<PAGE>
UST MASTER VARIABLE SERIES, INC.
(the "Company")
Supplement dated July 31, 1995
to the Prospectus dated October 14, 1994
(as revised November 18, 1994)
The following Financial Highlights should be
included in the Prospectus before page 3.
FINANCIAL HIGHLIGHTS
The following tables include selected data for a Share outstanding
throughout the period derived from the financial statements included in the
Company's Semi-Annual Report to Shareholders for the period ended June 30, 1995
(the "Financial Statements") which are unaudited. The following table should be
read in conjunction with the Financial Statements and notes thereto.
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<TABLE>
<CAPTION>
Period Ended June 30, 1995
----------------------------------------------------------------------------------------------
Intermediate-
Term Early
Managed Managed Life International International
Money Income Income Equity Cycle Bond Equity
Portfolio(A) Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period....................... $ 1.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
Income From Investment
Operations
Net Investment Income........ 0.02 0.31 0.30 0.30 0.12
Net gains and losses
on securities (both
realized and unrealized)... 0.61 0.59 2.44 1.31 0.64 0.42
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from Investment
operations................... 0.02 0.92 0.89 2.44 1.31 0.94 0.54
Less Distributions to
Shareholders
Dividends from net
investment income......... (0.02)
Dividends in excess of net
investment income.........
Distributions from capital
gains.....................
Distributions in excess of
capital gains.............
Returns of capital..........
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total distributions......... (0.02) 0.00 0.00 0.00 0.00 0.00 0.00
Net asset value, end of period.. $ 1.00 $ 10.92 $ 10.89 $ 12.44 $ 11.31 $ 10.94 $ 10.54
========== ========== ========== ========== ========== ========== ==========
Total Return(B)................. 2.47% 9.17% 8.93% 24.38% 13.09% 9.44% 5.37%
Ratios to Average Net Assets
(Annualized)
Expenses...................... 2.51% 2.45% 3.06% 2.91% 2.96% 2.99% 3.08%
Net Investment Income......... 5.45% 6.54% 6.38% 0.04% 0.04% 6.38% 2.54%
Portfolio Turnover Rate......... N/A 121.29% 261.66% 9.21% 15.18% 80.07% 4.67%
Net Assets, At End of Period.... $1,024,582 $1,091,754 $1,089,334 $1,276,791 $1,157,048 $3,283,201 $2,385,246
</TABLE>
(A) The per share amounts which are shown have been computed based on the
average number of shares outstanding during the period.
(B) Total return assumes reinvestment of all dividends during the period and
does not reflect deduction of account fees and charges. Investment returns
and principal values will fluctuate and shares, when redeemed, may be worth
more or less than the original cost.
-2-
<PAGE>
The second sentence under "DIVIDENDS AND DISTRIBUTIONS" is restated to
read as follows:
All such dividends are paid daily or within seven days after the
redemption of shares of the Money Portfolio.
-3-
<PAGE>
UST MASTER VARIABLE SERIES, INC.
EQUITY PORTFOLIOS
Equity Portfolio
Early Life Cycle Portfolio
FIXED INCOME PORTFOLIOS
Intermediate-Term Managed Income Portfolio
Managed Income Portfolio
INTERNATIONAL PORTFOLIOS
International Equity Portfolio
International Bond Portfolio
MONEY PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
October 14, 1994
(as revised July 31, 1995)
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current prospectus for the Equity, Early Life
Cycle, Intermediate-Term Managed Income, Managed Income, International Equity,
International Bond and Money Portfolios (individually, a "Portfolio," and
collectively, the "Portfolios") of UST Master Variable Series, Inc. ("Master
Variable Series") dated October 14, 1994 (as revised July 31, 1995 (the
"Prospectus"). Much of the information contained in this Statement of
Additional Information expands upon the subjects discussed in the Prospectus.
No investment in shares of the Portfolios described herein should be made
without reading the Prospectus. A copy of the Prospectus may be obtained by
writing the Administrator of Master Variable Series, Chubb Investment Advisory
Corporation, at One Granite Place, Concord, New Hampshire 03301, or by calling
(800) 258-3648.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INVESTMENT OBJECTIVES AND POLICIES 1
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS 6
ADDITIONAL INVESTMENT LIMITATIONS 16
MONEY PORTFOLIO 21
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION 22
DESCRIPTION OF CAPITAL STOCK 23
MANAGEMENT OF THE PORTFOLIOS 25
Directors and Officers 25
Investment Advisory and Sub-Advisory Agreements 28
Administrative Services and Transfer Agent Agreements 28
Expenses 29
Custodian 29
PORTFOLIO TRANSACTIONS 30
INDEPENDENT AUDITORS 33
COUNSEL 33
ADDITIONAL INFORMATION CONCERNING TAXES 33
PERFORMANCE AND YIELD INFORMATION 34
MISCELLANEOUS 39
FINANCIAL STATEMENTS 39
APPENDIX A-1
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
EQUITY PORTFOLIOS
The investment objective of the Equity Portfolio and of the Early Life
Cycle Portfolio is to seek long-term capital appreciation. Under normal market
and economic conditions, each of these Portfolios invests a significant portion
of its assets in common stock, preferred stock and debt securities convertible
into common stock.
Other Investment Considerations -- Equity Portfolio and Early Life
Cycle Portfolio. The Equity Portfolio and the Early Life Cycle Portfolio invest
primarily in common stocks, but each Portfolio may purchase both preferred
stocks and securities convertible into common stock at the discretion of United
States Trust Company of New York (the "Investment Adviser" or "U.S. Trust").
While current income is secondary to the objective of long-term capital
appreciation, Master Variable Series expects that the broad and diversified
strategies utilized by the Investment Adviser will result in somewhat more
current income than would be generated if the Investment Adviser utilized a
single strategy more narrowly focused on rapid growth of principal and involving
exposure to higher levels of risk.
The Investment Adviser's investment philosophy is to identify
investment values available in the market at attractive prices. Investment
value arises from the ability to generate earnings or from the ownership of
assets or resources. Underlying earnings potential and asset values are
frequently demonstrable but not recognized in the market prices of the
securities representing their ownership. The Investment Adviser employs the
following three different but closely interrelated portfolio strategies to focus
and organize its search for investment values:
Problem/Opportunity Companies. Important investment opportunities
often occur where companies develop solutions to large, complex, fundamental
problems, such as declining industrial productivity; rising costs and declining
sources of energy; the economic imbalances and value erosion caused by years of
high inflation and interest rates; the soaring costs and competing priorities of
providing health care; and the accelerating interdependence and "shrinking size"
of the world.
Solutions or parts of solutions to large problems may be generated by
established companies or comparatively new companies of all sizes through the
development of new products, technologies or services, or through new
applications of older ones.
<PAGE>
Investment in such companies represents a very wide range of
investment potential, current income return rates, and exposure to fundamental
and market risks. Income generated by each Portfolios' investments in these
companies would be expected to be moderate, characterized by lesser rates than
those of a fund whose sole objective is current income, and somewhat higher
rates than those of a higher-risk growth fund.
Transaction Value Companies. In the opinion of the Investment
Adviser, the stock market frequently values the aggregate ownership of a company
at a substantially lower figure than its component assets would be worth if they
were sold off separately over time. Such assets may include intangible assets
such as product and market franchises, operating know-how, or distribution
systems, as well as such tangible properties as oil reserves, timber, real
estate, or production facilities. Investment opportunities in these companies
are determined by the magnitude of difference between economic worth and current
market price.
Market undervaluations are very often corrected by purchase and sale,
restructuring of the company, or market appreciation to recognize the actual
worth. The recognition process may well occur over time, however, creating a
form of time-exposure risk. Success from investing in these companies is often
great, but may well be achieved only after a waiting period of inactivity.
Income derived from investing in undervalued companies is expected to
be moderately greater than that derived from investments in either the
Problem/Opportunity or Early Life Cycle companies.
Early Life Cycle Companies. Investments in Early Life Cycle companies
tend to be narrowly focused on an objective of higher rates of capital
appreciation. They correspondingly will involve a significantly greater degree
of risk and the reduction of current income to a negligible level. Such
investments will not be limited to new, small companies engaged only in frontier
technology, but will seek opportunities for maximum appreciation through the
full spectrum of business operations, products, services, and asset values.
Consequently, the Portfolios' investments in Early Life Cycle companies are
primarily in younger, small- to medium-sized companies in the early stages of
their development. Such companies are usually more flexible in trying new
approaches to problem-solving and in making new or different employment of
assets. Because of the high risk level involved, the ratio of success among
such companies is lower than the average, but for those companies which succeed,
the magnitude of investment reward is potentially higher.
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<PAGE>
FIXED INCOME PORTFOLIOS
The Intermediate-Term Managed Income Portfolio seeks as high a level
of current interest income consistent with relative stability of principal by
investing principally in investment grade or better debt obligations and money
market instruments. The Portfolio will ordinarily have a dollar-weighted average
portfolio maturity of three to ten years. The Managed Income Portfolio seeks
higher current income consistent with what is believed to be prudent risk of
capital. Subject to this investment objective, the Portfolio's investment
adviser will consider the total rate of return on portfolio securities in
managing the Portfolio. Under normal market or economic conditions, the
Portfolio will invest a majority of its assets in investment grade debt
obligations and money market instruments.
Other Investment Considerations - Intermediate-Term Managed Income
Portfolio and Managed Income Portfolio -- Because of their investment policies,
the Fixed Income Portfolios may or may not be suitable or appropriate for all
investors. These Portfolios are not money market funds and are not appropriate
investments for those whose primary objective is principal stability. There is
risk in all investment. The value of the portfolio securities of each of these
Portfolios will fluctuate based upon market, economic, and to some degree,
foreign exchange conditions. Although each Portfolio seeks to reduce risk by
investing in a diversified portfolio, such diversification does not eliminate
all risk. There can, of course, be no assurance that these Portfolios will
achieve these results.
Yields on short, intermediate, and long-term securities are dependent
on a variety of factors, including the general conditions of the money, bond and
foreign exchange markets, the size of a particular offering,the maturity of the
obligation, and the rating of the issue. Debt securities with longer maturities
tend to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market prices of debt securities usually vary, depending
upon available yields. An increase in interest rates will generally reduce the
value of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of each of the Fixed
Income Portfolios to achieve its investment objective is also dependent on the
continuing ability of the issuers of the debt securities in which each Portfolio
invests to meet their obligations for the payment of interest and principal when
due.
INTERNATIONAL PORTFOLIOS
The International Equity Portfolio seeks total return on its assets
through capital appreciation and income derived primarily
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<PAGE>
from investments in a diversified portfolio of marketable foreign equity
securities. The International Bond Portfolio seeks above average current income
by investing in an internationally diversified portfolio of nondollar-
denominated, high-quality government and corporate bonds. This Portfolio also
seeks capital appreciation and protection of principal by actively managing its
maturity structure and currency exposure.
Other Investment Considerations - International Equity Portfolio. In
determining the preferred distribution of investments of the International
Equity Portfolio among various geographic regions and countries, the Investment
Adviser and Foreign and Colonial Asset Management ("FACAM" or the "Sub-Adviser")
will consider, among other things, regional and country-by-country prospects for
economic growth, anticipated levels of inflation, prevailing interest rates, the
historical patterns of government regulation of the economy and the outlook for
currency relationships.
The transaction costs to the Portfolio of engaging in forward currency
transactions described in the Prospectus vary with factors such as the currency
involved, the length of the contract period and prevailing currency market
conditions. Because currency transactions are usually conducted on a principal
basis, no fees or commissions are involved. The use of forward currency
contracts does not eliminate fluctuations in the underlying prices of the
securities being hedged, but it does establish a rate of exchange that can be
achieved in the future. Thus, although forward currency contracts used for
transaction or position hedging purposes may limit the risk of loss due to an
increase in the value of the hedged currency, at the same time they limit
potential gain that might result were the contracts not entered into. Further,
the Investment Adviser and the Sub-Adviser may be incorrect in their
expectations as to currency fluctuations, and the Portfolio may incur losses in
connection with its currency transactions that it would not otherwise incur. If
a price movement in a particular currency is generally anticipated, the
International Equity Portfolio may not be able to contract to sell or purchase
that currency at an advantageous price.
At or before the maturity of a forward sale contract, the Portfolio
may sell a portfolio security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Portfolio will obtain, on the
same maturity date, the same amount of the currency which it is obligated to
deliver. If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio, at the time of execution of the
offsetting transaction, will incur a gain or a loss to the extent that movement
has occurred in forward contract prices. Should forward prices decline during
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<PAGE>
the period between the Portfolio's entering into a forward contract for the sale
of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Portfolio will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the Portfolio will
suffer a loss to the extent the price of the currency it has agreed to sell is
less than the price of the currency it has agreed to purchase in the offsetting
contract. The foregoing principles generally apply also to forward purchase
contracts.
The International Equity Portfolio may purchase gold bars primarily of
standard weight (approximately 400 troy ounces) at the best available prices in
the New York bullion market. However, the Investment Adviser and Sub-Adviser
will have discretion to purchase or sell gold bullion in other markets,
including foreign markets, if better prices can be obtained. Gold bullion is
valued by the Portfolio at the mean between the closing bid and asked prices in
the New York bullion market as of the close of the New York Stock Exchange each
business day. When there is no readily available market quotation for gold
bullion, the bullion will be valued by such method as determined by the Board of
Directors of Master Variable Series to best reflect its fair value. For
purposes of determining net asset value, gold held by the Portfolio, if any,
will be valued in U.S. dollars.
Other Investment Considerations - International Bond Portfolio -- The
Investment Adviser and Sub-Adviser believe that this Portfolio provides
investors with a means to participate in the growing international fixed income
securities market. Foreign fixed income securities offer a means of diversifying
an investment portfolio on a global basis. Such diversification may enhance
investment returns and reduce risks; however, there can be no assurance that
this will be the case. Like the Fixed Income Portfolios, the International Bond
Portfolio is subject to interest rate risk. See "Other Investment
Considerations -Intermediate-Term Managed Income Portfolio and Managed Income
Portfolio," above.
The total return of the International Bond Portfolio and, in
particular, the principal value of its foreign currency denominated debt
securities, is also significantly affected by changes in foreign interest rate
levels and foreign currency exchange rates. These changes provide greater
opportunity for capital gains as well as greater risks of capital loss.
Exchange rate movements can be large and endure for extended periods of time.
The Sub-Adviser will attempt to reduce the risks associated with investment in
international fixed income securities through portfolio diversification and
active management of the Portfolio's maturity structure and currency
- 5 -
<PAGE>
exposure; although there can be no assurance that such risk will be reduced.
