<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1995
Registration No. 33-79886
811-8554
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------------------------------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 1 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 2 [X]
UST Master Variable Series, Inc.
(Exact Name of Registrant as Specified in Charter
114 West 47th St., New York, New York 10036
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (212) 852-1000
W. Bruce McConnel, III
Drinker Biddle & Reath
1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107-3496
(Name and Address of Agent for Service)
It is proposed that this post-effective amendment will become effective (check
appropriate box)
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (n)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
--------------------------
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2. The Registrant filed a Notice
pursuant to Rule 24f-2 for the fiscal year ended December 31, 1994 on
February 28, 1995.
<PAGE>
UST MASTER VARIABLE SERIES, INC.
FORM N-1A
CROSS REFERENCE SHEET
-------------------------
<TABLE>
<CAPTION>
Part A
Item No. Prospectus Heading
<C> <S> <C>
1. Cover Page Cover Page
2. Synopsis
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and Policies;
Risk Factors; Portfolio Instruments
and Other Investment Information;
Investment Limitations
5. Management of the Fund Management of the Portfolios
6. Capital Stock and Other Securities Description of Capital Stock;
Dividends and Distributions;
Taxes; Miscellaneous
7. Purchase of Securities Being Offered How to Purchase and Redeem Shares;
Pricing of Shares
8. Redemption or Repurchase How to Purchase and Redeem Shares
9. Pending Legal Proceedings Not Applicable
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Part B Heading in Statement
Item No. of Additional Information
<C> <S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Description of Capital Stock
13. Investment Objectives and Policies Investment Objectives and Policies;
Additional Information on Portfolio
Instruments; Additional Investment
Limitations
14. Management of the Registrant Management of the Portfolios
15. Control Persons and Principal Management of the Portfolios
Holders of Securities
16. Investment Advisory and Other Management of the Portfolios;
Services Independent Auditors
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Other Securities Description of Capital Stock
19. Purchase, Redemption, and Pricing of Additional Purchase and Redemption
Securities Being Offered Information; Net Asset Value and Net
Income-Money Portfolio
20. Tax Status Additional Information Concerning
Taxes
21. Underwriters Additional Purchase and Redemption
Information
22. Calculation of Performance Data Performance and Yield Information
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
-ii-
<PAGE>
UST MASTER VARIABLE SERIES, INC.
(the "Company")
Equity Portfolio
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.
<PAGE>
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 10.00
Income from Investment Operations:
Net investment income...................... --
Net Gains or (Losses) on Securities
(both realized and unrealized)............ 2.44
Total from Investment Operations:.......... 2.44
Net Asset Value, End of period.................. $ 12.44
=========
Total Return 24.38%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $1,276,791
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 1.15%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 2.91%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 0.04%
Portfolio Turnover Rate.................... 9.21%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-2-
<PAGE>
EARLY LIFE CYCLE PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 10.00
Income from Investment Operations:
Net investment income...................... --
Net Gains or (Losses) on Securities
(both realized and unrealized)............ 1.31
Total from Investment Operations:.......... 1.31
Net Asset Value, End of period.................. $ 11.31
=========
Total Return.................................... 13.09%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $1,157,048
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 0.99%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 2.96%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 0.04%
Portfolio Turnover Rate.................... 15.18%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-3-
<PAGE>
INTERMEDIATE-TERM MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 10.00
Income from Investment Operations:
Net investment income...................... 0.31
Net Gains or (Losses) on Securities
(both realized and unrealized)............ 0.61
Total from Investment Operations:.......... 0.92
Net Asset Value, End of period.................. $ 10.92
=========
Total Return.................................... 9.17%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $1,091,754
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 0.72%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 2.45%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 6.54%
Portfolio Turnover Rate.................... 121.29%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-4-
<PAGE>
MANAGED INCOME PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 10.00
Income from Investment Operations:
Net investment income...................... 0.30
Net Gains or (Losses) on Securities
(both realized and unrealized)............ 0.59
Total from Investment Operations:.......... 0.89
Net Asset Value, End of period.................. $ 10.89
=========
Total Return.................................... 8.93%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $1,089,334
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 1.05%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 3.06%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 6.38%
Portfolio Turnover Rate.................... 261.66%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-5-
<PAGE>
INTERNATIONAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 10.00
Income from Investment Operations:
Net investment income...................... 0.12
Net Gains or (Losses) on Securities
(both realized and unrealized)............ 0.42
Total from Investment Operations:.......... 0.54
Net Asset Value, End of period.................. $ 10.54
=========
Total Return 5.37%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $2,385,246
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 1.50%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 3.08%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 2.54%
Portfolio Turnover Rate.................... 4.87%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-6-
<PAGE>
INTERNATIONAL BOND PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 10.00
Income from Investment Operations:
Net investment income...................... 0.30
Net Gains or (Losses) on Securities
(both realized and unrealized)............ 0.64
Total from Investment Operations:.......... 0.94
Net Asset Value, End of period.................. $ 10.94
=========
Total Return.................................... 9.44%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $3,283,201
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 1.40%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 2.99%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 6.38%
Portfolio Turnover Rate.................... 80.07%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-7-
<PAGE>
MONEY PORTFOLIO
<TABLE>
<CAPTION>
Period ended
June 30, 1995/(1)/
(unaudited)
<S> <C>
Net Asset Value,
Beginning of period........................ $ 1.00
Income from Investment Operations:
Net investment income...................... 0.02
----------
Total from Investment Operations........... 0.02
----------
Less Distributions:
Dividends from Net Investment Income....... (0.02)
Distributions in Excess of Net
Realized Gain on Investments..............
Total Distributions........................ (0.02)
----------
Net Asset Value, End of period.................. $ 1.00
=========
Total Return 2.47%**
Ratios/Supplemental Data:
Net Assets, End of period.................. $1,024,582
Ratio of Net Operating Expenses to
Average Net Assets/*/..................... 0.51%
Ratio of Gross Operating Expenses to
Average Net Assets/*/..................... 2.51%
Ratio of Net Investment Income to
Average Net Assets/*/..................... 5.45%
</TABLE>
__________________________
* Annualized
** Not Annualized
(1) The Portfolio commenced operations on January 17, 1995.
-8-
<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.
-9-
<PAGE>
UST
A Management Investment Company Master Variable
Series, Inc.
________________________________________________________________________________
114 West 47th Street
New York, New York 10036
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
________________________________________________________________________________
UST Master Variable Series, Inc. ("Master Variable Series") is an
open-end management investment company that is intended to be a funding vehicle
for variable annuity contracts and variable life insurance policies ("variable
contracts") to be offered by the separate accounts of certain life insurance
companies (the "Insurers"). Master Variable Series permits investors to invest
in seven separate portfolios (each, a "Portfolio"; together, the "Portfolios"),
although some portfolios may not be available for investment with respect to
variable contracts offered by certain Insurers. See the prospectus of the
separate account of the Insurer for information as to which portfolios of Master
Variable Series are available through the separate account. All Portfolios
except for the International Bond Portfolio are "diversified" under the
Investment Company Act of 1940, as amended (the "1940 Act").
Each of the Portfolios is advised by United States Trust Company of
New York (the "Investment Adviser" or "U.S. Trust"). The Master Variable Series
offers individual investors access to U.S. Trust's services through investment
in variable contracts issued through separate accounts of the Insurers.
EQUITY PORTFOLIOS
The EQUITY PORTFOLIO seeks long-term capital appreciation by investing
in companies believed by the Investment Adviser to
<PAGE>
represent good long-term values not currently recognized in the market prices of
their securities.
The EARLY LIFE CYCLE PORTFOLIO seeks long-term capital appreciation by
investing in smaller companies in the earlier stages of their development or
larger or more mature companies engaged in new and higher growth potential
operations.
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.
INTERNATIONAL PORTFOLIOS
The INTERNATIONAL EQUITY PORTFOLIO seeks total return on its assets
through capital appreciation and income derived primarily 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. The Portfolio also seeks capital
appreciation and protection of principal by actively managing its maturity
structure and currency exposure.
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.
_________________________________________________________
- 2 -
<PAGE>
This Prospectus sets forth concisely the information about the
Portfolios that a prospective investor should consider before investing in a
Portfolio through a variable contract offered by an Insurer. Investors should
read this Prospectus and retain it for future reference. A Statement of
Additional Information dated October 14, 1994 (as revised November 18, 1994) and
containing additional information about the Portfolios has been filed with the
Securities and Exchange Commission. The current Statement of Additional
Information is available upon request without charge by writing to the
Administrator of Master Variable Series, Chubb Investment Advisory Corporation,
at One Granite Place, Concord, New Hampshire 03301, or by calling (800) 258-
3648. The Statement of Additional Information, as it may be supplemented from
time to time, is incorporated by reference in its entirety into this Prospectus.
SHARES IN THE PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, UNITED STATES TRUST COMPANY OF NEW YORK, ITS PARENT OR AFFILIATES,
AND THE SHARES ARE NOT FEDERALLY INSURED BY, GUARANTEED BY OR OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY.
AN INVESTMENT IN THE PORTFOLIOS INVOLVES INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED. THE MONEY PORTFOLIO SEEKS TO MAINTAIN ITS
NET ASSET VALUE PER SHARE AT $1.00 FOR PURPOSES OF PURCHASES AND REDEMPTIONS,
ALTHOUGH THERE CAN BE NO ASSURANCE THAT IT WILL DO SO ON A CONTINUOUS BASIS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
October 14, 1994
(as revised November 18, 1994)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT OBJECTIVES AND POLICIES...................... 1
RISK FACTORS............................................ 10
PORTFOLIO INSTRUMENTS AND OTHER INVESTMENT INFORMATION.. 16
INVESTMENT LIMITATIONS.................................. 26
PRICING OF SHARES....................................... 29
HOW TO PURCHASE AND REDEEM SHARES....................... 31
MANAGEMENT OF MASTER VARIABLE SERIES.................... 32
DIVIDENDS AND DISTRIBUTIONS............................. 36
TAXES................................................... 37
DESCRIPTION OF CAPITAL STOCK............................ 38
CUSTODIAN............................................... 39
PERFORMANCE AND YIELD INFORMATION....................... 40
MISCELLANEOUS........................................... 42
</TABLE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Investment Adviser will use its best efforts to achieve the
investment objective of each Portfolio, although their achievement cannot be
assured. The investment objective of each Portfolio is "fundamental," meaning
that it may not be changed without a vote of the holders of a majority of the
particular Portfolio's outstanding shares (as defined under "Miscellaneous").
Except as described below in "Investment Limitations," the investment policies
of each Portfolio may be changed without a vote of the holders of a majority of
the outstanding shares of such Portfolio.
Because of the investment policies of the Portfolios and the
considerations discussed below, investments in these Portfolios may not be
appropriate for all investors and should not be considered a complete investment
program.
Equity Portfolios
U.S. Trust's Investment Philosophy and Strategies - Equity Portfolio
and Early Life Cycle Portfolio. Philosophy. In managing investments for these
Portfolios, U.S. Trust follows a long-term investment philosophy which generally
does not change with the short-term variability of financial markets or
fundamental conditions. U.S. Trust's approach begins with the conviction that
all worthwhile investments are grounded in value. The Investment Adviser
believes that an investor can identify fundamental values that eventually should
be reflected in market prices. U.S. Trust believes that over time, a
disciplined search for fundamental value will achieve better results than
attempting to take advantage of short-term price movements.
Implementation of this long-term value philosophy consists of
searching for, identifying and obtaining the benefits of present or future
investment values. For example, such values may be found in a company's future
earnings potential or in its existing resources and assets. Accordingly, in
managing investments for these Portfolios, U.S. Trust is constantly engaged in
assessing, comparing and judging the worth of companies, particularly in
comparison to the price the markets place on such companies' shares.
Strategies. In order to translate its investment philosophy into more
specific guidance for selection of investments, the Investment Adviser uses
three specific strategies. These strategies, while identified separately, may
overlap so that more than one may be applied in an investment decision.
U.S. Trust's "problem/opportunity strategy" seeks to identify
industries and companies with the capabilities to provide solutions to or
benefit from complex problems such as the
<PAGE>
changing demographics and aging of the U.S. population or the need to enhance
industrial productivity. U.S. Trust's second strategy is a "transaction value"
comparison of a company's real underlying asset value with the market price of
its shares and with the sale prices for similar assets changing ownership in
public market transactions. Differences between a company's real asset value
and the price of its shares often are corrected over time by restructuring of
the assets or by market recognition of their value. U.S. Trust's third strategy
involves identifying "early life cycle" companies whose products are in their
earlier stages of development or that seek to exploit new markets. Frequently,
such companies are smaller companies, but early life cycle companies may also
include larger established companies with new products or markets for existing
products. The Investment Adviser believes that over time the value of such
companies should be recognized in the market.
Themes. To complete U.S. Trust's investment philosophy, the three
portfolio strategies discussed above are applied in concert with several
"longer-term investment themes" to identify investment opportunities. The
Investment Adviser believes these longer-term themes represent strong and
inexorable trends. The Investment Adviser also believes that understanding the
instigation, catalysts and effects of these longer-term trends should help to
identify companies that are beneficiaries of these trends.
Investment Objective and Policies - Equity Portfolio -- The Equity
Portfolio's investment objective is to seek long-term capital appreciation. The
Equity Portfolio invests in companies which the Investment Adviser believes have
value currently not recognized in the market prices of the companies'
securities. The Investment Adviser uses the investment philosophy, strategies
and themes discussed above to identify such investment values and to diversify
the Portfolio's investments over a variety of industries and types of companies.
See "Investment Policies Common to the Equity Portfolio and the Early Life Cycle
Portfolio" for a discussion of various investment policies applicable to the
Equity Portfolio.
Investment Objective and Policies - Early Life Cycle Portfolio -- The
Early Life Cycle Portfolio seeks long-term capital appreciation by investing
primarily in smaller companies which are in the earlier stages of their
development or larger or more mature companies engaged in new and higher growth
potential operations. An early life cycle company is one which is early in its
development as a company, yet has demonstrated or is expected to achieve
substantial long-term earnings growth. More mature or larger, established
companies may also be positioned for accelerating earnings because of
rejuvenated management, new products, new markets for existing products or
structural changes in the economy. In selecting companies for investment, the
- 2 -
<PAGE>
Investment Adviser looks for innovative companies whose potential has not yet
been fully recognized by the securities markets. Under normal conditions, at
least 65% of the Portfolio's total assets will be invested in companies with
capitalization of $1 billion or less. The risk and venture oriented nature of
such companies naturally entails greater risk for investors when contrasted with
investing in more established companies.
Investment Policies Common to the Equity Portfolio and the Early Life
Cycle Portfolio -- Under normal market and economic conditions, the Equity and
Early Life Cycle Portfolios will each invest at least 65% of their total assets
in common stock, preferred stock and securities convertible into common stock.
Normally, up to 35% of each Portfolio's total assets may be invested in other
securities and instruments including, e.g., other investment-grade debt
securities, warrants, options, and futures instruments as described in more
detail below. During temporary defensive periods or when the Investment Adviser
believes that suitable stocks or convertible securities are unavailable, each
Portfolio may hold cash and/or invest some or all of its assets in U.S.
Government securities, high-quality money market instruments, and repurchase
agreements collateralized by the foregoing obligations.
In managing the Equity and Early Life Cycle Portfolios, the Investment
Adviser seeks to purchase securities having value not currently recognized in
the market price of a security, using the strategies discussed above.
Portfolio holdings will include common stocks of companies having
capitalizations of varying amounts, and these Portfolios will invest in the
securities of high growth, small companies where the Investment Adviser expects
earnings and the price of the securities to grow at an above-average rate. The
Early Life Cycle Portfolio emphasizes such companies. Certain securities owned
by the Equity and Early Life Cycle Portfolios may be traded only in the over-
the-counter market or on a regional securities exchange, may be listed only in
the quotation service commonly known as the "pink sheets," and may not be traded
every day or in the volume typical of trading on a national securities exchange.
As a result, there may be a greater fluctuation in the value of the shares and a
Portfolio may be required, in order to meet redemptions or for other reasons, to
sell these securities at a discount from market prices, to sell during periods
when such disposition is not desirable, or to make many small sales over a
period of time.
The Equity and Early Life Cycle Portfolios may invest in the
securities of foreign issuers. The Portfolios may invest indirectly in the
securities of foreign issuers through sponsored and unsponsored American
Depository Receipts ("ADRs"). ADRs represent receipts typically issued by a
U.S. bank or trust
- 3 -
<PAGE>
company which evidence ownership of underlying securities of foreign issuers.
Investments in unsponsored ADRs involve additional risk because financial
information based on generally accepted accounting principles ("GAAP") may not
be available for the foreign issuers of the underlying securities. ADRs may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Fixed Income Portfolios
Investment Objective - Intermediate-Term Managed Income Portfolio --
The Intermediate-Term Managed Income Portfolio's investment objective is to seek
as high a level of current interest income as is 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.
Investment Objective - Managed Income Portfolio -- The Managed Income
Portfolio's investment objective is to seek high current income consistent with
what is believed to be prudent risk of capital. Subject to this investment
objective, the Investment Adviser will consider the market value appreciation of
portfolio securities in managing the Portfolio. The Managed Income Portfolio's
dollar-weighted average portfolio maturity will vary from time to time in light
of current market and economic conditions, the comparative yields on instruments
with different maturities and other factors.
Investment Policies Common to Intermediate-Term Managed Income and
Managed Income Portfolios -- The Intermediate-Term Managed Income and Managed
Income Portfolios may invest in the following types of securities: corporate
debt obligations such as bonds, debentures, obligations convertible into common
stocks and money market instruments; preferred stocks; and obligations issued or
guaranteed by the U.S. Government and its agencies or instrumentalities. The
Intermediate-Term Managed Income and Managed Income Portfolios are also
permitted to enter into repurchase agreements. The Intermediate-Term Managed
Income and Managed Income Portfolios may, from time to time, invest in debt
obligations exempt from Federal income tax issued by or on behalf of states,
territories and possessions of the United States, the District of Columbia and
their authorities, agencies, instrumentalities and political subdivisions
("Municipal Bonds"). The purchase of Municipal Bonds may be advantageous when,
as a result of prevailing economic, regulatory or other circumstances, the
performance of such securities, on a pre-tax basis, is comparable to that of
corporate or U.S. Government debt obligations.
- 4 -
<PAGE>
Under normal market conditions, at least 75% of the Intermediate-Term
Managed Income and Managed Income Portfolio's total assets will be invested in
investment-grade debt obligations rated within the four highest ratings of
Standard & Poor's Corporation ("S&P") or Moody's Investor Service, Inc.
("Moody's") (or in unrated obligations considered to be of investment grade by
the Investment Adviser) and in U.S. Government obligations and money market
instruments of the types listed below under "Portfolio Instruments and Other
Investment Information - Money Market Instruments." When, in the opinion of the
Investment Adviser, a defensive investment posture is warranted, these
Portfolios may invest temporarily and without limitation in high quality, short-
term money market instruments.
Unrated securities will be considered investment grade if deemed by
the Investment Adviser to be comparable in quality to instruments so rated, or
if other outstanding obligations of the issuers of such securities are rated
"Baa/BBB" or better. It should be noted that obligations rated in the lowest of
the top four ratings ("Baa" by Moody's or "BBB" by S&P) are considered to have
some speculative characteristics and are more sensitive to economic change than
higher rated bonds.
The Intermediate-Term Managed Income and Managed Income Portfolios may
invest up to 25% of their respective total assets in: preferred stocks; dollar-
denominated debt obligations of foreign issuers, including foreign corporations
and foreign governments; and dollar-denominated debt obligations of U.S.
companies issued outside the United States (see additional limitation on
investments in obligations of foreign branches of U.S. banks and U.S. branches
of foreign banks under "Portfolio Instruments and Other Investment Information -
Money Market Instruments" below). The Intermediate-Term Managed Income and
Managed Income Portfolios may invest up to 10% and 25% of their respective total
assets in obligations rated below the four highest ratings of S&P or Moody's
(commonly called "junk bonds"), with no minimum rating required. The
Intermediate-Term Managed Income and Managed Income Portfolios will not invest
in common stocks, and any common stocks received through conversion of
convertible debt obligations will be sold in an orderly manner as soon as
possible. Changes in interest rates will affect the value of the portfolio
investments held by the Intermediate-Term Managed Income and Managed Income
Portfolios.
International Portfolios
Investment Objective and Policies - International Equity Portfolio --
The International Equity Portfolio's investment objective is to seek total
return on its assets through capital appreciation and income derived primarily
from investments in a diversified portfolio of marketable foreign equity
securities.
- 5 -
<PAGE>
In seeking to achieve this investment objective, the International
Equity Portfolio will invest primarily in equity securities of foreign issuers
who will, in the opinion of the Portfolio's sub-adviser, Foreign and Colonial
Asset Management (the "Sub-Adviser" or "FACAM") and the Investment Adviser,
benefit from global economic trends, promising technologies or products and
specific country opportunities resulting from changing geo-political, economic
or currency relationships. In making investment decisions, the Sub-Adviser and
Investment Adviser will seek to identify values not recognized in the market
price of a security. The primary emphasis will be on the achievement of a
higher total return focusing, as circumstances warrant, solely on either growth
of capital or generation of current income or any combination thereof.
The International Equity Portfolio does not intend to have, at any
time, a specified percentage of its assets invested either for growth or for
income, and all or any portion of its assets may be allocated among these two
components based on the Investment Adviser's and Sub-Adviser's analysis of the
prevailing market conditions. Although the Portfolio will seek to realize its
investment objective primarily through investments in foreign equity securities,
it may, from time to time, assume a defensive position by allocating some or all
of its assets to foreign debt obligations. In determining investment strategy
and allocating investments, the Sub-Adviser and Investment Adviser will
continuously analyze a broad range of international equity and fixed-income
securities in order to assess the level of return, and degree of risk, that can
be expected from each type of investment and from each market.
The International Equity Portfolio's investments will generally be
diversified among geographic regions and countries. While there are no
prescribed limits on geographic distribution other than those described below
under "Investment Limitations -State Insurance Regulation," the Portfolio will
normally include securities of issuers collectively having their principal
business in no fewer than three foreign countries. The Portfolio's assets may
be invested in securities of issuers located in the Pacific Basin (e.g., Japan,
Hong Kong, Singapore, Malaysia), Europe, Australia, Latin America and Canada.
The Portfolio may also, from time to time, invest in other regions, seeking to
capitalize on investment opportunities emerging in other parts of the world.
Under normal market and economic conditions, at least 75% of this
Portfolio's assets will be invested in foreign securities. Foreign securities
include common stock, preferred stock, securities convertible into common stock,
warrants, bonds, notes and other debt obligations issued by foreign entities, as
well as shares of U.S. registered investment companies that invest primarily in
foreign securities. Foreign debt securities
- 6 -
<PAGE>
purchased by the Portfolio may include obligations issued in the Eurocurrency
markets and obligations of foreign governments and their political subdivisions.
In addition, the Portfolio may invest in U.S. Government obligations, including
the when-issued securities of such issuers, and obligations issued by U.S.
companies which are either denominated in foreign currency and sold abroad or,
if denominated in U.S. dollars, payment on which is determined by reference to
some other foreign currency.
This Portfolio may invest indirectly in the securities of foreign
issuers through sponsored and unsponsored ADRs and European Depository Receipts
("EDRs"). ADRs and EDRs may not necessarily be denominated in the same currency
as the underlying securities into which they may be converted.
Convertible and non-convertible debt securities purchased by the
Portfolio will be rated "investment grade," or, if unrated, deemed by the Sub-
Adviser and the Investment Adviser to be comparable to securities rated
"investment grade" by Moody's or S&P. Debt obligations rated in the lowest of
the top four "investment grade" ratings ("Baa" by Moody's and "BBB" by S&P) are
considered to have some speculative characteristics and may be more sensitive to
adverse economic change than higher rated securities. The Portfolio will sell,
in an orderly fashion as soon as possible, any convertible and non-convertible
debt securities it holds if the securities are downgraded below "Baa" by Moody's
or below "BBB" by S&P. Foreign securities are generally unrated. In purchasing
foreign equity securities, the Portfolio's Sub-Adviser will look generally to
established foreign companies. The Portfolio may purchase securities both on
recognized stock exchanges and in over-the-counter markets. Most of the
Portfolio's portfolio transactions will be effected in the primary trading
market for the given security. The Portfolio also may invest up to 5% of its
total assets in gold bullion. Investments in gold will not produce dividends or
interest income, and the Portfolio can look only to price appreciation for a
return on such investments.
Under unusual economic and market conditions, the Portfolio may
restrict the securities markets in which its assets are invested and may invest
all or a major portion of its assets in U.S. Government obligations or in U.S.
dollar-denominated securities of U.S. companies. Up to 25% of the Portfolio's
assets may also be held on a continuous basis in cash or invested in U.S. money
market instruments (see below under "Portfolio Instruments and Other Investment
Information - Money Market Instruments") to meet redemption requests or to take
advantage of emerging investment opportunities. To the extent described below
under "Portfolio Instruments and Other Investment Information," the Portfolio
may purchase shares of other investment companies and may engage in repurchase
agreements, securities lending,
- 7 -
<PAGE>
forward currency contracts and futures contracts, options on futures and covered
call options.
Investment Objective and Policies - International Bond Portfolio --
The International Bond Portfolio seeks above average current income by investing
in an internationally diversified portfolio of non-dollar-denominated government
and corporate bonds selected by the Portfolio's sub-adviser, FACAM. The
Portfolio also seeks capital appreciation and protection of principal by
actively managing its maturity structure and currency exposure. At least 65% of
the Portfolio's total assets will be invested in debt instruments; the Portfolio
concentrates investments in investment-grade debt obligations. "Investment-
grade" debt obligations are those rated within the four highest ratings of S&P
or Moody's, or unrated obligations considered to be "investment grade" by the
Sub-Adviser.
The Portfolio normally invests in the bonds of a minimum of three
countries; however, it may invest some or all of its assets in the bonds of only
one country (including the U.S.) for temporary defensive purposes. Because of
its potential for concentration in foreign government securities, this Portfolio
is considered "non-diversified" for purposes of the 1940 Act.
The International Bond Portfolio will invest in debt obligations of
sovereign governments, government agencies or private corporations with a
predetermined schedule of interest payments and repayment of principal,
including (i) debt obligations issued or guaranteed by a foreign sovereign
government or one of its agencies, authorities, instrumentalities or political
subdivisions including a foreign state, province or municipality, and by
supranational organizations such as the World Bank, Asian Development Bank,
European Investment Bank, and European Economic Community; (ii) debt obligations
of foreign banks and foreign bank holding companies, of domestic banks and
corporations issued in foreign currencies, and denominated in the European
Currency Unit (ECU); (iii) foreign corporate debt securities and commercial
paper; and (iv) private placements. 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 may, for
temporary defensive purposes, invest some or all of its assets in high quality
money market instruments. The Portfolio may also establish and maintain such
high-quality reserves as the Sub-Adviser believes are advisable to facilitate
the Portfolio's cash flow needs (e.g., redemptions, expenses, and purchases of
portfolio securities). These reserves will consist of domestic and foreign
money market instruments rated within the top two rating categories by a
national rating
- 8 -
<PAGE>
organization or, if unrated, are of equivalent quality in the Sub-Adviser's
judgment.
Interest rates vary from country to country, depending on local
economic conditions and government policies. By taking a global approach to
bond investing, the Sub-Adviser believes that U.S. investors can access the
highest yields available worldwide. Overseas investments can also help
diversify a fixed income portfolio otherwise invested solely in U.S. securities.
The International Bond Portfolio takes an aggressive approach to investing for
income and capital appreciation. It invests outside the U.S. in longer-term
bonds, and normally does not hedge its non-dollar holdings back to the dollar to
allow the Portfolio to benefit from currency fluctuations which could enhance
total return; however, currency fluctuations could also depress total return.
The Portfolio will generally have greater interest rate and foreign
currency exposure than other international fixed income funds that hedge a
higher proportion of currency risk. The Portfolio will normally have no more
than 50% of the value of its total assets involved in cross hedging
transactions. Therefore, its total return and, in particular, the principal
value of its foreign currency-denominated debt securities, is likely to be
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 investments in international fixed income
securities through portfolio diversification and active management of the
Portfolio's maturity and currency exposure; however, there can be no assurances
that such risk will be reduced.
The Portfolio will invest primarily (at least 65% of assets) in debt
securities that are considered high quality at the time of purchase. The
Portfolio has no current intention of purchasing any security which at the time
of purchase is rated below investment grade. This policy does not preclude the
Portfolio from retaining a security whose credit quality is downgraded to a non-
investment grade level after purchase. Securities with the lowest rating in the
investment grade category (i.e., "Baa" by Moody's or "BBB" by S&P) are
considered to have some speculative characteristics and are more sensitive to
economic change than higher rated securities.
Money Portfolio
Investment Objective and Policies - Money Portfolio -- The Money
Portfolio's investment objective is to seek as high a level of current income as
is consistent with liquidity and stability
- 9 -
<PAGE>
of principal. The Portfolio will generally invest in money market instruments,
such as bank certificates of deposit, bankers' acceptances, commercial paper
(including variable and floating rate instruments) and corporate bonds with
remaining maturities of 13 months or less, as well as obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, and
repurchase agreements collateralized by such obligations. The Portfolio uses
the amortized cost method to value securities in its portfolio and has a dollar-
weighted portfolio maturity not exceeding 90 days.
__________________________________________
Additional information about each of the Portfolio's policies and
portfolio instruments is set forth below under "Portfolio Instruments and Other
Investment Information."
RISK FACTORS
Equity Portfolios
The Equity and Early Life Cycle Portfolios are each subject to market
risk, interest rate risk, and in some cases, industry risk. Market risk is the
possibility that stock prices will decline over short or even extended periods.
The stock markets tend to be cyclical, with periods of generally rising prices
and periods of generally declining prices. These cycles will affect the values
of each of these Portfolios. In addition, the prices of bonds and other debt
instruments generally fluctuate inversely with interest rate changes. The risk
factors associated with debt securities will affect the debt holdings of these
Portfolios.
Small companies may have limited product lines, markets, or financial
resources, or may be dependent upon a small management group, and their
securities may be subject to more abrupt or erratic market movements than
larger, more established companies, both because their securities typically are
traded in lower volume and because the issuers typically are subject to a
greater degree to changes in their earnings and prospects.
Each of these Portfolios may also invest in the securities of foreign
issuers. Investments in foreign securities involve certain risks not ordinarily
associated with investments in domestic securities. These risks are described
below under "Risk Factors - International Portfolios."
These Portfolios should not be considered a complete investment
program. In view of the specialized nature of their investment activities,
investment in the Equity Portfolio or Early Life Cycle Portfolio may be suitable
only for those investors who can invest without concern for current income and
- 10 -
<PAGE>
are financially able to assume risk in search of long-term capital gains.
Securities of companies discussed in this section may be more volatile
than the overall market.
Fixed Income Portfolios
These Portfolios are not money market funds, and are not appropriate
investments for those whose primary objective is principal stability. Yields on
short, intermediate, and long-term debt 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 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.
Investments of the Intermediate-Term Managed Income and Managed Income
Portfolios in obligations rated below the four highest ratings of S&P and
Moody's have different risks than investments in securities that are rated
"investment grade." Risk of loss upon default by the borrower is significantly
greater because lower-rated securities are generally unsecured and are often
subordinated to other creditors of the issuer, and because the issuers
frequently have high levels of indebtedness and are more sensitive to adverse
economic conditions, such as recessions, individual corporate developments and
increasing interest rates than are investment grade issuers. As a result, the
market price of such securities, and the net asset value of the Portfolios'
shares, may be particularly volatile.
Additional risks associated with lower-rated fixed-income securities
are (a) the relative youth and growth of the market for such securities, (b) the
relatively low trading market liquidity for the securities, (c) the impact that
legislation may have on the high-yield bond market (and, in turn, on the
Portfolios' net asset value and investment practices), (d) the operation of
mandatory sinking fund or call/redemption provisions during periods of declining
interest rates whereby the Portfolios may be required to reinvest premature
redemption proceeds in lower yielding portfolio securities, and (e) the
creditworthiness of the issuers of such securities. During an economic downturn
or substantial period of rising interest rates, highly-leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest
- 11 -
<PAGE>
payment obligations, to meet projected business goals, and to obtain additional
financing. An economic downturn could also disrupt the market for lower-rated
bonds generally and adversely affect the value of outstanding bonds and the
ability of the issuers to repay principal and interest. If the issuer of a
lower-rated security held by the Intermediate-Term Managed Income Portfolio or
Managed Income Portfolio defaulted, the Portfolio could incur additional
expenses to seek recovery. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may also decrease the values and liquidity
of lower-rated securities held by the Portfolio, especially in a thinly-traded
market. Finally, the Portfolios' trading in fixed-income securities to achieve
capital appreciation entails risks that capital losses rather than gains will
result. As a result, investment in the Intermediate-Term Managed Income and
Managed Income Portfolios should not be considered a complete investment
program.
Debt obligations rated "BB," "B" or "CCC" by S&P are regarded, on
balance, as predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
represents the lowest degree of speculation and "CCC" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. The rating "CC" is typically applied to debt
subordinated to senior debt that is assigned an actual or implied "CCC" rating.
The rating "C" is typically applied to debt subordinated to senior debt which is
assigned an actual or implied "CCC-" debt rating, and may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating "CI" is reserved for income bonds on which no
interest is being paid. Debt obligations rated "D" are in default, and payments
of interest and/or repayment of principal is in arrears. The ratings from "AA"
through "CCC" are sometimes modified by the addition of a plus or minus sign to
show relative standing within the major rating categories. Moody's has a
similar classification scheme for non-investment grade debt obligations. Debt
obligations rated "Ba," "B," "Caa," "Ca" and "C" provide questionable protection
of interest and principal. The rating "Ba" indicates that a debt obligation has
some speculative characteristics. The rating "B" indicates a general lack of
characteristics of desirable investment. Debt obligations rated "Caa" are of
poor quality, while debt obligations rated "Ca" are considered highly
speculative. "C" represents the lowest rated class of debt obligations.
Moody's applies numerical modifiers 1, 2 and 3 in each generic classification
from "Aa" to "B" in its bond rating system. The modifier "1" indicates that a
security ranks in the higher end of its rating category; the modifier "2"
reflects a mid-range ranking; and the modifier "3" indicates that
- 12 -
<PAGE>
the security ranks at the lower end of its generic rating category.
Investments in the obligations of foreign issuers may subject the
Intermediate-Term Managed Income and Managed Income Portfolios to additional
investment risks; see "Risk Factors-International Portfolios," below, for a
description of the risks associated with foreign investments.
International Portfolios
International Equity Portfolio -- The International Equity Portfolio
is subject to market risk and interest rate risk, which are described above
under "Risk Factors-Equity Portfolios." This Portfolio is also subject to the
risks of investing in foreign securities.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since the International Equity
Portfolio will invest heavily in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency exchange rates will, to
the extent the Portfolio does not adequately hedge against such fluctuations,
affect the value of securities in the Portfolio and the unrealized appreciation
or depreciation of investments so far as U.S. investors are concerned. In
addition, with respect to certain countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could adversely affect investments in those
countries.
There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S.-based companies. Foreign
securities markets, while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S.-based companies. Transaction costs in foreign securities
markets are generally higher than in the United States. There is generally less
government supervision and regulation of foreign exchanges, brokers and issuers
than there is in the U.S. The Portfolio might have greater difficulty taking
appropriate legal action in a foreign court than in a U.S. court.
- 13 -
<PAGE>
Dividends and interest payable on the Portfolio's foreign portfolio
securities may be subject to foreign withholding taxes. Investors should also
understand that the expense ratio of this Portfolio can be expected to be higher
than those of funds investing in domestic securities. The costs attributable to
investing abroad are usually higher for several reasons, including the higher
cost of investment research, higher cost of custody of foreign securities,
higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving
foreign securities.
Certain of the risks associated with international investments are
heightened with respect to investments in developing countries and fledgling
democracies in Latin America, Eastern Europe and the Pacific/Asia region. The
risks of expropriation, nationalization and social, political and economic
instability are greater in those countries than in more developed capital
markets. In addition, the developing countries and emerging democracies in
those regions may have economies based on only a few industries and small
securities markets with a low volume of trading. Certain countries may also
impose substantial restrictions on investments in their capital markets by
foreign entities, including restrictions on investments in issuers of industries
deemed sensitive to relevant national interests. These factors may limit the
investment opportunities available to the Portfolio and result in a lack of
liquidity and a high price volatility with respect to securities of issuers from
the developing countries and emerging democracies in those regions.
Countries in Latin America, Eastern Europe and the Pacific/Asia region
may also impose restrictions on the Portfolio's ability to repatriate investment
income or capital. Even where there is no outright restriction on repatriation
of investment income or capital, the mechanics of repatriation may affect
certain aspects of the operations of the Portfolio. For example, funds may be
withdrawn from the People's Republic of China only in U.S. or Hong Kong dollars,
and only at an exchange rate established by the government once each week.
