally do not charge a stated commission or
fee for conversion, the prices posted generally include a "spread," which is the
difference between the prices at which the dealers are buying and selling
foreign currencies.
HYBRID INSTRUMENTS
Hybrid Instruments combine the elements of futures contracts or options with
those of debt, preferred equity or a depository instrument. Often these Hybrid
Instruments are indexed to the price of a commodity, a particular currency, or a
domestic or foreign debt or equity securities index. Hybrid Instruments may take
a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the value
of a currency, or convertible securities with the conversion terms related to a
particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of the risks
of investing in securities, options, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of
futures, options, and forward contracts herein for a discussion of these risks.
Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). In addition, because the purchase and sale of Hybrid Instruments could
take place in an over-the-counter market or in a private transaction between a
Portfolio and the seller of the Hybrid Instrument, the creditworthiness of the
counterparty to the transaction would be a risk factor which a Portfolio would
have to consider. Hybrid Instruments also may not be subject to regulation by
the CFTC, which generally regulates the trading of commodity futures by U.S.
persons, the SEC (which regulates the offer and sale of securities by and to
U.S. persons), or any other governmental regulatory authority.
COMBINED TRANSACTIONS
The Portfolios may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures, options and foreign currency transactions, instead of a
single transaction, as part of a single hedging strategy when, in the opinion of
a Sub-Adviser, it is in the best interest of a Portfolio to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the 1940 Act and the
rules thereunder, "majority of the outstanding voting securities" of a Portfolio
means the lesser of (1) 67% of the shares of that Portfolio present at a meeting
if the holders of more than 50% of the outstanding shares of that Portfolio are
present in person or by proxy, and (2) more than 50% of the outstanding shares
of that Portfolio. Any investment restrictions which involve a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after, and is caused by, an
acquisition or encumbrance of securities or assets of, or borrowings by or on
behalf of, a Portfolio, as the case may be.
STRONG INTERNATIONAL STOCK PORTFOLIO AND STRONG GROWTH PORTFOLIO
Each of the Strong Portfolios:
1. May not with respect to 75% of its total assets, purchase the securities
of any issuer (except securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities) if, as a result, (i) more than 5% of the
Portfolio's total assets would be invested in the securities of that issuer, or
(ii) the Portfolio would hold more than 10% of the outstanding voting securities
of that issuer.
2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the 1940 Act which may involve a
borrowing such as reverse repurchase agreement and mortgage "dollar roll"
transactions, provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Portfolio's total assets (including the amount
borrowed), less the Portfolio's liabilities (other than borrowings), except that
the Portfolio may borrow up to an additional 5% of its total assets (not
including the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Portfolio may also
borrow money from the other Strong Funds for which it serves as investment
adviser or other persons to the extent permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's securities, except to
the extent that the Portfolio may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of portfolio
securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Portfolio from purchasing or selling options, futures contracts, or
other derivative instruments, or from investing in securities or other
instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Portfolio's
total assets would be lent to other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii) engaging in repurchase
agreements.
7. May not purchase the securities of any issuer if, as a result, more than
25% of the Portfolio's total assets would be invested in the securities of
issuers, the principal business activities of which are in the same industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Portfolio from purchasing or selling securities or other instruments backed by
real estate or of issuers engaged in real estate activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objective, policies, and restrictions as the Portfolio.
BERKELEY U.S. QUALITY BOND PORTFOLIO
The Berkeley U.S. Quality Bond Portfolio may not:
(1) Own more than 10% of the outstanding voting securities of any one
issuer, and as to seventy-five percent (75%) of the value of the total assets of
the Portfolio, purchase the securities of any one issuer (except cash items and
"government securities" as defined under the 1940 Act), if immediately after and
as a result of such purchase, the value of the holdings of the Portfolio in the
securities of such issuer exceeds 5% of the value of the Portfolio's total
assets.
(2) Invest more than 25% of the value of its respective assets in any
particular industry (other than U.S. Government securities).
(3) Invest directly in real estate or interests in real estate; however,
the Portfolio may own debt or equity securities issued by companies engaged in
those businesses.
(4) Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this limitation
shall not prevent the Portfolio from purchasing or selling options, futures,
swaps and forward contracts or from investing in securities or other instruments
backed by physical commodities).
(5) Lend any security or make any other loan if, as a result, more than 25%
of the Portfolio's total assets would be lent to other parties (but this
limitation does not apply to purchases of commercial paper, debt securities or
repurchase agreements).
(6) Act as an underwriter of securities issued by others, except to the
extent that the Portfolio may be deemed an underwriter in connection with the
disposition of portfolio securities of the Portfolio.
(7) Invest more than 15% of the Portfolio's net assets in securities which
are restricted as to disposition under federal securities law, or securities
with other legal or contractual restrictions or resale. This limitation does not
apply to securities eligible for resale pursuant to Rule 144A of the 1933 Act
which the Board of Trustees has determined to be liquid.
(8) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Trust or the investment adviser or sub-adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and together
they own more than 5% of the securities of such issuer.
(9) The Portfolio will not issue senior securities except that it may
borrow money for temporary or emergency purposes (not for leveraging or
investment) in an amount not exceeding 25% of the value of its respective total
assets (including the amount borrowed) less liabilities (other than borrowings).
If borrowings exceed 25% of the value of the Portfolio's total assets by reason
of a decline in net assets, the Portfolio will reduce its borrowings within
three business days to the extent necessary to comply with the 25% limitation.
This policy shall not prohibit reverse repurchase agreements, deposits of assets
to margin or guarantee positions in futures, options, swaps and forward
contracts, or the segregation of assets in connection with such contracts.
BERKELEY MONEY MARKET PORTFOLIO
The Berkeley Money Market Portfolio may not:
(1) purchase any securities which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that there is no limitation with respect to investment in
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, with respect to bank obligations or with respect to
repurchase agreements collateralized by any of such obligations;
(2) own more than 10% of the outstanding voting stock or other securities,
or both, of any one issuer (other than securities of the U.S. government or any
agency or instrumentality thereof);
(3) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by the
Portfolio's shareholders), provided that the Portfolio may purchase shares of
any registered open-end investment company that determines its net asset value
per share based on the amortized cost- or penny-rounding method, if immediately
after any such purchase the Portfolio does not (a) own more than 3% of the
outstanding voting stock of any one investment company, (b) invest more than 5%
of the value of its total assets in any one investment company, or (c) invest
more than 10% of the value of its total assets in the aggregate in securities of
investment companies;
(4) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions);
(5) sell securities short;
(6) purchase or sell commodities or commodity contracts, including futures
contracts;
(7) invest for the purpose of exercising control over management of any
company;
(8) make loans, except that the Portfolio may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and certificates
of deposit, banker's acceptances and fixed time deposits) in accordance with its
investment objectives and policies; and (b) enter into repurchase agreements
with respect to portfolio securities;
(9) underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Portfolio's investment
program may be deemed to be an underwriting;
(10) purchase real estate or real estate limited partnership interests
(other than money market securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or interests
therein);
(11) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases; or
(12) purchase warrants.
With respect to the Berkeley Money Market Portfolio, for the purpose of applying
the above percentage restrictions and the percentage investment limitations set
forth in the Prospectus to receivables-backed obligations, both the special
purpose entity issuing the receivables-backed obligations and the issuer of the
underlying receivables will be considered an issuer.
HARRIS ASSOCIATES VALUE PORTFOLIO
The Harris Associates Value Portfolio may not:
1. In regard to 75% of its assets, invest more than 5% of its assets
(valued at the time of investment) in securities of any one issuer, except in
U.S. government obligations;
2. Acquire securities of any one issuer which at the time of investment (a)
represent more than 10% of the voting securities of the issuer, or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at the time of investment) in
securities of companies in any one industry, except that this restriction does
not apply to investments in U.S. government obligations;
4. Borrow money except from banks for temporary or emergency purposes in
amounts not exceeding 10% of the value of the Portfolio's assets at the time of
borrowing;
5. Issue any senior security except in connection with permitted
borrowings; or
6. Underwrite the distribution of securities of other issuers; however the
Portfolio may acquire "restricted" securities which, in the event of a resale,
might be required to be registered under the Securities Act of 1933 on the
ground that the Portfolio could be regarded as an underwriter as defined by that
Act with respect to such resale;
7. Make loans, but this restriction shall not prevent the Portfolio from
(a) investing in debt obligations, (b) investing in repurchase agreements (A
repurchase agreement involves a sale of securities to the Portfolio with the
concurrent agreement of the seller (bank or securities dealer) to repurchase the
securities at the same price plus an amount equal to an agreed-upon interest
rate within a specified time. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Portfolio could experience both delays in
liquidating the underlying securities and losses);
8. Purchase and sell real estate or interests in real estate, although it
may invest in marketable securities of enterprises which invest in real estate
or interests in real estate;
9. Purchase and sell commodities or commodity contracts, except that it may
enter into forward foreign currency contracts;
10. Acquire securities of other investment companies except (a) by purchase
in the open market, where no commission or profit to a sponsor or dealer results
from such purchase other than the customary broker's commission or (b) where the
acquisition results from a dividend or a merger, consolidation or other
reorganization. (In addition to this investment restriction, the Investment
Company Act of 1940 provides that the Portfolio may neither purchase more than
3% of the voting securities of any one investment company nor invest more than
10% of the Portfolio's assets (valued at the time of investment) in all
investment company securities purchased by the Portfolio. Investment in the
shares of another investment company would require the Portfolio to bear a
portion of the management and advisory fees paid by that investment company,
which might duplicate the fees paid by the Portfolio.)
LEXINGTON CORPORATE LEADERS PORTFOLIO
The Lexington Corporate Leaders Portfolio will not:
a. issue any senior security (as defined in the 1940 Act), except that (a)
the Portfolio may enter into commitments to purchase securities in accordance
with the Portfolio's investment program, including reverse repurchase
agreements, foreign exchange contracts, delayed delivery and when-issued
securities, which may be considered the issuance of senior securities; (b) the
Portfolio may engage in transactions that may result in the issuance of a senior
security to the extent permitted under applicable regulations, interpretation of
the 1940 Act or an exemptive order; (c) the Portfolio may engage in short sales
of securities to the extent permitted in its investment program and other
restrictions; (d) the purchase or sale of futures contracts and related options
shall not be considered to involve the issuance of senior securities; and (e)
subject to fundamental restrictions, the Portfolio may borrow money as
authorized by the 1940 Act.
b. act as an underwriter of securities except to the extent that, in
connection with the disposition of portfolio securities by the Portfolio, the
Portfolio may be deemed to be an underwriter under the provisions of the 1933
Act.
c. purchase real estate, interests in real estate or real estate limited
partnership interests except that, to the extent appropriate under its
investment program, the Portfolio may invest in securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which deal in real estate or interests therein;
d. invest in commodity contracts, except that the Portfolio may, to the
extent appropriate under its investment program, purchase securities of
companies engaged in such activities, may enter into transactions in financial
and index futures contracts and related options, may engage in transactions on a
when-issued or forward commitment basis, and may enter into forward currency
contracts.
e. make loans, except that, to the extent appropriate under its investment
program, the Portfolio may (a) purchase bonds, debentures or other debt
securities, including short-term obligations, (b) enter into repurchase
transactions and (c) lend portfolio securities provided that the value of such
loaned securities does not exceed one-third of the Portfolio's total assets;
f. hold more than 5% of the value of its total assets in the securities of
any one issuer or hold more than 10% of the outstanding voting securities of any
one issuer. This restriction applies only to 50% of the value of the Portfolio's
total assets. Securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities are excluded from this restriction;
g. concentrate its investments in any one industry except that the
Portfolio may invest up to 25% of its total assets in securities issuers
principally engaged in any one industry. This limitation, however, will not
apply to securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, securities invested in, or repurchase agreements for, U.S.
Government securities, and certificates of deposit, or bankers' acceptances, or
securities of U.S. banks and bank holding companies;
h. borrow money, except that (a) the Portfolio may enter into certain
futures contracts and options related thereto; (b) the Portfolio may enter into
commitments to purchase securities in accordance with the Portfolio's investment
program, including delayed delivery and when-issued securities and reverse
repurchase agreements; (c) for temporary emergency purposes, the Portfolio may
borrow money in amounts not exceeding 5% of the value of its total assets at the
time when the loan is made; (d) the Portfolio may pledge its portfolio
securities or receivable or transfer or assign or otherwise encumber them in an
amount not exceeding one-third of the value of its total assets; and (e) for
purposes of leveraging, the Portfolio may borrow money from banks (including its
custodian bank), only if, immediately after such borrowing, the value of the
Portfolio's assets, including the amount borrowed, less its liabilities, is
equal to at least 300% of the amount borrowed, plus all outstanding borrowings.
If at any time, the value of the Portfolio's assets fails to meet the 300% asset
coverage requirement relative only to leveraging, the Portfolio will, within
three days (not including Sundays and holidays), reduce its borrowings to the
extent necessary to meet the 300% test.
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
The Robertson Stephens Diversified Growth Portfolio may not:
1. issue any class of securities which is senior to the Portfolio's shares
of beneficial interest, except that the Portfolio may borrow money to the extent
contemplated by Restriction 3 below;
2. purchase securities on margin (but may obtain such short-term credits as
may be necessary for the clearance of transactions). (Margin payments or other
arrangements in connection with transactions in short sales, futures contracts,
options, and other financial instruments are not considered to constitute the
purchase of securities on margin for this purpose.);
3. borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
4. act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under certain federal securities laws;
5. (i) as to 75% of the Portfolio's total assets, purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result more than 5% of the Portfolio's total assets
(taken at current value) would then be invested in securities of a single
issuer, or (ii) purchase any security if as a result 25% or more of the
Portfolio's total assets (taken at current value) would be invested in a single
industry;
6. make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of its
portfolio securities;
7. purchase or sell commodities or commodity contracts, except that the
Portfolio may purchase or sell financial futures contracts, options on financial
futures contracts, and futures contracts, forward contracts, and options with
respect to foreign currencies, and may enter into swap transactions or other
financial transactions, and except as required in connection with otherwise
permissible options, futures, and commodity activities as described elsewhere in
the prospectus or this SAI at the time;
8. purchase or sell real estate or interests in real estate, including real
estate mortgage loans, although it may purchase and sell securities which are
secured by real estate and securities of companies, including limited
partnership interests, that invest or deal in real estate and it may purchase
interests in real estate investment trusts. (For purposes of this restriction,
investments by the Portfolio in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the purchase or
sale of real estate or interests in real estate or real estate mortgage loans.)
MFS TOTAL RETURN PORTFOLIO
The MFS Total Return Portfolio shall not:
(1) borrow amounts in excess of 33 1/3% of its assets including amounts
borrowed and then only as a temporary measure for extraordinary or emergency
purposes;
(2) underwrite securities issued by other persons except insofar as the
Portfolio may technically be deemed an underwriter under the Securities Act of
1933, as amended (the "1933 Act") in selling a portfolio security;
(3) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein and
securities of companies, such as real estate investment trusts, which deal in
real estate or interests therein), interests in oil, gas or mineral leases,
commodities or commodity contracts (excluding currencies and any type of option,
futures contracts and forward contracts) in the ordinary course of its business.
The Portfolio reserves the freedom of action to hold and to sell real estate,
mineral leases, commodities or commodity contracts (including currencies and any
type of option, futures contracts and forward contracts) acquired as a result of
the ownership of securities;
(4) issue any senior securities except as permitted by the 1940 Act. For
purposes of this restriction, collateral arrangements with respect to any type
of swap, option, forward contracts and futures contracts and collateral
arrangements with respect to initial and variation margin are not deemed to be
the issuance of a senior security;
(5) make loans to other persons. For these purposes, the purchase of
commercial paper, the purchase of a portion or all of an issue of debt
securities, the lending of portfolio securities, or the investment of the
Portfolio's assets in repurchase agreements, shall not be considered the making
of a loan; or
(6) purchase any securities of an issuer of a particular industry, if as a
result, more than 25% of its gross assets would be invested in securities of
issuers whose principal business activities are in the same industry (except
there is no limitation with respect to obligations issued or guaranteed by the
U.S. Government or its agencies and instrumentalities and repurchase agreements
collateralized by such obligations).
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are non-fundamental and may be
changed by the Trustees of the Trust without shareholder approval. Although
shareholder approval is not necessary, the Trust intends to notify its
shareholders before implementing any material change in any non-fundamental
investment restriction.
STRONG INTERNATIONAL STOCK PORTFOLIO AND STRONG GROWTH PORTFOLIO
Each of the Strong Portfolios may not:
1. Sell securities short, unless the Portfolio owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and positions
of the SEC or its staff, and provided that transactions in options, futures
contracts, options on futures contracts, or other derivative instruments are not
deemed to constitute selling securities short.
2. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts, options on
futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities, or such
other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
investment management company with substantially the same fundamental investment
objective, restrictions and policies as the Portfolio.
6. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political subdivisions thereof)
if, as a result, more than 5% of its total assets would be invested in the
securities of issuers that, including predecessor or unconditional guarantors,
have a record of less than three years of continuous operation. This policy does
not apply to securities of pooled investment vehicles or mortgage or
asset-backed securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Portfolio may invest in the securities of
issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the CEA and, in accordance with Rule
4.5, will use futures or options on futures transactions solely for bona fide
hedging transactions (within the meaning of the CEA), provided, however, that
the Portfolio may, in addition to bona fide hedging transactions, use futures
and options on futures transactions if the aggregate initial margin and premiums
required to establish such positions, less the amount by which any such options
positions are in the money (within the meaning of the CEA), do not exceed 5% of
the Portfolio's net assets.
In addition, (i) the aggregate value of securities underlying call options
on securities written by the Portfolio or obligations underlying put options on
securities written by the Portfolio determined as of the date the options are
written will not exceed 50% of the Portfolio's net assets; (ii) the aggregate
premiums paid on all options purchased by the Portfolio and which are being held
will not exceed 20% of the Portfolio's net assets; (iii) the Portfolio will not
purchase put or call options, other than hedging positions, if, as a result
thereof, more than 5% of its total assets would be so invested; and (iv) the
aggregate margin deposits required on all futures and options on futures
transactions being held will not exceed 5% of the Portfolio's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Portfolio except
as may be necessary in connection with permissible borrowings or investments and
then such pledging, mortgaging, or hypothecating may not exceed 33 1/3% of the
Portfolio's total assets at the time of the borrowing or investment.
10. Purchase or retain the securities of any issuer if any officer or
trustee of the Trust or its investment advisor beneficially owns more than 1/2
of 1% of the securities of such issuer and such officers and trustees together
own beneficially more than 5% of the securities of such issuer.
11. Purchase warrants, valued at the lower of cost or market value, in
excess of 5% of the Portfolio's net assets. Included in that amount, but not to
exceed 2% of the Portfolio's net assets, may be warrants that are not listed on
any stock exchange. Warrants acquired by the Portfolio in units or attached to
securities are not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities when bank
borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except through
(i) purchases of debt securities or other debt instruments, or (ii) engaging in
repurchase agreements.
BERKELEY U.S. QUALITY BOND PORTFOLIO
The Berkeley U.S. Quality Bond Portfolio's additional investment restrictions
are as follows:
(a) Portfolio investments in warrants, valued at the lower of cost or
market, may not exceed 5% of the value of its net assets. Included within that
amount, but not to exceed 2% of the value of a Portfolio's net assets, may be
warrants that are not listed on the New York or American Stock Exchanges.
Warrants acquired by a Portfolio in units or attached to securities shall be
deemed to be without value for the purpose of monitoring this policy.
(b) The Portfolio does not currently intend to sell securities short,
unless they own or have the right to obtain securities equivalent in kind and
amount to the securities sold short without the payment of any additional
consideration therefor, and provided that transactions in futures, options,
swaps and forward contracts are not deemed to constitute selling securities
short.
(c) The Portfolio does not currently intend to purchase securities on
margin, except that the Portfolio may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin payments
and other deposits in connection with transactions in futures, options, swaps
and forward contracts shall not be deemed to constitute purchasing securities on
margin.
(d) The Portfolio does not currently intend to (i) purchase securities of
other investment companies, except in the open market where no commission except
the ordinary broker's commission is paid, or (ii) purchase or retain securities
issued by other open-end investment companies. Limitations (i) and (ii) do not
apply to money market funds or to securities received as dividends, through
offers of exchange, or as a result of a reorganization, consolidation, or
merger.
(e) The Portfolio does not currently intend to invest directly in oil, gas,
or other mineral development or exploration programs or leases; however, the
Portfolio may own debt or equity securities of companies engaged in those
businesses.
(f) The Portfolio intends to comply with the CFTC regulations limiting its
investments in futures and options for non-hedging purposes.