The Portfolio will invest primarily in an international diversified
portfolio of nondollar-denominated, high-quality fixed income securities. The
Sub-Adviser will base its investment decisions on fundamental market
attractiveness, currency trends, local market factors and credit quality. The
Portfolio will generally invest in countries where the combination of fixed
income market returns and currency exchange rate movements is attractive, or, if
the currency trend is unfavorable, where the currency risk can be minimized
through hedging. The Portfolio intends to invest in at least three countries
under ordinary circumstances. However, under unusual circumstances, it may
invest substantially all of its assets in one or two countries. Because the
Sub-Adviser currently expects to invest a large percentage of assets in foreign
government securities, the Portfolio is classified as a "non-diversified"
investment company. The Portfolio may, for temporary defensive purposes,
invest, without limitation, in U.S. dollar-denominated debt securities. The
International Bond Portfolio will also enter into forward currency transactions.
The risks associated with such transactions are described above under "Other
Investment Considerations - International Equity Portfolio."
MONEY PORTFOLIO
The Money Portfolio seeks as high a level of current income as is
consistent with liquidity and stability of principal. The Portfolio will
generally invest in money market instruments, including bank obligations,
commercial paper and U.S. Government obligations. The Money Portfolio generally
invests in money market instruments.
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
Commercial Paper
Investments in commercial paper will consist of issues that are rated
"A-2" or better by Standard & Poor's Corporation ("S&P") or "Prime-2" or better
by Moody's Investor Service, Inc. ("Moody's"). In addition, each of these
Portfolios may acquire unrated commercial paper that is determined by the
Investment Adviser at the time of purchase to be of comparable quality to rated
instruments that may be acquired by the particular Portfolio. Each Portfolio
will generally limit its investments in such unrated commercial paper to 5% of
its total assets.
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<PAGE>
Variable and Floating Rate Instruments
With respect to variable and floating rate instruments described in
the Prospectus in which the Money Portfolio may invest, the Investment Adviser
will consider the earning power, cash flows and other liquidity ratios of the
issuers of such instruments and will continuously monitor their financial
ability to meet payment on demand. In determining dollar-weighted average
portfolio maturity and whether a variable or floating rate instrument has a
remaining maturity of 13 months or less, the maturity of each instrument will be
computed in accordance with guidelines established by the Securities and
Exchange Commission ("SEC").
Options
As stated in the Prospectus, the Early Life Cycle Portfolio may
purchase put and call options listed on a national securities exchange and
issued by the Options Clearing Corporation. Such purchases would be in an
amount not exceeding 5% of the Portfolio's net assets. Purchase of options is a
highly specialized activity which entails greater than ordinary investment
risks. Regardless of how much the market price of the underlying security
increases or decreases, the option buyer's risk is limited to the amount of the
original investment for the purchase of the option. However, options may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuations than an
investment in the underlying securities. A listed call option gives the
purchaser of the option the right to buy from a clearing corporation, and the
writer has the obligation to sell to the clearing corporation, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A listed put option gives the purchaser the right to sell to a
clearing corporation the underlying security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. Put and call options purchased by the Portfolio will be valued
at the last sale price or, in the absence of such a price, at the mean between
bid and asked prices.
Also as stated in the Prospectus, the Equity Portfolio, Early Life
Cycle Portfolio, International Equity Portfolio, and International Bond
Portfolio may engage in writing covered call options and enter into closing
purchase transactions with respect to such options. When any of these
Portfolios writes a covered call option, it may terminate its obligation to sell
the underlying security prior to the expiration date of the option by executing
a closing purchase transaction, which is effected by
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<PAGE>
purchasing on an exchange an option of the same series (i.e., same underlying
---
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding call option, to prevent an underlying security from being called, to
permit the sale of the underlying security, or to permit the writing of a new
call option containing different terms on such underlying security. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event the writer will have
incurred a loss on the transaction. An option position may be closed out only
on an exchange which provides a secondary market for an option of the same
series. There is no assurance that a liquid secondary market on an exchange
will exist for any particular option. A covered option writer unable to effect
a closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer in such circumstances will be subject to the
risk of market decline in the underlying security during such period. The
Portfolios will write an option on a particular security only if the Investment
Adviser or Sub-Adviser believes that a liquid secondary market will exist on an
exchange for options of the same series, which will permit the Portfolios to
make a closing purchase transaction in order to close out its position.
When a Portfolio writes an option, an amount equal to the net premium
(the premium less the commission) received by that Portfolio is included in the
liability section of that Portfolio's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked
to market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date, or if the Portfolio involved enters into a closing
purchase transaction, the Portfolio will realize a gain (or loss if the cost of
a closing transaction exceeds the net premium received when the option is sold),
and the deferred credit related to such option will be eliminated. If an option
is exercised, the Portfolio involved may deliver the underlying security from
its portfolio or purchase the underlying security in the open market. In either
event, the proceeds of the sale will be increased by the net premium originally
received, and the Portfolio involved will realize a gain or a loss.
Future Contracts and Related Options
The Early Life Cycle Portfolio, International Equity Portfolio, and
International Bond Portfolio may invest in futures contracts and options
thereon. Each of these Portfolios may
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<PAGE>
enter into interest rate futures contracts and other types of financial futures
contracts, including foreign currency futures contracts, as well as any index or
foreign market futures which are available on recognized exchanges or in other
established financial markets. A futures contract on foreign currency creates a
binding obligation on one party to deliver, and a corresponding obligation on
another party to accept delivery of, a stated quantity of a foreign currency for
an amount fixed in U.S. dollars. Foreign currency futures, which operate in a
manner similar to interest rate futures contracts, may be used by these
Portfolios to hedge against exposure to fluctuations in exchange rates between
the U.S. dollar and other currencies arising from multinational transactions.
The Intermediate-Term Managed Income Portfolio and the Managed Income Portfolio
may invest in interest rate futures contracts or municipal bond index futures
contracts.
The Portfolios intend to enter into futures contracts only to hedge
risks associated with a Portfolio's securities investments, and not for
speculative purposes. Positions in futures contracts may be closed out only on
an exchange which provides a secondary market for such futures. However, there
can be no assurance that a liquid secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Portfolio would
continue to be required to make daily cash payments to maintain its required
margin. In such situations, if a Portfolio has insufficient cash, it may have
to sell portfolio securities to meet daily margin requirements at a time when it
may be disadvantageous to do so. In addition, the Portfolio may be required to
make delivery of the instruments underlying futures contracts it holds. The
inability to close options (where applicable) and futures positions also could
have an adverse impact on a Portfolio's ability to hedge effectively.
Successful use of futures by the Portfolios is also subject to the
ability of the Investment Adviser or Sub-Adviser to correctly predict movements
in the direction of the market. For example, if a Portfolio has hedged against
the possibility of a decline in the market adversely affecting securities held
by it and securities prices increase instead, the Portfolio will lose part or
all of the benefit to the increased value of its securities which it has hedged
because it will have approximately equal offsetting losses in its futures
positions. In addition, in some situations, if a Portfolio has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A Portfolio may have to sell
securities at a time when it may be disadvantageous to do so.
- 9 -
<PAGE>
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
Utilization of futures transactions by a Portfolio involves the risk
of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom such Portfolio has an open position in a futures contract, or
related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
The trading of futures contracts is also subject to the risk of
trading halts, suspensions, exchange or clearing house equipment failures,
government intervention, insolvency of a brokerage firm or clearing house or
other disruptions of normal trading activity, which could at times make it
difficult or impossible to liquidate existing positions or to recover excess
variation margin payments.
The Early Life Cycle Portfolio, International Equity Portfolio, and
International Bond Portfolio may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of
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<PAGE>
the option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in futures contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
of an option also entails the risk that changes in the value of the underlying
futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the instruments
being hedged, an option may or may not be less risky than ownership of the
futures contract or such instruments. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may frequently
involve less potential risk to a Portfolio because the maximum amount at risk is
the premium paid for the options (plus transaction costs). Although permitted
by its fundamental investment policies, each of these Portfolios does not
currently intend to write futures options, and will not do so in the future
absent any necessary regulatory approvals.
Hybrid Commodity and Security Instruments
Recently, instruments have been developed which combine the elements
of futures contracts or options with those of debt, preferred equity or a
depository instrument (hereinafter "Hybrid Instruments"). Often these Hybrid
Instruments are indexed to the price of a commodity or particular currency.
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 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 from investing in securities, futures and currencies, including
volatility and lack of liquidity. Reference is made to the discussion of futures
and forward contracts above for a discussion of these risks. Further, the
prices of the Hybrid Instrument and the related commodity or
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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. 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 the International Bond Portfolio and the seller of
the Hybrid Instrument, the creditworthiness of the contra party to the
transaction is a risk factor. Hybrid Instruments also may not be subject to
regulation of the Commodity Futures Trading Commission, 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.
Repurchase Agreements
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Portfolio plus interest
negotiated on the basis of current short-term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the custodian (or sub-
custodian) for Master Variable Series or in the Federal Reserve/Treasury book-
entry system. Repurchase agreements are considered loans by a Portfolio under
the Investment Company Act of 1940, as amended (the "1940 Act").
Securities Lending
When a Portfolio lends its securities, it continues to receive
interest or dividends on the securities lent and may simultaneously earn
interest on the investment of the cash loan collateral, which will be invested
in readily marketable, high-quality, short-term obligations. Although voting
rights, or rights to consent, attendant to loaned securities pass to the
borrower, such loans may be called at any time and will be called so that the
securities may be voted by a Portfolio if a material event affecting the
investment is to occur.
When-Issued and Forward Transactions
When a Portfolio agrees to purchase securities on a "when-issued" or
"forward commitment" basis, the custodian will set aside cash or liquid
portfolio securities equal to the amount of the commitment in a segregated
account. Normally, the custodian will set aside portfolio securities to satisfy
a purchase commitment and, in such case, a Portfolio may be required
subsequently to place additional assets in the segregated account in order to
ensure that the value of the account remains equal to the amount of the
Portfolio's commitment. It may be expected that a Portfolio's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase
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<PAGE>
commitments than when it sets aside cash. Because a Portfolio will set aside
cash or liquid assets to satisfy its purchase commitments in the manner
described, the Portfolio's liquidity and ability to manage its assets might be
affected in the event its "forward commitments" or commitments to purchase
"when-issued" securities ever exceeded 25% of the value of its assets.
A Portfolio will purchase securities on a "when-issued" or "forward
commitment" basis only with the intention of completing the transaction. If
deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Portfolio on the settlement date. In these cases, the Portfolio may realize
a gain or loss.
When the Portfolios engage in "when-issued" or "forward commitment"
transactions, they rely on the other party to consummate the trade. Failure of
such other party to do so may result in the Portfolio incurring a loss or
missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a "when-issued" purchase
or a "forward commitment" to purchase securities and any subsequent fluctuations
in their market value are taken into account when determining the market value
of a Portfolio starting on the day the Portfolio agrees to purchase the
securities. A Portfolio does not earn interest on the securities it has
committed to purchase until the securities are paid for and delivered on the
settlement date.
Municipal Obligations
The Intermediate-Term Managed Income and Managed Income Portfolios
may, when deemed appropriate by the Investment Adviser in light of these
Portfolios' investment objectives, invest in Municipal Obligations. Although
yields on municipal obligations can generally be expected under normal market
conditions to be lower than yields on corporate and U.S. Government obligations,
from time to time municipal securities have outperformed, on a total return
basis, comparable corporate and Federal debt obligations as a result of
prevailing economic, regulatory or other circumstances.
Municipal Obligations include debt obligations issued by governmental
entities to obtain funds for various public purposes, including the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to public
institutions and facilities. Private activity bonds that are issued by or on
behalf of public authorities to finance various privately operated facilities
are included within the
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term "Municipal Obligations" only if the interest paid thereon is exempt from
regular Federal income tax and not treated as a specific tax preference item
under the Federal alternative minimum tax.
The two principal classifications of Municipal Obligations are
"general obligation" and "revenue" issues, but these Portfolios may also
purchase "moral obligation" issues, which are normally issued by special-purpose
authorities. There are, of course, variations in the quality of Municipal
Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P described in the Prospectus and the
Appendix to this Statement of Additional Information represent their opinion as
to the quality of Municipal Obligations. It should be emphasized that these
ratings are general and are not absolute standards of quality, and Municipal
Obligations with the same maturity, interest rate, and rating may have different
yields while Municipal Obligations of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to its purchase by a
Portfolio, an issue of Municipal Obligations may cease to be rated, or its
rating may be reduced below the minimum rating required for purchase by that
Portfolio. The Investment Adviser will consider such an event in determining
whether a Portfolio should continue to hold the obligation.
The payment of principal and interest on Municipal Obligations will
depend upon the ability of the issuers to meet their obligations. Each state,
the District of Columbia, each of their political subdivisions, agencies,
instrumentalities and authorities, and each multistate agency of which a state
is a member, is a separate "issuer" as that term is used in this Statement of
Additional Information and the Prospectus. The non-governmental user of
facilities financed by private activity bonds is also considered to be an
"issuer." An issuer's obligations under its Municipal Obligations are subject
to the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Code, and laws, if
any, which may be enacted by Federal or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Obligations may be
materially adversely affected by litigation or other conditions.
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<PAGE>
Private activity bonds are or have been issued to obtain funds to
provide, among other things, privately-operated housing facilities, pollution
control facilities, convention or trade show facilities, mass transit, airport,
port or parking facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Private activity bonds are also
issued to privately-held or publicly-owned corporations in the financing of
commercial or industrial facilities. State and local governments are authorized
in most states to issue private activity bonds for such purposes in order to
encourage corporations to locate within their communities. The principal and
interest on these obligations may be payable from the general revenues of the
users of such facilities.
Among other instruments, these Portfolios may purchase short-term
general obligation notes, tax anticipation notes, bond anticipation notes,
revenue anticipation notes, tax-exempt commercial paper, construction loan notes
and other forms of short-term loans. Such instruments are issued with a short-
term maturity in anticipation of the receipt of tax funds, the proceeds of bond
placements or other revenues. In addition, each of these Portfolios may invest
in long-term tax-exempt instruments, such as municipal bonds and private
activity bonds, to the extent consistent with the maturity restrictions
applicable to it.
Stand-By Commitments
The Managed Income and Intermediate-Term Managed Income Portfolios may
acquire "stand-by commitments" with respect to Municipal Obligations held by
them. Under a "stand-by commitment," a dealer or bank agrees to purchase from a
Portfolio, at the Portfolio's option, specified Municipal Obligations at a
specified price. The amount payable to a Portfolio upon its exercise of a
"stand-by commitment" is normally (i) the Portfolio's acquisition costs of the
Municipal Obligations (excluding any accrued interest which the Portfolio paid
on their acquisition), less any amortized market premium or plus any amortized
market or original issue discount during the period the Portfolio owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period. "Stand-by commitments" are
exercisable by a Portfolio at any time before the maturity of the underlying
Municipal Obligations, and may be sold, transferred or assigned by the Portfolio
only with the underlying instruments.
