1
As filed with the Securities and Exchange Commission on October 30, 1996
File No. 811-8630
Registration No. 33-81712
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGITRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [x]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Post-Effective Amendment No. 4 [x]
________________________
*MUTUAL FUND VARIABLE ANNUITY TRUST
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(Exact Name of Registrant as Specified in Charter)
101 Park Avenue
New York, New York 10178
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 426-1600
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Copy to:
Ann Bergin Niall O'Toole, Esq. Gary S. Schpero, Esq.
Mutual Fund Variable Annuity Trust Chase Manhattan Bank Simpson Thacher & Bartlett
125 West 55th Street 270 Park Avenue 425 Lexington Avenue
New York, New York 10019 New York, New York 10017 New York, New York 10017
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
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[ ] Immediately upon filing pursuant to [ ] on ( ) pursuant to
paragraph (b) paragraph (b)
[X] 60 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(1) paragraph (a)(1)
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to
paragraph (a)(2) paragraph (a)(2) rule 485.
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If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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The Registrant has registered an indefinite number or amount of its shares of
common stock for each of its series of shares under the Securities Act of 1933
pursuant to Rule 24f-2 under the Investment Company Act of 1940 on July 18,
1994. The Registrant filed a Rule 24f-2 Notice on October 27, 1995.
This Filing Consists of _____ Pages.
Exhibit Index is Located on Page ______
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2
Mutual Fund Variable Annuity Trust
CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in each form of
Prospectus of the responses to the Items in Part A and location in each form of
Prospectus and the Statement of Additional Information of the responses to the
Items in Part B of Form N-1A).
INTERNATIONAL EQUITY PORTFOLIO
CAPITAL GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
ASSET ALLOCATION PORTFOLIO
TREASURY INCOME PORTFOLIO
MONEY MARKET PORTFOLIO
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Item Number
Form N-1A,
Part A Prospectus Caption
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1 Front Cover Page
2(a) Not Applicable
(b) Not Applicable
3(a) Financial Highlights
(b) Not Applicable
(c) Not Applicable
4(a)(b) Other Information Concerning the Fund;
Portfolio Objectives and Investment Approach;
Common Investment Policies
(c) Portfolio Objective and Investment Approach;
Common Investment Policies
5(a) Management
(b) Management
(c) Management
(d) Other Information Concerning the Fund
(e) Other Information Concerning the Fund
(f) Other Information Concerning the Fund
(g) Not Applicable
5A Not Applicable
6(a) Other Information Concerning the Fund
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
(e) Shareholder Inquiries
(f) How Distributions Are Made; Tax Information
(g) How Distributions Are Made; Tax Information
7(a) Not Applicable
(b) How the Portfolios Value Their Shares
(c) Not Applicable
(d) Not Applicable
(e) Not Applicable
8(a) Not Applicable
(b) Not Applicable
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Mutual Fund Variable Annuity Trust
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Item Number
Form N-1A,
Part A Prospectus Caption
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(c) Not Applicable
(d) Not Applicable
9 Not Applicable
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Mutual Fund Variable Annuity Trust
INTERNATIONAL EQUITY PORTFOLIO
CAPITAL GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
ASSET ALLOCATION PORTFOLIO
TREASURY INCOME PORTFOLIO
MONEY MARKET PORTFOLIO
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Item Number
Form N-1A Statement of Additional
Part B Information Caption
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10 Front Cover Page
11 Front Cover Page
12 Not Applicable
13 Investment Policies
and Restrictions
14 Management of the Trust and the Portfolios
15(a) Not Applicable
(b) General Information
(c) Management of the Trust and the Portfolios
16(a) Management of the Trust and the Portfolios
(b) Management of the Trust and the Portfolios
(c) Management of the Trust and the Portfolios
(d) Management of the Portfolios
(e) Not Applicable
(f) Not Applicable
(g) Not Applicable
(h) Management of the Trust and the Portfolios;
Independent Accountants
(i) Not Applicable
17 Not Applicable
18 General Information
19(a) Not Applicable
(b) Determination of Net Asset Value
(c) Not Applicable
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Mutual Fund Variable Annuity Trust
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20 Tax Matters
21(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
22 Performance Information
23 Financial Statements
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Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered in Part C of this Registration
Statement.
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PROSPECTUS
MUTUAL FUND VARIABLE ANNUITY TRUST
INTERNATIONAL EQUITY PORTFOLIO: Total Return
CAPITAL GROWTH PORTFOLIO: Capital Growth
GROWTH AND INCOME PORTFOLIO: Income and Capital Growth
ASSET ALLOCATION PORTFOLIO: Total Return
U.S. GOVERNMENT INCOME PORTFOLIO: Income
MONEY MARKET PORTFOLIO: Income
_______________, 1996
Mutual Fund Variable Annuity Trust (the "Trust") is an open-end management
investment company. The Trust consists of six portfolios (the "Portfolios"),
each of which has its own investment objectives and policies.
Shares of the Trust are issued and redeemed only in connection with investments
in and payments under variable annuity contracts and may be sold to fund
variable life contracts issued in the future. The contracts involve fees and
expenses not described in this Prospectus and also may involve certain
restrictions or limitations on the allocation of purchase payments or contract
values to one or more series of the Trust. Certain Portfolios may not be
available in connection with a particular contract. See the applicable contract
prospectus for information regarding contract fees and expenses and any
restrictions or limitations.
This Prospectus explains concisely what you should know before investing. Please
read it carefully and keep it for future reference. You can find more detailed
information about the Portfolios in their __________, 1996 Statement of
Additional Information, as amended periodically (the "SAI"). For a free copy of
the SAI, call the Annuity Service Center at 1-800-90-VISTA. The SAI has been
filed with the Securities and Exchange Commission and is incorporated into this
Prospectus by reference.
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. THIS PROSPECTUS SHOULD BE READ CAREFULLY AND
RETAINED FOR FUTURE REFERENCE.
INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE MONEY
MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
INVESTMENTS IN THE PORTFOLIOS ARE SUBJECT TO RISK - INCLUDING POSSIBLE LOSS
OF PRINCIPAL. INVESTMENTS IN THE PORTFOLIOS OTHER THAN THE MONEY MARKET
PORTFOLIO WILL FLUCTUATE IN VALUE. SHARES OF THE PORTFOLIOS ARE NOT BANK
DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, THE CHASE MANHATTAN
BANK OR ANY OF ITS AFFILIATES AND ARE NOT INSURED BY, OBLIGATIONS OF OR
OTHERWISE SUPPORTED BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
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2
TABLE OF CONTENTS
Topics Page
MUTUAL FUND VARIABLE ANNUITY TRUST .......................................... 1
FINANCIAL HIGHLIGHTS ........................................................
PORTFOLIO OBJECTIVES AND INVESTMENT APPROACH ................................ 3
INTERNATIONAL EQUITY PORTFOLIO .................................... 3
CAPITAL GROWTH PORTFOLIO .......................................... 4
GROWTH AND INCOME PORTFOLIO ....................................... 4
ASSET ALLOCATION PORTFOLIO ........................................ 5
U.S. GOVERNMENT INCOME PORTFOLIO .................................. 5
MONEY MARKET PORTFOLIO ............................................ 6
COMMON INVESTMENT POLICIES .................................................. 6
OTHER INVESTMENT PRACTICES ........................................ 7
ADDITIONAL INVESTMENT POLICIES OF THE MONEY
MARKET PORTFOLI .............................................. 11
LIMITING INVESTMENT RISKS ......................................... 12
MANAGEMENT .................................................................. 14
THE PORTFOLIO'S ADVISERS .......................................... 14
HOW TO PURCHASE AND REDEEM SHARES ........................................... 15
HOW THE PORTFOLIOS VALUE THEIR SHARES ....................................... 16
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION ................................. 16
OTHER INFORMATION CONCERNING THE PORTFOLIOS ................................. 17
ADMINISTRATOR ..................................................... 17
SUB-ADMINISTRATOR AND DISTRIBUTOR ................................. 17
TRANSFER AGENT AND CUSTODIAN ...................................... 17
EXPENSES .......................................................... 17
ORGANIZATION AND DESCRIPTION OF SHARES ............................ 18
CERTAIN REGULATORY MATTERS ........................................ 18
SHAREHOLDER INQUIRIES ....................................................... 19
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FInancial Highlights page 21
The table set forth below provides per share data and ratios for a share
outstanding throughout the periods shown. This information is supplemented by
financial statements and accompanying notes appearing in the Portfolios'
Annual Report to Shareholders for the fiscal year ended August 31, 1996,
which is incorporated by reference into the SAI. Shareholders may obtain a
copy of this annual report by contacting the Vista Capital Advantage. The
financial statements and notes, as well as the financial information set
forth in the table below, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon is also included in the Annual
Report to Shareholders.
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Growth and Income Capital Growth International Equity
Portfolio Portfolio Portfolio
-------------------- -------------------- --------------------
Year 03/1/95* Year 03/1/95* Year 03/01/95*
Ended through Ended through Ended through
08/31/96 08/31/95 08/31/96 08/31/95 08/31/96 08/31/95
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PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $11.48 $10.00 $11.90 $10.00 $10.89 $10.00
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.294 0.110 0.158 0.055 0.216 0.101
Net Gains or Losses on Investments
(both realized and unrealized) 1.516 1.370 2.139 1.845 0.034 0.789
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.810 1.480 2.297 1.900 0.250 0.890
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.300 -- 0.142 -- 0.250 --
Distributions from capital gains 0.250 -- 0.215 -- 0.300 --
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS 0.550 -- 0.357 -- 0.550 --
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NET ASSET VALUE, END OF PERIOD $12.74 $11.48 $13.84 $11.90 $10.59 $10.89
======= ======= ======= ======= ======= =======
TOTAL RETURN 16.24% 14.80% 19.66% 19.00% 2.42% 8.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $8,081 $6,247 $7,910 $6,329 $3,901 $5,482
Ratios to Average Net Assets:#
Ratio of Expenses 0.90% 0.90% 0.90% 0.90% 1.10% 1.09%
Ratio of Net Investment Income 1.71% 2.14% 0.97% 1.04% 0.82% 1.92%
Ratio of expenses without waivers and
assumption of expenses 1.98% 1.80% 1.97% 1.80% 4.22% 2.90%
Ratio of net investment income without
waivers and assumption of expenses 0.63% 1.24% (0.09)% 0.14% (2.30)% 0.11%
Portfolio Turnover Rate 129% 32% 107% 28% 200% 75%
Average commission rate paid** $.0599 -- $.0604 -- $.0631 --
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(restubbed table)
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Asset Allocation U.S. Government Money Market
Portfolio Income Portfolio Portfolio
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Year 03/01/95* Year 03/01/95* Year 03/01/95*
Ended through Ended through Ended through
08/31/96 08/31/95 08/31/96 08/31/95 08/31/96 08/31/95
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PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $ 11.04 $ 10.00 $ 10.69 $ 10.00 $ 1.00 $ 1.00
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INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.657 0.205 1.173 0.322 0.050 0.028
Net Gains or Losses on Investments
(both realized and unrealized) 0.488 0.835 (0.858) 0.368 -- --
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.145 1.040 0.315 0.690 0.050 0.028
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LESS DISTRIBUTIONS:
Dividends from net investment income 0.670 -- 1.134 -- 0.050 0.028
Distributions from capital gains 0.365 -- 0.341 -- -- --
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TOTAL DISTRIBUTIONS 1.035 -- 1.475 -- 0.050 0.028
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NET ASSET VALUE, END OF PERIOD $ 11.15 $ 11.04 $ 9.53 $ 10.69 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
TOTAL RETURN 10.90 % 10.40 % 2.62 % 6.90 % 5.15 % 2.79 %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $4,033 $5,546 $2,994 $5,390 $2,950 $5,422
Ratios to Average Net Assets:#
Ratio of Expenses 0.85 % 0.85 % 0.80 % 0.80 % 0.55 % 0.55 %
Ratio of Net Investment Income 3.18 % 3.86 % 6.06 % 6.19 % 5.10 % 5.46 %
Ratio of expenses without waivers and
assumption of expenses 2.33 % 1.65 % 1.79 % 1.62 % 1.74 % 1.21 %
Ratio of net investment income without
waivers and assumption of expenses 1.71 % 3.06 % 5.08 % 5.37 % 3.90 % 4.80 %
Portfolio Turnover Rate 155 % 45 % 83 % 46 % -- --
Average commission rate paid** $ .0598 -- -- -- -- --
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(end of restubbed table)
* Commencement of operations.
# Short periods have been annualized.
**Price per share required for periods commencing after 9/1/95.
See notes to financial statements.
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PORTFOLIO OBJECTIVES AND INVESTMENT APPROACH
INTERNATIONAL EQUITY PORTFOLIO
The Portfolio's objective is total return from long-term capital growth and
income.
The Portfolio will invest principally in a broad portfolio of marketable
equity securities of established foreign companies organized in countries other
than the U.S., and foreign subsidiaries of U.S. companies participating in
foreign economies. Under normal market conditions, the Portfolio will invest at
least 65% of its total assets in equity securities, including common stocks,
preferred stocks, securities convertible into common stocks, and warrants to
purchase common stocks.
The Portfolio's advisers seek to identify those countries and industries
where economic and political factors, including currency movements, are likely
to produce above-average growth rates. The Portfolio's advisers attempt to
identify those companies in such countries and industries that are best
positioned and managed to take advantage of these economic and political
factors. The Portfolio will seek to diversify investments broadly among issuers
in various countries and normally to have represented in the Portfolio business
activities of not less than three different countries other than the U.S. The
Portfolio may invest a substantial portion of its assets in one or more of such
countries.
The Portfolio intends to invest in companies based in (or governments
located in) the Far East (including Japan, Hong Kong, Singapore and Malaysia),
Western Europe (including the United Kingdom, Germany, Netherlands, France,
Switzerland, Italy and Spain), Scandinavia, Australia, Canada and such other
areas and countries as the Portfolio's advisers may determine from time to time.
Because the Portfolio invests a large portion of its assets in countries
comprising the Morgan Stanley Capital International Europe, Australia and Far
East Index, which is heavily weighted towards companies based in Japan and the
United Kingdom, a substantial portion of the Portfolio's assets may be invested
in companies based in Japan, the United Kingdom and/or other countries
represented in the Index. However, investments may be made from time to time in
companies in, or governments of, developing countries, as well as developed
countries.
The Portfolio's advisers will allocate the Portfolio's investments among
securities denominated in the U.S. dollar and currencies of foreign countries.
The advisers may adjust the Portfolio's exposure to each currency based on their
perception of the most favorable markets and issuers. The percentage of the
Portfolio's assets invested in securities of a particular country or denominated
in a particular currency will vary in accordance with the advisers' assessment
of the relative yield and appreciation potential of such securities and the
current and anticipated relationship of a country's currency to the U.S. dollar.
Fundamental economic strength, earnings growth, quality of management, industry
growth, credit quality and interest rate trends are some of the principal
factors which may be considered by the Portfolio's advisers in determining
whether to increase or decrease the emphasis placed upon a particular type of
security, industry sector, country or currency within the Portfolio's investment
portfolio. Securities purchased by the Portfolio may be denominated in a
currency other than that of the country in which the issuer is domiciled.
Primary emphasis will be placed on equity securities and securities with
equity features. However, the Portfolio may invest in any type of investment
grade debt security including, but not limited to, other convertible securities,
bonds, notes and other debt securities of foreign governmental and private
issuers, and various derivative securities.
The Portfolio will neither invest more than 25% of its net assets in debt
securities denominated in a single currency other than the U.S. dollar, nor
invest more than 25% of its net assets in debt securities issued by a single
foreign government or supranational organization.
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The Portfolio may invest in securities of companies of various sizes,
including smaller companies whose securities may be more volatile and less
liquid than securities of larger companies. With respect to certain countries in
which capital markets are either less developed or not easily accessed,
investments by the Portfolio may be made through investment in closed-end
investment companies that in turn are authorized to invest in the securities of
such countries. You should be aware that an investment in foreign securities
involves a higher degree of risk than investments in U.S. securities, as
described under "Risk Factors" below.
The Portfolio may invest any portion of its assets not invested as
described above in high quality money market instruments and repurchase
agreements. For temporary defensive purposes, the Portfolio may invest without
limitation in these instruments. At times when the Portfolio's advisers deem it
advisable to limit the Portfolio's exposure to the equity markets, the Portfolio
may invest up to 20% of its total assets in U.S. Government obligations
(exclusive of any investments in money market instruments). To the extent that
the Portfolio departs from its investment policies during temporary defensive
periods, the Portfolio's investment objective may not be achieved.
CAPITAL GROWTH PORTFOLIO
The Portfolio's objective is long-term capital growth.
The Portfolio will invest primarily in a broad portfolio of common stocks.
Under normal market conditions, the Portfolio will invest at least 80% of its
total assets in common stocks. The Portfolio will seek to invest in stocks of
companies with capitalizations of $750 million to $4.0 billion. Current income,
if any, is a consideration incidental to the Portfolio's objective of long-term
capital growth. The Portfolio's advisers intend to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change.
The Portfolio may invest any portion of its assets not invested in common
stocks in high quality money market instruments and repurchase agreements, as
described below. For temporary defensive purposes, the Portfolio may invest
without limitation in these instruments. At times when the Portfolio's advisers
deem it advisable to limit the Portfolio's exposure to the equity markets, the
Portfolio may invest up to 20% of its total assets in U.S. Government
obligations (exclusive of any investments in money market instruments). To the
extent that the Portfolio departs from its investment policies during temporary
defensive periods, the Portfolio's investment objective may not be achieved.
GROWTH AND INCOME PORTFOLIO
The Portfolio's objective is to provide long-term capital appreciation and
dividend income.
The Portfolio invests in common stocks of issuers with a broad range of
market capitalizations. Under normal market conditions, the Portfolio will
invest at least 80% of its total assets in common stocks. In addition, the
Portfolio may invest up to 20% of its total assets in convertible securities.
The Portfolio's advisers intend to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. The advisers believe that the market risk involved in seeking capital
appreciation will be moderated to an extent by the anticipated dividend returns
on the stocks in which the Portfolio invests.
The Portfolio may invest any portion of its assets not invested as
described above in high quality money market instruments and repurchase
agreements. For temporary defensive purposes, the Portfolio may invest without
limitation in these instruments as well as investment grade debt securities. At
times when the Portfolio's advisers deem it advisable to limit the Portfolio's
exposure to the equity markets, the Portfolio
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may invest up to 20% of its total assets in U.S. Government obligations
(exclusive of any investments in money market instruments). To the extent that
the Portfolio departs from its investment policies during temporary defensive
periods, the Portfolio's investment objective may not be achieved.
ASSET ALLOCATION PORTFOLIO
The Portfolio's objective is to maximize total return through long-term
capital growth and current income.
The Portfolio will invest in equity and debt securities. Under normal
market conditions, 35% to 70% of the Portfolio's total assets will be invested
in equity securities. The majority of the Portfolio's equity investments will be
in well-known, established companies with market capitalizations of at least
$200 million which are traded on established securities markets or
over-the-counter. The equity securities in which the Portfolio may invest
include common stocks, preferred stocks, securities convertible into common and
preferred stocks and warrants to purchase common stocks.
Under normal market conditions, at least 25% of the Portfolio's total
assets will be invested in investment grade fixed-income securities. The fixed
income securities in which the Portfolio may invest include non-convertible
corporate debt securities and U.S. Government obligations. Corporate debt
securities in which the Portfolio invests will be rated at the time of purchase
in the category Baa or higher by Moody's Investor Services, Inc. ("Moody's"), or
BBB or higher by Standard & Poor's Corporation ("S&P") or the equivalent by
another national rating organization, or, if unrated, determined by the
Portfolio's advisers to be of comparable quality.
The Portfolio's advisers may alter the relative portion of the Portfolio's
assets invested in equity and fixed income securities depending on their
judgment as to general market and economic conditions and trends, yields and
interest rates and changes in monetary policies. The average maturity of the
Portfolio's fixed income investments will vary based upon the advisers'
assessment of the relative yields available on securities of different
maturities.
The Portfolio may invest any portion of its assets not invested as
described above in high quality money market instruments and repurchase
agreements. For temporary defensive purposes, the Portfolio may invest without
limitation in these instruments. To the extent that the Portfolio departs from
its investment policies during temporary defensive periods, its investment
objective may not be achieved.
U.S. GOVERNMENT INCOME PORTFOLIO
The Portfolio's objective is to provide shareholders with monthly dividends
and to protect the value of their investment.
Under normal circumstances, the Portfolio will invest at least 65% of its
assets in U.S. Treasury obligations, obligations issued or guaranteed by U.S.
government agencies or instrumentalities if such obligations are backed by the
"full faith and credit" of the U.S. Treasury, and securities issued or
guaranteed as to principal and interest by the U.S. government or by agencies or
instrumentalities thereof.
There is no restriction on the maturity of the Portfolio's portfolio or on
any individual portfolio security. The Portfolio's advisers may adjust the
average maturity of the Portfolio's portfolio based upon their assessment of the
relative yields available on securities of different maturities and their
expectations of future changes in interest rates.
5
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MONEY MARKET PORTFOLIO
The Portfolio's objective is to provide maximum current income consistent
with the preservation of capital and the maintenance of liquidity.
The Portfolio invests in high quality, short-term U.S. dollar-denominated
money market instruments. The Portfolio invests principally in (i) high quality
commercial paper and other short-term obligations, including floating and
variable rate master demand notes of U.S. and foreign corporations; (ii) U.S.
dollar-denominated obligations of foreign governments and supranational agencies
(e.g., the International Bank for Reconstruction and Development); (iii)
obligations issued or guaranteed by U.S. banks with total assets exceeding $1
billion (including obligations of foreign branches of such banks) and by foreign
banks with total assets exceeding $10 billion (or the equivalent in other
currencies) which have branches or agencies in the U.S. (including U.S. branches
of such banks), or such other U.S. or foreign commercial banks which are judged
by the Portfolio's advisers to meet comparable credit standing criteria; (iv)
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and (v) repurchase agreements. The dollar weighted average
maturity of the Portfolio will be 90 days or less.
The Portfolio invests only in U.S. dollar-denominated high quality
obligations which are determined to present minimal credit risks. This credit
determination must be made in accordance with procedures established by the
Board of Trustees. Each investment must be rated in the highest short-term
rating category by at least two national rating organizations ("NROs") (or one
NRO if the instrument was rated only by one such organization) or, if unrated,
must be determined to be of comparable quality in accordance with the procedures
adopted by the Trust's Board of Trustees. If a security has an unconditional
guarantee or similar enhancement, the issuer of the guarantee or enhancement may
be relied upon in meeting these rating requirements rather than the issuer of
the security. Securities in which the Portfolio invests may not earn as high a
level of current income as long-term or lower quality securities.
The Portfolio purchases only instruments which have or are deemed to have
remaining maturities of 397 days or less in accordance with federal regulations.
Although the Portfolio seeks to be fully invested, at times it may hold
uninvested cash reserves, which would adversely affect its yield.
There can be no assurance that the Portfolio will achieve its investment
objective.
COMMON INVESTMENT POLICIES
In lieu of investing directly, each Portfolio is authorized to seek to
achieve its objective by investing all of its investable assets in an investment
company having substantially the same objective and policies as such Portfolio.
The International Equity Portfolio, Capital Growth Portfolio, Growth and
Income Portfolio and U.S. Government Income Portfolio are classified as
"non-diversified" funds under federal securities law, subject to certain tax
diversification requirements and diversification guidelines of the California
Department of Insurance. These Portfolios' assets may be more concentrated in
the securities of any single issuer or group of issuers than if the Portfolios
were diversified. The Asset Allocation Portfolio and Money Market Portfolio are
classified as "diversified" funds under federal securities law.
No Portfolio is intended to be a complete investment program and there is
no assurance that any Portfolio will achieve its investment objective.
6
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OTHER INVESTMENT PRACTICES
Each Portfolio may also engage in the following investment practices, when
consistent with its overall objective and policies. These practices, and certain
associated risks, are more fully described in the Statement of Additional
Information.
Foreign Securities. The Capital Growth Portfolio, Growth and Income
Portfolio and Asset Allocation Portfolio may invest up to 20% of their
respective total assets in foreign securities, including Depositary Receipts.
The International Equity Portfolio may invest without limitation in foreign
securities. The Money Market Portfolio is permitted to invest any portion of its
assets in U.S. dollar-denominated obligations of foreign issuers. The Money
Market Portfolio will limit its investments in foreign government obligations to
commercial paper and other short-term notes issued or guaranteed by the
governments of Western Europe, Australia, New Zealand, Japan and Canada.
Since foreign securities are normally denominated and traded in foreign
currencies, the values of a Portfolio's foreign investments may be affected
favorably or unfavorably by currency exchange rates and exchange control
regulations. There may be less information publicly available about foreign
companies than U.S. companies, and they are not generally subject to accounting,
auditing and financial reporting standards and practices comparable to those in
the U.S. The securities of foreign companies may be less liquid and more
volatile than the securities of comparable U.S. companies. Foreign settlement
procedures and trade regulations may involve certain risks (such as delay in
payment or delivery of securities or in the recovery of a Portfolio's assets
held abroad) and expenses. It is possible that nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability and diplomatic developments could affect the
value of a Portfolio's investments in certain foreign countries. Foreign laws
may restrict the ability to invest in certain countries or issuers and special
tax considerations will apply to foreign securities. The risks can increase if a
Portfolio invests in securities of issuers in emerging markets.
The International Equity Portfolio, Capital Growth Portfolio, Growth and
Income Portfolio and Asset Allocation Portfolio (collectively, the "Equity
Portfolios") may invest their assets in securities of foreign issuers in the
form of American Depositary Receipts, European Depositary Receipts, Global
Depositary Receipts or other similar securities representing securities of
foreign issuers (collectively, "Depositary Receipts"). Each such Portfolio
treats Depositary Receipts as interests in the underlying securities for
purposes of its investment policies. Each such Portfolio will limit its
investment in Depositary Receipts not sponsored by the issuer of the underlying
securities to no more than 5% of the value of its net assets (at the time of
investment).