Some of the currencies of developing countries and emerging
democracies in Latin America, Eastern Europe and the Pacific/Asia region have
experienced devaluations relative to the U.S. dollar, and major adjustments have
been made periodically in certain of such currencies. Certain countries in
these regions face serious exchange constraints.
Lastly, governments of many developing countries and emerging
democracies in Latin America, Eastern Europe and the Pacific/Asia region
exercise substantial influence over many aspects of the private sector. In some
countries, the government owns or controls many companies, including the largest
in the
- 14 -
<PAGE>
country. As such, government actions in the future could have a significant
effect on economic conditions in developing countries and emerging democracies
in these regions, which could affect private sector companies, the Portfolio,
and the value of the Portfolio's assets. Furthermore, certain countries in
Latin America, Eastern Europe and the Pacific/Asia region are among the largest
debtors to commercial banks and foreign governments. Trading in debt
obligations issued or guaranteed by those governments or their agencies and
instrumentalities involves a high degree of risk.
International Bond Portfolio -- The International Bond Portfolio is
subject to the risks of investing in foreign securities generally, which are
described above under "Risk Factors - International Equity Portfolio."
Generally, international fixed income investments involve more risk
than comparable domestic securities due to fluctuating currency values.
Although the Sub-Adviser will attempt to manage this risk through foreign
currency hedging, there is no assurance the hedging will work and currency risk
cannot be eliminated entirely. In addition, hedging costs, which are paid for
out of the Portfolio's capital and reflected in the Portfolios's net asset value
per share (not its yield), can be significant.
More generally, bond prices fluctuate with changes in overall interest
rates. See "Risk Factors - Fixed Income Portfolios." Since prices of longer-
term bonds tend to be more volatile than those of shorter-term bonds, portfolios
with longer average maturities generally involve greater risk and provide higher
reward potential. Conversely, portfolios with shorter average maturities
generally exhibit less share price fluctuation, but offer less return potential.
It is anticipated that the International Bond Portfolio will have an
intermediate to long average weighted maturity (i.e., over seven years),
increasing the relative interest rate risk exposure of the Portfolio. By
actively managing the International Bond Portfolio's maturity (i.e., lengthening
average maturity when lower rates are anticipated and shortening average
maturity when rates are expected to rise), the Sub-Adviser seeks to limit the
effect of -- or benefit from -- interest rate changes.
When the International Bond Portfolio's positions in issues maturing
in one year or less equals 35% or more of the Portfolio's total assets, the
Portfolio will, as a matter of fundamental policy, normally have 25% or more of
its assets invested in securities issued by foreign governments, their agencies,
or instrumentalities, and/or by the U.S. government, its agencies or
instrumentalities.
The International Bond Portfolio is classified as a non-diversified
investment portfolio under the 1940 Act. The
- 15 -
<PAGE>
investment return on a non-diversified portfolio typically is dependent upon the
performance of a smaller number of securities relative to the number of
securities held in a diversified portfolio. The International Bond Portfolio's
assumption of large positions in the obligations of a small number of issuers
will affect the value of the Portfolio's shares to a greater extent than that of
a diversified portfolio in the event of changes in the financial condition or in
the market's assessment of the issuers.
All Portfolios
Investments in obligations of foreign branches of U.S. banks and of
U.S. branches of foreign banks may subject a Portfolio to additional investment
risks, including future political and economic developments, the possible
imposition of withholding taxes on interest income, possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on such obligations. In
addition, foreign branches of U.S. banks and U.S. branches of foreign banks may
be subject to less stringent reserve requirements and to different accounting,
auditing, reporting, and recordkeeping standards than those applicable to
domestic branches of U.S. banks. Investments in the obligations of U.S.
branches of foreign banks or foreign branches of U.S. banks will be made only
when the Investment Adviser believes that the credit risk with respect to the
instrument is minimal.
PORTFOLIO INSTRUMENTS AND OTHER
INVESTMENT INFORMATION
Money Market Instruments
Each Portfolio may invest in accordance with their investment
objectives and policies stated above in "money market instruments," which
include, among other things, bank obligations, commercial paper and corporate
bonds with remaining maturities of 13 months or less.
Bank obligations include bankers' acceptances, negotiable certificates
of deposit, and non-negotiable time deposits earning a specified return and
issued by a U.S. bank which is a member of the Federal Reserve System or insured
by the Bank Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC"), or by a saving and loan association or savings bank which is insured
by the Savings Association Insurance Fund of the FDIC. Bank obligations also
include U.S. dollar-denominated obligations of foreign branches of U.S. banks
and obligations of domestic branches of foreign banks. With respect to the
Money Portfolio,
- 16 -
<PAGE>
investments in bank obligations are limited to the obligations of financial
institutions having more than $2 billion in total assets at the time of
purchase. Investments by the Equity, Early Life Cycle, Managed Income, and
Money Portfolios in bank obligations of foreign branches of domestic financial
institutions or of domestic branches of foreign banks are limited so that no
more than 5% of the value of the Portfolio's total assets may be invested in any
one branch, and that no more than 20% of the Portfolio's total assets at the
time of purchase may be invested in the aggregate in such obligations.
Investments of each of the Portfolios in time deposits are limited to no more
than 5% of the value of a Portfolio's total assets at the time of purchase, and
with respect to the Money Portfolio, investments in non-negotiable time deposits
are further subject to the overall 10% limit on illiquid securities.
Investments by the Portfolios other than the Money Portfolio in
commercial paper will consist of issues that are rated "A-2" or better by S&P or
"Prime-2" or better by Moody's. In addition, each such Portfolio 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. See "Portfolio Instruments and Other
Investment Information - Quality of Investments and Diversification Requirements
- Money Portfolio" for the rating requirements for the Money Portfolio.
Variable and Floating Rate Instruments
Commercial paper investments may include variable and floating rate
instruments. While there may be no active secondary market with respect to a
particular instrument purchased by the Portfolio, it may, from time to time as
specified in the instrument, demand payment of the principal of the instrument
or may resell the instrument to a third party. The absence of an active
secondary market, however, could make it difficult for the Money Portfolio to
dispose of the instrument if the issuer defaulted on its payment obligation or
during periods that the Portfolio is not entitled to exercise its demand rights,
and the Portfolio could, for this or other reasons, suffer a loss with respect
to such instrument. While the Money Portfolio will in general invest only in
securities that mature within 13 months of date of purchase, it may invest in
variable and floating rate instruments which have nominal maturities in excess
of 13 months if such instruments have demand features that comply with
conditions established by the Securities and Exchange Commission ("SEC") (see
"Additional Information on Portfolio Instruments-Variable and Floating Rate
Instruments" in the Statement of Additional Information).
- 17 -
<PAGE>
Quality of Investments and Diversification Requirements - Money Portfolio
The Money Portfolio may only invest in: (i) securities in the two
highest rating categories of a Nationally Recognized Statistical Rating
Organization ("NRSRO"), provided that if they are rated by more than one NRSRO,
at least one other NRSRO rates them in one of its two highest categories; and
(ii) unrated securities determined to be of comparable quality at the time of
purchase (collectively, "Eligible Securities"). The Money Portfolio may not
invest more than 5% of its assets in Eligible Securities that are not "First
Tier Securities" (as defined below). The rating symbols of the NRSROs which the
Portfolio may use are described in the Appendix to the Statement of Additional
Information.
The Money Portfolio will limit its purchases of any one issuer's
securities (other than U.S. Government obligations and customary demand
deposits) to 5% of the Portfolio's total assets, except that it may invest more
than 5% (but no more than 25%) of its total assets in "First Tier Securities" of
one issuer for a period of up to three business days. First Tier Securities
include: (i) securities in the highest rating category by the only NRSRO rating
them; (ii) securities in the highest rating category of at least two NRSROs, if
more than one NRSRO has rated them; (iii) securities that have no short-term
rating, but have been issued by an issuer that has other outstanding short-term
obligations that have been rated in accordance with (i) or (ii) above and are
comparable in priority and security to such securities; and (iv) certain unrated
securities that have been determined to be of comparable quality to such
securities. In addition, the Money Portfolio will limit its purchases of
"Second Tier Securities" (Eligible Securities that are not First Tier
Securities) of one issuer to the greater of 1% of its total assets or $1
million.
Government Obligations
Each Portfolio may invest in obligations issued or guaranteed by the
U.S. Government, its agencies, or instrumentalities. Obligations of certain
agencies and instrumentalities of the U.S. Government are supported by the full
faith and credit of the U.S. Treasury; others are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others are supported only by the credit of the instrumentality. No assurance
can be given that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
The Intermediate-Term Managed Income, Managed Income and Money Portfolios will
purchase obligations of such instrumentalities only when the Investment
- 18 -
<PAGE>
Adviser believes that the credit risk with respect to the instrumentality is
minimal.
U.S. Government obligations include U.S. Treasury Bills and the
obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land
Banks, the Federal Housing Administration, the Farmers Home Administration, the
Export-Import Bank of the United States, the Small Business Administration, the
Government National Mortgage Association, the Federal National Mortgage
Association, the General Services Administration, the Student Loan Marketing
Association, the Central Bank for Cooperatives, the Federal Home Loan Mortgage
Corporation, the Federal Intermediate Credit Banks and the Maritime
Administration.
Securities issued or guaranteed by the U.S. Government have
historically involved little risk of loss of principal if held to maturity.
However, due to fluctuations in interest rates, the market value of such
securities may vary.
Repurchase Agreements
To effectively manage cash holdings, each of the Portfolios may enter
into repurchase agreements. A Portfolio will enter into repurchase agreements
only with financial institutions that are deemed to be creditworthy by the
Investment Adviser, pursuant to guidelines established by the Board of Directors
of Master Variable Series. No Portfolio will enter into repurchase agreements
with the Investment Adviser or Sub-Adviser or any of its affiliates. Repurchase
agreements with remaining maturities in excess of seven days will be considered
illiquid securities and will be subject to the 10% limit applicable to such
securities described below.
The seller under a repurchase agreement will be required to maintain
the value of the securities which are subject to the agreement and held by a
Portfolio at not less than the repurchase price. Default or bankruptcy of the
seller would, however, expose a Portfolio to possible delay in connection with
the disposition of the underlying securities or loss to the extent that proceeds
from a sale of the underlying securities were less than the repurchase price
under the agreement.
Securities Lending
To increase return on portfolio securities, each Portfolio may lend
its portfolio securities to broker/dealers pursuant to agreements requiring the
loans to be continuously secured by collateral equal at all times in value to at
least the market value of the securities loaned. Collateral for such loans may
include cash, securities of the U.S. Government, its agencies or
instrumentalities or an irrevocable letter of credit issued by a bank which
meets the investment standards of the Portfolio, or
- 19 -
<PAGE>
any combination thereof. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of a Portfolio exceeds 30% of the value of
its total assets. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans are made only to borrowers deemed by the Investment Adviser or Sub-Adviser
to be of good standing and when, in the judgment of the Investment Adviser or
Sub-Adviser, the income to be earned from the loan justifies the attendant
risks.
Investment Company Securities
In connection with the management of their daily cash positions, the
Portfolios may invest in securities issued by other investment companies which
invest in high-quality, short-term debt securities and which determine their net
asset value per share based on the amortized cost or penny-rounding method. The
International Equity Portfolio and International Bond Portfolio may also
purchase shares of investment companies investing primarily in foreign
securities, including so-called "country funds" that have portfolios consisting
exclusively of securities of issuers located in one foreign country. In
addition to the advisory fees and other expenses a Portfolio bears directly in
connection with its own operations, as a shareholder of another investment
company, a Portfolio would bear its pro rata portion of the other investment
company's advisory fees and other expenses. As such, the Portfolio's
shareholders (and variable contract owners) would indirectly bear the expenses
of the Portfolio and the other investment company, some or all of which would be
duplicative.
Securities of other investment companies will be acquired by each
Portfolio within the limits prescribed by the 1940 Act. Each Portfolio
currently intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of the
Portfolio's total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio. Any change by the Portfolios in the
future with respect to these policies concerning investments in securities
issued by other investment companies will be made only in accordance with the
requirements of the 1940 Act.
Municipal Bonds
The two principal classifications of Municipal Bonds which may be held
by the Intermediate-Term Managed Income and Managed Income Portfolios are
"general obligation" securities and
- 20 -
<PAGE>
"revenue" securities. General obligation securities are secured by the issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue securities are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source such as the
user of the facility being financed. Private activity bonds held by the
Portfolios are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of
private activity revenue bonds is usually directly related to the credit
standing of the corporate user of the facility involved.
The Intermediate-Term Managed Income and Managed Income Portfolios may
also invest in "moral obligation" securities, which are normally issued by
special-purpose public authorities. If the issuer of moral obligation
securities is unable to meet its debt service obligations from current revenues,
it may draw on a reserve fund, the restoration of which is a moral commitment,
but not a legal obligation, of the state or municipality which created the
issuer. There is no limitation on the amount of moral obligation securities
that may be held by the Intermediate-Term Managed Income and Managed Income
Portfolios. The Investment Adviser will consider investments in Municipal Bonds
for the Intermediate-Term Managed Income and Managed Income Portfolios when the
Investment Adviser believes that the total return on such securities is
attractive relative to that of taxable securities.
When-Issued and Forward Transactions and Stand-by Commitments
The Intermediate-Term Managed Income, Managed Income, International
Equity, International Bond, and Money Portfolios may purchase eligible
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions involve a commitment by a
Portfolio to purchase or sell particular securities with payment and delivery
taking place in the future beyond the normal settlement date, at a stated price
and yield. Securities purchased on a "forward commitment" or "when-issued"
basis are recorded as an asset and are subject to changes in value based upon
changes in the general level of interest rates. It is expected that "forward
commitments" and "when-issued" purchases will not exceed 25% of the value of a
Portfolio's total assets absent unusual market conditions and that the length of
such commitments will not exceed 45 days. The Portfolios do not intend to
engage in "when-issued" purchases or "forward commitments" for speculative
purposes, but only in furtherance of their investment objectives.
In addition, the Intermediate-Term Managed Income and Managed Income
Portfolios may acquire "stand-by commitments" with respect to Municipal Bonds
held by them. Under a "stand-by
- 21 -
<PAGE>
commitment," a dealer agrees to purchase at a Portfolio's option specified
Municipal Bonds at a specified price. The Intermediate-Term Managed Income and
Managed Income Portfolios will acquire "stand-by commitments" solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. "Stand-by commitments" acquired by a Portfolio
would be valued at zero in determining the Portfolio's net asset value.
Options
To further increase return on their portfolio securities in accordance
with their respective investment objectives and policies, the Equity, Early Life
Cycle, International Equity, and International Bond Portfolios may enter into
option transactions as described below.
These Portfolios may engage in writing covered call options (options
on securities owned by the particular Portfolio) and enter into closing purchase
transactions with respect to such options. Such options must be listed on a
national securities exchange and issued by the Options Clearing Corporation or
be traded on foreign exchanges. The aggregate value of the securities subject
to options written by each Portfolio may not exceed 25% of the value of its net
assets. By writing a covered call option, a Portfolio forgoes the opportunity
to profit from an increase in the market price of the underlying security above
the exercise price except insofar as the premium represents such a profit, and
it will not be able to sell the underlying security until the option expires or
is exercised or the Portfolio effects a closing purchase transaction by
purchasing an option of the same series. The use of covered call options is not
a primary investment technique of the Portfolios and such options will normally
be written on underlying securities as to which the Investment Adviser or Sub-
Adviser does not anticipate significant short-term capital appreciation.
Additional information on option practices, including particular risks thereof,
is provided in the Statement of Additional Information.
The Early Life Cycle Portfolio may also purchase put and call options
listed on a national securities exchange and issued by the Options Clearing
Corporation in an amount not exceeding 5% of the Portfolio's net assets, as
described further in the Statement of Additional Information. Such options may
relate to particular securities or to various stock or bond indices. Purchasing
options is a specialized investment technique which entails a substantial risk
of a complete loss of the amounts paid as premiums to the writer of the options.
- 22 -
<PAGE>
Forward Currency Transactions
The International Equity Portfolio and International Bond Portfolio
will conduct currency exchange transactions either on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange markets, or by entering into
forward currency contracts. A forward foreign currency contract involves an
obligation to purchase or sell a specific currency for a set price at a future
date. In this respect, forward currency contracts are similar to foreign
currency futures contracts described below; however, unlike futures contracts,
which are traded on recognized commodities exchanges, forward currency contracts
are traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. Also, forward currency
contracts usually involve delivery of the currency involved instead of cash
payment as in the case of futures contracts.
A Portfolio's participation in forward currency 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. The purpose of transaction hedging is to "lock in" the U.S. dollar
equivalent price of such specific securities. Position hedging is the sale of
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. The Portfolios will not speculate in foreign currency
exchange. Transaction and position hedging will not be limited to an overall
percentage of a Portfolio's assets, but will be employed as necessary to
correspond to particular transactions or positions. A Portfolio may not hedge
its currency positions to an extent greater than the aggregate market value (at
the time of entering into the forward contract) of the securities held in its
portfolio denominated, quoted in, or currently convertible into that particular
currency. When a Portfolio engages in forward currency transactions, certain
asset segregation requirements must be satisfied to ensure that the use of
foreign currency transactions is unleveraged. When a Portfolio takes a long
position in a forward currency contract, it must maintain a segregated account
containing cash and/or certain liquid assets equal to the purchase price of the
contract, less any margin or deposit. When a Portfolio takes a short position
in a forward currency contract, the Portfolio must maintain a segregated account
containing cash and/or certain liquid assets in an amount equal to the market
value of the currency underlying such contract (less any margin or deposit),
which amount must be at least equal to the market price at which the short
position was established. Additional information on forward currency
transactions, including a discussion of risks involved in such transactions
(which are similar to those described below under
- 23 -
<PAGE>
"Futures Contracts"), is included in the Statement of Additional Information.
Futures Contracts
Each Portfolio other than the Money Portfolio and Equity Portfolio may
also enter into interest rate futures contracts, other types of financial
futures contracts (including, with respect to the International Equity and
International Bond Portfolios, foreign currency futures contracts, which are
similar to the forward currency contracts described above), and, with respect to
the Early Life Cycle, International Equity, and International Bond Portfolios,
related futures options, as well as any index or foreign market futures which
are available on recognized exchanges or in other established markets. Such
futures and options will be entered into as a hedge against changes in market
conditions. An interest rate futures contract represents a firm commitment by
which two parties agree to take or make delivery of fixed-income securities on
the last trading date of the contract and the price at which the futures
contract is originally struck.
The Portfolios will not engage in transactions in futures contracts
(or related options) for speculation, but only as a hedge against changes in
market values of securities which they hold or intend to purchase where the
transactions are intended to reduce risks inherent in the management of the
Portfolios. Each Portfolio may engage in futures transactions only to the
extent permitted by the Commodity Futures Trading Commission ("CFTC") and the
SEC. As of the date of this Prospectus, each Portfolio intends to limit its
hedging transactions in futures contracts (and for the Early Life Cycle,
International Equity, and International Bond Portfolios, related options) so
that, immediately after any such transaction, the aggregate initial margin that
is required to be posted by the Portfolio under the rules of the exchange on
which the futures contract (or futures option) is traded (plus any premiums paid
by such Portfolio on its open futures options positions where applicable), does
not exceed 5% of the Portfolio's total assets, after taking into account any
unrealized profits and unrealized losses on the Portfolio's open contracts (and
excluding the amount that a futures options is "in-the-money" at the time of the
purchase). An option to buy a futures contract is "in-the-money" if the then-
current purchase price of the underlying futures contract exceeds the exercise
or strike price; an option to sell a futures contract is "in-the-money" if the
exercise or strike price exceeds the then-current purchase price of the contract
that is the subject of the option.
When investing in futures contracts, the Portfolios must satisfy
certain asset segregation requirements to ensure that the use of futures is
unleveraged. When a Portfolio takes a long
- 24 -
<PAGE>
position in a futures contract, it must maintain a segregated account containing
cash and/or certain liquid assets equal to the purchase price of the contract,
less any margin or deposit. When a Portfolio takes a short position in a
futures contract, the Portfolio must maintain a segregated account with the
custodian for the Portfolio's assets containing cash and/or certain liquid
assets in an amount equal to the market value of the securities underlying such
contract (less any margin or deposit), which amount must be at least equal to
the market price at which the short position was established.
Transactions by a Portfolio in futures contracts may subject the
Portfolio to a number of risks. Successful use of futures by a Portfolio is
subject to the ability of the Investment Adviser or Sub-Adviser to anticipate
correctly movements in the direction of the market. In addition, there may be
an imperfect correlation, or no correlation at all, between movements in the
price of the futures contracts and movements in the price of the instruments
being hedged. Further, there is no assurance that a liquid market will exist
for any particular futures contract at any particular time. Consequently, a
Portfolio may realize a loss on a futures transaction that is not offset by a
favorable movement in the price of securities which it holds or intends to
purchase or may be unable to close a futures position in the event of adverse
price movements.
Hybrid Investments
As part of its investment program and to maintain greater flexibility,
the International Bond Portfolio may invest in instruments which have the
characteristics of both futures and securities. Such instruments may take a
variety of forms, such as debt securities with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time. The risks of such investments could reflect the risks of
investing in futures, currencies and securities, including volatility and
illiquidity.
Illiquid Securities
No Portfolio will knowingly invest more than 10% of the value of its
net assets in securities that are illiquid. Each Portfolio may purchase
securities which are not registered under the Securities Act of 1933 (the "1933
Act") but which can be sold to "qualified institutional buyers" in accordance
with Rule 144A under the 1933 Act. Any such security will not be considered
illiquid so long as it is determined by the Investment Adviser or Sub-Adviser,
acting under guidelines approved and monitored by the Board, that an adequate
trading market exists for that security. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio during any
period that qualified institutional buyers become uninterested in
- 25 -
<PAGE>
purchasing these restricted securities. The ability to sell to qualified
institutional buyers under Rule 144A is a recent development, and it is not
possible to predict how this market will develop.
Portfolio Turnover
Each Portfolio may sell a portfolio investment immediately after its
acquisition if the Investment Adviser or Sub-Adviser believes that such a
disposition is consistent with attaining the investment objective of the
particular Portfolio. Portfolio investments may be sold for a variety of
reasons, such as a more favorable investment opportunity or other circumstances
bearing on the desirability of continuing to hold such investments. The
portfolio turnover rate for the Equity Portfolio, Early Life Cycle Portfolio,
and International Equity Portfolio is anticipated to be less than 200%. A rate
of 100% indicates that the equivalent of all of a Portfolio's assets have been
sold and reinvested in a calendar year. The portfolio turnover rate for the
Intermediate-Term Managed Income Portfolio, Managed Income Portfolio, and
International Bond Portfolio is anticipated to be less than 400%. A high rate
of portfolio turnover may involve correspondingly greater brokerage commission
expenses and other transaction costs, which must be borne directly by a
Portfolio and ultimately by its shareholders.
INVESTMENT LIMITATIONS
The investment limitations enumerated below are matters of fundamental
policy and may not be changed with respect to a Portfolio without the vote of
the holders of a majority of the Portfolio's outstanding shares (as defined
under "Miscellaneous").
Investment Limitations -- A Portfolio may not:
1. 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;
2. 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
- 26 -
<PAGE>
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;
3. 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 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;
4. 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;
5. 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);
(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; and (iii) the International Bond
Portfolio will normally concentrate 25% or more of its assets in
securities of the banking industry when the Portfolio's position
in issues
- 27 -
<PAGE>
maturing in one year or less equals 35% or more of the
Portfolio's total assets;
6. 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.
* * *
In Investment Limitation No. 5 above: (a) a security is considered to
be issued by the governmental entity or entities whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only by
the assets and revenues of a non-governmental user, such non-governmental user;
(b) in certain circumstances, the guarantor of a guaranteed security may also be
considered to be an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
(including securities backed by the full faith and credit of the United States)
are deemed to be U.S. Government obligations.
State Insurance Regulation -- The Master Variable Series is intended
to be a funding vehicle for variable contracts to be offered by Insurers, and
will seek to be available under variable contracts sold in a number of
jurisdictions. Certain states have regulations or guidelines concerning
concentration of investments and other investment techniques. If applied to the
Master Variable Series, each Portfolio may be limited in its ability to engage
in certain techniques and to manage its portfolio with the flexibility provided
herein. In order to permit a Portfolio to be available under variable contracts
sold in certain states, Master Variable Series may make commitments that are
more restrictive than the investment policies and limitations described above
and in the Statement of Additional Information. Should Master Variable Series
determine that any such commitment is no longer in a Portfolio's best interests,
it may revoke such commitment by terminating the availability of such Portfolio
to investors residing in such states.
Pursuant to such state regulation, each Portfolio is subject to the
following diversification guidelines, which may also be changed by the Board of
Directors of Master Variable Series upon reasonable notice to shareholders:
1. A Portfolio that invests in securities of foreign issuers will be
invested in a minimum of five different foreign countries at all
times, except that this
- 28 -
<PAGE>
minimum is reduced to four when foreign country investments
comprise less than 80% of the Portfolio's net asset value; to
three when less than 60% of such value; to two when less than
40%; and to one when less than 20%.
2. A Portfolio that invests in the securities of foreign issuers
will have no more than 20% of its net asset value invested in
securities of issuers located in any one country; except that a
Portfolio may have an additional 15% of its value invested in
securities of issuers located in any one of the following
countries: Australia; Canada; France; Japan; the United Kingdom;
or Germany.
3. A Portfolio may not acquire the securities of any issuer if, as a
result of such investment, more than 10% of the Portfolio's total
assets would be invested in the securities of any one issuer,
except that this restriction shall not apply to U.S. Government
securities or foreign government securities; and the Portfolio
will not invest in a security if, as a result of such investment,
it would hold more than 10% of the outstanding voting securities
of any one issuer.
With respect to all investment limitations, 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 portfolio
securities will not constitute a violation of such limitation.
PRICING OF SHARES
The net asset value of each Portfolio is determined and the shares of
each Portfolio are priced at the close of regular trading hours on the New York
Stock Exchange (the "Exchange"), currently 4:00 p.m. (Eastern Time). Net asset
value and pricing for each Portfolio are determined on each day the Exchange and
the Investment Adviser are open for trading ("Business Day"). Currently, the
holidays which the Portfolios observe are New Year's Day, Martin Luther King,
Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas.
Net asset value per share for purposes of pricing sales and
redemptions is calculated by dividing the value of all securities and other
assets allocable to a Portfolio, less the liabilities charged to the Portfolio,
by the number of its outstanding shares. The assets in the Money Portfolio are
valued based on the amortized cost method.
- 29 -
<PAGE>
For each Portfolio other than the Money Market Portfolio, debt
securities having a maturity of 60 days or less are valued based upon the
amortized cost method. Under the amortized cost basis method of valuation, the
security is initially valued at its purchase price (or in the case of securities
purchased with more than 60 days remaining to maturity, the market value on the
61st day prior to maturity), and thereafter by amortizing any premium or
discount uniformly to maturity. If for any reason the Board of Directors
believes the amortized cost method of valuation does not fairly reflect the fair
value of any security, fair value will be determined in good faith by or under
the direction of the Board of Directors of the Fund.
All other investments will be generally will be valued based on their
market value. Assets in the Portfolios which are traded on a recognized
domestic stock exchange are valued at the last sale price on the securities
exchange on which such securities are primarily traded or at the last sale price
on the national securities market. Securities traded only on over-the-counter
markets are valued 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. Restricted securities, securities for which
market quotations are not readily available, and other assets are valued at fair
market value, pursuant to the guidelines adopted by the Board of Directors of
Master Variable Series.
Portfolio securities which 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 event subsequent
to the time where value was so established is likely to have changed such value,
then the fair market value of those securities will be determined by
consideration of other factors under the direction of the Board of Directors. A
security which is listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary market for such security.
All other foreign securities are valued at the last current bid quotation if
market quotations are available, or at fair value determined in accordance with
policies established by the Board of Directors. For valuation purposes,
quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents at the prevailing market rate on the day of conversion. Some
of the securities acquired by the Portfolios may be traded on foreign exchanges
or over-the-counter markets on days which are not Business Days. In such cases,
the net asset value of the shares may be significantly affected on days when
investors can neither purchase nor redeem a Portfolio's shares.
One or more independent pricing services may be used in connection
with pricing shares of the Portfolios.
- 30 -
<PAGE>
HOW TO PURCHASE AND REDEEM SHARES
Purchase of Shares
Separate accounts of the Insurers place orders based on, among other
things, the amount of premium payments to be invested pursuant to variable
contracts. Individuals may not place orders directly with Master Variable
Series. See the prospectus of the separate account of the Insurer for more
information on the purchase of Portfolio shares and with respect to the
availability for investment in specific Portfolios.
Purchase orders from separate accounts based on premiums and
transaction requests received by the Insurer prior to the determination of the
applicable Portfolio's net asset value on a given business day in accordance
with procedures established by the Insurer will be effected at the net asset
value of the applicable Portfolio determined on such business day if the orders
are received by Master Variable Series in proper form and in accordance with
applicable requirements on the next business day and Federal funds (monies of
member banks within the Federal Reserve System which are held on deposit at a
Federal Reserve Bank) in the net amount of such orders are received by Master
Variable Series on such next business day in accordance with applicable
requirements. It is each Insurer's responsibility to properly transmit purchase
orders and Federal funds in accordance with applicable requirements. Variable
contract owners should refer to the prospectus for their variable contract in
this regard.
Redemption Procedures
Portfolio shares may be redeemed at any time by the separate accounts
of the Insurers. Individuals may not place redemption orders directly with the
Portfolio. Redemption requests from separate accounts based on premiums and
transaction requests received by the Insurer prior to the determination of the
applicable Portfolio's net asset value on a given business day in accordance
with procedures established by the Insurer will be effected at the net asset
value of the applicable Portfolio if the requests are received by Master
Variable Series in proper form and in accordance with applicable requirements on
the next business day. It is each Insurer's responsibility to properly transmit
redemption requests in accordance with applicable requirements. Variable
contract owners should consult their Insurer in this regard. The value of the
shares redeemed may be more or less than their original cost, depending on the
Portfolio's then-current net asset value. No charges are imposed by a Portfolio
when shares are redeemed.
Master Variable Series ordinarily will make payment for all shares
redeemed within seven days after receipt by Master
- 31 -
<PAGE>
Variable Series or its transfer agent of a redemption request in proper form,
except as provided by rules of the Securities and Exchange Commission. Master
Variable Series may suspend the right of redemption under certain extraordinary
circumstances in accordance with the rules of the Securities and Exchange
Commission.
Master Variable Series does not assess any fees on share purchases or
redemptions. Surrender charges, mortality and risk fees and other charges may
be assessed by Insurers under the variable contracts. Variable contract owners
should refer to the prospectus for their variable contract in this regard.
Should any conflict between variable annuity contract owners and
variable life insurance policy owners arise which would require that a
substantial amount of net assets be withdrawn from a Portfolio, orderly
portfolio management could be disrupted to the potential detriment of affected
contract owners.
MANAGEMENT OF MASTER VARIABLE SERIES
The business and affairs of the Portfolios are managed under the
direction of the Board of Directors of Master Variable Series. The Statement of
Additional Information contains the names of and general background information
concerning Master Variable Series's directors.
Investment Adviser and Sub-Adviser
United States Trust Company of New York, 114 West 47th Street, New
York, New York 10036, serves as the Investment Adviser to each Portfolio. U.S.
Trust is a state-chartered bank and trust company created by Special Act of the
New York Legislature in 1853. The Investment Adviser is a subsidiary of U.S.
Trust Corporation, a registered bank holding company.
The Investment Adviser provides trust and banking services to
individuals, corporations, and institutions both nationally and internationally,
including investment management, estate and trust administration, financial
planning, corporate trust and agency, and personal and corporate banking. The
Investment Adviser is a member bank of the Federal Reserve System and the
Federal Deposit Insurance Corporation and is one of the twelve members of the
New York Clearing House Association. The Investment Adviser also serves as the
investment adviser to UST Master Funds, Inc. and to Master Tax-Exempt Funds,
Inc., each an open-end management investment company registered under the 1940
Act. On December 31, 1993, the Investment Adviser's Asset Management Group had
approximately $30 billion in assets under management.
- 32 -
<PAGE>
The Investment Adviser is required to manage each Portfolio, make
decisions with respect to and place orders for all purchases and sales of
portfolio securities, and maintain records relating to such purchases and sales.
Foreign and Colonial Asset Management ("FACAM" or the "Sub-Adviser"),
a SEC-registered investment adviser, provides sub-advisory services to the
International Equity Portfolio and the International Bond Portfolio. FACAM, a
New York general partnership with offices at Exchange House, Primrose Street,
London EC2A2NY, is an investment management joint venture created in 1982 by F&C
Overseas Limited ("FCOC") and UST Overseas Corporation ("USTOC"), an indirect
wholly-owned subsidiary of the Investment Adviser. FCOC and USTOC are general
partners of FACAM with equal capital contribution. FCOC, a private English
company, is a wholly-owned subsidiary of F&C Management, Ltd. F&C Management,
Ltd. is 50% owned by five U.K. investment trusts: F&C Investment Trust Plc, F&C
Pacific Investment Trust Plc, F&C Smaller Companies Investment Trusts Plc, F&C
Enterprise Trust Plc and F&C Eurotrust Plc. The remaining 50% of F&C Management,
Ltd. is owned by Bayerische Hypotheken und Wechsel Bank AG of Munich, Germany.
FACAM currently manages and advises several commingled funds with assets in
excess of $415 million at the end of 1993.
The Sub-Adviser provides a continuous investment program for the
International Equity and International Bond Portfolios, including investment
research and management with respect to all foreign securities and investments
of the Portfolios. The Sub-Adviser prepares, subject to the Investment
Adviser's approval, lists of recommended countries and determines what
securities and other investments will be purchased, retained or sold for the
International Equity and International Bond Portfolios. The Investment Adviser
advises the Sub-Adviser with respect to U.S economic factors and trends, assists
and consults with the Sub-Adviser in connection with the Portfolios' continuous
investment program, places orders with respect to purchases and sales of U.S.
issuers, manages the Portfolios' short-term cash in cooperation with the Sub-
Adviser, monitors the Sub-Adviser's investment procedures and periodically
reviews, evaluates and reports to the Board of Directors of Master Variable
Series concerning the Sub-Adviser's performance.
Portfolio Managers
Equity Portfolio -- The Equity Portfolio's portfolio manager, Diane M.
Englert, is the person primarily responsible for the day-to-day management of
the Portfolio's investment portfolio. Ms. Englert is Vice-President and
Director of Research for Campbell, Cowperthwait & Company, a wholly-owned
subsidiary of the Investment Adviser since 1992. Ms. Englert joined Campbell,
Cowperthwait & Company in 1988. She was previously with Shearson Lehman
Brothers. Ms. Englert received a
- 33 -
<PAGE>
B.A., Economics, from Boston College in 1985 and she is a Chartered Financial
Analyst.
Early Life Cycle Portfolio -- The Early Life Cycle Portfolio's
portfolio manager, Timothy W. Evnin, is the person primarily responsible for the
day-to-day management of the Portfolio's investment portfolio. Mr. Evnin, a Vice
President and Portfolio Manager of U.S. Trust, has been with U.S. Trust since
1987 and has been the Portfolio's portfolio manager since its inception.
Intermediate-Term Managed Income Portfolio and Managed Income
Portfolio --The portfolio manager for these Portfolios, Henry M. Milkewicz, is
the person primarily responsible for the day-to-day management of the
investments of these Portfolios. Mr. Milkewicz, a Senior Vice President and
Senior Fixed Income Portfolio Manager of U.S. Trust, has been with U.S. Trust
since 1986.
International Equity and Bond Portfolios -- All investment decisions
for the International Equity and Bond Portfolios are made by committee and no
persons are primarily responsible for making recommendations to that committee.
Advisory Fees and Expenses
For the 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; .75% of the average daily net assets of the
Managed Income Portfolio; .35% of the average daily net assets of the
Intermediate-Term 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. The advisory fee rates payable by the Equity,
Managed Income, International Equity, and International Bond Portfolios are
higher than the rates payable by most mutual funds. The Board of Directors
believes, based on information supplied to it by the Investment Adviser, that
these fees are comparable to the rates paid by many other funds with similar
investment objectives and policies and are appropriate for these Portfolios in
light of their investment objectives and policies. FACAM is entitled to receive
from the Investment Adviser (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
- 34 -
<PAGE>
applicable state expense limitations) all or a portion of the advisory fees
payable to it by a Portfolio, which waiver may be terminated at any time.
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; 1.05% for the
Managed Income Portfolio; 0.72% for the Intermediate-Term Managed Income
Portfolio; 1.50% for the International Equity Portfolio; 1.40% for the
International Bond Portfolio; and 0.51% for the Money Portfolio.