HARRIS ASSOCIATES VALUE PORTFOLIO
The Harris Associates Value Portfolio will not:
1. Invest more than (a) 5% of its total assets (valued at the time of
investment) in securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign country or
asset-backed securities) that, together with any predecessors or unconditional
guarantors, have been in continuous operation for less than three years
("unseasoned issuers") or (b) more than 15% of its total assets (valued at time
of investment) in restricted securities and securities of unseasoned issuers;
2. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 15% of its assets at
cost;
3. Make margin purchases or participate in a joint or on a joint or several
basis in any trading account in securities;
4. Invest in companies for the purpose of management or the exercise of
control;
5. Invest more than 15% of its net assets (valued at time of investment) in
illiquid securities, including repurchase agreements maturing in more than seven
days;
6. Invest in oil, gas or other mineral leases or exploration or development
programs, although it may invest in marketable securities of enterprises engaged
in oil, gas or mineral exploration;
7. Invest more than 25% of its total assets (valued at time of investment)
in securities of non-U.S. issuers (other than securities represented by American
Depository Receipts);
8. Make short sales of securities unless the Portfolio owns at least an
equal amount of such securities, or owns securities that are convertible or
exchangeable, without payment of further consideration, into at least an equal
amount of such securities;
9. Purchase a call option or a put option if the aggregate premium paid for
all call and put options then held exceeds 20% of its net assets (less the
amount by which any such positions are in-the-money);
10. Invest in futures or options on futures, except that it may invest in
forward foreign currency contracts.
11. Purchase additional securities when its borrowings, less receivables
from portfolio securities sold, exceed 5% of the Portfolio's total assets.
Notwithstanding the foregoing investment restrictions, the Portfolio may
purchase securities pursuant to the exercise of subscription rights, provided
that such purchase will not result in the Portfolio's ceasing to be a
diversified investment company. Japanese and European corporations frequently
issue additional capital stock by means of subscription rights offerings to
existing shareholders at a price substantially below the market price of the
shares. The failure to exercise such rights would result in a Portfolio's
interest in the issuing company being diluted. The market for such rights is not
well developed in all cases and, accordingly, the Portfolio may not always
realize full value on the sale of rights. The exception applies in cases where
the limits set forth in the investment restrictions would otherwise be exceeded
by exercising rights or would have already been exceeded as a result of
fluctuations in the market value of a Portfolio's portfolio securities with the
result that the Portfolio would be forced either to sell securities at a time
when it might not otherwise have done so, or to forego exercising the rights.
LEXINGTON CORPORATE LEADERS PORTFOLIO
The Lexington Corporate Leaders Portfolio will not:
i. purchase the securities of any other investment company, except as
permitted under the 1940 Act.
ii. purchase any securities on margin or make short sales of securities,
other than short sales "against the box", or purchase securities on margin
except for short-term credits necessary for clearance of portfolio transactions,
provided that this restriction will not be applied to limit the use of options,
futures contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment programs of the Portfolio.
iii. buy securities from or sell securities (other than securities issued
by the Portfolio) to any of its officers, trustees or its investment adviser or
sub-adviser or distributor as principal.
iv. contract to sell any security or evidence of interest therein, except
to the extent that the same shall be owned by the Portfolio.
v. purchase securities of an issuer if to the Portfolio's knowledge, one or
more of the Trustees or officers of the Trust, the adviser or the sub-adviser
individually owns beneficially more than 0.5% and together own beneficially more
than 5% of the securities of such issuer nor will the Portfolio hold the
securities of such issuer.
vi. except for investments which, in the aggregate, do not exceed 5% of the
Portfolio's total assets taken at market value, purchase securities unless the
issuer thereof or any company on whose credit the purchase was based has a
record of at least three years continuous operations prior to the purchase.
vii. invest for the purpose of exercising control over or management of any
company.
viii. write, purchase or sell puts, calls or combinations thereof. However,
the Portfolio may invest up to 15% of the value of its assets in warrants. This
restriction on the purchase of warrants does not apply to warrants attached to,
or otherwise included in, a unit with other securities.
ix. The Portfolio will not invest more than 15% of its total assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business without taking a materially reduced price. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule 144A
or securities offered pursuant to Section 4(2) of the 1933 Act, shall not be
deemed illiquid solely by reason of being unregistered. The Sub-Adviser shall
determine whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors.
x. The Portfolio will not purchase interests in oil, gas, mineral leases or
other exploration programs; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or transmission
of oil, gas or other materials.
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
The Robertson Stephens Diversified Growth Portfolio does not currently intend
to:
1. purchase securities restricted as to resale if, as a result, (i) more
than 10% of the Portfolio's total assets would be invested in such securities,
or (ii) more than 5% of the Portfolio's total assets (excluding any securities
eligible for resale under Rule 144A under the Securities Act of 1933) would be
invested in such securities;
2. invest in (a) securities which at the time of such investment are not
readily marketable, (b) securities restricted as to resale, and (c) repurchase
agreements maturing in more than seven days, if, as a result, more than 15% of
the Portfolio's net assets (taken at current value) would then be invested in
the aggregate in securities described in (a), (b), and (c) above;
3. invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (taken at current
value) would be invested in such securities, or except as part of a merger,
consolidation, or other acquisition;
4. invest in real estate limited partnerships;
5. purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old;
6. make investments for the purpose of exercising control or management;
7. invest in interests in oil, gas or other mineral exploration or
development programs or leases, although it may invest in the common stocks of
companies that invest in or sponsor such programs;
8. acquire more than 10% of the voting securities of any issuer;
9. invest more than 15%, in the aggregate, of its total assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operation and securities restricted as to
resale (including any securities eligible for resale under Rule 144A under the
Securities Act of 1933);
10. purchase or sell puts, calls, straddles, spreads, or any combination
thereof, if, as a result, the aggregate amount of premiums paid or received by
the Portfolio in respect of any such transactions then outstanding would exceed
5% of its total assets.
In addition, the Portfolio will only sell short securities that are traded
on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
MFS TOTAL RETURN PORTFOLIO
The MFS Total Return Portfolio will not:
(1) invest in illiquid investments, including securities subject to legal
or contractual restrictions on resale or for which there is no readily available
market (e.g., trading in the security is suspended, or, in the case of unlisted
securities, where no market exists) if more than 15% of the Portfolio's assets
(taken at market value) would be invested in such securities. Repurchase
agreements maturing in more than seven days will be deemed to be illiquid for
purposes of the Portfolio's limitation on investment in illiquid securities.
Securities that are not registered under the 1933 Act and sold in reliance on
Rule 144A thereunder, but are determined to be liquid by the Trust's Board of
Trustees (or its delegee), will not be subject to this 15% limitation;
(2) purchase securities issued by any other investment company in excess of
the amount permitted by the 1940 Act, except when such purchase is part of a
plan of merger or consolidation;
(3) purchase any securities or evidences of interest therein on margin,
except that the Portfolio may obtain such short-term credit as may be necessary
for the clearance of any transaction and except that the Portfolio may make
margin deposits in connection with any type of swap, option, futures contracts
and forward contracts;
(4) sell any security which the Portfolio does not own unless by virtue of
its ownership of other securities the Portfolio has at the time of sale a right
to obtain securities without payment of further consideration equivalent in kind
and amount to the securities sold and provided that if such right is
conditional, the sale is made upon the same conditions;
(5) pledge, mortgage or hypothecate in excess of 33 1/3% of its gross
assets. For purposes of this restriction, collateral arrangements with respect
to any type of swap, option, futures contracts and forward contracts and
payments of initial and variation margin in connection therewith, are not
considered a pledge of assets;
(6) purchase or sell any put or call option or any combination thereof,
provided that this shall not prevent the purchase, ownership, holding or sale of
(1) warrants where the grantor of the warrants is the issuer of the underlying
securities or (ii) put or call options or combinations thereof with respect to
securities, indices of securities, swaps, foreign currencies and futures
contracts;
(7) invest for the purpose of exercising control of management.
These investment restrictions are adhered to at the time of purchase or
utilization of assets; a subsequent change in circumstances will not be
considered to result in a violation of policy.
MANAGEMENT OF THE TRUST
The Trust's Board of Trustees has the responsibility for the overall management
of the Trust, including general supervision and review of their investment
activities. The Board of Trustees, in turn, appoints the officers who are
responsible for administering the day-to-day operations of the Trust. Listed
below are the Trustees and officers of the Trust and their affiliations and
principal occupations for the past five years.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Business Position Held Principal Occupation
Address With the Trust During Past 5 Years
- ------------------- ---------------------- -------------------------------
George C. Nicholson Vice President, Chief Financial Officer,
3109 Poplar Wood Court Treasurer & Principal Secretary and Director - Life
Raleigh, NC 27604 Financial Officer and Company and Adviser; Treasurer
Age: 39 Principal Accounting and Director (since September
Officer 1994) - London Pacific Financial
& Insurance Services; Senior
Manager - Ernst & Young,
Louisville, Kentucky from
January 1985 to August 1994
Mark E. Prillaman* President, Principal Executive Vice President
1755 Creekside Oaks Dr. Executive Officer and and Chief Marketing Officer of
Sacramento, CA 95833 Trustee the Life Company and Adviser
Age: 43 since February 1994;
prior thereto, Regional
Marketing Director, American
Skandia Assurance Company
Raymond L. Pfeister Trustee Principal, Chief Marketing
75 Maiden Lane Officer of Fred Alger
New York, NY 10038 Management, Inc.
Age: 51
Robert H. Singletary Trustee Senior Capital Markets Advisor
1800 N. Kent Street of U.S. Agency for International
Arlington, VA 22209 Development since 1996; Chief of
Age: 41 Enforcement, San Francisco
Office, U.S. Securities and
Exchange Commission from 1990
to 1996.
Jerry T. Tamura Vice President and Vice President - Administrative
1755 Creekside Oaks Dr. Secretary Services of the Life Company
Sacramento, CA 95833 since 1989.
Age: 51
James A. Winther Trustee President of WMI Corporation since
11000 Placidia Road 1983
Placidia, FL 33946
Age: 60
<FN>
* Interested person of the Trust within the meaning of the 1940 Act.
</FN>
</TABLE>
Each Trustee of the Trust who is not an interested person of the Trust or
Adviser or Sub-Adviser receives an annual fee of $8,000 and an additional fee of
$1,000 for each meeting attended. Each Trustee is also reimbursed for expenses
incurred in connection with attending Trustees' meetings. No Trustee receives
any other compensation directly from the Trust.
For the period ended December 31, 1997, the disinterested trustees received the
following fees for service as Trustee:
Pension or Total
Aggregate Retirement Benefits Compensation
Compensation Accrued As Part of from Trust and
Trustee From Trust Trust Expenses Fund Complex
Raymond L. Pfeister $10,000 -0- $10,000
Robert H. Singletary $ 8,750 -0- $ 8,750
James Winther $10,000 -0- $10,000
Substantial Shareholders
Shares of the Portfolios are issued and redeemed in connection with investments
in and payments under the Variable Contracts issued through separate accounts of
London pacific Life & Annuity Company (collectively, the "Life Company"). As of
April 1, 1998, LPLA Separate Account One, the separate account of London
Pacific Life & Annuity Company were each known to the Board of Trustees and the
management of the Trust to own of record the following percentages of the
various Portfolios of the Trust.
Separate Account Life Company
Percentage Percentage
Portfolio Ownership Ownership
--------- --------------- -------------
Harris Associates Value 100% 0%
(formerly MAS Value)
MFS Total Return 100% 0%
Berkeley U.S. Quality Bond 100% 0%
(formerly Salomon U.S. Quality Bond)
Berkeley Money Market 100% 0%
(formerly Salomon Money Market)
Robertson Stephens Diversified Growth 89.5% 10.5%
(formerly Berkeley Smaller Companies)
Lexington Corporate Leaders 100% 0%
Strong Growth 100% 0%
Strong International Stock 85.8% 14.2%
As of April 1, 1998, one officer and Trustee of the Trust owned a Variable
Contract representing less than 5% of the shares in the Portfolios.
The Declaration of Trust provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust, except if
it is determined in the manner specified in the Declaration of Trust that they
have not acted in good faith in the reasonable belief that their actions were in
the best interests of the Trust or that such indemnification would relieve any
officer or Trustee of any liability to the Trust or its shareholders by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
his or her duties. The Trust, at its expense, may provide liability insurance
for the benefit of its Trustees and officers.
Under the Investment Advisory Agreement between the Trust and the Adviser (the
"Investment Advisory Agreement"), the Adviser, at its expense, provides the
Portfolios with investment advisory services and advises and assists the
officers of the Trust in taking such steps as are necessary or appropriate to
carry out the decisions of its Trustees regarding the conduct of business of the
Trust and each Portfolio. The fees to be paid under the Investment Advisory
Agreement are set forth in the Trust's prospectus.
For the year ended December 31, 1997, the Adviser was paid advisory fees as
follows: $10,494 for the Strong International Stock Portfolio; $16,134 for the
Strong Growth Portfolio; $18,552 for the Harris Associates Value Portfolio;
$18,662 for the Robertson Stephens Diversified Growth Portfolio; $8,125 for the
Berkeley U.S. Quality Bond Portfolio, formerly Salomon U.S. Quality Bond
Portfolio; $7,334 for the Berkeley Money Market Portfolio, formerly Salomon
Money Market Portfolio; $19,980 for the MFS Total Return Portfolio; and $11,968
for the Lexington Corporate Leaders Portfolio. For the period ended December 31,
1996, the Adviser was paid advisory fees as follows: $6,330 for the Strong
International Stock Portfolio; $7,229 for the Strong Growth Portfolio; $6,141
for the Harris Associates Value Portfolio; $6,607 for the Robertson Stephens
Diversified Growth Portfolio; $3,543 for the Salomon U.S. Quality Bond
Portfolio; $2,019 for the Salomon Money Market Portfolio; $3,967 for the MFS
Total Return Portfolio; and $5,213 for the Lexington Corporate Leaders
Portfolio.
Under the Investment Advisory Agreement, the Adviser is obligated to formulate a
continuing program for the investment of the assets of each Portfolio of the
Trust in a manner consistent with each Portfolio's investment objectives,
policies and restrictions and to determine from time to time securities to be
purchased, sold, retained or lent by the Trust and implement those decisions,
subject always to the provisions of the Trust's Declaration of Trust and
By-laws, and of the Investment Company Act of 1940, and subject further to such
policies and instructions as the Trustees may from time to time establish.
The Investment Advisory Agreement further provides that the Adviser shall
furnish the Trust with office space and necessary personnel, pay ordinary office
expenses, pay all executive salaries of the Trust and furnish, without expense
to the Trust, the services of such members of its organization as may be duly
elected officers or Trustees of the Trust.
Under the Investment Advisory Agreement, the Trust is responsible for all its
other expenses including, but not limited to, the following expenses: legal,
auditing or accounting expenses, Trustees' fees and expenses, insurance
premiums, brokers' commissions, taxes and governmental fees, reports and notices
to shareholders, and fees and disbursements of custodians, transfer agents,
registrars, shareholder servicing agents and dividend disbursing agents, and
certain expenses with respect to membership fees of industry associations.
The Investment Advisory Agreement provides that the Adviser may retain
sub-advisers, at the Adviser's own cost and expense, for the purpose of managing
the investment of the assets of one or more Portfolios.
The Investment Advisory Agreement provides that neither the Adviser nor any
director, officer or employee of the Adviser will be liable for any loss
suffered by the Trust in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations and duties. In addition, the
Agreement provides for indemnification of the Adviser by the Trust.
The Investment Advisory Agreement may be terminated without penalty by vote of
the Trustees, as to any Portfolio by the shareholders of that Portfolio, or by
the Adviser on 60 days written notice. The Agreement also terminates without
payment of any penalty in the event of its assignment. In addition, the
Investment Advisory Agreement may be amended only by a vote of the shareholders
of the affected Portfolio(s), and provides that it will continue in effect from
year to year only so long as such continuance is approved at least annually with
respect to each Portfolio by vote of either the Trustees or the shareholders of
the Portfolio, and, in either case, by a majority of the Trustees who are not
"interested persons" of the Adviser. In each of the foregoing cases, the vote of
the shareholders is the affirmative vote of a "majority of the outstanding
voting securities" as defined in the 1940 Act.
The Adviser has undertaken to bear certain operating expenses of each Portfolio
as described in the Prospectus.
State Street Bank and Trust Company provides certain accounting and other
services to the Trust.
SUB-ADVISERS
Each of the Sub-Advisers described in the Prospectus serves as Sub-Adviser to
one or more of the Portfolios of the Trust pursuant to separate written
agreements. Certain of the services provided by, and the fees paid to, the
Sub-Advisers are described in the Prospectus under "Management of the Trust -
Sub-Advisers."
CODE OF ETHICS
To mitigate the possibility that a Portfolio will be adversely affected by
personal trading of employees, the Trust, the Adviser and the Sub-Advisers have
adopted Codes of Ethics under Rule 17j-1 of the 1940 Act. These Codes contain
policies restricting securities trading in personal accounts of the portfolio
managers and others who normally come into possession of information on
portfolio transactions. These Codes comply, in all material respects, with the
recommendations of the Investment Company Institute.
BROKERAGE AND RESEARCH SERVICES
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Trust of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. Transactions in foreign securities often involve the payment of
fixed brokerage commissions, which are generally higher than those in the United
States. There is generally no stated commission in the case of securities traded
in the over-the-counter markets, but the price paid by the Trust usually
includes an undisclosed dealer commission or mark-up. In underwritten offerings,
the price paid by the Trust includes a disclosed, fixed commission or discount
retained by the underwriter or dealer.
It is currently intended that the Sub-Advisers will place all orders for the
purchase and sale of portfolio securities for the Trust and buy and sell
securities for the Trust through a substantial number of brokers and dealers. In
so doing, the Sub-Advisers will use their best efforts to obtain for the Trust
the best price and execution available. In seeking the best price and execution,
the Sub-Advisers, having in mind the Trust's best interests, will consider all
factors they deem relevant, including, by way of illustration, price, the size
of the transaction, the nature of the market for the security, the amount of the
commission, the timing of the transaction taking into account market prices and
trends, the reputation, experience, and financial stability of the broker-dealer
involved, and the quality of service rendered by the broker-dealer in other
transactions.
It has for many years been a common practice in the investment advisory business
for advisers of investment companies and other institutional investors to
receive research, statistical, and quotation services from broker-dealers which
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Advisers may receive research, statistical, and quotation
services from any broker-dealers with which they place the Trust's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities, and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Advisers and/or their affiliates in advising various other clients
(including the Trust), although not all of these services are necessarily useful
and of value in managing the Trust. The management fees paid by the Trust are
not reduced because the Sub-Advisers and/or their affiliates may receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, a
Sub-Adviser may cause a Portfolio to pay a broker-dealer which provides
brokerage and research services to the Sub-Adviser an amount of disclosed
commission for effecting a securities transaction for the Portfolio in excess of
the commission which another broker-dealer would have charged for effecting that
transaction provided that the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised. A Sub-Adviser's authority to cause a Portfolio to pay any such
greater commissions is also subject to such policies as the Adviser or the
Trustees may adopt from time to time.
During the Trust's fiscal year ended December 31, 1997, the Portfolios paid the
following amounts in brokerage commissions:
Harris Associates Value Portfolio $ 7,177
(formerly MAS Value Portfolio)
Lexington Corporate Leaders Portfolio $ 3,005
Strong Growth Portfolio $12,021
Strong International Stock Portfolio $18,662
Robertson Stephens Diversified Growth Portfolio $ 9,419
(formerly Berkeley Smaller Companies Portfolio)
MFS Total Return Portfolio $ 3,215
Berkeley U.S. Quality Bond Portfolio -0-
(formerly Salomon U.S. Quality Bond Portfolio)
Berkeley Money Market Portfolio -0-
(formerly Salomon Money Market Portfolio)
INVESTMENT DECISIONS. Investment decisions for the Trust and for the other
investment advisory clients of the Sub-Advisers are made with a view to
achieving their respective investment objectives and after consideration of such
factors as their current holdings, availability of cash for investment, and the
size of their investments generally. Frequently, a particular security may be
bought or sold for only one client or in different amounts and at different
times for more than one but less than all clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling the security. In addition, purchases or sales of the same security
may be made for two or more clients of a Sub-Adviser on the same day. In such
event, such transactions will be allocated among the clients in a manner
believed by the Sub-Adviser to be equitable to each. In some cases, this
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Trust. Purchase and sale orders for the Trust may be
combined with those of other clients of a Sub-Adviser in the interest of
achieving the most favorable net results for the Trust.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined daily as of 4:00
p.m. New York time on each day the New York Stock Exchange is open for trading.
The New York Stock Exchange is normally closed on the following national
holidays: New Year's Day, Martin Luther King's Birthday, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
Portfolio securities that are primarily traded on foreign exchanges are
generally valued at the most recent closing values of such securities on their
respective exchanges, except when an occurrence subsequent to the time a value
was so established is likely to have changed the value, then the fair value of
those securities will be determined by the Board of Trustees or its delegates.
The net asset value of the shares of the Portfolios is determined by dividing
the total assets of the Portfolio, less all liabilities, by the total number of
shares outstanding. Securities traded on a national securities exchange or
quoted on the NASDAQ National Market System are valued at their last-reported
sale price on the principal exchange or reported by NASDAQ or, if there is no
reported sale, and in the case of over-the-counter securities not included in
the NASDAQ National Market System, at the closing bid price. Debt securities,
including zero-coupon securities, and certain foreign securities will be valued
by a pricing service. Other foreign securities will be valued by the Trust's
custodian. Securities for which current market quotations are not readily
available and all other assets are valued at fair value as determined in good
faith by the Trustees, although the actual calculations may be made by persons
acting pursuant to the direction of the Trustees.