Supranational and ECU Obligations. The Equity Portfolios and the Money
Market Portfolio may invest in securities issued by supranational organizations,
which include organizations such as The World Bank, the European Community, the
European Coal and Steel Community and the Asian Development Bank. Obligations of
supranational agencies are supported by subscribed, but unpaid, commitments of
member countries. There is no assurance that these commitments will be
undertaken or complied with in the future, and supranational securities are
subject to certain risks associated with foreign investing. Each such Portfolio
may also invest in securities denominated in the ECU, which is a "basket"
consisting of specified amounts of the currencies of certain member states of
the European Community. These securities are typically issued by European
governments and supranational organizations.
U.S. Government Obligations. U.S. Government obligations include
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Certain U.S. Government obligations, such as U.S. Treasury
securities and direct pass-through certificates of the Government National
Mortgage Association (GNMA), are backed by the "full faith and credit" of the
U.S. Government. Other U.S. Government obligations, such as obligations of the
Federal Home Loan Bank and the Federal Home Loan
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Mortgage Corporation, are not backed by the "full faith and credit" of the U.S.
Government. In the case of securities not backed by the "full faith and credit"
of the U.S. Government, the investor must look principally to the agency issuing
or guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Money Market Instruments. In addition to the Money Market Portfolio, each
other Portfolio may invest in cash or high-quality, short-term money market
instruments. Such instruments may include U.S. Government securities, commercial
paper of domestic and foreign issuers and obligations of domestic and foreign
banks. Investments in foreign money market instruments may involve certain risks
associated with foreign investment.
Repurchase Agreements, Securities Loans and Forward Commitments. Each
Portfolio may enter into agreements to purchase and resell securities at an
agreed-upon price and time. Each Portfolio also has the ability to lend
portfolio securities in an amount equal to not more than 30% of its total assets
to generate additional income. These transactions must be fully collateralized
at all times. Each Portfolio may purchase securities for delivery at a future
date, which may increase its overall investment exposure and involves a risk of
loss if the value of the securities declines prior to the settlement date. These
transactions involve some risk to a Portfolio if the other party should default
on its obligation and the Portfolio is delayed or prevented from recovering the
collateral or completing the transaction.
Borrowings and Reverse Repurchase Agreements. Each Portfolio may borrow
money from banks for temporary or short-term purposes, but will not borrow for
leveraging purposes. Each Portfolio may also sell and simultaneously commit to
repurchase a portfolio security at an agreed-upon price and time, to avoid
selling securities during unfavorable market conditions in order to meet
redemptions. Whenever a Portfolio enters into a reverse repurchase agreement, it
will establish a segregated account in which it will maintain liquid assets on a
daily basis in an amount at least equal to the repurchase price (including
accrued interest). Each Portfolio would be required to pay interest on amounts
obtained through reverse repurchase agreements, which are considered borrowings
under federal securities laws.
Stand-by Commitments. The Portfolios may enter into put transactions,
including transactions sometimes referred to as stand-by commitments, with
respect to securities in their portfolios. In these transactions, a Portfolio
would acquire the right to sell a security at an agreed-upon price within a
specified period prior to its maturity date. These transactions involve some
risk to the Portfolio if the other party should default on its obligation and
the Portfolio is delayed or prevented from recovering the collateral or
completing the transaction. Acquisition of puts will have the effect of
increasing the cost of the securities subject to the put and thereby reducing
the yields otherwise available from such securities.
Convertible Securities. Each Portfolio other than the Money Market
Portfolio and U.S. Government Income Portfolio may invest in convertible
securities, which are securities generally offering fixed interest or dividend
yields which may be converted either at a stated price or stated rate for common
or preferred stock. Each of the Capital Growth Portfolio and Growth and Income
Portfolio limit its investments in convertible securities to 20% of its net
assets. Although to a lesser extent than with fixed-income securities generally,
the market value of convertible securities tends to decline as interest rates
increase, and increase as interest rates decline. Because of the conversion
feature, the market value of convertible securities also tends to vary with
fluctuations in the market value of the underlying common or preferred stock.
Other Investment Companies. Each Portfolio other than the U.S. Government
Income Portfolio and Money Market Portfolio may invest up to 10% of its total
assets in shares of other investment companies when consistent with its
investment objectives and policies, subject to applicable regulatory
limitations. The Money Market Portfolio may invest up to 10% of its total assets
in shares of other money market funds, subject to applicable regulatory
limitations. Additional fees may be charged by other investment companies.
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Investment Grade Debt Securities. The Asset Allocation Portfolio, Growth
and Income Portfolio and International Equity Portfolio may invest in investment
grade debt securities. Investment grade debt securities are securities rated in
the category BBB or higher by S&P, or Baa or higher by Moody's or the equivalent
by another national rating organization, or, if unrated, determined by the
advisers to be of comparable quality.
Stripped Obligations. The Asset Allocation Portfolio may invest without
limitation in stripped obligations, which are separately traded principal and
interest components of an underlying obligation. In addition, the U.S.
Government Income Portfolio may invest without limitation, and each other
Portfolio may invest up to 20% of its total assets, in stripped obligations
backed by the full faith and credit of the U.S. Government, including
instruments known as "STRIPS". The value of stripped obligations tends to
fluctuate more in response to changes in interest rates than the value of
ordinary interest-paying debt securities with similar maturities. The risk is
greater when the period to maturity is longer.
Zero Coupon Securities and Payment-in-Kind Obligations. The Asset
Allocation Portfolio and Money Market Portfolio may invest in zero coupon
securities issued by governmental and private issuers. The U.S. Government
Income Portfolio may invest in zero coupon U.S. Government securities. Zero
coupon securities are debt securities that do not pay regular interest payments,
and instead are sold at substantial discounts from their value at maturity. The
Asset Allocation Portfolio may invest in payment-in-kind obligations, which are
obligations on which the interest is payable in additional securities rather
than cash. The value of these instruments tends to fluctuate more in response to
changes in interest rates than the value of ordinary interest-paying debt
securities with similar maturities. The risk is greater when the period to
maturity is longer.
Mortgage-related Securities. The Asset Allocation Portfolio may invest in
mortgage-related securities. The U.S. Government Income Portfolio may invest in
mortgage-related U.S. Government securities. Mortgage pass-through securities
are securities representing interests in "pools" of mortgages in which payments
of both interest and principal on the securities are made monthly, in effect
"passing through" monthly payments made by the individual borrowers on the
residential mortgage loans which underlie the securities. Early repayment of
principal on mortgage pass-through securities held by such Portfolios (due to
prepayments of principal on the underlying mortgage loans) may result in a lower
rate of return when the Portfolio reinvests such principal. In addition, as with
callable fixed-income securities generally, if the Portfolio purchased the
securities at a premium, sustained early repayment would limit the value of the
premium. Like other fixed-income securities, when interest rates rise the value
of a mortgage-related security generally will decline; however, when interest
rates decline, the value of the mortgage-related securities with prepayment
features may not increase as much as other fixed-income, fixed-maturity
securities which have no prepayment or call features. Payment of principal and
interest on the mortgage pass-through certificates (but not the market value of
the securities themselves) in which the U.S. Government Income Portfolio invests
will be guaranteed by the U.S. Government. Payment of principal and interest on
some mortgage pass-through securities (but not the market value of the
securities themselves) in which the Asset Allocation Portfolio invests may be
guaranteed by the U.S. Government, or by agencies or instrumentalities of the
U.S. Government (which guarantees are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). Certain
mortgage pass-through securities created by nongovernmental issuers may be
supported by various forms of insurance or guarantees, while other such
securities may be backed only by the underlying mortgage collateral.
The Asset Allocation Portfolio and U.S. Government Income Portfolio may
also invest in investment grade Collateralized Mortgage Obligations ("CMOs"),
which are hybrid instruments with characteristics of both mortgage-backed bonds
and mortgage pass-through securities. Similar to a bond, interest and prepaid
principal on a CMO are paid, in most cases, monthly. CMOs may be collateralized
by whole residential or commercial mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
the U.S. Government or its agencies or instrumentalities. CMOs are structured
into
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multiple classes, with each class having a different expected average life
and/or stated maturity. Monthly payments of principal, including prepayments,
are allocated to different classes in accordance with the terms of the
instruments, and changes in prepayment rates or assumptions may significantly
affect the expected average life and value of a particular class.
The Asset Allocation Portfolio and U.S. Government Income Portfolio expect
that governmental, government-related or private entities may create other
mortgage-related securities in addition to those described above. As new types
of mortgage-related securities are developed and offered to investors, such
Portfolios will consider making investments in such securities.
Dollar Rolls. The Asset Allocation Portfolio and U.S. Government Income
Portfolio may enter into mortgage "dollar rolls" in which the Portfolio sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. These transactions involve some risk to
such Portfolios if the other party should default on its obligation and the
Portfolio is delayed or prevented from completing the transaction.
Asset-backed Securities. The Asset Allocation Portfolio and Money Market
Portfolio may invest in asset-backed securities, which represent a participation
in, or are secured by and payable from, a stream of payments generated by
particular assets, most often a pool of assets similar to one another, such as
motor vehicle receivables or credit card receivables.
Floating and Variable Rate Securities. The U.S. Government Income Portfolio
and Money Market Portfolio may invest in floating rate securities, whose
interest rates adjust automatically whenever a specified interest rate changes,
and variable rate securities, whose interest rates are periodically adjusted.
Certain of these instruments permit the holder to demand payment of principal
and accrued interest upon a specified number of days' notice from either the
issuer or a third party. As a result of the floating or variable rate nature of
these investments, each such Portfolio's yield may decline and it may forego the
opportunity for capital appreciation during periods when interest rates decline;
however, during periods when interest rates increase, the Portfolio's yield may
increase and it may have reduced risk of capital depreciation. Demand features
on certain floating or variable rate securities may obligate the Portfolio to
pay a "tender fee" to a third party. Demand features provided by foreign banks
involve certain risks associated with foreign investments.
Indexed Investments. The International Equity Portfolio may invest in
instruments which are indexed to certain specific foreign currency exchange
rates. The terms of such instruments may provide that their principal amounts or
just their coupon interest rates are adjusted upwards or downwards (but not
below zero) at maturity or on established coupon payment dates to reflect
changes in the exchange rate between two or more currencies while the obligation
is outstanding. Such indexed investments entail the risk of loss of principal
and/or interest payments from currency movements in addition to principal risk,
but offer the potential for realizing gains as a result of changes in foreign
currency exchange rates.
Inverse Floaters and Interest Rate Caps. The Asset Allocation Portfolio may
invest in inverse floaters and in securities with interest rate caps. Inverse
floaters are instruments whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index, and their price
may be considerably more volatile than a fixed-rate security. Interest rate caps
are financial instruments under which payments occur if an interest rate index
exceeds a certain predetermined interest rate level, known as the cap rate,
which is tied to a specific index. These financial products will be more
volatile in price than securities which do not include such a structure.
Derivatives and Related Instruments. Each Portfolio other than the Money
Market Portfolio may invest its assets in derivative and related instruments to
hedge various market risks or to increase the
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Portfolio's income or gain. Some of these instruments will be subject to asset
segregation requirements to cover the Portfolio's obligations. Each such
Portfolio may (i) purchase, write and exercise call and put options on
securities and securities indexes (including using options in combination with
securities, other options or derivative instruments) and (ii) enter into futures
contracts and options on futures contracts. Each of the Equity Portfolios may
(i) enter into swaps; (ii) employ forward currency contracts; and (iii) purchase
and sell structured products, which are instruments designed to restructure or
reflect the characteristics of certain other investments. In addition, the Asset
Allocation Portfolio, U.S. Government Income Portfolio and International Equity
Portfolio may employ forward interest rate contracts.
There are a number of risks associated with the use of derivatives and
related instruments and no assurance can be given that any strategy will
succeed. The value of certain derivatives or related instruments in which a
Portfolio invests may be particularly sensitive to changes in prevailing
economic conditions and market value. The ability of a Portfolio to successfully
utilize these instruments may depend in part upon the ability of the Portfolio's
advisers to forecast these factors correctly. Inaccurate forecasts could expose
a Portfolio to a risk of loss. There can be no guarantee that there will be a
correlation between price movements in a hedging instrument and in the portfolio
assets being hedged. The Portfolios are not required to use any hedging
strategies. Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. Derivatives transactions not involving hedging may have
speculative characteristics, involve leverage and result in more risk to a
Portfolio than hedging strategies using the same instruments. There can be no
assurance that a liquid market will exist at a time when a Portfolio seeks to
close out a derivatives position. Activities of large traders in the futures and
securities markets involving arbitrage, "program trading," and other investment
strategies may cause price distortions in derivatives markets. In certain
instances, particularly those involving over-the-counter transactions or forward
contracts, there is a greater potential that a counterparty or broker may
default. In the event of a default, a Portfolio may experience a loss. For
additional information concerning derivatives, related instruments and the
associated risks, see the Statement of Additional Information.
Portfolio Turnover. The frequency of a Portfolio's portfolio transactions
will vary from year to year. A Portfolio's investment policies may lead to
frequent changes in investments, particularly in periods of rapidly changing
market conditions. High portfolio turnover rates would generally result in
higher transaction costs, including brokerage commissions or dealer mark-ups,
and would make it more difficult for a Portfolio to qualify as a registered
investment company under federal tax law. It is intended that the Money Market
Portfolio will be fully managed by buying and selling securities, as well as
holding securities to maturity. In managing the Money Market Portfolio, the
Portfolio's advisers will seek to take advantage of market developments, yield
disparities and variations in the creditworthiness of investors. See "How
Distributions are Made; Tax Information" and "Other Information Concerning the
Fund--Certain Regulatory Matters."
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET PORTFOLIO
Participation Certificates. The Money Market Portfolio may invest in
participation certificates and certificates of indebtedness or safekeeping.
Participation certificates are pro rata interests in securities held by others;
certificates of indebtedness or safekeeping are documentary receipts for such
original securities held in custody by others. As a result of the floating or
variable rate nature of these investments, the Portfolio's yield may decline and
it may forego the opportunity for capital appreciation during periods when
interest rates decline; however, during periods when interest rates increase,
the Portfolio's yield may increase and it may have reduced risk of capital
depreciation. Demand features on certain floating or variable rate securities
may obligate the Portfolio to pay a "tender fee" to a third party. Demand
features provided by foreign banks involve certain risks associated with foreign
investments.
Bank Obligations. Bank obligations include certificates of deposit, time
deposits and bankers' acceptances issued or guaranteed by U.S. banks (including
their foreign branches) and foreign banks
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(including their U.S. branches). These obligations may be general obligations of
the parent bank or may be limited to the issuing branch by the terms of the
specific obligation or by government regulation. Foreign bank obligations
involve certain risks associated with foreign investing.
Municipal Obligations. The Money Market Portfolio may invest in
high-quality, short-term municipal obligations that carry yields that are
competitive with those of other types of money market instruments in which it
may invest. Dividends paid by the Portfolio that are derived from interest on
municipal obligations will be taxable to shareholders for federal income tax
purposes.
Custodial Receipts. The Portfolio may acquire securities in the form of
custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. Treasury notes or bonds in connection
with programs sponsored by banks and brokerage firms. These are not deemed U.S.
Government securities. These note and bonds are held in custody by a bank on
behalf of the owners of the receipts.
Effect of Rule 2a-7 on Portfolio Management. The management of the Money
Market Portfolio is intended to comply with the provisions of Rule 2a-7 under
the 1940 Act (the "Rule") under which, if a Portfolio meets certain conditions,
it may use the "amortized cost" method of valuing its securities. Under the
Rule, the maturity of an instrument is generally considered to be its stated
maturity (or in the case of an instrument called for redemption, the date on
which the redemption payment must be made), with special exceptions for certain
kinds of instruments. Repurchase agreements and securities loan agreements are,
in general, treated as having a maturity equal to the period remaining until
they can be executed.
In accordance with the provisions of the Rule, the Money Market Portfolio
must: (i) maintain a dollar weighted average portfolio maturity (see above) not
in excess of 90 days; (ii) limit its investments, including repurchase
agreements, to those instruments which are denominated in U.S. dollars, which
the Board of Trustees determines present minimal credit risks, and which are of
"high quality" as determined by at least two major rating services; or, in the
case of any instrument that is split-rated or not rated, of comparable quality
as determined by the Board; and (iii) not purchase any instruments with a
remaining maturity (see above) of more than 397 days. The Rule also contains
special provisions as to the maturity of variable rate and floating rate
instruments.
LIMITING INVESTMENT RISKS
Specific investment restrictions help the Portfolios limit investment risks
for the Portfolios' shareholders. These restrictions prohibit the Portfolio
from: (a) investing more than 15% of its net assets (10% in the case of the
Money Market Portfolio) in illiquid securities (which include securities
restricted as to resale unless they are determined to be readily marketable in
accordance with procedures established by the Board of Trustees of the Trust);
or (b) investing more than 25% of its total assets in any one industry
(excluding U.S. Government obligations and, with respect to the Money Market
Portfolio, bank obligations). In addition, the Money Market Portfolio, with
certain limited exceptions, is prohibited from investing more than 5% of its net
assets in the securities of any one issuer (other than U.S. Government
obligations). The Asset Allocation Portfolio, with respect to 75% of its total
assets, is prohibited from investing more than 5% of its net assets in the
securities of any one issuer (other than U.S. Government obligations) or holding
more than 10% of the voting securities of any one issuer. A complete description
of these and other investment policies is included in the Statement of
Additional Information. Except for restriction (b) above and investment policies
designated as fundamental in the Statement of Additional Information, the
investment policies of the Portfolio are not fundamental. The Trustees may
change any non-fundamental investment policy without shareholder approval.
However, in the event of a change in the investment objective of a Portfolio,
such Portfolio's shareholders will be given at least 30 days' prior written
notice.
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Risk Factors. No Portfolio constitutes a complete investment program, and
an investment in certain funds may not be appropriate for all investors. The net
asset value of the shares of each Portfolio other than the Money Market
Portfolio can be expected to fluctuate based on the value of the securities in
the Portfolio's portfolio. There can be no assurance that the Money Market
Portfolio will be able to maintain a stable net asset value. Each Equity
Portfolio is subject to the general risks and considerations associated with
equity investing, as well as the risks discussed herein. The Asset Allocation
Portfolio, U.S. Government Income Portfolio and Money Market Portfolio are also
subject to the general risks and considerations associated with fixed income
investing.
The performance of the Portfolios, to the extent they invest in convertible
and/or fixed income securities, as applicable, will depend in part on interest
rate changes. As interest rates increase, the value of the fixed income
securities held by a Portfolio tends to decrease. This effect will be more
pronounced with respect to investments by certain Portfolios in mortgage-related
securities, the value of which are more sensitive to interest rate changes. To
the extent a Portfolio invests in fixed income securities with longer
maturities, the volatility of the Portfolio in response to changes in interest
rates can be expected to be greater than if the Portfolio had invested in
comparable securities with shorter maturities. The performance of the Portfolios
will also depend on the quality of these investments. While securities issued or
guaranteed by the U.S. Government generally are of high quality, the other fixed
income securities in which certain Portfolios may invest, while of
investment-grade quality, may be of lesser credit quality. Securities rated in
the category Baa by Moody's or BBB by S&P lack certain investment
characteristics and may have speculative characteristics. Guarantees of
principal and interest on obligations that may be purchased by the Portfolios
are not guarantees of the market value of such obligations, nor do they extend
to the value of shares in the Portfolios. In addition, with respect to a
Portfolio's investments in convertible securities, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common or preferred stock.
To the extent permitted by their investment objective and policies, the
Equity Portfolios may invest in the securities of small or mid cap companies.
The securities of small to mid cap companies often trade less frequently and in
more limited volume, and may be subject to more abrupt or erratic price
movements, than securities of larger, more established companies. Such companies
may have limited product lines, markets or financial resources, or may depend on
a limited management group.
As the International Equity Portfolio invests primarily in equity
securities of companies outside the U.S., an investment in the Portfolio's
shares involves a higher degree of risk than an investment in a U.S. equity
fund. See "Other Investment Practices--Foreign Securities" above. Investments in
securities of issuers based in developing countries entails certain additional
risks, including greater risks of expropriation, confiscatory taxation,
nationalization, and less social, political and economic stability. The small
size of markets for securities of issuers based in such countries and the low or
non-existent volume of trading may result in a lack of liquidity and in price
volatility. Certain national policies may restrict the investment opportunities,
including restrictions on investing in issuers or industries deemed sensitive to
relevant national interests. There may be an absence of developed legal
structures governing private or foreign investment and private property.
The Money Market Portfolio is permitted to invest any portion of its assets
in obligations of domestic banks (including their foreign branches), and in
obligations of foreign issuers. The ability to concentrate in the banking
industry may involve certain credit risks, such as defaults or downgrades, if at
some future date adverse economic conditions prevail in such industry. U.S.
banks are subject to extensive governmental regulations which may limit both the
amount and types of loans which may be made and interest rates which may be
charged. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financing
lending operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry. Securities issued by
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foreign banks, foreign branches of U.S. banks and foreign governmental and
private issuers involve investment risks in addition to those of obligations of
domestic issuers, including risks relating to future political and economic
developments, more limited liquidity of foreign obligations than comparable
domestic obligations, the possible imposition of withholding taxes on interest
income, the possible seizure or nationalization of foreign assets, and the
possible establishment of exchange controls or other restrictions. There may be
less publicly available information concerning foreign issuers, there may be
difficulties in obtaining or enforcing a judgment against a foreign issuer
(including branches), and accounting, auditing and financial reporting standards
and practices may differ from those applicable to U.S. issuers. In addition,
foreign banks are not subject to regulations comparable to U.S. banking
regulations.
Because the International Equity Portfolio, Capital Growth Portfolio and
Growth and Income Portfolio are "non-diversified," the value of such Portfolios'
shares is more susceptible to developments affecting issuers in which such
Portfolios invest.
For a discussion of certain other risks associated with each Portfolio's
additional investment activities, see "Other Investment Practices" above.
MANAGEMENT
THE PORTFOLIO'S ADVISERS
The Chase Manhattan Bank ("Chase") acts as investment adviser to the
Portfolios pursuant to an Investment Advisory Agreement and has overall
responsibility for investment decisions of the Portfolios, subject to the
oversight of the Board of Trustees. Chase is a wholly-owned subsidiary of The
Chase Manhattan Corporation, a bank holding company. Chase and its predecessors
have over 100 years of money management experience. For its investment advisory
services to the Portfolios, Chase is entitled to receive an annual fee computed
daily and paid monthly based at an annual rate equal to 0.80%, 0.60%, 0.60%,
0.55%, 0.50% and 0.25% of the average daily net assets of the International
Equity Portfolio, Capital Growth Portfolio, Growth and Income Portfolio, Asset
Allocation Portfolio, U.S. Government Income Portfolio and Money Market
Portfolio, respectively. Chase is located at 270 Park Avenue, New York, New York
10017.
Chase Asset Management, Inc. ("CAM"), a registered investment adviser, is
the sub-investment adviser to each of the Portfolios other than International
Equity Portfolio pursuant to a Sub-Investment Advisory Agreement between CAM and
Chase. CAM is a wholly-owned operating subsidiary of Chase. CAM makes investment
decisions for the Portfolios on a day-to-day basis. For these services, CAM is
entitled to receive a fee, payable by Chase from its advisory fee, at an annual
rate equal to 0.30%, 0.30%, 0.25%, 0.25% and 0.10% of the average daily net
assets of the Capital Growth Portfolio, Growth and Income Portfolio, Asset
Allocation Portfolio, U.S. Government Income Portfolio and Money Market
Portfolio. CAM was recently formed for the purpose of providing discretionary
investment advisory services to institutional clients and to consolidate Chase's
investment management function. The same individuals who serve as portfolio
managers for Chase also serve as portfolio managers for CAM. CAM is located at
1211 Avenue of the Americas, New York, New York 10036.
Chase Asset Management (London) Limited ("CAM London"), a registered
investment adviser, is the sub-investment adviser to the International Equity
Portfolio pursuant to a Sub-Investment Advisory Agreement between CAM London and
Chase. CAM London is a wholly-owned operating subsidiary of Chase. CAM London
makes investment decisions for the Portfolio on a day-to-day basis. For these
services, CAM London is entitled to receive a fee, payable by Chase from its
advisory fee, at an annual rate equal to 0.40% of the average daily net assets
of the International Equity Portfolio. CAM London was recently formed for the
purpose of providing discretionary investment advisory services to institutional
clients and to consolidate Chase's investment management function. The same
individuals who serve as
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portfolio managers for Chase with respect to the International Equity Portfolio
also serve as portfolio managers for CAM London. CAM London is located at
Colvile House, 32 Curzon Street, London W1Y 8AL.
Portfolio Managers. Michael Browne and David Webb, Vice Presidents of
Chase, are responsible for the day-to-day management of the International Equity
Portfolio. Mr. Browne is responsible for investment management and equity
research for European equities. Mr. Browne joined Chase in 1994. Prior to
joining Chase, Mr. Browne was Assistant Director of European equity fund
management at BZW Investment Management in London. Mr. Webb is responsible for
investment management and equity research in the Asia region. Mr. Webb joined
Chase in 1992. Prior to joining Chase, Mr. Webb was with Hambros Bank Limited
where he was responsible for the management of the Hambros Equus Pacific Japan
and Hambros Japan Trust.
David Klassen, Director of Domestic Equity Management at Chase, is
responsible for the day-to-day management of the Capital Growth Portfolio. Mr.
Klassen joined Chase in March 1992 and, in addition to managing the Portfolio,
manages a number of other mutual funds at Chase. Prior to joining Chase, Mr.
Klassen was a vice president and portfolio manager at Dean Witter Reynolds,
responsible for managing several mutual funds and other accounts.
Greg Adams, Vice President of Chase, is responsible for the day-to-day
management of the Growth and Income Portfolio. Mr. Adams joined Chase in 1987
and has been responsible for overseeing the proprietary computer model program
used in the U.S. equity selection process. Mr. Adams manages a number of mutual
funds at Chase.
Susan Huang, Vice President and Director of Fixed Income Management at
Chase, and Mr. Adams, are responsible for the day-to-day management of the Asset
Allocation Portfolio. Ms. Huang is responsible for developing the allocation and
risk management strategy for U.S. fixed-income portfolios, and managing the
institutional U.S. fixed income assets under management. Prior to joining Chase
in June of 1995, Ms. Huang was Director of the Insurance Asset Management Group
at Hyperion Capital Management, Inc. Prior to joining Hyperion, Ms. Huang was a
senior portfolio manager with CS First Boston Investment Management Inc.