The Managed Income and Intermediate-Term Managed Income Portfolios
expect that "stand-by commitments" will generally be available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Portfolio may pay for a "stand-by commitment" either separately in
cash or by paying a higher price for securities which are acquired
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<PAGE>
subject to the commitment (thus reducing the yield to maturity otherwise
available for the same securities). Where a Portfolio has paid any
consideration directly or indirectly for a "stand-by commitment," its cost will
be reflected as unrealized depreciation for the period during which the
commitment was held by the Portfolio.
The Managed Income and Intermediate-Term Managed Income Portfolios
intend to enter into "stand-by commitments" only with banks and broker/dealers
which, in the Investment Adviser's opinion, present minimal credit risks. In
evaluating the creditworthiness of the issuer of a "stand-by commitment," the
Investment Adviser will review periodically the issuer's assets, liabilities,
contingent claims and other relevant financial information.
American and European Depository Receipts
The Early Life Cycle, Equity and International Equity Portfolios may
invest in American Depository Receipts ("ADRs"). ADRs are receipts typically
issued by a U.S. bank or trust company which evidence ownership of underlying
securities of a foreign issuer. ADRs may be sponsored or unsponsored.
Investments in unsponsored ADRs involve additional risk because financial
information based on generally accepted accounting principles ("GAAP") may not
be available with respect to the foreign issuers of the underlying securities.
The International Equity Portfolio may invest in European Depository Receipts
("EDRs"). EDRs are sometimes referred to as Continental Depository Receipts
("CDRs"), are receipts issued in Europe typically by non-U.S. banks or trust
companies and foreign branches of U.S. banks that evidence ownership of foreign
or United States securities. Generally, ADRs, which are in registered form, are
designed for use in U.S. securities markets, and EDRs, which are in bearer form,
are designed for use in European securities markets.
ADDITIONAL INVESTMENT LIMITATIONS
In addition to the investment limitations disclosed in the Prospectus,
the Portfolios are subject to the investment limitations enumerated below.
Fundamental investment limitations may be changed with respect to a Portfolio
only by a vote of a majority of the holders of such Portfolio's outstanding
shares (as defined under "Miscellaneous" in the Prospectus). However,
investment limitations which are "operating policies" with respect to a
Portfolio may be changed by the Board of Directors of Master Variable Series
upon reasonable notice to investors.
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<PAGE>
The following investment limitations are fundamental with respect to
each Portfolio, except as otherwise noted. Each Portfolio may not:
1. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, except insofar as the Managed Income and
Money Portfolios might be deemed to be an underwriter upon
disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
2. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may
purchase securities which are secured by interests in real
estate;
3. Issue any senior securities, except (i) with respect to the
International Bond Portfolio, as permitted by the 1940 Act; and
(ii) with respect to the other Portfolios, insofar as any
borrowing, or entering into a futures contract or futures option,
each in accordance with a Portfolio's investment objective,
policies, and limitations, might be considered to be the issuance
of a senior security;
4. Borrow money, except that a Portfolio may borrow money from
banks for temporary purposes, and then in amounts not in excess
of 10% of the value of its total assets at the time of such
borrowing; or mortgage, pledge, or hypothecate any assets except
in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed and 10% of
the value of its total assets at the time of such borrowing.
(This borrowing provision is included solely to facilitate the
orderly sale of portfolio securities to accommodate abnormally
heavy redemption requests and is not for leverage purposes.)
Portfolios other than the International Bond Portfolio will not
purchase securities while borrowings in excess of 5% of total
assets are outstanding;
5. Purchase or sell commodity futures contracts (Equity, Managed
Income and International Equity Portfolios only), commodities or
commodity contracts (Early Life Cycle, Intermediate-Term Managed
Income, International Bond and Money Portfolios only), or, with
respect to each Portfolio other than the International Bond
Portfolio, invest in oil, gas, or other mineral exploration or
development programs; provided, however, that (i) a Portfolio may
purchase publicly-traded securities of companies engaging in
whole or in part in such activities; (ii) each Portfolio other
than the
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<PAGE>
Money Portfolio may enter into forward currency contracts,
futures contracts and related options, each in accordance with
the Portfolio's investment objective and policies; and (iii) the
International Equity Portfolio may invest up to 5% of its total
assets in gold bullion;
6. Make loans, except that each Portfolio may, in accordance with
its investment objective and investment policies, (i) lend
portfolio securities in an amount not exceeding 30% of the
Portfolio's total assets; and (ii) purchase debt securities and
enter into repurchase agreements;
7. Purchase the securities of any issuer if, as a result, more
than 25% of the value of the Portfolio's total assets would be
invested in the securities of issuers having their principal
business activities in the same industry; provided, however, that
(i) there is no limitation with respect to securities issued or
guaranteed by the U.S. Government or domestic bank obligations
(the domestic bank obligations exception does not apply to the
Early Life Cycle or Intermediate-Term Managed Income Portfolios);
and (ii) neither all finance companies, as a group, nor all
utility companies, as a group, are considered a single industry
for purposes of this policy;
8. Write (for the Intermediate-Term and Managed Income
Portfolios), invest in (for all Portfolios other than the
Intermediate-Term and Managed Income Portfolios) or sell put
options, call options, straddles, spreads, or any combination
thereof; provided, however, that the Equity, Early Life Cycle,
International Equity, and International Bond Portfolios may each
write covered call options with respect to portfolio securities
that are traded on a national securities exchange (also on
foreign exchanges for the International Equity and Bond
Portfolios), and may enter into closing purchase transactions
with respect to such options if, at the time of the writing of
such option, the aggregate value of the securities subject to the
options written by the Portfolio involved does not exceed 25% of
the value of its total assets; and provided that each Portfolio
may purchase options, enter into futures contracts and futures
options, and enter into forward currency transactions in
accordance with its investment objectives and policies;
9. Invest in companies for the purpose of exercising management
or control;
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<PAGE>
10. With respect to each Portfolio other than the International
Bond Portfolio, purchase securities of any one issuer, other than
U.S. Government obligations, if immediately after such purchase
more than 5% of the value of its total assets would be invested
in the securities of such issuer, except that up to 25% of the
value of its total assets may be invested without regard to this
5% limitation.
The following investment limitations are operating policies. Unless otherwise
noted, each of the Portfolios may not:
11. Make short sales of securities, maintain a short position,
or purchase securities on margin, except for each Portfolio other
than the Money Portfolio (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and
(ii) a Portfolio may make margin deposits in connection with
futures contracts or other investments made in accordance with
the Portfolio's investment objectives and policies;
12. Acquire any other investment company or investment company
security, except in connection with a merger, consolidation,
reorganization, or acquisition of assets or where otherwise
permitted by the 1940 Act;
13. With respect to the Money Portfolio, invest in bank
obligations having remaining maturities in excess of one year,
except that securities subject to repurchase agreements may bear
longer maturities;
14. With respect to each Portfolio, knowingly invest more than
10% of the value of the Portfolio's total assets in illiquid
securities, including repurchase agreements with remaining
maturities in excess of seven days, restricted securities, and
other securities for which market quotations are not readily
available; and
15. With respect to the Equity, Early Life Cycle, International
Equity, and International Bond Portfolios, purchase a futures
contract or an option thereon if, with respect to positions in
futures or options on futures, the aggregate initial margin and
premiums on such options would exceed 5% of the Portfolio's net
asset value;
16. With respect to the Intermediate-Term Managed Income,
Managed Income, and Money Portfolios, purchase foreign
securities, except that (i) the Money Portfolio may purchase
certificates of deposit, bankers' acceptances, or other similar
obligations issued by domestic branches of foreign banks and
foreign branches
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<PAGE>
of U.S. banks in an amount not to exceed 20% of its total assets;
and the Intermediate-Term Managed Income Portfolio and Managed
Income Portfolio may purchase (i) dollar-denominated debt
obligations issued by foreign issuers, including foreign
corporations and governments, by U.S. corporations outside the
United States in an amount not to exceed 25% of the Portfolio's
total assets at the time of purchase; and (ii) certificates of
deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks, or foreign branches
of U.S. banks, in an amount not to exceed 20% of its total net
assets.
17. With respect to the Equity, International Equity, and
Managed Income Portfolios, invest more than 25% of the value of
its total assets in domestic bank obligations.
18. With respect to the Equity, Early Life Cycle, Managed
Income, and Money Portfolios, invest in obligations of foreign
branches of financial institutions or in domestic branches of
foreign banks, if immediately after such purchase (i) more than
5% of the value of the Portfolio's total assets would be invested
in obligations of any one foreign branch of the financial
institution or domestic branch of a foreign bank; or (ii) more
than 20% of its total assets would be invested in foreign
branches of financial institutions or in domestic branches of
foreign banks;
19. With respect to the Equity, Early Life Cycle, Managed
Income, Intermediate-Term Managed Income, International Equity,
and International Bond Portfolios, purchase warrants if the
Portfolio's investments in warrants, valued at the lower of cost
or market value, would exceed 5% of the net assets of the
Portfolio involved following the purchase of such warrants,
including warrants which are not listed on the New York or
American Stock Exchanges (which may not exceed 2% of the value of
a Portfolio's net assets). For the purposes of this limitation,
warrants acquired by a Portfolio in units or attached to
securities will be deemed to be without value. The Equity, Early
Life Cycle and International Portfolios also intend to refrain
from entering into arbitrage transactions;
20. With respect to the International Bond Portfolio, purchase
participation or other direct interests or enter into leases with
respect to oil, gas, other mineral exploration or development
programs;
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<PAGE>
21. With respect to the International Bond Portfolio, invest
more than 20% of its total assets in securities issued by any one
foreign government, or invest more than 5% of assets in any
individual corporate issuer; and
22. With respect to the Money Portfolio, purchase foreign
securities, except the Portfolio may purchase certificates of
deposit, bankers' acceptances, or other similar obligations
issued by domestic branches of foreign banks and foreign branches
of U.S. banks in an amount not to exceed 20% of its total net
assets.
* * *
For the purpose of Investment Limitation No. 2, the prohibition of
purchases of real estate includes acquisition of limited partnership interests
in partnerships formed with a view toward investing in real estate, but does not
prohibit purchases of shares in real estate investment trusts. The
Intermediate-Term Managed Income and Managed Income Portfolios do not currently
intend to invest in real estate investment trusts.
The Equity, Managed Income and International Equity Portfolios may not
purchase or sell commodities except as provided in Investment Limitation No. 5
above.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
of a Portfolio's securities will not constitute a violation of such limitation.
In addition to the investment limitations described above, each
Portfolio is subject to investment limitations described in the Prospectus,
including certain state insurance law diversification guidelines which, as
operating policies of the Portfolios, may be changed by the Board of Directors
of Master Variable Series upon reasonable notice to shareholders.
MONEY PORTFOLIO
The Money Portfolio uses the amortized cost method of valuation for
shares in the Portfolio. Pursuant to this method, a security is valued at its
cost initially, and thereafter a constant amortization to maturity of any
discount or premium is assumed, regardless of the impact of fluctuating interest
rates on the market value of the security. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Portfolio would receive if it sold the security. The market
value of securities held by
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the Money Portfolio can be expected to vary inversely with changes in prevailing
interest rates.
The Portfolio invests only in high-quality instruments and maintains a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a constant net asset value per share. The Money Portfolio will not
purchase any security deemed to have a remaining maturity of more than 13 months
within the meaning of the 1940 Act or maintain a dollar-weighted average
portfolio maturity which exceeds 90 days. The Board of Directors of Master
Variable Series has established procedures that are intended to stabilize the
net asset value per share of the Money Portfolio for purposes of sales and
redemptions at $1.00. These procedures include the determination, at such
intervals as the Board deems appropriate, of the extent, if any, to which the
net asset value per share of the Portfolio calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one half of one percent, the Board of Directors will promptly consider what
action, if any, should be initiated. If the Board of Directors believes that
the extent of any deviation from the Portfolio's $1.00 amortized cost price per
share may result in material dilution or other unfair results to new or existing
investors, it will take appropriate steps to eliminate or reduce, to the extent
reasonably practicable, any such dilution or unfair results. These steps may
include selling portfolio instruments prior to maturity; shortening the average
portfolio maturity; withholding or reducing dividends; redeeming shares in kind;
reducing the number of the Portfolio's outstanding shares without monetary
consideration; or utilizing a net asset value per share determined by using
available market quotations.
Net income of the Money Portfolio for dividend purposes consists of
(i) interest accrued and discount earned on assets, less (ii) amortization of
market premium on such assets, accrued expenses directly attributable to the
Portfolio, and the general expenses or the expenses common to more than one
Portfolio of Master Variable Series (e.g., administrative, legal, accounting,
and directors' fees) prorated to the Money Portfolio on the basis of its net
assets relative to the other Portfolios.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The following information supplements and should be read in
conjunction with the section in the Prospectus for Master Variable Series
entitled "How to Purchase and Redeem Shares."
Master Variable Series may suspend the right of redemption or postpone
the date of payment for shares for more than seven days during any period when
(a) trading on the New York Stock
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<PAGE>
Exchange (the "Exchange") is restricted by applicable rules and regulations of
the Securities and Exchange Commission; (b) the Exchange is closed for other
than customary weekend and holiday closings; (c) the Securities and Exchange
Commission has by order permitted such suspension; or (d) an emergency exists as
determined by the Securities and Exchange Commission.
DESCRIPTION OF CAPITAL STOCK
Master Variable Series's Charter authorizes its Board of Directors to
issue up to one billion full and fractional shares of capital stock, and to
classify or reclassify any unissued shares of Master Variable Series into one or
more classes as it may determine, each comprising such number of shares and
having such designations, powers, preferences, and rights and such
qualifications, limitations, and restrictions thereof as may be fixed or
determined from time to time. The Prospectus describes the classes of shares
into which Master Variable Series' authorized capital is currently classified.
Shares have no preemptive rights and only such conversion or exchange
rights as the Board of Directors may grant in its discretion. When issued for
payment as described in the Prospectus, shares will be fully paid and non-
assessable. In the event of the Master Variable Series' liquidation or
dissolution, the holders of each established and designated class of stock will
be entitled to receive, as a class, when and as declared by the Board of
Directors, the excess of the assets belonging to that class over the liabilities
belonging to that class. The assets so distributable to the shareholders of any
particular class shall be distributed among such shareholders in proportion to
the number of shares of that class held by them and recorded on the books of
Master Variable Series.
Each share outstanding is entitled to one vote for each share held,
and fractional votes for fractional shares held. Shareholders will vote in the
aggregate and not by class, except as otherwise required by the 1940 Act or
other applicable law or when the matter to be voted upon affects only the
interests of the shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of
Master Variable Series' outstanding shares may elect all of Master Variable
Series's directors, regardless of votes of other shareholders.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as Master Variable Series shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
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affected by a matter unless it is clear that the interests of each portfolio in
the matter are substantially identical, or that the matter does not affect any
interest in the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent public
accountants, the approval of principal underwriting contracts, and the election
of directors may be effectively acted upon by shareholders of Master Variable
Series voting without regard to class.