Distributor, Administrator and Transfer Agent
Shares in each Portfolio are sold on a continuous basis by Master
Variable Series' distributor, Chubb Securities Corporation (the "Distributor"),
a wholly-owned subsidiary of Chubb Life Insurance Company of America. The
Distributor, with principal offices at One Granite Place, Concord, New Hampshire
03301, is registered as a broker-dealer under the Securities Exchange Act of
1934, as amended, and is a member firm of the National Association of Securities
Dealers, Inc. The Distributor does not receive any remuneration from Master
Variable Series for distribution services.
Chubb Investment Advisory Corporation, One Granite Place, Concord, New
Hampshire 03301, 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%
Money Market Portfolio .10% .075% .05%
</TABLE>
- 35 -
<PAGE>
Chubb Investment Advisory Corporation also serves as transfer and
dividend disbursing agent for Master Variable Series.
Banking Laws
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from issuing, underwriting, selling or
distributing securities such as shares of the Portfolios, but such banking laws
and regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment adviser, transfer agent, or custodian to
such an investment company, or from purchasing shares of such company for and
upon the order of such customers. The Investment Adviser may be subject to such
banking laws and regulations. State securities laws may differ from the
interpretations of Federal law discussed in this paragraph and banks and
financial institutions may be required to register as dealers pursuant to state
law.
Should legislative, judicial, or administrative action prohibit or
restrict the activities of the Investment Adviser in connection with purchases
of Portfolio shares, the Investment Adviser might be required to alter
materially or discontinue the investment services offered to customers. It is
not anticipated, however, that any resulting change in the Portfolios' method of
operations would affect their net asset values per Share or result in financial
loss to any shareholder.
DIVIDENDS AND DISTRIBUTIONS
With respect to the Money Portfolio, net investment income is declared
daily as a dividend immediately after 4:00 p.m. (Eastern Time). All such
dividends are paid within ten days after the end of each month or within seven
days after the redemption of shares of the Money Portfolio. With respect to
each of the other Portfolios, dividends from the net investment income of the
Portfolios are declared and paid annually. For dividend purposes, each
Portfolio's investment income is reduced by accrued expenses directly
attributable to that Portfolio and the general expenses of Master Variable
Series prorated to that Portfolio on the basis of its relative net assets. Net
realized capital gains, if any, are distributed at least annually. Dividends
and distributions will reduce the net asset value of each of the Portfolios,
except the Money Portfolio, by the amount of the dividend or distribution.
Dividends and distributions will automatically be paid in shares of the
Portfolio on which
- 36 -
<PAGE>
the dividend or distribution is paid (as determined on the payable date), unless
payment in cash is elected.
TAXES
Each Portfolio intends to qualify and to continue to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended ("Code"). As such, a Portfolio is not subject to Federal income
tax on that part of its investment company taxable income (consisting generally
of net investment income, net gains from certain foreign currency transactions,
and net short-term capital gain, if any) and any net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its shareholders. It is the intention of each Portfolio to distribute all
such income and gains.
Portfolio shares are offered only to separate accounts of Insurers
(which are insurance company separate accounts that fund the variable
contracts). For a discussion of the taxation of life insurance companies and the
separate accounts, as well as the tax treatment of the variable contracts and
the holders thereof, see the discussion regarding "Federal Tax Considerations"
included in the prospectus for the variable contracts.
Each Portfolio intends to comply with the diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder. These
requirements are in addition to the diversification requirements imposed on each
Portfolio by Subchapter M of the Code and the 1940 Act. These requirements
place certain limitations on the assets of each separate account that may be
invested in securities of a single issuer, and, because Section 817(h) and the
regulations thereunder treat a Portfolio's assets as assets of the related
separate account, these limitations also apply to the Portfolio's assets that
may be invested in securities of a single issuer. Generally, the regulations
provide that, as of the end of each calendar quarter, or within 30 days
thereafter, no more than 55% of a Portfolio's total assets may be represented by
any one investment, no more than 70% by any two investments, no more than 80% by
any three investments, and no more than 90% by any four investments. For
purposes of Section 817(h), all securities of the same issuer, all interests in
the same real property project, and all interests in the same commodity are
treated as a single investment. A government security includes any security
issued or guaranteed or insured by the United States or an instrumentality of
the United States. Failure of a Portfolio to satisfy the Section 817(h)
requirements could result in adverse tax consequences to the Insurers and
holders of variable contracts, other than as described in the prospectus for the
variable contracts.
- 37 -
<PAGE>
The foregoing is only a summary of some of the important Federal
income tax considerations generally affecting the Portfolios and their
shareholders; see the Statement of Additional Information for a more detailed
discussion. Prospective investors are urged to consult their tax advisers.
DESCRIPTION OF CAPITAL STOCK
UST Master Variable Series, Inc. was organized as a Maryland
corporation on April 29, 1994. Currently, Master Variable Series has authorized
capital of one billion shares of Common Stock, $.001 par value per share,
classified into seven classes of shares representing seven investment
portfolios. Shares of Class A, Class B, Class C, Class D, Class E, Class F, and
Class G represent interests in the Equity, Early Life Cycle, International
Equity, Intermediate-Term Managed Income, Managed Income, International Bond,
and Money Portfolios, respectively.
Each share represents an equal proportionate interest in the
particular Portfolio with other shares of the Portfolio; and is entitled to such
dividends and distributions out of the income and capital gains, accrued and
realized from the assets belonging to such Portfolio as are declared in the sole
discretion of the Board of Directors. Master Variable Series' Charter authorizes
the Board of Directors to classify or reclassify any unissued shares into one or
more additional classes or series.
Shareholders are entitled to one vote for each share held. Any
fractional share of stock carries proportionately all the rights of a whole
share, including the right to vote. Under the 1940 Act as currently interpreted,
any matter required to be submitted under the provisions of the 1940 Act or
applicable state law or otherwise, to the holders of the outstanding voting
securities of an investment company such as Master Variable Series will 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 such matter. In
general, a Portfolio shall be deemed to be affected by a matter unless it is
clear that the interests of each Portfolio in the matter are identical, or that
the matter does not affect any interest of such Portfolio. In accordance with
current law, Master Variable Series anticipates that an Insurer issuing a
variable contract that participates in a Portfolio will request voting
instructions from variable contract owners and will vote shares in proportion to
the voting instructions received. For further information on voting rights, see
the prospectus for the variable contract.
Certificates for shares will not be issued unless expressly requested
in writing to Chubb Investment Advisory Corporation and will not be issued for
fractional shares.
- 38 -
<PAGE>
Currently, shares of Master Variable Series are being offered only to
separate accounts of Chubb Life Insurance Company of America and its affiliates.
Shares of Master Variable Series may in the future be sold to other separate
accounts, including separate accounts established to receive and invest purchase
payments received under variable life insurance policies issued by Chubb Life
Insurance Company of America or its affiliates. If Master Variable Series
shares are sold to such other separate accounts, it is conceivable that, in the
future, it may become disadvantageous for variable life insurance separate
accounts and variable annuity separate accounts to invest in Master Variable
Series simultaneously. Although neither Master Variable Series nor Chubb Life
Insurance Company of America currently foresees any such disadvantages, either
to variable life insurance policyowners or to variable annuity policyowners, if
shares are sold to both types of separate accounts, the Board of Directors of
Master Variable Series intends to monitor events in order to identify any
material conflicts between the variable life policyowners and the variable
annuity policyowners and to determine what actions, if any, should be taken in
response thereto. Such action could include the sale of shares by one or more
of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example: (1) changes in state insurance laws;
(2) changes in federal income tax laws; or (3) differences in voting
instructions between those given by variable life insurance policyowners and
those given by variable annuity contract owners. If the Board of Directors of
Master Variable Series were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, variable
life insurance policyowners and variable annuity policyowners would no longer
have the economies of scale resulting from a larger combined fund.
As of the date of this prospectus, Chubb Life Insurance Company of
America, One Granite Place, Concord, New Hampshire 03301, held of record all of
the shares of the Portfolios.
CUSTODIAN
United States Trust Company of New York serves as the custodian of the
Portfolios' assets. Communications to the custodian should be directed to
United States Trust Company of New York, Mutual Funds Service Division, 770
Broadway, New York, New York 10003-9598. U.S. Trust has entered into an
International Custodian Agreement with Morgan Stanley Trust Company, 1 Evertrust
Plaza, Jersey City, New Jersey 07302, providing for the custody of foreign
securities held by the Portfolios.
- 39 -
<PAGE>
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.
Total Return
From time to time, in advertisements, sales literature, or reports to
shareholders, the performance of the Equity, Early Life Cycle, Intermediate-Term
Managed Income, Managed Income, International Equity, and International Bond
Portfolios may be quoted and compared to that of other mutual funds with similar
investment objectives and to other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, the performance of a Portfolio
may be compared to data prepared by Lipper Analytical Services, Inc., a widely
recognized independent service which monitors the performance of mutual funds.
The performance of the Equity, Early Life Cycle, and International Equity
Portfolios may be also compared to the Standard & Poor's 500 Stock Index ("S&P
500"), an index of unmanaged groups of common stocks, the Consumer Price Index,
or the Dow Jones Industrial Average, a recognized unmanaged index of common
stocks of 30 industrial companies listed on the New York Stock Exchange. The
performance of a Portfolio may also be compared to the Europe, Australia, and
Far East Index ("EAFE") and the Financial Times Index, unmanaged standard
foreign securities indices.
Performance data as reported in national financial publications
including but not limited to 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 these Portfolios.
From time to time, each of these Portfolios may advertise its
performance using "average annual total return" over various periods of time.
Such total return figure reflects the average percentage change in the value of
an investment in a Portfolio from the beginning date of the measuring period to
the end of the measuring period. Average total return figures will be given for
the most recent one-year periods, and may be given for other periods as well
(such as from the commencement of a Portfolio's
- 40 -
<PAGE>
operations, or on a year-by-year basis). Each of these Portfolios may also use
aggregate total return figures for various periods, representing the cumulative
change in the value of an investment in a Portfolio for the specific period.
Both methods of calculating total return assume that dividends and capital gain
distributions made by a Portfolio during the period are reinvested in Portfolio
shares.
Yield
From time to time, in advertisements, sales literature, or reports to
shareholders, the yields of the Intermediate-Term Managed Income, Managed
Income, International Bond, and Money Portfolios may be quoted and compared to
those of other mutual funds with similar investment objectives and to other
relevant indexes or to rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
For example, the yield of the Money Portfolio may be compared to the applicable
averages compiled by Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market funds.
Yield of the Money Portfolio may also be compared to the average yields reported
by the Bank Rate Monitor for money market deposit accounts offered by the 50
leading banks and thrift institutions in the top five standard metropolitan
statistical areas.
Yield data as reported in national financial publications including,
but not limited to, 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 Portfolios' yields.
The Money Portfolio may advertise a seven-day yield which refers to
the income generated over a particular seven-day period identified in the
advertisement by an investment in the Portfolio. This income is annualized,
i.e., the income during a particular week is assumed to be generated each week
over a 52-week period and is shown as a percentage of the investment. The Money
Portfolio may also advertise its "effective yield" which is calculated similarly
but, when annualized, income is assumed to be reinvested, thereby making the
effective yields slightly higher because of the compounding effect of the
assumed reinvestment.
The Intermediate-Term Managed Income, Managed Income, and
International Bond Portfolios each may advertise its effective yield which is
calculated by dividing its average daily net investment income per share during
a 30-day (or one month) base period identified in the advertisement by its net
asset value per share on the last day of the period, and annualizing the result
on a semi-annual basis.
- 41 -
<PAGE>
Performance and yields will fluctuate and any quotation of performance
or yield should not be considered as representative of a Portfolio's future
performance. Since yields fluctuate, yield data cannot necessarily be used to
compare an investment in a Portfolio with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time.
MISCELLANEOUS
UST Master Variable Series, Inc. will provide unaudited semi-annual
reports describing the Portfolios' investment operations and annual financial
statements audited by independent auditors.
As used in this Prospectus, a "vote of the holders of a majority of
the outstanding shares" of Master Variable Series or a particular Portfolio
means the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of Master Variable Series or such Portfolio, or (b) 67% or more of the
interests of Master Variable Series or such Portfolio present at a meeting if
more than 50% of the outstanding shares of Master Variable Series or such
Portfolio are represented at the meeting in person or by proxy.
Inquiries regarding the Portfolios may be directed to the
Administrator at One Granite Place, Concord, New Hampshire 03301, telephone
(800) 258-3648.
- 42 -
<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>
<CAPTION>
Page
------------------------------------------------------------
<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.
- 2 -
<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
- 3 -
<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
- 4 -
<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.
- 6 -
<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
- 7 -
<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
- 8 -
<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
- 10 -
<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
- 11 -
<PAGE>
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
- 12 -
<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
- 13 -
<PAGE>
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.
- 14 -
<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
- 15 -
<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.
- 16 -
<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
- 17 -
<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;
- 18 -
<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
- 19 -
<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;
- 20 -
<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
- 21 -
<PAGE>
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
- 22 -
<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
- 23 -
<PAGE>
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.
- 24 -
<PAGE>
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
- 36 -
<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%.
- 38 -
<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
<PAGE>
UST MASTER VARIABLE SERIES, INC.
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights for the Registrant's Equity, Early Life
Cycle, Intermediate-Term Managed Income, Managed Income,
International Equity, International Bond and Money Portfolios for
the period from January 17, 1995 (commencement of operations)
through June 30, 1995.
(2) Included in Part B:
Statement of Net Assets for Equity, Early Life Cycle,
Intermediate-Term Managed Income, Managed Income, International
Equity, International Bond and Money Portfolios - June 30, 1995
(unaudited).
Statement of Operations for Equity, Early Life Cycle,
Intermediate-Term Managed Income, Managed Income, International
Equity, International Bond and Money Portfolios - June 30, 1995
(unaudited).
Statement of Changes in Net Assets for Equity, Early Life Cycle,
Intermediate-Term Managed Income, Managed Income, International
Equity, International Bond and Money Portfolios for the period
ended June 30, 1995 (unaudited).
Financial Highlights for Equity, Early Life Cycle, Intermediate-
Term Managed Income, Managed Income, International Equity,
International Bond and Money Portfolios for the period from
January 17, 1995 (commencement of operations) to June 30, 1995
(unaudited).
Notes to Financial Statements - June 30, 1995 (unaudited).
(b) Exhibits
1 Articles of Amendment and Restatement.
2 Amended and Restated By-Laws.
5(a) Form of Investment Advisory Agreements between Master Variable
Series and United States Trust Company of New York.*
5(b) Form of Sub-Advisory Agreement between United States Trust Company of
New York and Foreign and Colonial Asset Management.*
6 Distribution Agreement between Master Variable Series and Chubb
Securities Corporation.
8(a) Custody Agreement between Master Variable Series and United States
Trust Company of New York.
9(a) Participation Agreement among Master Variable Series, Chubb Life
Insurance Company of America, and The Colonial Life Insurance
Company of America.
<PAGE>
9(b) Administrative Services Agreement between Master Variable Series
and Chubb Investment Advisory Services.
10 Opinion regarding the legality of the securities being registered.**
11 Consent of Drinker Biddle & Reath.
18 Powers of Attorney.*
27 (a) Financial Data Schedule as of June 30, 1995 for the Equity
Portfolio.
27 (b) Financial Data Schedule as of June 30, 1995 for the Early Life
Cycle Portfolio.
27 (c) Financial Data Schedule as of June 30, 1995 for the
Intermediate-Term Managed Income Portfolio.
27 (d) Financial Data Schedule as of June 30, 1995 for the Managed
Income Portfolio.
27 (e) Financial Data Schedule as of June 30, 1995 for the
International Equity Portfolio.
27 (f) Financial Data Schedule as of June 30, 1995 for the
International Bond Portfolio.
27 (g) Financial Data Schedule as of June 30, 1995 for the Money
Portfolio.
/*/Incorporated by reference to the Registrant's Pre-Effective Amendment
No. 1 to Registration Statement on Form N-1A filed on September 21,
1994.
/**/To be filed with the Registrant's Rule 24f-2 Notice.
-2-
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
Registrant is controlled by its Board of Directors.
Item 26. Number of Holders of Securities
The following information is as of July 1, 1995
Title of Class Number of Record Holders
Class A Common Stock 2
Class B Common Stock 0
Class C Common Stock 0
Class D Common Stock 0
Class E Common Stock 0
Class F Common Stock 0
Class G Common Stock 0
Item 27. Indemnification
Article IX, Sections 1 and 2 of the Registrant's Articles of
Amendment and Restatement, and Article VI of the Registrant's Amended and
Restated By-laws, provide for the indemnification of the Registrant's directors
and officers in accordance with, and to the extent permitted by, Section 2-418
of the General Corporation Law of the State of Maryland. Registrant has obtained
from a major insurance carrier a directors' and officers' liability policy
covering certain types of errors and omissions. In no event will Registrant
indemnify any of its directors, officers, employees, or agents against any
liability to which such person would otherwise be subject by reason of his
willful misfeasance, bad faith, gross negligence in the performance of his
duties, or by reason of his reckless disregard of the duties involved in the
conduct of his office or arising under his agreement with Registrant. Registrant
will comply with Rule 484 under the Securities Act of 1933, as amended, and
Release No. 11330 under the Investment Company Act of 1940, as amended, in
connection with any indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in connection with the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
Item 28(a). Business and Other Connections of Investment Adviser
(a) United States Trust Company of New York.
United States Trust Company of New York ("U.S. Trust") is a
full-service state-chartered bank located in New York, New York. Set forth below
are the names and principal businesses of the trustees and certain senior
executive officers of U.S. Trust, including those who are engaged in any other
business, profession, vocation, or employment of a substantial nature.
-3-
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================
POSITION NAME PRINCIPAL TYPE OF
WITH U.S. OCCUPATION BUSINESS
TRUST
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trustee/ Samuel C. Butler Partner in Cravath, Swaine & Law Firm
Director Cravath, Swaine & Moore Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
---------------------------------------------------------------------------------------------------------
Trustee/ Peter O. Crisp General Partner in Venrock
Director Venrock Associates Associates
Room 5600
30 Rockefeller Plaza
New York, NY 10112
---------------------------------------------------------------------------------------------------------
Trustee/ Antonia M. Grumbach Partner in Patterson, Belknap, Law Firm
Director Patterson, Belknap, Webb & Tyler Webb & Tyler
30 Rockefeller Plaza
New York, NY 10112
---------------------------------------------------------------------------------------------------------
Trustee/ H. Marshall Schwarz Chairman of the Board and Chief Bank
Director, United States Trust Company Executive Officer of U.S. Trust
Chairman of the of New York Corp. and U.S. Trust Company of
Board and Chief 114 West 47th Street N.Y.
Executive Officer New York, NY 10036
---------------------------------------------------------------------------------------------------------
Trustee/ Philippe de Montebello Director of the Metropolitan Art Museum
Director Metropolitan Museum of Art Museum of Art
1000 Fifth Avenue
New York, NY 10028-0198
---------------------------------------------------------------------------------------------------------
Trustee/ Frederic C. Hamilton Chairman of the Board of Hamilton Oil and Gas
Director Hamilton Oil Corp. Oil Corp. Exploration
1560 Broadway
Suite 2000
Denver, CO 80202
---------------------------------------------------------------------------------------------------------
Trustee/ John H. Stookey
Director Hanson Industries
410 Park Avenue
New York, NY
10028
---------------------------------------------------------------------------------------------------------
Trustee/ Robert N. Wilson Vice Chairman of the Board of
Director Johnson & Johnson Johnson & Johnson
One Johnson &
Johnson Plaza
New Brunswick, NJ 08933
---------------------------------------------------------------------------------------------------------
Trustee/ Peter L. Malkin Chairman of Wein, Malkin &
Director Wein, Malkin & Bettex Bettex
Lincoln Building
60 East 42nd Street
New York, NY 10165
---------------------------------------------------------------------------------------------------------
Trustee/ Richard F. Tucker Retired
Director 11 Over Rock Lane
Westport, CT 06880
---------------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
=========================================================================================================
POSITION NAME PRINCIPAL TYPE OF
WITH U.S. OCCUPATION BUSINESS
TRUST
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trustee/ Carroll L. Wainwright, Jr. Consulting partner of Milbank, Law Firm
Director Milbank, Tweed, Hadley & McCloy Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, NY 10005
---------------------------------------------------------------------------------------------------------
Trustee/ Frederick S. Wonham Vice Chairman of the Board of U.S. Bank
Director and Vice United States Trust Company Trust Corporation and United States
Chairman of New York Trust Company of New York
114 West 47th Street
New York, NY 10036
----------------------------------------------------------------------------------------------------------
Trustee/ Donald M. Roberts Vice Chairman of the Board and Bank
Director, Vice United States Trust Company Treasurer of U.S. Trust Corporation
Chairman and of New York and United States Trust Company of
Treasurer 114 West 47th Street New York
New York, NY 10036
----------------------------------------------------------------------------------------------------------
Trustee/ Frederick B. Taylor Vice Chairman and Chief Bank
Director, Vice United States Trust Company Investment Officer of U.S. Trust
Chairman and of New York Corporation and United States Trust
Chief Investment 114 West 47th Street Company of New York
Officer New York, NY 10036
---------------------------------------------------------------------------------------------------------
Trustee/ Jeffrey S. Maurer President of U.S. Trust Corporation Bank
Director and United States Trust Company and United States Trust Company of
President of New York New York
114 West 47th Street
New York, NY 10036
---------------------------------------------------------------------------------------------------------
Trustee/ Daniel P. Davison Chairman, Christie, Manson & Fine Arts
Director Christie, Manson & Woods Woods International, Inc. Auctioneer
International, Inc.
502 Park Avenue
New York, NY 10021
---------------------------------------------------------------------------------------------------------
Trustee/ Orson D. Munn Chairman and Director of Munn, Investment
Director Munn, Bernhard & Associates, Inc. Bernhard & Associates, Inc. Advisory
6 East 43rd Street Firm
28th Floor
New York, NY 10017
---------------------------------------------------------------------------------------------------------
Trustee/ Philip L. Smith Corporate Director and Trustee
Director P.O. Box 386
Ponte Verde Beach, FL 32004
---------------------------------------------------------------------------------------------------------
Trustee/ Edwin D. Etherington President Emeritus, Wesleyan Education
Director P.O. Box 100 University and Former President of
Old Lyme, CT 06371 American Stock Exchange
=========================================================================================================
</TABLE>
-5-
<PAGE>
Item 28(b). Business and Other Connections of Sub-Adviser
<TABLE>
<CAPTION>
======================================================================================
POSITION NAME PRINCIPAL TYPE OF
WITH OCCUPATION BUSINESS
FACAM/1/
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Simon James Director of Foreign and Colonial Investment
Exchange House Management Adviser
Primrose Street
London, England
EC2A 2NY
--------------------------------------------------------------------------------------
Oliver N. Dawson Chief Investment Officer of Foreign Investment
Exchange House & Colonial Management Limited Adviser
Primrose Street,
London, England
EC2A 2NY
--------------------------------------------------------------------------------------
Harry C. Rowney Senior Vice President of United Bank
114 W. 47th Street States Trust Company of New York
New York, NY 10036
--------------------------------------------------------------------------------------
Hon. James D.D. Ogilvy Chief Executive of Foreign & Investment
Exchange House Colonial Management Limited Adviser
Primrose Street,
London, England
SC2A 2NY
--------------------------------------------------------------------------------------
Managing Steve Darby Executive Vice President of U.S. Bank
Director 114 W. 47th Street Trust Company of New York
New York, NY 10036
--------------------------------------------------------------------------------------
Paul K. Napoli Executive Vice President of U.S. Bank
114 W. 47th Street Trust Company of New York
New York, NY 10036
--------------------------------------------------------------------------------------
Chairman Jeffrey S. Maurer President of United States Bank
114 W. 47th Street Trust Company of New York
New York, NY 10036
======================================================================================
</TABLE>
1/ All individuals listed above are members of FACAM's investment committee
that determines general investment advice to be given to clients.
Item 29. Principal Underwriter
a. Chubb Securities Corporation also acts as principal underwriter for
the following:
-- Hampshire Funding, Inc.
-- Chubb Investment Funds, Inc.
-- Separate Account A of Chubb Life Insurance Company of America
-- Separate Account C of Chubb Life Insurance Company of America
-- Separate Account B of The Colonial Life Insurance Company of
America
-- Chubb Separate Account VA-1 of Chubb Life Insurance Company of
America
-- Colonial Separate Account VA-2 of The Colonial Insurance
Company of America
-6-
<PAGE>
-- Chubb America Fund, Inc.
b. The Principal Business Address of each of the following Directors and
Officers of Chubb Securities Corporation is:
One Granite Place
Concord, New Hampshire 03301
<TABLE>
<CAPTION>
Name Position or Office with Underwriter
---- -----------------------------------
<S> <C>
Ronald R. Angarella...................... Vice Chairman
Frederick H. Condon...................... Director
Charles C. Cornelio...................... Vice President, General Counsel, Secretary
Randell G. Craig......................... Director
Harriett A. Haller....................... Director
Carol R. Hardiman........................ Vice President, Administration
F. Paul Kovach........................... Vice President, Securities Marketing
Joseph A. Morein......................... Director
Bruce R. Stefany......................... President and Director
John F. Swope............................ Chairman and Director
Mary Toumpas............................. Assistant Vice President/Assistant Secretary
Ernest J. Tsouros........................ Assistant Vice President and Director
John A. Weston........................... Treasurer
</TABLE>
Item 30. Location of Accounts and Records
(1) United States Trust Company of New York, 114 W. 47th Street, New
York, NY 10036 (records relating to its functions as investment adviser and
custodian).
(2) Foreign and Colonial Asset Management, Exchange House, Primrose
Street, London England EC2A 2NY (records relating to its function as sub-adviser
to the International Equity and International Bond Portfolios).
(3) Chubb Investment Advisory Corporation, One Granite Place,
Concord, New Hampshire 03301 (records relating to its functions as administrator
and transfer agent).
(4) Drinker Biddle & Reath, Philadelphia National Bank Building, 1345
Chestnut Street, Philadelphia, Pennsylvania 19107-3496 (Registrant's Articles of
Incorporation, By-Laws, and Minute Books).
Item 31. Management Services
Not applicable.
Item 32. Undertakings
The Registrant undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, Registrant hereby
certifies that it meets all of the requirements for effectiveness of this Post-
Effective Amendment No. 1 ("Amendment No. 1") to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment No. 1 to its Registration Statement to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of Philadelphia in the
Commonwealth of Pennsylvania on the 31st day of July, 1995.
UST MASTER VARIABLE SERIES, INC.,
Registrant
By: */s/ Alfred Tannachion
-----------------------------
Alfred Tannachion
President
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 1 to the Registration Statement has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
*/s/ Alfred Tannachion Director, Chairman of the July 31, 1995
---------------------- Board of Directors, President
Alfred Tannachion and Treasurer (Principal Executive
Officer, Principal Financial
Officer, and Principal Accounting
Officer)
*/s/ Donald L. Campbell Director July 31, 1995
-----------------------
Donald L. Campbell
*/s/ Charles C. Cornelio Director July 31, 1995
------------------------
Charles C. Cornelio
*/s/ Joseph H. Dugan Director July 31, 1995
--------------------
Joseph H. Dugan
*/s/ Wolfe J. Frankl Director July 31, 1995
--------------------
Wolfe J. Frankl
*/s/ Robert A. Robinson Director July 31, 1995
-----------------------
Robert A. Robinson
</TABLE>
/*/ By
--- ------------------------
W. Bruce McConnel, III,
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
1 Articles of Amendment and Restatement.
2 Amended and Restated By-Laws.
6 Distribution Agreement between Master Variable
Series and Chubb Securities Corporation.
8(a) Custody Agreement between Master Variable Series
and United States Trust Company of New York.
9(a) Participation Agreement among Master Variable Series,
Chubb Life Insurance Company of America, and The
Colonial Life Insurance Company of America.
9(b) Administrative Services Agreement between Master
Variable Series and Chubb Investment Advisory Services.
11 Consent of Drinker Biddle & Reath.
27 (a) Financial Data Schedule as of June 30, 1995 for the
Equity Portfolio.
27 (b) Financial Data Schedule as of June 30, 1995 for the
Early Life Cycle Portfolio.
27 (c) Financial Data Schedule as of June 30, 1995 for the
Intermediate-Term Managed Income Portfolio.
27 (d) Financial Data Schedule as of June 30, 1995 for the
Managed Income Portfolio.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
27 (e) Financial Data Schedule as of June 30, 1995 for
the International Equity Portfolio.
27 (f) Financial Data Schedule as of June 30, 1995 for
the International Bond Portfolio.
27 (g) Financial Data Schedule as of June 30, 1995 for
the Money Portfolio.
</TABLE>
<PAGE>
Exhibit 1
---------
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
UST MASTER VARIABLE SERIES, INC.
UST Master Variable Series, Inc., a Maryland corporation having its
principal office in Maryland in the City of Baltimore, State of Maryland
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland:
ARTICLE I
---------
The Corporation desires to amend and restate its Charter as currently
in effect. Therefore, the Charter of the Corporation is hereby amended and
restated by striking out in its entirety the existing Charter and substituting
in lieu thereof the following:
I
DEFINITIONS
-----------
The following definitions shall apply herein and in the By-laws.
Charter: These articles of incorporation as from time to time amended,
supplemented and/or restated.
General Assets: Any assets, income, earnings, profits or proceeds
thereof, funds, or payments that are not readily identifiable as belonging to
any particular class of the Corporation's stock or any corresponding investment
portfolio of the Corporation.
General Liabilities: Any liabilities, expenses, costs, charges, or
reserves of the Corporation that are not readily identifiable as belonging to
any particular class of
<PAGE>
the Corporation's stock or any corresponding investment portfolio of the
Corporation.
1940 Act: The Investment Company Act of 1940, as amended, and any
rules or regulations adopted thereunder.
II
NAME
----
The name of the corporation is UST MASTER VARIABLE SERIES, INC.
(hereinafter called the "Corporation").
The Corporation acknowledges that it is adopting its corporate name
through permission of United States Trust Company of New York (hereinafter
referred to as "US Trust") and agrees that if US Trust or a successor to its
business (whether such succession be by merger, consolidation, purchase of
assets or otherwise) should, at any time and for any cause, cease to be the
investment manager to the Corporation, the Corporation shall at the written
request of US Trust or any such successor eliminate the name "UST" from the
Corporation's name and from the designations of its shares and will not
thereafter use the name "UST" in any form or combination whatsoever in the
conduct of the Corporation's business. The Corporation further acknowledges
that US Trust and its subsidiaries reserve the right to grant the non-exclusive
right to use the name "UST" to any other corporation, including other investment
companies, whether now in existence or hereafter created, provided that nothing
in this Article II shall be understood to limit the rights of UST Master Funds,
Inc. and UST Master Tax-Exempt Funds, Inc. to use the name "UST". The foregoing
agreements on the part of the Corporation are hereby made binding upon it, its
directors, officers, shareholders, creditors and all other persons claiming
under or through it.
III
PURPOSES AND POWERS
-------------------
The purpose or purposes for which the Corporation is formed and the
business or objects to be transacted, carried on, and promoted by it are as
follows:
1. To operate as, and carry on the business of, an investment
company.
2. To hold, invest and reinvest its assets, and in connection
therewith, to hold part or all of its assets in cash, and to purchase, subscribe
for or otherwise acquire, hold for
-2-
<PAGE>
investment or otherwise, sell, assign, negotiate, transfer, exchange, pledge,
lend or otherwise dispose of or realize upon, securities (which term
"securities" shall for the purposes of this Charter, without limitation of the
generality hereof, be deemed to include any stocks, shares, bonds, debentures,
notes, certificates of deposit, mortgages, obligations, evidence of
indebtedness, and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the same, or
evidencing or representing any other rights or interests therein, or in any
property or assets, or, in general, any interest or instrument commonly known as
a security, whether domestic or foreign) and other assets and investments
created, issued, or guaranteed by any persons, firms, associations,
corporations, syndicates, combinations, organizations, governments or political
subdivisions, agencies or instrumentalities thereof, including futures or
forward contracts on or in financial instruments, stock indices and foreign
currencies; and to exercise, as owner or holder of any securities or other
assets, all rights, powers, and privileges in respect thereof; and to do any and
all acts and things for the preservation, protection, improvement, and/or
enhancement in value of any and all of its assets.
3. To borrow money and pledge assets in connection with any of the
objects and purposes of the Corporation, and to issue notes or other obligations
evidencing such borrowings.
4. To issue and sell shares of its own stock in such amounts and on
such terms and conditions, for such purposes and for such amount or kind of
consideration (including, without limitation, securities) now or hereafter
permitted by the laws of the State of Maryland and by this Charter, as its Board
of Directors may determine.
5. To redeem, repurchase, or otherwise acquire, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
shareholders of the Corporation) shares of its stock, in any manner and to the
extent now or hereafter permitted by the laws of the State of Maryland and by
this Charter.
6. To conduct its business at one or more offices in any part of the
world, without restriction or limit as to the extent.
7. To carry out all or any of the foregoing objects and purposes as
principal or agent, and alone or with associates or, to the extent now or
hereafter permitted by the laws of the State of Maryland, as a member of, or as
the owner or holder of any security of, or interest in, any firm, association,
corporation, trust or syndicate; and in connection therewith to make or enter
into such deeds or contracts with any persons,
-3-
<PAGE>
firms, associations, corporations, syndicates, governments or political
subdivisions or agencies or instrumentalities thereof and to do such acts and
things and to exercise such powers as a natural person could lawfully make,
enter into, do or exercise.
8. To do any and all such further acts or things and to exercise any
and all such further powers or rights as may be necessary, incidental, relative,
conducive, appropriate or desirable for the accomplishment, carrying out, or
attainment of all or any of the foregoing purposes or objectives.
9. To engage in any and all acts and do every other act not
inconsistent with law which is appropriate to promote and attain the purposes
set forth in this Charter.
The foregoing purposes and objectives shall, except as otherwise
expressly provided, be in no way limited or restricted by reference to, or
inference from, the terms of any other clause of this or any other article of
this Charter, and shall each be regarded as independent and construed as powers
as well as purposes and objectives, and the enumeration of specific purposes,
powers and objectives shall not be construed to limit or restrict in any manner
the meaning of general terms or the general powers of the Corporation now or
hereafter conferred by the laws of the State of Maryland, nor shall the
expression of one thing be deemed to exclude another, though it be of like
nature, not expressed; provided, however, that the Corporation shall not have
power to carry on within the State of Maryland any business whatsoever, the
carrying on of which would preclude it from being classified as an ordinary
business corporation under the laws of that State.
IV
PRINCIPAL OFFICE AND PLACE OF BUSINESS
--------------------------------------
The post office address of the principal office of the Corporation in
the State of Maryland is c/o Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the registered agent of the Corporation
in the State of Maryland is the Corporation Trust Incorporated, a corporation of
the State of Maryland, and the post office address of the resident agent is 32
South Street, Baltimore, Maryland 21202.
V
CAPITAL STOCK
-------------
1. The total number of shares of stock which the Corporation has
authority to issue is one billion (1,000,000,000)
-4-
<PAGE>
shares of capital stock (hereinafter, "stock" or "shares of stock") of the par
value of $0.001 each, and of the aggregate par value of one million dollars
($1,000,000). Seven hundred million (700,000,000) of such shares shall be issued
in the following classes of common stock comprising 100 million shares each and
bearing the following designations, provided, however, that the Board of
Directors may increase or decrease any such number of shares: Class A (Equity
Portfolio), Class B (Early Life Cycle Portfolio), Class C (International Equity
Portfolio), Class D (Intermediate-Term Managed Income Portfolio), Class E
(Managed Income Portfolio), Class F (International Bond Portfolio) and Class G
(Money Portfolio). The remaining three hundred million (300,000,000) of such
shares shall initially be unclassified shares of stock. The Board of Directors
shall have the authority to classify or reclassify any unissued stock, whether
now or hereafter authorized, into the above-designated classes or such other
classes as it may determine, each comprising such number of shares and having
such designations, voting powers, preferences, conversion and other rights and
such qualifications, limitations as to dividends, restrictions and terms or
conditions of redemption as may be fixed or determined from time to time by
resolution or resolutions. The Board of Directors may increase or decrease the
number of shares of any class, provided that it may not decrease the number of
shares of any class below the number of shares thereof then outstanding.
2. Except as the Board of Directors may provide when classifying or
reclassifying any unissued shares of stock, each class of stock of the
Corporation shall have the following voting powers, preferences, conversion or
other rights, qualifications, restrictions, limitations as to dividends and
terms or conditions of redemption:
(a) Except as otherwise provided herein, all consideration received by the
Corporation for the issue or sale of shares of stock of a particular class,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits, and proceeds thereof, including
any proceeds derived from the sale, exchange or liquidation of such assets,
any funds or payments derived from any reinvestment of such proceeds, and
any General Assets allocated to a class, shall constitute assets of that
class, in contrast to other classes (subject only to the rights of
creditors) and are herein referred to as assets "belonging to" that class.