Ms. Huang is responsible for the day-to-day management of the U.S.
Government Income Portfolio.
HOW TO PURCHASE AND REDEEM SHARES
Shares of the Trust currently are offered only to the Variable Annuity
Account Two, a separate account of Anchor National Life Insurance Company and FS
Variable Annuity Account Two, a separate account of First SunAmerica Life
Insurance Company. Variable Annuity Account Two and FS Variable Annuity Account
Two are referred to as the "Accounts" and Anchor National Life Insurance Company
and First SunAmerica Life Insurance Company are referred to as the "Life
Companies." At present, Trust shares are used as the investment vehicle for
variable annuity contracts only. Shares of the Trust may be offered to separate
accounts of other life insurance companies which are affiliates of the Life
Companies.
All shares of each Portfolio may be purchased or redeemed by the Accounts
without any sales or redemption charge at the next computed net asset value on
any business day during which the New York Stock Exchange (and, with respect to
the Money Market Portfolio, the Federal Reserve Bank of New York) is open for
business. Purchases and redemptions are made subsequent to corresponding
purchases and redemptions of units of the Accounts without delay. Withdrawals
from the Accounts will incur fees or charges described more fully in the
applicable contract prospectus.
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Except in extraordinary circumstances and as permissible under the 1940
Act, the redemption proceeds are paid on or before the seventh day following the
request for redemption, as described more fully in the applicable contract
prospectus.
HOW THE PORTFOLIOS VALUE THEIR SHARES
The net asset value of each Portfolio's shares is determined once daily
based upon prices determined as of the close of regular trading on the New York
Stock Exchange (normally 4:00 p.m., Eastern time, however, options are priced at
4:15 p.m., Eastern time), on each business day of that Portfolio, by dividing
the net assets of the Portfolio by the total number of outstanding shares of
that Portfolio. Values of assets held by each Portfolio other than the Money
Market Portfolio are determined on the basis of their market or other fair
value, as described in the Statement of Additional Information except that
short-term securities with 60 days or less to maturity are valued on an
amortized cost basis.
The portfolio securities of the Money Market Portfolio are valued at their
amortized cost in accordance with federal securities laws, certain requirements
of which are summarized under "Portfolio Objectives and Investment
Approach-Money Market Portfolio." This method increases stability in valuation,
but may result in periods during which the stated value of a portfolio security
is higher or lower than the price the Portfolio would receive if the instrument
were sold. It is anticipated that the net asset value of each share of the Money
Market Portfolio will remain constant at $1.00 and the Portfolio will employ
specific investment policies and procedures to accomplish this result, although
no assurance can be given that they will be able to do so on a continuing basis.
The Board of Trustees will review the holdings of the Portfolio at intervals it
deems appropriate to determine whether the Portfolio's net asset value
calculated by using available market quotations (or an appropriate substitute
which reflects current market conditions) deviates from $1.00 per share based
upon amortized cost. In the event the Trustees determine that a deviation exists
that may result in material dilution or other unfair results to investors or
existing shareholders, the Trustees will take such corrective action as they
regard as necessary and appropriate.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Portfolios. Each Portfolio intends to qualify as a regulated investment
company by satisfying the requirements under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), concerning the diversification of
assets, distribution of income, and sources of income. When a Portfolio
qualifies as a regulated investment company and all of its taxable income is
distributed in accordance with the timing requirements imposed by the Code, the
Portfolio will not be subject to Federal income tax. If, however, for any
taxable year a Portfolio does not qualify as a regulated investment company,
then all of its taxable income will be subject to tax at regular corporate rates
(without any deduction for distributions to the Accounts), and such
distributions will constitute taxable dividends of the Portfolio's current and
accumulated earnings and profits.
Each Portfolio of the Trust is also subject to asset diversification
regulations prescribed by the U.S. Treasury Department under the Code. These
regulations generally provide that, as of the end of each calendar quarter or
within 30 days thereafter, no more than 55% of the total assets of the Portfolio
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 this purpose, all securities of the same issuer are
considered a single investment, but each U.S. agency or instrumentality is
treated as a separate issuer. If a Portfolio fails to comply with these
regulations, the contracts invested in that Portfolio will not be treated as
annuity, endowment or life insurance contracts for tax purposes.
Portfolio Distributions. It is the policy of each Portfolio to distribute
to its shareholders substantially all of its ordinary income and net long-term
capital gains realized during each fiscal year. All distributions are reinvested
in shares of a Portfolio at net asset value unless the transfer agent is
instructed otherwise.
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Distributions by each Portfolio are taxable, if at all, to the Accounts, and not
to contract or policy holders. The Accounts will include distributions in its
taxable income in the year in which they are received (whether paid in cash or
reinvested).
Summary. The foregoing discussion of Federal income tax consequences is
based on tax laws and regulations in effect on the date of this Prospectus, and
is subject to change by legislative or administrative action. The foregoing
discussion also assumes that the Accounts are the owners of the shares and that
policies or contracts qualify as life insurance policies or annuities,
respectively, under the Code. If either of the foregoing requirements are not
met then the contract or policy holders will be treated as recognizing income
prior to actual receipt of monies under the contracts or policies. The foregoing
discussion is for general information only; a more detailed discussion of
Federal income tax considerations is contained in the Statement of Additional
Information. In addition, contract or policy holders must consult the
prospectuses and statements of additional information of their respective
contracts or policies for information concerning the Federal income tax
consequences of owning such contracts or policies.
OTHER INFORMATION CONCERNING THE PORTFOLIOS
ADMINISTRATOR
Chase acts as the Portfolios' administrator and is entitled to receive a
fee computed daily and paid monthly at an annual rate equal to 0.05% of each
Portfolio's average daily net assets.
SUB-ADMINISTRATOR AND DISTRIBUTOR
Vista Fund Distributors, Inc. ("VFD") acts as the Portfolios'
sub-administrator and distributor. VFD is a subsidiary of the BISYS Group, Inc.
and is unaffiliated with Chase. For the sub-administrative services it provides
VFD is entitled to receive a fee from each Portfolio at an annual rate equal to
0.15% of the Portfolios' average daily net assets. VFD has agreed to use a
portion of this fee to pay for certain expenses incurred in connection with
organizing new series of the Trust and certain other ongoing expenses of the
Trust. VFD is located at 101 Park Avenue, New York, New York 10178.
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company ("State Street") acts as transfer agent
and dividend disbursing agent for the Portfolios and receives compensation under
an agreement with the Trust. Chase acts as custodian for the Portfolios and
receives compensation under an agreement with the Trust. Chase may sub-contract
for the provision of certain services. In addition, portfolio securities and
cash may be held by sub-custodian banks if such arrangements are reviewed and
approved by the Trustees. State Street's address is 1 Heritage Drive, Quincy, MA
02171.
EXPENSES
Each Portfolio pays the expenses incurred in its operations, including its
pro rata share of expenses of the Trust. These expenses include investment
advisory and administrative fees; the compensation of the Trustees; registration
fees; interest charges; taxes; expenses connected with the execution, recording
and settlement of security transactions; fees and expenses of the Portfolios'
custodian for all services to the Portfolios, including safekeeping of funds and
securities and maintaining required books and accounts; expenses of preparing
and mailing reports to investors and to government offices and commissions;
expenses of meetings of investors; fees and expenses of independent accountants,
of legal counsel and of any transfer agent, registrar or dividend disbursing
agent of the Trust; insurance premiums; and expenses of calculating the net
asset value of, and the net income on, shares of the Portfolio. Service
providers to a Portfolio may, from time to time, voluntarily waive all or a
portion of any fees to which they are entitled.
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ORGANIZATION AND DESCRIPTION OF SHARES
The Portfolios are portfolios of Mutual Fund Variable Annuity Trust, an
open-end management investment company organized as a Massachusetts business
trust in 1994 (the "Trust"). The Trust was established to provide a funding
medium for certain variable annuity contracts issued by the Variable Annuity
Account Two, a separate account of Anchor National Life Insurance Company
("Anchor National"), originally organized under the laws of the State of
California and redomiciled under the laws of the State of Arizona on January 1,
1996 and FS Variable Annuity Account Two, a separate account of First SunAmerica
Life Insurance Company, organized under the laws of the State of New York. The
Trust has reserved the right to create and issue additional series and classes.
Each share of a series or class represents an equal proportionate interest in
that series or class with each other share of that series or class. The shares
of each series or class participate equally in the earnings, dividends and
assets of the particular series or class. Shares have no pre-emptive or
conversion rights. Shares when issued are fully paid and non-assessable, except
as set forth below. Shareholders are entitled to one vote for each whole share
held, and each fractional share shall be entitled to a proportionate fractional
vote, except that Trust shares held in the treasury of the Trust shall not be
voted.
The business and affairs of the Trust are managed under the general
direction and supervision of the Trust's Board of Trustees. The Trust is not
required to hold annual meetings of shareholders but will hold special meetings
of shareholders of all series or classes when in the judgment of the Trustees it
is necessary or desirable to submit matters for a shareholder vote. The Trustees
will promptly call a meeting of shareholders to remove a trustee(s) when
requested to do so in writing by record holders of not less than 10% of all
outstanding shares of the Trust.
Under Massachusetts law, shareholders of such a business trust may, under
certain circumstances, be held personally liable as partners for its
obligations. However, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which both
inadequate insurance existed and the Trust itself was unable to meet its
obligations.
CERTAIN REGULATORY MATTERS
Banking laws, including the Glass-Steagall Act as currently interpreted,
prohibit bank holding companies and their affiliates from sponsoring,
organizing, controlling, or distributing shares of, mutual funds, and generally
prohibit banks from issuing, underwriting, selling or distributing securities.
These laws do not prohibit banks or their affiliates from acting as investment
adviser or administrator. Chase and the Trust believe that Chase (including its
affiliates) may perform the services to be performed by it as described in this
Prospectus without violating such laws. If future changes in these laws or
interpretations required Chase to alter or discontinue any of these services, it
is expected that the Board of Trustees would recommend alternative arrangements
and that investors would not suffer adverse financial consequences. State
securities laws may differ from the interpretations of banking law described
above and banks may be required to register as dealers pursuant to state law.
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Chase and its affiliates may have deposit, loan and other commercial
banking relationships with the issuers of securities purchased on behalf of any
of the Portfolios, including outstanding loans to such issuers which may be
repaid in whole or in part with the proceeds of securities so purchased. Chase
and its affiliates deal, trade and invest for their own accounts in U.S.
Government obligations, municipal obligations and commercial paper and are among
the leading dealers of various types of U.S. Government obligations and
municipal obligations. Chase and its affiliates may sell U.S. Government
obligations and municipal obligations to, and purchase them from, other
investment companies sponsored by the Portfolios' distributor or affiliates of
the distributor. Chase will not invest any Portfolio assets in any U.S.
Government obligations, municipal obligations or commercial paper purchased from
itself or any affiliate, although under certain circumstances such securities
may be purchased from other members of an underwriting syndicate in which Chase
or an affiliate is a non-principal member. This restriction may limit the amount
or type of U.S. Government obligations, municipal obligations or commercial
paper available to be purchased by any Portfolio. Chase has informed the
Portfolios that in making its investment decisions, it does not obtain or use
material inside information in the possession of any other division or
department of Chase, including the division that performs services for the Trust
as custodian, or in the possession of any affiliate of Chase. Shareholders of
the Portfolios should be aware that, subject to applicable legal or regulatory
restrictions, Chase and its affiliates may exchange among themselves certain
information about the shareholder and his account. Transactions with affiliated
broker-dealers will only be executed on an agency basis in accordance with
applicable federal regulations.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to Anchor National Life Insurance
Company, Service Center, P.O. Box 100330, Pasadena, California 91189-0001. For
New York State residents, contact First SunAmerica Life Insurance Company, P.O.
Box 100357, Pasadena, California 91189-0357. All telephone inquiries may be made
to (800) 90-VISTA.
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<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
_____________, 1996
MUTUAL FUND VARIABLE ANNUITY TRUST
INTERNATIONAL EQUITY PORTFOLIO
CAPITAL GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
ASSET ALLOCATION PORTFOLIO
U.S. GOVERNMENT INCOME PORTFOLIO
MONEY MARKET PORTFOLIO
101 Park Avenue, New York, New York 10178
This Statement of Additional Information sets forth information which
may be of interest to investors but which is not necessarily included in the
Prospectus offering shares of the Portfolios. This Statement of Additional
Information should be read in conjunction with the Prospectus offering shares of
the International Equity Portfolio, Capital Growth Portfolio, Growth and Income
Portfolio and Asset Allocation Portfolio (collectively the "Equity Portfolios"),
and the U.S. Government Income Portfolio and Money Market Portfolio
(collectively the "Income Portfolios"). Any references to a "Prospectus" in this
Statement of Additional Information is a reference to the foregoing Prospectus.
This Statement of Additional Information is NOT a prospectus and is authorized
for distribution to prospective investors only if preceded or accompanied by an
effective prospectus.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS DATED __________,
1996, CALL OR WRITE TO:
Anchor National Life Insurance Company
Annuity Service Center
P.O. Box 100357
Pasadena, CA 91189-0357
For New York State residents, write to:
First SunAmerica Life Insurance Company
733 3rd Avenue - 4th Floor
New York, NY 10017
All telephone inquiries may be made to (800) 90-VISTA
<PAGE>
TABLE OF CONTENTS
-----------------
Page
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THE TRUST ................................................................. 3
INVESTMENT POLICIES AND RESTRICTIONS ...................................... 3
PERFORMANCE INFORMATION ................................................... 21
DETERMINATION OF NET ASSET VALUE .......................................... 22
TAX MATTERS ............................................................... 23
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS ................................ 27
INDEPENDENT ACCOUNTANTS ................................................... 35
GENERAL INFORMATION ....................................................... 36
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES ............................................. A-1
APPENDIX B
DESCRIPTION OF RATINGS .................................................... B-1
FINANCIAL STATEMENTS ...................................................... F-1
<PAGE>
3
THE TRUST
The Mutual Fund Variable Annuity Trust (the "Trust"), organized as a
Massachusetts business trust on April 14, 1994, is an open-end management
investment company. The Trust presently consists of six separate portfolios (the
"Portfolios"). Shares of the Trust are issued and redeemed only for certain
annuity contracts issued by the Variable Annuity Account Two, a separate account
of Anchor National Life Insurance Company, organized under the laws of the State
of California, and FS Variable Annuity Account Two, a separate account of First
SunAmerica Life Insurance Company, organized under the laws of the State of New
York. Variable Annuity Account Two and FS Variable Annuity Account Two are
referred to as the "Accounts" and Anchor National Life Insurance Company and
First SunAmerica Life Insurance Company are referred to as the "Life Companies."
The Board of Trustees of the Trust provides broad supervision over the
affairs of the Trust, including the Portfolios. The Chase Manhattan Bank
("Chase") is the investment adviser (the "Adviser") for each Portfolio. Chase
Asset Management, Inc. ("CAM"), an investment adviser subsidiary of Chase, is
the sub-investment adviser to the Portfolios, other than the International
Equity Portfolio. Chase Asset Management (London) Limited ("CAM London"), a
registered investment adviser, is the sub-investment adviser to the
International Equity Portfolio. Chase also serves as the Trust's administrator
(the "Administrator") and supervises the overall administration of the Trust,
including the Portfolios.
INVESTMENT POLICIES AND RESTRICTIONS
Investment Policies
The Prospectus sets forth the various investment policies of each
Portfolio. The following information supplements and should be read in
conjunction with the related sections of the Prospectus. For descriptions of the
securities ratings of Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P") and Fitch Investors Service, Inc. ("Fitch"), see
Appendix B.
U.S. Government Securities. U.S. Government Securities include (1) U.S.
Treasury obligations, which generally differ only in their interest rates,
maturities and times of issuance, including: U.S. Treasury bills (maturities of
one year or less), U.S. Treasury notes (maturities of one to ten years) and U.S.
Treasury bonds (generally maturities of greater than ten years); and (2)
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow any
amount listed to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality. Agencies and instrumentalities of the U.S. Government
include but are not limited to: Federal Land Banks, Federal Financing Banks,
Banks for Cooperatives, Federal Intermediate Credit Banks, Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal
National Mortgage Association, Student Loan Marketing Association, United States
Postal Service, Chrysler Corporate Loan Guarantee Board, Small Business
Administration, Tennessee Valley Authority and any other enterprise established
or sponsored by the U.S. Government. Certain U.S. Government Securities,
including U.S. Treasury bills, notes and bonds, Government National Mortgage
Association certificates and Federal Housing Administration debentures, are
supported by the full faith and credit of the United States. Other U.S.
Government Securities are issued or guaranteed by federal agencies or government
sponsored enterprises and are not supported by the full faith and credit of the
United States. These securities include obligations that are supported by the
right of the issuer to borrow from the U.S. Treasury, such as obligations of the
Federal Home Loan Banks, and obligations that are supported by the
creditworthiness of the particular instrumentality, such as obligations of the
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation.
For a description of certain obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, see Appendix A.
In addition, certain U.S. Government agencies and instrumentalities
issue specialized types of securities, such as guaranteed notes of the Small
Business Administration, Federal Aviation Administration, Department of Defense,
Bureau of Indian Affairs and Private Export Funding Corporation, which often
provide higher yields than are
<PAGE>
4
available from the more common types of government-backed instruments. However,
such specialized instruments may only be available from a few sources, in
limited amounts, or only in very large denominations; they may also require
specialized capability in portfolio servicing and in legal matters related to
government guarantees. While they may frequently offer attractive yields, the
limited-activity markets of many of these securities means that, if a Portfolio
were required to liquidate any of them, it might not be able to do so
advantageously; accordingly, each Portfolio invests in such securities normally
to hold such securities to maturity or pursuant to repurchase agreements, and
would treat such securities (including repurchase agreements maturing in more
than seven days) as illiquid for purposes of its limitation on investment in
illiquid securities.
Bank Obligations. Investments in bank obligations are limited to those
of U.S. banks (including their foreign branches) which have total assets at the
time of purchase in excess of $1 billion and the deposits of which are insured
by either the Bank Insurance Fund or the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation, and foreign banks (including their
U.S. branches) having total assets in excess of $10 billion (or the equivalent
in other currencies), and such other U.S. and foreign commercial banks which are
judged by the advisers to meet comparable credit standing criteria.
Bank obligations include negotiable certificates of deposit, bankers'
acceptances, fixed time deposits and deposit notes. A certificate of deposit is
a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of United States banks or foreign banks
which are payable at a stated maturity date and bear a fixed rate of interest.
Although fixed time deposits do not have a market, there are no contractual
restrictions on the right to transfer a beneficial interest in the deposit to a
third party. Fixed time deposits subject to withdrawal penalties and with
respect to which a Portfolio cannot realize the proceeds thereon within seven
days are deemed "illiquid" for purposes of its restriction on investments in
illiquid securities. Deposit notes are notes issued by commercial banks which
generally bear fixed rates of interest and typically have original maturities
ranging from eighteen months to five years.
Banks are subject to extensive governmental regulations that may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations. Bank obligations may be general obligations of the parent
bank or may be limited to the issuing branch by the terms of the specific
obligations or by government regulation. Investors should also be aware that
securities of foreign banks and foreign branches of United States banks may
involve foreign investment risks in addition to those relating to domestic bank
obligations.
Depositary Receipts. A Portfolio will limit its investment in
Depositary Receipts not sponsored by the issuer of the underlying security to no
more than 5% of the value of its net assets (at the time of investment). A
purchaser of an unsponsored Depositary Receipt may not have unlimited voting
rights and may not receive as much information about the issuer of the
underlying securities as with a sponsored Depositary Receipt.
ECU Obligations. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Trustees do not
believe that such adjustments will adversely affect holders of ECU-denominated
securities or the marketability of such securities.
Supranational Obligations. Supranational organizations, include
organizations such as the World Bank, which was chartered to finance development
projects in developing member countries; the European Community, which is a
multinational organization engaged in cooperative economic activities; the
European Coal and Steel Community, which is an economic union of various
European nations' steel and coal industries; and the Asian
<PAGE>
5
Development Bank, which is an international development bank established to lend
funds, promote investment and provide technical assistance to member nations of
the Asian and Pacific regions.
Corporate Reorganizations. In general, securities that are the subject
of a tender or exchange offer or proposal sell at a premium to their historic
market price immediately prior to the announcement of the offer or proposal. The
increased market price of these securities may also discount what the stated or
appraised value of the security would be if the contemplated action were
approved or consummated. These investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
must appraise not only the value of the issuer and its component businesses as
well as the assets or securities to be received as a result of the contemplated
transaction, but also the financial resources and business motivation of the
offeror as well as the dynamics of the business climate when the offer or
proposal is in progress. Investments in reorganization securities may tend to
increase the turnover ratio of a Portfolio and increase its brokerage and other
transaction expenses.
Warrants and Rights. Warrants basically are options to purchase equity
securities at a specified price for a specific period of time. Their prices do
not necessarily move parallel to the prices of the underlying securities. Rights
are similar to warrants but normally have a shorter duration and are distributed
directly by the issuer to shareholders. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
Commercial Paper. Commercial paper consists of short-term (usually from
1 to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
The commercial paper and other short-term obligations of U.S. and
foreign corporations which may be purchased by the Money Market Portfolio, other
than those of bank holding companies, include obligations which are (i) rated
Prime-1 by Moody's, A-1 by S&P, or F-1 by Fitch, or comparably rated by another
national statistical rating organization ("NRO"); or (ii) determined by the
advisers to be of comparable quality to those rated obligations which may be
purchased by the Money Market Portfolio at the date of purchase or which at the
date of purchase have an outstanding debt issue rated in the highest rating
category by Moody's, S&P, Fitch or another NRO. The commercial paper and other
short-term obligations of U.S. bank holding companies which may be purchased by
the Money Market Portfolio include obligations issued or guaranteed by bank
holding companies with total assets exceeding $1 billion. For purposes of the
size standards with respect to banks and bank holding companies, "total
deposits" and "total assets" are determined on an annual basis by reference to
an institution's then most recent annual financial statements.
Repurchase Agreements. A Portfolio will enter into repurchase
agreements only with member banks of the Federal Reserve System and securities
dealers believed creditworthy, and only if fully collateralized by securities in
which the Portfolio is permitted to invest. Under the terms of a typical
repurchase agreement, a Portfolio would acquire an underlying instrument for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase the instrument and the Portfolio to
resell the instrument at a fixed price and time, thereby determining the yield
during the Portfolio's holding period. This procedure results in a fixed rate of
return insulated from market fluctuations during such period. A repurchase
agreement is subject to the risk that the seller may fail to repurchase the
security. Repurchase agreements are considered under the 1940 Act to be loans
collateralized by the underlying securities. All repurchase agreements entered
into by a Portfolio will be fully collateralized at all times during the period
of the agreement in that the value of the underlying security will be at least
equal to 102% of the amount of the loan, including the accrued interest thereon,
and the Portfolio or its custodian or sub-custodian will have possession of the
collateral, which the Board of Trustees believes will give it a valid, perfected
security interest in the collateral. Whether a repurchase agreement is the
purchase and sale of a security or a collateralized loan has not been
conclusively established. This might become an issue in the event of
<PAGE>
6
the bankruptcy of the other party to the transaction. In the event of default by
the seller under a repurchase agreement construed to be a collateralized loan,
the underlying securities would not be owned by the Portfolio, but would only
constitute collateral for the seller's obligation to pay the repurchase price.
Therefore, a Portfolio may suffer time delays and incur costs in connection with
the disposition of the collateral. The Board of Trustees believes that the
collateral underlying repurchase agreements may be more susceptible to claims of
the seller's creditors than would be the case with securities owned by the
Portfolio. Repurchase agreements maturing in more than seven days are treated as
illiquid for purposes of the Portfolios' restrictions on purchases of illiquid
securities. Repurchase agreements are also subject to the same risks described
below with respect to stand-by commitments.
Reverse Repurchase Agreements. Reverse repurchase agreements involve
the sale of securities held by a Portfolio with an agreement to repurchase the
securities at an agreed upon price and date. The repurchase price is generally
equal to the original sales price plus interest. Reverse repurchase agreements
are usually for seven days or less and cannot be repaid prior to their
expiration dates. Reverse repurchase agreements involve the risk that the market
value of the portfolio securities transferred may decline below the price at
which the Portfolio is obliged to purchase the securities. A Portfolio retains
record ownership and the right to receive interest and principal payments on the
portfolio security involved. The Money Market Portfolio will enter into such
transactions only with member banks of the Federal Reserve System or securities
dealers believed creditworthy.
Forward Commitments. In order to invest a Portfolio's assets
immediately, while awaiting delivery of securities purchased on a forward
commitment basis, short-term obligations that offer same-day settlement and
earnings will normally be purchased. When a commitment to purchase a security on
a forward commitment basis is made, procedures are established consistent with
the General Statement of Policy of the Securities and Exchange Commission
concerning such purchases. Since that policy currently recommends that an amount
of the respective Portfolio's assets equal to the amount of the purchase be held
aside or segregated to be used to pay for the commitment, a separate account of
the Portfolio consisting of cash, cash equivalents or high quality debt
securities equal to the amount of the Portfolio's commitments to purchase
"when-issued" or "forward delivery" securities will be established at the
Portfolio's custodian bank. For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be valued at market
value. If the market value of such securities declines, additional cash, cash
equivalents or highly liquid securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
respective Portfolio.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the respective Portfolio's
portfolio are subject to changes in value based upon the public's perception of
the issuer and changes, real or anticipated, in the level of interest rates.
Purchasing securities on a forward commitment basis can involve the risk that
the yields available in the market when the delivery takes place may actually be
higher or lower than those obtained in the transaction itself. On the settlement
date of the forward commitment transaction, the respective Portfolio will meet
its obligations from then available cash flow, sale of securities held in the
separate account, sale of other securities or, although it would not normally
expect to do so, from sale of the forward commitment securities themselves
(which may have a value greater or lesser than the Portfolio's payment
obligations). The sale of securities to meet such obligations may result in the
realization of capital gains or losses.