Master Variable Series's Charter authorizes its Board of Directors,
without shareholder approval (unless otherwise required by applicable law) to
(a) sell and convey the assets of a Portfolio to another management investment
company for consideration which may include securities issued by the purchaser
and, in connection therewith, to cause all outstanding shares of the Portfolio
involved to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (b) sell and convert a
Portfolio's assets into money and, in connection therewith, to cause all
outstanding shares of the Portfolio involved to be redeemed at their net asset
value; or (c) combine the assets belonging to a Portfolio with the assets
belonging to another portfolio of Master Variable Series, if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on shareholders of any portfolio participating in such
combination, and, in connection therewith, to cause all outstanding shares of
the Portfolio involved to be redeemed at their net asset value or converted into
shares of another class of Master Variable Series' capital stock at net asset
value. The exercise of such authority by the Board of Directors will be subject
to the provisions of the 1940 Act, and the Board of Directors will not take any
action described in this paragraph unless the proposed action has been disclosed
in writing to the particular Portfolio's shareholders at least 30 days prior
thereto.
Notwithstanding any provision of Maryland law requiring a greater
share of Master Variable Series' Common Stock (or of the shares of a Portfolio
voting separately as a class) in connection with any corporate action, unless
otherwise provided by law (for example, by Rule 18f-2, discussed above) or by
Master Variable Series' Charter, Master Variable Series may take or authorize
such action upon the favorable vote of the holders of more than 50% of the
outstanding Common Stock of Master Variable Series voting without regard to
class.
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MANAGEMENT OF THE PORTFOLIOS
Directors and Officers
The directors and executive officers of Master Variable Series, their
addresses, principal occupations during the past five years, and other
affiliations are as follows:
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
Name and Address Master Variable Series Age and Other Affiliations
----------------------- --- -----------------------
<S> <C> <C> <C>
Alfred C. Tannachion/1/ Chairman of the Board, 69 Retired Senior Vice
1135 Hyde Park Court President and Treasurer President of United
Mahwah, NJ 07430 States Trust Company of
New York.
Donald L. Campbell Director 69 Retired; Senior Vice
333 East 69th Street President, Royal
Apt. 10-H Insurance Company, Inc.,
New York, NY 10021 until August, 1989;
Director, Royal Life
Insurance Co. of N.Y.
Charles C. Cornelio/1/ Director 35 Senior Vice President
and Chief Administrative
Officer, Chubb Life
Chubb Life Insurance Company Insurance Company of
of America America from March 1995;
One Granite Place Vice President, Counsel
Concord, NH 03301 and Assistant Secretary,
Chubb Life Insurance Company of
America from March 1992;
Counsel and Assistant
Secretary, Chubb Life Insurance
Company of America from June 1991
until February 1992; Associate
Counsel, Chubb Life Insurance Company
of America from September 1989 until
May 1991; Vice President and General
Counsel, Chubb America Fund, Inc.
and Chubb Investment Funds,
Inc.; Vice President, General Counsel
and Secretary, Chubb Securities
</TABLE>
---------------------------
/1/ This director is considered to be an "interested person" of Master
Variables Series as defined in the 1940 Act.
-25-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
Name and Address Master Variable Series Age and Other Affiliations
----------------------- --- -----------------------
<S> <C> <C> <C>
Corporation and Hampshire Funding,
Inc.; General Counsel and
Secretary, ChubbHealth, Inc.;
Secretary, Chubb Investment Advisory
Corporation; Senior Vice President,
and Chief Administrative Officer,
The Colonial Life Insurance Company
of America; Chubb America Service
Corporation; Chubb Sovereign Life
Insurance Company; Director,
Hampshire Syndication, Inc.
Joseph H. Dugan Director 70 Retired; President, CEO
913 Franklin Lake Road -- and Director, L.B.
Franklin Lakes, NJ 07417 Foster Company (tubular
products), from September,
1987 until May, 1990.
Wolfe J. Frankl Director 74 Retired; Director, Deutsche
40 Gooseneck Lane -- Bank Financial, Inc.;
Charlottesville, VA 22903 Director, The Harbus
Corporation; Trustee,
Mariner Funds Trust.
Robert A. Robinson Director 69 President Emeritus, The
Church Pension Fund -- Church Pension Fund and
800 Second Street its affiliated companies
New York, NY 10017 since 1968; Trustee,
Mariner Funds Trust;
Trustee, H.B. and F.H.
Bugher Foundation and
Director of its wholly
owned subsidiaries --
Rosiclear Lead and
Flourspar Mining Co. and
The Pigmy
Corporation; Director,
Morehouse Publishing Co.
W. Bruce McConnel, III Secretary 52 Partner of the law firm
Philadelphia National -- of Drinker Biddle &
Bank Building Reath.
1345 Chestnut Street
Philadelphia, PA 19107-3496
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Position with During Past 5 Years
Name and Address Master Variable Series Age and Other Affiliations
----------------------- --- -----------------------
<S> <C> <C> <C>
Shari J. Lease Assistant 40 Counsel and Assistant
One Granite Place Secretary Vice President of
Concord, NH 03301 Chubb Life Insurance
Company of America;
Secretary of Chubb America
Fund, Inc., Chubb
Investment Funds, Inc., and
Chubb Series Trust;
Assistant Secretary of
Chubb Investment Advisory
Corporation, Chubb
Securities Corporation and
Hampshire Funding, Inc.;
previously Assistant Counsel
and Assistant Vice President of
State Bond and Mortgage
Company and affiliates.
John A. Weston Assistant 35 Assistant Vice President
One Granite Place Treasurer of Chubb Life Insurance
Concord, NH 03301 Company of America;
Treasurer of Chubb
America Fund, Inc., Chubb
Investment Funds, Inc.,
Chubb Series Trust,
Hampshire Funding Inc.,
Chubb Securities
Corporation and Chubb
Investment Advisory
Corporation; formerly
Mutual Fund Accounting
Officer for Chubb America
Fund, Inc., Chubb
Investment Funds, Inc.
and Chubb Investment
Advisory Corporation and
Assistant Treasurer for
Chubb Securities
Corporation and Hampshire
Funding, Inc.
</TABLE>
---------------------------
Each Director of Master Variable Series receives an annual fee of
$3,000 plus a meeting fee of $500 for each meeting attended and is reimbursed
for expenses incurred in attending meetings. The Chairman of the Board is
entitled to receive an additional $2,000 per annum for services in such
capacity. The employees of any affiliate of the Investment Adviser or of the
Administration do not receive any compensation from Master Variable Series for
acting
-27-
<PAGE>
as officers or directors of Master Variable Series. The directors and officers
of Master Variable Series beneficially own less than 1% of the shares of each
Portfolio.
Investment Advisory and Sub-Advisory Agreements
United States Trust Company of New York serves as Investment Adviser
to the Portfolios, and FACAM provides sub-advisory services with respect to the
International Equity Portfolio and the International Bond Portfolio. In the
Investment Advisory and Sub-Advisory Agreements, the Investment Adviser and Sub-
Adviser have agreed to provide the services described in the Prospectus. The
Investment Adviser and Sub-Adviser have also agreed to pay all expenses incurred
by each in connection with their activities under the respective agreements
other than the cost of securities, including brokerage commissions, purchased
for the Portfolios.
The Investment Adviser may, from time to time, voluntarily waive a
portion of its fees, which waiver may be terminated at any time. See the
prospectus for information regarding any fee waiver or expense reimbursement
arrangements currently applicable to the Portfolios.
The Investment Advisory and Sub-Advisory Agreements provide that the
Investment Adviser and Sub-Adviser shall not be liable for any error of judgment
or mistake of law or for any loss suffered by the Portfolios in connection with
the performance of such agreements, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith or gross negligence on the
part of the Investment Adviser or Sub-Adviser in the performance of their duties
or from reckless disregard by either of them of their duties and obligations
thereunder. In addition, the Investment Adviser has undertaken in the
Investment Advisory Agreement to maintain its policy and practice of conducting
its Asset Management Group independently of its Banking Group.
Administrative Services and Transfer Agent Agreements
Chubb Investment Advisory Corporation serves as the Administrator for
the Master Variable Series. Under the Administrative Services Agreement, the
Administrator has agreed to maintain office facilities for the Portfolios,
furnish the Portfolios with statistical and research data, clerical, accounting
and bookkeeping services, and certain other services required by the Portfolios,
and to compute the net income and realized capital gains or losses, if any, of
the respective Portfolios. The Administrator prepares semiannual reports to the
Securities and Exchange Commission, prepares Federal and state tax returns,
prepares filings with state securities commissions,
- 28 -
<PAGE>
if necessary, arranges for and bears the cost of processing share purchase and
redemption orders, maintains the financial accounts and records of the
Portfolios, and generally assists in the Portfolios' operations.
Chubb Investment Advisory Corporation is also the transfer agent and
dividend disbursing agent for the Portfolios. In such capacity, Chubb
Investment Advisory Corporation has agreed to (i) issue and redeem shares; (ii)
address and mail all communications by the Portfolios to their shareholders,
including reports to shareholders, dividends and distribution notices, and proxy
materials for their meetings of shareholders; (iii) respond to correspondence by
shareholders and others relating to its duties; (iv) maintain shareholder
accounts; and (v) make periodic reports to Master Variable Series concerning the
Portfolios' operations. For its services as Administrator, transfer agent, and
dividend disbursing agent, the Administrator receives fees as set forth in the
Prospectus.
Expenses
Except as otherwise noted, the Investment Adviser and the
Administrator bear all expenses in connection with the performance of their
respective services in each capacity in which they perform such services. The
Portfolios bear the expenses incurred in their operations. Expenses of the
Portfolios include the following: taxes; interest; fees (including fees paid to
directors and officers of Master Variable Series who are not affiliated with the
Investment Adviser or the Administrator); SEC fees; any state securities
qualifications fees; costs of preparing and printing prospectuses for regulatory
purposes and for distribution to existing shareholders; advisory, administration
and administrative service fees; charges of the custodian; transfer agent and
dividend disbursing agent expenses; costs of pricing the Portfolios; the certain
insurance premiums; outside auditing and legal expenses; costs of shareholders
reports and shareholder meetings; and any extraordinary expenses. The Portfolios
also pay for brokerage fees and commissions in connection with the purchase of
portfolio securities.
Custodian
United States Trust Company of New York is also the custodian of the
assets of Master Variable Series. Under the custodian agreement, U.S. Trust has
agreed to (i) maintain a separate account or accounts for each of the
Portfolios; (ii) make receipts and disbursements of money on behalf of the
Portfolios; (iii) collect and receive income and other payments and
distributions on account of the portfolio securities of the Portfolios; (iv)
respond to correspondence from securities
- 29 -
<PAGE>
brokers and others relating to its duties; (v) maintain certain financial
accounts and records; and (vi) make periodic reports to Master Variable Series
concerning operations of the Portfolios. U.S. Trust may, at its own expense,
open and maintain custody accounts with respect to the Portfolios with other
banks or trust companies, provided that U.S. Trust shall remain liable for the
performance of all of its custodial duties under the Custodian Agreement,
notwithstanding any delegation.
U.S. Trust is entitled to monthly fees from Master Variable Series for
furnishing custodial services according to the following fee schedule: on the
face value of debt securities and the market value of equity securities, a fee
at the annual rate of .01%; and $12.00 for each domestic security transaction
and $15.00 for each foreign security transaction. In addition, U.S. Trust is
entitled to reimbursement of its out-of-pocket expenses in connection with the
above services. Any gold bullion purchased by the International Equity
Portfolio will be held in the custody of the Delaware Trust Company.
U.S. Trust has entered into an International Custodian Agreement with
Morgan Stanley Trust Company ("Morgan Stanley"), providing for the custody of
foreign securities held by the Portfolios. Morgan Stanley is not entitled to
additional sub-custodial fees from the Portfolios for its foreign custody
services.
PORTFOLIO TRANSACTIONS
Subject to the general control of the Board of Directors of Master
Variable Series, the Investment Adviser is responsible for, makes decisions with
respect to, and places orders for all purchases and sales of all portfolio
securities of each of the Portfolios other than the International Equity and
International Bond Portfolios. The Sub-Adviser supervises through its trading
desk the execution of all transactions in foreign securities for these
Portfolios.
The Portfolios may engage in short-term trading to achieve their
investment objectives. Portfolio turnover may vary greatly from year to year as
well as within a particular year. It is expected that the portfolio turnover
rate of the Intermediate-Term Managed Income and Managed Income Portfolios may
be higher than those of many other investment companies with similar investment
objectives and policies. However, since brokerage commissions are not normally
paid on instruments purchased by these Portfolios, portfolio turnover is not
expected to have a material effect on the income of these Portfolios. The
Portfolios' portfolio turnover rate may also be affected by cash requirements
for redemptions of shares and by regulatory provisions which enable the
Portfolios to receive certain
- 30 -
<PAGE>
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions.
Securities purchased and sold by the Intermediate-Term Managed Income and
Managed Income Portfolios are generally traded in the over-the-counter market on
a net basis (i.e., without commission) through dealers, or otherwise involve
transactions directly with the issuer of an instrument. The cost of securities
purchased from underwriters includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. With respect to over-the-counter
transactions, the Portfolios, where possible, will deal directly with the
dealers who make a market in the securities involved, except in those
circumstances where better price and execution are available elsewhere.
The Investment Advisory Agreement between Master Variable Series and
the Investment Adviser, and the Sub-Advisory Agreement between U.S. Trust and
the Sub-Adviser, provide that, in executing portfolio transactions and selecting
brokers or dealers, the Investment Adviser and Sub-Adviser will seek to obtain
the best net price and the most favorable execution. The Investment Adviser and
Sub-Adviser shall consider factors they deem relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis.
In addition, the Investment Advisory and Sub-Advisory Agreements
authorize the Investment Adviser and Sub-Adviser, to the extent permitted by law
and subject to the review of the Board of Directors of Master Variable Series
from time to time with respect to the extent and continuation of the policy, to
cause the Portfolios to pay a broker which furnishes brokerage and research
services a higher commission than that which might be charged by another broker
for effecting the same transaction, provided that the Investment Adviser or Sub-
Adviser determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of either that particular transaction or
- 31 -
<PAGE>
the overall responsibilities of the Investment Adviser or Sub-Adviser to the
accounts as to which it exercises investment discretion. Such brokerage and
research services might consist of reports and statistics on specific companies
or industries, general summaries of groups of stocks and their comparative
earnings, or broad overviews of the stock market and the economy. Such services
might also include reports on global, regional, and country-by-country prospects
for economic growth, anticipated levels of inflation, prevailing and expected
interest rates, and the outlook for currency relationships.
