<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1996
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. 2 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 3 [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, 1995 on
February 29, 1996.
<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
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 April 29, 1996 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.
April 29, 1996
FINANCIAL HIGHLIGHTS
Master Variable Series' Annual Report to Shareholders for the fiscal year
ended December 31, 1995 has been filed with the Securities and Exchange
Commission. The financial highlights in such Annual Report (the "Financial
Highlights") are incorporated into this Prospectus by reference. The Financial
Highlights included in such Annual Report have been audited by Master Variable
Series' independent accountants, whose report thereon also appears in such
Annual Report and is incorporated herein by reference. The Financial Highlights
in such Annual Report have been incorporated herein in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing. A
copy of such Annual Report 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.
<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 its 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 Excelsior Funds, Inc. (formerly known as UST Master Funds,
Inc.), Excelsior Tax-Exempt Funds, Inc. (formerly known as UST Master Tax-Exempt
Funds, Inc.) and Excelsior Institutional Trust, each an open-end management
investment company registered under the 1940 Act. On December 31, 1995, the
Investment Adviser's Asset Management Group had approximately $46.5 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 1995.
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.
For the period ended December 31, 1995, the Investment Adviser
received no advisory fees. For the same period, the Investment Adviser waived
advisory fees at the effective rates of .75% and reimbursed expenses at the
---
effective rates of .97% of the average daily net assets of the Equity Portfolio,
---
.60% and 1.26% of the Early Life Cycle Portfolio, .35% and 1.43% of the
- - --- ---- --- ----
Intermediate-Term Managed Income Portfolio, .75% and 1.11% of the Managed Income
--- ----
Portfolio, 1% and .61% of the International Equity Portfolio, .90% and .67% of
- --- --- ---
the International Bond Portfolio, and .25% and 1.87% of the Money Market
--- ----
Portfolio, respectively.
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 daily 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 generally 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, in addition to those 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
The Chase Manhattan Bank, N.A. ("Chase") serves as the custodian of
the Portfolios' assets. Communications to the custodian should be directed to
The Chase Manhattan Bank, N.A., Chase Metrotech Center, Brooklyn, NY 11245,
Attention: Global Custody Division. Chase has entered into an International
Custodian Agreement with Master Variable Series, 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
April 29, 1996
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 April 29, 1996 (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
2320 Cumberland Road -- Bank Financial, Inc.;
Charlottesville, VA 22901 Director, The Harbus
Corporation; Trustee,
HSBC Funds Trust and HSBC
Mutual 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,
HSBC Funds Trust and
HSBC Mutual 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 53 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.
The following chart provides certain information about the fees
received by the Directors for the period ended December 31, 1995.
- - --------------------------------------------------------------------------------
Pension or Total Compensa-
Retirement tion from
Aggregate Benefits Master Variable
Compensation Accrued as and Fund
Name of Person/ from Master Part of Fund Complex* Paid
Position Variable Series Expenses to Directors
- - --------------------------------------------------------------------------------
Alfred C. Tannachion $ 7,000 None (3)$44,750
Director
- - --------------------------------------------------------------------------------
Donald L. Campbell $ 5,000 None (3)$34,250
Director
- - --------------------------------------------------------------------------------
Charles Cornelios $ 0 None (0)$ 0
Director
- - --------------------------------------------------------------------------------
Joseph H. Dugan $ 5,000 None (3)$34,250
Director
- - --------------------------------------------------------------------------------
Wolfe J. Frankl $ 5,000 None (3)$34,250
Director
- - --------------------------------------------------------------------------------
Robert A. Robinson $ 5,000 None (3)$34,250
Director
- - --------------------------------------------------------------------------------
* The "Fund Complex" consists of Excelsior Funds, Inc., Excelsior Tax-Exempt
Funds, Inc., Excelsior Institutional Trust, Excelsior Funds and Master
Variable Series.
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.
For the period ended December 31, 1995, the Investment Adviser waived
advisory fees and reimbursed expenses of $23,401 with respect to the Equity
Portfolio, $20,867 with respect to the Early Life Cycle Portfolio, $18,304 with
respect to the Intermediate-Term Managed Income Portfolio, $19,138 with respect
to the Managed Income Portfolio, $37,209 with respect to the International
Equity Portfolio, $49,036 with respect to the International Bond Portfolio, and
$21,031 with respect to the Money Market Portfolio's average daily net assets,
respectively.
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.
For the period ended December 31, 1995, Chubb Investment Advisory
Corporation waived no fees and received administration, transfer agent and
dividend disbursing agent fees of $2,698, $2,224, $1,536, $1,538, $6,885, $9,298
and $987 for the Equity, Early Life Cycle, Intermediate-Term Managed Income,
Managed Income, International Equity, International Bond and Money Portfolios,
respectively.