If any securities held by a Portfolio are restricted as to resale, their fair
value is generally determined as the amount which the Trust could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Trust in connection with such disposition). In addition,
specific factors are also generally considered, such as the cost of the
investment, the market value of any unrestricted securities of the same class
(both at the time of purchase and at the time of valuation), the size of the
holding, the prices of any recent transactions or offers with respect to such
securities, and any available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the New
York Stock Exchange. The values of these securities used in determining the net
asset value of the Trust's shares are computed as of such times. Also, because
of the amount of time required to collect and process trading information as to
large numbers of securities issues, the values of certain securities (such as
convertible bonds and U.S. Government Securities) are determined based on market
quotations collected earlier in the day at the latest practicable time prior to
the close of the Exchange. Occasionally, events affecting the value of such
securities may occur between such times and the close of the Exchange which will
not be reflected in the computation of the Trust's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value, in the manner described
above.
The proceeds received by each Portfolio for each issue or sale of its shares,
and all income, earnings, profits, and proceeds thereof, subject only to the
rights of creditors, will be specifically allocated to such Portfolio, and
constitute the underlying assets of that Portfolio. The underlying assets of
each Portfolio will be segregated on the Trust's books of account, and will be
charged with the liabilities in respect of such Portfolio and with a share of
the general liabilities of the Trust. Expenses with respect to any two or more
Portfolios may be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made.
TAXES
Each Portfolio of the Trust intends to qualify each year and elect to be taxed
as a regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to the separate account of the Life Company. To the extent that a
Portfolio does not annually distribute substantially all taxable income and
realized gains, it is subject to an excise tax. Each Portfolio intends to avoid
this tax except when the cost of processing the distribution is greater than the
tax.
In order to qualify as a "regulated investment company," a Portfolio must, among
other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, and other income
(including gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies;
(b) diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the value of its total assets consists of cash, cash
items, U.S. Government Securities, and other securities limited generally with
respect to any one issuer to not more than 5% of the total assets of the
Portfolio and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any issuer (other than U.S. Government Securities). In order to
receive the favorable tax treatment accorded regulated investment companies and
their shareholders, moreover, a Portfolio must in general distribute at least
90% of its interest, dividends, net short-term capital gain, and certain other
income each year.
With respect to investment income and gains received by a Portfolio from sources
outside the United States, such income and gains may be subject to foreign taxes
which are withheld at the source. The effective rate of foreign taxes in which a
Portfolio will be subject depends on the specific countries in which its assets
will be invested and the extent of the assets invested in each such country and
therefore cannot be determined in advance.
United States Treasury Regulations applicable to portfolios that serve as the
funding vehicles for variable annuity and variable life insurance contracts
generally require that such portfolios invest no more than 55% of the value of
their assets in one investment, 70% in two investments, 80% in three
investments, and 90% in four investments. The Portfolio intends to comply with
the requirements of these Regulations.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be limited
by tax considerations. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income. This
difference may cause a portion of the Portfolio's distributions of book income
to constitute returns of capital for tax purposes or require the Portfolio to
make distributions exceeding book income in order to permit the Trust to
continue to qualify, and be taxed under Subchapter M of the Code, as a regulated
investment company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their face
value ("original issue discount") is considered to be income to the Portfolio
each year, even though the Portfolio will not receive cash interest payments
from these securities. This original issue discount (imputed income) will
comprise a part of the net investment income of the Portfolio which must be
distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
It is the policy of each of the Portfolios to meet the requirements of the Code
to qualify as a regulated investment company that is taxed pursuant to
Subchapter M of the Code.
This discussion of the federal income tax and state tax treatment of the Trust
and its shareholders is based on the law as of the date of this SAI. It does not
describe in any respect the tax treatment or offsets of any insurance or other
product pursuant to which investments in the Trust may be made.
DIVIDENDS AND DISTRIBUTIONS
Each of the Portfolios will declare and distribute dividends from net investment
income, if any, and will distribute its net realized capital gains, if any, at
least annually. Both dividends and capital gain distributions will be made in
shares of such Portfolios unless an election is made on behalf of a separate
account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
A Portfolio's yield is presented for a specified 30-day period (the "base
period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B) the
net asset value per share of the Portfolio on the last day of the base period.
The result is annualized on a compounding basis to determine the Portfolio's
yield. For this calculation, interest earned on debt obligations held by a
Portfolio is generally calculated using the yield to maturity (or first expected
call date) of such obligations based on their market values (or, in the case of
receivables-backed securities such as Ginnie Maes, based on cost). Dividends on
equity securities are accrued daily at their stated dividend rates.
From time to time the Berkeley Money Market Portfolio may make available
information as to its "yield" and "effective yield." The "yield" of the Berkeley
Money Market Portfolio refers to the income generated by an investment in the
Portfolio over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Berkeley Money Market Portfolio is
assumed to be reinvested. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000 investment
in the Portfolio made at the beginning of each period, then calculating the
average annual compounded rate of return which would produce the same investment
return on the $1,000 investment over the same period. Total return for a period
of one year or less is equal to the actual investment return on a $1,000
investment in the Portfolio during that period. Total return calculations assume
that all Portfolio distributions are reinvested at net asset value on their
respective reinvestment dates.
From time to time, the Adviser may reduce its compensation or assume expenses in
respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield and
total return during the period of the waiver or assumption.
The performance of the Portfolios may, from time to time, be compared to that of
other mutual funds tracked by mutual fund rating services, to broad groups of
comparable mutual funds, or to unmanaged indices which may assume investment of
dividends but generally do not reflect deductions for administrative and
management costs.
The Prospectus contains historical performance information of Strong Growth
Fund, MFS Total Return Fund, Strong International Stock Fund, The Oakmark Fund
and the Robertson Stephens Diversified Growth Fund, which are public mutual
funds which have the same investment objective and follow substantially the same
investment strategies as Strong Growth Portfolio, MFS Total Return Portfolio,
Strong International Stock Portfolio, Harris Associates Value Portfolio and
Robertson Stephens Diversified Growth Portfolio, respectively.
The performance of those public mutual funds is commonly measured as total
return. An average annual compounded rate of return ("T") may be computed by
using the redeemable value at the end of a specified period ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time ("n")
according to the formula:
n
P (1 + T) = ERV
The Prospectus contains comparative performance information with respect to the
S&P 500 Composite Stock Price Index ("S&P 500 Index"). The S&P 500 Index is a
broad index of common stock prices which assumes reinvestment of distributions
and is calculated without regard to tax consequences or the costs of investing.
Investors should not consider this performance data as an indication of the
future performance of any of the Portfolios in the Trust.
From time to time indications of the Portfolios' past performance may be
published. Such performance will be measured by independent sources such as (but
not limited to) Lipper Analytical Services, Incorporated, Weisenberger
Investment Companies Service, Bank Rate Monitor, Financial Planning Magazine,
Standard & Poor's Indices, Dow Jones Industrial Averages, VARDS, Barron's,
Business Week, Changing Times, Financial World, Forbes, Fortune, Money, Personal
Investor and The Wall Street Journal. Information provided to the NASD for
review may be used as advertisements for publication in regional and local
newspapers. In addition, Portfolio performance may be advertised relative to
certain indices and benchmark investments, including: (a) the Lipper Analytical
Services, Inc. Mutual Fund Performance Analysis, Fixed-Income Analysis and
Mutual Fund indices (which measure total return and average current yield for
the mutual fund industry and rank mutual fund performance); (b) the CDA Mutual
Fund Report published by CDA Investment Technologies, Inc. (which analyzes
price, risk and various measures of return for the mutual fund industry); (c)
the Consumer Price Index published by the U.S. Bureau of Labor Statistics (which
measures changes in the price of goods and services); (d) Stocks, Bonds, Bills
and Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Hambrecht & Quist Growth Stock Index; (f) the NASDAQ OTC Composite Prime Return;
(g) the Russell Midcap Index; (h) the Russell 2000 Index - Total Return; (i) the
ValueLine Composite-Price Return; (j) the Wilshire 4500 Index; (k) the Salomon
Brothers' World Bond Index (which measures the total return in U.S. dollar terms
of government bonds, Eurobonds and non-U.S. bonds of ten countries, with all
such bonds having a minimum maturity of five years); (l) the Shearson Lehman
Brothers Aggregate Bond Index or its component indices (the Aggregate Bond Index
measures the performance of Treasury, U.S. Government agencies, mortgage and
Yankee bonds); (m) the S&P Bond indices (which measure yield and price of
corporate, municipal and U.S. Government bonds); (n) the J.P. Morgan Global
Government Bond Index; (o) other taxable investments including certificates of
deposit, money market deposit accounts, checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (p) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers,
First Boston Corporation, Morgan Stanley (including EAFE), Salomon Brothers,
Merrill Lynch, Donaldson Lufkin and Jenrette or other providers of such data;
(q) the FT-Actuaries Europe and Pacific Index; (r) mutual fund performance
indices published by Variable Annuity Research & Data Service; and (s) mutual
fund performance indices published by Morningstar, Inc. The composition of the
investment in such indices and the characteristics of such benchmark investments
are not identical to, and in some cases are very different from, those of a
Portfolio. These indices and averages are generally unmanaged and the items
included in the calculations of such indices and averages may be different from
those of the equations used by the Trust to calculate a Portfolio's performance
figures.
A Portfolio's investment results will vary from time to time depending upon
market conditions, the composition of its investment portfolio and its operating
expenses. Yield and performance information of any Portfolio will not be
compared with such information for funds that offer their shares directly to the
public, because Portfolio performance data does not reflect charges imposed by
the Life Company on the variable contracts. The effective yield and total return
for a Portfolio should be distinguished from the rate of return of a
corresponding division of the Life Company's separate account, which rate will
reflect the deduction of additional charges, including mortality and expense
risk charges, and will therefore be lower. Accordingly, performance figures for
a Portfolio will only be advertised if comparable performance figures for the
corresponding division of the separate account are included in the
advertisements. Variable annuity contractholders should consult the variable
annuity contract prospectus for further information. Each Portfolio's results
also should be considered relative to the risks associated with its investment
objectives and policies.
SHAREHOLDER COMMUNICATIONS
Owners of VA contracts issued by the Life Company for which shares of one or
more Portfolios are the investment vehicle are entitled to receive from the Life
Company unaudited semi-annual financial statements and audited year-end
financial statements certified by the Trust's independent public accountants.
Each report will show the investments owned by the Portfolio and the market
value thereof and will provide other information about the Portfolio and its
operations.
ORGANIZATION AND CAPITALIZATION
The Trust is an open-end investment company established under the laws of The
Commonwealth of Massachusetts by a Declaration of Trust dated January 23, 1995,
as amended.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each Portfolio
on matters affecting an individual Portfolio. For example, a change in a
fundamental investment policy for the Strong Growth Portfolio would be voted
upon only by shareholders of the Strong Growth Portfolio. Additionally, approval
of the Investment Advisory Agreement is a matter to be determined separately by
each Portfolio. Approval by the shareholders of one Portfolio is effective as to
that Portfolio. Shares have noncumulative voting rights. Although the Trust is
not required to hold annual meetings of its shareholders, shareholders have the
right to call a meeting to elect or remove Trustees or to take other actions as
provided in the Declaration of Trust. Shares have no preemptive or subscription
rights, and are transferable. Shares are entitled to dividends as declared by
the Trustees, and if a Portfolio were liquidated, the shares of that Portfolio
would receive the net assets of that Portfolio. The Trust may suspend the sale
of shares at any time and may refuse any order to purchase shares.
The Trust is authorized to subdivide each series (Portfolio) into two or more
classes. Currently, shares of the Portfolios are divided into Class A and Class
B. Each class of shares of a Portfolio is entitled to the same rights and
privileges as all other classes of the Portfolio, provided however, that each
class bears the expenses related to its distribution arrangements, as well as
any other expenses attributable to the class and unrelated to managing the
Portfolio's portfolio securities. Any matter that affects only the holders of a
particular class of shares may be voted on only by such shareholders. To date,
the Trust has never offered any Class B shares for sale.
Additional Portfolios may be created from time to time with different investment
objectives or for use as funding vehicles for variable life insurance policies
or for different variable annuity contracts. Any additional Portfolios may be
managed by investment advisers or sub-advisers other than the current Adviser
and Sub-Advisers. In addition, the Trustees have the right, subject to any
necessary regulatory approvals, to create additional classes of shares in a
Portfolio, with the classes being subject to different charges and expenses and
having such other different rights as the Trustees may prescribe and to
terminate any Portfolio of the Trust.
PORTFOLIO TURNOVER
The portfolio turnover rate of a Portfolio is defined by the Securities and
Exchange Commission as the ratio of the lesser of annual sales or purchases to
the monthly average value of the portfolio, excluding from both the numerator
and the denominator securities with maturities at the time of acquisition of one
year or less. Portfolio turnover generally involves some expense to a Portfolio,
including brokerage commissions or dealer mark-ups and other transaction costs
on the sale of securities and reinvestment in other securities.
The Trust's Board of Trustees periodically reviews the Adviser's and
Sub-Advisers' performance of their respective responsibilities in connection
with the placement of portfolio transactions on behalf of the Portfolios, and
reviews the commissions paid by the Portfolios to determine whether such
commissions are reasonable in relation to what the Trustees believe are the
benefits for the Portfolios.
CUSTODIAN
State Street Bank and Trust Company is the custodian of the Trust's assets. The
custodian's responsibilities include safeguarding and controlling the Trust's
cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on the Trust's investments. The Trust may
employ foreign sub-custodians that are approved by the Board of Trustees to hold
foreign assets.
TRANSFER AGENT
The Adviser serves as the transfer agent for the Trust's shares. The Adviser
receives no payment for providing this service.
LEGAL COUNSEL
Legal matters in connection with the offering are being passed upon by Blazzard,
Grodd & Hasenauer, P.C., Westport, Connecticut.
INDEPENDENT ACCOUNTANTS
The Trust has selected Price Waterhouse LLP as the independent accountants who
will audit the annual financial statements of the Trust.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of a
Portfolio's property for all loss and expense of any shareholder held personally
liable for the obligations of a Portfolio. Thus the risk of a shareholder's
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Portfolio would be unable to meet its obligations.
DESCRIPTION OF NRSRO RATINGS
DESCRIPTION OF MOODY'S CORPORATE RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are the lowest rated class of bonds. Issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION OF S&P CORPORATE RATINGS
AAA -- Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB-B-CCC-CC AND C -- Bonds rated BB, B, CCC, CC and C are regarded, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the least degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. 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.
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 'B' -
rating.
Debt rated 'CCC' has a currently identifiable vulnerability to default,and id
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 sub-ordinated to senior debt that is assigned an actual or implied
'B' or 'B' rating.
Debt rated 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
Debt rated 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC' rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
The rating 'CI' is reserved for income bonds on which no interest is being
paid.
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 grade period. The 'D' rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
DESCRIPTION OF DUFF CORPORATE RATINGS
AAA - Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below-average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B - Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in quality rating within this category or into a higher or
lower quality rating grade.
CCC - Well below investment grade securities. Considerable uncertainty as
to timely payment of principal or interest. Protection factors are narrow and
risk can be substantial with unfavorable economic/industry conditions, and/or
with unfavorable company developments.
DD - Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DESCRIPTION OF FITCH IBCA
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issues is generally rated "[-]+."
A - Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and to repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and to repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB Bonds considered speculative. 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 considered highly speculative. While bonds in this class are
currently meeting debt service requirements or paying dividends, the probability
of continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC - Bonds which may have certain identifiable characteristics which, if
not remedied, could lead to default. The ability to meet obligations requires
an advantagous business and economic environment.
CC - Bonds which are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C - Bonds which are in imminent default in payment of interest or
principal.
DDD,DD,and D Bonds which are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery of these
securities, and 'D' represents the lowest potential for recovery.
DESCRIPTION OF THOMSON BANKWATCH, INC. CORPORATE RATINGS
AAA - Long-term debt securities that are rated AAA indicates that
the ability to repay principal and interest on a timely basis is very high.
AA - Long-term debt securities that are rated AA indicates a very strong
ability to repay principal and interest on a timely basis, with limited
incremental risk compared to issues rated in the highest category.
A - Long-term debt securities that are rated A indicates the ability to
repay principal and interest is strong. Issuers rated A could be more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
BBB - Long-term debt securities that are rated BBB indicates an acceptable
capacity to repay principal and interest. BBB issuer are more vulnerable to
adverse development (both internal and external) then obligations with higher
ratings.
BB - Long-term debt securities that are rated BB suggests that the
likelihood of default is considerably less than for lower-rated issuers.
However, there are significant uncertainties that could affect the ability to
adequately service debt obligations.
B - Long-term debt securities that are rated B show higher degree of
uncertainty and therefore greater likelihood of default than higher-rated
issuers. Adverse developments could negatively affect the payment of interest
and principal on a timely basis.
CCC - Long-term debt securities that are rated CCC clearly have a high
likelihood of default, with little capacity to address further adverse changes
in financial circumstances.
CC - Long-term debt securities that are rated CC are subordinated to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
D - Default
TBW may apply plus ("+") and minus ("-") modifiers to indicate where within
the respective category the issue is placed.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payments is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A-1. An A-3 designation indicates an
adequate capacity for timely payment. Issues with this designation, however, are
more vulnerable to the adverse effects of changes in circumstancesthan
obligations carrying the higher designations. B issues are regarded as having
only speculative capacity for timely payment. C issues have a doubtful capacity
for payment. D issues are in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date, even if
the applicable grace period has not expired, unless Standard & Poor's believes
that such payments will be made during such grace period.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior ability for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong ability for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trend and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained. P-3 issuers have an acceptable ability for repayment of
short-term promissory obligations. The effect of industry characteristics and
market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and the requirement for relatively high financial leverage. Adequate alternate
liquidity is maintained. Issuers rated 'Not Prime' do not fall within any of the
'Prime' rating categories.
DESCRIPTION OF DUFF'S COMMERCIAL PAPER RATINGS
The rating Duff-1 is the highest commercial paper rating assigned by Duff &
Phelps. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated Duff-2 is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small. Paper rated
Duff-3 is regarded as having satisfactory liquidity and other protection
factors. Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
DESCRIPTION OF FITCH'S COMMERCIAL PAPER RATINGS
The rating Fitch-1 (Exceptionally Strong Credit Quality) is the highest
commercial paper rating assigned by Fitch. Paper rated Fitch-1 is regarded as
having the strongest degree of assurance for timely payment. The rating Fitch-2
(Very Strong Credit Quality) is the second highest commercial paper rating
assigned by Fitch which reflects an assurance of timely payment only slightly
less in degree than the strongest issues.
DESCRIPTION OF THOMSON BANKWATCH, INC. COMMERCIAL PAPER RATINGS
TBW-1 - Short-term obligations rated TBW-1 indicate a very high likelihood
that principal and interest will be paid on a timely basis.
TBW-2 - Short-term obligations rated TBW-2 indicate that while the degree
of safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated TBW-1.
FINANCIAL STATEMENTS
The Trust's Financial Statements and notes thereto for the year ended December
31, 1997 and the report of Price Waterhouse LLP, Independent Auditors, with
respect thereto, appear in the Trust's Annual Report for the year ended
December 31, 1997, which is incorporated by reference into this Statement of
Additional Information. The Trust delivers a copy of the Annual Report to
investors along with the Statement of Additional Information. In addition, the
Trust will furnish, without charge, additional copies of such Annual Report to
investors which may be obtained without charge by calling the Life Company at
(800) 852-3152.
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
The Financial Statements filed as part of this Registration Statement are
as follows:
Statements of Assets and Liabilities-December 31, 1997*
Statements of Operations For the Year Ended December 31, 1997*
Statements of Changes in Net Assets for the Year Ended December 31, 1997
and the Period Ended December 31, 1996*
Financial Highlights**
Schedules of Investments, December 31, 1997*
Harris Associates Value Portfolio
MFS Total Return Portfolio
Berkeley U.S. Quality Bond Portfolio
Berkeley Money Market Portfolio
Strong International Stock Portfolio
Strong Growth Portfolio
Robertson Stephens Diversified Growth Portfolio
Lexington Corporate Leaders Portfolio
Notes to Financial Statements - December 31, 1997*
Report
Report of Independent Accountants - Price Waterhouse LLP
__________________
* Included in the Trust's Annual Report, dated December 31, 1997,
filed as Exhibit 12 hereto.
** Included in Part A of this Registration Statement and in the Trust's
Annual Report, dated December 31, 1997 filed as Exhibit 12 hereto.
(B) EXHIBITS
(1) (c) Amended and Restated Declaration of Trust**
(2) By-laws of Trust
(3) Not Applicable
(4) Not Applicable
(5) (a) Investment Advisory Agreement**
(b) Form of Amendment to Investment Advisory Agreement*****
(c) (i) Sub-Advisory Agreement dated as of July 24, 1995, among
Strong Capital Management, Inc., the Adviser and the Trust
(ii) Sub-Advisory Agreement dated as of July 7, 1995, among
Lexington Management Corporation, the Adviser and the
Trust
(iii) Sub-Advisory Agreement dated as of July 17, 1995, among
Massachusetts Financial Services Company, the Adviser
and the Trust
(iv) Form of Sub-Advisory Agreement among Harris Associates
L.P., the Adviser and the Trust*****
(v) Form of Sub-Advisory Agreement among Robertson, Stephens
& Company (RSC) Investment Management, L.P., the Adviser
and the Trust +
(vi) Form of Sub-Advisory Agreement among Berkeley Capital Management,
the Adviser and the Trust +
(6) Not Applicable
(7) Not Applicable
(8)(i) Form of Custodian Agreement and Fund Accounting Agreement
between the Registrant and the Custodian
(8)(ii) Amendment to Custodian Agreement
(9) Form of Subadministration Agreement for Reporting and
Accounting Services between the Registrant and the
Subadministrator***
(10) Consent and Opinion of Counsel
(11) Consent of Independent Accountants
(12) Financial Statements, incorporated herein by reference to the Trust's
Annual Report dated December 31, 1997, as filed electronically with the
Securities and Exchange Commission on March 5, 1998.