The Board of Directors shall determine allocation of the assets belonging
to the Corporation to a given class. Any General Assets shall be allocated
by or under the supervision of the Board of Directors to and among any one
or more of the classes established and designated from time to time, in
such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and
-5-
<PAGE>
equitable. Such decisions by the Board of Directors shall be final and
conclusive.
(b) The assets belonging to each class shall be charged with the
liabilities of the Corporation in respect of that class and with all
expenses, costs, charges, and reserves attributable to that class. Such
liabilities, expenses, costs, charges, and reserves, together with any
General Liabilities allocated to that class, shall constitute the
liabilities of that class, in contrast to other classes, and are herein
referred to as "belonging to" that class. Any General Liabilities shall be
allocated by or under the supervision of the Board of Directors to and
among any one or more of the classes established and designated from time
to time, in such manner and on such basis as the Board of Directors, in its
sole discretion, deems fair and equitable. Such decisions by the Board of
Directors shall be final and conclusive.
(c) The Board of Directors may declare and pay dividends or distributions,
in stock or in cash, on shares of any class of stock to the holders of such
stock, in such manner and from the assets belonging to such class (as such
phrase is defined in paragraph 2(a) of this Article V), after providing for
the actual and accrued liabilities belonging to that class (as such phrase
is defined in paragraph 2(b) of this Article V), as the directors, in their
sole discretion, determine.
(d) In the event of the Corporation's liquidation or dissolution, the
holders of each established and designated class of stock shall 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 the Corporation. General Assets shall be allocated by, or under
the supervision of, the Board of Directors to and among any one or more
established and designated classes. Such allocations by the Board of
Directors shall be conclusive and binding for all purposes.
(e) Each stockholder of each class of capital stock shall be entitled to
one vote for each share of capital stock, irrespective of the class, then
standing in his name on the books of the Corporation, and on any matter
submitted to a vote of stockholders, all shares of capital stock then
issued and outstanding and entitled to vote shall be voted in the aggregate
and not by class, except that: (i) when
-6-
<PAGE>
expressly required by law, or when otherwise permitted by the Board of
Directors acting in its sole discretion, shares of capital stock shall be
voted by individual class and (ii) only shares of capital stock of the
respective class or classes affected by a matter shall be entitled to vote
on such matter.
(f) All shares of each particular class shall represent an equal
proportionate interest in the assets belonging to that class (subject to
the liabilities belonging to that class), and each share of a particular
class shall be equal to each other share of that class. Without the vote
of the shares of any class of stock of the Corporation then outstanding
(unless such vote is otherwise required by applicable law), the Corporation
may, if so determined by the Board of Directors, from time to time divide
or combine the shares of any particular class into a greater or fewer
number of shares of that class without thereby changing the proportionate
beneficial interest in the assets belonging to that class or in any way
affecting the rights of shares of any other class of stock. Notwithstanding
the foregoing, Article V (2)(f) herein shall not restrict any dividends or
distributions permitted pursuant to Article V (2)(c) above or otherwise
under this Charter that may exist with respect to shareholder elections to
receive such dividends or distributions in cash or shares of the same class
or that may otherwise exist with respect to dividends or distributions on
shares of the same class of stock.
(g) Each holder of any class of capital stock of the Corporation who
surrenders his share certificate in good delivery form to the Corporation
or, if the shares in question are not represented by certificates, who
delivers to the Corporation a written request in good order signed by the
stockholder, shall, to the extent permitted by the By-laws or by resolution
of the Board of Directors, be entitled to convert the shares in question on
the basis hereinafter set forth, into shares of any other class of capital
stock of the Corporation with respect to which conversion is permitted by
applicable law. The Corporation shall determine the net asset value, as
provided herein, of the shares to be converted and may deduct therefrom a
conversion cost, in an amount determined within the discretion of the Board
of Directors. Within five (5) business days after such surrender and
payment of any conversion cost, the Corporation shall issue to the
stockholder such number of shares of stock of the class desired as, taken
at the net asset value thereof determined as provided herein in the same
manner and at the same time as that of the shares surrendered, shall equal
the net asset value of the shares surrendered, less any conversion cost as
aforesaid. Any amount representing a fraction of a share may be paid in
-7-
<PAGE>
cash at the option of the Corporation. Any conversion cost may be paid
and/or assigned by the Corporation to the underwriter and/or to any other
agency, as it may elect.
(h) If, in the opinion of the Board of Directors of the Corporation,
concentration in the ownership of shares of capital stock might cause the
Corporation to be deemed a personal holding company within the meaning of
the Internal Revenue Code, as now or hereafter in force, the Corporation
may at any time and from time to time refuse to give effect on the books of
the Corporation to any transfer or transfers of any share or shares of
capital stock in an effort to prevent such personal holding company status.
3. Any fractional share of stock shall carry proportionally all the
rights of a whole share, including the right to vote and the right to receive
dividends or distributions.
4. All persons who shall acquire stock in the Corporation shall
acquire the same subject to the provisions of this Charter and the Corporation's
By-laws.
5. The presence in person or by proxy of the holders of a majority
of the votes entitled to be cast at any meeting of stockholders shall constitute
a quorum for the transaction of any business at all such meetings except as
otherwise provided by law or this Charter. Notwithstanding the foregoing,
except as otherwise required by law or by this Charter, where the holders of any
class of stock are entitled or required to vote as a separate class (a "separate
class") or where the holders of any two or more (but not all) classes of stock
are entitled or required to vote as a single class (a "combined class"), the
presence in person or by proxy of the holders of a majority of the votes of such
separate class or combined class, as the case may be, entitled to be cast at any
meeting shall constitute a quorum for the transaction of any business via such a
vote.
6. Notwithstanding any provision of the laws of the State of
Maryland requiring any action to be taken or authorized by the affirmative vote
of the holders of a greater proportion than a majority of the votes of all
classes or of a separate class or combined class, as the case may be, entitled
to be cast, such action shall be effective and valid if taken or authorized by
the affirmative vote of the holders of a majority of the total number of votes
of all classes or of a separate class or a combined class, as the case may be,
entitled to vote thereon.
7. No stockholders of the Corporation shall, as such, have any
preemptive right to purchase or subscribe for any shares of stock of any class
or any other security of the Corporation which it may issue or sell (whether out
of the number of shares
-8-
<PAGE>
authorized by this Charter, or out of any shares of stock of the Corporation
acquired by it after the issue thereof, or otherwise) other than such right, if
any, as the Board of Directors in its sole discretion may determine.
8. The stockholders of the Corporation shall not be liable for, and
their private property shall not be subject to, claim, levy or other encumbrance
on account of debts or liabilities of the Corporation, to any extent whatsoever.
9. The Corporation may issue shares in open account form without
issuance or delivery of a certificate therefor, in which event the ownership of
such shares shall be reflected exclusively by entry on the books of the
Corporation. The Corporation shall be entitled to treat the person in whose
name any share of stock of the Corporation is registered as the owner thereof
for purposes of dividends and other distributions in the course of business or
in the course of recapitalization, consolidation, merger, reorganization,
liquidation, sale of the property and assets of the Corporation, or otherwise,
and for the purpose of votes, approvals and consents by stockholders, and for
the purpose of notices to stockholders, and for all other purposes whatever; and
the Corporation shall not be bound to recognize any equitable or other claim to
or interest in such share, on the part of any other person, whether or not the
Corporation shall have notice thereof, except as otherwise required by law.
10. Without the vote of the shares of any class of stock of the
Corporation then outstanding (unless stockholder approval is otherwise required
by applicable law), the Corporation may, if so determined by the Board of
Directors:
(a) sell and convey the assets belonging to a class of stock to another
corporation or trust that is a management investment company (as defined in
the Investment Company Act of 1940) and is organized under the laws of any
state of the United States for consideration which may include the
assumption of all outstanding obligations, taxes and other liabilities,
accrued or contingent, belonging to such class and which may include
securities issued by such corporation or trust. Following such sale and
conveyance, and after making provision for the payment of any liabilities
belonging to such class that are not assumed by the purchaser of the assets
belonging to such class, the Corporation may, at its option, redeem all
outstanding shares of such class at the net asset value thereof as
determined by the Board of Directors in accordance with the provisions of
applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors. Notwithstanding any other
provision of the Charter of the Corporation to the contrary, the
-9-
<PAGE>
redemption price may be paid in any combination of cash or other assets
belonging to the class, including but not limited to the distribution of
the securities or other consideration received by the Corporation for the
assets belonging to such class upon such conditions as the Board of
Directors deems, in its sole discretion, to be appropriate and consistent
with applicable law and the Charter of the Corporation;
(b) sell and convert the assets belonging to a class of stock into money
and, after making provision for the payment of all obligations, taxes and
other liabilities, accrued or contingent, belonging to such class, the
Corporation may, at its option (i) redeem all outstanding shares of such
class at the net asset value thereof as determined by the Board of
Directors in accordance with the provisions of applicable law, less such
redemption fee or other charge, if any, as may be fixed by resolution of
the Board of Directors upon such conditions as the Board of Directors
deems, in its sole discretion, to be appropriate consistent with applicable
law and the Charter of the Corporation, or (ii) combine the assets
belonging to such class following such sale and conversion with the assets
belonging to any one or more other classes of stock of the Corporation
pursuant to and in accordance with section 10(c) of this Article V; or
(c) combine the assets belonging to a class of stock with the assets
belonging to any one or more other classes of stock of the Corporation if
the Board of Directors reasonably determines that such combination will not
have a material adverse effect on the stockholders of any class of stock of
the Corporation participating in such combination. In connection with any
such combination of assets, the shares of any class of stock of the
Corporation then outstanding may, if so determined by the Board of
Directors, be converted into shares of any other class or classes of stock
of the Corporation with respect to which conversion is permitted by
applicable law, or may be redeemed, at the option of the Corporation, at
the net asset value thereof as determined by the Board of Directors in
accordance with the provisions of applicable law, less such redemption fee
or other charge, or conversion cost, if any, as may be fixed by resolution
of the Board of Directors upon such conditions as the Board of Directors
deems, in its sole discretion, to be appropriate and consistent with
applicable law and the Charter of the Corporation. Notwithstanding any
other provision of this Charter to the contrary, any redemption price, or
part thereof, paid pursuant to this Section 10(c) of this Article V may be
paid in shares of any other existing or future class or classes of stock of
the Corporation.
-10-
<PAGE>
VI
PROVISIONS FOR DEFINING,
LIMITING, AND REGULATING CERTAIN
POWERS OF THE CORPORATION AND OF
THE DIRECTORS AND SHAREHOLDERS
------------------------------
1. The number of directors of the Corporation shall be six (6)
provided that: (A) the number of directors of the Corporation may be increased
or decreased pursuant to the By-laws of the Corporation, but shall never be less
than three (3), except as provided in this Article VI; (B) if there is no
capital stock of the Corporation outstanding, the number of directors may be
less than three (3), but not less than one (1); and (C) if there is capital
stock of the Corporation outstanding and so long as there are less than three
(3) stockholders of the Corporation, the number of directors may be less than
three (3), but not less than the number of stockholders.
2. The By-laws of the Corporation may divide the directors of the
Corporation into classes and prescribe the tenure of office of the several
classes.
3. Stockholders of the Corporation may remove a director, with or
without cause, by the affirmative vote of a majority of all the votes entitled
to be cast for the election of directors.
4. The Board of Directors of the Corporation shall have the power to
issue and sell, or to cause the issuance and sale of, shares of the
Corporation's stock in such amounts and on such terms and conditions, for such
purposes and for such amount or kind of consideration (including, without
limitation, securities) now or hereafter permitted by the laws of the State of
Maryland and by this Charter, as it may determine.
5. In addition to the powers and authority hereinbefore, hereinafter,
or by statute expressly conferred upon it, the Board of Directors may exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject, nevertheless, to the express provisions of the laws of
the State of Maryland, of this Charter, and of the By-laws of the Corporation.
6. Except as may be provided elsewhere in this Charter or in the By-
laws of the Corporation, by vote of a majority of the entire Board of Directors,
any of the By-laws may be altered, amended or repealed, and new By-laws may be
made, except that the Board of Directors shall not alter, amend or repeal any
By-laws made by the stockholders.
-11-
<PAGE>
7. The Board of Directors shall have the power from time to time to
determine whether and to what extent, and at what times and places and under
what conditions and regulations, the accounts and books of the Corporation or
any of them shall be open to the inspection of stockholders, and no stockholder
shall have any right to inspect any account, book or document of the Corporation
except to the extent required by law or permitted by the By-laws.
8. Any director or officer, individually, or any firm of which any
director or officer may be a member, or any corporation, trust, or association
of which any director or officer may be an officer or director or in which any
director or officer may be directly or indirectly interested as the holder of
any amount of its stock or otherwise, may be a party to, or may be financially
or otherwise interested in, any contract or transaction of the Corporation, and
in the absence of fraud no contract or other transaction shall be thereby
affected or invalidated; provided, that the fact of any such interests or
relationships shall be disclosed or shall have been known to the Board of
Directors or a majority thereof; and any such director or officer of the
Corporation may be counted in determining the existence of a quorum at the
meeting of the Board of Directors of the Corporation which shall authorize any
such contract or transaction, and may vote thereat to authorize any such
contract or transaction, with like force and effect as if such other interests
or relationships did not exist. In furtherance and not in limitation of the
foregoing, the Board of Directors of the Corporation is expressly authorized to
contract for management services of any nature with respect to the conduct of
the business of the Corporation with any entity, person or company, incorporated
or unincorporated, on such terms as the Board of Directors may deem desirable.
Any such contract may provide for the rendition of management services of any
nature with respect to the conduct of the business of the Corporation, and for
the management or direction of the business and activities of the Corporation to
such extent as the Board of Directors may determine, whether or not the
procedure involves delegation of functions usually or customarily performed by
the Board of Directors or officers of the Corporation. The Board of Directors
is further expressly authorized to contract with any person or company on such
terms as it may deem desirable for the distribution of shares of the Corporation
and to contract for other services, including, without limitation, services as
transfer agent for the Corporation's stock, with any entity, person or company,
incorporated or unincorporated, on such terms as the Board of Directors may deem
desirable. Any entity, person or company which enters into one or more of such
contracts may also perform similar or identical services for other investment
companies and other persons and companies without restriction by reason of the
relationship with the Corporation.
-12-
<PAGE>
VII
REDEMPTION AND REPURCHASE
-------------------------
1. Each holder of a share of any class of stock, upon request to the
Corporation (accompanied by surrender of the appropriate stock certificate or
certificates, if any, in proper form for transfer), shall be entitled to require
the Corporation to redeem all or any part of the shares of that class standing
in the name of such holder on the books of the Corporation at a redemption price
based on the net asset value per share as in effect from time to time (less such
redemption fee or other charge, if any, as may be fixed by resolution of the
Board of Directors) and in the manner determined by the By-laws or the Board of
Directors of the Corporation in accordance with the provisions hereof, subject
to the right of the Board of Directors of the Corporation to suspend the right
of redemption of shares of stock of the Corporation or postpone the date of
payment of such redemption price in accordance with the provisions of applicable
law.
2. The Board of Directors of the Corporation may suspend the right of
the holders of shares to require the Corporation to redeem such shares or may
suspend any voluntary purchase of such shares in accordance with the provisions
of applicable law.
3. All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the Corporation. The Board of
Directors may by resolution from time to time authorize the Corporation to
require the redemption of all or any part of the outstanding shares of any class
upon the sending of written notice thereof to each stockholder any of whose
shares of that class are so redeemed and upon such terms and conditions as the
Board of Directors shall deem advisable, out of funds legally available
therefor, at net asset value per share of that class as in effect from time to
time and less such redemption fee or other charge, if any, as may be fixed by
resolution of the Board of Directors, and in the manner determined by the By-
laws or the Board of Directors of the Corporation in accordance with the
applicable provisions of this Charter and to take all other steps deemed
necessary or advisable in connection therewith.
4. The Board of Directors may by resolution from time to time
authorize the repurchase by the Corporation, either directly or through an
agent, of shares of any class upon such terms and conditions and for such
consideration as the Board of Directors shall deem advisable, out of funds
legally available therefor, at prices per share not in excess of the net asset
value per share of that class in the manner determined by the By-laws or the
Board of Directors in accordance with the applicable
-13-
<PAGE>
provisions of this Charter and to take all other steps deemed necessary or
advisable in connection therewith.
5. Payment of the redemption or repurchase price of shares
surrendered to the Corporation for redemption or for repurchase shall be made by
the Corporation within the time period, if any, required by the provisions of
applicable law. Any such payment may be made in whole or in part in portfolio
securities or in cash, as the Board of Directors shall deem advisable, and no
stockholder shall have the right, other than as determined by the Board of
Directors, to have his or her shares redeemed or repurchased in portfolio
securities.
6. The right of the holder of shares of stock redeemed or repurchased
by the Corporation, as provided in this Article VII, to receive dividends
thereon and all other rights of such holder with respect to such shares shall
forthwith cease and terminate from and after the time as of which the redemption
or repurchase price of such shares has been determined (except the right of such
holder to receive (a) the redemption or repurchase price of such shares from the
Corporation or its designated agent, and (b) any unpaid dividend or distribution
to which such holder had previously become entitled as the record holder of such
shares on the record date for such dividend or distribution).
VIII
DETERMINATION BINDING
---------------------
Any determination made in good faith, so far as accounting matters are
involved, in accordance with generally accepted accounting principles by or
pursuant to the direction of the Board of Directors; (i) as to the amount of the
assets, obligations, or liabilities of the Corporation; (ii) as to the amount of
the net income of the Corporation from dividends and interest for any period or
amounts at any time legally available for the payment of dividends; (iii) as to
the amount of any reserves or charges set up and the propriety thereof; (iv) as
to the time of, or purpose for, creating any reserves or charges and as to the
use, alteration, or cancellation of any reserves or charges (whether or not any
obligation or liability for which such reserves or charges shall have been
created shall have been paid or discharged or shall be then or thereafter
required to be paid or discharged); (v) as to the price or closing bid or asked
price of any security owned or held by the Corporation; (vi) as to the market
value of any security or fair value of any other asset owned by the Corporation;
(vii) as to the number of shares of the Corporation outstanding or deemed to be
outstanding; (viii) as to the impracticability or impossibility of liquidating
securities in orderly fashion; (ix) as to any other matters
-14-
<PAGE>
relating to the issue, sale, repurchase, and/or other acquisition or disposition
of securities or other investments or shares of stock of the Corporation; and
(x) any reasonable determination made in good faith by the Board of Directors as
to whether any transaction constitutes a purchase of any securities on "margin,"
a sale of any securities "short," or an underwriting of the sale of, or a
participation in any underwriting or selling group in connection with the public
distribution of, any securities, shall be final and conclusive, and shall be
binding upon the Corporation and upon all holders of shares of each class of its
stock (past, present and future); and all shares of each class of stock are
issued and sold on the condition and understanding that any and all such
determinations shall be so binding.
No provisions of this Charter shall be effective to (a) require a
waiver of compliance with any provision of the Securities Act of 1933, as
amended, or the Investment Company Act of 1940, as amended, or of any valid
rule, regulation or order of the Securities and Exchange Commission thereunder,
or (b) protect or purport to protect any director or officer of the Corporation
against any liability to the Corporation or its security holders to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office.
IX
LIABILITY AND INDEMNIFICATION
-----------------------------
1. To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation law, no
director or officer of the Corporation shall have any liability to the
Corporation or its stockholders for money damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the Corporation, whether or not such person is a director of officer at the
time of any proceeding in which liability is asserted.
2. The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify and advance expenses to its officers to
the same extent as its directors and to such further extent as is consistent
with such law. The Board of Directors may, through a By-law, resolution or
agreement, make further provisions for indemnification of directors, officers,
employees and agents to the fullest extent permitted by the Maryland General
Corporation Law. To the extent permitted by the Maryland General Corporation
-15-
<PAGE>
Law, the indemnification provided hereunder shall inure to the benefit of the
heirs, executors and administrators of such a person.
3. No provision of this Article IX shall be effective to protect or
purport to protect any director or officer of the Corporation against any
liability to the Corporation or its stockholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
4. References to the Maryland General Corporation Law in this Article
IX are to the law as from time to time amended. No amendment to the Charter of
the Corporation shall affect any right of any person under this Article IX based
on any event, omission or proceeding prior to such amendment.
X
PERPETUAL EXISTENCE
-------------------
The Corporation shall have perpetual existence.
XI
AMENDMENT
---------
From time to time any of the provisions of this Charter may be amended
(including any amendment which changes the contract rights of any of the
outstanding stock by classification, reclassification or otherwise), altered, or
repealed, upon the vote of the holders of a majority of the votes entitled to
vote thereon. In addition, other provisions that may, under the statutes of the
State of Maryland, be lawfully contained in the charter of a corporation may be
added or inserted upon the vote of the holders of a majority of the votes
entitled to vote thereon. All rights at any time conferred upon the
stockholders of the Corporation by this Charter are granted subject to the
provisions of this Article XI.
* * *
Article II
----------
The provisions set forth in the above Articles of Amendment and
Restatement are all the provisions of the Corporation's Charter currently in
effect as hereby amended.
-16-
<PAGE>
Article III
-----------
The current address of the principal office of the Corporation and the
name and address of the Corporation's current resident agent are set forth
herein.
Article IV
----------
The number of directors of the Corporation as of the date hereof is
six (6). The names of the directors of the Corporation currently in office are:
Donald L. Campbell
Charles C. Cornelio
Joseph H. Dugan
Wolfe J. Frankl
Robert A. Robinson
Alfred Tannachion
Article V
---------
At a meeting held on November 18, 1994, the Board of Directors of the
Corporation unanimously adopted a resolution declaring the provisions of these
Articles of Amendment and Restatement advisable and directing that they be
submitted to the sole shareholder of the Corporation for approval by unanimous
consent action. Pursuant to a Consent of Sole Shareholder dated as of November
18, 1994, the sole shareholder of the Corporation approved the provisions of
these Articles of Amendment and Restatement as set forth above.
-17-
<PAGE>
Article VI
----------
These Articles of Amendment and Restatement do not increase the
authorized stock of the Corporation or the aggregate par value of such
authorized stock.
IN WITNESS WHEREOF, UST Master Variable Series, Inc. has caused these
Articles of Amendment and Restatement to be signed in its name and on its behalf
by its President and its corporate seal to be hereunto affixed and attested to
by its Secretary as of November 18, 1994.
The undersigned President of the Corporation acknowledges these
Articles of Amendment and Restatement to be the corporate act of the Corporation
and states that to the best of his knowledge, information and belief, the
matters and facts set forth therein with respect to the authorization and
approval thereof are true in all material respects and that this statement is
made under the penalties of perjury.
UST MASTER VARIABLE SERIES, INC.
Attest:
/s/ W. Bruce McConnel, III By: /s/ Alfred Tannachion [SEAL]
-------------------------- ----------------------
W. Bruce McConnel, III, Alfred Tannachion,
Secretary President
-18-
<PAGE>
Exhibit 2
Amended and Restated By-Laws
UST MASTER VARIABLE SERIES, INC.
BY-LAWS
ARTICLE I
---------
STOCKHOLDERS
------------
SECTION 1. Annual Meetings. The Corporation is not required to hold
---------------
an annual stockholder meeting in any year in which the election of directors is
not required by the Investment Company Act of 1940, as amended (the "1940 Act").
If the Corporation is so required to hold a meeting of stockholders to elect
directors, such meeting shall be designated as an annual meeting and shall be
held at the registered office of the Corporation, or at such other place within
the United States of America, within or without the State of Maryland, as may be
determined by the Board of Directors and as shall be designated in the notice of
said meeting, on such day and at such time as shall be specified by the Board of
Directors for the purpose of electing directors and for the transaction of such
other business as may properly be brought before the meeting.
SECTION 2. Special Meetings. Special meetings of the stockholders
----------------
for any purpose or purposes, unless otherwise prescribed by statute or by the
Charter, may be held at any place within the United States of America, within or
without the State of Maryland, and may be called at any time by the Board of
Directors or by the President, and shall be called by the President or Secretary
at the request in writing of a majority of the Board or at the request in
writing of stockholders entitled to cast at least twenty-five (25) percent of
all the votes entitled to be cast at such meeting. Such request shall state the
purpose or purposes of the proposed meeting and the matters proposed to be acted
on at it; provided, however, that unless requested by stockholders entitled to
cast a majority of all the votes entitled to be cast at the meeting, a special
meeting need not be called to consider any matter which is substantially the
same as a matter voted on at any special meeting of the stockholders held during
the preceding twelve (12) months.
SECTION 3. Notice of Meetings and Shareholder - List. Written or
-----------------------------------------
printed notice of the purpose or purposes and of the time and place of every
meeting of the stockholders shall be given by the Secretary of the Corporation
to each stockholder of record entitled to vote at the meeting and each other
stockholder entitled to notice of the meeting, by placing such notice in the
mail at least ten (10) days, but not more than ninety (90) days, and in any
event within the period prescribed by law, prior to
<PAGE>
the date named for the meeting addressed to each stockholder at his address
appearing on the books of the Corporation or supplied by him to the Corporation
for the purpose of notice. The notice of every meeting of stockholders may be
accompanied by a form of proxy approved by the Board of Directors in favor of
such actions or persons as the Board of Directors may select. At least five (5)
days prior to each meeting of stockholders, the officer or agent having charge
of the share transfer books of the Corporation shall make a complete list of
stockholders entitled to vote at such meeting in alphabetical order with the
address of and the number of shares held by each stockholder.
SECTION 4. Record Date. The Board of Directors may fix a date not
-----------
more than ninety (90) days preceding the date of any meeting of stockholders, or
the date fixed for the payment of any dividend, or the date of the allotment of
rights or the date when any change or conversion or exchange of shares shall go
into effect, as a record date for the determination of stockholders entitled to
notice of, or to vote at, any such meeting (or any adjournment thereof) or
entitled to receive payment of any dividend, or to receive such allotment of
rights, or to exercise such rights, as the case may be. In such case, only
stockholders of record at the close of business on the date so fixed shall be
entitled to vote, to receive notice, or receive dividends or rights, or to
exercise rights, notwithstanding any subsequent transfer on the books of the
Corporation. The Board of Directors shall not close the books of the
Corporation against transfers of shares during the whole or any part of such
period. In the case of a meeting of stockholders, the record date shall be
fixed not less than ten (10) days prior to the date of the meeting.
SECTION 5. Quorum and Shareholder Action. Except as otherwise
-----------------------------
provided by statute or by the Charter, the presence in person or by proxy of
stockholders of the Corporation entitled to cast at least a majority of all the
votes entitled to be cast at the meeting (without regard to class) shall
constitute a quorum at any meeting of the stockholders, except with respect to
any matter that affects only one or more classes of stock or any matter that,
under the Charter or applicable law, requires approval by a separate vote of one
or more classes of stock, in which case the presence in person or by proxy of
stockholders of the Corporation entitled to cast at least a majority of all of
the votes of the separate class or classes, as the case may be, entitled to be
cast on such matter shall constitute a quorum; and, at a meeting at which a
quorum is present, a majority of all the votes cast and entitled to vote on a
matter at the meeting shall be sufficient to approve any such matter which
properly comes before the meeting. In the absence of a quorum, the stockholders
present in person or by proxy, by majority vote and without notice other than by
announcement at the meeting, may adjourn the meeting from time to time as
provided in Section 7 of this Article I until a quorum shall attend. The
stockholders
-2-
<PAGE>
present at any duly organized meeting may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum. The absence from any meeting of stockholders entitled to cast at
least a majority of all the votes of all classes, or any separate class or
classes, as the case may be, that may be required by applicable law or these By-
laws for action upon any given matter shall not prevent action at such meeting
upon any other matter or matters that may properly come before the meeting if
there shall be present thereat, in person or by proxy, holders of the number of
votes required for action in respect of such other matter or matters.
SECTION 6. Organization. At every meeting of the stockholders, the
------------
Chairman of the Board, if one has been selected and is present or, if not, the
President, or in the absence of the Chairman of the Board and the President, a
Vice President, or in the absence of the Chairman of the Board, the President
and all the Vice Presidents, a chairman chosen by the stockholders, shall act as
chairman; and the Secretary, or in his absence, an Assistant Secretary, or in
the absence of the Secretary and all the Assistant Secretaries, a person
appointed by the chairman, shall act as secretary.
SECTION 7. Adjournment. Any meeting of the stockholders may be
-----------
adjourned from time to time, without notice other than by announcement at the
meeting at which such adjournment is taken, and at any such adjourned meeting at
which a quorum shall be present any action may be taken that could have been
taken at the meeting originally called; provided, that the meeting may not be
adjourned without further notice to a date more than the number of days after
the original record date for the meeting permitted by law, and if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting.
ARTICLE II
----------
BOARD OF DIRECTORS
------------------
SECTION 1. Election and Powers. The number of directors shall be
-------------------
fixed from time to time by resolution of the Board of Directors adopted by a
majority of the entire Board of Directors; provided, however, that the number of
directors shall in no event be less than three (3) nor more than fifteen (15),
except that (a) if there is no stock outstanding the number of directors may be
less than three (3), but not less than one (1), and (b) if there is stock
outstanding and so long as there are less than three (3) stockholders, the
number of directors may be less than three (3), but not less than the number of
stockholders. The business, affairs and property of the
-3-
<PAGE>
Corporation shall be managed by the Board of Directors, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute, the Charter or these By-laws required to be exercised or done by the
stockholders. Subject to the provisions of Article I, Section 1, the members of
the Board of Directors shall be elected by the stockholders at their annual
meeting and each director shall hold office until the next annual meeting after
his election and until his successor shall have been duly elected and qualified,
until he shall have resigned, or until he shall have been removed as provided in
Sections 10 and 11 of this Article II.
SECTION 2. Regular Meetings. Regular meetings of the Board of
----------------
Directors may be held without notice on such dates as the Board may from time to
time determine.
SECTION 3. Special Meetings. Special meetings of the Board of
----------------
Directors shall be held whenever called by the Chairman of the Board, the
President or by a majority of the directors either in writing or by vote at a
meeting.
SECTION 4. Notice of Special Meetings. Notice of the place, day and
--------------------------
hour of every special meeting shall be delivered personally to each director or
mailed, telegraphed or cabled to his address on the books of the Corporation at
least one (1) day before the meeting. It shall not be requisite to the validity
of any meeting of the Board of Directors that notice thereof shall have been
given to any director who is present thereat, or, if absent, waives notice
thereof in writing filed with the records of the meeting either before or after
the holding thereof.
SECTION 5. Place of Meetings. The Board of Directors may hold its
-----------------
regular and special meetings at such place or places within or without the State
of Maryland as the Board may from time to time determine.
SECTION 6. Quorum and Board Action. Except as otherwise provided by
-----------------------
statute or by the Charter: (a) one-third (1/3) of the entire Board of Directors,
but in no case less than two (2) directors (unless there is only one (1)
director of the Corporation, in which event one (1) director), shall be
necessary to constitute a quorum for the transaction of business at each meeting
of the Board; (b) the action of a majority of the directors present at a meeting
at which a quorum is present shall be the action of the Board; and (c) if at any
meeting there be less than a quorum present, a majority of those directors
present may adjourn the meeting from time to time, but not for a period greater
than thirty (30) days at any one time, without notice other than by announcement
at the meeting until a quorum shall attend. At any such adjourned meeting at
which a quorum shall be present, any business may be transacted which might have
been transacted at the meeting as originally scheduled.
-4-
<PAGE>
SECTION 7. Chairman. The Board of Directors may at
--------
any time appoint one of its members as Chairman of the Board, who shall serve at
the pleasure of the Board and who shall perform and execute such duties and
powers as may be conferred upon or assigned to him by the Board or these By-
laws, but who shall not by reason of performing and executing these duties and
powers be deemed an officer or employee of the Corporation.
SECTION 8. Organization. At every meeting of the Board of Directors,
------------
the Chairman of the Board, if one has been selected and is present, and, if not,
the President, or in the absence of the Chairman of the Board and the President,
a Vice President, or in the absence of the Chairman of the Board, the President
and all the Vice Presidents, a chairman chosen by a majority of the directors
present, shall preside; and the Secretary, or in his absence, an Assistant
Secretary, or in the absence of the Secretary and all the Assistant Secretaries,
a person appointed by the chairman, shall act as secretary.
SECTION 9. Vacancies. Any vacancy on the Board of Directors
----------
occurring by reason of any increase in the number of directors may be filled by
a majority of the entire Board of Directors then in office. Any vacancy on the
Board of Directors occurring for any other cause may be filled by a majority of
the remaining members of the Board of Directors, whether or not these members
constitute a quorum under Section 6 of this Article II. Any director so chosen
to fill a vacancy shall hold office until the next annual meeting of
stockholders and until his successor shall have been duly elected and qualified.
SECTION 10. Removal. At any meeting of the stockholders called for
-------
that purpose, the stockholders of the Corporation may remove from office any
director, with or without cause, by the affirmative vote of a majority of the
votes entitled to be cast for the election of directors, and another director
may be elected in the place of the director so removed to serve for the
remainder of the term of the removed director.
SECTION 11. Resignations. Any director may resign at any time by
------------
giving written notice to the Board of Directors, the President or the Secretary.
Any such resignation shall take effect at the time of the receipt of such notice
or at any later time specified therein; and unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
SECTION 12. Committees. The Board of Directors may appoint from
----------
among its members an executive and other committees of the Board composed of two
(2) or more directors. To the extent permitted by law, the Board of Directors
may delegate to any such committee or committees any of the powers of the Board
of Directors in the management of the business, affairs and
-5-
<PAGE>
property of the Corporation and may authorize any such committee or committees
to cause the seal of the Corporation to be affixed to all papers which may
require it. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the same to
the Board of Directors when required. The members of a committee present at any
meeting, whether or not they constitute a quorum, may appoint a director to act
in the place of an absent member.
SECTION 13. Telephone Conference. Members of the Board of Directors
--------------------
or any committee thereof may participate in a meeting of the Board or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time, and participation by such means shall constitute presence in
person at the meeting.
SECTION 14. Written Consent. Any action required or permitted to be
---------------
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board or of such committee, as the case may be, and such written
consent is filed with the minutes of proceedings of the Board or committee.
SECTION 15. Compensation of Directors. Any director, whether or not
-------------------------
he is a compensated officer, employee, agent or contractor of the Corporation,
may be compensated for his services as director or as a member of a committee,
or as Chairman of the Board or chairman of a committee, and in addition may be
reimbursed for transportation and other expenses, all in such manner and amounts
as the directors may from time to time determine.
ARTICLE III
-----------
OFFICERS
--------
SECTION 1. Number. The officers of the Corporation shall be a
------
President, a Secretary and a Treasurer, and may include one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as the Board of Directors may from time to time
determine. Any officer may hold more than one office in the Corporation, except
that an officer may not serve concurrently as both the President and a Vice
President.
SECTION 2. Election and Term of Office. The officers of the
---------------------------
Corporation shall be elected by the Board of Directors
-6-
<PAGE>
and, subject to earlier termination of office, each officer shall hold office
for one year and until his successor shall have been elected and qualified.
SECTION 3. Resignations. Any officer may resign at any time by
------------
giving written notice to the Board of Directors or to the President or the
Secretary of the Corporation. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 4. Removal. If the Board of Directors in its judgment finds
-------
that the best interests of the Corporation will be served, the Board may remove
any officer of the Corporation at any time.
SECTION 5. President. The President shall be the chief executive
---------
officer of the Corporation and shall have general supervision over the business
and operations of the Corporation, subject, however, to the control of the Board
of Directors. He, or such persons as he shall designate, shall sign, execute,
acknowledge, verify, deliver and accept, in the name of the Corporation, deeds,
mortgages, bonds, contracts and other instruments authorized by the Board of
Directors, except in the case where the signing, execution, acknowledgement,
verification, delivery or acceptance thereof shall be delegated by the Board to
some other officer or agent of the Corporation; and, in general, he shall have
general executive powers as well as other powers and duties as from time to time
may be conferred upon or assigned to him by the Board.
SECTION 6. The Vice Presidents. In the absence or disability of the
-------------------
President, or when so directed by the President, any Vice President designated
by the Board of Directors may perform any or all of the duties of the President,
and, when so acting, shall have all the powers of, and be subject to all the
restrictions upon, the President; provided, however, that no Vice President
shall act as a member of or as chairman of any committee of which the President
is a member or chairman by designation or ex-officio, except when designated by
the Board. Each Vice President shall perform such other duties as from time to
time may be conferred upon or assigned to him by the Board or the President.