Supplementary research information so received is in addition to and
not in lieu of services required to be performed by the Investment Adviser and
Sub-Adviser and does not reduce the investment advisory fees payable by the
Portfolios. Such information may be useful to the Investment Adviser and Sub-
Adviser in serving the Portfolios and other clients and, conversely,
supplemental information obtained by the placement of business of other clients
may be useful to the Investment Adviser and Sub-Adviser in carrying out their
obligations to the Portfolios.
Portfolio securities will not be purchased from or sold to the
Investment Adviser, the Sub-Adviser, or any affiliated person of either of them
(as such term is defined in the 1940 Act) acting as principal, except to the
extent permitted by the Securities and Exchange Commission.
Investment decisions for the Portfolios are made independently from
those of other investment companies, common trust funds and other types of funds
managed by the Investment Adviser or Sub-Adviser. Such other investment
companies and funds may also invest in the same securities as the Portfolios.
When a purchase or sale of the same security is made at substantially the same
time on behalf of a Portfolio and another investment company or common trust
fund, the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which the Investment Adviser or Sub-Adviser
believes to be equitable to the Portfolio and such other investment company or
common trust fund. In some instances, this investment procedure may adversely
affect the price paid or received by the Portfolios or the size of the position
obtained by the Portfolios. To the extent permitted by law, the Investment
Adviser or Sub-Adviser may aggregate the securities to be sold or purchased for
the Portfolios with those to be sold or purchased for other investment companies
or common trust funds in order to obtain best execution.
- 32 -
<PAGE>
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, 200 Clarendon Street, Boston,
MA 02116, serve as auditors of Master Variable Series.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of Master
Variable Series, is a partner), Philadelphia National Bank Building, 1345
Chestnut Street, Suite 1100, Philadelphia, Pennsylvania 19107-3496, is counsel
to Master Variable Series and will pass upon the legality of the shares offered
by the Prospectus.
ADDITIONAL INFORMATION CONCERNING TAXES
Shares of the Portfolios are offered only to separate accounts that
fund variable contracts. See the prospectus for the variable contracts for a
discussion of the special taxation of insurance companies with respect to the
separate accounts and the variable contracts, and the holders thereof.
Each Portfolio intends to qualify and to continue to qualify for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended (the "Code"). In order to qualify for that treatment,
the Portfolio must distribute to shareholders for each taxable year at least 90%
of its investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign currency
transactions) ("Distribution Requirement") and must meet several additional
requirements. These requirements include the following: (1) the Portfolio must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies ("Income
Requirement"); (2) the Portfolio must derive less than 30% of its gross income
each taxable year from the sale or other disposition of securities, or any of
the following, that were held for less than three months -- options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the Portfolio's principal business of investing in
securities (or options and futures with respect thereto) ("Short-Short
Limitation"); (3) at the close of each quarter of the Portfolio's taxable year,
at least 50% of the value of its total assets must be represented by cash or
cash items, U.S. Government securities, securities of other RICs, and
- 33 -
<PAGE>
other securities that, with respect to any one issuer, do not exceed 5% of the
value of the Portfolio's total assets and that do not represent more than 10% of
the outstanding voting securities of the issuer; and (4) at the close of each
quarter of the Portfolio's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer.
As noted in the Prospectus, each Portfolio must, and intends to,
comply with the diversification requirements imposed by Section 817(h) of the
Code and the regulations thereunder. For information concerning the
consequences of failure to meet the requirements of Section 817(h), see the
prospectus for the variable contracts.
No Portfolio will be subject to the 4% Federal excise tax imposed on
RICs that do not distribute substantially all their income and gains each
calendar year because that tax does not apply to a RIC whose only shareholders
are segregated asset accounts of life insurance companies held in connection
with variable annuity contracts and/or variable life insurance policies.
The foregoing is only a general summary of some of the important
Federal income tax considerations generally affecting the Portfolios and their
shareholders. No attempt is made to present a complete explanation of the
Federal tax treatment of the Portfolios' activities, and this discussion and the
discussion in the prospectuses and/or statements of additional information for
variable contracts are not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult their own tax advisers for
more detailed information and for information regarding any state, local, or
foreign taxes applicable to the variable contracts and the holders thereof.
PERFORMANCE AND YIELD INFORMATION
Performance quoted for the Portfolios reflects each Portfolio's
expenses, but does not include charges and expenses attributable to a particular
variable contract. Since shares of the Fund may only be purchased through a
variable contract, an individual owning a variable contract should carefully
review variable contract disclosure documents for information on relevant
charges and expenses. Excluding these charges from quotations of a Portfolio's
performance has the effect of increasing the performance quoted. These charges
should be considered when comparing a Portfolio's performance to other
investment vehicles.
- 34 -
<PAGE>
Portfolios Other Than the Money Portfolio. The Portfolios may
advertise their "average annual total return." Such return is computed by
determining the average annual compounded rate of return during specified
periods that equates the initial amount invested to the ending redeemable value
of such investment according to the following formula:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1, 5 and 10
year (or other) periods at the end of the applicable period
(or a fractional portion thereof).
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in years.
Each Portfolio that advertises an "aggregate total return" computes
such return by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate
total return is as follows:
ERV
Aggregate Total Return = [(-------)] - 1
P
The above calculations are made assuming that (1) all dividends and
capital gain distributions are reinvested on the reinvestment dates at the price
per share existing on the reinvestment date, and (2) all recurring fees charged
to all shareholder accounts are included. The ending redeemable value (variable
"ERV" in the formula) is determined by assuming complete redemption of the
hypothetical investment at the end of the measuring period. The aggregate annual
total returns for the Equity, Early Life Cycle, Intermediate-Term Managed
Income, Managed Income, International Equity and International Bond Portfolios
for the period from commencement of operations (January 17, 1995) through
June 30, 1995 were 24.38%, 13.09%, 9.17%, 8.93%, 5.37% and 9.44%, respectively.
The Portfolios may also from time to time include in advertisements,
sales literature and communications to
- 35 -
<PAGE>
shareholders a total return figure that is not calculated according to the
formula set forth above in order to compare more accurately a Portfolio's
performance with other measures of investment return. For example, in comparing
a Portfolio's total return with data published by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. or Weisenberger Investment Company
Service, or with the performance of an index, a Portfolio may calculate its
aggregate total return for the period of time specified in the advertisement or
communication by assuming the investment of $10,000 in shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.
The Intermediate-Term Managed Income, Managed Income, and
International Bond Portfolios may advertise their standardized effective 30-day
(or one month) yields calculated in accordance with the method prescribed by the
SEC. Such yield will be calculated separately for each Portfolio according to
the following formula:
a-b
Yield = 2 [( ------ + 1)/6/ - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = average daily number of shares outstanding that were entitled
to receive dividends.
d = net asset value per share on the last day of the period.
For the purposes of determining interest earned during the period
(variable "a" in the formula), each Portfolio computes the yield to maturity of
any debt obligation held by it based on the market value of the obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to obligations purchased during the
month, the purchase price (plus actual accrued interest). Such yield is then
divided by 360, and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that the
obligation is in the Portfolio. It is assumed in the above calculation that
each month contains 30 days. Also, the maturity
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<PAGE>
of a debt obligation with a call provision is deemed to be the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. Each of the Portfolios calculates interest gained on tax-exempt
obligations issued without original issue discount and having a current market
discount by using the coupon rate of interest instead of the yield to maturity.
In the case of tax-exempt obligations with original issue discount, where the
discount based on the current market value exceeds the then-remaining portion of
original issue discount, the yield to maturity is the imputed rate based on the
original issue discount calculation. Conversely, where the discount based on the
current market value is less than the remaining portion of the original issue
discount, the yield to maturity is based on the market value.
Expenses accrued for the period (variable "b" in the formula) include
all recurring fees charged to the particular Portfolio in proportion to the
length of the base period. Undeclared earned income will be subtracted from the
net asset value per share (variable "d" in the formula).
Based on the foregoing calculation, the effective yields of the
Intermediate-Term Managed Income, Managed Income and International Bond
Portfolios for the 30-day period ended June 30, 1995 were 5.84%, 6.25% and
6.11%, respectively.
The total return and yield of a Portfolio may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indices or to ratings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the total return and/or yield of a Portfolio may be compared to data
prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc.
or Weisenberger Investment Company Service. Total return and yield data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal, and The New York Times, or in publications of
a local or regional nature, may also be used in comparing the performance of a
Portfolio. Advertisements, sales literature or reports to shareholders may from
time to time also include a discussion and analysis of each Portfolio's
performance, including without limitation, those factors, strategies and
techniques that together with market conditions and events, materially affected
each Portfolio's performance.
The Portfolios may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original Portfolio
- 37 -
<PAGE>
investment, but also of the additional Portfolio shares received through
reinvestment. As a result, the value of the Portfolio investment would increase
more quickly than if dividends or other distributions had been paid in cash. The
Portfolios may also include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of a Portfolio, economic conditions, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time, advertisements, sale literature or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Portfolio), as well as the views of
the Investment Adviser as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Portfolio. The Portfolios
may also include in advertisements, charts, graphs, or drawings which illustrate
the potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, Treasury bills, and shares of a
Portfolio. In addition, advertisements, sales literature or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in a Portfolio. Such advertisements or communications
may include symbols, headlines or other material which highlight or summarize
the information discussed in more detail therein.
Money Portfolio. The standardized annualized seven-day yield for the
shares of the Money Portfolio is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account in the Portfolio, having a balance of one share at the beginning of the
period, dividing the net change in account value by the value of the account at
the beginning of the period to obtain the base period return, and multiplying
the base period return by (365/7). The net change in the value of an account in
the Money Portfolio includes the value of additional shares purchased with
dividends from the original share and dividends declared on both the original
share and any such additional shares, net of all fees that are charged to the
Money Portfolio in proportion to the length of the base period. The capital
changes to be excluded from the calculation of the net change in account value
are realized gains and losses from the sale of securities and unrealized
appreciation and depreciation. In addition, the Money Portfolio may use
effective compound yield quotations for its shares computed by adding 1 to the
unannualized base period return (calculated as described above), raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the results. For
the seven-day period ending June 30, 1995, the
annualized yield of the Money Market Portfolio was 5.35% and the effective yield
was 5.50%.
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<PAGE>
From time to time, in advertisements, sales literature or in reports
to shareholders, the yield of the Money Portfolio may be quoted and compared to
those of other mutual funds with similar investment objectives and to stock or
other relevant indices. For example, the yield of the Portfolio's shares may be
compared to the Donoghue's Money Fund average, which is an average compiled by
Donoghue's MONEY FUND REPORT of Holliston, MA 01746, a widely recognized
independent publication that monitors the performance of money market funds, or
to the data prepared by Lipper Analytical Services, Inc., a widely recognized
independent service that monitors the performance of mutual funds.
The current yield for the Money Portfolio may be obtained by calling
the Administrator at (800) 258-3648.
FINANCIAL STATEMENTS
The unaudited financial statements for Master Variable Series'
Portfolios for the period from commencement of operations (January 17, 1995)
through June 30, 1995 are included in this Statement of Additional Information.
MISCELLANEOUS
As used in the Prospectus, "assets belonging to a Portfolio" means the
consideration received upon the issuance of shares in the Portfolio, together
with all income, earnings, profits, and proceeds derived from the investment
thereof, including any proceeds from the sale of such investments, any funds or
payments derived from any reinvestment of such proceeds, and a portion of any
general assets of Master Variable Series not belonging to a particular Portfolio
of Master Variable Series. In determining a Portfolio's net asset value, assets
belonging to the Portfolio are charged with the direct liabilities in respect to
the Portfolio and with a share of the general liabilities of Master Variable
Series which are normally allocated in proportion to the relative asset values
of the Portfolios at the time of allocation. Subject to the provisions of the
Charter of Master Variable Series, determinations by the Board of Directors as
to the direct and allocable liabilities, and the allocable portion of any
general assets with respect to a particular Portfolio, are conclusive.
As of July 1, 1995, all of the issued and outstanding shares of each
Portfolio were owned by Chubb Life Insurance Company of America and held in
separate accounts pursuant to variable annuity contracts.
- 39 -
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EQUITY PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
------------ ------------
<S> <C> <C>
COMMON STOCK 100.04%
Beverage, Food, Soap & Tobacco 2.00%
Coca Cola Company......................................... 400 $25,500
------------
Biotechnology 1.81%
Medtronic, Inc............................................ 300 23,137
------------
Brokerage 5.10%
Charles Schwab Corp., New................................. 1,500 65,062
------------
Chemical 2.04%
Idexx Laboratories, Inc.@................................. 1,000 26,000
------------
Commercial Services 2.63%
CUC International, Inc.@.................................. 800 33,600
------------
Communications Services 8.02%
America Online, Inc.@..................................... 1,100 48,400
Capital Cities ABC, Inc................................... 500 54,000
------------
102,400
------------
Computer - Peripherals 12.66%
Compaq Computer Corp.@.................................... 1,100 49,913
EMC Corp., Mass.@......................................... 2,000 48,500
Microsoft Corp.@.......................................... 700 63,263
------------
161,676
------------
Computer - Software 8.38%
Cisco Systems, Inc.@...................................... 1,200 60,675
Intuit, Inc.@............................................. 300 22,800
Sybase, Inc.@............................................. 800 23,500
------------
106,975
------------
</TABLE>
__________
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EQUITY PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
---------- ------------
<S> <C> <C>
COMMON STOCK - Continued
Electronics 10.62%
Intel Corp........................................... 1,400 $88,638
Motorola, Inc........................................ 700 46,987
------------
135,625
------------
Entertainment, Leisure & Media 2.61%
The Walt Disney Co................................... 600 33,375
------------
Financial Services 14.15%
Citicorp............................................. 1,000 57,875
First Finl Mgmt Corp................................. 700 59,850
Merrill Lynch & Co, Inc.............................. 1,200 63,000
------------
180,725
------------
Government Agency 2.22%
Federal National Mortgage Association................ 300 28,312
------------
Insurance 2.92%
United Healthcare Corp............................... 900 37,237
------------
Office Equipment 1.96%
Indigo, N.V.@........................................ 500 25,000
------------
Pharmaceuticals 3.62%
Pfizer, Inc.......................................... 500 46,188
------------
Publishing & Printing 3.01%
News Corp., Ltd., ADR................................ 1,700 38,463
------------
</TABLE>
__________
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EQUITY PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
---------- ------------
<S> <C> <C>
COMMON STOCK - Continued
Restaurants 2.03%
Brinker International, Inc.@...................... 1,500 $25,875
------------
Retail Specialty 12.00%
Autozone, Inc.@................................... 1,200 30,150
Gillette Co....................................... 800 35,700
Home Depot, Inc................................... 900 36,563
Wal-Mart Stores, Inc.............................. 1,900 50,825
------------
153,238
------------
Telecommunications Equipment 2.26%
Tellabs@.......................................... 600 28,875
------------
TOTAL COMMON STOCKS (Cost $1,057,797).......... 1,277,263
------------
<CAPTION>
Principal
Value
----------
<S> <C> <C>
SHORT-TERM OBLIGATIONS 0.31%
General Electric Corp. Master Note Agreement....... $4,000 4,000
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $4,000)...... 4,000
------------
TOTAL INVESTMENTS
(Cost $1,061,797*)........ 100.35% 1,281,263
Other assets, less liabilities.... (0.35) (4,472)
------- ------------
TOTAL NET ASSETS............... 100.00% $1,276,791
======= ============
</TABLE>
__________
* Aggregate cost for Federal income tax purposes.