To the extent a Portfolio engages in forward commitment transactions,
it will do so for the purpose of acquiring securities consistent with its
investment objective and policies and not for the purpose of investment
leverage, and settlement of such transactions will be within 90 days from the
trade date.
Floating and Variable Rate Securities; Participation Certificates.
Floating and variable rate demand instruments permit the holder to demand
payment upon a specified number of days' notice of the unpaid principal balance
plus accrued interest either from the issuer or by drawing on a bank letter of
credit, a guarantee or insurance issued with respect to such instrument. While
there is usually no established secondary market for issues of these types of
securities, the dealer that sells an issue of such security frequently will also
offer to repurchase the securities at any time at a repurchase price which
varies and may be more or less than the amount the holder paid for them.
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7
The floating or variable rate demand instruments in which the Money Market
Portfolio may invest are payable on demand on not more than seven calendar days'
notice.
The terms of these types of securities commonly provide that interest
rates are adjustable at intervals ranging from daily to up to six months and the
adjustments are based upon the prime rate of a bank or other short-term rates,
such as Treasury Bills or LIBOR (London Interbank Offered Rate), as provided in
the respective instruments. A Portfolio will decide which variable rate
securities to purchase in accordance with procedures prescribed by Board of
Trustees of the Trust in order to minimize credit risks.
In the case of the Money Market Portfolio, the Board of Trustees may
determine that an unrated floating or variable rate security meets the
Portfolio's high quality criteria if it is backed by a letter of credit or
guarantee or is insured by an insurer that meets such quality criteria, or on
the basis of a credit evaluation of the underlying obligor. If the credit of the
obligor is of "high quality," no credit support from a bank or other financial
institution will be necessary. The Board of Trustees will re-evaluate each
unrated floating or variable rate security on a quarterly basis to determine
that it continues to meet the Money Market Portfolio's high quality criteria. If
an instrument is ever deemed to fall below the Money Market Portfolio's high
quality standards, either it will be sold in the market or the demand feature
will be exercised.
The securities in which the Money Market Portfolio may be invested
include participation certificates issued by a bank, insurance company or other
financial institution in securities owned by such institutions or affiliated
organizations ("Participation Certificates"). A Participation Certificate gives
the Money Market Portfolio an undivided interest in the security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the security and generally provides the demand feature
described below. Each Participation Certificate is backed by an irrevocable
letter of credit or guaranty of a bank (which may be the bank issuing the
Participation Certificate, a bank issuing a confirming letter of credit to that
of the issuing bank, or a bank serving as agent of the issuing bank with respect
to the possible repurchase of the Participation Certificate) or insurance policy
of an insurance company that the Board of Trustees of the Trust has determined
meets the prescribed quality standards for the Money Market Portfolio.
The Money Market Portfolio may have the right to sell the Participation
Certificate back to the institution and draw on the letter of credit or
insurance on demand after the prescribed notice period, for all or any part of
the full principal amount of the Portfolio's participation interest in the
security, plus accrued interest. The institutions issuing the Participation
Certificates would retain a service and letter of credit fee and a fee for
providing the demand feature, in an amount equal to the excess of the interest
paid on the instruments over the negotiated yield at which the Participation
Certificates were purchased by the Portfolio. The total fees generally range
from 5% to 15% of the applicable prime rate or other short-term rate index. With
respect to insurance, the Money Market Portfolio will attempt to have the issuer
of the participation certificate bear the cost of any such insurance, although
the Portfolio retains the option to purchase insurance if deemed appropriate.
Obligations that have a demand feature permitting the Portfolio to tender the
obligation to a foreign bank may involve certain risks associated with foreign
investment. The Portfolio's ability to receive payment in such circumstances
under the demand feature from such foreign banks may involve certain risks such
as future political and economic developments, the possible establishment of
laws or restrictions that might adversely affect the payment of the bank's
obligations under the demand feature and the difficulty of obtaining or
enforcing a judgment against the bank.
The advisers have been instructed by the Board of Trustees to monitor
on an ongoing basis the pricing, quality and liquidity of the floating and
variable rate securities held by the Portfolios, including Participation
Certificates, on the basis of published financial information and reports of the
rating agencies and other bank analytical services to which the Portfolios may
subscribe. Although these instruments may be sold by a Portfolio, it is intended
that they be held until maturity.
Past periods of high inflation, together with the fiscal measures
adopted to attempt to deal with it, have seen wide fluctuations in interest
rates, particularly "prime rates" charged by banks. While the value of the
underlying floating or variable rate securities may change with changes in
interest rates generally, the floating or variable rate nature of the underlying
floating or variable rate securities should minimize changes in value of the
instruments.
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Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed income securities. A Portfolio's portfolio
may contain floating or variable rate securities on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such variable rate securities may fluctuate; to the extent it does,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Because the adjustment of interest rates on the variable
rate securities is made in relation to movements of the applicable banks' "prime
rates" or other short-term rate adjustment indices, the floating or variable
rate securities are not comparable to long-term fixed rate securities.
Accordingly, interest rates on the floating or variable rate securities may be
higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
The maturity of variable rate securities is deemed to be the longer of
(i) the notice period required before a Portfolio is entitled to receive payment
of the principal amount of the security upon demand or (ii) the period remaining
until the security's next interest rate adjustment. With respect to the Money
Market Portfolio, the maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Portfolio's
dollar-weighted average portfolio maturity.
Zero Coupon, Payment-in-Kind and Stripped Obligations. The principal
and interest components of United States Treasury bonds with remaining
maturities of longer than ten years are eligible to be traded independently
under the Separate Trading of Registered Interest and Principal of Securities
("STRIPS") program. Under the STRIPS program, the principal and interest
components are separately issued by the United States Treasury at the request of
depository financial institutions, which then trade the component parts
separately. The interest component of STRIPS may be more volatile than that of
United States Treasury bills with comparable maturities.
Zero coupon obligations are sold at a substantial discount from their
value at maturity and, when held to maturity, their entire return, which
consists of the amortization of discount, comes from the difference between
their purchase price and maturity value. Because interest on a zero coupon
obligation is not distributed on a current basis, the obligation tends to be
subject to greater fluctuations in response to changes in interest rates than
are ordinary interest-paying securities with similar maturities. The value of
zero coupon obligations appreciates more than such ordinary interest-paying
securities during periods of declining interest rates and depreciates more
during periods of rising interest rates. Under the stripped bond rules of the
Internal Revenue Code of 1986, as amended, investments by a Portfolio in zero
coupon obligations will result in the accrual of interest income on such
investments in advance of the receipt of the cash corresponding to such income.
Zero coupon securities may be created when a dealer deposits a U.S.
Treasury or federal agency security with a custodian and then sells the coupon
payments and principal payment that will be generated by this security
separately. Proprietary receipts, such as Certificates of Accrual on Treasury
Securities, Treasury Investment Growth Receipts and generic Treasury Receipts,
are examples of stripped U.S. Treasury securities separated into their component
parts through such custodial arrangements.
Payment-in-kind ("PIK") bonds are debt obligations which provide that
the issuer thereof may, at its option, pay interest on such bonds in cash or in
the form of additional debt obligations. Such investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of such
cash. Such investments experience greater volatility in market value due to
changes in interest rates than debt obligations which provide for regular
payments of interest. A Portfolio will accrue income on such investments for tax
and accounting purposes, as required, which is distributable to shareholders and
which, because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations.
Illiquid Securities. As a matter of nonfundamental policy, the
Portfolios may invest up to 15% (10% in the case of the Money Market Portfolio)
of their respective total assets in illiquid securities, including repurchase
agreements maturing in more than seven days and fixed time deposits subject to
withdrawal penalties having notice periods of more than seven days.
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9
For purposes of its limitation on investments in illiquid securities,
each Portfolio may elect to treat as liquid, in accordance with procedures
established by the Board of Trustees, certain investments in restricted
securities for which there may be a secondary market of qualified institutional
buyers as contemplated by Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act") and commercial obligations issued in reliance on the
so-called "private placement" exemption from registration afforded by Section
4(2) of the Securities Act ("Section 4(2) paper"). Rule 144A provides an
exemption from the registration requirements of the Securities Act for the
resale of certain restricted securities to qualified institutional buyers.
Section 4(2) paper is restricted as to disposition under the federal securities
laws, and generally is sold to institutional investors such as a Portfolio which
agrees that it is purchasing the paper for investment and not with a view to
public distribution. Any resale of Section 4(2) paper by the purchaser must be
in an exempt transaction.
One effect of Rule 144A and Section 4(2) is that certain restricted
securities may now be liquid, though there is no assurance that a liquid market
for Rule 144A securities or Section 4(2) paper will develop or be maintained.
The Trustees have adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A and Section 4(2)
paper are liquid or illiquid for purposes of the limitation on investment in
illiquid securities. Pursuant to those policies and procedures, the Trustees
have delegated to the advisers the determination as to whether a particular
instrument is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of trades and quotes for the security, the
number of dealers willing to sell the security and the number of potential
purchasers, dealer undertakings to make a market in the security, the nature of
the security and the time needed to dispose of the security. The Trustees will
periodically review the Portfolio's purchases and sales of Rule 144A securities
and Section 4(2) paper.
Stand-By Commitments. In a put transaction, a Portfolio acquires the
right to sell a security at an agreed upon price within a specified period prior
to its maturity date, and a stand-by commitment entitles a Portfolio to same-day
settlement and to receive an exercise price equal to the amortized cost of the
underlying security plus accrued interest, if any, at the time of exercise.
Stand-by commitments are subject to certain risks, which include the inability
of the issuer of the commitment to pay for the securities at the time the
commitment is exercised, the fact that the commitment is not marketable by a
Portfolio, and that the maturity of the underlying security will generally be
different from that of the commitment.
Tender Option Floating or Variable Rate Certificates. The Money Market
Portfolio may invest in tender option bonds. A tender option bond is a synthetic
floating or variable rate security issued when long term bonds are purchased in
the secondary market and are then deposited into a trust. Custodial receipts are
then issued to investors, such as the Money Market Portfolio, evidencing
ownership interests in the trust. The trust sets a floating or variable rate on
a daily or weekly basis which is established through a remarketing agent. These
types of derivatives, to be money market eligible under Rule 2a-7, must have a
liquidity facility in place which provides additional comfort to the investors
in case the remarketing fails. The sponsor of the trust keeps the difference
between the rate on the long term bond and the rate on the short term floating
or variable rate security.
Securities Loans. To the extent specified in the Prospectus, each
Portfolio is permitted to lend its securities to broker-dealers and other
institutional investors in order to generate additional income. Such loans of
portfolio securities may not exceed 30% of the value of the Portfolio's total
assets. In connection with such loans, a Portfolio will receive collateral
consisting of cash, cash equivalents, U.S. Government securities or irrevocable
letters of credit issued by financial institutions. Such collateral will be
maintained at all times in an amount equal to at least 102% of the current
market value plus accrued interest of the securities loaned. A Portfolio can
increase its income through the investment of such collateral. A Portfolio
continues to be entitled to the interest payable or any dividend-equivalent
payments received on a loaned security and, in addition, to receive interest on
the amount of the loan. However, the receipt of any dividend-equivalent payments
by a Portfolio on a loaned security from the borrower will not qualify for the
dividends-received deduction. Such loans will be terminable at any time upon
specified notice. A Portfolio might experience risk of loss if the institutions
with which they have engaged in portfolio loan transactions breach their
agreements with such Portfolio. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of possible delays in receiving
additional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower experience financial difficulty.
Loans will
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10
be made only to firms deemed by the advisers to be of good standing and will not
be made unless, in the judgment of the advisers, the consideration to be earned
from such loans justifies the risk.
Additional Policies Regarding Derivative and Related Transactions
Introduction. As explained more fully below, the Equity Portfolios and
the U.S. Government Income Portfolio may employ derivative and related
instruments as tools in the management of portfolio assets. Put briefly, a
"derivative" instrument may be considered a security or other instrument which
derives its value from the value or performance of other instruments or assets,
interest or currency exchange rates, or indexes. For instance, derivatives
include futures, options, forward contracts, structured notes and various
over-the-counter instruments.
Like other investment tools or techniques, the impact of using
derivatives strategies or similar instruments depends to a great extent on how
they are used. Derivatives are generally used by portfolio managers in three
ways: First, to reduce risk by hedging (offsetting) an investment position.
Second, to substitute for another security particularly where it is quicker,
easier and less expensive to invest in derivatives. Lastly, to speculate or
enhance portfolio performance. When used prudently, derivatives can offer
several benefits, including easier and more effective hedging, lower transaction
costs, quicker investment and more profitable use of portfolio assets. However,
derivatives also have the potential to significantly magnify risks, thereby
leading to potentially greater losses for a Portfolio.
Each of the Portfolios may invest their assets in derivative and
related instruments subject only to their respective investment objectives and
policies and the requirement that the Portfolio maintain segregated accounts
consisting of liquid assets, such as cash, U.S. Government securities, or other
high-grade debt obligations (or, as permitted by applicable regulation, enter
into certain offsetting positions) to cover its obligations under such
instruments with respect to positions where there is no underlying portfolio
asset so as to avoid leveraging the Portfolio.
The value of some derivative or similar instruments in which a
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates or other economic factors, and -- like other investments of the
Portfolios -- the ability of a Portfolio to successfully utilize these
instruments may depend in part upon the ability of the advisers to forecast
interest rates and other economic factors correctly. If the advisers incorrectly
forecast such factors and have taken positions in derivative or similar
instruments contrary to prevailing market trends, a Portfolio could be exposed
to the risk of a loss. The Portfolios might not employ any or all of the
strategies described herein, and no assurance can be given that any strategy
used will succeed.
Set forth below is an explanation of the various derivatives strategies
and related instruments the Portfolios may employ along with risks or special
attributes associated with them. This discussion is intended to supplement the
Portfolios' current Prospectus as well as provide useful information to
prospective investors.
Risk Factors. As explained more fully below and in the discussions of
particular strategies or instruments, there are a number of risks associated
with the use of derivatives and related instruments. There can be no guarantee
that there will be a correlation between price movements in a hedging vehicle
and in the portfolio assets being hedged. An incorrect correlation could result
in a loss on both the hedged assets in a Portfolio and the hedging vehicle so
that the portfolio return might have been greater had hedging not been
attempted. This risk is particularly acute in the case of "cross-hedges" between
currencies. The advisers may incorrectly forecast interest rates, market values
or other economic factors in utilizing a derivatives strategy. In such a case,
the Portfolio may have been in a better position had it not entered into such
strategy. Hedging strategies, while reducing risk of loss, can also reduce the
opportunity for gain. In other words, hedging usually limits both potential
losses as well as potential gains. Strategies not involving hedging may increase
the risk to a Portfolio. Certain strategies, such as yield enhancement, can have
speculative characteristics and may result in more risk to a Portfolio than
hedging strategies using the same instruments. There can be no assurance that a
liquid market will exist at a time when a Portfolio seeks to close out an
option, futures contract or other derivative or related position. Many exchanges
and boards of trade limit the amount of fluctuation permitted in option or
futures contract prices during a single day; once the daily limit has been
<PAGE>
11
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain instruments are relatively new and
without a significant trading history. As a result, there is no assurance that
an active secondary market will develop or continue to exist. Finally,
over-the-counter instruments typically do not have a liquid market. Lack of a
liquid market for any reason may prevent a Portfolio from liquidating an
unfavorable position. Activities of large traders in the futures and securities
markets involving arbitrage, "program trading," and other investment strategies
may cause price distortions in these markets. In certain instances, particularly
those involving over-the-counter transactions, forward contracts, foreign
exchanges or foreign boards of trade, there is a greater potential that a
counterparty or broker may default or be unable to perform on its commitments.
In the event of such a default, a Portfolio may experience a loss. In
transactions involving currencies, the value of the currency underlying an
instrument may fluctuate due to many factors, including economic conditions,
interest rates, governmental policies and market forces.
Specific Uses and Strategies
Set forth below are explanations of various strategies involving
derivatives and related instruments which may be used by the Equity Portfolios
and the U.S. Government Income Portfolio.
Options on Securities, Securities Indexes, Currencies and Debt
Instruments. A Portfolio may PURCHASE, SELL or EXERCISE call and put options on
(i) securities, (ii) securities indexes, and (iii) debt instruments.
Although in most cases these options will be exchange-traded, the
Portfolios may also purchase, sell or exercise over-the-counter options.
Over-the-counter options differ from exchange-traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller. As such, over-the-counter options generally have much less market
liquidity and carry the risk of default or nonperformance by the other party.
One purpose of purchasing put options is to protect holdings in an
underlying or related security against a substantial decline in market value.
One purpose of purchasing call options is to protect against substantial
increases in prices of securities the Portfolio intends to purchase pending its
ability to invest in such securities in an orderly manner. A Portfolio may also
use combinations of options to minimize costs, gain exposure to markets or take
advantage of price disparities or market movements. For example, a Portfolio may
sell put or call options it has previously purchased or purchase put or call
options it has previously sold. These transactions may result in a net gain or
loss depending on whether the amount realized on the sale is more or less than
the premium and other transaction costs paid on the put or call option which is
sold. A Portfolio may write a call or put option in order to earn the related
premium from such transactions. Prior to exercise or expiration, an option may
be closed out by an offsetting purchase or sale of a similar option. The
Portfolios will not write uncovered options.
In addition to the general risk factors noted above, the purchase and
writing of options involve certain special risks. During the option period, a
Portfolio writing a covered call (i.e., where the underlying securities are held
by the Portfolio) has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but has retained the risk of loss should the price of the
underlying securities decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price.
If a put or call option purchased by a Portfolio is not sold when it
has remaining value, and if the market price of the underlying security, in the
case of a put, remains equal to or greater than the exercise price or, in the
case of a call, remains less than or equal to the exercise price, such Portfolio
will lose its entire investment in the option. Also, where a put or call option
on a particular security is purchased to hedge against price movements in a
related security, the price of the put or call option may move more or less than
the price of the related security. There can be no assurance that a liquid
market will exist when a Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Portfolio may be unable to close out a position.
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12
Futures Contracts and Options on Futures Contracts. A Portfolio may
purchase or sell (i) interest-rate futures contracts, (ii) futures contracts on
specified instruments or indices, and (iii) options on these futures contracts
("futures options").
The futures contracts and futures options may be based on various
instruments or indices in which the Portfolios may invest such as foreign
currencies, certificates of deposit, Eurodollar time deposits, securities
indices, economic indices (such as the Consumer Price Indices compiled by the
U.S. Department of Labor).
Futures contracts and futures options may be used to hedge portfolio
positions and transactions as well as to gain exposure to markets. For example,
a Portfolio may sell a futures contract -- or buy a futures option -- to protect
against a decline in value, or reduce the duration, of portfolio holdings.
Likewise, these instruments may be used where a Portfolio intends to acquire an
instrument or enter into a position. For example, a Portfolio may purchase a
futures contract -- or buy a futures option -- to gain immediate exposure in a
market or otherwise offset increases in the purchase price of securities or
currencies to be acquired in the future. Futures options may also be written to
earn the related premiums.
When writing or purchasing options, the Portfolios may simultaneously
enter into other transactions involving futures contracts or futures options in
order to minimize costs, gain exposure to markets, or take advantage of price
disparities or market movements. Such strategies may entail additional risks in
certain instances. The Portfolios may engage in cross-hedging by purchasing or
selling futures or options on a security or currency different from the security
or currency position being hedged to take advantage of relationships between the
two securities or currencies.
Investments in futures contracts and options thereon involve risks
similar to those associated with options transactions discussed above. The
Portfolios will only enter into futures contracts or options or futures
contracts which are traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system.
Forward Contracts. A Portfolio may use foreign currency and
interest-rate forward contracts for various purposes as described below.
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. A Portfolio that may
invest in securities denominated in foreign currencies may, in addition to
buying and selling foreign currency futures contracts and options on foreign
currencies and foreign currency futures, enter into forward foreign currency
exchange contracts to reduce the risks or otherwise take a position in
anticipation of changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be a fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, a Portfolio "locks in" the
exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, a Portfolio reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of a Portfolio is similar to selling securities denominated
in one currency and purchasing securities denominated in another. Transactions
that use two foreign currencies are sometimes referred to as "cross- hedges."
A Portfolio may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Portfolio's investments or
anticipated investments in securities denominated in foreign currencies. A
Portfolio may also enter into these contracts for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
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A Portfolio may also use forward contracts to hedge against changes in
interest-rates, increase exposure to a market or otherwise take advantage of
such changes. An interest-rate forward contract involves the obligation to
purchase or sell a specific debt instrument at a fixed price at a future date.
Interest Rate and Currency Transactions. A Portfolio may employ
currency and interest rate management techniques, including transactions in
options (including yield curve options), futures, options on futures, forward
foreign currency exchange contracts, currency options and futures and currency
and interest rate swaps. The aggregate amount of a Portfolio's net currency
exposure will not exceed the total net asset value of its portfolio. However, to
the extent that a Portfolio is fully invested while also maintaining currency
positions, it may be exposed to greater combined risk.
The Portfolios will only enter into interest rate and currency swaps on
a net basis, i.e., the two payment streams are netted out, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and currency swaps do not involve the delivery of
securities, the underlying currency, other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and currency swaps
is limited to the net amount of interest or currency payments that a Portfolio
is contractually obligated to make. If the other party to an interest rate or
currency swap defaults, a Portfolio's risk of loss consists of the net amount of
interest or currency payments that the Portfolio is contractually entitled to
receive. Since interest rate and currency swaps are individually negotiated, the
Portfolios expect to achieve an acceptable degree of correlation between their
portfolio investments and their interest rate or currency swap positions.
A Portfolio may hold foreign currency received in connection with
investments in foreign securities when it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.
A Portfolio may purchase or sell without limitation as to a percentage
of its assets forward foreign currency exchange contracts when the advisers
anticipate that the foreign currency will appreciate or depreciate in value, but
securities denominated in that currency do not present attractive investment
opportunities and are not held by such Portfolio. In addition, a Portfolio may
enter into forward foreign currency exchange contracts in order to protect
against adverse changes in future foreign currency exchange rates. A Portfolio
may engage in cross-hedging by using forward contracts in one currency to hedge
against fluctuations in the value of securities denominated in a different
currency if its advisers believe that there is a pattern of correlation between
the two currencies. Forward contracts may reduce the potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if it had not entered into such
contracts. The use of foreign currency forward contracts will not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Portfolio to certain
risks.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency denominated
asset that is the subject of the hedge generally will not be precise. In
addition, a Portfolio may not always be able to enter into foreign currency
forward contracts at attractive prices, and this will limit a Portfolio's
ability to use such contract to hedge or cross-hedge its assets. Also, with
regard to a Portfolio's use of cross-hedges, there can be no assurance that
historical correlations between the movement of certain foreign currencies
relative to the U.S. dollar will continue. Thus, at any time poor correlation
may exist between movements in the exchange rates of the foreign currencies
underlying a Portfolio's cross-hedges and the movements in the exchange rates of
the foreign currencies in which the Portfolio's assets that are the subject of
such cross-hedges are denominated.
A Portfolio may enter into interest rate and currency swaps to the
maximum allowed limits under applicable law. A Portfolio will typically use
interest rate swaps to shorten the effective duration of its portfolio. Interest
rate swaps involve the exchange by a Portfolio with another party of their
respective commitments to pay or receive interest, such as an exchange of fixed
rate payments for floating rate payments. Currency swaps involve the exchange of
their respective rights to make or receive payments in specified currencies.
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14
Mortgage-Related Securities. A Portfolio may purchase mortgage-backed
securities -- i.e., securities representing an ownership interest in a pool of
mortgage loans issued by lenders such as mortgage bankers, commercial banks and
savings and loan associations. Mortgage loans included in the pool -- but not
the security itself -- may be insured by the Government National Mortgage
Association or the Federal Housing Administration or guaranteed by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Veterans Administration. Mortgage-backed securities provide investors with
payments consisting of both interest and principal as the mortgages in the
underlying mortgage pools are paid off. Although providing the potential for
enhanced returns, mortgage-backed securities can also be volatile and result in
unanticipated losses.
The average life of a mortgage-backed security is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of the principal invested
far in advance of the maturity of the mortgages in the pool. The actual rate of
return of a mortgage-backed security may be adversely affected by the prepayment
of mortgages included in the mortgage pool underlying the security.
A Portfolio may also invest in securities representing interests in
collateralized mortgage obligations ("CMOs"), real estate mortgage investment
conduits ("REMICs") and in pools of certain other asset-backed bonds and
mortgage pass-through securities. Like a bond, interest and prepaid principal
are paid, in most cases, monthly. CMOs may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by the U.S. Government, or U.S.
Government-related, entities, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. Monthly payment of principal received
from the pool of underlying mortgages, including prepayments, is allocated to
different classes in accordance with the terms of the instruments, and changes
in prepayment rates or assumptions may significantly affect the expected average
life and value of a particular class.
REMICs include governmental and/or private entities that issue a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities. REMICs issued by private
entities are not U.S. Government securities and are not directly guaranteed by
any government agency. They are secured by the underlying collateral of the
private issuer.
The advisers expect that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed-rate mortgages. A Portfolio may also invest in
debentures and other securities of real estate investment trusts. As new types
of mortgage-related securities are developed and offered to investors, the
Portfolios may consider making investments in such new types of mortgage-related
securities.
Dollar Rolls. Under a mortgage "dollar roll," a Portfolio sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, a Portfolio
forgoes principal and interest paid on the mortgage-backed securities. A
Portfolio is compensated by the difference between the current sales price and
the lower forward price for the future purchase (often referred to as the
"drop") as well as by the interest earned on the cash proceeds of the initial
sale. A Portfolio may only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position
which matures on or before the forward settlement date of the dollar roll
transaction. At the time a Portfolio enters into a mortgage "dollar roll", it
will establish a segregated account with its custodian bank in which it will
maintain cash, U.S. government securities or other liquid high grade debt
obligations equal in value to its obligations in respect of dollar rolls, and
accordingly, such dollar rolls will not be considered borrowings. Mortgage
dollar rolls involve the risk that the market value of the securities the
Portfolio is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a mortgage dollar
roll files for bankruptcy or becomes insolvent, the Portfolio's use of proceeds
of the dollar roll may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Portfolio's obligation to
repurchase the securities.