SECTION 7. The Secretary. The Secretary shall record all the votes
-------------
of the stockholders and of the directors and the minutes of the meetings of the
stockholders and of the Board of Directors in a book or books to be kept for
that purpose; he shall see that notices of meetings of the stockholders and the
Board of Directors are given and that all records and reports are properly kept
and filed by the Corporation as required by law; he
-7-
<PAGE>
shall be the custodian of the seal of the Corporation and shall see that it is
affixed to all documents to be executed on behalf of the Corporation under its
seal, provided that in lieu of affixing the corporate seal to any document, it
shall be sufficient to meet the requirements of any law, rule or regulation
relating to a corporate seal to affix the word "(SEAL)" adjacent to the
signature of the authorized officer of the Corporation; and, in general, he
shall perform all duties incident to the office of Secretary, and such other
duties as from time to time may be conferred upon or assigned to him by the
Board or the President.
SECTION 8. Assistant Secretaries. In the absence or disability of
---------------------
the Secretary, or when so directed by the Secretary, any Assistant Secretary may
perform any or all of the duties of the Secretary, and, when so acting, shall
have all the powers of, and be subject to all restrictions upon, the Secretary.
Each Assistant Secretary shall perform such other duties as from time to time
may be conferred upon or assigned to him by the Board of Directors, the
President or the Secretary.
SECTION 9. The Treasurer. Subject to the provisions of any contract
-------------
which may be entered into with any custodian pursuant to authority granted by
the Board of Directors, the Treasurer shall have charge of all receipts and
disbursements of the Corporation and shall have or provide for the custody of
its funds and securities; he shall have full authority to receive and give
receipts for all money due and payable to the Corporation, and to endorse
checks, drafts and warrants, in its name and on its behalf, and to give full
discharge for the same; he shall deposit all funds of the Corporation, except
such as may be required for current use, in such banks or other places of
deposit as the Board of Directors may from time to time designate; and, in
general, he shall perform all duties incident to the office of Treasurer and
such other duties as from time to time may be conferred upon or assigned to him
by the Board or the President.
SECTION 10. Assistant Treasurers. Each Assistant Treasurer shall
--------------------
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors or the President.
SECTION 11. Compensation of Officers. The compensation of all
------------------------
officers shall be fixed from time to time by the Board of Directors, or any
committee or officer authorized by the Board so to do. No officer shall be
precluded, except as determined by the Board of Directors or any such committee
thereof, from receiving such compensation by reason of the fact that he is also
a director of the Corporation.
-8-
<PAGE>
ARTICLE IV
----------
STOCK
-----
SECTION 1. Certificates. Each stockholder shall be entitled upon
------------
written request to a stock certificate or certificates, representing and
certifying the number and kind of full shares held by him signed by the
President, a Vice President or the Chairman of the Board and counter-signed by
the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer,
which signatures may be either manual or facsimile signatures, and sealed with
the seal of the Corporation, which seal may be either facsimile or any other
form of seal. Stock certificates shall be in such form, not inconsistent with
law or with the Charter, as shall be approved by the Board of Directors.
SECTION 2. Transfer of Shares. Transfers of shares shall be made on
------------------
the books of the Corporation at the direction of the person named on the
Corporation's books or named in the certificate or certificates for such shares
(if issued), or by his attorney lawfully constituted in writing, upon surrender
of such certificate or certificates (if issued) properly endorsed, together with
a proper request for redemption, to the Corporation's Transfer Agent, with such
evidence of the authenticity of such transfer, authorization and such other
matters as the Corporation or its agents may reasonably require, and subject to
such other reasonable terms and conditions as may be required by the Corporation
or its agents; or, if the Board of Directors shall by resolution so provide,
transfer of shares may be made in any other manner permitted by law.
SECTION 3. Transfer Agents and Registrars. The Corporation may have
------------------------------
one or more Transfer Agents and one or more Registrars of its stock, whose
respective duties the Board of Directors may, from time to time, define. No
certificate of stock shall be valid until countersigned by a Transfer Agent, if
the Corporation shall have a Transfer Agent, or until registered by a Registrar,
if the Corporation shall have a Registrar. The duties of Transfer Agent and
Registrar may be combined.
SECTION 4. Mutilated, Lost, Stolen or Destroyed Certificates. The
-------------------------------------------------
Board of Directors, by standing resolution or by resolutions with respect to
particular cases, may authorize the issuance of a new stock certificate in lieu
of any stock certificate lost, stolen, destroyed or mutilated, upon such terms
and conditions as the Board may direct. The Board may in its discretion refuse
to issue such a new certificate, unless ordered to do so by a court of competent
jurisdiction.
SECTION 5. Stock Ledgers. The Corporation shall not be required to
-------------
keep original or duplicate stock ledgers at its
-9-
<PAGE>
principal office in the City of Baltimore, Maryland, but stock ledgers shall be
kept at the respective offices of the Transfer Agents of the Corporation's
capital stock.
ARTICLE V
---------
SEAL
----
The seal of the Corporation shall be in such
form as the Board of Directors shall prescribe.
ARTICLE VI
----------
SUNDRY PROVISIONS
-----------------
SECTION 1. Amendments. (a) By Stockholders. By-laws may be adopted,
----------
altered, amended or repealed in the manner provided in Section 5 of Article I
hereof at any annual or special meeting of the stockholders.
(b) By Directors. By-laws may be adopted, altered, amended
or repealed in the manner provided in Section 6 of Article II hereof by the
Board of Directors at any regular or special meeting of the Board.
SECTION 2. Indemnification of Directors and Officers (a)
-----------------------------------------
Indemnification. Any person who was or is a party or is threatened to be made a
---------------
party in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is a current or former director or officer of the Corporation,
or is or was serving while a director or officer of the Corporation at the
request of the Corporation as a director, officer, partner, trustee, employee,
agent or fiduciary of another corporation, partnership, joint venture, trust,
enterprise or employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and reasonable
expenses (including attorney's fees) actually incurred by such person in
connection with such action, suit or proceeding to the full extent permissible
under the General Laws of the State of Maryland, the Securities Act of 1933 and
the Investment Company Act of 1940, as such statutes are now or hereafter in
force, except that such indemnity shall not protect any such person against any
liability to the Corporation or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
(b) Advances. Any current or former director or
--------
-10-
<PAGE>
officer of the Corporation claiming indemnification within the scope of this
Section 2 shall be entitled to advances from the Corporation for payment of the
reasonable expenses incurred by him in connection with proceedings to which he
is a party in the manner and to the full extent permissible under the General
Laws of the State of Maryland, the Securities Act of 1933 and the Investment
Company Act of 1940, as such statutes are now or hereafter in force.
(c) Procedure. On the request of any current or former director or
---------
officer requesting indemnification or an advance under this Section 2, the Board
of Directors shall determine, or cause to be determined, in a manner consistent
with the General Laws of the State of Maryland, the Securities Act of 1933 and
the Investment Company Act of 1940, as such statutes are now or hereafter in
force, whether the standards required by this Section 2 have been met.
(d) Other Rights. The indemnification provided by this Section 2
------------
shall not be deemed exclusive of any other right, in respect of indemnification
or otherwise, to which those seeking such indemnification may be entitled under
any insurance or other agreement, vote of stockholders or disinterested
directors or otherwise, both as to action by a director or officer of the
Corporation in his official capacity and as to action by such person in another
capacity while holding such office or position, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and administrators of such a person.
-11-
<PAGE>
Exhibit 6
DISTRIBUTION AGREEMENT
Chubb Securities Corporation
One Granite Place
P.O. Box 2005
Concord, NH 03302
Gentlemen:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, UST Master Variable Series, Inc. (the "Company"), a
Maryland corporation registered as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), has
agreed that Chubb Securities Corporation (the "Distributor"), a New Hampshire
corporation registered as a broker-dealer under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and a member firm of the National Association
of Securities Dealers, Inc. ("NASD"), shall be, for the period of this
Agreement, the distributor of shares of the Company's Common Stock of all
classes and series (the "Shares") representing interests in the Company's Money,
Intermediate-Term Managed Income, Managed Income, Equity, Early Life Cycle,
International Bond and International Equity Portfolios (individually, a
"Portfolio," collectively, "Portfolios"). In the event that the Company
establishes one or more additional portfolios other than the Portfolios with
respect to which it decides to retain the Distributor to act as the distributor
hereunder, the Company shall so notify the Distributor in writing. If the
Distributor is willing to render such services to a new portfolio, it will
notify the Company in writing whereupon such portfolio will become a Portfolio
under this Agreement. The Company is intended to be a funding vehicle for
variable annuity contracts and variable life insurance policies to be offered by
the separate accounts of certain life insurance companies (the "Insurers").
1. Services as Distributor.
------------------------
1.1 The Distributor will act as an agent for the distribution of
Shares in accordance with the instructions of the Company's Board of Directors
and the Company's registration statement and Prospectuses then in effect under
the Securities Act of 1933, as amended (the "1933 Act"). Orders for the sale,
redemption or repurchase of the Company's Shares shall be transmitted directly
from the Insurers to the Company's transfer agent and payments for Shares shall
be transmitted by the Insurers directly to the Company's custodian or transfer
agent. No commission or other fee shall be charged or paid to any persons or
entity in connection with the sale of Shares hereunder.
<PAGE>
1.2 The Distributor agrees to use its best efforts to solicit orders
for the sale of Shares and will undertake such advertising and promotion as it
believes appropriate in connection with such solicitation. The Distributor
shall not be obligated to sell any specific number of Shares in any Portfolios.
The Company understands that the Distributor currently is and may in the future
be the distributor of units and shares of other investment company separate
accounts and funds ("Funds") including Funds having investment objectives
similar to those of the Portfolios. The Company further understands that
existing and future investors in the Portfolios may invest in units and shares
of such other Funds. The Company agrees that the Distributor's duties to such
Funds shall not be deemed in conflict with its duties to the Company under this
paragraph 1.2.
1.3 All Shares offered for sale by the Distributor shall be offered
for sale to the separate accounts of insurers at a price per share (the
"offering price") equal to their net asset value (determined in the manner set
forth in the Company's Charter and the then current Prospectus). The offering
price, if not an exact multiple of one cent, shall be adjusted to the nearest
cent.
1.4 All activities by the Distributor and its agents and employees as
distributor of Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted pursuant to the 1940 Act by the Securities and Exchange Commission
("SEC") or any securities association registered under the 1934 Act.
Notwithstanding any other provision in this Agreement to the contrary, the Board
of Directors of the Company (the "Directors") may refuse to sell Shares to any
person or separate account, or suspend or terminate the offering of Shares if
such action is required by law or by regulatory authorities having jurisdiction
or, in the sole discretion of the Directors acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, is necessary
in the best interests of the shareholders of the Portfolio (it being understood
that "shareholders" for this purpose shall mean the owners of variable annuity
contracts and/or variable annuity policies).
1.5 The Company agrees at its own expense to execute any and all
documents and to furnish any and all information and otherwise to take all
actions that may be reasonably necessary in connection with the qualification of
Shares for sale in such states as the Distributor may designate to the Company
and the Company may approve, and the Company shall pay all fees and other
expenses incurred in connection with such qualification. The Distributor agrees
to pay all expenses related to its own qualification as a broker or dealer
required by any federal or state law or self-regulatory organization.
-2-
<PAGE>
1.6 The Company shall timely furnish from time to time, for use in
connection with the sale of Shares, such information with respect to the
Portfolios and Shares as the Distributor may reasonably request; and the Company
warrants that the statements contained in any such information shall fairly show
or represent what they purport to show or represent. The Company shall also
furnish the Distributor upon request with: (a) audited annual and unaudited semi
annual statements of the Company's books and accounts with respect to each
Portfolio, and, (b) from time to time such additional information regarding the
Portfolios' financial condition as the Distributor may reasonably request. The
Company shall also make available to the Distributor such number of copies of
the Prospectus as the Distributor shall reasonably request.
1.7 The Company represents to the Distributor that all registration
statements and prospectuses filed by the Company with the SEC under the 1933
Act, with respect to Shares have been prepared in conformity with the
requirements of said 1933 Act and rules and regulations of the SEC thereunder.
As used in this Agreement, the terms "registration statement" and "prospectus"
shall mean any registration statement, prospectus (together with the related
statement of additional information) filed with respect to Shares with the SEC,
and any amendments and supplements thereto which at any time shall have been
filed with said SEC. The Company represents and warrants to the Distributor
that any registration statement and prospectus, when such become effective, will
contain all statements required to be stated therein in conformity with said
1933 Act and the rules and regulations of said SEC; that all statements of fact
contained in any such registration statement and prospectus will be true and
correct when such registration statement and prospectus become effective; and
that neither any registration statement nor any prospectus, when they become
effective, will include an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading to a purchaser of Shares. The Company may but
shall not be obligated to propose from time to time such amendment or amendments
to any registration statement and such supplement or supplements to any
prospectus which, in the light of future developments, may, in the opinion of
the Company's counsel, be necessary or advisable. The Company shall promptly
notify the Distributor of any advice given to it by the Company's counsel
regarding the necessity or advisability so to amend or supplement such
registration statement or prospectus. If the Company shall not propose such
amendment or amendments and/or supplement or supplements within fifteen days
after receipt by the Company of a written request from the Distributor to do so,
the Distributor may, at its option, terminate this Agreement. The Company shall
not file any amendment to any registration statement or supplement to any
prospectus without giving the Distributor reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any
-3-
<PAGE>
way limit the Company's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus, of whatever
character, as the Company may deem advisable, such right being in all respects
absolute and unconditional.
1.8 The Company authorizes the Distributor to use any prospectus in
the form furnished from time to time in connection with the sale of Shares. The
Company agrees to indemnify, defend and hold the Distributor, its several
officers and directors, and any person who controls the Distributor within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and reasonable expenses (as those expenses
are incurred) (including the cost of investigating or defending such claims,
demands or liabilities and any counsel fees incurred in connection therewith)
which the Distributor, its officers and directors, or any such controlling
person may incur under the 1933 Act or under common law or otherwise, arising
out of or based upon any untrue statement, or alleged untrue statement, of a
material fact contained in any registration statement or any prospectus or
arising out of or based upon any omission, or alleged omission, to state a
material fact required to be stated in any registration statement or prospectus
or necessary to make any statement in such documents not misleading; provided,
--------
however, that the Company's agreement to indemnify the Distributor, its officers
-------
or directors, and any such controlling person shall not be deemed to cover any
claims, demands, liabilities or expenses arising out of any untrue statement or
alleged untrue statement or omission or alleged omission made in any
registration statement or prospectus or in any financial or other statements in
reliance upon and in conformity with any information furnished to the Company by
the Distributor and used in the preparation thereof; and further provided that
------- --------
the Company's agreement to indemnify the Distributor and the Company's
representations and warranties herein set forth shall not be deemed to cover any
liability to the Company or its shareholders to which the Distributor would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of the Distributor's
reckless disregard of its obligations and duties under this Agreement. The
Company's agreement to indemnify the Distributor, its officers and directors,
and any such controlling person, as aforesaid, is expressly conditioned upon the
Company's being notified of any action brought against the Distributor, its
officers or directors, or any such controlling person, such notification to be
given by letter or by telegram addressed to the Company at its principal office
and sent to the Company by the person against whom such action is brought within
20 days after the summons or other first legal process shall have been served.
The failure to so notify the Company of any such action shall not relieve the
Company from any liability which the Company may have to the person against whom
such action is brought by reason of any such
-4-
<PAGE>
untrue, or allegedly untrue, statement or omission, or alleged omission,
otherwise than on account of the Company's indemnity agreement contained in this
paragraph 1.8. The Company will be entitled to assume the defense of any suit
brought to enforce any such claim, demand or liability, but, in such case, such
defense shall be conducted by counsel of good standing chosen by the Company and
approved by the Distributor, which approval shall not unreasonably be withheld.
In the event the Company elects to assume the defense of any such suit and
retain counsel of good standing approved by the Distributor, the defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by any of them; but in case the Company does not elect to
assume the defense of any such suit, or in case the Distributor reasonably does
not approve of counsel chosen by the Company, the Company will reimburse the
Distributor, its officers and directors, or the controlling person or persons
named as defendant or defendants in such suit, for the reasonable fees and
expenses of any counsel retained by the Distributor or them. The Company's
indemnification agreement contained in this paragraph 1.8 and the Company's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
the Distributor, its officers and directors, or any controlling person and shall
survive the delivery of any Shares. This agreement of indemnity will inure
exclusively to the Distributor's benefit, to the benefit of its several officers
and directors, and their respective estates, and to the benefit of the
controlling persons and their successors. The Company agrees promptly to notify
the Distributor of the commencement of any litigation or proceedings against the
Company or any of its officers or directors in connection with the issue and
sale of any Shares.
1.9 The Distributor agrees to indemnify, defend and hold the Company,
its several officers and directors, and any person who controls the Company
within the meaning of Section 15 of the 1933 Act; free and harmless from and
against any and all claims, demands, liabilities and reasonable expenses (as
those expenses are incurred) (including the costs of investigating or defending
such claims, demands or liabilities and any counsel fees incurred in connection
therewith) which the Company, its officers or directors or any such controlling
person may incur under the 1933 Act or under common law or otherwise, but only
to the extent that such liability or expense incurred by the Company, its
officers or directors, or such controlling person resulting from such claims or
demands, shall arise out of or be based upon any untrue, or alleged untrue,
statement of a material fact contained in information furnished by the
Distributor to the Company or its counsel and used in the Company's registration
statement or corresponding statements made in the prospectus, or shall arise out
of or be based upon any omission, or alleged omission, to state a material fact
in connection with such information furnished by the Distributor to the Company
or its
-5-
<PAGE>
counsel required to be stated in such answers or necessary to make such
information not misleading. The Distributor's agreement to indemnify the
Company, its officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon the Distributor's being notified of any
action brought against the Company, its officers or directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Distributor at its principal office in New Hampshire and sent
to the Distributor by the person against whom such action is brought, within 20
days after the summons or other first legal process shall have been served. The
Distributor shall have the right to control the defense of such action, with
counsel of its own choosing, satisfactory to the Company, if such action is
based solely upon such alleged misstatement or omission on the Distributor's
part, and in any other event the Company, its officers or directors or such
controlling person shall each have the right to participate in the defense or
preparation of the defense of any such action. The failure to so notify the
Distributor of any such action shall not relieve the Distributor from any
liability which the Distributor may have to the Company, its officers or
directors, or to such controlling person by reason of any such untrue or alleged
untrue statement, or omission or alleged omission, otherwise than on account of
the Distributor's indemnity agreement contained in this paragraph 1.9.
1.10 No Shares shall be offered by either the Distributor or the
Company under any of the provisions of this Agreement and no orders for the
purchase or sale of Shares hereunder shall be accepted by the Company if and so
long as effectiveness of the registration statement then in effect or any
necessary amendments thereto shall be suspended under any of the provisions of
the 1933 Act or if and so long as a current prospectus, as required by Section
10(b) of said 1933 Act is not on file with the SEC; provided, however, that
nothing contained in this paragraph 1.10 shall in any way restrict or have any
application to or bearing upon the Company's obligation to repurchase Shares
from any shareholder in accordance with the provisions of the Company's
prospectus or Articles of Incorporation.
1.11 The Company agrees to advise the Distributor as soon as
reasonably practical:
(a) of any request by the SEC for amendments to the
registration statement or prospectus then in effect;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement or
prospectus then in effect or the initiation of any proceeding for
that purpose;
-6-
<PAGE>
(c) of the happening of any event that makes untrue any
statement of a material fact made in the registration statement or
prospectus then in effect or which requires the making of a change
in such registration statement or prospectus in order to make the
statements therein not misleading; and
(d) of all actions of the SEC with respect to any amendment
to any registration statement or prospectus which may from time to
time be filed with the SEC.
For purposes of this section, informal requests by or acts of the
Staff of the SEC shall not be deemed actions of or requests by the SEC.
1.12 The Distributor agrees on behalf of itself and its employees
to treat confidentially and as proprietary information of the Company all
records and other information relative to the Portfolios and its prior, present
or potential shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Company, which
approval shall not be unreasonably withheld and may not be withheld where the
Distributor may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Company.
2. Term.
-----
This agreement shall become effective on October 14, 1994 and, unless
sooner terminated as provided herein, shall continue until July 31, 1995 and
thereafter shall continue automatically with respect to each Portfolio for
successive annual periods ending on July 31 of each year, provided such
continuance is specifically approved at least annually by (i) the Company's
Board of Directors or (ii) by a vote of a majority (as defined in the 1940 Act)
of the outstanding voting securities of the Portfolio, provided that in either
--------
event the continuance is also approved by the majority of the Company's
directors who are not parties to this Agreement or interested persons (as
defined in the 1940 Act of any such party, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is not
assignable and is terminable with respect to each Portfolio, without penalty, on
not less than ninety days' notice, by the Company's Board of Directors, by vote
of a majority (as defined in the 1940 Act) of the outstanding voting securities
of such Portfolio, or by the Distributor. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
-7-
<PAGE>
3. Miscellaneous.
--------------
3.1 No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which an enforcement of the change, waiver, discharge or termination is
sought. This Agreement may be executed in one or more counterparts and all such
counterparts will constitute one and the same instrument.
3.2 This Agreement shall be construed in accordance with the laws of
the State of New Hampshire and the applicable provisions of the 1940 Act and
rules thereunder. To the extent the applicable law of the State of New
Hampshire, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act or rules thereunder, the latter shall control.
3.3 The Distributor shall act as an independent contractor and
nothing herein contained shall constitute the Distributor, its agents or
representatives, or any employees thereof, as employees of the Company in
connection with the sale of Shares of the Company. The Distributor is
responsible for its own conduct and the employment, control and conduct of its
agents and employees and for injury to such agents or employees or to others
through its agents or employees.
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance hereof at the
-8-
<PAGE>
place below indicated, whereupon it shall become a binding agreement between us.
Yours very truly,
UST MASTER VARIABLE SERIES, INC.
By:/s/ A. C. Tannachion
--------------------
Title:
Accepted:
CHUBB SECURITIES CORPORATION
By: /s/ Bruce R. Stefany
--------------------
Bruce R. Stefany
President
-9-
<PAGE>
Exhibit 8(a)
CUSTODY AGREEMENT
THIS AGREEMENT dated as of October 14, 1994 by and between UST MASTER
VARIABLE SERIES, INC., a Maryland corporation (the "Company"), and UNITED STATES
TRUST COMPANY OF NEW YORK, a New York corporation ("U.S. Trust").
R E C I T A L
WHEREAS, the Company is registered as an open-end, diversified, management
investment company under the Investment Company Act of 1940, as amended ("the
1940 Act"); and
WHEREAS, the Company desires to retain U.S. Trust to serve as the Company's
custodian and U.S. Trust is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Company hereby appoints U.S. Trust to act as
-----------
custodian of the portfolio securities, cash and other property of each Portfolio
of the Company for the period and on the terms set forth in this Agreement.
U.S. Trust accepts such appointment and agrees to furnish the services herein
set forth in return for the compensation as provided in Paragraph 23 of this
Agreement.
2. Delivery of Documents. The Company has furnished U.S. Trust with
---------------------
copies properly certified or authenticated of each of the following:
(a) Resolutions of the Company's Board of Directors authorizing the
appointment of U.S. Trust as custodian of the portfolio securities, cash and
other property of each Portfolio of the Company.
(b) Incumbency and signature certificates identifying and containing the
signatures of the Company's officers and/or the persons authorized to sign
Written Instructions, as hereinafter defined, on behalf of the Company;
(c) The Company's Articles of Incorporation filed with the Department of
Assessments and Taxation of the State of Maryland on April 29, 1994 and all
amendments thereto (such Articles of Incorporation, as currently in effect and
as they
<PAGE>
shall from time to time be amended, are herein called the "Charter");
(d) The Company's By-Laws and all amendments thereto (such By-Laws, as
currently in effect and as they shall from time to time be amended, are herein
called the "By-Laws");
(e) Resolutions of the Company's Board of Directors appointing U.S. Trust
and Foreign and Colonial Asset Management ("FACAM") as the respective investment
adviser and sub-investment adviser to the Company, and resolutions of the
Company's Board of Directors and Portfolio shareholders ("Shareholders")
approving proposed Investment Advisory Agreements between U.S. Trust and the
Company and a proposed Sub-Advisory Agreement between U.S. Trust and FACAM
(collectively, the "Advisory Agreements");
(f) Resolutions of the Company's Board of Directors appointing Chubb
Securities Corporation (the "Distributor") as the Company's distributor for the
Portfolios and approving a proposed Distribution Agreement between the
Distributor and the Company (the "Distribution Agreement");
(g) Resolutions of the Company's Board of Directors appointing Chubb
Investment Advisory Corporation (the "Administrator") as the administrator and
transfer agent for the Company and approving a proposed Administrative Services
Agreement between the Administrator and the Company (the "Administration
Agreement");
(h) The Advisory Agreements, the Distribution Agreement and the
Administration Agreement;
(i) The Company's Notification of Registration filed pursuant to Section
8(a) of the 1940 Act on Form N-8A with the Securities and Exchange Commission
("SEC") on June 7, 1994;
(j) The Company's Registration Statement on Form N-1A under the 1940 Act
and the Securities Act of 1933, as amended ("the 1933 Act") as filed with the
SEC on June 7, 1994 (Registration No. 33-79886) relating to shares of the
Company's shares, $.001 par value per share (such shares and shares of the
Company hereafter classified by the Company's Board of Directors are hereinafter
collectively called "Shares"), and all amendments thereto; and
(k) The Company's most recent prospectus (such prospectus, as currently in
effect, and all amendments and supplements thereto are herein called the
"Prospectus").
The Company will furnish U.S. Trust from time to time with copies of all
amendments of or supplements to the foregoing,
-2-
<PAGE>
if any, and with comparable documents with respect to any Portfolio of the
Company organized after the date of this Agreement.
3. Definitions.
-----------
(a) "Authorized Person". As used in this Agreement, the term "Authorized
-----------------
Person" means the Company's President, Treasurer, and any other person, whether
or not any such person is an officer or employee of the Company, duly authorized
by the Board of Directors of the Company to give Oral and Written Instructions
on behalf of the Company and listed on the Certificate annexed hereto as
Appendix A or such other Certificate listing persons duly authorized to give
Oral and Written Instructions on behalf of the Company as may be received by
U.S. Trust from time to time.
(b) "Book Entry System". As used in this Agreement, the term "Book-Entry
-----------------
System" means the Federal Reserve/Treasury book-entry system for United States
and federal agency securities, its successor or successors and its nominee or
nominees.
(c) "Broker". As used in this Agreement, the term "Broker" shall mean any
------
dealer, broker or futures commission merchant.
(d) "Broker Account". As used in this Agreement, "Broker Account" shall
--------------
mean a segregated account, in the name of a Broker, or in the name of the
Company for the benefit of a Broker, as the case may be, separate and distinct
from the Company's custody account, in which certain securities and/or cash of
the Company shall be deposited and held by U.S. Trust for the benefit of a
Broker in connection with the purchase or sale of Municipal Bond Index Futures
Contracts.
(e) "Oral Instructions". As used in this Agreement, the term "Oral
-----------------
Instructions" means oral instructions actually received by U.S. Trust from an
Authorized Person or from a person reasonably believed by U.S. Trust to be an
Authorized Person. The Company agrees to deliver to U.S. Trust, at the time and
in the manner specified in Paragraph 8(b) of this Agreement, Written
Instructions confirming Oral Instructions.
(f) "Property". The term "Property", as used in this Agreement, means:
--------
(i) any and all securities and other property of any
Portfolio which the Company may from time to time deposit, or cause to
be deposited, with U.S. Trust or which U.S. Trust may from time to
time hold for any Portfolio;
-3-
<PAGE>
(ii) all income in respect of any of such securities or
other property;
(iii) all proceeds of the sale of any of such securities or
other property; and
(iv) all Proceeds Of the sale of securities issued by the
Company, which are received by U.S. Trust from time to time from or on
behalf of the Company.
(g) "Securities Depository". As used in this Agreement, the term
---------------------
"Securities Depository" shall mean The Depository Trust Company, a clearing
agency registered with the SEC or its successor or successors and its nominee or
nominees; and shall also mean any other registered clearing agency, its
successor or successors specifically identified in a certified copy of a
resolution of the Company's Board of Directors approving deposits by U.S. Trust
therein.
(h) "Special Sub-Account". As used in this Agreement, the term
-------------------
"Special Sub-Account" shall mean the account maintained under the terms of this
Agreement as a segregated account, by recordation or otherwise, within the
custody account of the Company in which certain securities and/or cash of the
Company may be deposited from time to time, in accordance with Written
Instructions received by U.S. Trust in connection with such transactions as the
Company may from time to time determine.
(i) "Written Instructions". As used in this Agreement, the term
--------------------
"Written Instructions" mean instructions delivered by mail, tested telegram,
cable, telex or facsimile sending device, and received by U.S. Trust, signed by
two Authorized Persons or by persons reasonably believed by U.S. Trust to be
Authorized Persons.
4. Delivery and Registration of the Property.
-----------------------------------------
(a) The Company will deliver or cause to be delivered to U.S. Trust
all securities and all monies owned by it, including cash received for the
issuance of its Shares, at any time during the period of this Agreement, except
for Municipal Bond Index Futures Contracts and securities and monies to be
delivered to any subcustodian appointed pursuant to Paragraph 6 hereof. U.S.
Trust will not be responsible for such securities and such monies until actually
received by it. All securities delivered to U.S. Trust or to any such
subcustodian (other than in bearer form) shall be registered in the name of the
Company or in the name of a nominee of the Company or in the name of U.S. Trust
or any nominee of U.S. Trust (with or without indication of fiduciary status) or
in the name of any subcustodian or any nominee of such subcustodian appointed
-4-
<PAGE>
pursuant to Paragraph 6 hereof or shall be properly endorsed and in form for
transfer satisfactory to U.S. Trust.
(b) In connection with Municipal Bond Index Futures Contracts, the
Company will deliver or cause to be delivered to U.S. Trust a Broker's statement
or confirmation confirming that Municipal Bond Index Futures Contracts purchased
by the Company through a Broker are held by such Broker, in book entry form or
otherwise, in the name of the Company, a nominee of the Company, U.S. Trust or a
nominee of U.S. Trust.
5. Receipt and Disbursement of Money.
---------------------------------
(a) U.S. Trust shall open and maintain a separate custodial account or
accounts for each Portfolio in the name of such Portfolio, subject only to draft
or order by U.S. Trust acting pursuant to the terms of this Agreement, and shall
hold in such account or accounts, subject to the provisions hereof, all cash
received by it from or for the account of each Portfolio of the Company. U.S.
Trust shall make payments of cash to, or for the account of, the Company from
such cash only (i) for the purchase of securities for each of the Portfolios as
provided in Paragraph 11 hereof; (ii) upon receipt of Written Instructions, for
the payment of dividends or other distributions of Shares of each Portfolio, the
payment of redemption proceeds for shares, or for the payment of interest,
taxes, administration, distribution or advisory fees or expenses which are to be
borne by the Company or by any Portfolio under the terms of this Agreement, the
Advisory Agreements, the Administrative Services Agreement, or the Distribution
Agreement; (iii) upon receipt of Written Instructions for payments in connection
with the conversion, exchange or surrender of securities owned or subscribed to
by the Company for each of the Portfolios and held by or to be delivered to U.S.
Trust; (iv) to a subcustodian pursuant to Paragraph 6 hereof; (v) for deposit in
a Broker's Account; (vi) for deposit in a Special Sub-Account; or (vii) upon
receipt of Written Instructions, for other corporate purposes. No payment
pursuant to (i) above shall be made unless U.S. Trust has received a copy of the
broker's or dealer's confirmation or the payee's invoice, as appropriate.
(b) U.S. Trust is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received as custodian for the
account of each Portfolio of the Company.
6. Receipt of Securities. Except as provided by Paragraph 7 hereof,
---------------------
U.S. Trust shall hold and physically segregate in a separate account,
identifiable at all times from those of any other persons, firms or
corporations, all securities and non-cash property received by it for the
account of each Portfolio of the Company. All such securities and non-cash
-5-
<PAGE>
property are to be held or disposed of by U.S. Trust for each Portfolio of the
Company pursuant to the terms of this Agreement. In the absence of Written
Instructions accompanied by a certified resolution authorizing the specific
transaction by the Company's Board, U.S. Trust shall have no power or authority
to withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any
such securities and investments, except in accordance with the express terms
provided for in this Agreement. In no case may any director, officer, employee
or agent of the Company withdraw any securities. In connection with its duties
under this Paragraph 6, U.S. Trust may, at its own expense, enter into
subcustodian agreements with other banks or trust companies for the receipt of
certain securities and cash to be held by U.S Trust for the account of each
Portfolio of the Company pursuant to this Agreement; provided that each such
bank or trust company has an aggregate capital, surplus and undivided profits,
as shown by its last published report, of not less than twenty million dollars
($20,000,000) and that such bank or trust company agrees with U.S. Trust to
comply with all relevant provisions of the 1940 Act and applicable rules and
regulations thereunder. U.S. Trust shall remain responsible for the performance
of all of its duties under this Agreement and shall hold the Company harmless
from the acts and omissions of any bank or trust company that it might choose
pursuant to this Paragraph 6.
7. Use of a Securities Depository or the Book-Entry System. The
-------------------------------------------------------
Company shall deliver to U.S. Trust a certified resolution of the Board of
Directors of the Company approving, authorizing and instructing U.S. Trust on a
continuous and ongoing basis until instructed to the contrary by Oral or Written
Instructions actually received by U.S. Trust (i) to deposit in the Securities
Depository or the Book-Entry System all securities of each Portfolio of the
Company eligible for deposit therein, and (ii) to utilize a Securities
Depository or the Book-Entry System to the extent possible in connection with
the performance of its duties hereunder, including, without limitation,
settlements of purchases and sales of securities by each Portfolio of the
Company, and deliveries and returns of securities collateral in connection with
borrowings. Without limiting the generality of such use, it is agreed that the
following provisions shall apply thereto:
(a) Securities and any cash of each Portfolio of the Company deposited
in a Securities Depository or the Book-Entry System will at all times be
segregated from any assets and cash controlled by U.S. Trust in other than a
fiduciary or custodian capacity but may be commingled with other assets held in
such capacities. U.S. Trust will pay out money only upon receipt of securities
and will deliver securities only upon the receipt of money.
-6-
<PAGE>
(b) All books and records maintained by U.S. Trust which relate to
each Portfolio of the Company's participation in a Securities Depository or the
Book-Entry System will at all times during U.S. Trust's regular business hours
be open to the inspection of the Company's' duly authorized employees or agents,
and the Company will be furnished with all information in respect of the
services rendered to it as it may require.
(c) U.S. Trust will provide the Company with copies of any report
obtained by U.S. Trust on the system of internal accounting control of a
Securities Depository or the Book-Entry System within ten days after receipt of
such a report by U.S. Trust. U.S. Trust will also provide the Company with such
reports on its own system of internal control as the Company may reasonably
request from time to time.
8. Instructions Consistent with Charter, etc.
-----------------------------------------
(a) Unless otherwise provided in this Agreement, U.S. Trust shall act
only upon Oral and Written Instructions. Although U.S. Trust may take
cognizance of the provisions of the Charter and By-Laws of the Company, U.S.
Trust may assume that any Oral or Written Instructions received hereunder are
not in any way inconsistent with any provisions of such Charter or By-Laws or
any vote or resolution of the Company's Board of Directors, or of any committee
thereof.
(b) U.S. Trust shall be entitled to rely upon any Oral Instructions
and any Written Instructions actually received by U.S. Trust pursuant to this
Agreement. The Company agrees to forward to U.S. Trust Written Instructions
confirming Oral Instructions in such manner that the Written Instructions are
received by U.S. Trust, whether by hand delivery, telex, facsimile sending
device or otherwise, by the close of business of the same day that such Oral
Instructions are given to U.S. Trust. The Company agrees that the fact that
such confirming Written Instructions are not received by U.S. Trust shall in no
way affect the validity of the transactions or enforceability of the
transactions authorized by the Company by giving Oral Instructions. The Company
agrees that U.S. Trust shall incur no liability to the Company in acting upon
Oral or Written Instructions given to U.S. Trust hereunder provided such
instructions reasonably appear to have been received from an Authorized Person.
9. Transactions Not Requiring Instructions. U.S. Trust is
---------------------------------------
authorized to take the following action without Oral or Written Instructions:
(a) Collection of Income and Other Payments. U.S. Trust shall:
---------------------------------------
-7-
<PAGE>
(i) collect and receive for the account of each Portfolio
of the Company, all income and other payments and distributions,
including (without limitation) stock dividends, rights, warrants and
similar items, included or to be included in the Property of such
Portfolio, and promptly advise' the Company of such receipt and shall
credit such income, as collected, to the Company's account for such
Portfolio;
(ii) endorse and deposit for collection, in the name of the
Company, checks, drafts, or other orders for the payment of money on
the same day as received;
(iii) receive and hold for the account of each Portfolio of
the Company all securities received by the Portfolio as a result of a
stock dividend, share split-up or reorganization, recapitalization,
readjustment or other rearrangement or distribution of rights or
similar securities issued with respect to any portfolio securities of
such Portfolio of the Company held by U.S. Trust hereunder;
(iv) present for payment and collect the amount payable
upon all securities which may mature or be called, redeemed, or
retired, or otherwise become payable on the date such securities
become payable;
(v) take any action which may be necessary and proper in
connection with the collection and receipt of such income and other
payments and the endorsement for collection of checks, drafts, and
other negotiable instruments.