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Calculation of Performance Information
(27) Not Applicable
** incorporated by reference to Registrant's Pre-Effective Amendment No. 2
to Form N-1A (File No. 33-88792), as filed electronically on January 26,
1996.
*** incorporated by reference to Registrant's Post-Effective Amendment No.
1 to Form N-1A (File No. 33-88792), as filed electronically on September
13, 1996.
**** incorporated by reference to Registrant's Post-Effective Amendment No.
2 to Form N-1A (File No. 33-88792), as filed electronically on March 7,
1997.
***** incorporated by reference to Registrant's Post-Effective Amendment
No. 3 to Form N-1A (File No. 33-88792), as filed electronically on April
25, 1997.
+ incorporated by reference to Registrant's Post-Effective Amendment No. 4
to Form N-1A (File No. 33-88792), as filed electronically on September 5,
1997.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The shares of the Trust are currently sold to LPLA Separate Account One.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The general account of London Pacific Life & Annuity Company and LPLA Separate
Account One are the shareholders of the Trust.
ITEM 27. INDEMNIFICATION
Each officer, Trustee or agent of the Trust shall be indemnified by the Trust to
the full extent permitted under the General Laws of The Commonwealth of
Massachusetts and the Investment Company Act of 1940 ("1940 Act"), as amended,
except that such indemnity shall not protect any such person against any
liability to the Trust or any shareholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office ("disabling conduct"). Indemnification shall be made when (i) a final
decision on the merits, by a court or other body before whom the proceeding was
brought, that the person to be indemnified was not liable by reason of disabling
conduct or, (ii) in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the person to be indemnified was not
liable by reason of disabling conduct, by (a) the vote of a majority of a quorum
of Trustees who are neither "interested persons" of the company as defined in
section 2(a)(19) of the 1940 Act, nor parties to the proceedings or (b) an
independent legal counsel in a written opinion. The Trust may, by vote of a
majority of a quorum of Trustees who are not interested persons, advance
attorneys' fees or other expenses incurred by officers, Trustees, investment
advisers or principal underwriters, in defending a proceeding upon the
undertaking by or on behalf of the person to be indemnified to repay the advance
unless it is ultimately determined that he is entitled to indemnification. Such
advance shall be subject to at least one of the following: (1) the person to be
indemnified shall provide a security for his undertaking, (2) the Trust shall be
insured against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of the disinterested, non-party Trustees of the Trust,or an
independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts, that there is reason to believe that the
person to be indemnified ultimately will be found entitled to indemnification.
The law of Massachusetts is superseded by the 1940 Act insofar as it conflicts
with the 1940 Act or rules published thereunder.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER AND SUB-
ADVISERS
There is set forth below information as to any other business, profession,
vocation or employment of a substantial nature in which each director or officer
of the Registrant's Investment Adviser is, or at any time during the past two
years has been, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee.
<TABLE>
<CAPTION>
<S> <C>
NAME AND PRINCIPAL
BUSINESS ADDRESS BUSINESS AND OTHER CONNECTIONS
- ----------------------- ------------------------------------------------
Ian K. Whitehead President, Chief Executive Officer and Director
1755 Creekside Oaks Dr. of the Adviser; President, Chief Executive
Sacramento, CA 95833 Officer and Director - Life Company; Chairman and
Director - London Pacific Financial & Insurance
Services; Chief Financial Officer - Govett & Company
Limited; Chairman - North American Trust
Company, an affiliate of the Life Company
Arthur I. Trueger Chairman of the Board and Director of the
650 California St. Adviser; Chairman of the Board and Director -
San Francisco, CA 94108 Life Company; Executive Chairman - Govett &
Company Limited
George C. Nicholson Chief Financial Officer and Director of the
3109 Poplarwood Court Adviser; Chief Financial Officer, Secretary
Raleigh, NC 27604 and Director - Life Company; Treasurer and
Director (since September 1994) - London Pacific
Financial & Insurance Services
Mark E. Prillaman Executive Vice President and Chief Marketing
1755 Creekside Oaks Dr. Officer of the Adviser and the Life Company
Sacramento, CA 95833 (since February 1994)
Susan Y. Gressel Vice President and Treasurer of the Adviser;
3109 Poplarwood Court Vice President and Treasurer - Life Company
Raleigh, NC 27604
Charles M. King Vice President and Controller of the Adviser;
3109 Poplarwood Court Vice President and Controller - Life Company
Raleigh, NC 27604
William J. McCarthy Vice President and Chief Actuary of the Adviser;
3109 Poplarwood Court Vice President and Chief Actuary - Life Company
Raleigh, NC 27604
Charlotte M. Stott Vice President, Marketing of the Adviser; Vice
1755 Creekside Oaks Dr. President, Marketing - Life Company
Sacramento, CA 95833
Jerry T. Tamura Vice President - Administrative Services of the
1755 Creekside Oaks Dr. Adviser; Vice President - Administrative
Sacramento, CA 95833 Services - Life Company; Chairman, President and
Chief Executive Officer - London Pacific
Financial & Insurance Services
Jerry S. Waters Vice President, Technology Services of the
1755 Creekside Oaks Dr. Adviser; Vice President, Technology Services -
Sacramento, CA 95833 Life Company
</TABLE>
The principal address of Registrant's Investment Adviser is 1755 Creekside Oaks
Drive, Sacramento, California 95833.
With respect to information regarding the Sub-Advisers, reference is hereby made
to "Management of the Trust" in the Prospectus. For information as to the
business, profession, vocation or employment of a substantial nature of each of
the officers and directors of the Sub-Advisers, reference is made to the current
Form ADVs of the Sub-Advisers filed under the Investment Advisers Act of 1940,
incorporated herein by reference, the file numbers of which are as follows:
Robertson, Stephens & Company Investment Management, L.P.
File No. 801-144125
Harris Associates L.P.
File No. 801-50333
Lexington Management Corporation
File No. 801-8281
Strong Capital Management, Inc.
File No. 801-10724
Massachusetts Financial Services Company
File No. 801-17352
Berkeley Capital Management Inc
File No. 801-40598
ITEM 29. PRINCIPAL UNDERWRITER
Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
Persons maintaining physical possession of accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules promulgated thereunder include the Registrant's Secretary; the
Registrant's investment adviser, LPIMC Insurance Marketing Services; and the
Registrant's custodian, State Street Bank and Trust Company. The address of the
Secretary and LPIMC Insurance Marketing Services is 31 Poplarwood Court,
Raleigh, NC 27604.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth in Parts A and B of this Registration Statement, the
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
Not Applicable.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) and has duly caused this Post-Effective Amendment No. 5 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Raleigh, and State of North Carolina on the 21st
day of April, 1998.
LPT VARIABLE INSURANCE SERIES TRUST
By: /s/GEORGE C. NICHOLSON
__________________________________________
George C. Nicholson
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 5 has been signed below by the following persons in the capacities
and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/S/ MARK E. PRILLAMAN* President, Principal 4/21/98
- ------------------------------- ----------------
Mark E. Prillaman Executive Officer and
Trustee
/s/GEORGE C. NICHOLSON Vice President, Treasurer, 4/21/98
- ------------------------------- ----------------
George C. Nicholson Principal Financial
Officer and Principal
Accounting Officer
/S/ RAYMOND L. PFEISTER* Trustee 4/21/98
- ------------------------------- -----------------
Raymond L. Pfeister
/S/ ROBERT H. SINGLETARY* 4/21/98
- ------------------------------- Trustee -----------------
Robert H. Singletary
/S/ JAMES WINTHER* Trustee 4/21/98
- ------------------------------- ----------------
James Winther
</TABLE>
*By: /s/GEORGE C. NICHOLSON
------------------------
George C. Nicholson
Attorney-in-Fact
PART II
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM N-1A
FOR
LPT VARIABLE INSURANCE SERIES TRUST
INDEX TO EXHIBITS
PAGE
Ex-99.B2 Bylaws
EX-99.B5(c)(i) Sub-Advisory Agreement among Strong Capital
Management, Inc., the Adviser and the Trust
EX-99.B5(c)(ii) Sub-Advisory Agreement among Lexington Management
Corporation, the Adviser and the Trust
EX-99.B5(c)(iii) Sub-Advisory Agreement among Massachusetts Financial
Services Company, the Adviser and the Trust
EX-99.B8 Form of Custodian Agreement and Fund Accounting
Agreement between the Registrant and the Custodian
EX-99.B10 Consent and Opinion of Counsel
EX-99.B11 Consent of Independent Accountants
EX-99.B16 Calculation of Performance Information
BY-LAWS
These By-laws are made and adopted pursuant to the Declaration of Trust
establishing GOVETT VARIABLE INSURANCE SERIES TRUST (the "Trust"), as from time
to time amended, restated or modified (the "Declaration"). All words and terms
capitalized in these By-laws shall have the meaning or meanings set forth for
such words or terms in the Declaration. If any term or provision of these
By-laws shall be in conflict with any term or provision of the Declaration, the
terms and provisions of the Declaration shall be controlling.
ARTICLE I
SHAREHOLDERS' MEETINGS AND RECORD DATES
SECTION 1.1 GENERAL. All meetings of the Shareholders shall be held, pursuant to
written notice, within or without The Commonwealth of Massachusetts and on such
day and at such time as the Trustees shall designate. Notice shall be given by
mail not less than ten (10) nor more than sixty (60) days prior to the day named
for the meeting, and shall be deemed to have been properly given to a
Shareholder when deposited in the United States mail with first class postage
prepaid or in a telegraph office with charges prepaid, directed to the
Shareholder's address as given to a transfer agent or such other officer or
agent of the Trust as shall keep the register for entry thereon. A certificate
or affidavit by the Secretary or an Assistant Secretary or a transfer agent
shall be prima facie evidence of the giving of any notice required by the
Declaration.
SECTION 1.2 NOTICE OF ADJOURNMENTS. Upon adjournment of any meeting of
Shareholders, it shall not be necessary to give any notice of the adjourned
meeting or of the business to be transacted thereat, other than by announcement
at the meeting at which such adjournment is taken. At any adjourned meeting at
which a quorum shall be present or represented, only such business may be
transacted which might have been transacted at the meeting originally called. If
after the adjournment, the Trustees fix a new record date for the adjourned
meeting, a notice of the adjourned meeting shall be given to each Shareholder of
record on the new record date entitled by law to receive such notice.
SECTION 1.3 CHAIRMAN. The Chairman shall act as chairman at all meetings of the
Shareholders; in his absence, the President shall act as chairman; and in the
absence of the Chairman and President, the Trustee or Trustees present at each
meeting may elect a temporary chairman for the meeting, who may be one of
themselves.
SECTION 1.4 PROXIES; VOTING. Shareholders may vote at any meeting, or by consent
in writing without a meeting pursuant to the Declaration, either in person or by
proxy. Every proxy shall be executed in writing by the Shareholder, or by his
duly authorized attorney-in-fact, with each full share represented at the
meeting being entitled to one vote and fractional shares to fractional votes. A
proxy, unless coupled with an interest, shall be revocable at will,
notwithstanding any other agreement or any provision in the proxy to the
contrary, but the revocation of a proxy shall not be effective until notice
thereof has been given to the Secretary, or such other officer or agent of the
Trust as the Secretary may direct. No proxy shall be valid after eleven (11)
months from the date of its execution, unless a longer time is expressly stated
in such proxy, but in no event shall a proxy, unless coupled with an interest,
be voted on after three (3) years from the date of its execution. A proxy shall
not be revoked by the death or incapacity of the maker unless, before the vote
is counted or the authority is exercised, written notice of such death or
incapacity is given to the Secretary or to such other officer or agent of the
Trust as the Secretary may direct.
SECTION 1.5 CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATES. For the purpose
of determining the Shareholders who are entitled to notice of or to vote or act
at any meeting, including any adjournment thereof, or who are entitled to
participate in any dividend or distribution, or for any other proper purpose,
the Trustees may from time to time close the transfer books or fix a record date
in the manner provided in the Declaration. If the Trustees do not, prior to any
meeting of Shareholders, so fix a record date or close the transfer books, then
the record date shall be the close of business of the day next preceding the
date of mailing of notice of the meeting, or in the case of a dividend or other
distribution, the close of business on the day upon which the dividend or
distribution resolution is adopted, or on such later day as the Trustees may
determine.
SECTION 1.6 INSPECTORS OF ELECTION. In advance of any meeting of Shareholders,
the Trustees may appoint Inspectors of Election, who may but need not be
Shareholders, to act at such meeting or any adjournment thereof. If Inspectors
of Election are not so appointed, the chairman of any such meeting may, and upon
the request of any Shareholder or his proxy shall, make such appointments at the
meeting. The number of Inspectors shall be either one (1) or three (3). If
appointed at the meeting on the request of one or more Shareholders or proxies,
a majority of shares present shall determine whether one or three Inspectors are
to be appointed, but failure to allow such determination by the Shareholders or
proxies shall not affect the validity of the appointment of Inspectors of
Election. In case any person appointed as Inspector fails to appear or fails or
refuses to act, the vacancy must be filled by appointment made by the Trustees
in advance of the convening of the meeting, or at the meeting by the person
acting as chairman. The Inspectors of Election shall determine the number of
shares outstanding, the shares represented at the meeting, the existence of a
quorum, the authenticity, validity and effect of proxies; shall receive votes,
ballots or consents; shall hear and determine all challenges and questions in
any way arising in connection with the right to vote; shall count and tabulate
all votes or consents, determine the results, and do such other acts as may be
proper to conduct the election or vote with impartiality and fairness to all
Shareholders. If there are three Inspectors of election, the decision, act or
certificate of a majority shall be effective in all respects as the decision,
act or certificate of all. On request of the chairman of the meeting, or of any
Shareholder or his proxy, the Inspectors of Election shall make a written report
of any challenge or question or matter determined by them and execute a
certificate of any fact found by them.
ARTICLE II
TRUSTEES
SECTION 2.1 REGULAR MEETINGS. Regular meetings of the Trustees may be held at
such time and place as the Trustees may by resolution from time to time
determine without call or notice. If any day fixed for a regular meeting shall
be a legal holiday in the Commonwealth of Massachusetts or the place designated
for regular meetings, then the meeting shall be held at the same hour and place
on the next succeeding business day.
SECTION 2.2 SPECIAL MEETINGS. Special Meetings of the Trustees shall be held
upon the call of the Chairman, the President, or the Secretary, or any two
Trustees, at such time, on such day, and at such place, as shall be designated
in the notice of the meeting.
SECTION 2.3 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting,
specifying the place, day and hour of the meeting, shall be given to a Trustee
either personally or by sending a copy thereof through the mail, with first
class postage prepaid, or by telegram, charges prepaid, to his address appearing
on the books of the Trust or supplied by him to the Trust for the purpose of
notice, at least forty-eight (48) hours prior to the time named for such
meeting. If the notice is sent by mail or by telegraph, it shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail, postage prepaid, or with a telegraph office, charges prepaid, for
transmission to such person. Notice by telephone shall constitute personal
delivery for these purposes. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Trustees need be stated in the notice or
waiver of notice of such meeting, and no notice need be given of action proposed
to be taken by unanimous consent.
SECTION 2.4 WAIVER OF NOTICE. Whenever any notice is required by the Declaration
or these By-laws to be given to a Trustee, a waiver thereof in writing, whether
signed by him before or after the meeting, shall be deemed equivalent to the
giving of due notice. Attendance of any Trustee at any meeting shall constitute
a waiver of notice of such meeting except where such Trustee attends the meeting
for the express purpose of objecting to the transaction of any business because
the meeting was not lawfully called or convened.
SECTION 2.5 ADJOURNMENT. Adjournment or adjournments of any meeting may be
taken, and it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted thereat other than by announcement at the
meeting at which such adjournment is taken. At any adjourned meeting at which a
quorum shall be present, any business may be transacted which might have been
transacted at the meeting originally called.
SECTION 2.6 EXECUTIVE COMMITTEE. Subject to the provisions of Section 3.4
hereof, the Trustees may, by resolution adopted by a majority thereof, designate
one or more of their number to constitute an Executive Committee, and may
designate one or more of their number as alternate members of the Executive
Committee, who may replace any absent or disqualified member at any meeting of
the Committee. The President shall be notified in advance of all Executive
Committee meetings, and whenever feasible or convenient for him, the President
shall attend meetings of the Executive Committee and serve ex officio, as a
non-voting advisory member. Any such Committee, to the extent provided in such
resolution and the Declaration, shall have and exercise the authority of the
Trustees in the management of the business and affairs of the Trust and the
management and disposition of Trust Property. Vacancies in the membership of the
Committee shall be filled by the Trustees. In the absence or disqualification of
any member of such Committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another Trustee to act at the meeting in the
place of any such absent or disqualified member. The Executive Committee shall
keep regular minutes of its proceedings and report the same to the Trustees.
SECTION 2.7 CHAIRMAN; RECORDS. The Chairman shall act as chairman at all
meetings of the Trustees; in his absence the Trustees present may elect one of
their number to act as temporary chairman. The results of all actions taken at a
meeting of the Trustees, or by written consents of the Trustees without a
meeting, shall be recorded by the Secretary.
SECTION 2.8 MEETING OF SHAREHOLDERS. Meetings of Shareholders shall be held at
such times and in such places as the Trustees shall, by resolution, direct.
ARTICLE III
OFFICERS, AGENTS AND EMPLOYEES
SECTION 3.1 OFFICERS OF THE TRUST. The officers of the Trust shall be a Chairman
chosen from among the Trustees and a President, a Secretary and a Treasurer or
persons who shall act as such regardless of the name or title by which they may
be designated, elected or appointed. One or more Vice-Presidents, one or more
Assistant Secretaries and Assistant Treasurers, and such other officers or
agents as the Trustees shall deem necessary or appropriate to carry out the
business of the Trust also may be elected or appointed. Any two or more offices
may be held by the same person, except those of President and Secretary and
provided that no officer shall execute, acknowledge or verify any instrument in
more than one capacity if such instrument is required to be executed,
acknowledged or verified by two or more officers. In addition to the powers and
duties prescribed by the Declaration and these By-laws, the officers and
assistant officers shall have such authority and shall perform such duties as
from time to time shall be prescribed by the Trustees. The officers and
assistant officers of the Trust shall hold office until their successors are
chosen and have qualified, unless their term of office is sooner terminated, by
death, resignation or removal. The Trustees may amend the title of any officer
or assistant officer or create a new office, by utilizing a word or words
descriptive of his powers or the general character of his duties. If the office
of any officer or assistant officer becomes vacant for any reason, the vacancy
may be filled by the Trustees at any time.
SECTION 3.2 REMOVAL OF OFFICERS, AGENTS OR EMPLOYEES. Any officer, assistant
officer, agent or employee may be removed or have his authority revoked at any
time, with or without cause, by a majority of the Trustees, whenever in their
judgment the best interests of the Trust will be served thereby, but such
removal or revocation shall be without prejudice to the rights, if any, of the
person so removed to receive compensation or other benefits in accordance with
the terms of existing contracts. Any agent or employee likewise may be removed
by the President or, subject to the supervision of the President, by the person
having authority with respect to the appointment of such agent or employee. Any
officer may resign at any time by written notice signed by such officer and
delivered or mailed to the Chairman, President, or Secretary, and such
resignation shall take effect upon receipt by the Chairman, President, or
Secretary, or at a later date according to the terms of such notice.
SECTION 3.3 BONDS AND SURETY. Any officer may be required by the Trustees to be
bonded for the faithful performance of his duties in such amount and with such
sureties as the Trustees may determine.
SECTION 3.4 CHAIRMAN OF THE BOARD OF TRUSTEES; POWERS AND DUTIES. The Chairman
shall, if present, preside at all meetings of the Shareholders and of the
Trustees. He shall perform such other powers and duties as may from time to time
be assigned to him by the Trustees.
SECTION 3.5 THE PRESIDENT. Subject to such supervisory powers, if any, as may be
given by the Trustees, the President shall be the chief executive officer of the
Trust and, subject to the control of the Trustees, shall have general
supervision, direction and control of the business of the Trust and of its
employees and shall exercise such general powers of management as are usually
vested in the office of president of a Massachusetts business corporation. In
the absence of the Chairman, the President shall preside at all meetings of the
Shareholders and of the Trustees. Subject to direction of the Trustees, the
President shall have power in the name and on behalf of the Trust to execute any
and all loan documents, contracts, agreements, deeds, mortgages, and other
instruments in writing, and to employ and discharge employees and agents of the
Trust. Unless otherwise directed by the Trustees, the President shall have full
authority and power, on behalf of all of the Trustees, to attend and to act and
to vote, on behalf of the Trust at any meetings of business organizations in
which the Trust holds an interest, or to confer such powers upon any other
persons, by executing any proxies duly authorizing such persons. The President
shall have such further authorities and duties as the Trustees shall from time
to time determine and shall be an ex officio member of the Executive Committee
and of all standing committees (if any) appointed by the Trustees.