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EARLY LIFE CYCLE PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
----------- -----------
<S> <C> <C>
COMMON STOCK 98.97%
Aerospace 2.30%
BE Aerospace, Inc.@..................................... 3,000 $26,625
-----------
Automotive Services & Supplies 3.74%
Exide Corp.............................................. 500 21,500
Standard Products Co.................................... 1,000 21,750
-----------
43,250
-----------
Beverage, Food, Soap & Tobacco 1.66%
Goodmark Foods, Inc..................................... 1,200 19,200
-----------
Broadcast - Radio & TV 4.55%
Comcast Corp., Special Class A.......................... 1,400 25,987
Westcott Communications, Inc.@.......................... 1,500 26,625
-----------
52,612
-----------
Computer - Software 16.66%
Adobe Systems, Inc...................................... 700 40,600
Informix Corp.@......................................... 1,400 35,525
Intersolv, Inc.@........................................ 1,400 32,550
Phoenix Technologies, Ltd.@............................. 2,000 21,500
Spectrum Holobyte, Inc.@................................ 1,700 24,331
System Software Assc., Inc.............................. 1,000 20,000
Wall Data, Inc.@........................................ 1,200 18,300
-----------
192,806
-----------
Electronics 6.74%
Allen Group, Inc........................................ 900 26,662
Perceptron, Inc.@....................................... 1,200 25,500
Teleflex, Inc........................................... 600 25,800
-----------
77,962
-----------
</TABLE>
__________
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EARLY LIFE CYCLE PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
----------- -----------
<S> <C> <C>
COMMON STOCK - Continued
Entertainment, Leisure & Media 3.34%
Bell Sports Corp.@.................................... 1,600 $18,400
King World Productions, Inc.@......................... 500 20,250
-----------
38,650
-----------
Financial Services 9.13%
Alex. Brown, Inc. .................................... 600 24,900
First American Corp. Tenn. ........................... 800 28,700
National Auto Credit, Inc.@........................... 1,900 25,413
West One Bancorp...................................... 800 26,700
-----------
105,713
-----------
Home Appliance 1.66%
Juno Lighting, Inc. .................................. 1,200 19,200
-----------
Hospital Services & Supplies 2.05%
Veterinary Centers of America@........................ 2,000 23,750
-----------
Insurance 5.60%
Capsure Holdings Corp.@............................... 1,700 23,800
Home State Holdings, Inc.@............................ 1,400 13,825
Integon Corporation of Delaware....................... 1,600 27,200
-----------
64,825
-----------
Machinery 4.65%
Asyst Technologies, Inc.@............................. 700 25,988
Lindsay Manufacturing Co.@............................ 800 27,800
-----------
53,788
-----------
</TABLE>
__________
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EARLY LIFE CYCLE PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
---------- ------------
<S> <C> <C>
COMMON STOCK - Continued
Manufacturing 6.38%
Harmon Industries, Inc............................ 1,200 $20,100
Recovery Engineering, Inc.@....................... 1,900 29,450
Stimsonite Corp.@................................. 2,000 24,250
------------
73,800
------------
Medical Supplies 13.76%
Benson Eyecare Corp.@............................. 2,900 29,362
Coastal Healthcare Group, Inc.@................... 900 11,588
I-Stat Corp.@..................................... 1,200 43,800
Physician Reliance Network, Inc.@................. 1,100 21,450
Sunrise Med, Inc.@................................ 700 21,787
Thermedics, Inc.@................................. 1,600 31,200
------------
159,187
------------
Metal & Mining 2.19%
TriMas Corp....................................... 1,100 25,300
------------
Oil - Production 1.64%
Snyder Oil Corp................................... 1,500 18,938
------------
Pharmaceuticals 4.13%
Genzyme Corp. General Division@................... 700 28,000
Ligand Pharmaceuticals-Class B@................... 2,400 19,800
------------
47,800
------------
Steel & Iron 1.69%
Steel of West Virginia, Inc.@..................... 1,700 19,550
------------
</TABLE>
__________
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
EARLY LIFE CYCLE PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
----------- ------------
<S> <C> <C>
COMMON STOCK - Continued
Telecommunications Equipment 1.94%
Metricom, Inc.@...................................... 1,500 $22,500
------------
Transportation 5.16%
Air Express International............................ 1,000 23,500
Skywest, Inc......................................... 1,600 36,200
------------
59,700
------------
TOTAL COMMON STOCKS (Cost $1,016,221)............. 1,145,156
------------
Principal
Value
-----------
SHORT-TERM OBLIGATIONS 2.94%
Associate Corp. Master Note Agreement................ $8,000 8,000
General Electric Co. Master Note Agreement........... 26,000 26,000
------------
34,000
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $34,000).... 34,000
------------
TOTAL INVESTMENTS
(Cost $1,050,221*)....... 101.91% 1,179,156
Other assets, less liabilities... (1.91) (22,108)
------- ------------
TOTAL NET ASSETS.............. 100.00% $1,157,048
======= ============
</TABLE>
__________
* Aggregate cost for Federal income tax purposes.
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENT-(Unaudited)
INTERMEDIATE-TERM MANAGED INCOME PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Market
Principal Value
Value (Note 1)
---------- --------------
<S> <C> <C>
CORPORATE BONDS 16.11%
Abbot Labs Note, 5.600%, due 10/01/03......................... $50,000 $47,042
Bank Of New York, Inc., 7.625%, due 07/15/02.................. 50,000 52,217
Ford Motor Credit, 7.750%, due 03/15/05....................... 50,000 52,694
J.C. Penney, Inc., 6.125%, due 11/15/03....................... 25,000 23,885
------------
TOTAL CORPORATE BONDS (Cost $168,294)...................... 175,838
------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS 78.34%
Federal Home Loan Bond, 7.590%, due 05/20/04.................. 100,000 107,516
FNMA, 7.550%, due 06/10/04.................................... 225,000 231,698
U.S. Treasury Note, 7.250%, due 02/15/98...................... 150,000 154,969
U.S. Treasury Note, 7.500%, due 10/31/99...................... 250,000 264,063
U.S. Treasury Note, 5.750%, due 08/15/03...................... 100,000 97,062
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $810,591)....................................... 855,308
------------
SHORT-TERM OBLIGATIONS 4.41%
Dreyfus Cash Management Fund.................................. 48,189 48,189
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $48,189)................ 48,189
------------
TOTAL INVESTMENTS
(Cost $1,027,074*)...... 98.86% 1,079,335
Other assets, less liabilities..... 1.14 12,419
------- ------------
TOTAL NET ASSETS...... 100.00% $1,091,754
======= ============
</TABLE>
__________
* Aggregate cost for Federal income tax purposes.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
MANAGED INCOME PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Market
Principal Value
Value (Note 1)
----------- ------------
<S> <C> <C>
CORPORATE BONDS 18.56%
Bank Of New York, Inc., 7.625%, due 07/15/02....... $50,000 $52,217
Ford Motor Credit, 7.750%, due 03/15/05............ 50,000 52,695
J.C. Penney, Inc., 6.125%, due 11/05/03............ 50,000 47,769
Northern States Power, 7.125%, due 07/01/25........ 50,000 49,534
------------
TOTAL CORPORATE BONDS (Cost $197,398)........... 202,215
------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS 75.41%
FNMA, 8.500%, due 02/01/05......................... 100,000 108,582
GNMA, Pool #371224, 8.000%, due 01/15/24........... 498,844 510,222
U.S. Treasury Note, 5.750%, due 08/15/95........... 100,000 97,062
U.S. Treasury Note, 7.500%, due 10/31/99........... 100,000 105,625
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $790,087)............................ 821,491
------------
SHORT-TERM OBLIGATIONS 9.70%
Dreyfus Treasury Cash Management Fund.............. 43,277 43,277
Fidelity Cash Port Money Market Fund............... 12,322 12,322
General Electric Master Note Agreement............. 50,000 50,000
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $105,599).... 105,599
------------
TOTAL INVESTMENTS
(Cost $1,093,084*)........ 103.67% 1,129,305
Other assets, less liabilities... (3.67) (39,971)
------- ------------
TOTAL NET ASSETS.............. 100.00% $1,089,334
======= ============
</TABLE>
__________
* Aggregate cost for Federal income tax purposes.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
INTERNATIONAL EQUITY PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
---------- ------------
<S> <C> <C>
COMMON STOCK 96.05%
Aerospace - Defense 1.71%
Mitsubishi Heavy Ind., Ltd....................... 6,000 $40,707
------------
Auto, Trucks & Parts 1.48%
Fiat SPA......................................... 10,000 35,247
------------
Banking 9.01%
Australia & New Zealand Bank Group............... 13,000 46,077
Corporacion Bancaria de Espana, SA............... 1,200 44,347
Development Bank of Singapore.................... 5,000 56,887
Sakura Bank, Ltd................................. 3,000 31,272
Sumitomo Trust and Banking....................... 3,000 36,396
------------
214,979
------------
Broadcast Media - Cable 1.79%
Tokyo Broadcasting System........................ 3,000 42,756
------------
Building Materials 2.01%
Lafarge-Coppee................................... 615 47,855
------------
Chemicals - Plastics 5.53%
Akzo Nobel NV.................................... 400 47,778
Asahi Chemical Inds.............................. 6,000 39,364
Bayer, AG........................................ 180 44,698
------------
131,840
------------
Electrical Equipment 1.67%
Hitachi.......................................... 4,000 39,812
------------
Electronics 3.80%
General Electric, PLC............................ 9,000 43,962
Matsushita Electric Inds......................... 3,000 46,643
------------
90,605
------------
</TABLE>
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
INTERNATIONAL EQUITY PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
------------ ------------
<S> <C> <C>
COMMON STOCK - Continued
Engineering & Construction 3.37%
Kajima Corporation.......................................... 4,000 $39,670
Marubeni Corporation........................................ 8,000 40,613
------------
80,283
------------
Financial Services 3.41%
Credit Local de France...................................... 500 46,416
Nomura Securities Corporation, Ltd.......................... 2,000 34,864
------------
81,280
------------
Food Processing 1.96%
Nestle, SA.................................................. 45 46,832
------------
Forest Products & Paper 2.60%
Honshu Paper Co., Ltd....................................... 6,000 35,124
Stora Kopparberg A-F........................................ 2,000 26,780
------------
61,904
------------
Insurance 1.79%
Prudential Corporation, Ltd................................. 8,000 42,641
------------
Investment Companies 3.59%
Genesis Chile Fund, Ltd..................................... 1,400 51,100
Schroder Korea Investment Trust Fund@....................... 3,000 34,500
------------
85,600
------------
Manufacturing - Diversified 5.94%
Alusuisse-Lonsa Holdings AG................................. 80 50,135
BTR, PLC.................................................... 9,000 45,752
Mannesmann AG............................................... 150 45,788
------------
141,675
------------
</TABLE>
__________
@ Non-income producing security.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
INTERNATIONAL EQUITY PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
---------- ------------
<S> <C> <C>
COMMON STOCK - Continued
Mining & Metals 3.33%
NKK Corporation................................... 16,000 $37,503
Preussag AG....................................... 140 41,876
------------
79,379
------------
Oil & Gas - Integrated 3.83%
Shell Transport and Tranding Co................... 4,000 47,796
Total, SA, "B" Shares............................. 725 43,672
------------
91,468
------------
Pharmaceuticals 4.29%
Astra AB, "A" Shares.............................. 1,650 50,871
Roche Holdings Genusscheine, NPV.................. 8 51,523
------------
102,394
------------
Publishing & Printing 3.21%
Dairy Farm International Holdings, Ltd............ 34,000 29,240
VNU-Verenigde Nederlandse Uitgevbedre............. 395 47,257
------------
76,497
------------
Real Estate 6.34%
Hutchison Whampoa, Ltd............................ 12,000 58,003
Land Securities PLC............................... 5,000 48,369
Mitsubishi Estate Co., Ltd........................ 4,000 44,994
------------
151,366
------------
Retail Stores 3.02%
Isetan Company.................................... 2,000 27,091
Marks & Spencer, PLC.............................. 7,000 45,052
------------
72,143
------------
</TABLE>
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
INTERNATIONAL EQUITY PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Number Market
of Value
Shares (Note 1)
---------- ------------
<S> <C> <C>
COMMON STOCK - Continued
Telecommunications 14.40%
British Telecommunications, PLC.................. 7,000 $43,659
DDI Corporation.................................. 5 40,047
Koninklijke PTT Nederland NV..................... 1,260 45,264
Telecom Argentina, ADR........................... 1,100 50,050
Telecom Italia, SPA, (Societa Italia Tel)........ 15,500 41,993
Telecommunications Brasileiras, SA, ADR.......... 1,600 54,618
Telefonica De Espana, SA......................... 3,500 45,090
Telekom Malaysia, Bhd............................ 3,000 22,766
------------
343,487
------------
Transportation 3.02%
Mayne Nickliss, Ltd.............................. 8,000 32,835
Nippon Yusen..................................... 7,000 39,164
------------
71,999
------------
Utilities 4.95%
Cie Generale Des Eaux............................ 455 50,686
Tenaga Nasional Berhad........................... 5,000 20,407
Veba AG.......................................... 120 47,077
------------
118,170
------------
TOTAL COMMON STOCK (Cost $2,195,033).......... 2,290,919
------------
</TABLE>
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
INTERNATIONAL EQUITY PORTFOLIO-(Continued)
JUNE 30, 1995
<TABLE>
<CAPTION>
Market
Principal Value
Value (Note 1)
----------- ------------
<S> <C> <C>
SHORT-TERM OBLIGATIONS 3.35%
U.S. Treasury Bill, 6.24%, due 07/09/95................... $80,000 $79,943
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $79,943)............ $79,943
------------
TOTAL INVESTMENTS
(Cost $2,274,976*)....... 99.40% 2,370,862
Other assets, less liabilities... 0.60 14,384
------- ------------
TOTAL NET ASSETS.............. 100.00% $2,385,246
======= ============
</TABLE>
__________
* Aggregate cost for Federal income tax purposes.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC,
SCHEDULE OF INVESTMENTS-(Unaudited)
INTERNATIONAL BOND PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Market
Principal Value
Value (Note 1)
----------- ------------
<S> <C> <C>
FOREIGN DEBT OBLIGATIONS 74.75%
Australia Commonwealth Bond, 12.000%, 11/15/01................ 250,000 $204,074
Bayerische Hypo Bank, 6.000%, 10/28/99........................ 100,000 144,590
Bundes Deutschland, 6.250%, 01/04/24.......................... 200,000 122,390
Bundesrepublik, 6.750%, 07/15/04.............................. 150,000 106,434
Depfa Finance, 7.125%, 11/11/03............................... 50,000 72,295
Dresdner Bank, 6.000%, 12/07/99............................... 100,000 144,391
European Investment Bank, 6.000%, 11/26/04.................... 100,000 130,668
France O.A.T., 5.000%, 03/16/99............................... 100,000 123,255
France O.A.T., 8.250%, 02/24/04............................... 500,000 107,654
France O.A.T., 8.500%, 03/15/02............................... 100,000 137,716
France O.A.T., 8.500%, 04/25/23............................... 500,000 106,715
France O.A.T., 8.500%, 10/25/08............................... 500,000 108,778
France O.A.T., 9.500%, 04/25/00............................... 100,000 143,201
Kingdom of Denmark, 7.000%, 12/15/04.......................... 1,000,000 166,932
Kobe City, 9.500%, 10/20/04................................... 100,000 167,462
Metropolis of Tokyo, 7.875%, 10/13/04......................... 150,000 162,750
Republic of Italy, 9.500%, 12/01/99........................... 250,000,000 139,279
Spanish Government Bond, 8.000%, 05/30/04..................... 25,000,000 165,683
------------
TOTAL FOREIGN DEBT OBLIGATIONS
(Cost $2,351,016)................................... 2,454,267
------------
SHORT-TERM OBLIGATIONS 23.13%
U.S. Treasury Bill, 6.420%, 07/06/95.......................... 760,000 759,462
------------
TOTAL SHORT-TERM OBLIGATIONS (Cost $759,462)............. 759,462
------------
TOTAL INVESTMENTS
(Cost $3,110,478*)...... 97.88% 3,213,729
Other assets, less liabilities.... 2.12 69,472
------- ------------
TOTAL NET ASSETS............. 100.00% $3,283,201
======= ============
</TABLE>
__________
*Aggregate cost for Federal income tax purposes.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
SCHEDULE OF INVESTMENTS-(Unaudited)
MONEY PORTFOLIO
JUNE 30, 1995
<TABLE>
<CAPTION>
Market
Principal Value
Value (Note 1)
------------ ------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS 82.76%
Federal Farm Credit Bank, 5.900%, due 07/05/95.... $200,000 $199,869
Federal Home Loan Bank, 5.880%, due 07/06/95...... 200,000 199,837
FNMA, 5.860%, due 07/10/95........................ 200,000 199,707
U.S. Treasury Bill, 5.330%, due 08/10/95.......... 250,000 248,519
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost $847,932)........................... 847,932
------------
COMMERCIAL PAPER 14.64%
Prudential Funding, 5.980%, due 07/10/95.......... 50,000 50,000
American Express, 5.880%, due 07/31/95 ........... 50,000 50,000
Ford Motor Credit, 5.930%, due 07/31/95........... 50,000 50,000
------------
TOTAL COMMERCIAL PAPER (Cost $150,000)......... 150,000
------------
REGISTERED INVESTMENT COMPANY 2.76%
Dreyfus Treasury Prime Cash Management Fund....... 28,297 28,297
------------
TOTAL REGISTERED INVESTMENT COMPANY
(Cost $28,297)............................ 28,297
------------
TOTAL INVESTMENTS
(Cost $1,026,229*).......... 100.16% 1,026,229
Other assets, less liabilities..... (0.16) (1,647)
------- ------------
TOTAL NET ASSETS................ 100.00% $1,024,582
======= ============
</TABLE>
__________
* Aggregate cost for Federal income tax purposes.