(b) Miscellaneous Transactions. U.S. Trust is authorized to deliver
--------------------------
or cause to be delivered Property against payment or other consideration or
written receipt therefor in the following cases:
(i) for examination by a broker selling for the account of
any Portfolio of the Company in accordance with street delivery
custom;
(ii) for the exchange of interim receipts or temporary
securities for definitive securities;
(iii) for transfer of securities into the name of the
Company or U.S. Trust or a nominee of either, or for exchange of
securities for a different number of bonds, certificates, or other
evidence, representing the same aggregate face amount or number
-8-
<PAGE>
of units bearing the same interest rate, maturity date and call
provisions, if any; provided that, in any such case, the new
securities are to be delivered to U.S. Trust.
10. Transactions Requiring Instructions. Upon receipt of Oral or
-----------------------------------
Written Instructions and not otherwise, U.S. Trust, directly or through the use
of the Securities Depository or the Book-Entry System, shall:
(a) Execute and deliver to such persons as may be designated in such
Oral or Written Instructions, proxies, consents,' authorizations, and any other
instruments whereby the authority of the Company as owner of any securities may
be exercised;
(b) Deliver any securities held for the Company against receipt of
other securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(c) Deliver any securities held for the Company to any protective
committee, reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization or sale of
assets of any corporation, against receipt of such certificates of deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Company and
take such other steps as shall be stated in said instructions to be for the
purpose of effectuating any duly authorized plan of liquidation, reorganization,
merger, consolidation or recapitalization of the Company; and
(e) Release securities belonging to the Company to any bank or trust
company for the purpose of pledge or hypothecation to secure any loan incurred
by the Company; provided, however, that securities shall be released only upon
payment to U.S. Trust of the monies borrowed, except that in cases where
additional collateral is required to secure a borrowing already made, subject to
proper prior authorization, further securities may be released for that purpose;
and pay such loan upon redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or notes evidencing the
loan.
11. Purchases of Securities.
-----------------------
(a) Promptly after each purchase of securities (other than Municipal
Bond Index Futures Contracts) by U.S. Trust
-9-
<PAGE>
(as investment adviser), the Company, through U.S. Trust (as investment
adviser), shall deliver to U.S. Trust (as custodian) Oral Instructions
specifying with respect to each such purchase: (a) the name of the issuer and
the title of the securities, (b) the number of shares or the principal amount
purchased and accrued interest, if any, (c) the dates of purchase and
settlement, (d) the purchase price per unit, (e) the total amount payable upon
such purchase, (f) the name of the person from whom or the Broker through whom
the purchase was made and (g) the Portfolio of the Company for which the
purchase was made. U.S. Trust shall upon receipt of securities purchased by or
for a Portfolio of the Company pay out of the monies held for the account of
such Portfolio of the Company the total amount payable to the person from whom
or the Broker through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Oral Instructions.
(b) Whenever U.S. Trust (as investment adviser), shall enter into a
Municipal Bond Index Futures Contract, the Company, through U.S. Trust (as
investment adviser) shall deliver to U.S. Trust (as custodian) Oral Instructions
specifying with respect to such Municipal Bond Index Futures Contract: (a) the
category of Municipal Bond Index Futures Contract (the name of underlying
financial instrument); (b) the delivery or settlement date of the Municipal Bond
Index Futures Contract; (c) the date the Municipal Bond Index Futures Contract
was entered into; (d) whether the Company is buying (going long) or selling
(going short) on such Municipal Bond Index Futures Contract; (f) the amount of
cash and/or the amount and kind of securities to be deposited in a Broker
Account and the name in which the Broker Account has been, or is to be,
established; (g) the amount of cash and/or the amount and kind of securities, if
any, to be deposited in the Special Sub-Account; (h) the name of the Broker
through whom the Municipal Bond Index Futures Contract was entered into; (i) the
amount of fee or commission, if any, to be paid to the Broker; and (j) the name
of the Portfolio of the Company for which the Municipal Bond Index Futures
Contract was entered into. U.S. Trust shall upon receipt of a Broker's
statement confirming the purchase (creation of a long position) or sale
(creation of a short position) of such Municipal Bond Index Futures Contract pay
out of the monies held for the account of such Portfolio of the Company the
total amount payable to the Broker, provided that the same conforms to the total
amount payable as set forth in the Oral Instructions.
12. Sales of Securities.
-------------------
(a) Promptly after each sale of securities (other than Municipal Bond
Index Futures Contracts) by U.S. Trust (as investment adviser), the Company,
through U.S. Trust (as investment adviser), shall deliver to U.S. Trust (as
custodian) Oral Instructions, specifying with respect to each such sale: (a)
-10-
<PAGE>
the name of the issuer and the title of the security, (b) the number of shares
or principal amount sold, and accrued interest, if any, (c) the date of sale,
(d) the sale price per unit, (e) the total amount payable to the Company upon
such sale, (f) the name of the Broker through whom or the person to whom the
sale was made and (g) the Portfolio of the Company for which the sale was made.
U.S. Trust shall deliver the securities upon receipt of the total amount payable
to the Company upon such sale, provided that the same conforms to the total
amount payable as set forth in such Oral Instructions. Subject to the
foregoing, U.S. Trust may accept payment in such form as shall be satisfactory
to it, and may deliver securities and arrange for payment in accordance with the
customs prevailing among dealers in securities.
(b) Whenever a Municipal Bond Index Futures Contract is retained by a
Portfolio of the Company until delivery or settlement is made on such Municipal
Bond Index Futures Contract, the Company, through U.S. Trust (as investment
adviser), shall deliver to U.S. Trust (as custodian) Oral Instructions
specifying: (a) the Municipal Bond Index Futures Contract; (b) the securities
and/or amount of cash to be delivered or received; (c) the Broker to or from
whom payment or delivery is to be made or received; (d) the amount of cash
and/or securities to be withdrawn from the related Broker Account and/or the
Special Sub-Account, if any; and (e) the name of the Portfolio of the Company
for which the cash/or securities are to be delivered or received. Upon the
receipt of a Broker's statement or confirmation confirming that the Municipal
Bond Index Bond Index Futures Contract is being settled and that the Portfolio's
position in such Municipal Bond Index Futures Contract is thereby terminated,
U.S. Trust shall make the payment or delivery specified in the Broker's
statement, provided that the same conforms to the total amount payable as set
forth in the Oral Instructions.
(c) Whenever a Portfolio of the Company, through U.S. Trust (as
investment adviser), shall enter into a Municipal Bond Index Futures Contract to
offset a Municipal Bond Index Futures Contract, the Company, through U.S. Trust
(as investment adviser), shall deliver to U.S. Trust (as custodian) Oral
Instructions specifying: (a) the items of information required in Oral
Instructions described in Sub-paragraph (b) of this Paragraph, (b) the Municipal
Bond Index Futures Contract being offset; and (c) the amount, if any, to be paid
or received by the Portfolio. U.S. Trust shall, upon receipt of a Broker's
statement or confirmation confirming the offsetting transaction, make payment of
the amount, if any, specified in the Broker's statement, provided that the same
conforms to the total amount payable as set forth in the Oral Instructions.
-11-
<PAGE>
13. Broker Accounts and Special Sub-Accounts.
----------------------------------------
(a) Whenever a Portfolio of the Company shall enter into a Municipal
Bond Index Futures Contract, U.S. Trust shall open and maintain a Broker Account
as specified in Oral Instructions relating to such Municipal Bond Index Futures
Contract and deposit in such Broker Account the amount of cash and/or the amount
and kind of securities specified in such Oral Instructions.
(b) From time to time, U.S. Trust may open and maintain a Special Sub-
Account as specified in Oral Instructions relating to certain transactions in
which the Company may engage and deposit in such Special Sub-Account the amount
of cash and/or the amount and kind of securities specified in such Oral
Instructions.
(c) U.S. Trust shall, from time to time, make such additional deposits
to, or withdrawals from, such Broker Account or Special Sub-Account as specified
in Oral Instructions.
(d) U.S. Trust shall make deliveries and payments from a Special Sub-
Account only in accordance with the express terms of this Agreement relating to
the general custody accounts of the Portfolios of the Company.
(e) U.S. Trust shall make deliveries or payments from a Broker Account
only upon the receipt of a certification signed by an officer or director of the
Broker in whose name or for whose benefit the account was established specifying
(a) the amount of cash and/or the amount and kind of securities to be paid or
delivered, (b) to whom the delivery or payment shall be made, and (c) the date
of such payment. U.S. Trust shall make a delivery or payment from a Broker
Account to a party other than the Company only if the Broker's certification
states that all conditions precedent to its right under its agreement with the
Company to direct disposition of the assets held therein have been satisfied.
14. Certain Information Provided by U.S. Trust. Promptly after the
------------------------------------------
close of business on each day, U.S. Trust shall furnish the Company with
confirmations and a summary of all transfers to or from the account of each
Portfolio of the Company and any Broker Account or Special Sub-Account. Where
securities are transferred to an account of any Portfolio of the Company
established pursuant to Paragraph 7 hereof, U.S. Trust shall also by book entry
or otherwise identify as belonging to such Portfolio of the Company the quantity
of securities in a fungible bulk of securities registered in the name of U.S.
Trust (or its nominee) or shown in U.S. Trust's account on the books of the
Securities Depository or the Book-Entry System. At least monthly and from time
to time, U.S. Trust shall furnish the Company with
-12-
<PAGE>
a detailed statement of the Property held for each Portfolio of the Company
under this Agreement. U.S. Trust shall also make available upon request to any
Broker specified in the name of a Broker Account a copy of any summary or
statement furnished the Company with respect to such Broker Account.
15. Dividends and Distributions. The Company shall furnish U.S.
---------------------------
Trust with appropriate evidence of action taken by the Company's Board of
Directors authorizing the declaration and payment of dividends and distributions
to the Company's Shareholders. With respect to each Portfolio, upon receipt by
U.S. Trust of Written Instructions with respect to dividends and distributions
declared by the Company's Board of Directors and payable to Shareholders who
have elected in the proper manner to receive their distributions or dividends in
cash, and in conformance with procedures mutually agreed upon by U.S. Trust, the
Company, and the Administrator, U.S. Trust shall pay to the Administrator, as
agent for the Shareholders, an amount equal to the amount indicated in said
Written Instructions as payable by each Portfolio to such Shareholders for
distribution in cash by the Administrator to such Shareholders. In lieu of
paying the Administrator cash dividends and distributions, U.S. Trust may
arrange for the direct payment of cash dividends and distributions to
Shareholders by U.S. Trust in accordance with such procedures and controls as
are mutually agreed upon from time to time by and among the Company, U.S. Trust
and the Administrator.
16. Records. The books and records pertaining to the Company which
-------
are in the possession of U.S. Trust shall be the property of the Company. Such
books and records shall be prepared and maintained as required by the 1940 Act,
as amended, and other applicable securities laws and rules and regulations. The
Company, or the Company's authorized representatives, shall have access to such
books and records at all times during U.S. Trust's normal business hours, and
such books and records shall be surrendered to the Company promptly upon
request. Upon the reasonable request of the Company, copies of any such books
and records shall be provided by U.S. Trust to the Company or the Company's
authorized representative at the Company's expense.
17. Reports. U.S. Trust shall furnish the Company such periodic and
-------
special reports as the Company may reasonably request, and such other
information as may be agreed upon from time to time between the Company and U.S.
Trust.
18. Cooperation with Accountants. U.S. Trust shall cooperate with
----------------------------
the Company's independent accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to assure that the
necessary information is made available to such accountants for the expression
of their
-13-
<PAGE>
unqualified opinion, including but not limited to the opinion included in the
Company's semi-annual report on Form N-SAR.
19. Confidentiality. U.S. Trust agrees on behalf of itself and its
---------------
employees to treat confidentially and as the proprietary information of the
Company all records and other information relative to the Company and its prior,
present or potential Shareholders and relative to the Distributor and its prior,
present or potential customers, and not to use such records and information for
any purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Company, which
approval shall not be unreasonably withheld and may not be withheld where U.S.
Trust may be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by the Company. Nothing contained herein,
however, shall prohibit U.S. Trust from advertising or soliciting the public
generally with respect to other products or services, regardless of whether such
advertisement or solicitation may include prior, present or potential
Shareholders of the Company.
20. Equipment Failures. In the event of equipment failures beyond
------------------
U.S. Trust's control, U.S. Trust shall, at no additional expense to the Company,
take reasonable steps to minimize service interruptions but shall have no
liability with respect thereto. U.S. Trust shall enter into and shall maintain
in effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available.
21. Right to Receive Advice.
-----------------------
(a) Advice of Company. If U.S. Trust shall be in doubt as to any
-----------------
action to be taken or omitted by it, it may request, and shall receive, from the
Company directions or advice.
(b) Advice of Counsel. If U.S. Trust shall be in doubt as to any
-----------------
question of law involved in any action to be taken or omitted by U.S. Trust, it
may request advice at its own cost from counsel of its own choosing (who may be
counsel for the Distributor, the Administrator, the Company or U.S. Trust, at
the option of U.S. Trust).
(c) Conflicting Advice. In case of conflict between directions or
------------------
advice received by U.S. Trust pursuant to subparagraph (a) of this paragraph and
advice received by U.S. Trust pursuant to subparagraph (b) of this paragraph,
U.S. Trust shall be entitled to rely on and follow the advice received pursuant
to the latter provision alone.
-14-
<PAGE>
(d) Protection of U.S. Trust. U.S. Trust shall be protected in any
------------------------
action or inaction which it takes or omits to take in reliance on any directions
or advice received pursuant to subparagraphs (a) or (b) of this paragraph which
U.S. Trust, after receipt of any such directions or advice, in good faith
believes to be consistent with such directions or advice. However, nothing in
this paragraph shall be construed as imposing upon U.S. Trust any obligation (i)
to seek such directions or advice, or (ii) to act in accordance with such
directions or advice when received, unless, under the terms of another provision
of this Agreement, she same is a condition to U.S. Trust's properly taking or
omitting to take such action. Nothing in this subparagraph shall excuse U.S.
Trust when an action or omission on the part of U.S. Trust constitutes willful
misfeasance, bad faith, gross negligence or reckless disregard by U.S. Trust of
its duties under this Agreement.
22. Compliance with Governmental Rules and Regulations. The Company
--------------------------------------------------
assumes full responsibility for insuring that the contents of each Prospectus of
the Company complies with all applicable requirements of the 1933 Act, the 1940
Act, and any laws, rules and regulations of governmental authorities having
jurisdiction.
23. Compensation. As compensation for the services rendered by U.S.
------------
Trust during the term of this Agreement, the Company will pay to U.S. Trust, in
addition to reimbursement of its out-of-pocket expenses, fees payable on a
monthly basis, determined in accordance with Schedule A attached hereto.
24. Indemnification. The Company, as sole owner of the Property,
---------------
agrees to indemnify and hold harmless U.S. Trust and its nominees from all
taxes, charges, expenses, assessments, claims and liabilities (including,
without limitation, liabilities arising under the 1933 Act, the Securities
Exchange Act of 1934, the 1940 Act, and any state and foreign securities and
blue sky laws, as amended from time to time) and expenses, including (without
limitation) attorneys' fees and disbursements, arising directly or indirectly
(a) from the fact that securities included in the property are registered in the
name of any such nominee, or (b) without limiting the generality of the
foregoing clause (a), from any action or thing which U.S. Trust takes or does or
omits to take or do (i) at the request or on the direction of or in reliance on
the advice of the Company, or (ii) upon Oral or Written Instructions, provided,
--------
that neither U.S. Trust nor any of its nominees shall be indemnified against any
liability to the Company or to its Shareholders (or any expenses incident to
such liability) arising out of (x) U.S. Trust's or such nominee's own willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
under this Agreement, or (y) U.S. Trust's own negligent failure to perform its
duties under this Agreement. In the event of any advance of
-15-
<PAGE>
cash for any purpose made by U.S. Trust resulting from orders or Oral or Written
Instructions of the Company, or in the event that U.S. Trust or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Agreement, except such as
may arise from its or its nominee's own negligent action, negligent failure to
act, willful misconduct, or reckless disregard, any Property at any time held
for the account of the Company shall be security therefor.
25. Responsibility of U.S. Trust. U.S. Trust shall be under no duty
----------------------------
to take any action on behalf of the Company except as specifically set forth
herein or as may be specifically agreed to by U.S. Trust in writing. In the
performance of its duties hereunder, U.S. Trust shall be obligated to exercise
care and diligence and to act in good faith and to use its best efforts within
reasonable limits to insure the accuracy of all services performed under this
Agreement. U.S. Trust shall be responsible for its own negligent failure to
perform its duties under this Agreement, but to the extent that duties,
obligations and responsibilities are not expressly set forth in this Agreement,
U.S. Trust shall not be liable for any act or omission which does not constitute
willful misfeasance, bad faith or gross negligence on the part of U.S. Trust or
reckless disregard of such duties, obligations and responsibilities. Without
limiting the generality of the foregoing or of any other provision of this
Agreement, U.S. Trust, in connection with its duties under this Agreement, shall
not be under any duty or obligation to inquire into and shall not be liable for
or in respect of (a) the validity or invalidity or authority or lack thereof of
any advice, direction, notice or other instrument which conforms to the
applicable requirements of this Agreement, if any, and which U.S. Trust believes
to be genuine, (b) the validity of the issue of any securities purchased or sold
by any Portfolio of the Company, the legality of the purchase or sale thereof or
the propriety of the amount paid or received therefor, (c) the legality of the
issue or sale of any Shares, or the sufficiency of the amount to be received
therefor, (d) the legality of the redemption of any Shares, or the propriety of
the amount to be paid therefor, (e) the legality of the declaration or payment
of any dividend or distribution on Shares, or (f) delays or errors or loss of
data occurring by reason of circumstances beyond U.S. Trust's control, including
acts of civil or military authority, national emergencies, labor difficulties,
fire, mechanical breakdown (except as provided in Paragraph 20), flood or
catastrophe, Acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
26. Collections. All collections of monies or other property in
-----------
respect, or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by U.S. Trust) shall be at the sole risk of the Company.
In any case in which
-16-
<PAGE>
U.S. Trust does not receive any payment due the Company within a reasonable time
after U.S. Trust has made proper demands for the same, it shall so notify the
Company in writing, including copies of all demand letters, any written
responses thereto, and memoranda of all oral responses thereto and to telephonic
demands, and await instructions from the Company. U.S. Trust shall not be
obliged to take legal action for collection unless and until reasonably
indemnified to its satisfaction. U.S. Trust shall also notify the Company as
soon as reasonably practicable whenever income due on securities is not
collected in due course.
27. Duration and Termination. This Agreement shall be effective as
------------------------
of the date hereof and shall continue until termination by the Company or by
U.S. trust on 60 days' written notice. Upon any termination of this Agreement,
pending appointment of a successor to U.S. Trust or a vote of the Shareholders
of the Company to dissolve or to function without a custodian of its cash,
securities or other property, U.S. Trust shall not deliver cash, securities or
other property of the Company to the Company, but may deliver them to a bank or
trust company of its own selection, having an aggregate capital, surplus and
undivided profits, as shown by its last published report of not less than twenty
million dollars ($20,000,000) as a custodian for the Company to be held under
terms similar to those of this Agreement, provided, however, that U.S. Trust
-------- -------
shall not be required to make any such delivery or payment until full payment
shall have been made by the Company of all liabilities constituting a charge on
or against the properties then held by U.S. Trust, or on or against U.S. Trust,
and until full payment shall have been made to U.S. Trust of all of its fees,
compensation, costs and expenses, subject to the provisions of Paragraph 23 of
this Agreement.
28. Notices. All notices and other communications (collectively
-------
referred to as "Notice" or "Notices" in this paragraph) hereunder, shall be in
writing or by confirming telegram, cable, telex or facsimile sending device.
Notices shall be addressed (a) if to U.S. Trust, at U.S. Trust's address, 114
West 47th Street, New York, New York 10036; (b) if to the Company, at the
address of the Company; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice. If the
location of the sender of a Notice and the address of the addressee thereof are,
at the time of sending, more than 100 miles apart, the Notice may be sent by
first-class mail, in which case it shall be deemed to have been given three days
after it is sent, or if sent by confirming telegram, cable, telex or facsimile
sending device, it shall be deemed to have been given immediately, and, if the
location of the sender of a Notice and the address of the addressee thereof are,
at the time of sending, not more than 100 miles apart, the Notice may be sent by
first-class mail, in which case it shall be deemed to have been given two days
after it is
-17-
<PAGE>
sent, or if sent by messenger, it shall be deemed to have been given on the day
it is delivered, or if sent by confirming telegram, cable, telex or facsimile
sending device, it shall be deemed to have been given immediately. All postage,
cable, telegram, telex and facsimile sending device charges arising from the
sending of a Notice hereunder shall be paid by the sender.
29. Further Actions. Each party agrees to perform such further acts
---------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
30. Amendments. This Amendment or any part hereof may be changed or
----------
waived only by an instrument in writing singed by the party against which
enforcement of such change or waiver is sought.
31. Miscellaneous. This Agreement embodies the entire agreement and
-------------
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be deemed to be a contract made in New York and
governed by New York law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and year first
above written.
[SEAL] UST MASTER VARIABLE
SERIES, INC.
Attest:/s/ Anastasia McLaughlin By/s/ A. C. Tannachion
------------------------ --------------------
[SEAL] UNITED STATES TRUST COMPANY
OF NEW YORK
Attest:/s/ Anastasia McLaughlin By/s/
------------------------ -----------------------
-18-
<PAGE>
SCHEDULE A
As compensation for the services rendered by U.S. Trust during the
term of this Agreement, the Company will pay to U.S. Trust the following fees:
One (1) basis point on the face value of debt securities and the
market value of equity securities plus $12.00 for each domestic
security transaction and $15.00 for each foreign security
transaction.
/s/ACT
<PAGE>
Exhibit 9(a)
PARTICIPATION AGREEMENT
BY AND AMONG
CHUBB LIFE INSURANCE COMPANY OF AMERICA
THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA
AND
UST MASTER VARIABLE SERIES, INC.
<PAGE>
This PARTICIPATION AGREEMENT (the "Agreement"), is made and entered into as
of the 14th day of October, 1994 by and among Chubb Life Insurance Company of
America ("Chubb Life") and The Colonial Life Insurance Company of America
("Colonial Life"), on their own behalf and on behalf of each of their segregated
asset accounts as set forth on Schedule A, attached hereto and incorporated
herein by reference, as such Schedule A may be amended from time to time (each
such account being hereinafter referred to individually as a "Separate Account"
and collectively as the "Separate Accounts"), and UST Master Variable Series,
Inc. (the "Fund").
WHEREAS, Chubb Life is a life insurance company organized under the laws of
the State of New Hampshire; and
WHEREAS, Colonial Life is a life insurance company organized under the laws
of the State of New Jersey; and
WHEREAS, Chubb Life and Colonial Life (collectively, the "Companies") have
established duly organized, validly existing segregated asset accounts (the
Separate Accounts) by resolution of the Board of Directors of the Companies on
the dates shown for each such Separate Account on Schedule A hereto, to set
aside and invest assets attributable to certain individual flexible payment
deferred variable annuity contracts and such other variable annuity contracts
and variable life insurance policies which may
-2-
<PAGE>
be added from time to time (collectively, the "Contracts," the owners of such
contracts being referred to as the "Owner's"); and
WHEREAS, the Companies have registered the Contracts under the Securities
Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Companies have registered the Separate Accounts as unit
investment trusts under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund, a Maryland corporation, is registered as an open-end
management investment company under the 1940 Act, and the common stock of which
consists of separate series ("Series") named in Schedule A, which issue separate
classes of shares, each such class representing an interest in a particular
managed portfolio of securities and other assets (such Series being hereinafter
referred to individually as a "Portfolio" or collectively as the "Portfolios");
and
WHEREAS, the Fund was established for the purpose of serving as the
investment vehicle for the Separate Accounts established to fund the Contracts
to be offered by the Companies; and
WHEREAS, the Fund has entered into Investment Advisory Agreements, on
behalf of each of its Portfolios, with United States Trust Company of New York
("UST"), a New York state
-3-
<PAGE>
chartered bank and trust company, whereby UST has agreed to provide certain
investment management services on behalf of the Fund; and
WHEREAS, the Fund has entered into an Administrative Services Agreement
with Chubb Investment Advisory Corporation ("Chubb Investment"), a duly
registered investment adviser under the Investment Advisers Act of 1940
("Advisers Act") and applicable state securities laws, whereby Chubb Investment
has agreed to provide certain administrative, transfer agency and dividend
disbursing services on behalf of the Fund;
WHEREAS, the Fund has entered into a Distribution Agreement with Chubb
Securities Corporation ("Chubb Securities") a duly licensed broker/dealer with
the National Association of Securities Dealers, Inc. ("NASD") and under
applicable state laws;
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Companies intend to purchase shares of the Fund on behalf of
each Separate Account to fund the Contracts and the Fund is authorized to sell
such shares through Chubb Securities to unit investment trusts such as each
Separate Account at net asset value;
-4-
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises, the Companies
and the Fund agree as follows:
ARTICLE I.
Sale of Fund Shares
-------------------
1.1 The Fund agrees to sell to the Companies through Chubb Securities
shares of those Series of the Fund listed on Schedule A which the Companies
order on behalf of the Separate Accounts, executing such orders on a daily basis
in accordance with Section 1.4. of this Agreement. Series may be added to or
deleted from Schedule A upon prior written agreement of the Companies and the
Fund.
1.2 The Fund agrees to make the Fund's shares available through Chubb
Securities for purchase by the Companies on behalf of the Separate Accounts at
the then applicable net asset value per share on Business Days as defined in
Section 1.4. of this Agreement, and the Fund shall use reasonable efforts to
calculate such net asset value on each Business Day. Notwithstanding any other
provision in this Agreement to the contrary, the Board of Directors of the Fund
(the "Directors") may refuse to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or, in the sole
discretion of the Directors acting in good faith and in
-5-
<PAGE>
light of their fiduciary duties under federal and any applicable state laws, is
necessary in the best interests of the shareholders of such Portfolio (it being
understood that "shareholders" for this purpose shall mean Owners).
1.3 The Fund agrees to redeem for cash, at the Companies' request, any
full or fractional shares of the Fund held by the Companies on behalf of the
Separate Accounts, executing such requests at the net asset value on a daily
basis in accordance with Section 1.4. of this Agreement, the applicable
provisions of the 1940 Act and the then currently effective Fund Prospectus and
Statement of Additional Information (the "SAI," hereinafter together with said
Prospectus, the "Prospectus" or "the then currently effective Fund Prospectus").
Notwithstanding the foregoing, the Fund may delay redemption of Fund shares to
the extent permitted by the 1940 Act, any rules, regulations or orders
thereunder, or the then currently effective Fund Prospectus.
1.4 (a) For purposes of Sections 1.1, 1.2 and 1.3 of this Agreement, the
Companies shall be the agent of the Fund for the limited purpose of receiving
redemption and purchase requests from the Separate Accounts based on
transactions in the Separate Accounts' securities or units, and receipt on any
Business Day by the Companies as such limited agent of the Fund prior to the
time prescribed in the then currently effective Fund Prospectus (which
-6-
<PAGE>
as of the date of execution of this Agreement is 4 p.m. Eastern Time) shall
constitute receipt by the Fund on that same Business Day, provided that the Fund
receives notice of such redemption or purchase request by 11:00 a.m. Eastern
Time on the next following Business Day. For purposes of this Agreement,
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading or as otherwise provided in the Fund's then currently effective Fund
Prospectus.
(b) The Companies shall pay for shares of each Portfolio on the same
day that it places an order with the Fund to purchase those Portfolio shares.
Payment for Portfolio shares will be made by the Separate Accounts or the
Companies in Federal Funds transmitted to the Fund by wire to be received by
11:00 a.m. Eastern Time on the day the Fund is properly notified of the purchase
order for Portfolio shares (unless sufficient proceeds are available from
redemption of shares of other Portfolios). If Federal Funds are not received on
time, such funds will be invested, and Portfolio shares purchased thereby will
be issued, as soon as practicable.
(c) Payment for Fund shares redeemed by the Separate Accounts or the
Companies will be made in Federal Funds transmitted to the Companies by wire by
11:00 a.m. Eastern Time on the next Business Day after the Fund is properly
notified of the redemption order of Fund shares (unless redemption proceeds
-7-
<PAGE>
are applied to the purchase of shares of other Portfolios), except that the Fund
reserves the right to delay payment of redemption proceeds, but in no event may
such payment be delayed longer than the period permitted under Section 22(e) of
the 1940 Act. The Fund shall not bear any responsibility whatsoever for the
proper disbursement or crediting of redemption proceeds; the Companies alone
shall be responsible for such action.
(d) Any purchase or redemption request for Fund shares held or to be
held in a Company's general account shall be effected at the net asset value per
share next determined after the Fund's receipt of such request, provided that,
in the case of a purchase request, payment for Fund shares so requested is
received by the Fund in Federal Funds prior to the time prescribed in the then
currently effective Fund Prospectus (which as of the date of execution of this
Agreement is 4 p.m. Eastern Time).
1.5 The Companies agree that all net amounts available under the Contracts
with the form number(s) which are listed on Schedule B, attached hereto and
incorporated herein by reference, as such Schedule B may be amended from time to
time, shall be invested exclusively in the Fund.
1.6 Although the Fund has stock certificates, issuance and transfer of the
Fund's shares for the Separate Accounts and the
-8-
<PAGE>
Companies will be by book entry only. Stock certificates will not be issued to
either the Companies or the Separate Accounts. Purchase and redemption orders
for Fund shares will be recorded in an appropriate ledger for each Separate
Account or the appropriate subaccount of each Separate Account.
1.7 The Fund, through its designee Chubb Investment, shall use its best
efforts to furnish same day notice to the Companies of any income dividends or
capital gain distributions payable on the shares of any Portfolio. The
Companies, on their behalf and on behalf of the Separate Accounts, hereby elect
to receive all such income, dividend and capital gain distributions as are
payable on the shares of each Portfolio in the form of additional shares of that
Portfolio. The Companies reserve the right, on their behalf and on the behalf
of the Separate Accounts, to revoke this election and to receive all such
income, dividend and capital gain distributions in cash. The Fund, through its
designee Chubb Investment, shall notify the Companies through its designee,
Chubb Investment, of the number of shares so issued as payment of such income,
dividend and capital gain distributions.
1.8 The Fund, through its designee Chubb Investment, shall use its best
efforts to make the net asset value per share for each Portfolio available to
the Companies on a daily basis as soon as reasonably practical after the net
asset value per share is calculated and shall use its best efforts to make such
net
-9-
<PAGE>
asset value per share available by 7 p.m., Eastern Time, and shall calculate
such net asset value in accordance with the then currently effective Fund
Prospectus. Neither the Fund, any Portfolio nor the Investment Adviser nor any
of their affiliates shall be liable for any information provided to the
Companies pursuant to this Agreement which information is based on incorrect or
untimely information supplied by the Companies or their affiliates to the Fund
or any of its service providers.
1.9 (a) The Companies shall invest all amounts available for investment
under the Contracts only in the Series listed on Schedule A to this Agreement.
Series may be added to, or deleted from Schedule A upon prior written agreement
of the Companies and the Fund. In no event shall any investment media managed
by a party other than the Investment Adviser or an affiliate thereof be made
available under the Contracts without the prior written consent of the Fund.
The Companies shall not withdraw the Separate Account's investment in the Fund
or a Series of the Fund (unless otherwise required by applicable law) except:
(i) as necessary to facilitate Owner requests; (ii) upon requisite vote of the
Owners having an interest in the affected Series and the written consent of the
Fund (unless otherwise required by applicable law), to substitute the shares of
another investment company for Series shares of the Fund in accordance with the
terms of the Contracts; or (iii) is permitted by an exemptive order of the
Securities and Exchange Commission ("SEC") pursuant
-10-
<PAGE>
to Section 26(b) of the 1940 Act, provided that the Fund shall have given prior
written consent to the filing of the exemptive application pursuant to which
such order was obtained.
(b) The Companies shall not, without the prior written consent of the
Fund (unless otherwise required by applicable law), take any action to operate
the Separate Account as a management investment company under the 1940 Act.
(c) The Companies shall not, without the prior written consent of the
Fund (unless otherwise required by applicable law), solicit, induce or encourage
Owners to change or modify the Fund or change the Fund's service providers.
(d) The Companies shall not, without the prior written consent of the
Fund, materially modify the Contracts (unless otherwise required by applicable
law). The Companies shall notify the Fund promptly in writing upon the
occurrence of any event that the Companies believes may necessitate any
modification of the Contracts.
(e) If the Companies determine that it is required by applicable law
(i) to withdraw the Separate Account's investment in the Fund or a Series of the
Fund, (ii) to take any action to operate the Separate Account as a management
investment company, (iii) to solicit, induce or encourage Owners to change or
modify
-11-
<PAGE>
the Fund or change the Fund's investment adviser or sub-adviser, or (iv) to
modify the Contracts, then prior to taking any action described in this Section
1.9, the Companies shall provide the Fund with an opinion of counsel
satisfactory to the Fund regarding such applicable law and the requirements
thereof.
1.10 The Fund agrees that shares of the Fund will be sold only to the
Companies and their Separate Accounts. No share of any Portfolio will be sold
to the general public or to any insurance companies other than the Companies
unless the Companies consent, in writing, to the use of such other insurance
companies.
ARTICLE II.
Representations and Warranties
------------------------------
2.1 The Companies represent and warrant that (a) the Contracts are or will
be registered under the 1933 Act to the extent required by the 1933 Act, and
that the Companies will maintain such registration for so long as and to the
extent required by the 1933 Act, (b) that the Contracts will be issued and sold
in compliance in all material respects with all applicable federal and state
laws and that the sale of the Contracts shall comply in all material respects
with state insurance suitability requirements. The Companies further represent
and warrant that they are insurance companies duly
-12-
<PAGE>
organized and in good standing under applicable law and that prior to any
issuance or sale of any Contract they have legally and validly established each
Separate Account as a segregated asset account under the applicable state
insurance laws and have registered or, prior to any issuance or sale of the
Contracts, will register each Separate Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Contracts, and that a registration statement under
the 1940 Act for each such unit investment trust has been filed with the SEC, to
the extent required by the 1940 Act, and that they will maintain such
registrations for so long as any Contracts are outstanding.
2.2 The Companies represent and warrant that the Contracts are currently
and at the time of issuance will be treated as annuity contracts or life
insurance policies under applicable provisions of the Internal Revenue Code of
1986, as amended, and regulations thereunder (the "Code") and that they will
make every effort to maintain such treatment and that they will notify the Fund
immediately upon having a reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.3 The Companies represent that each Separate Account is a "segregated
asset account" and that interests in each Separate Account are offered
exclusively through the purchase of a
-13-
<PAGE>
"variable contract," within the meaning of such term under Section 1.817-5(f)(2)
of the regulations under the Code, that they will make every effect to continue
to meet such definitional requirements, and that they will notify the Fund
immediately upon having a reasonable basis for believing that such requirements
have ceased to be met or that they might not be met in the future.
2.4 The Companies represent and warrant that all of their directors,
officers, employees, and other individuals/entities having access to securities
or monies of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund. The
aforesaid bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable fidelity insurance company.
2.5 The Companies represent and warrant that they will not transfer or
otherwise convey shares of the Fund, without the prior written consent of the
Fund.
2.6 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act to the extent required by
the 1933 Act, duly authorized for issuance and sold in compliance in all
material respects with all applicable federal and, subject to the Companies
fulfilling their obligations under this Section 2.6, any state securities laws,
-14-
<PAGE>
and that the Fund is and shall remain registered under the 1940 Act to the
extent required by the 1940 Act for so long as Fund shares are sold. The Fund
shall amend the registration statement for its shares under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Companies shall provide the Fund, upon the request
of the Fund, with a list of the states where the Contracts have been sold or
where the owners reside, or any other related information reasonably requested
by the Fund to comply with any state securities or other regulations. The
Companies shall also inform the Fund of any investment restrictions imposed by
state insurance law that may become applicable to the Fund from time to time as
a result of a Separate Account's investment therein (including, but not limited
to, restrictions with respect to fees and expenses and investment policies),
other than those set forth on Schedule C to this Agreement, attached hereto and
incorporated herein by reference, as such Schedule C may be amended from time to
time. Upon receipt of such information from the Companies, the Fund shall
determine whether it is in the best interests of shareholders to comply with any
such restrictions. If the Fund determines that it is not in the best interest
of shareholders (it being understood that "shareholders" for this purpose shall
mean Owners), the Fund shall so inform the Companies, and the Fund and the
Companies shall discuss alternative accommodations in the circumstances. If the
Fund determines that it is in the best interests of shareholders to
-15-
<PAGE>
comply with such restrictions, the Fund and the Companies shall amend Schedule C
to this Agreement to reflect such restrictions.