Asset-Backed Securities. Each Portfolio, including the Money Market
Portfolio, may invest in asset-backed securities, including conditional sales
contracts, equipment lease certificates and equipment trust certificates. The
advisers expects that other asset-backed securities (unrelated to mortgage
loans) will be offered to investors in the future. Several types of asset-backed
securities already exist, including, for example, "Certificates for Automobile
ReceivablesSM" or CARSSM ("CARS"). CARS represent undivided fractional interests
in a trust whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the CARS trust. An investor's return on CARS
may be affected by early prepayment of principal on the underlying vehicle sales
contracts. If the letter of credit is exhausted, the CARS trust may be prevented
from realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of federal and state
bankruptcy and
<PAGE>
15
insolvency laws, the failure of servicers to take appropriate steps to perfect
the CARS trust's rights in the underlying loans and the servicer's sale of such
loans to bona fide purchasers, giving rise to interests in such loans superior
to those of the CARS trust, or other factors. As a result, certificate holders
may experience delays in payments or losses if the letter of credit is
exhausted. A Portfolio also may invest in other types of asset-backed
securities. In the selection of other asset-backed securities, the advisers will
attempt to assess the liquidity of the security giving consideration to the
nature of the security, the frequency of trading in the security and the overall
nature of the marketplace for the security.
Structured Products. A Portfolio may invest in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of certain other investments. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities ("structured products")
backed by, or representing interests in, the underlying instruments. The cash
flow on the underlying instruments may be apportioned among the newly issued
structured products to create securities with different investment
characteristics such as varying maturities, payment priorities and interest rate
provisions, and the extent of the payments made with respect to structured
products is dependent on the extent of the cash flow on the underlying
instruments. A Portfolio may invest in structured products which represent
derived investment positions based on relationships among different markets or
asset classes.
A Portfolio may also invest in other types of structured products,
including among others, inverse floaters, spread trades and notes linked by a
formula to the price of an underlying instrument. Inverse floaters have coupon
rates that vary inversely at a multiple of a designated floating rate (which
typically is determined by reference to an index rate, but may also be
determined through a dutch auction or a remarketing agent or by reference to
another security) (the "reference rate"). As an example, inverse floaters may
constitute a class of CMOs with a coupon rate that moves inversely to a
designated index, such as LIBOR (London Interbank Offered Rate) or the Cost of
Funds Index. Any rise in the reference rate of an inverse floater causes an
increase in the coupon rate. A spread trade is an investment position relating
to a difference in the prices or interest rates of two securities where the
value of the investment position is determined by movements in the difference
between the prices or interest rates, as the case may be, of the respective
securities. When a Portfolio invests in notes linked to the price of an
underlying instrument, the price of the underlying security is determined by a
multiple (based on a formula) of the price of such underlying security. A
structured product may be considered to be leveraged to the extent its interest
rate varies by a magnitude that exceeds the magnitude of the change in the index
rate of interest. Because they are linked to their underlying markets or
securities, investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security.
Total return on the structured product is derived by linking return to one or
more characteristics of the underlying instrument. Because certain structured
products of the type in which a Portfolio may invest may involve no credit
enhancement, the credit risk of those structured products generally would be
equivalent to that of the underlying instruments. A Portfolio may invest in a
class of structured products that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated structured products
typically have higher yields and present greater risks than unsubordinated
structured products. Although a Portfolio's purchase of subordinated structured
products would have similar economic effect to that of borrowing against the
underlying securities, the purchase will not be deemed to be leverage for
purposes of a Portfolio's fundamental investment limitation related to borrowing
and leverage.
Certain issuers of structured products may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, a Portfolio's investments in
these structured products may be limited by the restrictions contained in the
1940 Act. Structured products are typically sold in private placement
transactions, and there currently is no active trading market for structured
products. As a result, certain structured products in which a Portfolio invests
may be deemed illiquid and subject to its limitation on illiquid investments.
Investments in structured products generally are subject to greater
volatility than an investment directly in the underlying market or security. In
addition, because structured products are typically sold in private placement
transactions, there currently is no active trading market for structured
products.
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16
Additional Restrictions on the Use of Futures and Option Contracts.
None of the Portfolios is a "commodity pool" (i.e., a pooled investment vehicle
which trades in commodity futures contracts and options thereon and the operator
of which is registered with the CFTC), and futures contracts and futures options
will be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Portfolio may enter into such transactions for purposes other
than bona fide hedging purposes, provided that a Portfolio may enter into such
transactions for purposes other that bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the
Portfolio's portfolio, provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation.
When a Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be deposited in a
segregated account with such Portfolio's custodian or sub-custodian so that the
amount so segregated, plus the initial deposit and variation margin held in the
account of its broker, will at all times equal the value of the futures
contract, thereby insuring that the use of such futures is unleveraged.
A Portfolio's ability to engage in the hedging transactions described
herein may be limited by the current federal income tax requirement that a
Portfolio derive less than 30% of its gross income from the sale or other
disposition of stock or securities held for less than three months.
Investment Restrictions
The Portfolios have adopted the following investment restrictions which
may not be changed without approval by a "majority of the outstanding shares" of
a Portfolio which, as used in this Statement of Additional Information, means
the vote of the lesser of (i) 67% or more of the shares of a Portfolio present
at a meeting, if the holders of more than 50% of the outstanding shares of a
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
Each Portfolio may not:
(1) borrow money, except that each Portfolio may
borrow money for temporary or emergency purposes, or by
engaging in reverse repurchase transactions, in an amount not
exceeding 33-1/3% of the value of its total assets at the time
when the loan is made and may pledge, mortgage or hypothecate
no more than 1/3 of its net assets to secure such borrowings.
Any borrowings representing more than 5% of a Portfolio's
total assets must be repaid before the Portfolio may make
additional investments;
(2) make loans, except that each Portfolio may: (i)
purchase and hold debt instruments (including without
limitation, bonds, notes, debentures or other obligations and
certificates of deposit, bankers' acceptances and fixed time
deposits) in accordance with its investment objectives and
policies; (ii) enter into repurchase agreements with respect
to portfolio securities; and (iii) lend portfolio securities
with a value not in excess of one-third of the value of its
total assets;
(3) purchase the securities of any issuer (other than
securities issued or guaranteed by the U.S. government or any
of its agencies or instrumentalities, or repurchase agreements
secured thereby) if, as a result, more than 25% of the
Portfolio's total assets would be invested in the securities
of companies whose principal business activities are in the
same industry. Notwithstanding the foregoing, (i) there is no
limitation with respect to securities issued by banks, or
repurchase agreements secured thereby, (ii) with respect to a
Portfolio's permissible futures and options transactions in
U.S. government securities, positions in such options and
futures shall not be subject to this restriction and (iii) the
Money Market Portfolio may invest more than 25% of its total
assets in obligations issued by banks, including U.S. banks,
and in obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
<PAGE>
17
(4) purchase or sell physical commodities unless
acquired as a result of ownership of securities or other
instruments but this shall not prevent a Portfolio from (i)
purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by
physical commodities or (ii) engaging in forward purchases or
sales of foreign currencies or securities;
(5) purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent a Portfolio from investing in
securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
Investments by the Portfolio in securities backed by mortgages
on real estate or in marketable securities of companies
engaged in such activities are not hereby precluded;
(6) issue any senior security (as defined in the 1940
Act), except that (a) a Portfolio may engage in transactions
that may result in the issuance of senior securities to the
extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) a
Portfolio may acquire other securities, the acquisition of
which may result in the issuance of a senior security, to the
extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the
restrictions set forth above, a Portfolio may borrow money as
authorized by the 1940 Act. For purposes of this restriction,
collateral arrangements with respect to a Portfolio's
permissible options and futures transactions, including
deposits of initial and variation margin, are not considered
to be the issuance of a senior security; or
(7) underwrite securities issued by other persons
except insofar as the Portfolio may technically be deemed an
underwriter under the Securities Act of 1933 in selling a
portfolio security.
In addition, as a matter of fundamental policy, notwithstanding any
other investment policy or restriction, a Portfolio may seek to achieve its
investment objective by investing all of its investable assets in another
investment company having substantially the same investment objective and
policies as the Portfolio. For purposes of investment restriction (5) above,
real estate includes Real Estate Limited Partnerships. For purposes of
investment restriction (3) above, industrial development bonds, where the
payment of principal and interest is the ultimate responsibility of companies
within the same industry, are grouped together as an "industry." Investment
restriction (3) above, however, is not applicable to investments by a Portfolio
in municipal obligations where the issuer is regarded as a state, city,
municipality or other public authority since such entities are not members of
any "industry." Supranational organizations are collectively considered to be
members of a single "industry" for purposes of restriction (3) above.
In addition, the Portfolios will be subject to the following
nonfundamental restrictions which may be changed without shareholder approval:
(1) Each Portfolio other than the Asset Allocation
Portfolio and Money Market Portfolio may not, with respect to
50% of its assets, hold more than 10% of the outstanding
voting securities of any issuer. Each of the Asset Allocation
Portfolio and Money Market Portfolio may not, with respect to
75% of its assets, hold more than 10% of the outstanding
voting securities of any issuer or invest more than 5% of its
assets in the securities of any one issuer (other than
obligations of the U.S. Government, its agencies and
instrumentalities).
(2) Each Portfolio may not make short sales of
securities, other than short sales "against the box," or
purchase securities on margin except for short-term credit
necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of
options, futures contracts and related options, in the manner
otherwise permitted by the investment restrictions, policies
and investment program of a Portfolio.
(3) Each Portfolio may not purchase or sell interests
in oil, gas or mineral leases.
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18
(4) Each Equity Portfolio and the U.S. Government
Income Portfolio may not invest more than 15% of its net
assets in illiquid securities; the Money Market Portfolio may
not invest more than 10% of its net assets in illiquid
securities
(5) Each Portfolio may not write, purchase or sell
any put or call option or any combination thereof, provided
that this shall not prevent (i) with respect to the Growth and
Income Portfolio and the Capital Growth Portfolio only, the
purchase, ownership, holding or sale of warrants where the
grantor of the warrants is the issuer of the underlying
securities, (ii) with respect to all of the Portfolios, the
writing, purchasing or selling of puts, calls or combinations
thereof with respect to portfolio securities or (iii) with
respect to a Portfolio's permissible futures and options
transactions, the writing, purchasing, ownership, holding or
selling of futures and options positions or of puts, calls or
combinations thereof with respect to futures.
(6) Each Portfolio may invest up to 5% of its total
assets in the securities of any one investment company, but
may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets
in the securities of other investment companies.
It is the Trust's position that proprietary strips, such as CATS and
TIGRS, are United States Government securities. However, the Trust has been
advised that the staff of the Commission's Division of Investment Management
does not consider these to be United States Government securities, as deemed
under the Investment Company Act of 1940, as amended.
For purposes of the Portfolios' investment restrictions, the issuer of
a tax-exempt security is deemed to be the entity (public or private) ultimately
responsible for the payment of the principal of and interest on the security.
With respect to the International Equity Portfolio, as a matter of
nonfundamental policy, to the extent permitted under applicable law, the above
restrictions do not apply to the following investments ("OECD investments"): (i)
any security issued by or the payment of principal and interest on which is
guaranteed by the government of any member state of the Organization for
Economic Cooperation and Development ("OECD country"); (ii) any fixed income
security issued in any OECD country by any public or local authority or
nationalized industry or under taking of any OECD country or anywhere in the
world by the International Bank for Reconstruction and Development, European
Investment Bank, Asian Development Bank or any body which is, in the Trustees'
opinion, of similar standing. However, no investment may be made in any OECD
investment of any one issue if that would result in the value of a Portfolio's
holding of that issue exceeding 30% of the net asset value of the Portfolio and,
if the Portfolio's portfolio consists only of OECD investments, those OECD
investments shall be of at least six different issues.
In order to permit the sale of its shares in certain states, a
Portfolio may make commitments more restrictive than the investment policies and
limitations described above and in the Prospectus. Should a Portfolio determine
that any such commitment is no longer in its best interests, it will revoke the
commitment by terminating sales of its shares in the state involved. In order to
comply with certain federal and state statutes and regulatory policies, as a
matter of operating policy, each Portfolio will not: (i) invest more than 5% of
its assets in companies which, including predecessors, have a record of less
than three years' continuous operation, (ii) invest in warrants, valued at the
lower of cost or market, in excess of 5% of the value of its net assets, and no
more than 2% of such value may be warrants which are not listed on the New York
or American Stock Exchanges, (iii) with respect to the Money Market Portfolio,
invest for the purpose of exercising control or management, or (iv) purchase or
retain in its portfolio any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee of
the Trust or Portfolio, or is an officer or director of the adviser, if after
the purchase of the securities of such issuer by the Portfolio one or more of
such persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning more
than 1/2 of 1% of such shares or securities together own beneficially more than
5% of such shares or securities, or both, all taken at market value.
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19
If a percentage or rating restriction on investment or use of assets
set forth herein or in the Prospectus is adhered to at the time a transaction is
effected, later changes in percentage resulting from any cause other than
actions by a Portfolio will not be considered a violation. If the value of a
Portfolio's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
Portfolio Transactions and Brokerage Allocation
Specific decisions to purchase or sell securities for a Portfolio are
made by a portfolio manager who is an employee of the adviser or sub-adviser to
such Portfolio and who is appointed and supervised by senior officers of such
adviser or sub-adviser. Changes in the Portfolios' investments are reviewed by
the Board of Trustees. The portfolio managers may serve other clients of the
advisers in a similar capacity. Money market instruments are generally purchased
in principal transactions; thus, the Money Market Portfolio generally pays no
brokerage commissions.
The frequency of a Portfolio's portfolio transactions -- the portfolio
turnover rate -- will vary from year to year depending upon market conditions.
Because a high turnover rate may increase transaction costs and the possibility
of taxable short-term gains, the advisers will weigh the added costs of
short-term investment against anticipated gains. Each Portfolio will engage in
portfolio trading if its advisers believe a transaction, net of costs (including
custodian charges), will help it achieve its investment objective. Portfolios
investing in both equity and debt securities apply this policy with respect to
both the equity and debt portions of their portfolios.
For the fiscal year ended August 31, 1996, the annual rates of
portfolio turnover for the International Equity Portfolio, Capital Growth
Portfolio, Growth and Income Portfolio, Asset Allocation Portfolio and U.S.
Government Income Portfolio were ___%, ___%, ___%, ___% and ___%, respectively.
For the period from March 1, 1995 through August 31, 1995, the annual
rates of portfolio turnover for the International Equity Portfolio, Capital
Growth Portfolio, Growth and Income Portfolio, Asset Allocation Portfolio and
U.S. Government Income Portfolio were ___%, ___%, ___%, ___% and ___%,
respectively.
Under the advisory agreement and the sub-advisory agreement and the
sub-advisory agreements, the adviser and sub-advisers shall use their best
efforts to seek to execute portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the most favorable to the
Portfolios. In assessing the best overall terms available for any transaction,
the adviser and sub-advisers consider all 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, research
services provided to the adviser or sub-advisers, and the reasonableness of the
commissions, if any, both for the specific transaction and on a continuing
basis. The adviser and sub-advisers are not required to obtain the lowest
commission or the best net price for any Portfolio on any particular
transaction, and are not required to execute any order in a fashion either
preferential to any Portfolio relative to other accounts they manage or
otherwise materially adverse to such other accounts.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the adviser or
sub-adviser to a Portfolio normally seeks to deal directly with the primary
market makers unless, in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the adviser or sub-adviser on the
tender of a Portfolio's portfolio securities in so-called tender or exchange
offers. Such soliciting dealer fees are in effect recaptured for the Portfolios
by the adviser and sub-advisers. At present, no other recapture arrangements are
in effect.
Under the advisory and sub-advisory agreements and as permitted by
Section 28(e) of the Securities Exchange Act of 1934, the adviser and
sub-advisers may cause the Portfolios to pay a broker-dealer which provides
<PAGE>
20
brokerage and research services to the adviser and sub-advisers, the Portfolios
and/or other accounts for which they exercise investment discretion an amount of
commission for effecting a securities transaction for the Portfolios in excess
of the amount of the broker-dealers would have charged for the transaction if
they determine in good faith that the total commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either that particular transaction or their
overall responsibilities to accounts over which they exercise investment
discretion. Not all of such services are useful or of value in advising the
Portfolios. The adviser and sub-advisers report to the Board of Trustees
regarding overall commissions paid by the Portfolios and their reasonableness in
relation to the benefits to the Portfolios. The term "brokerage and research
services" includes advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or of purchasers or sellers of securities, furnishing analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts, and effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
The management fees that the Portfolios pay to the adviser will not be
reduced as a consequence of the adviser's or sub-advisers' receipt of brokerage
and research services. To the extent the Portfolios' portfolio transactions are
used to obtain such services, the brokerage commissions paid by the Portfolios
will exceed those that might otherwise be paid by an amount which cannot be
presently determined. Such services generally would be useful and of value to
the adviser or sub-advisers in serving one or more of the Portfolios and other
clients and, conversely, such services obtained by the placement of brokerage
business of other clients generally would be useful to the adviser and
sub-advisers in carrying out their obligations to the Portfolios. While such
services are not expected to reduce the expenses of the adviser or sub-advisers,
the advisers would, through use of the services, avoid the additional expenses
which would be incurred if they should attempt to develop comparable information
through their own staffs.
In certain instances, there may be securities that are suitable for one
or more of the Portfolios as well as one or more of the adviser's or
sub-advisers' other clients. Investment decisions for the Portfolios and for
other clients are made with a view to achieving their respective investment
objectives. It may develop that the same investment decision is made for more
than one client or that a particular security is bought or sold for only one
client even though it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment adviser, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more Portfolios or
other clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the
Portfolios are concerned. However, it is believed that the ability of the
Portfolios to participate in volume transactions will generally produce better
executions for the Portfolios.
No portfolio transactions are executed with the advisers or with any
affiliate of the advisers, acting either as principal or as broker.
For the period from March 1, 1995 through August 31, 1995, and the
fiscal year ended August 31, 1996, the International Equity Portfolio paid
aggregate brokerage commissions of $________ and $________, respectively.
For the period from March 1, 1995 through August 31, 1995, and the
fiscal year ended August 31, 1996, the Capital Growth Portfolio paid aggregate
brokerage commissions of $________ and $_________, respectively.
For the period from March 1, 1995 through August 31, 1995, and the
fiscal year ended August 31, 1996, the Growth and Income Portfolio paid
aggregate brokerage commissions of $_________ and $_________, respectively.
For the period from March 1, 1995 through August 31, 1995, and the
fiscal year ended August 31, 1996, the Asset Allocation Portfolio paid aggregate
brokerage commissions of $_________ and $_________, respectively.
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21
For the period from March 1, 1995 through August 31, 1995, and the
fiscal year ended August 31, 1996, the U.S. Government Income Portfolio paid
aggregate brokerage commissions of $_________ and $_________, respectively.
PERFORMANCE INFORMATION
From time to time, a Portfolio may use hypothetical investment examples
and performance information in advertisements, shareholder reports or other
communications to shareholders. Because such performance information is based on
past investment results, it should not be considered as an indication or
representation of the performance of any classes of a Portfolio in the future.
From time to time, the performance and yield of classes of a Portfolio may be
quoted and compared to those of other mutual funds with similar investment
objectives, unmanaged investment accounts, including savings accounts, or other
similar products and to stock or 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 or
its classes may be compared to data prepared by Lipper Analytical Services, Inc.
or Morningstar Mutual Funds on Disc, widely recognized independent services
which monitor the performance of mutual funds. Performance and 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 local or regional publications, may also be used in comparing the performance
and yield of a Portfolio or its classes. A Portfolio's performance may be
compared with indices such as the Lehman Brothers Government/Corporate Bond
Index, the Lehman Brothers Government Bond Index, the Lehman Government Bond 1-3
Year Index and the Lehman Aggregate Bond Index; the S&P 500 Index, the Dow Jones
Industrial Average or any other commonly quoted index of common stock prices;
and the Russell 2000 Index and the NASDAQ Composite Index. Additionally, a
Portfolio may, with proper authorization, reprint articles written about such
Portfolio and provide them to prospective shareholders.
A Portfolio may provide period and average annual "total rates of
return." The "total rate of return" refers to the change in the value of an
investment in a Portfolio over a period (which period shall be stated in any
advertisement or communication with a shareholder) based on any change in net
asset value per share including the value of any shares purchased through the
reinvestment of any dividends or capital gains distributions declared during
such period.
Unlike some bank deposits or other investments which pay a fixed yield
for a stated period of time, the yields and the net asset values of the classes
of shares of a Portfolio will vary based on market conditions, the current
market value of the securities held by a Portfolio and changes in the
Portfolio's expenses. The advisers, the Administrator, the sub-administrator and
other service providers may voluntarily waive a portion of their fees on a
month-to-month basis. In addition, the sub-administrator may assume a portion of
a Portfolio's operating expenses on a month-to-month basis. These actions would
have the effect of increasing the net income (and therefore the yield and total
rate of return) of the classes of shares of a Portfolio during the period such
waivers are in effect. These factors and possible differences in the methods
used to calculate the yields and total rates of return should be considered when
comparing the yields or total rates of return of the classes of shares of a
Portfolio to yields and total rates of return published for other investment
companies and other investment vehicles (including different classes of shares).
Advertising or communications to shareholders may contain the views of
the advisers as to current market, economic, trade and interest rate trends, as
well as legislative, regulatory and monetary developments, and may include
investment strategies and related matters believed to be of relevance to a
Portfolio.
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22
Total Rate of Return
A Portfolio's or class' total rate of return for any period will be
calculated by (a) dividing (i) the sum of the net asset value per share on the
last day of the period and the net asset value per share on the last day of the
period of shares purchasable with dividends and capital gains declared during
such period with respect to a share held at the beginning of such period and
with respect to shares purchased with such dividends and capital gains
distributions, by (ii) the public offering price per share on the first day of
such period, and (b) subtracting 1 from the result. The average annual rate of
return quotation will be calculated by (x) adding 1 to the period total rate of
return quotation as calculated above, (y) raising such sum to a power which is
equal to 365 divided by the number of days in such period, and (z) subtracting 1
from the result.
The Portfolios may also from time to time include in advertisements or
other communications a total return figure that is not calculated according to
the formula set forth above in order to compare more accurately the performance
of a Portfolio with other measures of investment return.
Yield Quotations
Any current "yield" quotation for a class of shares of a Portfolio,
other than the Money Market Portfolio, shall consist of an annualized
hypothetical yield, carried at least to the nearest hundredth of one percent,
based on a thirty calendar day period and shall be calculated by (a) raising to
the sixth power the sum of 1 plus the quotient obtained by dividing the
Portfolio's net investment income earned during the period by the product of the
average daily number of shares outstanding during the period that were entitled
to receive dividends and the maximum offering price per share on the last day of
the period, (b) subtracting 1 from the result, and (c) multiplying the result by
2.
Any current "yield" for a class of shares of the Money Market Portfolio
which is used in such a manner as to be subject to the provisions of Rule 482(d)
under the Securities Act of 1933, as amended, shall consist of an annualized
historical yield, carried at least to the nearest hundredth of one percent,
based on a specific seven calendar day period and shall be calculated by
dividing the net change in the value of an account having a balance of one share
at the beginning of the period by the value of the account at the beginning of
the period and multiplying the quotient by 365/7. For this purpose, the net
change in account value would reflect the value of additional shares purchased
with dividends declared on the original share and dividends declared on both the
original share and any such additional shares, but would not reflect any
realized gains or losses from the sale of securities or any unrealized
appreciation or depreciation on portfolio securities. In addition, any effective
yield quotation for a class of shares of the Money Market Portfolio so used
shall be calculated by compounding the current yield quotation for such period
by multiplying such quotation by 7/365, adding 1 to the product, raising the sum
to a power equal to 365/7, and subtracting 1 from the result.
Because of the charges and deduction imposed by the Accounts the total
rate of return and yield realized by owners in the subdivisions of the Accounts
will be lower than the total rate of return and yield for the corresponding
Portfolio.
DETERMINATION OF NET ASSET VALUE
As of the date of this Statement of Additional Information, the New
York Stock Exchange is open for trading every weekday except for the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. In addition to the
days listed above (other than Good Friday), the Federal Reserve Bank of New York
is closed for business on the following holidays: Martin Luther King Day,
Columbus Day and Veterans Day. Since the International Equity Portfolio invests
in securities primarily listed on foreign exchanges which may trade on Saturdays
or other customary United States national business holidays on which the
Portfolio does not price, the Portfolio's portfolio will trade and the net asset
value of the Portfolio's shares may be significantly affected on days when the
investor has no access to the Portfolio.
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23
The Money Market Portfolio's portfolio securities are valued at their
amortized cost. Amortized cost valuation involves valuing an instrument at its
cost and thereafter at a constant rate to maturity accreting discounts and
amortizing premiums. Pursuant to the rules of the Securities and Exchange
Commission, the Board of Trustees has established procedures to stabilize the
net asset value of the Money Market Portfolio at $1.00 per share. These
procedures include a review of the extent of any deviation of net asset value
per share, based on available market rates, from the $1.00 amortized cost price
per share. If fluctuating interest rates cause the market value of the Money
Market Portfolio's portfolio to approach a deviation of more than 1/2 of 1% from
the value determined on the basis of amortized cost, the Board of Trustees will
consider what action, if any, should be initiated. Such action may include
redemption of shares in kind (as described in greater detail below), selling
portfolio securities prior to maturity, reducing or withholding dividends and
utilizing a net asset value per share as determined by using available market
quotations. The Money Market Portfolio has established procedures to ensure that
its portfolio securities meet its high quality criteria.
Equity securities in a Portfolio's portfolio are valued at the last
sale price on the exchange on which they are primarily trade on or on the NASDAQ
National Market System, or at the last quoted bid price for securities in which
there were no sales during the day or for other unlisted (over-the-counter)
securities. Bonds and other fixed income securities (other than short-term
obligations, but including listed issues) in a Portfolio's portfolio are valued
on the basis of valuations furnished by a pricing service, the use of which has
been approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Short-term obligations which mature in 60 days or less are valued at
amortized cost, which constitutes fair value as determined by the Board of
Trustees. Futures and option contracts that are traded on commodities or
securities exchanges are normally valued at the settlement price on the exchange
on which they are traded. Portfolio securities (other than short-term
obligations) for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Board of
Trustees.