See notes to financial statements.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period
from January 17, 1995 (Commencement of Operations) to June 30, 1995
<TABLE>
<CAPTION>
Intermediate-
Early Term
Life Managed Managed International International
Equity Cycle Income Income Equity Bond Money
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio(A)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 1.00
Income From Investment
Operations
Net investment income........ 0.31 0.30 0.12 0.30 0.02
Net gains and losses
on securities (both
realized and unrealized).. 2.44 1.31 0.61 0.59 0.42 0.64 0.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total from investment
operations.................. 2.44 1.31 0.92 0.89 0.54 0.94 0.02
Distributions to
Shareholders
Dividends from net
investment income......... (0.02)
Net asset value, end of period.. $ 12.44 $ 11.31 $ 10.92 $ 10.89 $ 10.54 $ 10.94 $ 1.00
========== ========== ========== ========== ========== ========== ==========
Total Return (B)................ 24.38% 13.09% 9.17% 8.93% 5.37% 9.44% 2.47%
Ratios to Average Net Assets:
(Annualized)
Expenses..................... 2.91% 2.96% 2.45% 3.06% 3.08% 2.99% 2.51%
Net investment income........ 0.04% 0.04% 6.54% 6.38% 2.54% 6.38% 5.45%
Portfolio Turnover Rate......... 9.21% 15.18% 121.29% 261.66% 4.87% 80.07% N/A
Net Assets, At End of Period.... $1,276,791 $1,157,048 $1,091,754 $1,089,334 $2,385,246 $3,283,201 $1,024,582
</TABLE>
(A) The per share amounts which are shown have been computed based on the
average number of shares outstanding during the period.
(B) Total return assumes reinvestment of all dividends during the period and
does not reflect deduction of account fees and charges.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
STATEMENTS OF OPERATIONS-(UNAUDITED)
FOR THE PERIOD ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
INTERMEDIATE
EARLY TERM
LIFE MANAGED MANAGED INTERNATIONAL INTERNATIONAL
EQUITY CYCLE INCOME INCOME EQUITY BOND MONEY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest Income..................... $ 2,579 $ 2,283 $ 34,087 $ 34,955 $ 8,355 $ 110,727 $ 27,170
Dividend Income..................... 3,283 2,682 - - 36,961 - -
Less: Foreign taxes withheld........ - - - - (3,046) - -
--------- --------- --------- --------- --------- --------- ---------
TOTAL INCOME...................... 5,862 4,965 34,087 34,955 42,270 110,727 27,170
--------- --------- --------- --------- --------- --------- ---------
EXPENSES:
Investment advisory fees (Note 2)... 3,689 2,887 1,663 3,527 10,457 12,788 1,139
Administration fees (Note 2)........ 984 962 713 706 3,137 4,278 456
Audit fees.......................... 2,984 2,947 2,887 2,893 6,403 8,712 2,841
Legal fees.......................... 1,518 1,490 1,458 1,461 3,242 4,406 1,426
Security valuation.................. 1,461 1,434 1,404 1,407 3,122 4,243 1,373
Custodian fees (Note 2)............. 1,026 1,877 747 1,781 903 1,511 1,623
Shareholder reports................. 1,014 1,002 981 984 2,176 2,961 967
Directors' fees and expenses........ 912 894 875 876 1,946 2,644 854
Amortization of deferred organization
costs (Note 5)..................... 683 683 683 683 683 683 683
Miscellaneous expenses.............. 81 80 78 78 174 236 77
Fees waived by Advisor (Note 2)..... (3,689) (2,887) (1,663) (3,527) (10,457) (12,788) (1,139)
Expenses reimbursed by Advisor
(Note 2)........................... (5,006) (6,606) (6,446) (5,932) (6,101) (9,641) (7,976)
--------- --------- --------- --------- --------- --------- ---------
TOTAL EXPENSES.................... 5,657 4,763 3,380 4,937 15,685 20,033 2,324
--------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME................ 205 202 30,707 30,018 26,585 90,694 24,846
--------- --------- --------- --------- --------- --------- ---------
REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS
(NOTE 1):
Net realized gain/(loss):
Security transactions.............. 29,644 4,179 8,776 23,085 (6,958) 60,156 -
Foreign currency transactions...... - - - - 5,739 27,777 -
--------- --------- --------- --------- --------- --------- ---------
Total net realized gain/(loss)....... 29,644 4,179 8,776 23,085 (1,219) 87,933 0
Change in unrealized
appreciation on investments
and foreign currency
translations........................ 219,466 128,935 52,261 36,221 96,136 104,564 -
--------- --------- --------- --------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS...................... 249,110 133,114 61,037 59,306 94,917 192,497 0
--------- --------- --------- --------- --------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........... $ 249,315 $ 133,316 $ 91,744 $ 89,324 $ 121,502 $ 283,191 $ 24,846
========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST MASTER VARIABLE SERIES, INC.
STATEMENT OF CHANGES IN NET ASSETS-(UNAUDITED)
FOR THE PERIOD FROM JANUARY 17, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH
JUNE 30, 1995
<TABLE>
<CAPTION>
INTERMEDIATE
EARLY TERM
LIFE MANAGED MANAGED INTERNATIONAL INTERNATIONAL
EQUITY CYCLE INCOME INCOME EQUITY BOND MONEY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income.................... $ 205 $ 202 $ 30,707 $ 30,018 $ 26,585 $ 90,694 $ 24,846
Net realized gain/(loss) on investments.. 29,644 4,179 8,776 23,085 (1,219) 87,933 -
Change in unrealized appreciation/
on investments and foreign
currency translations during
the year................................ 219,466 128,935 52,261 36,221 96,136 104,564 -
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net increase in net assets
resulting from operations............... 249,315 133,316 91,744 89,324 121,502 283,191 24,846
Distributions to shareholders:
From net investment income.............. - - - - - - (24,846)
Increase in net assets from fund
share transactions (Note 4)............. 1,027,466 1,023,722 1,000,000 1,000,000 2,263,734 3,000,000 1,024,572
--------- --------- --------- --------- --------- --------- ---------
Net increase in net assets............... 1,276,781 1,157,038 1,091,744 1,089,324 2,385,236 3,283,191 1,024,572
NET ASSETS:
Beginning of Period...................... 10 10 10 10 10 10 10
---------- ---------- ---------- ---------- ---------- ---------- ----------
End of Period (1)........................ $1,276,791 $1,157,048 $1,091,754 $1,089,334 $2,385,246 $3,283,201 $1,024,582
========== ========== ========== ========== ========== ========== ==========
undistributed net investment income...... $ 205 $ 202 $ 30,707 $ 30,018 $ 26,585 $ 90,694 $ 0
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) Including undistributed net investment income.
See Notes to Financial Statements
1
<PAGE>
UST MASTER VARIABLE SERIES, INC.
STATEMENT OF ASSETS AND LIABILITIES-(UNAUDITED)
AS OF JUNE 30, 1995
<TABLE>
<CAPTION>
INTERMEDIATE
EARLY TERM
LIFE MANAGED MANAGED INTERNATIONAL INTERNATIONAL
EQUITY CYCLE INCOME INCOME EQUITY BOND MONEY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at cost-see
accompanying portfolios.. $ 1,061,797 $ 1,050,221 $ 1,027,074 $ 1,093,084 $ 2,274,976 $ 3,110,478 $ 1,026,229
=========== =========== =========== =========== =========== =========== ===========
Investments, at value
(Note 1).................. $ 1,281,263 $ 1,179,156 $ 1,079,335 $ 1,129,305 $ 2,370,862 $ 3,213,729 $ 1,026,229
Cash....................... 162 528 25 55,622 8,667 4,863 -
Foreign Currency (Cost $19) - - - - 20 - -
Accrued investment income.. 346 977 15,121 13,880 15,652 82,406 167
Receivable for investments
sold...................... - - 25,729 55,521 36,251 - -
Receivable for foreign
forward contracts......... - - - - 15 - -
Deferred organization costs
(Note 5).................. 6,872 6,872 6,872 6,872 6,872 6,872 6,872
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS............. 1,288,643 1,187,533 1,127,082 1,261,200 2,438,339 3,307,870 1,033,268
LIABILITIES:
Due to Chubb Life Insurance
Company of America........ 27 21 - - 12 - -
Payable for dividends
declared.................. - - - - - - 149
Payable for investments
purchased................. - 19,545 25,755 160,736 32,060 - -
Accrued expenses........... 11,825 10,919 9,573 11,130 21,021 24,669 8,537
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES........ 11,852 30,485 35,328 171,866 53,093 24,669 8,686
----------- ----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS.................. $ 1,276,791 $ 1,157,048 $ 1,091,754 $ 1,089,334 $ 2,385,246 $ 3,283,201 $ 1,024,582
=========== =========== =========== =========== =========== =========== ===========
NET ASSETS consist of:
Undistributed net
investment income......... $ 205 $ 202 $ 30,707 $ 30,018 $ 26,585 $ 90,694 -
Accumulated net realized
gain/(loss) on investments 29,644 4,179 8,776 23,085 (1,219) 87,933 -
Unrealized appreciation on
investments and foreign
currency transactions..... 219,466 128,935 52,261 36,221 96,136 104,564 -
Par Value (Note 4)......... 103 102 100 100 226 300 $ 1,025
Paid-in capital in excess
of par value.............. 1,027,373 1,023,630 999,910 999,910 2,263,518 2,999,710 1,023,557
----------- ----------- ----------- ----------- ----------- ----------- -----------
TOTAL NET ASSETS......... $ 1,276,791 $ 1,157,048 $ 1,091,754 $ 1,089,334 $ 2,385,246 $ 3,283,201 $ 1,024,582
=========== =========== =========== =========== =========== =========== ===========
Shares in Common Stock
Outstanding............... 102,656 102,312 100,001 100,001 226,369 300,001 1,024,582
=========== =========== =========== =========== =========== =========== ===========
NET ASSET VALUE PER SHARE... $ 12.44 $ 11.31 $ 10.92 $ 10.89 $ 10.54 $ 10.94 $ 1.00
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST MASTER VARIABLE SERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
UST Master Variable Series, Inc. ("Master Variable Series") was incorporated
under the laws of the State of Maryland on April 29, 1994 and is registered
under the Investment Company Act of 1940 (the "Act"), as amended, as a open-end
management investment company. Master Variable Series was established to provide
a vehicle for the investment of assets of various separate accounts of Chubb
Life Insurance Company of America ("Chubb Life") and its affiliated life
insurance companies supporting variable annuity contracts. The Fund currently
has seven investment series, each issuing a separate series of shares (the
"Portfolios"): Equity Portfolio, Early Life Cycle Portfolio, Intermediate-Term
Managed Income Portfolio, Managed Income Portfolio, International Equity
Portfolio, International Bond Portfolio and Money Portfolio. Certain of the
Portfolios may not be available in all states. Shares of the Portfolios are not
offered to the general public but solely to separate accounts of Chubb Life and
its affiliated life insurance companies.
It is Master Variable Series' policy, to the extent possible, to maintain a
continuous net asset value per share of $1.00 with respect to the Money
Portfolio. The Money Portfolio has adopted certain investment portfolio,
valuation and dividend distribution policies to enable it to do so. However,
there can be no assurance that the net asset value per share of the Money
Portfolio will not vary. The net asset values per share of the other Portfolios
will fluctuate as the market values of their portfolio securities change in
response to market factors.