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
The Chase Manhattan Bank, N.A. ("Chase") is the custodian of the
assets of Master Variable Series. Under the custodian agreement, Chase 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. Chase may, at its own expense,
open and maintain custody accounts with respect to the Portfolios with other
banks or trust companies, provided that Chase shall remain liable for the
performance of all of its custodial duties under the Custodian Agreement,
notwithstanding any delegation.
Chase 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, Chase 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
Chase, providing for the custody of foreign securities held by the Portfolios.
Chase 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.
For the fiscal year ended December 31, 1995, the Equity, Early Life
Cycle, Intermediate-Term Managed Income, Managed Income, International Equity
and International Bond Portfolios paid brokerage commissions aggregating
$2,457, $2,824, $0 , $0 , $9,003 and $0 , respectively.
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 their 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) 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; (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); (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
December 31, 1995 were 47.95%, 18.95%, 14.93, 15.78, 15.13 and 16.34,
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 December 31, 1995 were 5.70 %, 6.64 % and
5.99 % 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 December 31, 1995, the annualized yield of the Money
Market Portfolio was 4.95% and the effective yield was 5.07%.
- 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
Master Variable Series' Annual Report to Shareholders for the fiscal
year ended December 31, 1995 has been filed with the Securities and Exchange
Commission. The financial statements in such Annual Report (the "Financial
Statements") are incorporated into this Statement of Additional Information by
reference. The Financial Statements included in such Annual Report have been
audited by Master Variable Series' independent accountants, whose report thereon
also appears in such Annual Report and is incorporated herein by reference. The
Financial Statements in such Annual Report have been incorporated herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. A copy of such Annual Report 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.
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 March 31, 1996, 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>
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 December 31, 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 - December 31,
1995.
Statement of Operations for Equity, Early Life Cycle,
Intermediate-Term Managed Income, Managed Income, International
Equity, International Bond and Money Portfolios - December 31,
1995.
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 December 31, 1995.
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 December 31,
1995.
Notes to Financial Statements - December 31, 1995.
(b) Exhibits
1 Articles of Amendment and Restatement are incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 1 to the Registration
Statement, filed July 31, 1995 ("Post-Effective Amendment No. 1").
2 Amended and Restated By-Laws are incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 1.
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 is incorporated by reference to Exhibit 6 to
Post-Effective Amendment No. 1.
8(a) Custody Agreement between Master Variable Series and United States
Trust Company of New York is incorporated by reference to Exhibit
8(a) to Post-Effective Amendment No. 1.
9(a) Participation Agreement among Master Variable Series, Chubb Life
Insurance Company of America, and The Colonial Life Insurance
Company of America is incorporated by reference to Exhibit 9(a) to
Post-Effective Amendment No. 1.
<PAGE>
9(b) Administrative Services Agreement between Master Variable Series
and Chubb Investment Advisory Services is incorporated by reference
to Exhibit 9(b) to Post-Effective Amendment No. 1.
10 Opinion regarding the legality of the securities being registered.**
11(a) Consent of Drinker Biddle & Reath.
11(b) Consent of Ernst & Young LLP.
18 Powers of Attorney.*
27 (a) Financial Data Schedule as of December 31, 1995 for the Equity
Portfolio.
27 (b) Financial Data Schedule as of December 31, 1995 for the Early
Life Cycle Portfolio.
27 (c) Financial Data Schedule as of December 31, 1995 for the
Intermediate-Term Managed Income Portfolio.
27 (d) Financial Data Schedule as of December 31, 1995 for the Managed
Income Portfolio.
27 (e) Financial Data Schedule as of December 31. 1995 for the
International Equity Portfolio.
27 (f) Financial Data Schedule as of December 31, 1995 for the
International Bond Portfolio.
27 (g) Financial Data Schedule as of December 31, 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 February 29, 1996
Title of Class Number of Record Holders
Class A Common Stock 3
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. 2 ("Amendment No. 2") to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment No. 2 to its Registration Statement to be signed on its behalf by
the undersigned, thereto duly authorized, in the City of New York in the
State of New York on the 29th day of April, 1996.
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. 2 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 April 29, 1996
- - ---------------------- Board of Directors, President
Alfred Tannachion and Treasurer (Principal Executive
Officer, Principal Financial
Officer, and Principal Accounting
Officer)
/s/ Donald L. Campbell Director April 29, 1996
- - -----------------------
Donald L. Campbell
/s/ Charles C. Cornelio Director April 29, 1996
- - ------------------------
Charles C. Cornelio
/s/ Joseph H. Dugan Director April 29, 1996
- - --------------------
Joseph H. Dugan
/s/ Wolfe J. Frankl Director April 29, 1996
- - --------------------
Wolfe J. Frankl
/s/ Robert A. Robinson Director April 29, 1996
- - -----------------------
Robert A. Robinson
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- - ----------- ----------- --------
<S> <C> <C>
11 (a) Consent of Drinker Biddle & Reath.