2.7 The Fund represents and warrants that it intends to qualify as a
Regulated Investment Company under Subchapter M of the Code and that it will
make every effort to maintain such qualification (under Subchapter M or any
successor or similar provision) and that it will notify the Companies
immediately upon having a reasonable basis for believing that it has ceased to
so qualify or that it might not so qualify in the future.
2.8 The Fund represents and warrants that it will at all times comply with
Section 817(h) of the Code and the Treasury regulations thereunder relating to
the diversification requirements for variable annuity, endowment, or life
insurance contracts and any amendments or other modifications to such section or
regulations, and that it will notify the Companies immediately upon having a
reasonable basis for believing that it has ceased to meet such diversification
requirements or that it might not do so in the future. The Fund shall provide
the Companies within ten (10) Business Days after the end of each calendar
quarter with a letter from the appropriate Fund officer or Compliance Officer
certifying to the continued accuracy of the representations contained in this
Section 2.8 and Section 2.7 above, and attaching a detailed listing of the
individual
-16-
<PAGE>
securities and other assets, if any, held by each Portfolio of the Fund as of
the end of such calendar quarter.
2.9 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future consistent with applicable law.
To the extent that it decides to finance distribution expenses pursuant to Rule
12b-1, the Fund undertakes to have its Directors, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.
2.10 The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees, expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.11 The Fund represents that it is lawfully and validly existing under
the laws of the State of Maryland and that it does and will comply in all
material aspects with the 1940 Act.
2.12 The Fund represents and warrants that all of its directors, officers,
employees, investment advisers, and other individuals/entities having access to
securities or monies of the Fund are and shall continue to be at all times
covered by a fidelity bond in accordance with Rule 17g-1 under the 1940 Act.
-17-
<PAGE>
ARTICLE III.
Proxy Statements and Voting
---------------------------
3.1 The Fund, at its expense, shall provide the Companies with copies of
its proxy material, reports to shareholders and other communications to
shareholders in such quantity as the Companies shall reasonably require for
distribution to owners. The Fund shall pay the costs of distributing such
proxy material, reports and other communications to the Owners, who are the
beneficial shareholders of the Fund.
3.2 If and to the extent required by law, the Companies shall:
(i) solicit voting instructions from Owners;
(ii) vote the Fund shares in accordance with instructions
received from Owners; and
(iii) vote Fund shares for which no instructions have been
received and Fund shares held by the Companies outright
or held in any segregated asset account in its own
right in the same proportion as Fund shares of such
Portfolio for which instructions have been received.
-18-
<PAGE>
The Companies shall be responsible for assuring that each of their Separate
Accounts participating in the Fund calculates voting privileges in a manner
consistent with the standards set forth above.
3.3 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders. The Fund reserves the right to take all actions,
including but not limited to, the dissolution, merger, and sale of all assets of
the Fund, upon the sole authorization of its Directors, to the extent permitted
by the laws of the State of Maryland and the 1940 Act.
3.4 The Companies and the Fund agree to handle Fund proxies in a manner
consistent with the standards set forth on Schedule D, attached hereto and
incorporated herein by reference, as such Schedule D may be amended from time to
time.
ARTICLE IV.
Information
-----------
4.1 The Companies shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund other
than the information or representations contained in the registration statement
or Prospectus for the Fund shares, as such registration statement and Prospectus
may be amended or supplemented from time to time, or in reports or proxy
-19-
<PAGE>
statements for the Fund, or in sales literature or other promotional material
approved by the Fund or its designee, except with the permission of the Fund or
its designee.
4.2 The Companies will provide to the Fund at least one complete copy of
all registration statements, Prospectuses, SAIs, reports, solicitations for
voting instructions, sales literature or other promotional materials,
applications for exemption, requests for no-action letters, and all amendments
to any of the above, that relate to the Contracts or any Separate Account,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities. The Companies agree that to the extent required by
applicable law, regulation, or rules of any self-regulatory organization, sales
literature and advertising relating to the Contracts will be filed with relevant
regulatory agencies and/or self-regulatory organizations.
4.3 The Fund shall not give any information or make any representations or
statements on behalf of the Companies or concerning the Companies, any Separate
Account, or the Contracts other than the information or representations
contained in a registration statement or Prospectus for such Contracts, as such
registration statement and Prospectus may be amended or supplemented from time
to time, or in published reports for such Separate Account which are in the
public domain or approved by the Companies for distribution to Owners, or in
sales literature
-20-
<PAGE>
or other promotional material approved by the Companies or their designee,
except with the permission of the Companies.
4.4 The Fund will provide to the Companies at least one complete copy of
all registration statements, Prospectuses, SAIs, reports, proxy statements,
sales literature or other promotional materials, applications for exemption,
requests for no-action letters, and all amendments to any of the above, that
relate to the Fund or its shares, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
4.5 Each party will provide to the other party upon request copies of
draft versions of any registration statements, Prospectuses, SAIs, reports,
proxy statements, solicitations for voting instructions, sales literature and
other promotional materials, applications for exemptions, requests for no-action
letters, and all amendments or supplements to any of the above, to the extent
that the other party reasonably needs such information for purposes of preparing
a report or other filing to be filed with or submitted to a regulatory agency.
If a party requests any such information before it has been filed, the other
party will provide the requested information if then available and in the
version then available at the time of such request.
-21-
<PAGE>
ARTICLE V.
Fees and Expenses
-----------------
5.1 No fees or other compensation shall be paid to any of the parties
under this Agreement. Unless otherwise provided herein, as among the parties
hereto, each party hereto shall be responsible for paying any fees or expenses
arising out of the performance of such party's obligations and duties under this
Agreement.
5.2 As among the parties hereto, all expenses incident to the
performance by the Fund under this Agreement shall be paid by the Fund. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses of registration and qualification
of the Fund's shares, preparation and filing of the Fund's Prospectus and
registration statement, proxy materials and reports, setting the Prospectus in
type, setting in type and printing the proxy materials and reports to
shareholders (including the costs of printing a Prospectus that constitutes an
annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares. The Fund shall neither be charged nor pay for the costs of preparing,
printing,
-22-
<PAGE>
recording, taping and disseminating sales literature or other promotional
material or the costs of printing and mailing to prospective Owners copies of
the Fund Prospectus, notices, periodic reports, or other materials, except that
if the Fund adopts and implements a plan pursuant to Rule 12b-1 under the 1940
Act to finance distribution expenses, then payments may be made to the Companies
and/or others in accordance with such plan. The Fund currently does not intend
to make any payments to finance distribution expenses pursuant to Rule 12b-1
under the 1940 Act, although it may make payments pursuant to Rule 12b-1 in the
future.
5.3 As among the parties hereto, all expenses incident to the performance
by the Companies under this Agreement shall be paid by the Companies. The
Companies shall bear the expenses of registration of the Contracts and Separate
Accounts, preparation, filing and mailing of the Separate Accounts'
Prospectuses, SAIs, registration statements and periodic reports, setting the
Prospectuses for the Contracts in type, and the preparation and mailing of all
statements and notices required by any federal or state law.
-23-
<PAGE>
ARTICLE VI.
Indemnification
---------------
6.1 (a) As among the parties hereto, the Companies will jointly and
severally indemnify and hold harmless the Fund and each of its directors and
officers and each person, if any, who controls the Fund within the meaning of
Section 15 of the 1933 Act and any officer, trustee, director, employee or agent
of any of the foregoing (collectively, the "Indemnified Parties" for the
purposes of this Section 6.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
one or both of the Companies) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact
contained in the registration statement, Prospectus,
SAI, sales literature or other promotional material for
the Contracts or in the Contracts themselves (or any
amendment or supplement to any
-24-
<PAGE>
of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein
or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity
with information furnished in writing to one or both of
the Companies by the Fund for use in the registration
statement or Prospectus for the Contracts or in the
Contracts or sales literature or promotional materials
(or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or are based upon incorrect statements of
or incorrect representations by (other than statements
or representations contained in the registration
statement, Prospectus, SAI or sales literature of
-25-
<PAGE>
the Fund, which statements or representations were not
supplied by one or both of the Companies, any affiliate
of either Company, or persons under their control or
subject to their authorization or supervision), or
wrongful conduct of one or both of the Companies, any
affiliate of either Company, or persons under their
control or subject to their authorization or
supervision, with respect to the sale or distribution
of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a
registration statement, Prospectus, SAI or sales
literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading if such a statement or omission was made in
reliance upon information furnished in
-26-
<PAGE>
writing to the Fund by or on behalf of one or both of
the Companies or any affiliate of either Company; or
(iv) arise out of or result from any failure by one or both
of the Companies to perform its obligations under this
Agreement; or
(v) arise out of or result from any breach of any
representation and/or warranty made by one or both of
the Companies in this Agreement or arise out of or
result from any other breach of this Agreement by one
or both of the Companies;
as limited by and in accordance with the provisions of Section 6.1.(b) and
6.1.(c) hereof.
6.1 (b) The Companies shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject if such losses, claims,
damages, liabilities or litigation are due to the Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of
-27-
<PAGE>
such Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the Companies or each Separate Account, whichever is applicable.
6.1 (c) The Companies shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Companies in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Companies of
any such claim shall not relieve the Companies from any liability which they may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Companies shall be entitled to
participate, at their own expense, in the defense of such action. The Companies
also shall be entitled, at their own expense, to assume the defense thereof,
with counsel satisfactory to the party named in the action. After notice from
one or both of the Companies to such party of the election of one or both of the
Companies to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Companies
will not be liable to such party under this Agreement
-28-
<PAGE>
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation, unless (i) the indemnifying party and the Indemnified Party
shall have mutually agreed to the retention of such counsel and/or other
expenses or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the Indemnified Party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them.
6.1 (d) The Indemnified Parties will promptly notify the Companies of the
commencement of any litigation or proceeding against them in connection with the
issuance or sale of the Fund shares or the Contracts or the operation of the
Fund.
6.2 (a) As among the parties hereto, the Fund will indemnify and hold
harmless the Companies and each of their directors and officers and each person,
if any, who controls the Companies within the meaning of Section 15 of the 1933
Act and any officer, trustee, director, employee or agent of any of the
foregoing (collectively, the "Indemnified Parties" for purposes of this Section
6.2) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Fund) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
-29-
<PAGE>
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement, Prospectus, SAI, sales
literature or other promotional material for the Fund (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Fund
by or on behalf of one or both of the Companies (or their
affiliates) for use in the registration statement or
Prospectus for the Fund or sales literature or promotional
materials (or any amendment or supplement) or otherwise for
use in
-30-
<PAGE>
connection with the sale of Contracts or Fund shares; or
(ii) arise out of or are based upon incorrect statements of or
incorrect representations by (other than statements or
representations contained in the registration statement,
Prospectus, SAI or sales literature of the Contracts, which
statements or representations were not supplied by the
Fund), or wrongful conduct of the Fund, with respect to the
sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, Prospectus, SAI or sales literature of the
Contracts or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
-31-
<PAGE>
omission was made in reliance upon information furnished in
writing to the Companies by the Fund; or
(iv) arise out of or result from any failure by the Fund to
perform its obligations under this Agreement (including a
failure to comply with the diversification requirements
specified in Section 2.8 of this Agreement); or
(v) arise out of or result from any breach of any representation
and/or warranty made by the Fund in this Agreement or arise
out of or result from any other breach of this Agreement by
the Fund;
as limited by and in accordance with the provisions of Section 6.2(b) and 6.2(c)
hereof.
6.2 (b) The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation to which
an Indemnified Party would otherwise be subject if such losses, claims, damages,
liabilities or litigation are due to the Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the
-32-
<PAGE>
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Fund, UST or each Separate Account, whichever is applicable.
6.2 (c) The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have served upon such Indemnified Party (or after such
Indemnified party shall have received notice of such service on any designated
agent), but failure to notify the Fund of any such claim shall not relieve the
Fund from any liability which it may have to the Indemnified Party against whom
such action is brought otherwise than on account of this indemnification
provision. In case any such action is brought against the Indemnified Parties,
the Fund will be entitled to participate, at its own expense, in the defense
thereof. The Fund also shall be entitled, at its own expense, to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently
-33-
<PAGE>
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigations, unless (i) the indemnifying party
and the Indemnified Party shall have mutually agreed to the retention of such
counsel and/or other expenses or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
Indemnified Party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
6.2 (d) The Indemnified Parties will promptly notify the Fund of the
commencement of any litigation or proceedings against them or any of their
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Separate
Account, or the sale or acquisition of shares of the Fund.
6.3 The indemnification provisions contained in this Agreement shall
survive any termination of this Agreement, and a successor in interest to the
parties hereto shall be entitled to indemnification hereunder.
-34-
<PAGE>
ARTICLE VII.
Termination
-----------
7.1 This Agreement shall terminate:
(a) at the option of any party upon ninety (90) days' advance written
notice to the other parties; provided, however, such notice shall not be given
earlier than one (1) year following the date of this Agreement; or
(b) at the option of one or both of the Companies to the extent that
shares of Portfolios are not reasonably available to meet the requirements of
the Contracts as determined in good faith by one or both of the Companies,
provided, however, that such termination shall apply only to the Portfolio not
reasonably available and shall not apply if within 120 days after the Fund's
receipt of such Company's notice of the election to terminate for such cause the
Fund makes available a sufficient number of shares of such Portfolio to meet the
requirements of the Contracts. Prompt notice of the election to terminate for
such cause shall be furnished by one or both of the Companies; or
(c) at the option of the Fund as to one or both of the Companies in
the event that formal administrative proceedings are instituted against one or
both of the Companies by the NASD, the SEC, or any state insurance department or
any other regulatory
-35-
<PAGE>
body regarding the duties of one or both of the Companies under this Agreement
or related to the sale of the Contracts, with respect to the operation of a
Separate Account, the administration of the Contracts, or the purchase of the
Fund shares, provided, however, that the Fund determines in its sole judgement
exercised in good faith, that any such administrative proceedings will have a
material adverse effect upon the ability of one or both of the Companies to
perform their obligations under this Agreement; or
(d) at the option of one or both of the Companies in the event that
formal administrative proceedings are instituted against the Fund by the NASD,
the SEC, or any state securities or insurance department or any other regulatory
body, provided, however, that one or both of the Companies determine in their
sole judgement exercised in good faith, that any such administrative proceedings
will have a material adverse effect upon the ability of the Fund to perform its
obligations under this Agreement, and provided further that such administrative
proceedings are not caused by one or both of the Companies or any of their
affiliates; or
(e) with respect to a Separate Account, upon requisite vote of the
owners having an interest in the affected Portfolio and the written consent of
the Fund (unless otherwise required by applicable law based on an opinion of
counsel reasonably
-36-
<PAGE>
satisfactory to the Fund) to substitute the shares of another investment company
for shares of the corresponding Portfolio of the Fund in accordance with the
terms of the Contracts for which those Portfolio shares had been selected to
serve as the underlying investment media. The Companies will give thirty (30)
days' prior written notice to the Fund of the date of any proposed action to
replace the Fund shares; or
(f) at the option of one or both of the Companies, in the event any of
the Fund's shares are not registered, issued or sold in accordance in all
material respects with applicable federal and any state law provided such event
has a material adverse impact on the Contracts, that such event is not caused by
either Company or any of their affiliates and that the Fund has not cured such
event within ninety (90) days after either Company has given the Fund written
notice of such event, or such law precludes the use of such shares as the
underlying investment media of the Contracts issued or to be issued by the
Companies; or
(g) at the option of one or both of the Companies, if the Fund ceases
to qualify as a Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if one or both of the Companies
reasonably believes based on an opinion of counsel reasonably satisfactory to
the Fund that the Fund may fail to so qualify, provided the Fund
-37-
<PAGE>
fails to provide reasonable assurance within thirty (30) days after it has
received written notice of termination from either Company under this provision
that the Fund will take action to cure or correct such failure; or
(h) at the option of one or both of the Companies, if the Fund fails
to meet the diversification requirements specified in Section 2.8 hereof,
provided the Fund fails to provide reasonable assurance within thirty (30) days
after it has received written notice of termination under this provision that
the Fund will take action to cure or correct such failure; or
(i) at the option of the Fund as to one or both of the Companies if
(1) the Fund shall determine, in its sole judgement reasonably exercised in good
faith, that one or both of the Companies has suffered a material adverse change
in its business or financial condition or is the subject of material adverse
publicity and such material adverse publicity will have a material adverse
impact upon the business and operations of the Fund, (2) the Fund shall notify
one or both of the Companies in writing of such determination and its intent to
terminate this Agreement, and (3) after considering the actions taken by one or
both of the Companies and any other changes in circumstances since the giving of
such notice, such determination of the Fund shall continue to apply on the
sixtieth (60th) day following the giving of such notice, which sixtieth (60th)
day shall be the
-38-
<PAGE>
effective date of termination, provided that the Fund may not terminate this
Agreement if such material adverse change in one or both of the Companies,
business or financial condition or such material adverse publicity is caused by
the Fund; or
(j) at the option of one or both of the Companies, if (1) one or both
of the Companies shall determine, in its sole judgment reasonably exercised in
good faith, that the Fund has suffered a material adverse change in its business
or financial condition or is the subject of material adverse publicity and such
material adverse publicity will have a material adverse impact upon the business
and operations of one or both of the Companies, (2) one or both of the Companies
shall notify the Fund in writing of such determination and its intent to
terminate the Agreement, and (3) after considering the actions taken by the Fund
and any other changes in circumstances since the giving of such notice, such
determination shall continue to apply on the sixtieth (60th) day following the
giving of such notice, which sixtieth (60th) day shall be the effective date of
termination, provided that the Companies may not terminate this Agreement if
such material adverse change in the Fund's business or financial condition or
such material adverse publicity is caused by one or both of their Companies or
any of their affiliates; or
(k) at the option of the Fund if one or both of the Companies gives
the Fund the written notice specified in Section
-39-
<PAGE>
7.3(a) hereof and at the time such notice was given there was not notice of
termination outstanding under any other provision of this Agreement, provided,
however any termination under this Section 7.1(k) shall be effective forty-five
(45) days after the notice specified in 7.3 (a) was given; or
(l) at the option of the Fund as to one or both Companies, upon either
Company's assignment of this Agreement (including, without limitation, any
transfer of the Contracts or the Separate Accounts, to another insurance company
pursuant to an assumption reinsurance agreement) unless the Fund consents
thereto.
7.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 7.1(a) may be exercised for any
reason or for no reason.
7.3 No termination of this Agreement shall be effective (except
pursuant to Section 7.1 (l)) unless and until the party terminating this
Agreement gives prior written notice to all other parties to this Agreement of
its intent to terminate which notice shall set forth the basis for such
termination. Furthermore,
(a) in the event that any termination is based upon the provision of
Section 7.1 (a), 7.1 (b), 7.1 (e), 7.1 (f), 7.1
-40-
<PAGE>
(g), 7.1 (h), 7.1 (i), 7.1 (j) or 7.1 (k) of this Agreement, such prior written
notice shall be given in advance of the effective date of termination as
required by such provisions; and
(b) in the event that any Termination is based upon the provisions of
Section 7.1(c) or 7.1(d) of this Agreement, such prior written notice shall be
given at least ninety (90) days before the effective date of termination.
7.4 Notwithstanding any termination of this Agreement, the Fund at its
option may continue to make available additional shares of the Fund pursuant to
the terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts") to permit Owners of the Existing Contracts to reallocate
investments in the Fund, redeem investments in the Fund and/or invest in the
Fund upon the making of additional purchase payments under the Existing
Contracts.
7.5 The Companies shall not prevent Owners from allocating payments to a
Portfolio that was otherwise available under the Contracts.
7.6 The parties to this Agreement understand and acknowledge that it is
essential for compliance with Section 817(h) of the Code that the Contracts
qualify as annuity
-41-
<PAGE>
contracts or life insurance policies, as applicable, under the Code.
Accordingly, if any of the Contracts cease to qualify as annuity contracts or
life insurance policies, as applicable, under the Code, or if the Fund
reasonably believes that any such Contracts may fail to so qualify, then (i)
notwithstanding anything in this Agreement to the contrary, the obligations of
the Fund to sell shares to either or both Companies under this Agreement shall
terminate at the option of the Fund upon notice to the particular Company; and
(ii) the Fund shall have the right to require either or both Companies to redeem
Fund shares attributable to such Contracts upon notice to the particular
Company, and such Companies shall redeem such Fund shares, in order to ensure
that the Fund complies with the provisions of Section 817(h) of the Code
applicable to ownership of Fund shares. Notice to the Companies pursuant to
Section 7.6 shall specify the period of time the Company has to redeem such
shares or to make other arrangements satisfactory to the Fund and its counsel,
such period of time to be determined with reference to the requirements of
Section 817(h) of the Code.
7.7 The parties to this Agreement acknowledge that the Fund may in
the future file an application with the SEC to request an order granting relief
from various provisions of the 1940 Act and the rules thereunder to the extent
necessary to permit Fund shares to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and
-42-
<PAGE>
unaffiliated insurance companies which have entered into participation
agreements with the Fund ("Participating Insurance Companies"). Any conditions
or undertakings that may be imposed on the Companies and the Fund by virtue of
such order (or by any SEC rule, regulation, or order that may be adopted or
issued after the date hereof regarding the sale of Fund shares to and holding of
Fund shares by both variable annuity and variable life insurance separate
accounts) shall be incorporated herein by this reference, as of the date such
order is granted, as though set forth herein in full, and the parties to this
Agreement shall comply with such conditions and undertakings to the extent
applicable to each such party. The Fund will not enter into a participation
agreement with any other Participating Insurance Company unless it imposes the
same conditions and undertakings incorporated by reference herein on the parties
to such agreement.
The Fund may be required to terminate sales of shares to the Companies, and
the Companies may be required to redeem Fund shares, pursuant to action taken or
request made by the Fund Directors in accordance with order of the SEC described
in this Section 7.7, any conditions or undertaking incorporated by reference in
this Section 7.7, or any SEC rule, regulation, or order that may be adopted or
issued after the date hereof regarding the sale of Fund shares to and holding of
Fund shares by both variable annuity and variable life insurance separate
-43-
<PAGE>
accounts. In the event that the Fund Directors take any action or make any
request as described in this Section 7.7, then (i) notwithstanding any other
provision in this Agreement to the contrary, the obligation of the Fund to sell
shares to the Companies pursuant to Article I of this Agreement shall terminate
in accordance with the provisions set forth in such order or incorporated by
reference therein, and in accordance with the action taken or request made by
the Fund Directors as described above; and (ii) the Companies shall redeem Fund
shares in accordance with the provisions set forth in such order or incorporated
by reference therein, and in accordance with the action taken or request made by
the Fund Directors as described above.
ARTICLE VIII.
General Provisions
------------------
8.1 This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of New Hampshire provided,
however, that if such laws or any of the provisions of this Agreement conflict
with applicable provisions of the 1940 Act, the latter shall control. This
Agreement shall be made subject to the provisions of the 1933, 1934, and 1940
Acts, and the rules and regulations and rulings thereunder, including such
exemptions from those statutes, rules
-44-
<PAGE>
and regulations as the SEC may grant and the terms hereof shall be interpreted
and construed in accordance therewith.
8.2 Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to one or both of the Companies:
Chubb Life Insurance Company of America
The Colonial Life Insurance Company of America
One Granite Place
Concord, New Hampshire 03301
Attention: Mark Connolly, Vice President
If to the Fund:
UST Master Variable Series, Inc.
114 West 47th Street
New York, New York 10036
Attention: Anastasia McLaughlin, Vice President and
Assistant General Counsel of The United
States Trust Company of New York
With a copy to:
W. Bruce McConnel, III
1345 Chestnut Street, Suite 1100
Philadelphia, Pennsylvania 19107-3496
8.3 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
Owners and all information reasonably identified as confidential in writing by
any other party hereto and, except as permitted by this
-45-
<PAGE>
Agreement, shall not disclose, disseminate or utilize such names and addresses
and other confidential information until such time as it may come into the
public domain without the express written consent of the affected party.
8.4 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.5 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.6 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be effected thereby.
8.7 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, the Internal Revenue Service and state insurance regulators) and shall
permit such authorities reasonable access to its books and records in connection
with any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby. However, such access shall not extend to attorney-client
privileged information.
-46-
<PAGE>
8.8 Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
8.9 The Fund agrees that to the extent any advisory or other fees received
by the Fund, are determined to be unlawful in appropriate legal or
administrative proceedings, the Fund shall indemnify and reimburse the Companies
for any out of pocket expenses and actual damages the Companies have incurred as
a result of any such proceeding, provided however that the provision of Sections
6.2(b) and 6.2(c) shall apply to such indemnification and reimbursement
obligation. Such indemnification and reimbursement obligation shall be in
addition to any other indemnification and reimbursement obligations of the Fund
under this Agreement.
8.10 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by
-47-
<PAGE>
its duly authorized representative and its seal to be hereunder affixed hereto
as of the date first specified above.
CHUBB LIFE INSURANCE COMPANY OF
AMERICA FOR ITSELF AND ON BEHALF OF
ITS CHUBB SEPARATE ACCOUNT VA-1
By:/s/ William A. Spencer
----------------------
Title: Vice President,
Corporate Accounts
THE COLONIAL LIFE INSURANCE COMPANY
OF AMERICA FOR ITSELF AND ON BEHALF
OF ITS COLONIAL SEPARATE ACCOUNT
VA-2
By:/s/ William A. Spencer
----------------------
Title: Vice President,
Corporate Accounts
UST MASTER VARIABLE SERIES, INC.
By:/s/ A. C. Tannachion
--------------------
Title: President
-48-
<PAGE>
SCHEDULE A
Separate Accounts And Sub-Accounts
----------------------------------
<TABLE>
<CAPTION>
Date of Resolution
of Company's Board which
Established the Separate
Name of Separate Account Account
------------------------ ------------------------
<S> <C> <C>
1. Chubb Separate Account VA-1 March 4, 1994
2. Colonial Separate Account VA-2 March 2, 1994
Sub-Accounts (Separate Series)
------------------------------
1. Equity Portfolio
2. Early Life Cycle Portfolio
3. International Portfolio
4. International Bond Portfolio
5. International-Term Managed Income Portfolio
6. Managed Income Portfolio
7. Money Portfolio
</TABLE>
<PAGE>
SCHEDULE B
Contracts
---------
1. Individual Payment Deferred Variable Annuity Contract, Form VAP1000 (or
such other form numbers as may be approved in certain states), issued by
Chubb Life Insurance Company of America.
2. Individual Payment Deferred Variable Annuity Contract, Form VAP1000NY,
issued by The Colonial Life Insurance Company of America.
<PAGE>
SCHEDULE C
Investment Restrictions Applicable To The Fund
----------------------------------------------
To the best of the Companies knowledge, as of the date this Agreement was
executed, California is the only state whose insurance law may impose investment
restrictions that may be applicable to the Fund. Excerpts from the applicable
provisions of California law are set forth below.
California
----------
BORROWING GUIDELINES LIMITS APPLICABLE TO
A PORTFOLIO OF A SEPARATE ACCOUNT
(SECTION 10506 OF THE INSURANCE CODE)
The borrowing limits for any variable contract separate account portfolio are
(1) 10% of net asset value when borrowing for any general purpose and (2) 25% of
net asset value when borrowing as a temporary measure to facilitate redemptions.
Net asset value of a portfolio is the market value of all investments or assets
owned less outstanding liabilities of the portfolio at the time that any new or
additional borrowing is undertaken.
* * * * * * * * *
<PAGE>
DIVERSIFICATION GUIDELINES FOR
FOREIGN COUNTRY INVESTMENTS BY A
PORTFOLIO OF A SEPARATE ACCOUNT
(SECTION 10506 OF THE INSURANCE CODE)
The foreign country diversification guidelines to be followed by each portfolio
of a Separate Account are as follows:
1. A Portfolio will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four when
foreign country investments comprise less than 80% of the Portfolio's net
asset value; to three when less than 60% of such value; to one when less
than 40% and to one when less than 20%.
2. Except as set forth in items 3 and 4 below, a Portfolio will have no more
than 20% of its net asset value invested in securities of issuers located
in any one country.
3. A Portfolio may have an additional 15% of its value invested in securities
of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany.
4. A Portfolio's investments in United States issuers are not subject to the
foreign country diversification guidelines.
* * * * * * * * *
<PAGE>
GUIDELINES FOR USE OF FOREIGN CUSTODIAN
1. In connection with the approval of foreign securities custody arrangements
the Board of Trustees (the "Board") of fund (the "Fund")
should consider all matters which the Board finds relevant, including but
not necessarily limited to, consideration of the following:
(a) with respect to the selection of the country where the Fund's assets
-------
will be maintained:
(i) whether applicable foreign law would restrict the access
afforded the Fund's independent public accountants to books
and records kept by an eligible foreign custodian located in
that country;
(ii) whether applicable foreign law would restrict the Fund's
ability to recover its assets in the event of the bankruptcy
of an eligible foreign custodian located in that country;
(iii) whether applicable foreign law would restrict the Fund's
ability to recover assets that are lost while under the
control of an eligible foreign custodian located in that
country;
<PAGE>
(iv) the likelihood of expropriation, nationalization, freezes or
confiscations of the Fund's assets; and
(v) whether difficulties in converting the Fund's cash and cash
equivalents to U.S. dollars are reasonably foreseeable.
(b) with respect to the selection of an eligible foreign custodian, the
Board should consider:
(i) the financial strength of the foreign custodian, its general
reputation and standing in the country in which it is
located, its ability to provide efficiently the custodial
services required and the relative costs of those services;
(ii) whether the foreign custodian would provide a level of
safeguards for maintaining the Fund's assets not materially
different from that provided by the Fund's U.S. custodian in
maintaining its securities in the United States;
-2-
<PAGE>
(iii) whether the foreign custodian has branch offices in the
United States in order to facilitate the assertion of
jurisdiction over and enforcement of judgements against such
custodian;
(iv) in the case of a foreign securities depository, the number
of participants in, and operating history of, the
depository; and
(v) in the case of a U.S. custodian which may use the custodial
securities of foreign correspondents, whether the U.S.
custodian has adequately considered all of the foregoing in
selecting its correspondents.
2. As used in these guidelines, the term "eligible foreign custodian" means:
(i) a qualified U.S. bank which uses the custodial services of
its foreign branches or foreign correspondents which qualify
as "eligible foreign custodians";
(ii) a banking institution or trust company, incorporated or
organized under the laws of a
-3-
<PAGE>
country other than the United States, that is regulated as
such by that country's government or an agency thereof and
that has shareholders' equity, or the equivalent, of
$200,000,000 (U.S. dollars or equivalent of U.S. dollars);
or
(iii) a majority-owned direct or indirect subsidiary of a
qualified U.S. bank or bank-holding company that is
incorporated or organized under the laws of a country other
than the United States and that has shareholders' equity, or
the equivalent, in excess of $100,000,000 or which has
otherwise been approved as an eligible foreign custodian by
the United States Securities and Exchange Commission; or
(iv) a securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United
States, which operates the central system for handling of
securities or equivalent book-entries in that country, or
--
which operates a transnational system for the central
-----------------------------------------------------
handling of securities
----------------------
-4-
<PAGE>
or equivalent book-entries (a "Qualified Foreign
--------------------------
Depository").
As used in the guidelines, the term "qualified U.S. bank" --means:
(i) a banking institution organized under the laws of the United
States, (ii) a member bank of the Federal Reserve System, (iii) any
other banking institution or trust company organized under the laws of
any state or of the United States, whether incorporated or not, doing
business under the laws of any state or of the business of which
consists of receiving deposits or exercising fiduciary powers similar
to those permitted to national banks under the authority of the
Comptroller of the Currency and which is supervised and examined by a
State or Federal authority having supervision over banks. Any entity
described in clause (i), (ii) or (iii) must have an aggregate capital,
surplus and undivided profits or not less than $500,000.
3. The Board will approve a written contract with an eligible foreign
custodian, or sub-custodian which will govern the manner in which such
custodian or sub-custodian will maintain the Fund's assets. With respect
to securities
-5-
<PAGE>
maintained with an eligible foreign custodian, or sub-custodian, any
custody agreement between the fund and its custodian shall, among other
things, provide that:
(a) the Fund will be adequately indemnified and its assets adequately
insured in the event of loss;
(b) the Fund's assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the eligible foreign
custodian or sub-custodian or its creditors except a claim of payment
for their safe custody or administration;
(c) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for safe custody or
administration;
(d) adequate records will be maintained identifying the assets as
belonging to the Fund;
(e) the Fund's independent public accountants will be given access to
those records or confirmation of the contents of those records;
(f) the Fund will receive periodic reports with respect to the safekeeping
of its assets, including, but not
-6-
<PAGE>
necessarily limited to, notification of any transfer to or from the
Fund's account; and
(g) Should the California Department of Insurance succeed to control of
Chubb Life Insurance Company's assets in the event of an impairment or
insolvency, the custodian will recognize the Department's succession
to Chubb's rights under the contract as shareholder of the Fund, and
accordingly will accept instructions from the Department in the same
manner as from Chubb to the extent consistent with applicable law.
4. The Board will establish a system to monitor such foreign custody
arrangements to ensure compliance with these guidelines.
-7-
<PAGE>
SCHEDULE D
Proxy Voting Procedures
-----------------------
The following is a list of procedures and corresponding responsibilities
for the handling of proxies relating to the Fund by the Fund and the Companies.
The defined terms herein shall have the meanings assigned in the Agreement
except that the term "Company" shall also include the department or third party
assigned by the Companies to perform the steps delineated below.
1. The number of proxy proposals is given to the Companies by the Fund as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Fund will inform the Companies of the Record, mailing and meeting
dates. This will be done verbally approximately two months before meeting.
2. Promptly after the Record Date, the Companies will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each Owner as of the Record Date. Allowance
should be made for account adjustments made after this date that could
affect the status of the Owners' accounts as of the Record Date.
<PAGE>
Note: The number of proxy statements is determined by the activities
described in this Step 2. The Companies will use its best efforts to call
in the number of Owners to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
3. The Fund's Annual Report generally must be sent to each Owner by the
Companies either before or together with the Owners' receipt of a proxy
statement. The Fund will provide the last Annual Report to the Companies
pursuant to the terms of Section 3.3 of the Agreement to which this
Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Companies by the Fund. The Companies, at their expense,
shall produce and personalize the Voting Instruction Cards. The legal
counsel of the Fund ("Fund Legal") must approve the Card before it is
printed. Allow approximately 2-4 business days for printing information on
the Cards. Information commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
-2-
<PAGE>
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fund Legal will develop, produce, and the Fund will pay
for the Notice of Proxy and the Proxy Statement (one document). Printed
and folded notices and statements will be sent to Companies for insertion
into envelopes (envelopes and return envelopes are provided and paid for by
the Companies). Contents of envelope sent to Owners by the Companies will
include:
a. Voting Instruction Card(s)
b. one proxy notice and statement (one document)
c. return envelope (postage pre-paid by the Companies) addressed to
the Companies or its tabulation agent
-3-
<PAGE>
d. "urge buckslip" - optional, but recommended (This is a small,
single sheet of paper that requests Owners to vote as quickly as
possible and that their vote is important. One copy will be
supplied by the Fund)
e. cover letter - optional, supplied by the Companies and reviewed
and approved in advance by Fund Legal.
6. The above contents should be received by the Companies approximately 3-5
Business Days before mail date. The individual in charge at the Companies
reviews and approves the contents of the mailing package to ensure
correctness and completeness. Copy of this approval sent to Fund Legal.
7. Package mailed by the Companies.
Note: The Fund must allow at least a 15 day solicitation time to the
----
Companies as the shareowner. (A 5 week period is recommended.)
Solicitation time is calculated as calendar days from (but not
---
including the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor
-4-
<PAGE>
depending on process used. An often used procedure is to sort Cards on
arrival by proposal into vote categories of all yes, no, or mixed replies,
and to begin data entry.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Owner with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
Cards that have been "kicked out" (e.g. mutilated, illegible) of the
procedure are "hand verified," i.e., examined as to why they did not
complete the system. Any questions on those Cards are usually remedied
individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
-5-
<PAGE>
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fund Legal must
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Companies to Fund Legal
on the morning of the meeting not later than 10:00 a.m. Eastern time. Fund
Legal may request an earlier deadline if required to calculate the vote in
time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Companies as well as an original copy of the final vote.
Fund Legal will provide a standard form for each Certification.
15. The Companies will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fund Legal will be
permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
-6-
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
BY AND BETWEEN
UST MASTER VARIABLE SERIES, INC.