The following is a summary of significant accounting policies for the Equity
Portfolio, the Early Life Cycle Portfolio, the Intermediate-Term Managed Income
Portfolio, the Managed Income Portfolio, the International Equity Portfolio, the
International Bond Portfolio and the Money Portfolio.
(a) Portfolio valuation:
Money Portfolio: Securities are valued at amortized cost. Amortized
cost valuation involves valuing an instrument at its cost initially and,
thereafter, assuming a constant amortization to maturity of any discount or
premium.
Equity Portfolio, Early Life Cycle Portfolio, Intermediate-Term
Managed Income Portfolio, Managed Income Portfolio, International Equity
Portfolio and International Bond Portfolio: Investments in securities that are
traded on a domestic stock exchange are valued at the last sale price on the
exchange on which securities are primarily traded or at the last sale price on
the national securities market. Securities traded over-the-counter are valued
each business day on the basis of closing over-the-counter bid prices.
Securities for which there were no transactions are valued at the average of the
most recent bid and asked prices ( as calculated by an independent pricing
service (the "Service") based upon its evaluation of the market for such
securities) when, in the judgement of the Service, quoted bid prices for
securities are readily available and are representative of the bid side of the
market.
Investment securities that are primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed such
value, then a fair value of those securities will be determined by consideration
of other factors under the direction of the Board of Directors. A security which
is traded on more than one exchange is valued at the quotation on the exchange
determined to be the primary market on which the security is traded. All other
foreign securities are valued at the last current bid quotation if market
quotations are available, or at fair value as determined in accordance with
policies established by the Board of Directors. Investment valuations, other
assets and liabilities initially expressed in foreign currencies are converted
each business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments and income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates are recorded for financial statement purposes as net realized gains and
losses on investments. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Short-term debt instruments with remaining maturities of 60 days or
less are valued at amortized cost, which approximates market value. Securities
and other assets for which market quotations are not readily available are
62
<PAGE>
valued at fair value pursuant to guidelines adopted by Master Variable Series'
Board of Directors.
Forward foreign currency exchange contracts: The International Equity
and International Board Portfolios' participation in forward currency exchange
contracts will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging involves the purchase or sale of
foreign currency with respect to specific receivables or payables of the
Portfolio generally arising in connection with the purchase or sale of its
portfolio securities. Risk may arise upon entering into these contracts from
the potential inability of counterparties to meet the terms of their contracts
and is generally limited to the amount of unrealized gain on the contracts, if
any, at the date of default. Risk may also arise from unanticipated movements in
the value of a foreign currency relative to the U.S. dollar. Contracts are
marked-to-market daily and the change in market value is recorded as unrealized
appreciation or depreciation. Realized gains or losses arising from such
transactions are included in net realized gains or losses from foreign currency
transactions.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized
gains and losses on investments sold are recorded on the basis of identified
cost. Interest income, including where applicable, amortization of discount on
investments, is recorded on the accrual basis. Dividend income is recorded on
the ex-dividend date, except for certain dividends from foreign securities,
which are recorded as soon as the Portfolios are informed of the dividend.
(c) Repurchase agreements:
Master Variable Series may purchase portfolio securities from
financial institutions deemed to be creditworthy by the investment adviser
subject to the seller's agreement to repurchase and Master Variable Series'
agreement to resell such securities at mutually agreed upon prices. Securities
purchased subject to such repurchase agreements are deposited with Master
Variable Series' custodian or sub-custodian or are maintained in the Federal
Reserve/Treasury book-entry system and must have, at all times, an aggregate
market value greater than 101% of the repurchase price (including accrued
interest).
If the value of the underlying security, including accrued interest,
falls below the value of 101% of the repurchase price plus accrued interest,
Master Variable Series will require the seller to deposit the additional
collateral by the next business day. Default or bankruptcy of the seller may,
however, expose the applicable Portfolio of Master Variable Series to possible
delay in connection with the disposition of the underlying securities of loss to
the extent that proceeds from a sale of the underlying securities were less than
the repurchase price under the agreement.
(d) Dividends and distributions to shareholders:
Dividends from net investment income are declared and paid daily for
the Money Portfolio and declared and paid annually for the Equity Portfolio,
the Early Life Cycle Portfolio, the Intermediate-Term Managed Income Portfolio,
the Managed Income Portfolio, the International Equity Portfolio and the
International Bond Portfolio. Net realized capital gains, unless offset by any
available capital loss carryforward, are distributed to shareholders at least
annually. Dividends and distributions are recorded on the ex-dividend date.
Dividends and distributions are determined in accordance with Federal
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
foreign currency transactions, passive foreign investment companies and deferral
of losses on wash sales and post-October losses.
In order to avoid a Federal excise tax, each Portfolio is required
to distribute certain minimum amounts of net realized capital gain and net
investment income for the respective periods ending October 31 and December 31
in each calendar year.
(e) Federal taxes:
It is the policy of Master Variable Series that each Portfolio
continue to qualify as a regulated investment company, if such qualification is
in the best interest of the shareholders, by complying with the requirements of
the
63
<PAGE>
Internal Revenue Code applicable to regulated investment companies, and by
distributing substantially all of its taxable earnings to its shareholders.
At June 30, 1995, aggregate gross unrealized appreciation for all
securities for which there was an excess of value over tax cost and aggregate
gross unrealized depreciation for all securities for which there was an excess
of tax cost over value were as follows:
<TABLE>
<CAPTION>
Net
Tax Basis Tax Basis Unrealized
Unrealized Unrealized Appreciation
Appreciation (Depreciation) (Depreciation)
------------ -------------- --------------
<S> <C> <C> <C>
Equity Portfolio.............. $255,271 $35,805 $219,466
Early Life Cycle Portfolio.... 184,577 55,642 128,935
Intermediate-Term Managed
Income Portfolio............. 52,596 335 52,261
Managed Income Portfolio...... 36,891 670 36,221
International Equity Portfolio 163,484 67,348 96,136
International Bond Portfolio.. 112,191 7,627 104,564
</TABLE>
(f) Expense allocation:
Expenses directly attributable to a portfolio are charged to that
Portfolio. Other expenses are allocated to the respective Portfolios based on
average net assets.
2. Investment Advisory Fee, Administration Fee and Related Party Transactions
United States Trust Company of New York ("U.S. Trust") serves as the
investment adviser to Master Variable Series. Foreign and Colonial Asset
Management ("FACAM") serves as the sub-adviser to International Equity Portfolio
and International Bond Portfolio. For services provided and expenses assumed
pursuant to the Investment Advisory Agreement, the Investment Adviser is
entitled to be paid a fee, computed daily and paid monthly, at the annual rate
of: .75% of the average daily net assets of the Equity Portfolio; .60% of the
average daily net assets of the Early Life Cycle Portfolio; .35% of the average
daily net assets of the Intermediate-Term Managed Income Portfolio; .75% of the
average daily net assets of the Managed Income Portfolio; 1.00% of the average
daily net assets of the International Equity Portfolio; .90% of the average
daily net assets of the International Bond Portfolio; and .25% of the average
daily net assets of the Money Portfolio. FACAM is entitled to receive from U.S.
Trust (and not from the International Equity Portfolio or International Bond
Portfolio) an annual fee, computed and paid quarterly, at the annual rate of
.70% of the average daily net assets of the International Equity Portfolio and
International Bond Portfolio. From time to time, the Investment Adviser or
Sub-Adviser may waive (either voluntarily or pursuant to applicable state
expense limitations) all or a portion of the advisory fees payable to it by a
Portfolio and may also reimburse the Portfolio for a portion of other expenses,
which waiver or reimbursement may be terminated at any time.
Chubb Investment Advisory Corporation serves as the Administrator for
the Master Variable Series and provides the Portfolios with general
administrative and operational assistance, including accounting services. For
the services provided to the portfolios of Master Variable Series, the
Administrator is entitled to annual fees, computed daily and paid monthly, based
on the average daily net assets of each Portfolio as follows:
<TABLE>
<CAPTION>
1st $75 Next $75 Over $150
Million Million Million
-------- --------- ----------
<S> <C> <C> <C>
Equity Portfolio............................ .20% .175% .15%
Early Life Cycle Portfolio.................. .20% .175% .15%
Intermediate-Term Managed Income Portfolio.. .15% .125% .10%
Managed Income Portfolio.................... .15% .125% .10%
International Equity Portfolio.............. .30% .275% .25%
International Bond Portfolio................ .30% .275% .25%
</TABLE>
64
<PAGE>
<TABLE>
<S> <C> <C> <C>
Money Market Portfolio .10% .075% .05%
</TABLE>
Chubb Investment Advisory Corporation also serves as transfer and
dividend disbursing agent for Master Variable Series.
The portfolios bear the expenses incurred in their operations,
including annual fees paid to the Administrator as described below, and pay for
brokerage fees and commissions in connection with the purchase of portfolio
securities. Until further notice, the Investment Adviser intends to voluntarily
waive investment advisory fees , and, if necessary, reimburse Portfolio expenses
(including Administrator fees), to the extent necessary for each of the
Portfolios to maintain annual expense ratios of not more than 1.15% for the
Equity Portfolio; 0.99% for the Early Life Cycle Portfolio; 0.72% for the
Intermediate-Term Managed Portfolio; 1.05% for the Managed Income Portfolio;
1.50% for the International Equity Portfolio; 1.40% for the International Bond
Portfolio; and 0.51% for the Money Portfolio.
For the period ended June 30, 1995, U.S. Trust has waived and
reimbursed expenses as set forth below:
<TABLE>
<S> <C>
Equity Portfolio............................ $ 8,695
Early Life Cycle Portfolio.................. 9,493
Intermediate-Term Managed Income Portfolio.. 8,109
Managed Income Portfolio.................... 9,459
International Equity Portfolio.............. 16,558
International Bond Portfolio................ 22,429
Money Portfolio............................. 9,115
</TABLE>
Each Director of Master Variable Series receives an annual fee of
$3,000, plus a meeting fee of $500 for each meeting attended, and is reimbursed
for expenses incurred for attending meetings. The Chairman receives an
additional annual fee of $2,000. Officers and directors, deemed to be affiliated
or "interested parties" under the Act of the Master Variable Series and who are
also affiliated with the administrator receive no compensation from the Master
Variable Series for their services.
3. Purchase and Sales of Securities
Purchases and sales of securities, excluding short-term investments,
for the Portfolios aggregated:
<TABLE>
<CAPTION>
Purchases Sales
---------- ----------
<S> <C> <C>
Equity Portfolio........................... $1,109,961 $ 81,847
Early Life Cycle Portfolio................. 1,120,678 108,635
Intermediate-Term Managed Income Portfolio. 217,621 49,512
Managed Income Portfolio................... 197,377 0
International Equity Portfolio............. 2,475,378 97,781
International Bond Portfolio............... 3,806,729 1,560,503
</TABLE>
4. Common Stock:
Authorized capital for each Master Variable Series Portfolio is 100,000,000
shares. Each share has a par value of $.001 and represents an equal
proportionate interest in the particular Portfolio with other shares of the same
Portfolio, and is entitled to such dividends and distributions of taxable
earnings on the assets belonging to such Portfolio as are declared at the
discretion of the Master Variable Series' Board of Directors.
65
<PAGE>
<TABLE>
<CAPTION>
Equity Portfolio
--------------------------
For the period January 17,
through June 30, 1995
--------------------------
Shares Dollars
-------- ----------
<S> <C> <C>
Sold........................... 102,663 $1,027,550
Issued as reinvestment of
dividends..................... - -
Redeemed....................... (8) (84)
------- ----------
Net Increase................... 102,655 $1,027,466
------- ----------
</TABLE>
<TABLE>
<CAPTION>
Early Life Cycle Portfolio
--------------------------
For the period January 17.
through June 30, 1995
--------------------------
Shares Dollars
-------- ----------
<S> <C> <C>
Sold........................... 102,318 $1,023,800
Issued as reinvestment of
dividends..................... - -
Redeemed....................... (7) (78)
------- ----------
Net Increase................... 102,311 $1,023,722
------- ----------
</TABLE>
<TABLE>
<CAPTION>
Intermediate-Term
Managed Income Portfolio
--------------------------
For the period January 17,
through June 30, 1995
--------------------------
Shares Dollars
-------- ----------
<S> <C> <C>
Sold........................... 100,000 $1,000,000
Issued as reinvestment of
dividends..................... - -
Redeemed....................... - -
------- ----------
Net Increase................... 100,000 $1,000,000
------- ----------
</TABLE>
<TABLE>
<CAPTION>
Managed Income Portfolio
--------------------------
For the period January 17,
through June 30, 1995
--------------------------
Shares Dollars
-------- ----------
<S> <C> <C>
Sold................................. 100,000 $1,000,000
Issued as reinvestment of dividends.. - -
Redeemed............................. - -
------- ----------
Net Increase......................... 100,000 $1,000,000
------- ----------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
International Equity Portfolio
------------------------------
For the period January 17,
through June 30, 1995
------------------------------
Shares Dollars
-------- ---------
<S> <C> <C>
Sold....................... 226,372 $2,263,775
Issued as reinvestment of
dividends................. - -
Redeemed................... (4) (41)
-------- ----------
Net Increase............... 226,368 $2,263,734
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
International Bond Portfolio
----------------------------
For the period January 17,
through June 30, 1995
----------------------------
Shares Dollars
-------- ----------
<S> <C> <C>
Sold....................... 300,000 $3,000,000
Issued as reinvestment of
dividends................. - -
Redeemed................... - -
-------- ----------
Net Increase............... 300,000 $3,000,000
-------- ----------
</TABLE>
<TABLE>
<CAPTION>
Money Portfolio
----------------------------
For the period January 17,
through June 30, 1995
----------------------------
Shares Dollars
--------- ----------
<S> <C> <C>
Sold....................... 1,049,735 $1,049,726
Issued as reinvestment of
dividends................. 24,846 24,846
Redeemed................... (50,000) (50,000)
--------- ----------
Net Increase............... 1,024,581 $1,024,572
--------- ----------
</TABLE>
5. Organization Costs:
Master Variable Series has borne all costs in connection with the
initial organization of new portfolios, including the fees for registering and
qualifying its shares for distribution under Federal and state securities
regulations. All such costs are being amortized on the straight-line basis over
periods of five years from the dates on which each Portfolio commenced
operations.
67
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes and circumstances
than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by 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 earning
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" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-
A-1
<PAGE>
term promissory 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.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "Duff 1," "Duff 2" and "Duff 3." Duff
& Phelps employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within
the highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"Duff 3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
A-2
<PAGE>
"Duff 4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned
this rating reflect an assurance of timely payment only slightly less in degree
than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this
rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this
rating have characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this
rating have characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial and
economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which is issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-
A-3
<PAGE>
dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates 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."
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which are
currently in default.
A-4