SECTION 3.6 VICE-PRESIDENT: POWERS AND DUTIES. The Vice-President, if any,
shall, in the absence or disability of the President, perform all the duties of
the President, and when so acting shall have all the powers and be subject to
all of the restrictions upon the President. If there be more than one
Vice-President, their seniority in performing such duties and exercising such
powers shall be in order of their rank as fixed by the Trustees, or, if more
than one and not ranked, then by determination of the Trustees, or, in the
absence of such determination, by the order in which they were first elected.
Subject to the direction of the Trustees, and the President, each Vice-President
shall have the power in the name and on behalf of the Trust to execute any and
all loan documents, contracts, agreements, deeds, mortgages and other
instruments in writing, and, in addition, shall have such other duties and
powers as shall be designated from time to time by the Trustees or the President
and as by general usage appertain to the office.
SECTION 3.7 SECRETARY: POWERS AND DUTIES. The Secretary shall keep the minutes
of all meetings of, and record all votes of, Shareholders, Trustees and the
executive or other committees, if any. He shall give, or cause to be given, as
required by the Declaration or these By-laws, notice of meetings of the
Shareholders and of the Trustees, and shall perform such other duties as may be
prescribed by the Trustees, or the President. The Secretary shall also perform
any other duties commonly incident to such office in a Massachusetts business
corporation, and shall have such other authorities and duties as the Trustees or
the President shall from time to time determine.
SECTION 3.8 TREASURER; POWERS AND DUTIES. Except as otherwise directed by the
Trustees, the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and
President all powers and duties normally incident to his office. He may endorse
for deposit or collection all notes, checks and other instruments payable to the
Trust or to its order. He shall deposit all funds of the Trust in such
depositories as the Trustees shall designate. He shall be responsible for such
disbursement of the funds of the Trust as may be ordered by the Trustees, or the
President. He shall keep accurate account of the books of the Trust's
transactions which shall be the property of the Trust, and which, together with
all other property of the Trust in his possession, shall be subject at all times
to the inspection and control of the Trustees. Unless the Trustees shall
otherwise determine, the Treasurer shall be the principal financial and
accounting officer of the Trust. He shall have such other duties and authorities
as the Trustees or the President shall from time to time determine.
Notwithstanding anything to the contrary herein contained, the Trustees may
authorize the Investment Adviser, the Custodian, or the Transfer Agent to
maintain bank accounts and deposit and disburse funds of the Trust on behalf of
the Trust.
SECTION 3.9 DELEGATION OF OFFICERS' DUTIES. The Trustees may appoint such other
officers and assistant officers as they shall from time to time determine to be
necessary or desirable in order to conduct the business of the Trust. Assistant
officers shall act generally in the absence of the officer whom they assist,
shall assist that officer in the duties of his office and shall have such other
duties and authority as may be conferred upon them by the Trustees or delegated
to them by the President. In case of the absence or disability of any officer or
assistant officer of the Trust or for any other reason that the Trustees may
deem sufficient, the Trustees may delegate or authorize the delegation of his
powers or duties, for the time being, to any person.
ARTICLE IV
SHARES
SECTION 4.1 EVIDENCE OF SHARE OWNERSHIP. Certificates representing the Trust's
shares shall not be physically issued. Shares in the Trust shall be recorded on
a register maintained for the Trust by the Transfer Agent appointed by the
Trustees. The holders of shares so maintained shall have the same rights of
ownership with respect to such shares as if certificates had been issued. The
Trustees shall, from time to time, by appropriate resolution, establish such
rules for authentication of Shareholders for purposes of purchase and redemption
as they shall deem necessary.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 DEPOSITORIES. The funds of the Trust shall be deposited in such
depositories as the Trustees shall designate in accordance with the provisions
of the Declaration, and shall be drawn out on checks, drafts or other orders
signed by such officer, officers, agent or agents (including the Adviser), as
the Trustees may from time to time authorize.
SECTION 5.2 SIGNATURES. All contracts and other instruments shall be executed on
behalf of the Trust by such officer, officers, agent or agents, as provided in
the Declaration or these By-laws or as the Trustees may from time to time by
resolution provide.
ARTICLE VI
AMENDMENT OF BY-LAWS
SECTION 6.1 AMENDMENT AND REPEAL OF BY-LAWS. In accordance with the Declaration,
the Trustees have the power to alter, amend or repeal the by-laws or adopt new
by-laws at any time. Action by the Trustees with respect to the By-laws shall be
taken by an affirmative vote of a majority of the Trustees. The Trustees shall
in no event adopt By-laws which are in conflict with the Declaration, and any
apparent inconsistency shall be construed in favor of the related provisions in
the Declaration.
* * * * *
The Declaration of Trust establishing Govett Variable Insurance Series Trust,
dated January 23, 1995, a copy of which, together with all amendments thereto
(the "Declaration"), is on file in the office of the Secretary of The
Commonwealth of Massachusetts, provides that the name "Govett Variable Insurance
Series Trust" refers to the Trustees under the Declaration collectively as
Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of Govett Variable Insurance Series Trust shall be
held to any personal liability, nor shall resort be had to their private
property for the satisfaction of any obligation or claim or otherwise in
connection with the affairs of said Govett Variable Insurance Series Trust but
the Trust Property only shall be liable.
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of ______________, 1995, among Strong Capital
Management, Inc., a Wisconsin corporation (the "Sub-Adviser"), LPIMC Insurance
Marketing Services, a California corporation (the "Adviser"), and LPT Variable
Insurance Series Trust, a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement
(referred to herein as the "Advisory Agreement"), dated __________, 1995, with
the Trust, under which Adviser has agreed to act as investment adviser to the
Trust, which is registered as an open-end diversified management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in the
business of rendering investment management services, to provide certain
investment management services for the investment portfolios of the Trust listed
on Exhibit A hereto (each a "Portfolio" and collectively the "Portfolios"); and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
Sub-Adviser to Adviser with respect to the Portfolios and the terms and
conditions under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
1. Services of Sub-Adviser. Sub-Adviser shall have the following
responsibilities:
(a) to furnish continuous investment information, advice and
recommend ations to the Portfolios as to the acquisition, holding or
disposition of any or all of the securities or other assets, including
cash, which the Portfolios may own or contemplate acquiring from time
to time;
(b) to cause its officers to attend meetings of the Adviser or
the Trust and furnish oral or written reports, as the Adviser may
reasonably require, in order to keep the Adviser and its officers and
the Trustees of the Trust and appropriate officers of the Trust fully
informed as to the condition of the investment securities of the
Portfolios, the investment recommendations of the Sub-Adviser, and the
investment considerations which have given rise to those
recommendations;
(c) to furnish such statistical and analytical information and
reports as may reasonably be required by the Adviser from time to
time;
(d) to determine the investment securities to be purchased or
sold by the Portfolios and, as agent for the Portfolios to: (i)
execute any and all necessary agreements with brokers and/or dealers
and (ii) purchase, hold, sell and effect transactions for the
Portfolios pursuant to its determinations either directly with an
issuer or with any broker and/or dealer in such securities;
(e) at all times to invest money from London Pacific Life &
Annuity Company's (the "Company") segregated asset account in such a
manner as to satisfy the requirements for variable contracts under the
Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder. Without limiting the scope of the
foregoing, the Sub-Adviser will at all times comply with Section
817(h) of the Code and Treasury Regulations 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life
insurance contracts and any amendments or other modifications to such
Section or Regulations. In the event of a breach of this provision by
the Sub-Adviser, it will take all reasonable steps (a) to notify the
Adviser of such breach and (b) to adequately diversify the Portfolios
so as to achieve compliance with the grace period afforded by Treasury
Regulations 1.817-5;
Except for the restrictions necessary to comply with Section
817(h) of the Code and Treasury Regulations 1.817-5 (the "Tax
Restrictions"), Adviser represents and warrants that the investment
objective of each Portfolio is identical to, and that investment
policies, restrictions and limitations of each Portfolio are no more
restrictive or limiting than those contained in the current prospectus
and statement of additional information of the Corresponding Strong
Fund identified opposite each Portfolio on Exhibit B hereto. Except to
the extent of the Tax Restrictions, and to the extent that the parties
hereto may otherwise agree in writing, Adviser shall cause the Trust
to file such amendments, supplements and stickers to the registration
statement as are necessary to ensure that the investment policies,
restrictions and limitations applicable to each Portfolio are at all
times no more restrictive than those contained in the registration
statement as the same may be amended or supplemented from time to
time, of the Corresponding Strong Fund. Adviser shall not permit the
investment objective of any Portfolio to change without the prior
written consent of the Sub-Adviser unless such change is in response
to a change made to the Corresponding Strong Fund and then, only to
the extent necessary to make the investment objective of the Portfolio
identical to that of the Corresponding Strong Fund;
(f) to maintain all books and records required to be maintained
pursuant to the 1940 Act and the rules and regulations promulgated
thereunder with respect to transactions made by it on behalf of the
Portfolios including, without limitation, the books and records
required by Subsections (b)(1), (5), (6), (7), (9), (10) and (11) and
Subsection (f) of Rule 31a-1 under the 1940 Act and shall timely
furnish to the Adviser all information relating to the Sub-Adviser's
services hereunder needed by the Adviser to keep such other books and
records of the Portfolios required by Rule 31a-1 under the 1940 Act.
The Sub-Adviser will also preserve all such books and records for the
periods prescribed in Rule 31a-2 under the 1940 Act, and agrees that
such books and records shall remain the sole property of the Trust and
shall be immediately surrendered to the Trust upon request. The
Sub-Adviser further agrees that all books and records maintained
hereunder shall be made available to the Trust or the Adviser at any
time upon request, including telecopy, without unreasonable delay,
during any business day. From time to time as the Adviser or the
Trustees of the Trust may reasonably request, the Sub-Adviser will
furnish the requesting party reports on Portfolio transactions and
reports on investments held in a Portfolio, all in such detail as the
Adviser or Trustees of the Trust may reasonably request; and
(g) to comply with the Sub-Adviser's Code of Ethics, adopted
pursuant to Rule 17j-1 under the 1940 Act.
2. Obligations of the Adviser. The Adviser shall have the following
obligations under this Agreement:
(a) to keep the Sub-Adviser continuously and fully informed as to the
composition of each Portfolio's investment securities and the nature of
each Portfolio's assets and liabilities;
(b) to provide to the Sub-Adviser any amendments, supplements or other
changes to the Trust's Declaration of Trust, By-Laws, currently effective
registration statement under the 1940 Act, including any amendments or
supplements thereto, and Notice of Eligibility under Rule 4.5 of the
Commodity Exchange Act, if applicable, (collectively, "Governing
Instruments and Regulatory Filings") as soon as practicable after such
materials become available and, upon receipt by the Sub-Adviser, the
Sub-Adviser will act in accordance with such amended, supplemented or
otherwise changed Governing Instruments and Regulatory Filings;
(c) to furnish the Sub-Adviser with a certified copy of any financial
statement or report prepared for the Trust with respect to the Portfolios
by certified or independent public accountants, and with copies of any
financial statements or reports made by the Trust to shareholders or to any
governmental body or securities exchange and to inform the Sub-Adviser of
the results of any audits or examinations by regulatory authorities
pertaining to the Portfolios, if these results affect the services provided
by the Sub-Adviser pursuant to this Agreement;
(d) to comply with the Adviser's Code of Ethics, adopted pursuant to
Rule 17j- 1 under the 1940 Act;
(e) to furnish the Sub-Adviser with any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement; and
(f) to compensate the Sub-Adviser for its services under this
Agreement by the payment of fees as set forth in Exhibit C attached hereto.
3. Portfolio Transactions.The Sub-Adviser shall place all orders for the
purchase and sale of portfolio securities for the account of the Portfolios with
broker-dealers selected by the Sub-Adviser. In executing portfolio transactions
and selecting broker-dealers, the Sub-Adviser will use its best efforts to seek
best execution on behalf of the Portfolios. In assessing the best execution
available for any transaction, the Sub-Adviser shall consider all factors it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and execution capability of the
broker-dealer, and the reasonableness of the commission, if any (all for the
specific transaction and on a continuing basis). In evaluating the best
execution available, and in selecting the broker-dealer to execute a particular
transaction, the Sub-Adviser may also consider the brokerage and research
services (as those terms are used in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Portfolios and/or other accounts over which the
Sub-Adviser, an affiliate of the Sub-Adviser (to the extent permitted by law) or
another investment adviser of the Portfolios exercises investment discretion.
The Sub-Adviser is authorized to cause the Portfolios to pay a broker-dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for the Portfolios which is in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction if, (i) the Sub-Adviser determines in good faith that the amount is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker in terms of the particular transaction or in
terms of the Sub-Adviser's overall responsibilities with respect to the
Portfolios and the accounts as to which the Sub-Adviser exercises investment
discretion, (ii) such payment is made in compliance with Section 28(e) of the
Securities Exchange Act of 1934, and any other applicable laws and regulations,
and (iii) in the opinion of the Sub-Adviser, the total commissions paid by a
Portfolio will be reasonable in relation to the benefits to the Portfolio over
the long term. It is recognized that the services provided by such brokers may
be useful to the Sub-Adviser in connection with the Sub-Adviser's service to
other clients. On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interests of a Portfolio as well as other clients of
the Sub-Adviser, the Sub-Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of
securities so sold or purchased, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner the Sub-Adviser
considers to be the most equitable and consistent with its fiduciary obligations
to the Portfolio and to such other clients.
4. Marketing Support. The Sub-Adviser shall provide marketing support to
the Adviser in connection with the sale of Trust shares and/or the sale of
variable annuity contracts issued by the Company, as reasonably requested by the
Adviser. Such support shall include, but not necessarily be limited to,
presentations by representatives of the Sub-Adviser at investment seminars,
conferences and other industry meetings as may be mutually agreed upon between
Adviser and Sub-Adviser. Notwithstanding the foregoing, nothing contained in
this Agreement shall obligate the Sub-Adviser to provide any funding or
financial support for the purpose of directly or indirectly promoting
investments in the Trust. Any materials utilized by the Adviser which contain
any information relating to the Sub-Adviser shall be submitted to the
Sub-Adviser for approval prior to use, not less than five (5) business days
before such approval is needed by the Adviser. Any materials utilized by the
Sub-Adviser which contain any information relating to the Adviser, the Company
(including any information relating to its separate accounts or variable annuity
contracts) or the Trust shall be submitted to the Adviser for approval prior to
use, not less than five (5) business days before such approval is needed by the
Sub-Adviser.
5. Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of California.
6. Execution of Agreement. This Agreement will become binding on the
parties hereto upon their execution of the attached Exhibit C to this Agreement.
7. Compliance With Laws. The Sub-Adviser represents that it is, and will
continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, the Sub-Adviser will act in conformity
with the Trust's Declaration of Trust, By-Laws, and current registration
statement applicable to the Portfolios and with the instructions and direction
of the Adviser and the Trust's Trustees, and will conform to and comply with the
1940 Act and all other applicable federal or state laws and regulations.
8. Termination. This Agreement may be terminated at any time, without
penalty, by the Adviser or by the Trust by giving sixty (60) days' written
notice of such termination to the Sub-Adviser at its principal place of
business, provided that such termination shall have been authorized (i) by
resolution of the Trust's Board of Trustees, including the vote or written
consent of Trustees of the Trust who are not parties to the Agreement or
interested persons of any party hereto, or (ii) by vote of a majority of the
outstanding voting securities of the Portfolio. This Agreement may be terminated
at any time by the Sub-Adviser by giving sixty (60) days' written notice of such
termination to the Trust and the Adviser at their respective principal places of
business.
9. Assignment. This Agreement may not be assigned by the Adviser or
Sub-Adviser without the prior written consent of the parties hereto and shall
automatically terminate in the event of any assignment without such consent.
10. Term. This Agreement shall begin on the date of its execution and
unless sooner terminated in accordance with its terms shall continue in effect
for two years from that date and from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Trustees of the Trust who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Trustees of the Trust or the
affirmative vote of a majority of the outstanding voting securities of a
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act), and
provided that the Sub-Adviser shall not have notified the Trust in writing at
least sixty (60) days prior to the termination date of this Agreement or at
least sixty (60) days prior to each renewal thereafter that it does not desire
such continuation. .
11. Amendments. This Agreement may be amended only in accordance with the
1940 Act.
12. Indemnification. The Adviser shall indemnify and hold harmless the
Sub-Adviser, its officers and directors and each person, if any, who controls
the Sub-Adviser within the meaning of Section 15 of the Securities Act of 1933
("1933 Act") (any and all such persons shall be referred to as "Indemnified
Party"), against any loss, liability, claim, damage or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
claim, damages or expense and reasonable counsel fees incurred in connection
therewith), arising by reason of any matter to which this Agreement relates.
However, in no case (i) is this indemnity to be deemed to protect any particular
Indemnified Party against any liability to which such Indemnified Party would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless disregard
of its obligations and duties under this Agreement or (ii) is the Adviser to be
liable under this indemnity with respect to any claim made against any
particular Indemnified Party unless such Indemnified Party shall have notified
the Adviser in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Sub-Adviser or such controlling persons.
The Sub-Adviser shall indemnify and hold harmless the Adviser and each of
its directors and officers and each person if any who controls the Adviser
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
claim, damage or expense described in the foregoing indemnity, but only with
respect to the Sub-Adviser's willful misfeasance, bad faith or gross negligence
in the performance of its duties under this Sub-Advisory Agreement. In case any
action shall be brought against the Adviser or any person so indemnified, in
respect of which indemnity may be sought against the Sub-Adviser, the
Sub-Adviser shall have the rights and duties given to the Adviser, and the
Adviser and each person so indemnified shall have the rights and duties given to
the Sub-Adviser by the provisions of subsections (i) and (ii) of this section.
13. Non-Exclusivity. The investment advisory services of the Sub-Adviser to
the Portfolios under this Agreement are not exclusive, and the Sub-Adviser shall
be free to render similar services to others.
14. Independent Contractor. The Sub-Adviser shall for all purposes herein
be deemed to be an independent contractor and shall not, unless otherwise
expressly provided herein or authorized by the Trustees of the Trust from time
to time, have any authority to act for or represent the Portfolios or Trust in
any way or otherwise be deemed to be an agent of the Portfolios or the Trust.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
16. Notice. Any notice that is required to be given by the parties to each
other under the terms of this Agreement shall be in writing, delivered, or
mailed postpaid to the other party, or transmitted by facsimile with
acknowledgment of receipt, to the parties at the following addresses or
facsimile numbers, which may from time to time be changed by the parties by
notice to the other party:
(a) If to the Sub-Adviser:
Strong Capital Management, Inc.
100 Heritage Reserve
Milwaukee, Wisconsin 53051
Attention: General Counsel
Facsimile: (414) 359-3949
(b) If to the Adviser:
LPIMC Insurance Marketing Services
1755 Creekside Oaks Drive
Sacramento, California 95833
Attention: President
Facsimile: (916) 641-4298
(c) If to the Trust:
LPT Variable Insurance Series Trust
1755 Creekside Oaks Drive
Sacramento, California 95833
Attention: President
Facsimile: (916) 641-4298
EXHIBIT A
LPT VARIABLE INSURANCE SERIES TRUST
The following Portfolios of LPT Variable Insurance Series Trust are
subject to this Agreement:
Strong International Stock Portfolio
Strong Growth Portfolio
EXHIBIT B
Portfolio Corresponding Strong Fund
Strong International Stock Portfolio Strong International Stock Fund, Inc.
Strong Growth Portfolio Strong Growth Fund, Inc.
EXHIBIT C
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder with respect to each of the Strong International
Stock Portfolio and the Strong Growth Portfolio, monthly a fee of:
.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.
LPT VARIABLE INSURANCE SERIES TRUST
By:______________________________________
Title:
LPIMC INSURANCE MARKETING SERVICES
By:______________________________________
Title:
STRONG CAPITAL MANAGEMENT, INC.
By:______________________________________
Title:
A copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of each
Portfolio.
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of July 7, 1995, among Lexington Management Corporation
(LMC), Inc., a Delaware corporation (the "Sub-Adviser"), LPIMC Insurance
Marketing Services, a California corporation (the "Adviser"), and LPT Variable
Insurance Series Trust, a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement
(referred to herein as the "Advisory Agreement"), dated June 30, 1995, with the
Trust, under which Adviser has agreed to act as investment adviser to the trust,
which is registered as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended ("1940 Act");and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in the
business of rendering investment management services, to provide certain
sub-investment advisory services for the investment portfolio(s) of the Trust
listed on Exhibit A hereto (the "Portfolio") of the Trust as more fully
described below; and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
Sub-Adviser to Adviser with respect to the Portfolio and the terms and
conditions under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
1. Services of Sub-Adviser. The Sub-Adviser shall act as investment
sub-adviser to the Adviser with respect to the Portfolio. In this capacity,
Sub-Adviser shall have the following responsibilities:
(a) to furnish continuous investment information, advice and
recommendations to the Adviser as to the acquisition, holding or
disposition of any or all of the securities or other assets which the
Portfolio may own or contemplate acquiring from time to time;
(b) to cause its officers to attend meetings of the Adviser or the
Trust and furnish oral or written reports, as the Adviser may reasonably
require, in order to keep the Adviser and its officers and the Trustees of
the Trust and appropriate officers of the Trust fully informed as to the
condition of the investment securities of the Portfolio, the investment
recommendations of the Sub-Adviser, and the investment considerations which
have given rise to those recommendations;
(c) to furnish such statistical and analytical information and reports
as may reasonably be required by the Adviser from time to time; and
(d) to supervise and place orders for the purchase, sale, exchange and
conversion of securities as directed by the appropriate officers of the
Trust or of the Adviser.