Interest income on long-term obligations in a Portfolio's portfolio is
determined on the basis of interest accrued plus amortization of discount
(generally, the difference between issue price and stated redemption price at
maturity) and premiums (generally, the excess of purchase price over stated
redemption price at maturity). Interest income on short-term obligations is
determined on the basis of interest and discount accrued less amortization of
premium.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting the Portfolios and their shareholders that
are not described in the respective Portfolio's Prospectus. No attempt is made
to present a detailed explanation of the tax treatment of the Portfolios or its
shareholders, and the discussions here and in each Portfolio's Prospectus are
not intended as substitutes for careful tax planning.
The holders of the variable insurance or annuity contracts should not
be subject to tax with respect to distributions made on Portfolio shares,
assuming that the variable insurance and annuity contracts qualify under the
Internal Revenue Code of 1986, as amended (the "Code"), as life insurance or
annuities, respectively, and that the Accounts are treated as the owners of the
Portfolio shares. See "Qualifications of Segregated Asset Accounts." The summary
describes tax consequences to the owner of the Portfolio shares (i.e. the
Accounts), and the Portfolio itself. It does not describe the tax consequences
to a holder of a life insurance contract or annuity contract as a result of the
ownership of such policies or contracts. Contract or policy holders must consult
the prospectuses of their respective contracts or policies for information
concerning the Federal income tax consequences of owning such contracts or
policies.
Qualification as a Regulated Investment Company
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24
Each Portfolio has elected to be taxed as a regulated investment
company under Subchapter M of the Code. As a regulated investment company, a
Portfolio is not subject to federal income tax on the portion of its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, without a deduction for dividends paid) and net capital
gain (i.e., the excess of net long-term capital gains over net short-term
capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e., net
investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by a Portfolio made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and can
therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). Foreign currency gains, including
those derived from options, futures and forwards, will not be characterized as
Short-Short Gain if they are directly related to the regulated investment
company's investments in stock or securities (or options or futures thereon).
Because of the Short-Short Gain Test, a Portfolio may have to limit the sale of
appreciated securities that it has held for less than three months. However, the
Short-Short Gain Test will not prevent a Portfolio from disposing of investments
at a loss, since the recognition of a loss before the expiration of the
three-month holding period is disregarded for this purpose. Interest (including
original issue discount) received by a Portfolio at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income attributable to
realized market appreciation will be treated as such income.
In general, gain or loss recognized by a Portfolio on the disposition
of an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by a Portfolio at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Portfolio held such obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code Section 1256 (unless a Portfolio
elects otherwise), will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by a Portfolio on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, (2) the asset is otherwise held by the Portfolio as part of a "straddle"
(as defined) or (3) the asset is stock and the Portfolio grants an in-the-money
qualified covered call option with respect thereto. (However, for purposes of
the Short-Short Gain Test, the holding period of the asset disposed of may be
reduced only in the case of clause (1) above.) In addition, the Portfolio may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by a Portfolio on the lapse of, or any gain or loss
recognized by a Portfolio from a closing transaction with respect to, an option
written by the Portfolio will be treated as a short-term capital gain or loss.
For purposes of the Short-Short Gain Test, the holding period of an option
written by a Portfolio will
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25
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, a Portfolio may be limited in
its ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by a Portfolio (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
the taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during the year. Any
capital gain or loss for the taxable year with respect to Section 1256 contracts
(including any capital gain or loss arising as a consequence of the year-end
deemed sale of such contracts) is generally treated as 60% long-term and 40%
short-term capital gain or loss. A Portfolio, however, may elect not to have
this special tax treatment apply to Section 1256 contracts that are part of a
"mixed straddle" with other investments of the Portfolio that are not Section
1256 contracts. Deemed gains from constructive sales of Section 1256 contracts
under Code Section 1256 will be treated for purposes of the Short-Short Gain
Test as being derived from securities held for not less than three months.
Each Portfolio may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If a Portfolio invests in a PFIC, it may elect
to treat the PFIC as a qualifying electing fund (a "QEF") in which event the
Portfolio will each year have ordinary income and long-term capital gain equal
to its respective pro rata share of the PFIC's ordinary earnings and net capital
gain for the year, regardless of whether the Portfolio receives distributions of
any such ordinary earning or capital gain from the PFIC. If the Portfolio does
not (because it is unable to, chooses not to or otherwise) elect to treat the
PFIC as a QEF, then in general (1) any gain recognized by the Portfolio upon a
sale or other disposition of its interest in the PFIC or any "excess
distribution" (as defined) received by the Portfolio from the PFIC will be
allocated ratably over the Portfolio's holding period of the underlying PFIC
stock, (2) the portion of such gain or excess distribution so allocated to the
year in which the gain is recognized or the excess distribution is received
shall be included in the Portfolio's gross income for such year as ordinary
income (and the distribution of such portion by the Portfolio to the Accounts
will be treated as an ordinary income dividend, but such portion will not be
subject to tax at the Portfolio level), (3) the Portfolio shall be liable for
tax on the portions of such gain or excess distribution so allocated to prior
years in an amount equal to, for each such prior year, (i) the amount of gain or
excess distribution allocated to such prior year multiplied by the highest
corporate tax rate in effect for such prior year plus (ii) interest on the
amount determined under clause (i) for the period from the due date for filing a
return for such prior year until the date for filing a return for the year in
which the gain is recognized or the excess distribution is received at the rates
applicable to underpayments of tax for such period, and (4) the distribution by
the Portfolio to the Accounts of such gain or excess distribution so allocated
to prior years (net of the tax payable by the Portfolio thereon) will again be
treated as the distribution of an ordinary income dividend.
Under proposed Treasury Regulations (not yet in effect) a Portfolio
will be able to elect to recognize as gain the excess, if any, as of the last
day of its taxable year, of the fair market value of each share of PFIC stock
over the Portfolio's adjusted tax basis in such share ("mark to market gain").
Such gain will be included by a Portfolio as ordinary income and will not be
subject to the Short-Short Gain Test; the Portfolio's holding period with
respect to such PFIC stock will commence on the first day of the next taxable
year. If a Portfolio makes such an election in the first taxable year it holds
PFIC stock, it will not incur the tax described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain for any
taxable year, to elect (unless it has made a taxable year election for excise
tax purposes as discussed below) to treat all or any part of any net capital
loss, any net long-term capital loss or any net foreign currency loss incurred
after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a Portfolio
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of its taxable
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26
year, at least 50% of the value of the Portfolio's assets must consist of cash
and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Portfolio
has not invested more than 5% of the value of its total assets in securities of
such issuer and as to which it does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies), or in two or more issuers which the Portfolio controls and which are
engaged in the same or similar trades or businesses. Generally, an option (call
or put) with respect to a security is treated as issued by the issuer of the
security and not the issuer of the option. For purposes of asset diversification
testing, obligations issued or guaranteed by agencies or instrumentalities of
the U.S. Government such as the Federal Agricultural Mortgage Corporation, the
Farm Credit System Financial Assistance Corporation, a Federal Home Loan Bank,
the Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, the Government National Mortgage Corporation, and the Student Loan
Marketing Association are treated as U.S. Government securities.
If for any taxable year a Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be treated by the
shareholders as ordinary dividends to the extent of the Portfolio's current and
accumulated earnings and profits.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year.
Each Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Portfolio may in certain circumstances be required
to liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
Qualification of Segregated Asset Accounts
A variable life insurance or annuity contract will not be treated as a
life insurance contract or annuity, respectively, under the Code, if the
segregated asset account upon which such contracts are based is not "adequately
diversified." A segregated asset account will be "adequately diversified" if it
satisfies one of two alternative tests set forth in the Treasury Regulations as
of the end of each calendar quarter (or within 30 days thereafter). First, the
Treasury Regulations provide that a segregated asset account will be adequately
diversified if no more than 55% of the value of its total assets are 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 this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. Government agency and instrumentality is considered a separate
issuer. As a safe harbor, a segregated asset account will be treated as
adequately diversified if the diversification requirements under Subchapter M,
as set forth above, are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items (including receivables), U.S.
Government securities, and securities of other regulated investment companies.
In addition, a segregated asset account with respect to a variable life
insurance contract can also be considered adequately diversified if, instead of
satisfying either of the above-noted tests, the segregated asset account,
excluding U.S. Government securities, satisfies the general diversification
percentages noted above increased by the product of (a) .5 and (b) the
percentage of value of the total assets of the segregated asset account
represented by the Treasury securities. The effect of this special test is that
a segregated asset account is treated as adequately diversified to the extent it
holds securities issued by the U.S. Government.
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27
For purposes of these diversification tests, a segregated asset account
invested in shares of a regulated investment company will be entitled to
"look-through" the shares of the regulated investment company to its pro rata
portion of the assets of the regulated investment company based on its stock
ownership in the company, provided that the shares of the regulated investment
company are generally held only by insurance companies, certain fund managers,
and trustees of qualified pension or retirement plans (a "Closed Fund").
If the segregated asset account upon which a variable contract is based
is not treated as "adequately diversified" under the foregoing rules for each
calendar quarter, then (a) the variable contract is not treated as a life
insurance policy or annuity contract under the Code for all subsequent periods
and (b) the holders of such policy or contract must include as ordinary income
the "income on the contract" for each taxable year. The "income on the contract"
is generally the excess of (a) the sum of the increase in net surrender value of
the contract during the taxable year and the cost of the life insurance
protection provided under the contract during the year over (b) the premiums
paid under the contract during the taxable year. In addition, it is also
possible that if the Portfolio does not satisfy the requirements of a Closed
Fund set forth above, the holders of the contracts and annuities, which invest
in the Portfolio through the segregated asset account, will be treated as the
owners of such shares and taxable with respect to distributions paid by the
Portfolio, as described herein.
Portfolio Distributions
Each Portfolio anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions are
generally offset by deductible life insurance reserves and should therefore not
be taxable to the Accounts. Contract or policy holders should consult the
prospectuses of their respective contracts or policies concerning the tax
treatment of the Accounts.
MANAGEMENT OF THE TRUST AND THE PORTFOLIOS
Trustees and Officers
The Trustees and officers of the Trust and their principal occupations
for at least the past five years are set forth below. Their titles may have
varied during that period.
Fergus Reid, III--Chairman of the Trust. Chairman and Chief Executive
Officer, Lumelite Corporation, since September 1985; Trustee, Morgan Stanley
Funds. Age: 63. Address: 202 June Road, Stamford, CT 06903.
Richard E. Ten Haken--Trustee; Chairman of the Audit Committee.
Formerly District Superintendent of Schools, Monroe No. 2 and Orleans Counties,
New York; Chairman of the Board and President, New York State Teachers'
Retirement System. Age: 61. Address: 4 Barnfield Road, Pittsford, NY 14534.
William J. Armstrong--Trustee. Vice President and Treasurer,
Ingeroll-Rand Company. Age: 54. Address: 49 Aspen Way, Upper Saddle River, NJ
07458.
John R.H. Blum--Trustee. Attorney in private practice; formerly,
partner in the law firm of Richards, O'Neil & Allegaert; Commissioner of
Agriculture - State of Connecticut, 1992-1995. Age: 66. Address: 322 Main
Street, Lakeville, CT 06039.
Joseph J. Harkins--Trustee. Retired; Commercial Sector Executive and
Executive Vice President of The Chase Manhattan Bank, N.A. from 1985 through
1989. He has been employed by Chase in numerous capacities and offices since
1954. Director of Blessings Corporation, Jefferson Insurance Company of New
York, Monticello Insurance Company and National. Age: 64. Address: 257
Plantation Circle South, Ponte Vedra Beach, FL 32082.
*H. Richard Vartabedian--Trustee and President of the Trust; Chairman
of the Portfolios; Consultant, Republic Bank of New York; formerly, Senior
Investment Officer, Division Executive of the Investment Management Division of
The Chase Manhattan Bank, N.A., 1980 through 1991. Age: 60. Address: P.O. Box
296, Beach Road, Hendrick's Head, Southport, ME 04576.
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Stuart W. Cragin, Jr.--Trustee. Retired; formerly President, Fairfield
Testing Laboratory, Inc. He has previously served in a variety of marketing,
manufacturing and general management positions with Union Camp Corp., Trinity
Paper & Plastics Corp., and Conover Industries. Age: 63. Address: 108 Valley
Road, Cos Cob, CT 06807.
Irving L. Thode--Trustee. Retired; formerly Vice President of Quotron
Systems. He has previously served in a number of executive positions with
Control Data Corp., including President of its Latin American Operations, and
General Manager of its Data Services business. Age: 64. Address: 80 Perkins
Road, Greenwich, CT 06830.
*W. Perry Neff--Trustee. Independent Financial Consultant; Director of
North America Life Assurance Co., Petroleum & Resources Corp. and The Adams
Express Co.; Director and Chairman of The Hanover Funds, Inc.; Director,
Chairman and President of The Hanover Investment Funds, Inc. Age: 68. Address:
RR1 Box 102, Weston, VT 05181.
Roland R. Eppley, Jr.--Trustee. Retired: formerly President and Chief
Executive Officer, Eastern States Bankcard Association Inc. (1971-1988);
Director, Janel Hydraulics, Inc.; Director of The Hanover Funds, Inc. Age: 63.
Address: 105 Ceventry Place, Palm Beach Gardens, FL 33418.
W.D. MacCallan--Trustee. Director of The Adams Express Co. and
Petroleum & Resources Corp.; formerly Chairman of the Board and Chief Executive
Officer of The Adams Express Co. and Petroleum & Resources Corp.; Director of
The Hanover Funds, Inc. and The Hanover Investment Funds, Inc. Age: 68. Address:
624 East 45th Street, Savannah, GA 31405
Martin R. Dean--Treasurer and Assistant Secretary. Associate Director,
Accounting Services, BISYS Fund Services; formerly Senior Manager, KPMG Peat
Marwick (1987-1994). Age: 32. Address: 3435 Stelzer Road, Columbus, OH 43219.
Ann E. Bergin--Secretary. Senior Vice President, BISYS Fund Services,
Inc.; formerly, Senior Vice President, Administration, Concord Financial Group
(1991-1995); Assistant Vice President, Dreyfus Service Corporation (1982-1991).
Age 36. Address: 125 West 55th Street, New York, NY 10019.
- -----------------------------
* Asterisks indicate those Trustees that are "interested persons" (as defined
in the 1940 Act). Mr. Reid is not an interested person of the Trust's
investment advisers or principal underwriter, but may be deemed an
interested person of the Trust solely by reason of being an officer of the
Trust.
The Board of Trustees of the Trust presently has an Audit Committee.
The members of the Audit Committee are Messrs. Ten Haken (Chairman), Blum,
Cragin, Thode, Armstrong, Harkins, Reid and Vartabedian. The function of the
Audit Committee is to recommend independent auditors and monitor accounting and
financial matters. The Audit Committee met _____ times during the fiscal year
ended August 31, 1996.
The Board of Trustees of the Trust has established an Investment
Committee. The members of the Investment Committee are Messrs. Vartabedian
(Chairman) and Reid, as well as Leonard M. Spalding, President of Vista Capital
Management. The function of the Investment Committee is to review the investment
management process of the Trust.
Remuneration of Trustees and Certain Executive Officers:
Each Trustee is reimbursed for expenses incurred in attending each
meeting of the Board of Trustees or any committee thereof. Each Trustee who is
not an affiliate of the advisers is compensated for his or her services
according to a fee schedule which recognizes the fact that each Trustee also
serves as a Trustee of other investment companies advised by the advisers. Each
Trustee receives a fee, allocated among all investment companies for which
<PAGE>
29
the Trustee serves, which consists of an annual retainer component and a meeting
fee component. Effective August 21, 1995, each Trustee of the Vista Funds
receives a quarterly retainer of $12,000 and an additional per meeting fee of
$1,500. Members of committees receive a meeting fee only if the committee
meeting is held on a day other than a day on which a regularly scheduled meeting
is held. The Chairman of the Trustees and the Chairman of the Investment
Committee each receive a 50% increment over regular Trustee total compensation
for serving in such capacities for all the investment companies advised by the
Adviser.
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended August 31, 1996 for each Trustee of the Trust:
<TABLE>
<CAPTION>
Asset International Capital Money U.S.Govern-
Allocation Equity Growth and Growth Market ment Income
Portfolio Portfolio Income Portfo Portfolio Portfolio Portfolio
--------- --------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee $ $ $ $ $ $
Richard E. Ten Haken, Trustee
William J. Armstrong, Trustee
John R.H. Blum, Trustee
Joseph J. Harkins, Trustee
H. Richard Vartabedian, Trustee
Stuart W. Cragin, Jr., Trustee
Irving L. Thode, Trustee
W. Perry Neff, Trustee
Ronald R. Eppley, Jr., Trustee
W.D. MacCallan, Trustee
</TABLE>
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued Total Compensation
as Fund Expenses from "Fund Complex"(1)
---------------- ----------------------
<S> <C>
Fergus Reid, III, Trustee $__________
Richard E. Ten Haken, Trustee
William J. Armstrong, Trustee
John R.H. Blum, Trustee
Joseph J. Harkins, Trustee
H. Richard Vartabedian, Trustee
Stuart W. Cragin, Jr., Trustee
Irving L. Thode, Trustee
W. Perry Neff, Trustee
Ronald R. Eppley, Jr., Trustee
</TABLE>
<PAGE>
30
W.D. MacCallan, Trustee
- ---------------
(1) Data reflects total compensation earned during the period September 1,
1995 to August 31, 1996 for service as a Trustee to all Portfolios
advised by the adviser.
Vista Funds Retirement Plan for Eligible Trustees
Effective August 21, 1995, the Trustees also instituted a Retirement
Plan for Eligible Trustees (the "Plan") pursuant to which each Trustee (who is
not an employee of any of the Vista Funds, the advisers, administrator or
distributor or any of their affiliates) may be entitled to certain benefits upon
retirement from the Board of Trustees. Pursuant to the Plan, the normal
retirement date is the date on which the eligible Trustee has attained age 65
and has completed at least five years of continuous service with one or more of
the investment companies advised by the adviser (collectively, the "Covered
Funds"). Each Eligible Trustee is entitled to receive from the Covered Funds an
annual benefit commencing on the first day of the calendar quarter coincident
with or following his date of retirement equal to 10% of the highest annual
compensation received from the Covered Funds multiplied by the number of such
Trustee's years of service (not in excess of 10 years) completed with respect to
any of the Covered Funds. Such benefit is payable to each eligible Trustee in
monthly installments for the life of the Trustee.
Set forth below in the table are the estimated annual benefits payable
to an eligible Trustee upon retirement assuming various compensation and years
of service classifications. As of September 30, 1996, the estimated credited
years of service for Messrs. Reid, Ten Haken, Armstrong, Blum, Harkins,
Vartabedian, Cragin, Thode, Neff, Eppley and MacCallan are 11, 11, 8, 11, 5, 3,
3, 3, 6, 7 and 6, respectively.
Highest Annual Compensation Paid by All Vista Funds
---------------------------------------------------
Years of $40,000 $45,000 $50,000 $55,000
Service
Estimated Annual Benefits Upon Retirement
-----------------------------------------
10 $40,000 $45,000 $50,000 $55,000
9 36,000 40,500 45,000 49,500
8 32,000 36,000 40,000 44,000
7 28,000 31,500 35,000 38,500
6 24,000 27,000 30,000 33,000
5 20,000 22,500 25,000 27,500
Effective August 21, 1995, the Trustees instituted a Deferred
Compensation Plan for Eligible Trustees (the "Deferred Compensation Plan")
pursuant to which each Trustee (who is not an employee of any of the Covered
Funds, the advisers, administrator or distributor or any of their affiliates)
may enter into agreements with the Covered Funds whereby payment of the
Trustee's fees are deferred until the payment date elected by the Trustee (or
the Trustee's termination of service). The deferred amounts are deemed invested
in shares of Vista funds selected by the Trustee. The deferred amounts are paid
out in a lump sum or over a period of several years as elected by the Trustee at
the time of deferral. If a deferring Trustee dies prior to the distribution of
amounts held in the deferral account, the balance of the deferral account will
be distributed to the Trustee's designated beneficiary in a single lump sum
payment as soon as practicable after such deferring Trustee's death.
<PAGE>
31
Messrs. Ten Haken, Thode and Vartabedian have each executed a deferred
compensation agreement for the 1996 calendar year and as of September 30, 1996
they had contributed $15,200, $39,500 and $59,250 respectively.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers against liabilities and expenses incurred in connection
with litigation in which they may be involved because of their offices with the
Trust, unless, as to liability to the Trust or its shareholders, it is finally
adjudicated that they engaged in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in their offices or with
respect to any matter unless it is finally adjudicated that they did not act in
good faith in the reasonable belief that their actions were in the best interest
of the Trust. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
As of October 15, 1996, the Trustees and officers as a group owned less
than 1% of each Portfolio's outstanding shares, all of which were acquired for
investment purposes. For the fiscal year ended August 31, 1996, the Trust paid
its disinterested Trustees fees and expenses for all of the meetings of the
Board and any committees attended in the aggregate amount of approximately
$_______ which amount is then apportioned between the Portfolios comprising the
Trust.
Adviser and Sub-Adviser
Chase acts as investment adviser to the Portfolios pursuant to an
Investment Advisory Agreement, dated as of May 6, 1996 (the "Advisory
Agreement"). Subject to such policies as the Board of Trustees may determine,
Chase is responsible for investment decisions for the Portfolios. Pursuant to
the terms of the Advisory Agreement, Chase provides the Portfolios with such
investment advice and supervision as it deems necessary for the proper
supervision of the Portfolios' investments. The advisers continuously provide
investment programs and determine from time to time what securities shall be
purchased, sold or exchanged and what portion of the Portfolios' assets shall be
held uninvested. The advisers to the Portfolios furnish, at their own expense,
all services, facilities and personnel necessary in connection with managing the
investments and effecting portfolio transactions for their Portfolios. The
Advisory Agreement for the Portfolios will continue in effect from year to year
only if such continuance is specifically approved at least annually by the Board
of Trustees or by vote of a majority of a Portfolio's outstanding voting
securities and by a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons of any such party, at a meeting called for the
purpose of voting on such Advisory Agreement.
Under the Advisory Agreement, the adviser may utilize the specialized
portfolio skills of all its various affiliates, thereby providing the Portfolios
with greater opportunities and flexibility in accessing investment expertise.
Pursuant to the terms of the Advisory Agreement and the sub-advisers'
agreements with the adviser, the adviser and sub-advisers are permitted to
render services to others. Each advisory agreement is terminable without penalty
by the Trust on behalf of the Portfolios on not more than 60 days', nor less
than 30 days', written notice when authorized either by a majority vote of a
Portfolio's shareholders or by a vote of a majority of the Board of Trustees of
the Trust, or by the adviser or sub-adviser on not more than 60 days', nor less
than 30 days', written notice, and will automatically terminate in the event of
its "assignment" (as defined in the 1940 Act). The advisory agreements provide
that the adviser or sub-adviser under such agreement shall not be liable for any
error of judgment or mistake of law or for any loss arising out of any
investment or for any act or omission in the execution of portfolio transactions
for the respective Portfolio, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties thereunder.
With respect to the Equity Portfolios, the equity research team of the
adviser looks for two key variables when analyzing stocks for potential
investment by equity portfolios: value and momentum. To undercover these
qualities, the team uses a combination of quantitative analysis, fundamental
research and computer technology to help identify undervalued stocks.
<PAGE>
32
In the event the operating expenses of the Portfolios, including all
investment advisory, administration and sub-administration fees, but excluding
brokerage commissions and fees, taxes, interest and extraordinary expenses such
as litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to the Portfolios imposed by the securities laws or
regulations thereunder of any state in which the shares of the Portfolios are
qualified for sale, as such limitations may be raised or lowered from time to
time, the adviser shall reduce its advisory fee (which fee is described below)
to the extent of its share of such excess expenses. The amount of any such
reduction to be borne by the adviser shall be deducted from the monthly advisory
fee otherwise payable with respect to the Portfolios during such fiscal year;
and if such amounts should exceed the monthly fee, the adviser shall pay to a
Portfolio its share of such excess expenses no later than the last day of the
first month of the next succeeding fiscal year.
Under the Advisory Agreement, Chase may delegate a portion of its
responsibilities to a sub-adviser. In addition, the Advisory Agreement provides
that Chase may render services through its own employees or the employees of one
or more affiliated companies that are qualified to act as an investment adviser
of the Portfolio and are under the common control of Chase as long as all such
persons are functioning as part of an organized group of persons, managed by
authorized officers of Chase.
Chase, on behalf of the Portfolios (except the International Equity
Portfolio), has entered into an investment sub-advisory agreement with Chase
Asset Management, Inc. ("CAM"). With respect to the International Equity
Portfolio, Chase has entered into an investment sub-advisory agreement with
Chase Asset Management (London) Limited ("CAM London"). With respect to the
day-to-day management of the Portfolios, under the sub-advisory agreements, the
sub-advisers make decisions concerning, and place all orders for, purchases and
sales of securities and help maintain the records relating to such purchases and
sales. The sub-advisers may, in their discretion, provide such services through
their own employees or the employees of one or more affiliated companies that
are qualified to act as an investment adviser to the Company under applicable
laws and are under the common control of Chase; provided that (i) all persons,
when providing services under the sub-advisory agreement, are functioning as
part of an organized group of persons, and (ii) such organized group of persons
is managed at all times by authorized officers of the sub-advisers. This
arrangement will not result in the payment of additional fees by the Portfolios.
Chase, a wholly-owned subsidiary of The Chase Manhattan Corporation, a
registered bank holding company, is a commercial bank offering a wide range of
banking and investment services to customers throughout the United States and
around the world. Also included among Chase's accounts are commingled trust
funds and a broad spectrum of individual trust and investment management
portfolios. These accounts have varying investment objectives.
CAM is a wholly-owned operating subsidiary of the adviser. CAM is
registered with the Securities and Exchange Commission as an investment adviser
and was formed for the purpose of providing discretionary investment advisory
services to institutional clients and to consolidate Chase's investment
management function, and the same individuals who serve as portfolio managers
for CAM also serve as portfolio managers for Chase.