11 (b) Consent of Ernst & Young LLP
27 (a) Financial Data Schedule as of December 31, 1995
for the Equity Portfolio.
27 (b) Financial Data Schedule as of December 31, 1995
for the Early Life Cycle Portfolio.
27 (c) Financial Data Schedule as of December 31, 1995
for the Intermediate-Term Managed Income Portfolio.
27 (d) Financial Data Schedule as of December 31, 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 December 31, 1995
for the International Equity Portfolio.
27 (f) Financial Data Schedule as of December 31, 1995
for the International Bond Portfolio.
27 (g) Financial Data Schedule as of December 31, 1995
for the Money Portfolio.
</TABLE>
<PAGE>
EXHIBIT 11(a)
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 Statement of Additional Information
that are included in Post-Effective Amendment No. 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
April 29, 1996
<PAGE>
EXHIBIT 11(b)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent Auditors"
in the Statement of Additional Information and to the use of our report dated
February 16, 1996, incorporated by reference in Post-Effective Amendment Number
2 to the Registration Statement (Form N-1A No. 33-79886) of UST Master Variable
Series, Inc.
ERNST & YOUNG LLP
Boston, Massachusetts
April 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> EQUITY PORTFOLIO UST MASTER VARIABLE SERIES, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1,568,893
<INVESTMENTS-AT-VALUE> 2,059,500
<RECEIVABLES> 3,68
<ASSETS-OTHER> 11,850
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,071,718
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50,449
<TOTAL-LIABILITIES> 50,449
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,520,394
<SHARES-COMMON-STOCK> 139,043
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,268
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 490,6077
<NET-ASSETS> 2,021,269
<DIVIDEND-INCOME> 7,514
<INTEREST-INCOME> 3,902
<OTHER-INCOME> 0
<EXPENSES-NET> 15,513
<NET-INVESTMENT-INCOME> (4,097)
<REALIZED-GAINS-CURRENT> 50,214
<APPREC-INCREASE-CURRENT> 490,6077
<NET-CHANGE-FROM-OPS> 536,724
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 35,849
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139,145
<NUMBER-OF-SHARES-REDEEMED> 103
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,021,259
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,117
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 38,914
<AVERAGE-NET-ASSETS> 1,425,327
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.03)
<PER-SHARE-GAIN-APPREC> 4.83
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.54
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> EARLY LIFE CYCLE PORTFOLIO UST MASTER VARIABLE SERIES, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1,173,484
<INVESTMENTS-AT-VALUE> 1,309,231
<RECEIVABLES> 817
<ASSETS-OTHER> 12,685
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,322,733
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26,969
<TOTAL-LIABILITIES> 26,969
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,119,427
<SHARES-COMMON-STOCK> 110,303
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 40,590
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 135,747
<NET-ASSETS> 1,295,764
<DIVIDEND-INCOME> 5,719
<INTEREST-INCOME> 4,332
<OTHER-INCOME> 0
<EXPENSES-NET> 11,009
<NET-INVESTMENT-INCOME> (958)
<REALIZED-GAINS-CURRENT> 55,673
<APPREC-INCREASE-CURRENT> 135,747
<NET-CHANGE-FROM-OPS> 190,462
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 14,125
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 110,335
<NUMBER-OF-SHARES-REDEEMED> 33
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,295,754
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 31,876
<AVERAGE-NET-ASSETS> 1,173,580
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> 1.89
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> .13
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.75
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERMEDIATE-TERM MANAGED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1,066,846
<INVESTMENTS-AT-VALUE> 1,136,260
<RECEIVABLES> 13,600
<ASSETS-OTHER> 11,646
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,161,506
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,082
<TOTAL-LIABILITIES> 92,028
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,000,010
<SHARES-COMMON-STOCK> 100,001
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 69,414
<NET-ASSETS> 1,069,424
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 73,367
<OTHER-INCOME> 0
<EXPENSES-NET> 7,371
<NET-INVESTMENT-INCOME> 65,996
<REALIZED-GAINS-CURRENT> 13,851
<APPREC-INCREASE-CURRENT> 69,414
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 65,996
<DISTRIBUTIONS-OF-GAINS> 13,851
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,069,414
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,583
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 25,675
<AVERAGE-NET-ASSETS> 1,080,123
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .66
<PER-SHARE-GAIN-APPREC> .83
<PER-SHARE-DIVIDEND> .66
<PER-SHARE-DISTRIBUTIONS> .14
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.69
<EXPENSE-RATIO> .72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> MANAGED INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1,081,806
<INVESTMENTS-AT-VALUE> 1,143,274