2. Obligations of the Adviser. The Adviser shall have the following
obligations under this Agreement:
(a) to keep the Sub-Adviser continuously and fully informed as to the
composition of the Portfolio's investment securities and the nature of the
Portfolio's assets and liabilities;
(b) to keep the Sub-Adviser continually and fully advised of the
Portfolio's investment objectives, and any modifications and changes
thereto, as well as any specific investment restrictions or limitations;
(c) to furnish the Sub-Adviser with a certified copy of any financial
statement or report prepared for the Trust with respect to the Portfolio by
certified or independent public accountants, and with copies of any
financial statements or reports made by the Trust to shareholders or to any
governmental body or securities exchange and to inform the Sub-Adviser of
the results of any audits or examinations by regulatory authorities
pertaining to the Portfolio, if these results affect the services provided
by the Sub-Adviser pursuant to this Agreement;
(d) to furnish the Sub-Adviser with any further materials or
information which the Sub-Adviser may reasonably request to enable it to
perform its functions under this Agreement; and
(e) to compensate the Sub-Adviser for its services under this
Agreement by the payment of fees as set forth in Exhibit B attached hereto.
3. Portfolio Transactions. The Sub-Adviser shall place all orders for the
purchase and sale of portfolio securities for the account of the Portfolio with
broker-dealers selected by the Sub-Adviser. In executing portfolio transactions
and selecting broker-dealers, the Sub-Adviser will use its best efforts to seek
best execution on behalf of the Portfolio. In assessing the best execution
available for any transaction, the Sub-Adviser shall consider all factors it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and execution capability of the
broker-dealer, and the reasonableness of the commission, if any (all for the
specific transaction and on a continuing basis). In evaluating the best
execution available, and in selecting the broker-dealer to execute a particular
transaction, the Sub-Adviser may also consider the brokerage and research
services (as those terms are used in Section 28(e) of the Securities Exchange
Act of 1934) provided to the Portfolio and/or other accounts over which the
Sub-Adviser, an affiliate of the Sub-Adviser (to the extent permitted by law) or
another investment adviser of the Portfolio exercises investment discretion. The
Sub-Adviser is authorized to cause the Portfolio to pay a broker-dealer who
provides such brokerage and research services a commission for executing a
portfolio transaction for the Portfolio which is in excess of the amount of
commission another broker-dealer would have charged for effecting that
transactions if, but only if, the Sub-Adviser determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer viewed in terms of that particular
transaction or in terms of all of the accounts over which investment discretion
is so exercised.
4. Marketing Support. The Sub-Adviser shall provide marketing support to
the Adviser in connection with the sale of Trust shares and/or the sale of
variable annuity and variable life insurance contracts issued by London Pacific
Life & Annuity Company and its affiliates which may invest in the Trust
(collectively, the "Life Company"), as reasonably requested by the Adviser. Such
support shall include, but not necessarily be limited to, presentations by
representatives of the Sub-Adviser at investment seminars, conferences and other
industry meetings. Any materials utilized by the Adviser which contain any
information relating the Sub-Adviser shall be submitted to the Sub-Adviser for
approval prior to use, not less than five (5) business days before such approval
is needed by the Adviser. Any materials utilized by the Sub-Adviser which
contain any information relating to the Adviser, the Life Company (including any
information relating to its separate accounts or variable annuity or variable
life insurance contracts) or the Trust shall be submitted to the Adviser for
approval prior to use, not less than five (5) business days before such approval
is needed by the Sub-Adviser.
5. Service Mark. LMC, as the owner of the service mark "Lexington" and
"Corporate Leaders", has sublicensed the Lexington Corporate Leaders 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. This Agreement will thereupon automatically
terminate and a new contract will, at such time, be submitted to a vote of the
shareholders of the Portfolio.
6. Governing Law. The Agreement shall be construed in accordance with and
governed by the laws of the Commonwealth of Massachusetts.
7. Execution of Agreement. This Agreement will become binding on the
parties hereto upon their execution of the attached Exhibit B to this Agreement.
8. Compliance With Laws. The Sub-Adviser represents that it is, and will
continue to be throughout the term of this Agreement, an investment adviser
registered under all applicable federal and state laws. In all matters relating
to the performance of this Agreement, the Sub-Adviser will act in conformity
with the Trust's Declaration of Trust, Bylaws, and current registration
statement applicable to the Portfolio and with the instructions and direction of
the Adviser and the Trust's Trustees, and will conform to and comply with the
1940 Act and all other applicable federal or state laws and regulations.
9. Termination. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement. This Agreement may be terminated at any
time, without penalty, by the Adviser or by the Trust by giving sixty (60) days'
written notice of such termination to the Sub-Adviser at its principal place of
business, provided that such termination is approved by the Board of Trustees of
the Trust or by vote of a majority of the outstanding voting securities (as that
phrase is defined in Section 2(a)(42) of the 1940 Act) of the Portfolio. This
Agreement may be terminated at any time by the Sub-Adviser by giving 60 days'
written notice of such termination to the Trust and the Adviser at their
respective principal places of business.
10. Assignment. This Agreement shall terminate automatically in the event
of any assignment (as that term is defined in Section 2(a)(4) of the 1940 Act)
of this Agreement.
11. Term. This Agreement shall begin on the date of its execution and
unless sooner terminated in accordance with its terms shall continue in effect
for two years from that date and from year to year thereafter provided
continuance is specifically approved at least annually by the vote of a majority
of the Trustees of the Trust who are not parties hereto or interested persons
(as the term is defined in Section 2(a)(19) of the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on the approval of
the terms of such renewal, and by either the Trustees of the Trust or the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that Phrase is defined in Section 2(a)(42) of the 1940 Act).
12. Amendments. This Agreement may be amended only with the approval by the
affirmative vote of a majority of the outstanding voting securities of the
Portfolio (as that phrase is defined in Section 2(a)(42) of the 1940 Act) and
the approval by the vote of a majority of the Trustees of the Trust who are not
parties hereto or interested persons (as that term is defined in Section
2(a)(19) of the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on the approval of such amendment, unless otherwise
permitted in accordance with the 1940 Act.
13. Indemnification. The Adviser shall indemnify and hold harmless the
Sub-Adviser, its officers and directors and each person, if any, who controls
the Sub-Adviser, within the meaning of Section 15 of the Securities Act of 1933
("1933 Act") (any and all such persons shall be referred to as "Indemnified
Party"), against any loss, liability, claim damage or expense (including the
reasonable cost of investigating or defending any alleged loss, liability,
claim, damages or expense and reasonable counsel fees incurred in connection
therewith), arising by reason of any matter to which this Sub-Advisory Agreement
relates. However, in no case (i) is this indemnity to be deemed to protect any
particular Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under this Sub-Advisory Agreement or
(ii) is the Adviser to be liable under this indemnity with respect to any claim
made against any particular Indemnified Party unless such Indemnified Party
shall have notified the Adviser in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
claim shall have been served upon the Sub-Adviser or such controlling persons.
The Sub Adviser shall indemnify and hold harmless the Adviser and each of
its directors and officers and each person if any who controls the Adviser
within the meaning of Section 15 of the 1933 Act, against any loss, liability,
claim, damage or expense described in the foregoing indemnity, but only with
respect to the Sub-Adviser's willful misfeasance, bad faith or gross negligence
in the performance of its duties under this Sub-Advisory Agreement. In case any
action shall be brought against the Adviser of any person so indemnified, in
respect of which indemnity may be sought against the Sub-Adviser, the
Sub-Adviser shall have the rights and duties given to the Adviser, and the
Adviser and each person so indemnified shall have the rights and duties given to
the Sub-Adviser by the Provisions of subsections (i) and (ii) of this section.
EXHIBIT A
LPT VARIABLE INSURANCE SERIES TRUST
The following Portfolios of LPT Variable Insurance Series Trust are subject
to this Agreement.
Lexington Corporate Leaders Portfolio
EXHIBIT B
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay to
Sub-Adviser and Sub-Adviser agrees to accept as full compensation for all
services rendered hereunder, monthly a fee of:
Lexington Corporate Leaders Portfolio
.40% of first $10 million on an annualized basis of average daily net
assets under management
.35% of next $90 million on an annualized basis of average daily net assets
under management
.30% on an annualized basis of average daily net assets under management
over and above $100 million.
LPT VARIABLE INSURANCE SERIES TRUST
By: /s/ MARK E. PRILLAMAN
___________________________________
Title: President
LPIMC INSURANCE MARKETING SERVICES
By: /s/ MARK E. PRILLAMAN
___________________________________
Title: Executive Vice President
LEXINGTON MANAGEMENT CORPORATION
By: /s/ signature illegible
___________________________________
Title: Executive Vice President
A copy of the document establishing the Trust is filed with the
Secretary of the Commonwealth of Massachusetts. This Agreement is
executed by officers not as individuals and is not binding upon any of
the Trustee, officers or shareholders of the Trust individually but
only upon the assets of each Portfolio.
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY AGREEMENT
AGREEMENT dated as of January 9, 1996, among Massachusetts Financial
Services Company, a Delaware corporation (the "Sub-Adviser"), LPIMC Insurance
Marketing Services, a California corporation (the "Adviser"), and LPT Variable
Insurance Series Trust, a Massachusetts business trust (the "Trust").
WHEREAS, Adviser has entered into an Investment Advisory Agreement
(referred to herein as the "Advisory Agreement"), dated January 9, 1996, with
the Trust, attached as Exhibit A hereto, under which Adviser has agreed to act
as investment adviser to the Trust, which is registered as an open-end
diversified management investment company under the Investment Company Act of
1940, as amended ("1940 Act"); and
WHEREAS, the Advisory Agreement provides that the Adviser may engage a
sub-adviser or sub-advisers for the purpose of managing the investments of the
Portfolios of the Trust; and
WHEREAS, the Adviser desires to retain Sub-Adviser, which is engaged in the
business of rendering investment management services, to provide certain
investment management services for the investment portfolio(s) of the Trust
listed on Exhibit B hereto (the "Portfolio") of the Trust as more fully
described below; and
WHEREAS, it is the purpose of this Agreement to express the mutual
agreements of the parties hereto with respect to the services to be provided by
Sub-Adviser to Adviser with respect to the Portfolio and the terms and
conditions under which such services will be rendered.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
1. Services of Sub-Adviser. The Sub-Adviser shall act as investment
sub-adviser to the Adviser with respect to the Portfolio. In this capacity,
Sub-Adviser shall have the following responsibilities:
(a) subject to the provisions of Sections 2 and 3 hereof, to manage the
Portfolio's assets in accordance with its investment objective(s), policies and
limitations as stated in the Portfolio's current prospectus and statement of
additional information (collectively, the "Prospectus"), in accordance with the
Trust's Declaration of Trust and Bylaws, as amended from time to time (the
"Charter Documents"), and in accordance with the 1940 Act;
20. Notices. All notices provided for by this Agreement shall be in writing
and shall be deemed given when received, against appropriate receipt, by Stephen
E. Cavan, General Counsel and Senior Vice President of Massachusetts Financial
Services Company in the case of the Sub-Adviser, Mark E. Prillaman, Executive
Vice President and Chief Marketing Officer of LPIMC Insurance Marketing Services
in the case of the Adviser, and the Trust's Secretary in the case of the
Portfolio, or such other person as a party shall designate by notice to the
other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers designated below as of the day and year
first above written.
<TABLE>
<CAPTION>
<S> <C>
LPT VARIABLE INSURANCE LPIMC INSURANCE
SERIES TRUST MARKETING SERVICES
By:___________________________ By:___________________________
Mark E. Prillaman Mark E. Prillaman
Title: President and Principal Executive Officer Title: Executive Vice President and
Chief Marketing Officer
</TABLE>
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By:___________________________________
A. Keith Brodkin
Title: Chairman
EXHIBIT B
LPT VARIABLE INSURANCE SERIES TRUST
The following Portfolios of LPT Variable Insurance Series Trust are subject
to this Agreement:
MFS Total Return Portfolio
EXHIBIT C
LPT VARIABLE INSURANCE SERIES TRUST
SUB-ADVISORY COMPENSATION
For all services rendered by Sub-Adviser hereunder, Adviser shall pay
to Sub-Adviser and Sub-Adviser agrees to accept as full compensation for
all
services rendered hereunder, monthly a fee of:
MFS Total Return Portfolio
.50% of first $200 million on an annualized basis of average daily net assets
under management.
.45% of the next $1.1 billion on an annualized basis of average daily net
assets.
.40% on an annualized basis of average daily net assets over and above $1.3
billion
LPT VARIABLE INSURANCE SERIES TRUST
By:______________________________________
Title:_____________________________________
LPIMC INSURANCE MARKETING SERVICES
By:______________________________________
Title:_____________________________________
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By:______________________________________
Title:_____________________________________
A copy of the document establishing the Trust is filed with the Secretary of the
Commonwealth of Massachusetts. This Agreement is executed by officers not as
individuals and is not binding upon any of the Trustees, officers or
shareholders of the Trust individually but only upon the assets of each
Portfolio.
CUSTODIAN AND FUND ACCOUNTING AGREEMENT
Between
LPT VARIABLE INSURANCE SERIES TRUST
and
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held By It............. 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States............ 2
2.1 Holding Securities........................................ 2
2.2 Delivery of Securities.................................... 2
2.3 Registration of Securities................................ 5
2.4 Bank Accounts............................................. 5
2.5 Availability of Federal Funds............................ 6
2.6 Collection of Income..................................... 6
2.7 Payment of Fund Monies................................... 6
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased.......................... 8
2.9 Appointment of Agents.................................... 8
2.10 Deposit of Fund Assets in Securities System.............. 8
2.11 Fund Assets Held in the Custodian's Direct
Paper System...............................................9
2.12 Segregated Account....................................... 10
2.13 Ownership Certificates for Tax Purposes.................. 11
2.14 Proxies...................................................11
2.15 Communications Relating to Portfolio Securities.......... 11
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States........................ 12
3.1 Appointment of Foreign Sub-Custodians.................... 12
3.2 Assets to be Held.........................................12
3.3 Foreign Securities Depositories.......................... 12
3.4 Agreements with Foreign Banking Institutions............. 12
3.5 Access of Independent Accountants of the Fund............ 13
3.6 Reports by Custodian..................................... 13
3.7 Transactions in Foreign Custody Account.................. 13
3.8 Liability of Foreign Sub-Custodians...................... 13
3.9 Liability of Custodian....................................14
3.10 Reimbursement for Advances............................... 14
3.11 Monitoring Responsibilities.............................. 15
3.12 Branches of U.S. Banks................................... 15
3.13 Tax Law.................................................. 15
4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund............................................ 16
5. Proper Instructions............................................... 16
6. Actions Permitted Without Express Authority....................... 17
7. Evidence of Authority............................................. 17
8. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income................................................... 17
9. Records.......................................................... 18
10. Opinion of Fund's Independent Accountants......................... 18
11. Reports to Fund by Independent Public Accountants................. 18
12. Compensation of Custodian......................................... 19
13. Responsibility of Custodian....................................... 19
14. Effective Period, Termination and Amendment....................... 20
15. Successor Custodian............................................... 21
16. Interpretive and Additional Provisions............................ 22
17. Additional Portfolios............................................ 22
18. Massachusetts Law to Apply........................................ 23
19. Prior Contracts.................................................. 23
20. Shareholder Communications........................................ 23
21. Representations of the Custodian.................................. 24
CUSTODIAN AND FUND ACCOUNTING AGREEMENT
This Agreement between LPT Variable Insurance Series Trust, a business
trust organized and existing under the laws of the Commonwealth of
Massachusetts, having its principal place of business in Raleigh, North
Carolina, hereinafter called the "Fund", and State Street Bank and Trust
Company, a Massachusetts trust company, having its principal place of business
at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
WHEREAS, the Fund intends to initially offer shares in eight series, the
Strong Growth Portfolio, the MAS Value Portfolio, the Govett Smaller Companies
Portfolio, the Lexington Corporate Leaders Portfolio, the Strong International
Stock Portfolio, the Salomon Brothers U.S. Quality Bond Portfolio, the Salomon
Brothers Money Market Portfolio, and the MFS Total Return Portfolio (such series
together with all other series subsequently established by the Fund and made
subject to this Agreement in accordance with paragraph 17, being herein referred
to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Trust Indenture.
The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian all
securities and cash of the Portfolios, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Portfolio(s) from time to time, and the cash consideration received
by it for such new or treasury shares of capital stock of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized in
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Agreement shall be in
"street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Agreement, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940. Funds held by the Custodian for a Portfolio
may be deposited by it to its credit as Custodian in the Banking Department
of the Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however, that every such
bank or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust company and
the funds to be deposited with each such bank or trust company shall on
behalf of each applicable Portfolio be approved by vote of a majority of
the Board of Trustees of the Fund. Such funds shall be deposited by the
Custodian in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity. Upon receipt of Proper Instructions from a
Portfolio (which may be in the form of standing instructions), the
Custodian will sweep the available cash in such Portfolio's demand deposit
account at the Custodian into such money market fund custodied at the
Custodian as the Portfolio shall specify in such instructions.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Portfolio or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth in Section 2.11;
(d) in the case of repurchase agreements entered into between the Fund
on behalf of the Portfolio and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing purchase
by the Portfolio of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to repurchase such
securities from the Portfolio or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions from
the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except
as specifically stated otherwise in this Agreement, in any and every case
where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the Securities System
that such securities have been transferred to the Account, and (ii)
the making of an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Portfolio. The Custodian
shall transfer securities sold for the account of the Portfolio upon
(i) receipt of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the making of
an entry on the records of the Custodian to reflect such transfer and
payment for the account of the Portfolio. Copies of all advices from
the Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall furnish
to the Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the Securities System for
the account of the Portfolio.
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof;
6) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the Securities
System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to the
extent that the Portfolio has not been made whole for any such loss or
damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
deposit and/or maintain securities owned by a Portfolio in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities sold
for the account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the Securities System for the account of the
Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper Instructions
from the Fund on behalf of each applicable Portfolio establish and maintain
a segregated account or accounts for and on behalf of each such Portfolio,
into which account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract market), or
of any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Portfolio, (ii) for
purposes of segregating cash or government securities in connection with
options purchased, sold or written by the Portfolio or commodity futures
contracts or options thereon purchased or sold by the Portfolio, (iii) for
the purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or
releases of the Securities and Exchange Commission relating to the
maintenance of segregated accounts by registered investment companies and
(iv) for other proper corporate purposes, but only, in the case of clause
(iv), upon receipt of, in addition to Proper Instructions from the Fund on
behalf of the applicable Portfolio, a certified copy of a resolution of the
Board of Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring such
purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian
from issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the Custodian from issuers of
the securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Agreement, together with a
certified resolution of the Fund's Board of Trustees, the Custodian and the
Fund may agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities depositories
to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions. The
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a foreign
banking institution shall provide that: (a) the assets of each Portfolio
will not be subject to any right, charge, security interest, lien or claim
of any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to each applicable Portfolio; (d) officers of or
auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public
accountants for the Fund, will be given access to the books and records of
the foreign banking institution relating to its actions under its agreement
with the Custodian; and (e) assets of the Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the Custodian or
its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account maintained by
a foreign banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired for a Portfolio,
the identity of the entity having physical possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided
in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and 2.7
of this Agreement shall apply, mutatis mutandis to the foreign securities
of the Fund held outside the United States by foreign sub-custodians. (b)
Notwithstanding any provision of this Agreement to the contrary, settlement
and payment for securities received for the account of each applicable
Portfolio and delivery of securities maintained for the account of each
applicable Portfolio may be effected in accordance with the customary
established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivering securities to the purchaser
thereof or to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer. (c) Securities maintained in the
custody of a foreign sub-custodian may be maintained in the name of such
entity's nominee to the same extent as set forth in Section 2.3 of this
Agreement, and the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Agreement and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.12 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this paragraph
3.9, in delegating custody duties to State Street London Ltd., the
Custodian shall not be relieved of any responsibility to the Fund for any
loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Agreement, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Fund fail to repay the Custodian promptly after notice by the Custodian
to the Fund, the Custodian shall be entitled to utilize available cash and
to dispose of such Portfolios assets to the extent necessary to obtain
reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar
in kind and scope to that furnished to the Fund in connection with the
initial approval of this Agreement. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the case
of any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Agreement, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Agreement. (b) Cash
held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction
of the Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Trust Indenture and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Agreement means a writing
signed or initialled by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board of Trustees of the Fund
accompanied by a detailed description of procedures approved by the Board of
Trustees, Proper Instructions may include communications effected directly
between electro-mechanical or electronic devices provided that the Board of
Trustees and the Custodian are satisfied that such procedures afford adequate
safeguards for the Portfolios' assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.12. 6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Agreement, provided that such expenses shall not exceed $ 1000.00 per
calendar quarter for any Portfolio without express authorization from
the Fund and all such payments shall be accounted for to the Fund on
behalf of the applicable Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper reasonably believed
by it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Trustees of the Fund as conclusive evidence (a) of the authority of any
person to act in accordance with such vote or (b) of any determination or of any
action by the Board of Trustees pursuant to the Trust Indenture as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall keep the books of account of each Portfolio and compute
the net asset value per share of the outstanding shares of each Portfolio. The
Custodian shall also calculate daily the net income of the Portfolio as
described in the Fund's currently effective prospectus related to such Portfolio
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value per
share and the daily income of each Portfolio shall be made at the time or times
described from time to time in the Fund's currently effective prospectus related
to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Agreement in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Agreement;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, calculated in accordance with the fee schedule
attached hereto as Exhibit 2 (as such schedule may be amended from time to time
as agreed upon between the Fund and the Custodian).