CAM London is an indirect wholly-owned operating subsidiary of the
adviser. CAM London is registered with the Securities and Exchange Commission
and is regulated by the Investment Management Regulatory Organization (IMRO) as
an investment adviser and was formed for the purpose of providing discretionary
investment advisory services to institutional clients and to consolidate Chase's
investment management function, and the same individuals who serve as portfolio
managers for CAM London also serve as portfolio managers for Chase.
In consideration of the services provided by the adviser pursuant to
the Advisory Agreement, the adviser is entitled to receive from each Portfolio
an investment advisory fee computed daily and paid monthly based on a rate equal
to a percentage of such Portfolio's average daily net assets specified in the
Prospectus. However, the adviser may voluntarily agree to waive a portion of the
fees payable to it on a month-to-month basis. For their services under their
sub-advisory agreements, CAM and CAM London will be entitled to receive, with
respect to each such Portfolio, such compensation, payable by the adviser out of
its advisory fee, as is described in the Prospectus.
<PAGE>
33
For the fiscal years ended August 31, 1995 and 1996, Chase was paid or
accrued the following investment advisory fees with respect to the following
Portfolios, and voluntarily waived the amounts in parentheses following such
fees with respect to each such period:
<TABLE>
<CAPTION>
Fiscal Year-Ended August 31,
-----------------------------------------------------------------------------
1995 1996
--------------------------------------- ------------------------------------
Portfolio
- ---------
paid/accrued waived paid/accrued waived
-------------------- ----------------- ----------------------- ------------
<S> <C> <C> <C> <C>
U.S. Government Income Portfolio $ $ $ $
Growth and Income Portfolio.................
Capital Growth Portfolio....................
Asset Allocation Portfolio..................
International Equity Portfolio..............
Money Market Portfolio......................
</TABLE>
Administrator
Pursuant to an Administration Agreement (the "Administration
Agreement"), Chase is the administrator of each Portfolio. Chase provides
certain administrative services to the Portfolios, including, among other
responsibilities, coordinating the negotiation of contracts and fees with, and
the monitoring of performance and billing of, the Portfolios' independent
contractors and agents; preparation for signature by an officer of the Trust and
Portfolios of all documents required to be filed for compliance by the Trust and
Portfolios with applicable laws and regulations excluding those of the
securities laws of various states; arranging for the computation of performance
data, including net asset value and yield; responding to shareholder inquiries;
and arranging for the maintenance of books and records of the Portfolios and
providing, at its own expense, office facilities, equipment and personnel
necessary to carry out its duties. Chase in its capacity as administrator does
not have any responsibility or authority for the management of the Portfolios,
the determination of investment policy, or for any matter pertaining to the
distribution of Portfolio shares.
Under the Administration Agreement, Chase is permitted to render
administrative services to others. The Administration Agreement will continue in
effect from year to year with respect to each Portfolio only if such continuance
is specifically approved at least annually by the Board of Trustees of the Trust
or by vote of a majority of such Portfolio's outstanding voting securities and,
in either case, by a majority of the Trustees who are not parties to the
Administration Agreements or "interested persons" (as defined in the 1940 Act)
of any such party. The Administration Agreement is terminable without penalty by
the Trust on behalf of each Portfolio on 60 days' written notice when authorized
either by a majority vote of such Portfolio's shareholders or by vote of a
majority of the Board of Trustees, including a majority of the Trustees who are
not "interested persons" (as defined in the 1940 Act) of the Trust or
Portfolios, or by Chase on 60 days' written notice, and will automatically
terminate in the event of their "assignment" (as defined in the 1940 Act). The
Administration Agreement also provides that neither Chase nor its personnel
shall be liable for any error of judgment or mistake of law or for any act or
omission in the administration of the Portfolios, except for willful
misfeasance, bad faith or gross negligence in the performance of its or their
duties or by reason of reckless disregard of its or their obligations and duties
under the Administration Agreement.
In addition, the Administration Agreement provides that, in the event
the operating expenses of any Portfolio, including all investment advisory,
administration and sub-administration fees, but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, for any
fiscal year exceed the most restrictive expense limitation applicable to that
Portfolio imposed by the securities laws or regulations thereunder of any state
in which the shares of such Portfolio are qualified for sale, as such
limitations may be raised or lowered from time to time, Chase shall reduce its
administration fee (which fee is described below) to the extent of its share of
such excess expenses. The amount of any such reduction to be borne by Chase
shall be deducted from the monthly administration fee otherwise payable to Chase
during such fiscal year; and if such amounts should
<PAGE>
34
exceed the monthly fee, Chase shall pay to such Portfolio its share of such
excess expenses no later than the last day of the first month of the next
succeeding fiscal year.
In consideration of the services provided by Chase pursuant to the
Administration Agreement, Chase receives from each Portfolio a fee computed
daily and paid monthly at an annual rate equal to 0.05% of each of the
Portfolio's average daily net assets, on an annualized basis for the Portfolio's
then-current fiscal year. Chase may voluntarily waive a portion of the fees
payable to it with respect to each Portfolio on a month-to-month basis.
For the fiscal years ended August 31, 1995 and 1996, Chase was paid or
accrued the following administration fees and voluntarily waived the amounts in
parentheses following such fees:
<TABLE>
<CAPTION>
Fiscal Year-Ended August 31,
--------------------------------------------------------------------------------------
1995 1996
------------------------------------------ ------------------------------------------
Portfolio
- ---------
paid/accrued waived paid/accrued waived
--------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Government Income Portfolio............ $ $ $ $
Growth and Income Portfolio.................
Capital Growth Portfolio....................
Asset Allocation Portfolio..................
International Equity Portfolio..............
Money Market Portfolio......................
</TABLE>
Sub-Administration Agreement
The Trust has entered into a Sub-Administration Agreement (the
"Sub-Administration Agreement") with Vista Fund Distributors, Inc. ("VFD"),
pursuant to which VFD provides certain administration services, including
providing officers, clerical staff and office space. VFD is a wholly-owned
subsidiary of BISYS Fund Services, Inc. The Sub-Administration Agreement
provides that the Trust will bear the expenses of printing, distributing and
filing prospectuses and statements of additional information and reports used
for sales purposes, and of preparing and printing sales literature and
advertisements. The Trust pays for all of the expenses for qualification of the
shares of each Portfolio for sale in connection with the public offering of such
shares, and all legal expenses in connection therewith. In addition, pursuant to
the Sub-Administration Agreement, VFD provides certain sub-administration
services to the Trust, including providing officers, clerical staff and office
space.
The Sub-Administration Agreement is currently in effect until
__________, 199_, and will continue in effect thereafter with respect to each
Portfolio only if such continuance is specifically approved at least annually by
the Board of Trustees or by vote of a majority of such Portfolio's outstanding
voting securities and, in either case, by a majority of the Trustees who are not
parties to the Sub-Administration Agreement or "interested persons" (as defined
in the 1940 Act) of any such party. The Sub-Administration Agreement is
terminable without penalty by the Trust on behalf of each Portfolio on 60 days'
written notice when authorized either by a majority vote of such Portfolio's
shareholders or by vote of a majority of the Board of Trustees of the Trust,
including a majority of the Trustees who are not "interested persons" (as
defined in the 1940 Act) of the Trust, or by VFD on 60 days' written notice, and
will automatically terminate in the event of its "assignment" (as defined in the
1940 Act). The Sub-Administration Agreement also provides that neither VFD nor
its personnel shall be liable for any act or omission in the course of, or
connected with, rendering services under the Sub-Administration Agreement,
except for willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations or duties.
In the event the operating expenses of any Portfolio, including all
investment advisory, administration and sub-administration fees, but excluding
brokerage commissions and fees, taxes, interest and extraordinary expenses such
as litigation, for any fiscal year exceed the most restrictive expense
limitation applicable to that Portfolio
<PAGE>
35
imposed by the securities laws or regulations thereunder of any state in which
the shares of such Portfolio are qualified for sale, as such limitations may be
raised or lowered from time to time, VFD shall reduce its sub-administration fee
with respect to such Portfolio (which fee is described below) to the extent of
its share of such excess expenses. The amount of any such reduction to be borne
by VFD shall be deducted from the monthly sub-administration fee otherwise
payable with respect to such Portfolio during such fiscal year; and if such
amounts should exceed the monthly fee, VFD shall pay to such Portfolio its share
of such excess expenses no later than the last day of the first month of the
next succeeding fiscal year.
In consideration of the sub-administration services provided by VFD
pursuant to the Sub-Administration Agreement, VFD receives an annual fee,
payable monthly, of .15% of the net assets of each Portfolio. VFD may
voluntarily waive a portion of the fees payable to it under the
Sub-Administration Agreement with respect to each Portfolio on a month-to-month
basis.
For the fiscal years ended August 31, 1995 and 1996, VFD was paid or
accrued the following sub-administration fees and voluntarily waived the amounts
in parentheses following such fees:
<TABLE>
<CAPTION>
Fiscal Year-Ended August 31,
-------------------------------------------------------------------------------------
1995 1996
----------------------------------------- ------------------------------------------
Portfolio
- ---------
paid/accrued waived paid/accrued waived
-------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
U.S. Government Income Portfolio............ $ $ $ $
Growth and Income Portfolio.................
Capital Growth Portfolio....................
Asset Allocation Portfolio..................
International Equity Portfolio..............
Money Market Portfolio......................
</TABLE>
Transfer Agent and Custodian
State Street Bank and Trust Company ("State Street") acts as transfer
agent and dividend disbursing agent (the "Transfer Agent") for the Trust. For
its services as Transfer Agent, State Street receives such compensation as is
from time to time agreed upon by the Trust and State Street. State Street's
address is 1 Heritage Drive, Quincy, MA 02171. Pursuant to a Custodian
Agreement, Chase acts as the custodian of the assets of each Portfolio
for which Chase receives compensation as is from time to time agreed upon
by the Trust and the Custodian. The Custodian's responsibilities include
safeguarding and controlling the cash and securities of each Portfolio, handling
the receipt and delivery of securities, determining income and collecting
interest on each Portfolio's investments, maintaining books of original entry
for the portfolio accounting and other required books and accounts, and
calculating the daily net asset value of shares of each Portfolio. The Custodian
may contract with other entities to perform certain services. In addition,
Portfolio securities and cash may be held by sub-custodian banks under certain
arrangements.
INDEPENDENT ACCOUNTANTS
The financial statements for the fiscal year ended August 31, 1996 for
the Portfolios which appear in this Statement of Additional Information, and the
related financial highlights for the fiscal year ended August 31, 1996 which
appear in the Prospectus have been included herein and in the Prospectus in
reliance on the reports of Price Waterhouse LLP, 1177 Avenue of the Americas,
New York, New York 10036, independent accountants of the Portfolios, given on
the authority of said firm as experts in accounting and auditing. Price
Waterhouse LLP provides the Portfolios with audit services, tax return
preparation and assistance and consultation with respect to the preparation of
filings with the Securities and Exchange Commission.
<PAGE>
36
GENERAL INFORMATION
Description of Shares, Voting Rights and Liabilities
Mutual Fund Variable Annuity Trust is an open-end, management
investment company organized as a Massachusetts business trust under the laws of
the Commonwealth of Massachusetts in 1994. The Trust currently consists of six
Portfolios of shares of beneficial interest (par value $0.001 per share). The
Trust has reserved the right to create and issue additional series or classes.
Each share of a series or class represents an equal proportionate interest in
that series or class with each other share of that series or class. The shares
of each series or class participate equally in the earnings, dividends and
assets of the particular series or class. Expenses of the Trust which are not
attributable to a specific series or class are allocated among all the series in
a manner believed by management of the Trust to be fair and equitable. Shares
have no preemptive or conversion rights. Shares when issued are fully paid and
non-assessable, except as set forth below. Shareholders are entitled to one vote
for each share held. Shares of each series or class generally vote together,
except when required under federal securities laws to vote separately on matters
that only affect a particular class, such as the approval of distribution plans
for a particular class. To the extent required by applicable law, shares of the
Portfolios held by Accounts will be voted at meetings of the shareholders of the
Trust in accordance with instructions received from persons having the voting
interest in the Portfolios. Shares for which no instructions have been received
will be voted in the same proportion as shares for which instructions have been
received. The Trust does not hold regular meetings of shareholders.
The Trust is not required to hold annual meetings of shareholders but
will hold special meetings of shareholders of a series or class when, in the
judgment of the Trustees, it is necessary or desirable to submit matters for a
shareholder vote. Shareholders have, under certain circumstances, the right to
communicate with other shareholders in connection with requesting a meeting of
shareholders for the purpose of removing one or more Trustees. Shareholders also
have, in certain circumstances, the right to remove one or more Trustees without
a meeting. No material amendment may be made to the Trust's Declaration of Trust
without the affirmative vote of the holders of a majority of the outstanding
shares of each Portfolio affected by the amendment. Shares have no preemptive or
conversion rights. Shares, when issued, are fully paid-and non-assessable,
except as set forth below. Any series or class may be terminated (i) upon the
merger or consolidation with, or the sale or disposition of all or substantially
all of its assets to, another entity, if approved by the vote of the holders of
two-thirds of its outstanding shares, except that if the Board of Trustees
recommends such merger, consolidation or sale or disposition of assets, the
approval by vote of the holders of a majority of the series' or class'
outstanding shares will be sufficient, or (ii) by the vote of the holders of a
majority of its outstanding shares, or (iii) by the Board of Trustees by written
notice to the series' or class' shareholders. Unless each series and class is so
terminated, the Trust will continue indefinitely.
Under Massachusetts law, shareholders of such a business trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Trust's Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides for indemnification and reimbursement of expenses out of the Trust
property for any shareholder held personally liable for the obligations of the
Trust. The Trust's Declaration of Trust also provides that the Trust shall
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
The Trust's Declaration of Trust further provides that obligations of
the Trust are not binding upon the Trustees individually but only upon the
property of the Trust and that the Trustees will not be liable for any action or
failure to act, errors of judgment or mistakes of fact or law, but nothing in
the Declaration of Trust protects a Trustee against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
The Board of Trustees has adopted a code of ethics addressing personal
securities transactions by investment personnel and access persons and other
related matters. The code has been designated to address potential conflicts
<PAGE>
37
of interest that can arise in connection with the personal trading activities of
such persons. Persons subject to the code are generally permitted to engage in
personal securities transactions, subject to certain prohibitions, pre-clearance
requirements and blackout periods.
Principal Holders
As of August 31, 1995, 100% of each of the Portfolios were beneficially
owned by Variable Annuity Account Two, a separate account of Anchor National
Life Insurance Company and First SunAmerica Life Insurance Company.
<PAGE>
page 8 Growth & Income Portfolio
Portfolio of Investments August 31, 1996
<TABLE>
<CAPTION>
Shares Issuer Value
- ------ ------ ---------
<S> <C> <C>
LONG-TERM INVESTMENTS--88.8%
COMMON STOCK--85.3%
1.6% AEROSPACE
2,100 ALLIED-SIGNAL, INC. $ 129,675
---------
1.6% AGRICULTURAL
2,900 CASE CORP. 131,950
---------
1.0% AIRLINES
700 AMR CORP. * 57,400
1,100 CONTINENTAL AIRLINES, INC., CLASS B,* 24,888
---------
82,288
---------
0.9% AUTOMOTIVE
1,400 GENERAL MOTORS 69,650
---------
6.4% BANKING
3,400 BANK OF BOSTON CORP. 179,350
600 CITICORP 49,950
2,000 COMMONWEALTH BANK OF AUSTRALIA, ADR# (AUSTRALIA) 32,250
4,800 NATIONAL CITY CORP. 180,600
900 NATIONSBANK CORP. 76,613
---------
518,763
---------
2.8% CHEMICALS
1,100 CABOT CORP. 30,250
700 DOW CHEMICAL CO. 55,825
1,700 DUPONT (EI) DE NEMOURS 139,613
---------
225,688
---------
4.5% COMPUTERS/COMPUTER HARDWARE
2,200 COMPAQ COMPUTER* 124,574
700 GATEWAY 2000 INC.* 31,194
1,500 INTERNATIONAL BUSINESS MACHINES CORP. 171,563
900 SOLECTRON CORP.* 33,638
---------
360,969
---------
8.3% CONSUMER PRODUCTS
2,400 AVON PRODUCTS, INC. 114,900
4,800 BLACK & DECKER CORP. 189,600
4,000 FIRST BRANDS CORP. 91,000
700 NIKE, INC., CLASS B 75,600
1,200 PHILIP MORRIS COMPANIES, INC. 107,700
1,000 PROCTER & GAMBLE CO. 88,875
---------
667,675
---------
0.3% DIVERSIFIED
700 HARNISCHFEGER INDUSTRIES, INC. 26,425
---------
2.9% ELECTRONICS/ELECTRICAL EQUIPMENT
1,600 INTEL CORP. 127,700
1,800 TERADYNE INC.* 27,900
1,700 TEXAS INSTRUMENTS 79,475
---------
235,075
---------
2.3% ENTERTAINMENT/LEISURE
6,500 CARNIVAL CORP., CLASS A 183,625
---------
3.8% FINANCIAL SERVICES
1,800 FEDERAL HOME LOAN MORTGAGE CORP. $ 159,075
4,200 GREEN TREE FINANCIAL CORP. 145,950
---------
305,025
---------
2.9% FOOD/BEVERAGE PRODUCTS
1,400 COCA-COLA ENTERPRISES, INC. 56,525
2,700 PEPSICO., INC. 77,625
700 UNILEVER NV, ADR (NETHERLANDS) 100,450
---------
234,600
---------
4.0% HEALTH CARE
3,300 COLUMBIA/HCA HEALTHCARE CORP. 186,038
1,400 HEALTHSOUTH CORP.* 45,325
900 MEDTRONIC, INC. 46,800
1,700 ORNDA HEALTHCORP * 43,775
---------
321,938
---------
2.4% INSURANCE
1,600 ALLSTATE CORP. 71,400
1,200 AMERICAN BANKERS INSURANCE GROUP, INC. 57,000
800 MID OCEAN, LTD. (BERMUDA) 33,100
500 TRANSATLANTIC HOLDINGS, INC. 34,688
---------
196,188
---------
5.3% MANUFACTURING
2,400 INGERSOLL-RAND CO. 102,600
1,700 JOHNSON CONTROLS 119,850
1,100 KENNAMETAL INC. 34,100
3,700 PARKER HANNIFIN CORP. 144,300
1,000 PENTAIR, INC. 27,250
---------
428,100
---------
2.1% METALS/MINING
2,200 ALUMINUM CO. OF AMERICA (ALCOA) 136,675
1,100 INCO, LTD. (CANADA) 35,475
---------
172,150
---------
1.0% OFFICE/BUSINESS EQUIPMENT
1,400 XEROX CORP. 76,825
---------
8.2% OIL & GAS
500 BRITISH PETROLEUM PLC, ADR (UNITED KINGDOM) 58,874
1,400 HALLIBURTON COMPANY 73,675
1,200 MOBIL CORP. 135,300
2,300 PANENERGY CORP. 76,188
1,400 TEXACO, INC. 124,250
1,500 TIDEWATER, INC. 57,563
2,700 WILLIAMS COMPANIES, INC. 134,663
---------
660,513
---------
1.0% PAPER/FOREST PRODUCTS
800 BOISE CASCADE CORP. 27,000
900 WILLAMETTE INDUSTRIES 55,575
---------
82,575
---------
See notes to financial statements.
<PAGE>
Growth & Income Portfolio page 9
Portfolio of Investments August 31, 1996
Shares Issuer Value
- ------ ------ ----------
3.8% PHARMACEUTICALS
1,400 AMERICAN HOME PRODUCTS CORP. $ 82,950
1,500 GLAXO WELLCOME PLC (UNITED KINGDOM) 42,750
3,600 JOHNSON & JOHNSON 177,300
---------
303,000
---------
0.9% PRINTING & PUBLISHING
2,300 NEW YORK TIMES COMPANY, CLASS A, 71,875
---------
1.5% RESTAURANTS/FOOD SERVICE
6,000 WENDY'S INTERNATIONAL, INC. 121,500
---------
5.1% RETAILING
2,100 FEDERATED DEPARTMENT STORES, INC.* 72,713
5,300 GAP, INC. 185,500
3,700 KROGER CO.* 156,788
---------
415,001
---------
1.4% SHIPPING/TRANSPORTATION
2,300 CSX CORP. 116,438
---------
4.7% TELECOMMUNICATIONS
3,300 BELLSOUTH CORP. 119,625
700 CINCINNATTI BELL, INC. 33,425
3,700 SPRINT CORP. 150,313
3,300 TELEFONAKTIEBOLAGET LM ERICSSON, SP, ADR (SWEDEN) 76,106
---------
379,469
---------
4.6% UTILITIES
2,400 CMS ENERGY CORP. 71,700
4,300 FPL GROUP INC. 190,270
1,600 SIERRA PACIFIC RESOURCES 40,800
1,700 TEXAS UTILITIES CO. 69,700
---------
372,470
---------
TOTAL COMMON STOCK (COST $6,550,813) 6,889,450
---------
CONVERTIBLE PREFERRED STOCK--2.2%
CONSUMER PRODUCTS
8,500 RJR NABISCO HOLDINGS CORP. $0.6012, SER. C 45,687
OIL & GAS
1,800 ENRON CORP., 6.25% EXCHANGE NOTES, 12/13/98, ACES, 43,875
PAPER/FOREST PRODUCTS
800 INTERNATIONAL PAPER CAPITAL CORP., 5.25% # 37,037
RETAILING
300 TJX COMPANIES, $7.00,11/17/98, SER. E 54,600
---------
TOTAL CONVERTIBLE PREFERRED STOCK
(COST $187,290) 181,199
---------
PRINCIPAL
AMOUNT
- ---------
CONVERTIBLE CORPORATE BONDS & NOTES--1.3%
INSURANCE
$30,000 AMERICAN TRAVELLERS CORP., 6.5%, DUE 10/1/05 $ 63,788
RETAILING
40,000 WABAN INC., 6.5%, DUE 7/1/02 42,800
---------
TOTAL CONVERTIBLE CORPORATE BONDS & NOTES (COST $69,083) 106,588
---------
TOTAL LONG-TERM INVESTMENTS
(COST $6,807,186) 7,177,237
---------
SHORT-TERM INVESTMENTS--11.0%
COMMERCIAL PAPER
886,000 HOUSEHOLD FINANCE CORP., 5.2%, DUE 9/3/96
(COST $886,000) 886,000
---------
99.8% TOTAL INVESTMENTS
(COST $7,693,186) $8,063,237
==========
See notes to financial statements.
<PAGE>
page 10 Capital Growth Portfolio
Portfolio of Investments August 31, 1996
Shares Issuer Value
- ------ ------ ---------
LONG-TERM INVESTMENTS--74.0%
COMMON STOCK--74.0%
1.6% AGRICULTURAL PRODUCTION/SERVICES
5,400 AGCO CORP. $127,575
---------
1.4% AIRLINES
5,000 CONTINENTAL AIRLINES, INC., CLASS B,* 113,125
---------
1.1% BANKING
2,000 STANDARD FEDERAL BANCORP. 83,750
---------
1.7% CHEMICALS
5,000 CABOT CORP. 137,500
---------
3.7% COMPUTER SOFTWARE
2,300 REYNOLDS & REYNOLDS, INC., CLASS A 115,288
5,000 WIND RIVER SYSTEMS* 173,750
---------
289,038
---------
3.7% COMPUTERS/COMPUTER HARDWARE
4,000 GATEWAY 2000 INC.,* 178,250
3,000 SOLECTRON CORP.* 112,125
---------
290,375
---------
9.5% CONSUMER PRODUCTS
6,000 ADT LTD. * 117,750
2,400 DANAHER CORP. 99,600
5,500 FIRST BRANDS CORP. 125,125
6,000 FURNITURE BRANDS INTERNATIONAL, INC.* 72,000
1,500 LANCASTER COLONY CORP. 54,563
3,000 OAKLEY, INC. * 123,000
5,000 WATERS CORP.* 156,875
---------
748,913
---------
1.4% DIVERSIFIED
3,000 HARNISCHFEGER INDUSTRIES, INC. 113,250
---------
4.2% ELECTRONICS / ELECTRICAL EQUIPMENT
4,000 ATMEL CORP.* 103,500
5,000 ESTERLINE TECHNOLOGIES CORP.* 103,125
8,000 TERADYNE INC,* 124,000
---------
330,625
---------
2.4% ENTERTAINMENT/LEISURE
7,000 BALLY ENTERTAINMENT CORP. * 190,750
---------
5.3% FINANCIAL SERVICES
3,000 ADVANTA CORP., CLASS A 146,625
3,000 AT&T CAPITAL CORP. 133,875
4,000 GREEN TREE FINANCIAL CORP. 139,000
---------
419,500
---------
2.0% FOOD/BEVERAGE PRODUCTS
4,000 COCA-COLA ENTERPRISES, INC. 161,500
---------
4.1% HEALTH CARE
5,000 ASSISTED LIVING CONCEPTS* 97,500
5,000 ORNDA HEALTHCORP * 128,750
3,000 PHYCOR, INC.* 98,250
---------
324,500
---------
1.4% HOMEBUILDERS
10,000 PACIFIC GREYSTONE CORP.* 108,750
---------
0.7% HOTELS/OTHER LODGING
2,000 BRISTOL HOTEL CO.* $ 54,750
---------
4.6% INSURANCE
3,500 MID OCEAN, LTD. (BERMUDA) 144,812
1,900 RELIASTAR FINANCIAL CORP. 83,837
2,000 TRANSATLANTIC HOLDINGS, INC. 138,750
---------
367,399
---------
4.5% MANUFACTURING
3,500 KENNAMETAL INC. 108,500
4,000 PENTAIR, INC. 109,000
3,500 UCAR INTERNATIONAL, INC.* 136,500
---------
354,000
---------
1.7% METALS/MINING
4,000 ALUMAX, INC. * 132,000
---------
3.7% OIL & GAS
4,000 SMITH INTERNATIONAL * 139,000
4,000 TIDEWATER, INC. 153,500
---------
292,500
---------
1.5% PAPER/FOREST PRODUCTS
3,500 BOISE CASCADE CORP. 118,125
---------
2.4% PHARMACEUTICALS
4,000 PAREXEL INTERNATIONAL CORP.* 194,000
---------
1.6% PROFESSIONAL SERVICES
4,500 OLSTEN CORP. 125,437
---------
1.8% REAL ESTATE INVESTMENT TRUST
6,600 OASIS RESIDENTIAL, INC. 144,375
---------
1.3% RESTAURANTS/FOOD SERVICE
5,000 WENDY'S INTERNATIONAL, INC. 101,250
---------
2.3% RETAILING
3,000 DILLARD DEPARTMENT STORES, INC., CLASS A 102,000
2,500 MSC INDUSTRIAL DIRECT CO., INC.* 79,375
---------
181,375
---------
1.4% STEEL
3,000 AK STEEL HOLDING CORP. 111,750
---------
1.5% TELECOMMUNICATIONS
2,500 CINCINNATI BELL, INC. 119,375
---------
1.5% UTILITIES
3,300 PORTLAND GENERAL CORP. 119,626
---------
TOTAL COMMON STOCK (COST $4,954,078) 5,855,113
---------
Principal
Amount
- ---------
SHORT-TERM INVESTMENTS--29.0%
COMMERCIAL PAPER
$1,788,000 HOUSEHOLD FINANCE CORP., 5.2%, DUE 9/3/96 1,788,000
500,000 H. J. HEINZ CO., 5.27%, DUE 10/11/96 497,072
---------
(COST $2,285,072) 2,285,072
---------
103.0% TOTAL INVESTMENTS
(COST $7,239,150) $8,140,185
==========
See notes to financial statements.