<RECEIVABLES> 15,518
<ASSETS-OTHER> 11,601
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,170,393
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 105,592
<TOTAL-LIABILITIES> 105,592
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,000,010
<SHARES-COMMON-STOCK> 100,001
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,323
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,468
<NET-ASSETS> 1,064,801
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 75,661
<OTHER-INCOME> 0
<EXPENSES-NET> 10,766
<NET-INVESTMENT-INCOME> 64,895
<REALIZED-GAINS-CURRENT> 31,481
<APPREC-INCREASE-CURRENT> 61,468
<NET-CHANGE-FROM-OPS> 157,844
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 64,895
<DISTRIBUTIONS-OF-GAINS> 28,158
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 100,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,064,791
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,690
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 29,904
<AVERAGE-NET-ASSETS> 1,081,895
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .65
<PER-SHARE-GAIN-APPREC> .93
<PER-SHARE-DIVIDEND> .65
<PER-SHARE-DISTRIBUTIONS> .28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.65
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> UST INTERNATIONAL EQUITY PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 2,310,384
<INVESTMENTS-AT-VALUE> 2,628,153
<RECEIVABLES> 11,365
<ASSETS-OTHER> 14,982
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,654,500
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 65,670
<TOTAL-LIABILITIES> 65,670
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,295,615
<SHARES-COMMON-STOCK> 229,277
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> (9,768)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,764)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 317,747
<NET-ASSETS> 2,588,830
<DIVIDEND-INCOME> 58,498
<INTEREST-INCOME> 11,482
<OTHER-INCOME> (5,870)
<EXPENSES-NET> 34,717
<NET-INVESTMENT-INCOME> 29,393
<REALIZED-GAINS-CURRENT> (2,997)
<APPREC-INCREASE-CURRENT> 317,747
<NET-CHANGE-FROM-OPS> 344,143
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 39,736
<DISTRIBUTIONS-OF-GAINS> 11,192
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 229,292
<NUMBER-OF-SHARES-REDEEMED> 16
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,588,820
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22,950
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 71,926
<AVERAGE-NET-ASSETS> 2,421,467
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .13
<PER-SHARE-GAIN-APPREC> 1.38
<PER-SHARE-DIVIDEND> .17
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .05
<PER-SHARE-NAV-END> 11.29
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> UST INTERNATIONAL BOND PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 3,251,739
<INVESTMENTS-AT-VALUE> 3,413,736
<RECEIVABLES> 71,562
<ASSETS-OTHER> 19,912
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,505,210
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 327,738
<TOTAL-LIABILITIES> 327,738
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,000,010
<SHARES-COMMON-STOCK> 300,001
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 15,549
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 161,913
<NET-ASSETS> 3,177,472
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 236,937
<OTHER-INCOME> (2,727)
<EXPENSES-NET> 43,389
<NET-INVESTMENT-INCOME> 190,821
<REALIZED-GAINS-CURRENT> 137,599
<APPREC-INCREASE-CURRENT> 161,913
<NET-CHANGE-FROM-OPS> 490,333
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 228,371
<DISTRIBUTIONS-OF-GAINS> 84,500
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 300,000
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,177,462
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 27,893
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 92,425
<AVERAGE-NET-ASSETS> 3,269,962
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .64
<PER-SHARE-GAIN-APPREC> .99
<PER-SHARE-DIVIDEND> .76
<PER-SHARE-DISTRIBUTIONS> .28
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.59
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> MONEY PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-17-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1,049,224
<INVESTMENTS-AT-VALUE> 1,049,224
<RECEIVABLES> 2,652
<ASSETS-OTHER> 11,601
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,063,477
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,152
<TOTAL-LIABILITIES> 12,152
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,051,326
<SHARES-COMMON-STOCK> 1,051,326
<SHARES-COMMON-PRIOR> 1
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,051,325
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 57,401
<OTHER-INCOME> 0
<EXPENSES-NET> 5,034
<NET-INVESTMENT-INCOME> 52,367
<REALIZED-GAINS-CURRENT> (1)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 52,366
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 52,367
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,350,009
<NUMBER-OF-SHARES-REDEEMED> 350,782
<SHARES-REINVESTED> 52,098
<NET-CHANGE-IN-ASSETS> 1,051,315
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,468
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 26,065
<AVERAGE-NET-ASSETS> 1,041,405
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