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Agreement and agrees that
it will be liable to the Fund for losses (including reasonable attorneys' fees )
experienced by the Fund as a consequence of the Custodian's failure to exercise
reasonable care in the performance of its duties hereunder. In no event shall
the Custodian be liable for indirect, consequential or special damages. The
Custodian shall be kept indemnified by and shall be without liability to the
Fund for any action taken or omitted by it in connection with this Agreement;
provided that such action or omission does not constitute a bad faith or
negligent violation of the terms of this Agreement. The Custodian shall be
entitled to rely on and may act upon advice of counsel satisfactory to the Fund
(who may be counsel for the Fund) on all matters, and shall be without liability
for any action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody of any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) for
the benefit of a Portfolio including the purchase or sale of foreign exchange or
of contracts for foreign exchange or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Agreement,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the applicable Portfolio shall be security therefor and
should the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's assets to
the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however that the Custodian shall not with respect to a Portfolio act under
Section 2.10 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board of Trustees of the Fund has
approved the initial use of a particular Securities System by such Portfolio, as
required by Rule 17f-4 under the Investment Company Act of 1940, as amended and
that the Custodian shall not with respect to a Portfolio act under Section 2.11
hereof in the absence of receipt of an initial certificate of the Secretary or
an Assistant Secretary that the Board of Trustees has approved the initial use
of the Direct Paper System by such Portfolio; provided further, however, that
the Fund shall not amend or terminate this Agreement in contravention of any
applicable federal or state regulations, or any provision of the Trust
Indenture, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Agreement in the
event of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Agreement, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements, in each determined in accordance with the fee
schedule attached hereto as Exhibit 2 (as such schedule may be amended from time
to time as agreed upon by the Fund and the Custodian).
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Agreement on behalf of each applicable Portfolio and to
transfer to an account of such successor custodian all of the securities of each
such Portfolio held in any Securities System. Thereafter, such bank or trust
company shall be the successor of the Custodian under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Agreement relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Agreement, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Agreement as
may in their joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Trust Indenture of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Agreement.
17. Additional Portfolios
In the event that the Fund establishes one or more series of Shares in
addition to the Strong Growth Portfolio, the MAS Value Portfolio, the Govett
Smaller Companies Portfolio, the Lexington Corporate Leaders Portfolio, the
Strong International Stock Portfolio, the Salomon Brothers U.S. Quality Bond
Portfolio, the Salomon Brothers Money Market Portfolio, and the MFS Total the
Strong Growth Portfolio, the MAS Value Portfolio, the Govett Smaller Companies
Portfolio, the Lexington Corporate Leaders Portfolio, the Strong International
Stock Portfolio, the Salomon Brothers U.S. Quality Bond Portfolio, the Salomon
Brothers Money Market Portfolio, and the MFS Total Return Portfolio with respect
to which it desires to have the Custodian render services as custodian under the
terms hereof, it shall so notify the Custodian in writing, and if the Custodian
agrees in writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
18. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Agreements
This Agreement supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the Custodian
"no", the Custodian will not provide this information to requesting companies.
If the Fund tells the Custodian "yes" or does not check either "yes" or "no"
below, the Custodian is required by the rule to treat the Fund as consenting to
disclosure of this information for all securities owned by the Fund or any funds
or accounts established by the Fund. For the Fund's protection, the Rule
prohibits the requesting company from using the Fund's name and address for any
purpose other than corporate communications. Please indicate below whether the
Fund consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name, address,
and share positions.
21. Representations of the Custodian
The Custodian represents and warrants that (i) it is duly incorporated or
organized and is validly existing in good standing in its jurisdiction of
incorporation or organization, (ii) the execution, delivery and performance of
this Agreement and all documents and instruments to be delivered hereunder or
thereunder have been duly authorized, (iii) the person executing this Agreement
on its behalf has been duly authorized to act on its behalf, (iv) this Agreement
constitutes its legal, valid, binding and enforceable agreement and (v) its
entry into this Agreement will not violate any agreement, law, rule or
regulation by which it is bound or by which any of its assets are affected.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 13th day of September, 1995.
ATTEST LPT VARIABLE INSURANCE SERIES TRUST
/S/ Bonnie J. Bridge By: /S/ Mark E. Prillaman
- -------------------- ---------------------------
ATTEST STATE STREET BANK AND TRUST
COMPANY
/S/ Ken Bergeron By: /S/ Mark Bowler
- ---------------- -------------------
Senior Vice President
AMENDMENT TO CUSTODIAN AGREEMENT
Agreement made by and between State Street Bank and Trust Company (the
"Custodian") and LPT Variable Insurance Series Trust (the "Fund").
WHEREAS, the Custodian and the Fund are parties to a Custodian Agreement
dated September 13, 1995 (the "Custodian Agreement") governing the terms and
conditions under which the Custodian maintains custody of the securities and
other assets of the Fund; and
WHEREAS, the Custodian and the Fund desire to amend the terms and
conditions under which the Custodian maintains the Fund's securities and other
non-cash property in the custody of certain foreign sub-custodians in conformity
with the requirements of Rule 17f-5 under the Investment Company Act of 1940, as
amended;
NOW THEREFORE, in consideration of the premises and covenants contained
herein, the Custodian and the Fund hereby amend the Custodian Agreement by the
addition of the following terms and provisions;
1. Notwithstanding any provisions to the contrary set forth in the
Custodian Agreement, the Custodian may hold securities and other non-cash
property for all of its customers, including the Fund, with a foreign
sub-custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
records of the Custodian with respect to securities and other non-cash property
of the Fund which are maintained in such account shall identify by book-entry
those securities and other non-cash property belonging to the Fund and (ii) the
Custodian shall require that securities and other non-cash property so held by
the foreign sub-custodian be held separately from any assets of the foreign
sub-custodian or of others.
2. Except as specifically superseded or modified herein, the terms and
provisions of the Custodian Agreement shall continue to apply with full force
and effect.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed as a sealed instrument in its name and behalf by its duly authorized
representative this 7th day of February, 1996.
LPT VARIABLE INSURANCE SERIES TRUST
By: /S/ George Nicholson
------------------------
Title: Treasurer
STATE STREET BANK AND TRUST COMPANY
By: \S\ Mark Bowler
-------------------
Title: Senior Vice President
Exhibit 2
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY AND ACCOUNTING FEE SCHEDULE
FOR
LONDON PACIFIC LIFE & ANNUITY COMPANY
- --------------------------------------------------------------------------------
I. GLOBAL CUSTODY
- --------------------------------------------------------------------------------
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions in local and base currency.
Withhold foreign taxes. File foreign tax reclaims. Monitor corporate
actions.
Report portfolio positions.
<TABLE>
<CAPTION>
A. Country Grouping
<S> <C> <C> <C> <C> <C>
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Group A Group B Group C Group D Group E Group F
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
USA Austria Australia Denmark Indonesia Argentina
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Canada Belgium Finland Malaysia Bangladesh
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Euroclear Hong Kong France Philippines Brazil
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Germany Netherlands Ireland Portugal Chile
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Japan New Zealand Italy South Korea China
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
U.K. Singapore Luxembourg Spain Columbia
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Switzerland Mexico Sri Lanka Cypress
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Norway Sweden Greece
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Thailand Taiwan Hungary
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
India
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Pakistan
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Peru
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Turkey
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Uruguay
--------------- --------------- ----------------- ------------------ ------------------- ------------------
--------------- --------------- ----------------- ------------------ ------------------- ------------------
Venezuela
--------------- --------------- ----------------- ------------------ ------------------- ------------------
</TABLE>
GLOBAL CUSTODY AND ACCOUNTING FEE SCHEDULE PAGE 2
FOR
LONDON PACIFIC LIFE & ANNUITY COMPANY
<TABLE>
<CAPTION>
B. Transaction Charges
<S> <C> <C> <C> <C> <C>
--------------------------- -------------- -------------- --------------- --------------- ------------------
Group A Group B Group C Group D Group E Group F
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
State Street Bank $25 $40 $45 $50 $100
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
Repos or Euros - N/C
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
DTC or Fed Book
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
Entry - $10.00
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
All other - $25.00
--------------------------- -------------- -------------- --------------- --------------- ------------------
C. Holdings Charges in Basis Points (Annual Fee)
--------------------------- -------------- -------------- --------------- --------------- ------------------
Group A Group B Group C Group D Group E Group F
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
--------------------------- -------------- -------------- --------------- --------------- ------------------
1.0 5.0 6.0 10.0 25.0 40.0
--------------------------- -------------- -------------- --------------- --------------- ------------------
</TABLE>
- --------------------------------------------------------------------------------
II. MULTICURRENCY ACCOUNTING
- --------------------------------------------------------------------------------
Maintain investment ledgers in local and base currency, provide selected
portfolio transactions, position and income reports. Maintain general
ledger and capital stock accounts in compliance with GAAP (FAS 52). Prepare
daily trial balance. Calculate net asset value daily. Provide selected
general ledger reports in multicurrency detail. Provide selected general
ledger reports in multicurrency detail. Securities yield or market value
quotations will be provided to State Street via State Street's Automated
Pricing System (See Section III) or by the fund.
<TABLE>
<CAPTION>
U.S. Portfolios Global Portfolios
--------------- -----------------
<S> <C> <C>
First Month $0 $0
Second Month $0 $0
Third Month $500 $1,000
Fourth Month $500 $1,000
Fifth Month $1,000 $1,500
Sixth Month and thereafter $2,000 $3,000
</TABLE>
GLOBAL CUSTODY AND ACCOUNTING FEE SCHEDULE PAGE 3
FOR
LONDON PACIFIC LIFE & ANNUITY COMPANY
- --------------------------------------------------------------------------------
III. NAVIGATOR AUTOMATED PRICING
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Monthly Base Charge $100.00
Monthly Quote Charge
Municipal Bonds via Kenny / S&P or Muller Data $16.00
Corporate, Municipal, Convertible, Government Bonds and Adjustable Rate
Preferred Stocks Via IDSI $13.00
Government, Corporate Bonds via Kenny / S&P or Muller $11.00
Government, Corporate and Convertible Bonds via Merrill Lynch $11.00
Foreign Bonds via Extel $10.00
Options, Futures and Private Placements $6.00
Listed Equities (including International) and OTC Equities $6.00
</TABLE>
For billing purposes, the monthly quote charge will be based on the average
number of positions in the portfolio at month end.
- --------------------------------------------------------------------------------
IV. SPECIAL SERVICES
- --------------------------------------------------------------------------------
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation of
special reports will be subject to negotiation. Fees for SEC yield
calculation, fund administration activities, self directed securities
lending transactions, SaFiRe financial reporting, multiple class and core /
feeder accounting, and other special items will be negotiated separately.
- --------------------------------------------------------------------------------
V. OUT-OF-POCKET EXPENSES
- --------------------------------------------------------------------------------
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
<TABLE>
<CAPTION>
<S> <C>
- Telephone - Transfer Fees
- Wire Charges ($5.25 in and $5 out) - Price Waterhouse Audit Letter
- Postage and Insurance - Federal Reserve Fee for Return Check Items
- Courier Service Over $2,500 ($4.25 each)
- Duplicating - GNMA Transfer ($15 each)
- Legal Fees - PTC Deposit / Withdrawal for same day
- Supplies Related to Fund Records turnaround ($50 each)
- Rush Transfer ($8 each) - Subcustodian charges
</TABLE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of LPT Variable
Insurance Series Trust for use as sub-custodians for the Fund's securities and
other assets:
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- ------- ------------ ------------------
<S> <C> <C>
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Corporation Austraclear Limited;
Reserve Bank Information and
Transfer System (RITS)
Austria GirCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
de Sparkassen (Wertpapiersammelbank Division)
Bangladesh Standard Chartered Bank None
Belgium Generale Bank Caisse Interprofessionnelle de Depots et de
Virements de Titres S.A. (CIK);
Banque Nationale de Belgique
Botswana Barclays Bank of Botswana Limited None
Brazil Citibank, N.C. Bolsa de Valores de Sao Paulo (Bovespa);
Banco Central do Brasil, Systema Especial
de Liquidacao e Custodia (SELIC)
Canada Canada Trustco The Canadian Depository
Mortgage Company for Securities Limited (CDS)
Chile Citibank, N.A. None
People's Republic of China The Hongkong and Shanghai Shanghai Securities Central
Banking Corporation Limited, Clearing and Registration
Shanghai and Shenzhen branches Corporation (SSCCRC);
Shenzhen Securities Registrars Co., Ltd.
and its designated agent banks.
Columbia Cititrust Colombia S.A. None
Sociedad Fiduciaria
Cyprus Barclays Bank PLC None
Czech Republic Ceskosloveska Obchodnf Bank, A.S. Stredisko cennych papiru (SCP);
</TABLE>
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- ------- ------------ ------------------
<S> <C> <C>
Denmark Den Danske Bank Vaeridipapircentralen - The Danish
Securities Center (VP)
Egypt National Bank of Egypt None
Finland Merita Bank Limited The Central Share Register of Finland
France Banque Paribas Societe Interprofessionnelle pour la
Compensation des Valeurs
Mobilieres (SICOVAM);
Banque de France, Saturne System
Germany BHF-Bank Aktiengesellschaft The Deutscher Kassenverein AG
Ghana Barclays Bank of Ghana Limited None
Greece National Bank of Greece S.A. The Central Securities Depository
(Apothetirion Titlon A.E.)
Hong Kong Standard Chartered Bank The Central Clearing and Settlement
System (CCASS)
Hungary Citibank Budapest Rt. The Central Depository and Clearing House
(Budapest) Ltd. (KELLER Ltd.)
India Deutsche Bank AG None
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland None;
The Central Bank of Ireland, The Gilt
Settlement Office (GSO)
Israel Bank Hapoalim B.M. The Clearing House of the Tel Aviv
Stock Exchange
Italy Morgan Guaranty Trust Company Monte Titoli S.p.A.;
Banca d'Italia
Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC);
Bank of Japan Net System
The Sumitomo Trust Japan Securities Depository Center (JASDEC);
& Banking Co., Ltd.
Bank of Japan Net System
</TABLE>
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- ------- ------------ ------------------
<S> <C> <C>
Jordan The Britisch Bank of the Middle East None
Kenya Barclays Bank of Kenya Limited None
Republic of Korea SEOULBANK Korea Securities Depository (KSD)
Malaysia Standard Chartered Bank Malaysian Central Depository Sdn.
Malaysia Berhad Bhd. (MCD)
Mauritius The Hongkong and Shanghai None
Banking Corporation Limited
Mexico Citibank Mexico, S.A. S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de Valores);
Banco de Mexico
Morocco Banque Commerciale du Maroc None
Netherlands MeesPierson N.V. Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
New Zealand ANZ Banking Group None;
(New Zealand) Limited
The Reserve Bank of New Zealand,
Austraclear NZ
Norway Christiania Bank og Kreditkasse Verdipapirsentralen - The Norwegian
Registry of Securities (VPS)
Pakistan Deutsch Bank AG None
Peru Citibank, N.A. Caja de Valores (CAVAL)
Philippines Standard Chartered Bank None
Poland Citibank Poland S.A. The National Depository of Securities
(Centrum Krajowego Depozytu
Papierow Wartoschiowych)
Portugal Banco Comercial Portugues Central de Valores Mobiliarios (Central)
Singapore The Development Bank The Central Depository (Pte) Limited (CDP)
of Singapore Ltd.
Slovak Republic Ceskoslovenska Obchodna Banka A.S. Stredisko cennych papierov (SCP);
National Bank of Slovakia
South Africa Standard Bank of South Africa None
Limited
</TABLE>
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- ------- ------------ ------------------
<S> <C> <C>
Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores, S.A. (SCLV);
Banco de Espana, Anotaciones en Cuenta
Sri Lanka The Hongkong and Shanghai Central Depository System (Pvt) Limited
Banking Corporation Limited
Swaziland Barclays Bank of Swaziland Limited None
Sweden Skandinaviska Enskilda Vardepapperscentralen VPC AB, The
Banken Swedish Central Securities Depository
Switzerland Union Bank of Switzerland Schweizerische Effeketen - Giro AG (SEGA)
Taiwan - R.O.C. Central Trust of China The Taiwan Securities Central Depository
Company, Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities Depository Company
Limited (TSD)
Turkey Citibank, N.A. Istanbul Stock Exchange Settlement and Custody
Co., Inc. (I.M.K.B. Takas ve Saklama A.S.)
United Kingdom State Street Bank and Trust Company None;
The Bank of England, The Central Gilts Office
(CGO); The Central Money Markets
Office (CMO)
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
Zambia Barclays Bank of Zambia Limited None
Zimbabwe Barclays Bank of Zimbabwe Limited None
</TABLE>
Euroclear (The Euroclear System) / State Street London Limited
Cedel (Cedel Bank societe anonyme) / State Street London Limited
Certified:
\S\ George Nicholson
- --------------------
Fund's Authorized Officer
Date:
January 9, 1996
- ---------------
April 28, 1998
Board of Trustees
LPT Variable Insurance Series Trust
1755 Creekside Oaks Drive
Sacramento, CA 95833
Re: Opinion of Counsel - LPT Variable Insurance Series Trust
Gentlemen:
You have requested our Opinion of Counsel in connection with the filing with
the Securities and Exchange Commission of a Post-Effective Amendment to a
Registration Statement on Form N-1A with respect to LPT Variable Insurance
Series Trust.
We have made such examination of the law and have examined such records and
documents as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
We are of the following opinions:
1. LPT Variable Insurance Series Trust ("Trust") is a valid and
existing unincorporated voluntary association, commonly known as a business
trust.
2. The Trust is a business Trust created and validly existing pursuant
to the Massachusetts Laws.
3. All of the prescribed Trust procedures for the issuance of the shares
have been followed, and, when such shares are issued in accordance with the
Prospectus contained in the Registration Statement for such shares, all state
requirements relating to such Trust shares will have been complied with.
4. Upon the acceptance of purchase payments made by shareholders in
accordance with the Prospectus contained in the Registration Statement and
upon compliance with applicable law, such shareholders will have
legally-issued, fully paid, non-assessable shares of the Trust.
You may use this opinion letter, or a copy thereof, as an exhibit to the
Registration.
We consent to the reference to our Firm under the caption "Legal Counsel"
contained in the Statement of Additional Information which forms a part of the
Registration Statement.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ RAYMOND A. O'HARA III
- -----------------------------
Raymond A. O'Hara III
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 5 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 13, 1998, relating to the financial
statements and financial highlights appearing in the December 31, 1997 Annual
Report to Shareholders of the LPT Variable Insurance Series Trust, which is
also incorporated by reference into the Registration Statement. We also
consent to the references to us under the headings "Financial Highlights" in
the Prospectus and under the headings "Independent Accountants" and
"Financial Statements" in the Statement of Additional Information.