AND
CHUBB INVESTMENT ADVISORY CORPORATION
Page 1 of 28
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
--------- ----
<S> <C>
1. Duties of Chubb Investment.......................... 5
(a) Administrative Services...................... 6
(b) Sub-Contracting.............................. 10
(c) Chubb Investment to Issue and Register Shares 10
(d) Distributions................................ 11
(e) Redemptions and Repurchases.................. 12
2. Compensation of Chubb Investment.................... 13
3. Non-Exclusivity..................................... 14
4. Books and Records................................... 14
5. Liability........................................... 16
6. (a) Initial Documents............................ 17
(b) Further Documentation........................ 17
(c) Information.................................. 18
(d) Reliance on Documents and Information........ 18
7. Authorized Shares................................... 18
8. Notice of Distribution.............................. 18
9. Processing Transactions............................. 19
10. Tax Returns and Related Filings..................... 20
11. (a) Expenses of the Fund......................... 21
(b) Expenses of Chubb Investment................. 24
12. Duration and Termination of the Agreement........... 24
13. Amendment of the Agreement.......................... 25
14. Definitions......................................... 25
15. Further Actions..................................... 25
16. Governing Law....................................... 25
17. Proprietary and Confidential Information............ 26
18. Notices............................................. 26
19. Miscellaneous....................................... 27
</TABLE>
<PAGE>
This ADMINISTRATIVE SERVICES AGREEMENT (the "Agreement") is made as of the
14th day of October, 1994, by and between UST Master Variable Series, Inc., a
Maryland corporation with offices at 114 West 47th Street, New York, New York
(the "Fund"), and Chubb Investment Advisory Corporation, a Tennessee corporation
with offices at One Granite Place, Concord, New Hampshire ("Chubb Investment");
WITNESSETH
WHEREAS, the Fund is engaged in business as a diversified open-end
management investment company and is registered as such under the Investment
Company Act of 1940 (the "1940 Act");
WHEREAS, the Fund is authorized to issue shares of $.001 par value, in
separate classes or series with each such class or series representing an
interest in a separate portfolio of securities and other assets;
WHEREAS, the Fund is currently comprised of seven such Portfolios and
offers or intends to offer shares in those seven portfolios (known individually
as the Equity Portfolio, the Early Life Cycle Portfolio, the Managed Income
Portfolio, the Intermediate-Term Managed Income Portfolio, the international
Equity Portfolio, the International Bond Portfolio, and the Money Portfolio and
known collectively as the "Portfolios"), and each
-3-
<PAGE>
of which pursues or will pursue its investment objectives through separate
investment policies and separate investment management;
WHEREAS, the Board of Directors of the Fund (the "Board") may add or delete
Portfolios from time to time;
WHEREAS, the shares of the Fund are and will be owned by Chubb Life
Insurance Company of America ("Chubb Life") and The Colonial Life Insurance
Company of America ("Colonial Life"), their successors and assigns, through
their general account and/or through the Chubb Separate Account VA-1 established
by Chubb Life and the Colonial Separate Account VA-2 established by Colonial
Life, and may in the future be offered to additional separate accounts
established by Chubb Life and Colonial Life, their successors or assigns, and
any other insurance companies;
WHEREAS, Chubb Investment is engaged in the business of rendering
administrative services and is registered as an investment adviser under the
Investment Advisers Act of 1940;
WHEREAS, the Board desires to retain Chubb Investment to render corporate
administrative services to the Portfolio in the manner and on the terms set
forth herein; and
-4-
<PAGE>
WHEREAS, the Board of the Fund believes that Chubb Investment's expertise
will be of material benefit to the Fund in providing the services described
below;
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, the Fund and Chubb investment hereby agree as follows:
1. Duties of Chubb Investment. Chubb Investment hereby agrees, subject to
--------------------------
the supervision and control of the Board, to assume the obligations and to
render the administrative, transfer agency and dividend disbursing services
herein set forth in return for the compensation provided for herein. In taking
any action hereunder, Chubb Investment shall always be subject to, and shall
follow at all times (i) any restrictions and provisions of the Fund's Articles
of Incorporation, By-Laws, Prospectus and Statement of Additional information,
as amended from time to time, (ii) the applicable provisions of the 1940 Act,
and any rules and regulations adopted thereunder, (iii) any other provisions of
state and federal law applicable to it in connection with its duties hereunder,
including without limitation any applicable provisions imposed by state
insurance regulations and under the Internal Revenue Code of 1986, as amended,
and regulations thereunder (the "Code"), and (iv) such policies that the Board
may from time to time determine, provided that such policies are not in conflict
with this Agreement, the
-5-
<PAGE>
Fund's governing documents, or any applicable statutes or regulations.
(a) Administrative Services. In performing the duties stated in Paragraph
-----------------------
1 above, Chubb Investment will regularly provide the Board and officers of the
Fund, and any owner of shares of the Portfolios with asset valuations daily at
the close of business and with all statistical information with respect to
investments of the Portfolios and such periodic and special reports and
information as the Board or officers of the Fund may reasonably request.
Subject to the direction and control of the Board, Chubb Investment shall
perform the following administrative functions:
(1) Prepare and maintain the Fund's financial statements, accounts and
records (other than those required to be prepared and maintained by the Fund's
Custodian), including, without limitation, computing and monitoring expense
accruals and payments, and computing the Portfolios' assets and liabilities;
compute the daily income and net asset value of the Portfolios; and pay
dividends and other distributions to shareholders, in accordance with applicable
laws and the Fund's Prospectus and Statement of Additional Information;
-6-
<PAGE>
(2) Compute the yield, total return and other performance data of the
Portfolios as may be required, in accordance with applicable law, or for
advertising or dissemination to information services covering the investment
company industry;
(3) Distribute all required proxy statements, reports and other
communications with shareholders, and receive and tabulate proxy cards;
(4) Prepare and file on a timely basis the Fund's federal and state
income and other tax returns along with any other related filings;
(5) Prepare and file with the Securities and Exchange Commission
("SEC"), the National Association of Securities Dealers, Inc. ("NASD"), state
blue sky and other authorities, the Fund's reports pursuant to Rule 24f-2 of the
1940 Act ("Rule 24f-2 Notices"), Form N-SAR, Reports to Shareholders and such
other documents as mutually agreed to by Chubb Investment and the Fund as may be
necessary or convenient to enable the Fund to make continuous offering of its
shares and to conduct its affairs;
(6) Generally monitor compliance with all federal and state securities
laws, the Code, and the Fund's Prospectus and Statement of Additional
Information;
-7-
<PAGE>
(7) Administer contracts on behalf of the Fund with entities, among
others, the Fund's Custodian, and assist the Fund in examining and reviewing the
operations of such entities to promote compliance with applicable state and
federal laws, provided, however, that Chubb Investment will not be liable for
the operations of such entities;
(8) Perform internal audit examinations in accordance with procedures
to be adopted by Chubb Investment and the Fund;
(9) Provide individuals reasonably acceptable to the Fund's Board for
nomination, appointment, or election as officers of the Fund, who will be
responsible for the management of certain of the Fund's affairs as determined by
the Fund's Board;
(10) Supply clerical, secretarial, accounting and bookkeeping
services, data processing services, office supplies and stationery;
(11) Provide persons to perform such professional, administrative and
clerical functions as are necessary in connection with shareholder relations,
reports, redemption requests and account adjustments;
-8-
<PAGE>
(12) Provide adequate office space and related services (including
telephone and other utility service) necessary for the Portfolios' operations;
(13) Maintain corporate records not otherwise maintained by the
Fund's Custodian or Investment Adviser;
(14) Assist, generally, in all aspects of the Fund's design,
development and operations with respect to the Portfolios and advise the Fund
and the Board on matters concerning the Fund and its affairs; and
(15) Monitor compliance with state and federal insurance law
diversification requirements necessary for the Fund to qualify as a "regulated
investment company" and as an appropriate underlying fund investment for the
Chubb Separate Account VA-1 and the Colonial Separate Account VA-2, and any
additional separate accounts established by any insurance company, including
compliance with section 817 and sections 851 through 855 of the Code, and the
regulations thereunder, provided, however, that Chubb Investment will not be
liable for the Fund's failure to comply with such diversification requirements.
-9-
<PAGE>
Nothing herein will be construed to restrict the Fund's right, at its own
expense, to hire its own employees or to contract for services to be performed
by third parties.
(b) Sub-Contracting. Notwithstanding any other provision hereof, Chubb
---------------
Investment may contract with one or more parties to perform any of the
administrative services required provided, however, that the compensation of
such other parties will be the sole responsibility of Chubb Investment and the
duties and responsibilities of such other parties shall be as set forth in an
agreement or agreements among the Fund, Chubb investment and such other parties.
It also is understood that Chubb Investment, at its expense, will enter
into an agreement with Chubb America Service Corporation, a New Hampshire
Corporation, pursuant to which Chubb Investment will obtain from said
corporation most staff, facilities and services necessary to meet its
obligations hereunder. Entering into said agreement shall in no way diminish
any obligation or liability of Chubb Investment hereunder.
(c) Chubb Investment to Issue and Register Shares. Chubb Investment, in
---------------------------------------------
its capacity as transfer agent and dividend paying agent for the Fund, shall
issue and record the issuance of shares of the Portfolios upon receipt, directly
or indirectly, of orders therefor from Chubb Life through its general account or
Chubb
-10-
<PAGE>
Separate Account VA-1, Colonial Life through its general account or Colonial
Separate Account VA-2, or any additional separate accounts established by Chubb
Life or Colonial Life, their successors or assigns, or any other insurance
companies. Chubb Investment shall notify the Custodian of every such issuance,
which notice shall include the date, class of shares, number of shares, and
dollar amount of the transaction. If Chubb Investment receives any check or
funds for the purchase of shares of the Portfolios, such check or funds shall
promptly be forwarded to the Custodian for the Fund's account. Chubb Investment
shall compute the number of shares issuable in the case of an order for a dollar
amount of shares (or the purchase price in the case of an order for a specific
number of shares) at the net asset value per share, as described in the Fund's
Prospectus. Chubb investment will ensure that the Custodian receives all
payments due the Fund in consideration of the issuance of shares of the
Portfolios. Chubb Investment shall notify the Fund, and refuse to issue the
shares in question, in case any proposed issuance of shares by the Fund would
result in an overissue of a class or series of shares as defined by Section 8-
104(2) of Article 8 of the Maryland Uniform Commercial Code.
(d) Distributions. Chubb investment shall, in accordance with the actions
-------------
of the Fund's Board of Directors and the provisions of the Fund's Articles of
Incorporation, Prospectus and Statement of Additional Information, credit income
and
-11-
<PAGE>
capital gain payments to shareholders. The Fund's management shall cause the
Custodian to make available the amount of any such payment to be paid out in
cash, and Chubb Investment shall distribute such amounts. Chubb Investment
shall process the reinvestment of distributions at the net asset value per share
next computed for the shares of the Portfolios after the payment, in accordance
with the Prospectus and Statement of Additional information of the Fund and any
written instructions of the shareholder.
(e) Redemptions and Repurchases. Chubb Investment, in its capacity as
---------------------------
transfer agent and dividend paying agent for the Fund, shall process each order
for the redemption or repurchase of shares given directly or indirectly by Chubb
Life through its general account or Chubb Separate Account VA-1, Colonial Life
through its general account or Colonial Separate Account VA-2, or any additional
separate accounts established by Chubb Life or Colonial Life, their successors
or assigns, or any other insurance companies at the net asset value per share of
the shares of the Portfolios, as described in the Fund's Prospectus and
Statement of Additional Information. Where redemption or repurchase of a dollar
amount is requested, Chubb Investment shall calculate the number of shares to be
redeemed so as to provide the shareholder with the dollar value identified in
the redemption order and where a stated number of shares is to be redeemed or
repurchased, Chubb Investment shall compute the
-12-
<PAGE>
dollar amount of the redemption proceeds. The Fund's management shall cause the
Custodian to make such funds available not more than seven days after receipt of
the redemption or repurchase request and, Chubb Investment shall distribute the
required amount of funds to the shareholder.
2. Compensation of Chubb Investment. For the services provided herein,
--------------------------------
Chubb Investment 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%
Money Portfolio .10% .075% .05%
</TABLE>
The average asset value of the Portfolio shall be determined and computed in
accordance with the description of the method of determining net asset value
contained in the Prospectus and Statement of Additional Information.
-13-
<PAGE>
In case of termination of this Agreement during any month, the fee for that
month shall be reduced proportionately on the basis of the number of business
days during which it is in effect, and the fee computed upon the average of the
aggregate net assets for the business days it is so in effect for that month.
3. Non-Exclusivity. The Fund agrees that the services of Chubb Investment
---------------
are not to be deemed exclusive and Chubb Investment is free to act as investment
manager, investment adviser and administrator to various investment companies
and as fiduciary for other managed accounts. Chubb Investment shall, for all
purposes herein, be deemed to be an independent contractor and shall, unless
otherwise provided or authorized, have no authority to act for or represent the
Fund with respect to the Portfolios in any way or otherwise be deemed an agent
of the Fund with respect to the Portfolios other than in furtherance of its
duties and responsibilities as set forth in this Agreement.
4. Books and Records. Chubb Investment will maintain all books and records
-----------------
required for the Fund with respect to the Portfolios, to the extent not
maintained by the Custodian or the investment Adviser. In compliance with Rule
31a-3 of the 1940 Act, Chubb Investment agrees that all books and records which
it maintains for the Fund are the Fund's property, and, in the event
-14-
<PAGE>
of termination of this Agreement for any reason, Chubb Investment agrees
promptly to return to the Fund, free from any claim or retention of rights by
Chubb Investment, all records relating to the Fund. Chubb Investment also
agrees, upon request of the Fund, promptly to surrender such books and records
to the Fund or, at the Fund's expense, to make copies thereof available to the
Fund or to make such books and records available for inspection by
representatives of regulatory authorities or other persons reasonably designated
by the Fund. Chubb Investment further agrees to maintain, prepare and preserve
such books and records in accordance with the 1940 Act and rules thereunder,
including but not limited to, Rules 31a-1 and 31a-2.
Chubb Investment will use records or information obtained under this
Agreement only for the purposes contemplated hereby, and will not disclose such
records or information in any manner other than as expressly authorized by the
Board or officers of the Fund, or unless disclosure is expressly required by
applicable federal or state regulatory authorities or by this Agreement. Chubb
Investment shall supply all information requested by any insurance regulatory
authorities to determine whether all insurance laws and regulations are being
complied with.
The records maintained for the Fund hereunder by Chubb Investment shall
include records showing, for each shareholder's
-15-
<PAGE>
account, the following: (a) name, address and tax identifying number; (b)
number and class of shares held; (c) historical information regarding the
account of each shareholder, including dividends paid and the date, class of
shares and price for all transactions; (d) any stop or restraining order placed
against the account; (e) any dividend reinvestment order, dividend address and
correspondence relating to the current maintenance of the account; (f) any
correspondence relating to the current maintenance of a shareholder's account;
(g) information with respect to withholdings; (h) any other information require
in order for Chubb Investment to perform the calculations contemplated or
required by this Agreement; and (i) such other records as the Fund may from time
to time reasonably request.
5. Liability. Chubb Investment will not be liable for any loss suffered by
---------
the Fund or the Portfolios in connection with any investment policy established
by the Fund for the purchase, sale or redemption of any securities at the
direction of the Board. Nothing herein contained shall be construed to protect
Chubb Investment against any liability resulting from the willful misfeasance,
bad faith or negligence of Chubb Investment in the performance of its duties or
from reckless disregard of its obligations and duties under this Agreement or by
virtue of violation of any applicable law.
-16-
<PAGE>
Any person, even though also an officer, director, partner, employee or agent
of Chubb Investment, who may be or become an officer, director, employee or
agent of the Fund, shall be deemed, when rendering services to the Fund or
acting on any business of the Fund (other than services or business in
connection with the duties of Chubb Investment hereunder) in accordance with his
responsibilities to the Fund as such officer, employee or agent, to be rendering
such services to or acting solely for the Fund and not as an officer, director,
partner, employee or agent of one under the control or direction of Chubb
Investment even though paid by Chubb Investment.
6. (a) Initial Documents. The Fund's management shall file with Chubb
-----------------
Investment the following documents: (i) certified copies of the Articles of
Incorporation of the Fund and all amendments thereto, made from time to time;
(ii) a certified copy of the By-Laws of the Fund as amended, from time to time;
(iii) a copy of the resolution of the Board authorizing this Agreement; and (iv)
copies of opinions of counsel for the Fund that are filed with the Fund's Rule
24f-2 Notices.
(b) Further Documentation. The Fund's management will also furnish from
---------------------
time to time the following documents: (i) each resolution of the Board
authorizing the original issue of the Portfolios' shares; (ii) each registration
statement filed with the SEC under the Securities Act of 1933 (the "1933 Act")
or
-17-
<PAGE>
under the 1940 Act and amendments, thereof, orders relating thereto and the
Prospectus in effect with respect to the sale of shares of the Fund; and (iii)
certified copies of each resolution of the Board authorizing officers to give
instructions to Chubb Investment.
(c) Information. The Fund, its officers or designated agents will
-----------
provide timely information to Chubb Investment as may be reasonably necessary,
or appropriate, in order for Chubb Investment to perform its responsibilities
hereunder.
(d) Reliance on Documents and Information. Chubb Investment will be
-------------------------------------
entitled to rely on all documentation and information furnished to it by the
Fund's management.
7. Authorized Shares. The Fund certifies to Chubb Investment, that as of the
-----------------
close of business on the date of this Agreement, it has authorized one billion
shares and further certifies that, by virtue of its Articles of incorporation
and the provisions of the law of the state of its creation, its shares which are
redeemed or repurchased by the Fund from its shareholder are restored to the
status of authorized and unissued shares.
8. Notice of Distribution. The Board shall promptly inform Chubb
----------------------
Investment of the declaration of any dividend or
-18-
<PAGE>
distribution on account of shares of the Portfolios, including the record date
and date payable. Chubb Investment may rely on a certified copy of a resolution
of the Board that distributions of net income shall be declared daily and paid
monthly for the Money Portfolio and declared annually and paid annually for all
other Portfolios.
9. Processing Transactions. In issuing shares pursuant to Section 1(c) of
-----------------------
this Agreement and processing redemptions and repurchases pursuant to Section
1(e) in its capacity as transfer agent and dividend paying agent for the Fund,
Chubb Investment shall at its expense, maintain, on behalf of the Fund, a record
of the time when a proper and complete order or request for each such sale,
redemption or repurchasing transaction was received by it, and the Fund may rely
on Chubb Investment's so doing. At its expense, Chubb Investment shall, on
behalf of the Fund, keep records of confirmations and all other records in
connection with the sale, redemption or repurchase of shares of the Portfolios
required by, and subject to, all the terms and conditions of Rule 17a-3 and 17a-
4 under the 1940 Act, and the Fund may rely on Chubb Investment's so doing. All
records required by this paragraph to be maintained by Chubb Investment will (i)
be and remain the property of the Fund and (ii) be at all times subject to
inspection by the SEC in accordance with Section 17(a) of the 1940 Act.
-19-
<PAGE>
It is understood that, unless the Fund directs otherwise, the issuance,
redemption or repurchase of shares of the Portfolios arising out of an automatic
transaction under an annuity contract (such as investment of net purchase
payments, death of the annuity contract owners or annuitants, deduction of fees
and charges, transfers, surrenders or partial withdrawals) shall be effected at
the net asset value per share computed as of the close of business on the date
as of which said automatic transaction is effected, even though the "order" for
purchase, sale or redemption of shares of the Portfolios is not received until
after said close of business; and all other issuances, redemptions or
repurchases of shares of the Portfolios shall be effected at net asset values
per share next computed after receipt of the orders therefor, and said orders
shall become irrevocable at the time as of which said value is next computed.
The authority of Chubb Investment to process purchases, reinvestments,
repurchases and redemptions with respect to any shares of the Portfolios shall
be suspended upon receipt by it of an oral or written notification from the
Board of the suspension by the Fund of said activities or as a result of an
order or determination by the SEC.
10. Tax Returns and Related Filings. Chubb Investment or its nominees or
-------------------------------
agents shall prepare, file with the Internal Revenue Service and with the
appropriate state agencies, and, if
-20-
<PAGE>
required, mail to shareholders such returns or filings for reporting dividends
and distributions paid as are required to be so filed and mailed, and shall
withhold such sums, if any, as are required to be withheld under applicable
federal and state income tax laws, rules and regulations.
11. (a) Expenses of the Fund. As between the Fund and Chubb Investment, the
--------------------
following expenses shall be borne exclusively by the Fund:
(i) Brokerage commissions and transfer taxes in connection with
portfolio transactions and similar fees and charges for the acquisition,
disposition, lending or borrowing of portfolio investments;
(ii) All other state, federal, local or foreign governmental fees
and taxes (including any insurance, transfer, franchise or income taxes) payable
by the Fund and all corporate or filing fees payable by the Fund to any
governmental entity or agency;
(iii) All incidental expenses, associated with preparing and filing
with appropriate state, federal, local or foreign governments or agencies all
tax returns, including the expenses associated with any mailings to the annuity
contract owners with respect to such returns.
-21-
<PAGE>
(iv) Fees and expenses incurred in the registration or qualification
(and maintaining said registration or qualification) of the Fund and its shares
under federal or state securities laws, if deemed applicable, prior to and
subsequent to the effective date of the registration statement including all
fees and expenses incurred in connection with the preparation, setting in type,
printing and mailing of the registration statement and any amendments or
supplements that may be made from time to time;
(v) Compensation and expenses paid to directors who are not
"affiliates" of the Fund's service providers within the meaning of the 1940 Act,
and travel expenses paid to all directors;
(vi) Interest and any other cost related to borrowings by the Fund;
(vii) Costs of printing and distributing to current annuity contract
owners, shareholder reports, proxy statements, Prospectuses and any stickers and
supplements thereto, and otherwise communicating with the shareholders;
(viii) Costs and all incidental expenses
associated with conducting meetings of shareholders and directors and committees
thereof or;
-22-
<PAGE>
(ix) The cost of the fidelity bond required by Rule 17g-1 of the
1940 Act and any errors and omissions insurance or other liability insurance
covering the Fund and/or its officers, directors and employees;
(x) The cost of obtaining quotes necessary for valuing the assets
and related liabilities for the Portfolio;
(xi) The charges and expenses of the Custodian, independent
accountants and independent legal counsel retained by the Fund, the charges and
expenses of any independent proxy solicitation firm retained by the Fund to
solicit voting instructions from annuity contract owners with respect to shares
of the Portfolios, and the charges and expenses of any trade association fees
incurred by the Fund as a member of such trade association;
(xii) Investment advisory and administrative fees;
(xiii) Such of the Fund's nonrecurring or extraordinary expenses as
may arise, including those relating to actions, suits or proceedings to which
the Fund is a party and the legal obligation which the Fund may have to
indemnify the Fund's directors and officers with respect thereto; and
-23-
<PAGE>
(xiv) All other expenses not specifically assumed hereunder by Chubb
Investment that are traditionally borne by investment companies.
(b) Expenses of Chubb Investment. As between the Fund and Chubb Investment,
----------------------------
the costs and expenses of providing the necessary facilities, personnel, office
equipment and supplies, office space, telephone service, and other utility
service necessary to carry out its obligations hereunder shall be borne
exclusively by Chubb Investment, except as otherwise herein expressly provided.
In addition, Chubb Investment shall directly or indirectly through its nominees
or assigns pay and assume all expenses specifically assumed by Chubb Investment
as set forth in Paragraphs 1(a), (b), (c), (d), and (e) of this Agreement.
12. Duration and Termination of the Agreement. This Agreement shall become
-----------------------------------------
effective as of the date first written above and shall remain in force until
July 31, 1995. Thereafter, it shall continue in effect with respect to the Fund
from year to year, but only so long as such continuance is specifically approved
at least annually by (a) the Board, or by the vote of a majority of the
outstanding shares of the Fund, and (b) a vote of a majority of those Directors
of the Fund who are parties to this Agreement nor interested persons of any
party to this Agreement, cast in person at a meeting called for the purpose of
voting on such approval. This Agreement may be terminated, without the
-24-
<PAGE>
payment of any penalty, by the Board or by vote of a majority of the outstanding
shares of the Fund on sixty (60) days' written notice to Chubb Investment, or by
Chubb Investment on sixty (60) days' written notice to the Fund. This Agreement
shall automatically terminate in the event of its assignment.
13. Amendment of the Agreement. This Agreement may be amended with respect to
--------------------------
the Fund only if, to the extent required by law, such amendment is specifically
approved by (a) the vote of a majority of the outstanding shares of the Fund,
and (b) by the vote of the Board, including a majority of those Directors of the
Fund who are not parties to nor interested persons of any party to this
Agreement cast in person at a meeting called for the purpose of voting on such
approval.
14. Definitions. The terms "assignment," "interested person," and "majority
-----------
of the outstanding shares," when used in this Agreement, shall have the
respective meanings specified under the 1940 Act and rules thereunder.
15. Further Actions. Each party agrees to perform such further acts and
---------------
execute such further documents as are necessary to effectuate the purposes
hereof.
16. Governing Law. The provisions of this Agreement shall be construed and
-------------
interpreted in accordance with the laws of the
-25-
<PAGE>
State of New Hampshire, as at the time in effect, and the applicable provisions
of the 1940 Act and rules thereunder or other federal laws and regulations which
may be applicable. To the extent that the applicable law of the State of New
Hampshire, or any of the provisions herein, conflict with the applicable
provisions of the Act and rules thereunder or other federal laws and regulations
which may be applicable the latter shall control.
17. Proprietary and Confidential Information. Chubb Investment agrees an
----------------------------------------
behalf of itself and its directors, officers, and employees to treat
confidentially and as proprietary information of the Fund all records and other
information relative to the Fund and prior, present, or potential shareholders,
and not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Fund, which approval may not be
withheld where Chubb Investment may be exposed to civil or criminal contempt
proceedings for failure, to comply, when requested to divulge such information
by duly constituted authorities, or when so requested by the Fund.
18. Notices. Notices of any kind to be given to the Fund hereunder by Chubb
-------
Investments shall be in writing and shall be duly given if delivered to the Fund
at the following address:
-26-
<PAGE>
UST Master Variable Series, Inc.
114 West 47th Street
New York, New York 10036
Attn: Clive Tobin, Senior Vice President
of United States Trust Company of New York
With copies to:
Anastasia McLaughlin, Vice President and
Assistant General Counsel of United States Trust
Company of New York
UST Master Variable Series, Inc.
114 West 47th Street
New York, New York 10036
and
W. Bruce McConnel, III
Drinker Biddle & Reath
1345 Chestnut Street, Suite 1100
Philadelphia, PA 19107-3496
Notices of any kind to be given to Chubb Investment hereunder by the Fund
shall be in writing and shall be duly given if delivered to Chubb Investment at:
Chubb Investment Advisory Corporation
One Granite Place
Concord, New Hampshire 03301
Attn: Jack Weston, Treasurer
19. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court or
regulatory agency decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
-27-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first written
above.
UST MASTER VARIABLE SERIES, INC.
By: /s/ A. C. Tannachion
--------------------
Title: President
CHUBB INVESTMENT ADVISORY CORPORATION
By: /s/ John A. Weston
------------------
Title: Treasurer
-28-
<PAGE>
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the references to our
Firm under the caption "Counsel" in the Statements of Additional Information
that are included in Post-Effective Amendment Nos. 1 and 2 to the Registration
Statement (Nos. 33-79886; 811-8554) on Form N-1A of UST Master Variable Series,
Inc. under the Securities Act of 1933 and the Investment Company Act of 1940,
respectively. This consent does not constitute a consent under Section 7 of the
Securities Act of 1933, and in consenting to the use of our name and the
references to our Firm under such caption we have not certified any part of the
Registration Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or the rules and regulations
of the Securities and Exchange Commission thereunder.
/s/DRINKER BIDDLE & REATH
-------------------------
DRINKER BIDDLE & REATH
Philadelphia, Pennsylvania
July 31, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 1,061,797
<INVESTMENTS-AT-VALUE> 1,281,263
<RECEIVABLES> 0
<ASSETS-OTHER> 7,380<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,288,643
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,852<F2>
<TOTAL-LIABILITIES> 11,852
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,027,476
<SHARES-COMMON-STOCK> 102,656
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 205
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29,644
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 219,466
<NET-ASSETS> 1,276,791
<DIVIDEND-INCOME> 3,283
<INTEREST-INCOME> 2,579
<OTHER-INCOME> 0
<EXPENSES-NET> 5,657
<NET-INVESTMENT-INCOME> 205
<REALIZED-GAINS-CURRENT> 29,644
<APPREC-INCREASE-CURRENT> 219,466
<NET-CHANGE-FROM-OPS> 249,315
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,027,550
<NUMBER-OF-SHARES-REDEEMED> 84
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,276,781
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,689
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,352
<AVERAGE-NET-ASSETS> 1,095,889
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 2.44
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.44
<EXPENSE-RATIO> 2.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CASH - 162, ACCRUED INVESTMENT INCOME - 346, DEFERRED ORGINAL COSTS - 6,872,
TOTAL -7,380.
<F2>PAYABLE TO CLA - 27, ACCRUED EXPENSE - 4,953, ORGINAL COSTS PAYABLE - 6,872,
TOTAL - 11,852.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> EARLY LIFE CYCLE PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 1,050,221
<INVESTMENTS-AT-VALUE> 1,179,156
<RECEIVABLES> 0
<ASSETS-OTHER> 8,377<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,187,533
<PAYABLE-FOR-SECURITIES> 19,545
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,940<F2>
<TOTAL-LIABILITIES> 30,485
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,023,732
<SHARES-COMMON-STOCK> 102,312
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 202
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,179
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 128,935
<NET-ASSETS> 1,157,048
<DIVIDEND-INCOME> 2,682
<INTEREST-INCOME> 2,283
<OTHER-INCOME> 0
<EXPENSES-NET> 4,763
<NET-INVESTMENT-INCOME> 202
<REALIZED-GAINS-CURRENT> 4,179
<APPREC-INCREASE-CURRENT> 128,935
<NET-CHANGE-FROM-OPS> 133,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,023,800
<NUMBER-OF-SHARES-REDEEMED> 78
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,157,038
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,887
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,256
<AVERAGE-NET-ASSETS> 1,071,488
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 1.31
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 2.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CASH - 528, ACCRUED INVESTMENT INCOME - 977, DEFERRED ORGINAL COSTS - 6,872,
TOTAL - 8,377
<F2>PAYABLE TO CLA - 21, ACCRUED EXPENSE - 4,047, ORGINAL COSTS PAYABLE - 6,872,
TOTAL - 10,940.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> INTERMEDIATE TERM MANAGEMENT INCOME
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 1,027,074
<INVESTMENTS-AT-VALUE> 1,079,335
<RECEIVABLES> 25,729
<ASSETS-OTHER> 22,018<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,127,082
<PAYABLE-FOR-SECURITIES> 25,755
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,573<F2>
<TOTAL-LIABILITIES> 35,328
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,000,010
<SHARES-COMMON-STOCK> 100,000
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 30,707
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,776
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 52,261
<NET-ASSETS> 1,091,754
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 34,087
<OTHER-INCOME> 0
<EXPENSES-NET> 3,380
<NET-INVESTMENT-INCOME> 30,707
<REALIZED-GAINS-CURRENT> 8,776
<APPREC-INCREASE-CURRENT> 52,261
<NET-CHANGE-FROM-OPS> 91,744
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,000,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,091,744
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,663
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,489
<AVERAGE-NET-ASSETS> 1,045,195
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.92
<EXPENSE-RATIO> 2.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CASH - 25, ACCRUED INVESTMENT INCOME - 15,121, DEFERRED ORGINAL COSTS -
6,872, TOTAL - 22,018.
<F2>ACCRUED EXPENSES - 2,701, ORGINAL COSTS PAYABLE - 6,872, TOTAL - 9,573
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> MANAGED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 1,093,084
<INVESTMENTS-AT-VALUE> 1,129,305
<RECEIVABLES> 55,521
<ASSETS-OTHER> 76,374<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,261,200
<PAYABLE-FOR-SECURITIES> 160,736
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,130<F2>
<TOTAL-LIABILITIES> 171,866
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,000,010
<SHARES-COMMON-STOCK> 100,001
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 30,018
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 23,085
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 36,221
<NET-ASSETS> 1,089,334
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 34,955
<OTHER-INCOME> 0
<EXPENSES-NET> 4,937
<NET-INVESTMENT-INCOME> 30,018
<REALIZED-GAINS-CURRENT> 23,085
<APPREC-INCREASE-CURRENT> 36,221
<NET-CHANGE-FROM-OPS> 89,324
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,000,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,089,324
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,527
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,396
<AVERAGE-NET-ASSETS> 1,046,938
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 0.59
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.89
<EXPENSE-RATIO> 3.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CASH - 55,622, ACCRUED INVESTMENT INCOME - 13,880, DEFERRED ORGINAL
EXPENSE - 6,872, TOTAL - 76,374.
<F2>ACCRUED EXPENSES - 4,258, ORGINAL COSTS PAYABLE - 6,872, TOTAL - 11,130
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> INTERNATIONAL EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 2,274,976
<INVESTMENTS-AT-VALUE> 2,370,862
<RECEIVABLES> 36,266
<ASSETS-OTHER> 31,211<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,438,339
<PAYABLE-FOR-SECURITIES> 32,060
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,033<F2>
<TOTAL-LIABILITIES> 53,093
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,263,744
<SHARES-COMMON-STOCK> 226,369
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 26,585
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,219)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 96,136
<NET-ASSETS> 2,385,246
<DIVIDEND-INCOME> 33,915
<INTEREST-INCOME> 8,355
<OTHER-INCOME> 0
<EXPENSES-NET> 15,685
<NET-INVESTMENT-INCOME> 26,585
<REALIZED-GAINS-CURRENT> (1,219)
<APPREC-INCREASE-CURRENT> 96,136
<NET-CHANGE-FROM-OPS> 121,502
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,263,775
<NUMBER-OF-SHARES-REDEEMED> 41
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,385,236
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,457
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 32,243
<AVERAGE-NET-ASSETS> 2,326,543
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.12
<PER-SHARE-GAIN-APPREC> 0.42
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.54
<EXPENSE-RATIO> 5.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CASH - 8,687, ACCRUED INVESTMENT INCOME - 15,652, DEFERRED ORGINAL
COSTS - 6,872, TOTAL - 31,211.
<F2>PAYABLE TO CLA - 12, ACCRUED EXPENSES - 14,149, ORGINAL COSTS PAYABLE -
6,872, TOTAL - 21,033.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 6
<NAME> INTERNATIONAL BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 3,110,478
<INVESTMENTS-AT-VALUE> 3,213,729
<RECEIVABLES> 0
<ASSETS-OTHER> 94,141<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,307,870
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,669<F2>
<TOTAL-LIABILITIES> 24,669
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,000,010
<SHARES-COMMON-STOCK> 300,001
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 90,694
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 87,933
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 104,564
<NET-ASSETS> 3,283,201
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 110,727
<OTHER-INCOME> 0
<EXPENSES-NET> 20,033
<NET-INVESTMENT-INCOME> 90,694
<REALIZED-GAINS-CURRENT> 87,933
<APPREC-INCREASE-CURRENT> 104,564
<NET-CHANGE-FROM-OPS> 283,191
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,000,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,283,191
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,788
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 42,462
<AVERAGE-NET-ASSETS> 3,161,444
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.30
<PER-SHARE-GAIN-APPREC> 0.64
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.94
<EXPENSE-RATIO> 9.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>CASH - 4,863, ACCRUED INVESTMENT INCOME - 82,406, DEFERRED ORGINAL COSTS -
6,872, TOTAL - 94,141.
<F2>ACCRUED EXPENSES - 17,797, ORGINAL COSTS PAYABLE - 6,872, TOTAL - 24,669.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
ASSETS AND LIABILITIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 7
<NAME> MONEY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 1,026,229
<INVESTMENTS-AT-VALUE> 1,026,229
<RECEIVABLES> 0
<ASSETS-OTHER> 7,039<F1>
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,033,268
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,686<F2>
<TOTAL-LIABILITIES> 8,686
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,024,582
<SHARES-COMMON-STOCK> 1,024,582
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,024,582
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 27,170
<OTHER-INCOME> 0
<EXPENSES-NET> 2,324
<NET-INVESTMENT-INCOME> 24,846
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 24,846
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 24,846
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,049,726
<NUMBER-OF-SHARES-REDEEMED> 50,000
<SHARES-REINVESTED> 24,846
<NET-CHANGE-IN-ASSETS> 1,024,572
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,139
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 11,439
<AVERAGE-NET-ASSETS> 1,014,344
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.02
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 2.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>ACCRUED INCOME - 167, DEFERRED ORGINAL COSTS - 6,872, TOTAL - 7,039.
<F2>DIVIDENDS PAYABLE - 149, ACCRUED EXPENSES - 1,665, ORGINAL COSTS PAYABLE -
6,872, TOTAL - 8,686.
</FN>
</TABLE>