/S/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Boston, MA
April 24, 1998
<TABLE>
<CAPTION>
CUMULATIVE AND AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
ORIGINAL PURCHASE AS OF DECEMBER 31, 1996
VALUATION DATE AS OF DECEMBER 31, 1997
Date Transaction Dollar Amount Net Asset Value Shares This Trans
- ---- ----------- ------------- --------------- -----------------
HARRIS ASSOCIATES VALUE PORTFOLIO
<S> <C> <C> <C> <C>
12-30-96 Purchase $1,000.00 11.86 84.317
9-8-97 SCG Dividend Distribution ($.104/shr) 8.76 14.43 0.607
12-30-97 SCG Dividend Distribution ($.543/shr) 46.14 13.35 3.456
12-30-97 MCG Dividend Distribution ($.469/shr) 39.82 13.35 2.983
12-30-97 LCG Dividend Distribution ($.264/shr) 22.42 13.35 1.679
12-30-97 Income Dividend Distribution ($.049/shr) 4.15 13.35 0.311
12-31-97 Current Value 13.45 0.000
Cumulative & Average Annual Total Return
MFS TOTAL RETURN PORTFOLIO
12-30-96 Purchase $1,000.00 10.90 91.743
9-8-97 Income Dividend Distribution ($.005/shr) 0.04 12.60 0.003
12-30-97 SCG Dividend Distribution ($.120/shr) 11.03 12.77 0.864
12-30-97 MCG Dividend Distribution ($.050/shr) 4.62 12.77 0.362
12-30-97 LCG Dividend Distribution ($.039/shr) 3.60 12.77 0.282
12-30-97 Income Dividend Distribution ($.187/shr) 18.13 12.77 1.420
12-31-97 Current Value 12.80 0.000
Cumulative & Average Annual Total Return
BERKELEY U.S. QUALITY BOND PORTFOLIO
12-30-96 Purchase $1,000.00 9.81 101.937
9-8-97 Income Dividend Distribution ($.0001/shr) 0.00 10.25 0.000
12-30-97 Income Dividend Distribution ($.825/shr) 84.08 9.88 8.510
12-31-97 Current Value 9.91 0.000
Cumulative & Average Annual Total Return
STRONG INTERNATIONAL STOCK PORTFOLIO
12-30-96 Purchase $1,000.00 10.58 94.518
9-8-97 SCG Dividend Distribution ($.047/shr) 4.42 10.51 0.420
12-30-97 SCG Dividend Distribution ($.069/shr) 6.52 8.91 0.733
12-30-97 MCG Dividend Distribution ($.249/shr) 23.65 8.91 2.654
12-30-97 LCG Dividend Distribution ($.030/shr) 2.86 8.91 0.321
12-30-97 Income Dividend Distribution ($.062/shr) 5.89 8.91 0.661
12-31-97 Current Value 8.90 0.000
Cumulative & Average Annual Total Return
STRONG GROWTH PORTFOLIO
12-30-96 Purchase $1,000.00 11.92 83.893
9-8-97 SCG Dividend Distribution ($.254/shr) 21.28 14.50 1.468
9-8-97 Income Dividend Distribution ($.001/shr) 0.04 14.50 0.003
12-30-97 SCG Dividend Distribution ($.957/shr) 81.66 13.35 6.117
12-30-97 MCG Dividend Distribution ($.184/shr) 15.72 13.35 1.177
12-30-97 LCG Dividend Distribution ($.087/shr) 7.42 13.35 0.556
12-31-97 Current Value 13.47 0.000
Cumulative & Average Annual Total Return
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
12-30-96 Purchase $1,000.00 8.58 116.551
12-31-97 Current Value 10.22 0.000
Cumulative & Average Annual Total Return
LEXINGTON CORPORATE LEADERS PORTFOLIO
12-30-96 Purchase $1,000.00 11.44 87.413
9-8-97 Income Dividend Distribution ($.001/shr) 0.06 14.00 0.004
12-30-97 SCG Dividend Distribution ($.024/shr) 2.13 13.42 0.158
12-30-97 MCG Dividend Distribution ($.061/shr) 5.35 13.42 0.399
12-30-97 LCG Dividend Distribution ($.710/shr) 62.05 13.42 4.624
12-30-97 Income Dividend Distribution ($.083/shr) 7.28 13.42 0.543
12-31-97 Current Value 13.39 0.000
Cumulative & Average Annual Total Return
<FN>
A = (Accum Value as of December 31, 1997 - Accum Value at Purchase)/Accum Value at Purchase
SCG = Short Term Capital Gain
MCG = Mid Term Capital Gain
LCG = Long Term Capital Gain
</FN>
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE AND AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
ORIGINAL PURCHASE AS OF DECEMBER 31, 1996
VALUATION DATE AS OF DECEMBER 31, 1997
Date Transaction Accum Shares Accum Value
- ---- ----------- ------------ -----------
HARRIS ASSOCIATES VALUE PORTFOLIO
<S> <C> <C> <C>
12-30-96 Purchase 84.317 1,000.00
9-8-97 SCG Dividend Distribution ($.104/shr) 84.924 1,225.46
12-30-97 SCG Dividend Distribution ($.543/shr) 88.380 1,179.88
12-30-97 MCG Dividend Distribution ($.469/shr) 91.363 1,219.70
12-30-97 LCG Dividend Distribution ($.264/shr) 93.042 1,242.11
12-30-97 Income Dividend Distribution ($.049/shr) 93.353 1,246.26
12-31-97 Current Value 93.353 1,255.60
Cumulative & Average Annual Total Return 25.56% A
MFS TOTAL RETURN PORTFOLIO
12-30-96 Purchase 91.743 1,000.00
9-8-97 Income Dividend Distribution ($.005/shr) 91.747 1,156.01
12-30-97 SCG Dividend Distribution ($.120/shr) 92.611 1,182.64
12-30-97 MCG Dividend Distribution ($.050/shr) 92.972 1,187.26
12-30-97 LCG Dividend Distribution ($.039/shr) 93.254 1,190.85
12-30-97 Income Dividend Distribution ($.187/shr) 94.674 1,208.99
12-31-97 Current Value 94.674 1,211.83
Cumulative & Average Annual Total Return 21.18% A
BERKELEY U.S. QUALITY BOND PORTFOLIO
12-30-96 Purchase 101.937 1,000.00
9-8-97 Income Dividend Distribution ($.0001/shr) 101.937 1,044.86
12-30-97 Income Dividend Distribution ($.825/shr) 110.447 1,091.22
12-31-97 Current Value 110.447 1,094.53
Cumulative & Average Annual Total Return 9.45% A
STRONG INTERNATIONAL STOCK PORTFOLIO
12-30-96 Purchase 94.518 1,000.00
9-8-97 SCG Dividend Distribution ($.047/shr) 94.938 997.80
12-30-97 SCG Dividend Distribution ($.069/shr) 95.671 852.43
12-30-97 MCG Dividend Distribution ($.249/shr) 98.325 876.07
12-30-97 LCG Dividend Distribution ($.030/shr) 98.646 878.94
12-30-97 Income Dividend Distribution ($.062/shr) 99.307 884.82
12-31-97 Current Value 99.307 883.83
Cumulative & Average Annual Total Return -11.62% A
STRONG GROWTH PORTFOLIO
12-30-96 Purchase 83.893 1,000.00
9-8-97 SCG Dividend Distribution ($.254/shr) 85.360 1,237.73
9-8-97 Income Dividend Distribution ($.001/shr) 85.363 1,237.77
12-30-97 SCG Dividend Distribution ($.957/shr) 91.480 1,221.26
12-30-97 MCG Dividend Distribution ($.184/shr) 92.658 1,236.98
12-30-97 LCG Dividend Distribution ($.087/shr) 93.213 1,244.39
12-31-97 Current Value 93.213 1,255.58
Cumulative & Average Annual Total Return 25.56% A
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
12-30-96 Purchase 116.551 1,000.00
12-31-97 Current Value 116.551 1,191.15
Cumulative & Average Annual Total Return 19.12% A
LEXINGTON CORPORATE LEADERS PORTFOLIO
12-30-96 Purchase 87.413 1,000.00
9-8-97 Income Dividend Distribution ($.001/shr) 87.417 1,223.83
12-30-97 SCG Dividend Distribution ($.024/shr) 87.575 1,175.26
12-30-97 MCG Dividend Distribution ($.061/shr) 87.974 1,180.61
12-30-97 LCG Dividend Distribution ($.710/shr) 92.597 1,242.66
12-30-97 Income Dividend Distribution ($.083/shr) 93.140 1,249.94
12-31-97 Current Value 93.140 1,247.14
Cumulative & Average Annual Total Return 24.71% A
<FN>
A = (Accum Value as of December 31, 1997 - Accum Value at Purchase)/Accum Value at Purchase
SCG = Short Term Capital Gain
MCG = Mid Term Capital Gain
LCG = Long Term Capital Gain
</FN>
</TABLE>
<TABLE>
<CAPTION>
SAMPLE
<S> <C> <C> <C> <C> <C> <C>
12-31-93 Purchase $1,000.00 13.676948110 73.116 73.116 1,000.00
12-31-94 Contract Fee (1.00) 13.214629410 (0.076) 73.040 965.20
12-31-95 Contract Fee (1.00) 17.309659990 (0.058) 72.982 1,263.30
12-31-96 Contract Fee (1.00) 19.489598600 (0.051) 72.931 1,421.40
12-31-96 Value before Surr Chg 19.489598600 0.000 72.931 1,421.40
12-31-96 Surrender Charge (22.00) 19.489598600 (1.129) 71.802 1,399.40
Cumulative Total Returns without/with chrgs 42.50% 39.94% C
Avg. Annual Total Returns without/with chrgs 12.53% 11.85% D
1.89315068493
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE AND AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
ORIGINAL PURCHASE AS OF INCEPTION
VALUATION DATE AS OF DECEMBER 31, 1997
Date Transaction Dollar Amount Net Asset Value Shares This Trans
- ---- ----------- ------------- --------------- -----------------
HARRIS ASSOCIATES VALUE PORTFOLIO
<S> <C> <C> <C> <C>
2-9-96 Purchase $1,000.00 10.15 98.522
2-9-96 Income Dividend Distribution ($.003/shr) 0.32 10.15 0.032
12-31-96 SCG Dividend Distribution ($.274/shr) 27.03 11.86 2.279
12-31-96 Income Dividend Distribution ($.079/shr) 7.99 11.86 0.674
9-8-97 SCG Dividend Distribution ($.104/shr) 10.55 14.43 0.731
12-30-97 SCG Dividend Distribution ($.543/shr) 55.54 13.35 4.161
12-30-97 MCG Dividend Distribution ($.469/shr) 49.89 13.35 3.737
12-30-97 LCG Dividend Distribution ($.264/shr) 29.07 13.35 2.178
12-30-97 Income Dividend Distribution ($.049/shr) 5.49 13.35 0.412
12-31-97 Current Value 13.45 0.000
Cumulative Total Return
Average Annual Total Return
MFS TOTAL RETURN PORTFOLIO
2-9-96 Purchase $1,000.00 10.10 99.010
2-9-96 Income Dividend Distribution ($.004/shr) 0.41 10.10 0.041
12-31-96 Income Dividend Distribution ($.187/shr) 18.48 10.90 1.695
9-8-97 Income Dividend Distribution ($.005/shr) 0.05 12.60 0.004
12-30-97 SCG Dividend Distribution ($.120/shr) 12.12 12.77 0.949
12-30-97 MCG Dividend Distribution ($.050/shr) 5.12 12.77 0.401
12-30-97 LCG Dividend Distribution ($.039/shr) 4.00 12.77 0.313
12-30-97 Income Dividend Distribution ($.187/shr) 19.19 12.77 1.503
12-31-97 Current Value 12.80 0.000
Cumulative Total Return
Average Annual Total Return
BERKELEY U.S. QUALITY BOND PORTFOLIO
2-9-96 Purchase $1,000.00 10.00 100.000
2-9-96 Income Dividend Distribution ($.004/shr) 0.39 10.00 0.039
12-31-96 Income Dividend Distribution ($.413/shr) 41.36 9.81 4.215
9-8-97 Income Dividend Distribution ($.0001/shr) 0.01 10.25 0.001
12-30-97 Income Dividend Distribution ($.825/shr) 85.99 9.88 8.704
12-31-97 Current Value 9.91 0.000
Cumulative Total Return
Average Annual Total Return
STRONG INTERNATIONAL STOCK PORTFOLIO
2-9-96 Purchase $1,000.00 10.05 99.502
2-9-96 Income Dividend Distribution ($.003/shr) 0.27 10.05 0.027
12-31-96 SCG Dividend Distribution ($.055/shr) 5.42 10.58 0.513
12-31-96 Income Dividend Distribution ($.001/shr) 0.03 10.58 0.003
9-8-97 SCG Dividend Distribution ($.047/shr) 4.67 10.51 0.445
12-30-97 SCG Dividend Distribution ($.069/shr) 6.91 8.91 0.775
12-30-97 MCG Dividend Distribution ($.249/shr) 25.22 8.91 2.831
12-30-97 LCG Dividend Distribution ($.030/shr) 3.14 8.91 0.352
12-30-97 Income Dividend Distribution ($.062/shr) 6.48 8.91 0.727
12-31-97 Current Value 8.90 0.000
Cumulative Total Return
Average Annual Total Return
STRONG GROWTH PORTFOLIO
2-9-96 Purchase $1,000.00 10.56 94.697
2-9-96 Income Dividend Distribution ($.003/shr) 0.32 10.56 0.030
12-31-96 SCG Dividend Distribution ($.555/shr) 52.58 11.92 4.411
12-31-96 Income Dividend Distribution ($.212/shr) 20.98 11.92 1.760
9-8-97 SCG Dividend Distribution ($.254/shr) 25.60 14.50 1.765
9-8-97 Income Dividend Distribution ($.001/shr) 0.05 14.50 0.004
12-30-97 SCG Dividend Distribution ($.957/shr) 98.21 13.35 7.357
12-30-97 MCG Dividend Distribution ($.184/shr) 20.26 13.35 1.518
12-30-97 LCG Dividend Distribution ($.087/shr) 9.69 13.35 0.726
12-31-97 Current Value 13.47 0.000
Cumulative Total Return
Average Annual Total Return
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
2-9-96 Purchase $1,000.00 10.16 98.425
2-9-96 Income Dividend Distribution ($.004/shr) 0.35 10.16 0.034
12-31-96 Income Dividend Distribution ($1.824/shr) 179.42 8.58 20.912
12-31-97 Current Value 10.22 0.000
Cumulative Total Return
Average Annual Total Return
LEXINGTON CORPORATE LEADERS PORTFOLIO
2-9-96 Purchase $1,000.00 10.24 97.656
2-9-96 Income Dividend Distribution ($.006/shr) 0.60 10.24 0.058
12-31-96 Income Dividend Distribution ($.108/shr) 10.55 11.44 0.922
9-8-97 Income Dividend Distribution ($.001/shr) 0.07 14.00 0.005
12-30-97 SCG Dividend Distribution ($.024/shr) 2.40 13.42 0.179
12-30-97 MCG Dividend Distribution ($.061/shr) 6.05 13.42 0.451
12-30-97 LCG Dividend Distribution ($.710/shr) 70.46 13.42 5.250
12-30-97 Income Dividend Distribution ($.083/shr) 8.70 13.42 0.649
12-31-97 Current Value 13.39 0.000
Cumulative Total Return
Average Annual Total Return
<FN>
A = (Accum Value as of December 31, 1997 - Accum Value at Purchase)/Accum Value at Purchase
B =((A+1) ^(1/1.893150685)) - 1
SCG = Short Term Capital Gain
MCG = Mid Term Capital Gain
LCG = Long Term Capital Gain
</FN>
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE AND AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
ORIGINAL PURCHASE AS OF INCEPTION
VALUATION DATE AS OF DECEMBER 31, 1997
Date Transaction Accum Shares Accum Value
- ---- ----------- ------------ -----------
HARRIS ASSOCIATES VALUE PORTFOLIO
<S> <C> <C> <C>
2-9-96 Purchase 98.522 1,000.00
2-9-96 Income Dividend Distribution ($.003/shr) 98.554 1,000.32
12-31-96 SCG Dividend Distribution ($.274/shr) 100.833 1,195.88
12-31-96 Income Dividend Distribution ($.079/shr) 101.507 1,203.88
9-8-97 SCG Dividend Distribution ($.104/shr) 102.239 1,475.30
12-30-97 SCG Dividend Distribution ($.543/shr) 106.399 1,420.43
12-30-97 MCG Dividend Distribution ($.469/shr) 110.136 1,470.31
12-30-97 LCG Dividend Distribution ($.264/shr) 112.314 1,499.39
12-30-97 Income Dividend Distribution ($.049/shr) 112.725 1,504.88
12-31-97 Current Value 112.725 1,516.15
Cumulative Total Return 51.62% A
Average Annual Total Return 24.59% B
MFS TOTAL RETURN PORTFOLIO
2-9-96 Purchase 99.010 1,000.00
2-9-96 Income Dividend Distribution ($.004/shr) 99.051 1,000.41
12-31-96 Income Dividend Distribution ($.187/shr) 100.746 1,098.13
9-8-97 Income Dividend Distribution ($.005/shr) 100.749 1,269.44
12-30-97 SCG Dividend Distribution ($.120/shr) 101.698 1,298.68
12-30-97 MCG Dividend Distribution ($.050/shr) 102.099 1,303.81
12-30-97 LCG Dividend Distribution ($.039/shr) 102.412 1,307.81
12-30-97 Income Dividend Distribution ($.187/shr) 103.915 1,327.00
12-31-97 Current Value 103.915 1,330.12
Cumulative Total Return 33.01% A
Average Annual Total Return 16.26% B
BERKELEY U.S. QUALITY BOND PORTFOLIO
2-9-96 Purchase 100.000 1,000.00
2-9-96 Income Dividend Distribution ($.004/shr) 100.039 1,000.39
12-31-96 Income Dividend Distribution ($.413/shr) 104.254 1,022.73
9-8-97 Income Dividend Distribution ($.0001/shr) 104.255 1,068.61
12-30-97 Income Dividend Distribution ($.825/shr) 112.959 1,116.03
12-31-97 Current Value 112.959 1,119.42
Cumulative Total Return 11.94% A
Average Annual Total Return 6.14% B
STRONG INTERNATIONAL STOCK PORTFOLIO
2-9-96 Purchase 99.502 1,000.00
2-9-96 Income Dividend Distribution ($.003/shr) 99.529 1,000.27
12-31-96 SCG Dividend Distribution ($.055/shr) 100.042 1,058.44
12-31-96 Income Dividend Distribution ($.001/shr) 100.044 1,058.47
9-8-97 SCG Dividend Distribution ($.047/shr) 100.489 1,056.14
12-30-97 SCG Dividend Distribution ($.069/shr) 101.264 902.27
12-30-97 MCG Dividend Distribution ($.249/shr) 104.095 927.49
12-30-97 LCG Dividend Distribution ($.030/shr) 104.448 930.63
12-30-97 Income Dividend Distribution ($.062/shr) 105.174 937.10
12-31-97 Current Value 105.174 936.05
Cumulative Total Return -6.39% A
Average Annual Total Return -3.43% B
STRONG GROWTH PORTFOLIO
2-9-96 Purchase 94.697 1,000.00
2-9-96 Income Dividend Distribution ($.003/shr) 94.727 1,000.32
12-31-96 SCG Dividend Distribution ($.555/shr) 99.138 1,181.72
12-31-96 Income Dividend Distribution ($.212/shr) 100.898 1,202.70
9-8-97 SCG Dividend Distribution ($.254/shr) 102.663 1,488.62
9-8-97 Income Dividend Distribution ($.001/shr) 102.667 1,488.67
12-30-97 SCG Dividend Distribution ($.957/shr) 110.024 1,468.81
12-30-97 MCG Dividend Distribution ($.184/shr) 111.541 1,489.07
12-30-97 LCG Dividend Distribution ($.087/shr) 112.267 1,498.76
12-31-97 Current Value 112.267 1,512.23
Cumulative Total Return 51.22% A
Average Annual Total Return 24.42% B
ROBERTSON STEPHENS DIVERSIFIED GROWTH PORTFOLIO
2-9-96 Purchase 98.425 1,000.00
2-9-96 Income Dividend Distribution ($.004/shr) 98.459 1,000.35
12-31-96 Income Dividend Distribution ($1.824/shr) 119.371 1,024.20
12-31-97 Current Value 119.371 1,219.97
Cumulative Total Return 22.00% A
Average Annual Total Return 11.07% B
LEXINGTON CORPORATE LEADERS PORTFOLIO
2-9-96 Purchase 97.656 1,000.00
2-9-96 Income Dividend Distribution ($.006/shr) 97.714 1,000.60
12-31-96 Income Dividend Distribution ($.108/shr) 98.637 1,128.40
9-8-97 Income Dividend Distribution ($.001/shr) 98.641 1,380.98
12-30-97 SCG Dividend Distribution ($.024/shr) 98.820 1,326.17
12-30-97 MCG Dividend Distribution ($.061/shr) 99.271 1,332.22
12-30-97 LCG Dividend Distribution ($.710/shr) 104.521 1,402.68
12-30-97 Income Dividend Distribution ($.083/shr) 105.170 1,411.38
12-31-97 Current Value 105.170 1,408.23
Cumulative Total Return 40.82% A
Average Annual Total Return 19.82% B
<FN>
A = (Accum Value as of December 31, 1997 - Accum Value at Purchase)/Accum Value at Purchase
B =((A+1) ^(1/1.893150685)) - 1
SCG = Short Term Capital Gain
MCG = Mid Term Capital Gain
LCG = Long Term Capital Gain
</FN>
</TABLE>
<TABLE>
<CAPTION>
SAMPLE
<S> <C> <C> <C> <C> <C> <C> <C>
12-31-93 Purchase $1,000.00 13.676948110 73.116 73.116 1,000.00
12-31-94 Contract Fee (1.00) 13.214629410 (0.076) 73.040 965.20
12-31-95 Contract Fee (1.00) 17.309659990 (0.058) 72.982 1,263.30
12-31-96 Contract Fee (1.00) 19.489598600 (0.051) 72.931 1,421.40
12-31-96 Value before Surr Chg 19.489598600 0.000 72.931 1,421.40
12-31-96 Surrender Charge (22.00) 19.489598600 (1.129) 71.802 1,399.40
Cumulative Total Returns without/with chrgs 42.50% 39.94% C
Avg. Annual Total Returns without/with chrgs 12.53% 11.85% D
1.89315068493
</TABLE>