<PAGE>
International Equity Portfolio page 11
Portfolio of Investments August 31, 1996
Shares Issuer Value
- ------ ------ ----------
COMMON STOCK--88.5%
ARGENTINA--0.5%
BANKING
500 BANCO FRANCES DEL RIO DE LA PLATA SA, ADS * $ 11,500
OIL & GAS
600 TRANSPORTADOR DE GAS DEL SUR, SA (TGS), ADR 7,200
----------
18,700
----------
AUSTRALIA--0.3%
BROADCASTING
700 NEWS CORP. LTD. 3,738
ENTERTAINMENT/LEISURE
5,750 REEF CASINO TRUST* 2,505
METALS/MINING
4,000 MOUNT EDON GOLD MINES 5,640
----------
11,883
----------
AUSTRIA--1.6%
STEEL
393 BOEHLER-UDDEHOLM AG 30,678
OIL & GAS
316 OMV AG 31,594
----------
62,272
----------
BRAZIL--0.9%
TELECOMMUNICATIONS
450 TELECOMUNICACOES BRASILEIROS SA, ADR 33,413
----------
CHILE--0.2%
UTILITIES
300 CHILGENER SA, ADR 6,975
----------
FRANCE--4.6%
AUTOMOTIVE
195 EQUIPMENT ET COMPOSANTS POUR L'INDUSTRIE AUTOMOBILE 26,229
BROADCASTING & PUBLISHING
92 TV FRANCAISE 10,518
COMPUTER SOFTWARE
115 GROUP AXIME* 13,467
FINANCIAL SERVICES
173 CETELEM GROUP* 36,205
INSURANCE
875 AGF (ASSURANCES GENERALES DE FRANCE) 22,673
OIL & GAS
324 TOTAL CIE FRANCAISE PETROLES, SER. B, 23,873
PHARMACEUTICALS
91 ROUSSEL-UCLAF 21,168
UTILITIES
249 COMPAGNIE GENERALE DES EAUS 24,055
----------
178,188
----------
GERMANY--6.4%
BANKING
832 DEUTSCHE BANK AG 41,166
CAPITAL GOODS
81 MANNESMANN AG 29,281
GERMANY (cont'd)
CONSUMER PRODUCTS
598 ADIDAS AG $ 51,513
926 PUMA AG 31,719
INSURANCE
28 ALLIANZ AG HOLDING 49,965
PHARMACEUTICALS
340 SCHWARZ PHARMA AG 24,697
UTILITIES
460 VEBA GROUP PLC 24,180
----------
252,521
----------
HONG KONG--6.8%
BANKING
3,000 GUOCO GROUP LTD* 14,239
2,000 HANG SENG BANK LTD. 20,499
DIVERSIFIED
4,000 CITIC PACIFIC LTD.* 17,589
8,000 FIRST PACIFIC COMPANY LTD. 12,985
3,000 HUTCHISON WHAMPOA 18,158
1,200 JARDINE MATHESON HOLDINGS LTD., ADR 7,725
2,500 SWIRE PACIFIC, LTD., CLASS A* 22,228
FINANCIAL SERVICES
1,800 HSBC HOLDINGS PLC* 31,078
REAL ESTATE
3,000 CHEUNG KONG (HOLDINGS) LTD. 21,048
12 HENDERSON CHINA HOLDING LTD.* 28
2,000 HENDERSON LAND DEVELOPMENT COMPANY, LTD. 15,649
3,000 HONG KONG LAND HOLDINGS LTD. 6,810
5,000 HYSAN DEVELOPMENT CO. LTD. 15,423
3,000 NEW WORLD DEVELOPMENT COMPANY, LTD. 14,550
6,000 NEW WORLD INFRASTRUCTURE LTD.* 14,123
14,000 SINO LAND CO. 14,575
2,000 SUN HUNG KAI PROPERTIES LTD. 19,529
----------
266,236
----------
INDIA--0.5%
AUTOMOTIVE
350 TATA ENGINEERING & LOCOMOTIVE CO., LTD., GDR 5,731
HOTELS/OTHER LODGING
280 INDIAN HOTELS CO. LTD., GDR 7,315
METALS/MINING
100 HINDALCO INDUSTRIES LTD., GDR 3,330
UTILITIES
200 BSES LTD., GDR 3,775
----------
20,151
----------
INDONESIA--0.6%
BANKING
3,750 PT LIPPO BANK (FOREIGN) 5,766
See notes to financial statements.
<PAGE>
page 12 International Equity Portfolio
Portfolio of Investments August 31, 1996
Shares Issuer Value
- ------ ------ ----------
INDONESIA (cont'd)
CONSTRUCTION MATERIALS
1,500 PT SEMEN GRESIK (FOREIGN) $ 4,180
CONSUMER PRODUCTS
1,500 PT GUDANG GARAM (FOREIGN) 5,509
DIVERSIFIED
7,000 PT BIMANTARA CITRA (FOREIGN) 7,175
----------
22,630
----------
IRELAND--1.0%
BANKING
5,538 BANK OF IRELAND 40,696
----------
ITALY--3.1%
FINANCIAL SERVICES
7,000 ISTITUTO MOBILIARE ITALIANO SPA 54,901
OIL & GAS
7,500 SAIPEM SPA 34,234
UTILITIES
5,782 EDISON SPA 31,285
----------
120,420
----------
JAPAN--28.2%
AUTOMOTIVE
1,000 HONDA MOTOR CO. LTD.* 23,119
1,000 TOYOTA MOTOR CORP. 24,132
BANKING
1,000 BANK OF TOKYO-MITSUBISHI 20,356
3,000 MITSUI TRUST & BANKING 30,119
3,000 SUMITOMO TRUST & BANKING 35,645
BUSINESS SERVICES
2,000 RICOH CORP. LTD. 19,527
CHEMICALS
6,000 DAINIPPON INK & CHEMICAL INC. 26,195
ELECTRONICS/ELECTRICAL EQUIPMENT
2,000 ALPS ELECTRIC CO. LTD. 23,579
500 FANUC CO. 18,283
2,000 HITACHI LTD. 18,384
300 KEYENCE CORP. 38,132
500 MABUCHI MOTOR 27,448
2,000 NIPPON SIGNAL CO. 18,974
1,000 SHARP CORP. 15,842
5,000 YASKAWA ELECTRICE CORP.* 20,908
ENGINEERING & CONSTRUCTION
2,000 KAJIMA CORP. 17,942
3,000 NICHIEI CONSTRUCTION 28,737
MACHINERY & ENGINEERING EQUIPMENT
2,000 CKD CORP. 18,606
4,000 ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES 18,421
2,000 KOMATSU LTD. 17,113
1,000 KOMORI CORP. 22,198
3,000 MITSUBISHI HEAVY INDUSTRIES LTD.* 23,736
JAPAN (cont'd)
2,000 MORI SEIKI $ 33,158
3,000 NACHI-FUJIKOSHI CORP.* 12,462
2,000 NTN CORP. 12,803
500 SMC CORP. 35,000
MEDICAL DEVICES
4,000 SHIMADZU CORP. 24,021
METALS/MINING
6,000 SHOWA ALUMINUM CORP. 35,369
PACKAGING
5,000 TOMOKU CO. LTD. 27,125
PAPER/FOREST PRODUCTS
2,000 MITSUBISHI PAPER MILLS 10,555
PRINTING & PUBLISHING
1,000 DAI NIPPON PRINTING CO. LTD. 17,592
REAL ESTATE
2,000 DAIBIRU CORP. 25,974
3,000 HANKYU REALTY 29,014
1,000 MITSUBISHI ESTATE CO., LTD. 12,250
1,000 MITSUI FUDOSAN 12,342
RETAILING
1,000 ISETAN 13,632
1,000 MR. MAX 17,684
4,000 TOKYU DEPARTMENT STORE 24,095
SHIPPING/TRANSPORTATION
4,000 HITACHI TRANSPORT SYSTEM 40,527
4,000 MITSUI O.S.K. LINES LTD.* 12,011
5,000 NAGOYA RAILROAD CO., LTD. 23,395
3,000 NANKAI ELECTRIC RAILWAY 18,044
3,000 NAVIX LINE* 7,626
3,000 TOKYU CORP. 19,729
STEEL
4,000 NKK CORP.* 10,574
3,000 YAMATO KOGYO CO., LTD. 32,329
TELECOMMUNICATIONS
2,000 TAMURA ELECTRIC WORKS 17,316
TEXTILES/APPAREL
1,000 TOKYO STYLE 16,027
WAREHOUSING
4,000 SUMITOMO WAREHOUSE 26,379
WHOLESALING
4,000 ITOCHU CORP. 24,279
--------
1,098,708
--------
MALAYSIA--2.8%
AGRICULTURE
3,000 KUMPULAN GUTHRIE BHD 4,813
AUTOMOTIVE
7,000 TRACTORS MALAYSIA HOLDINGS BHD 15,161
See notes to financial statements.
<PAGE>
International Equity Portfolio page 13
Portfolio of Investments August 31, 1996
Shares Issuer Value
- ------ ------ ----------
MALAYSIA (cont'd)
CONSTRUCTION/CONSTRUCTION MATERIALS
4,000 KEDAH CEMENT HOLDINGS, BHD $ 7,155
6,000 SUNWAY BUILDING TECHNOLOGY BHD 15,040
2,000 SUNGEI WAY HOLDINGS BHD 10,107
DIVERSIFIED
7,000 WESTMONT BHD 12,409
ELECTRONICS/ELECTRICAL EQUIPMENT
4,000 LEADER UNIVERSAL HOLDINGS BHD 8,663
ENGINEERING/CONSTRUCTION
2,500 EKRAN BHD 10,628
5,000 PILECON ENGINEERING BHD 6,136
TELECOMMUNICATIONS
4,000 FCW HOLDINGS BHD 10,428
1,000 TELEKOM MALAYSIA BHD 8,824
--------
109,364
--------
MEXICO--0.5%
DIVERSIFIED
2,074 ALFA, SA DE C.V., CLASS A 9,095
HOMEBUILDERS
500 CORPORACION GEO, SA DE C.V., SER. B, ADR 10,077
--------
19,172
--------
NETHERLANDS--2.8%
CHEMICALS
326 AKZO NOBEL 37,979
640 CSM NV, N.R. CERTIFICATE 31,269
PRINTING & PUBLISHING
2,252 VERENIGDE NEDERLANDSE UITGEVERSBEDRIJVAN
VERENIGD BEZIT (VNU) 39,170
--------
108,418
--------
PHILIPPINES--0.9%
BANKING
250 METROPOLITAN BANK & TRUST CO. 5,973
DIVERSIFIED
24,200 METRO PACIFIC CORP. 7,401
ELECTRONICS/ELECTRICAL EQUIPMENT
4,600 IONICS CIRCUIT INC 3,912
REAL ESTATE
6,150 AYALA LAND, INC., CLASS B, 7,876
7,700 FILINVEST DEVELOPMENT CORP. 3,753
TELECOMMUNICATIONS
5,600 PHILIPINO TELEPHONE CORP.* 7,385
--------
36,300
--------
PORTUGAL--1.0%
TELECOMMUNICATIONS
1,456 PORTUGAL TELECOM SA* 39,009
--------
SINGAPORE--0.9%
AIRLINES
1,000 SINGAPORE AIRLINES LTD. 10,592
SINGAPORE (cont'd)
BANKING
1,000 OVERSEAS CHINESE BANKING CORP. $ 12,014
SHIPPING/TRANSPORTATION
12,000 COMFORT GROUP LTD. 11,431
--------
34,037
--------
SPAIN--2.1%
CONSUMER PRODUCTS
1,000 TABACALERA SA, CLASS A 40,790
RETAILING
1,690 CENTROS COMERCIALES PRYCA, SA 40,956
--------
81,746
--------
SWEDEN--1.2%
MACHINERY & ENGINEERING EQUIPMENT
2,688 SVEDALA INDUSTRI AB-FREE 46,335
--------
SWITZERLAND--5.2%
BANKING
343 SCHWEIZERISCHER BANKVEREIN, REGISTERED SHARES 66,992
PHARMACEUTICALS
50 CIBA-GEIGY AG, REGISTERED SHARES 63,294
61 SANDOZ AG 72,376
--------
202,662
--------
THAILAND--1.0%
BANKING
1,800 KRUNG THAI BANK LTD., (FOREIGN) 7,755
ENTERTAINMENT/LEISURE
800 GRAMMY ENTERTAINMENT PUBLIC CO. (FOREIGN) 10,498
TELECOMMUNICATIONS
600 LOXLEY COMPANY LTD (FOREIGN) 7,162
UTILITIES
2,000 COGENERATION PUBLIC CO., LTD. (FOREIGN) 8,221
2,500 ELECTRICITY GENERATING PUBLIC COMPANY LTD. (FOREIGN) 7,411
--------
41,047
--------
UNITED KINGDOM--15.4%
AIRLINES
3,298 BRITISH AIRPORT AUTHORITY PLC 24,802
AUTOMOTIVE (RETAILING)
1,792 LEX SERVICE PLC 10,843
BANKING
2,638 BARCLAYS PLC 37,492
3,081 NATIONAL WESTMINSTER BANK 31,914
BROADCASTING
7,111 GENERAL CABLE PLC 19,790
CHEMICALS
2,826 BTP PLC 13,255
See notes to financial statements.
<PAGE>
Shares Issuer Value
- ------ ------ ----------
UNITED KINGDOM (cont'd)
CONSTRUCTION
1,917 BERKELEY GROUP PLC $ 17,429
CONSTRUCTION MATERIALS
2,912 MEYER INTERNATIONAL PLC 18,325
DIVERSIFIED
5,865 COOKSON GROUP PLC 23,429
ELECTRONICS/ELECTRICAL EQUIPMENT
3,143 CHUBB SECURITY PLC 15,725
ENGINEERING SERVICES
14,010 SENIOR ENGINEERING GROUP PLC 23,109
FOOD/BEVERAGE PRODUCTS
4,353 ALLIED DOMECQ PLC 31,273
HOTELS/OTHER LODGING
9,096 JARVIS HOTELS PLC* 23,110
INSURANCE
1,371 LLOYDS ABBEY LIFE GROUP 12,818
4,582 PRUDENTIAL CORP. PLC 30,984
MACHINERY & ENGINEERING EQUIPMENT
2,988 POWERSCREEN INTERNATIONAL PLC 24,433
MEDIA/ADVERTISING
3,589 WPP GROUP PLC 12,934
OIL & GAS
3,309 SHELL TRANSPORT & TRADING PLC 48,166
PRINTING & PUBLISHING
3,842 MIRROR GROUP PLC 11,864
REAL ESTATE
2,857 LAND SECURITIES PLC 30,442
RETAILING
2,902 GREAT UNIVERSAL STORES PLC 29,560
6,036 SAFEWAY PLC 32,087
SHIPPING/TRANSPORTATION
2,072 PENINSULAR & ORIENT STEAM NAVIGATION CO. 16,635
UTILITIES
1,368 EAST MIDLANDS ELECTRICITY PLC 12,320
1,603 LONDON ELECTRICITY PLC 15,799
5,278 NATIONAL POWER PLC 21,703
1,062 SOUTHERN ELECTRICITY PLC 11,150
--------
601,391
--------
TOTAL COMMON STOCK
(COST $3,452,478) 3,452,274
--------
PREFERRED STOCK--0.0%
MALAYSIA--
CONSTRUCTION
4,000 SUNWAY BUILDING TECHNOLOGY, BHD, LOAN STOCK $ 1,275
--------
(COST $1,284)
WARRANTS--0.1%
MALAYSIA --
AGRICULTURE
11,750 INDUSTRIAL OXYGEN INC., BHD 1,084
CONSTRUCTION
1,600 SUNWAY BUILDING TECHNOLOGY, BHD, EXPIRE 7/30/01 1,591
--------
TOTAL WARRANTS
(COST $1,065) 2,675
--------
88.6% TOTAL LONG-TERM INVESTMENTS
(COST $3,454,827) 3,456,224
--------
Principal
Amount(USD)
- -----------
SHORT-TERM INVESTMENTS--4.7%
COMMERCIAL PAPER
$175,000 HOUSEHOLD FINANCE CORP., 5.20%, 09/03/96 175,000
--------
U.S. GOVERNMENT OBLIGATIONS
10,000 U.S. TREASURY BILL, 11/14/96 9,895
--------
TOTAL SHORT-TERM INVESTMENTS
(COST $184,895) 184,895
--------
TOTAL INVESTMENTS--93.3%
(COST $3,639,722) $3,641,119
==========
See notes to financial statements.
<PAGE>
Asset Allocation Portfolio page 15
Portfolio of Investment August 31, 1996
Shares Issuer Value
- ------ ------ ----------
LONG-TERM INVESTMENTS--81.8%
COMMON STOCK--48.3%
1.1% AEROSPACE
700 ALLIED-SIGNAL, INC. $ 43,225
0.9% AGRICULTURAL
800 CASE CORP. 36,400
0.5% AIRLINES
200 AMR CORP. * 16,400
200 CONTINENTAL AIRLINES, INC., CLASS B,* 4,525
--------
20,925
--------
0.5% AUTOMOTIVE
400 GENERAL MOTORS 19,900
3.8% BANKING
1,100 BANK OF BOSTON CORP. 58,025
200 CITICORP 16,650
1,000 COMMONWEALTH BANK OF AUSTRALIA, ADR# (AUSTRALIA) 16,125
1,200 NATIONAL CITY CORP. 45,150
200 NATIONSBANK CORP. 17,025
--------
152,975
--------
1.4% CHEMICALS
300 CABOT CORP. 8,250
100 DOW CHEMICAL CO. 7,975
500 DUPONT (EI) DE NEMOURS 41,063
--------
57,288
--------
2.7% COMPUTERS/COMPUTER HARDWARE
600 COMPAQ COMPUTER* 33,975
200 GATEWAY 2000 INC.,* 8,913
500 INTERNATIONAL BUSINESS MACHINES CORP. 57,188
300 SOLECTRON CORP.* 11,212
--------
111,288
--------
4.8% CONSUMER PRODUCTS
700 AVON PRODUCTS, INC. 33,512
1,300 BLACK & DECKER CORP. 51,350
1,100 FIRST BRANDS CORP. 25,025
200 NIKE, INC., CLASS B, 21,600
400 PHILIP MORRIS COMPANIES, INC. 35,900
300 PROCTER & GAMBLE CO. 26,663
--------
194,050
--------
0.2% DIVERSIFIED
200 HARNISCHFEGER INDUSTRIES, INC. 7,550
--------
1.5% ELECTRONICS / ELECTRICAL EQUIPMENT
400 INTEL CORP. 31,925
500 TERADYNE INC,* 7,750
500 TEXAS INSTRUMENTS 23,375
--------
63,050
--------
1.3% ENTERTAINMENT/LEISURE
1,800 CARNIVAL CORP., CLASS A 50,850
--------
2.1% FINANCIAL SERVICES
500 FEDERAL HOME LOAN MORTGAGE CORP. $ 44,188
1,200 GREEN TREE FINANCIAL CORP. 41,700
--------
85,888
--------
1.8% FOOD/BEVERAGE PRODUCTS
500 COCA-COLA ENTERPRISES, INC. 20,187
800 PEPSICO., INC. 23,000
200 UNILEVER NV, ADR (NETHERLANDS) 28,700
--------
71,887
--------
2.5% HEALTH CARE
1,000 COLUMBIA/HCA HEALTHCARE CORP. 56,375
500 HEALTHSOUTH CORP.* 16,187
300 MEDTRONIC, INC. 15,600
500 ORNDA HEALTHCORP * 12,875
--------
101,037
--------
1.2% INSURANCE
400 ALLSTATE CORP. 17,850
300 AMERICAN BANKERS INSURANCE GROUP, INC. 14,250
200 MID OCEAN, LTD. (BERMUDA) 8,275
100 TRANSATLANTIC HOLDINGS, INC. 6,937
--------
47,312
--------
3.0% MANUFACTURING
800 INGERSOLL-RAND CO. 34,200
400 JOHNSON CONTROLS 28,200
300 KENNAMETAL INC. 9,300
1,100 PARKER HANNIFIN CORP. 42,900
300 PENTAIR, INC. 8,175
--------
122,775
--------
1.2% METALS/MINING
600 ALUMINUM CO. OFAMERICA (ALCOA) 37,275
300 INCO, LTD. (CANADA) 9,675
--------
46,950
--------
0.5% OFFICE/BUSINESS EQUIPMENT
400 XEROX CORP. 21,950
--------
4.4% OIL & GAS
100 BRITISH PETROLEUM PLC, ADR (UNITED KINGDOM) 11,775
400 HALLIBURTON COMPANY 21,050
300 MOBIL CORP. 33,825
600 PANENERGY CORP. 19,875
400 TEXACO, INC. 35,500
400 TIDEWATER, INC. 15,350
800 WILLIAMS COMPANIES, INC. 39,900
--------
177,275
--------
0.6% PAPER/FOREST PRODUCTS
200 BOISE CASCADE CORP. 6,750
300 WILLAMETTE INDUSTRIES 18,525
--------
25,275
--------
See notes to financial statements.
<PAGE>
page 16 Allocation Portfolio
Portfolio of Investments August 31, 1996
Shares Issuer Value
- ------ ------ ----------
2.0% PHARMACEUTICALS
400 AMERICAN HOME PRODUCTS CORP. $ 23,700
400 GLAXO WELLCOME PLC (UNITED KINGDOM) 11,400
900 JOHNSON & JOHNSON 44,325
--------
79,425
--------
0.5% PRINTING & PUBLISHING
700 NEW YORK TIMES COMPANY, CLASS A, 21,875
--------
0.9% RESTAURANTS/FOOD SERVICE
1,700 WENDY'S INTERNATIONAL, INC. 34,425
--------
2.8% RETAILING
600 FEDERATED DEPARTMENT STORES, INC.* 20,775
1,400 GAP, INC. 49,000
1,000 KROGER CO.* 42,375
--------
112,150
--------
0.9% SHIPPING/TRANSPORTATION
700 CSX CORP. 35,437
--------
2.6% TELECOMMUNICATIONS
900 BELLSOUTH CORP. 32,625
200 CINCINNATI BELL, INC. 9,550
1,000 SPRINT CORP. 40,625
900 TELEFONAKTIEBOLAGET LM ERICSSON, SP, ADR (SWEDEN) 20,756
--------
103,556
--------
2.6% UTILITIES
700 CMS ENERGY CORP. 20,912
1,200 FPL GROUP INC. 53,100
400 SIERRA PACIFIC RESOURCES 10,200
500 TEXAS UTILITIES CO. 20,500
--------
104,712
--------
TOTAL COMMON STOCK
(COST $1,828,397) 1,949,430
--------
CONVERTIBLE PREFERRED STOCK--1.3%
CONSUMER PRODUCTS
2,400 RJR NABISCO HOLDINGS CORP. $0.6012, SER. C 12,900
OIL & GAS
800 ENRON CORP., 6.25% EXCHANGE NOTES, 12/13/98, ACES, 19,500
PAPER/FOREST PRODUCTS
400 INTERNATIONAL PAPER CAPITAL CORP., 5.25% # 18,518
--------
TOTAL CONVERTIBLE PREFERRED STOCK (COST $53,420) 50,918
--------
Principal
Amount Issuer Value
- -------- ------ ----------
CORPORATE BONDS & NOTES--5.3%
AEROSPACE
$100,000 LOCKHEED MARTIN CORP., 7.45%, DUE 6/15/04 $ 100,091
FINANCE
100,000 GENERAL ELECTRIC CAPITAL CORP., MTN, 9.18%,
DUE 12/30/08 115,664
--------
TOTAL CORPORATE BONDS & NOTES
(COST $220,392) 215,755
--------
CONVERTIBLE CORPORATE BONDS & NOTES--1.6%
INSURANCE
15,000 AMERICAN TRAVELLERS CORP., 6.50%, DUE 10/1/05 31,894
RETAILING
30,000 WABAN INC., 6.50%, DUE 7/1/02 32,100
--------
TOTAL CONVERTIBLE CORPORATE BONDS & NOTES (COST $44,312) 63,994
--------
U.S. GOVERNMENT OBLIGATIONS--19.0%
U.S. TREASURY NOTES,
100,000 6.13%, DUE 9/30/00 98,000
500,000 8.00%, DUE 5/15/01 525,705
125,000 8.50%, DUE 2/15/20 141,973
--------
765,678
--------
U.S. GOVERNMENT AGENCY SPONSORED OBLIGATIONS--6.3%
250,000 FEDERAL HOME LOAN BANK,7.54%, DUE 2/13/98 254,103
--------
TOTAL U.S. GOVERNMENT AND AGENCY SPONSORED OBLIGATIONS
(COST $1,038,240) 1,019,781
--------
TOTAL LONG-TERM INVESTMENTS
(COST $3,184,761) 3,299,878
--------
SHORT-TERM INVESTMENTS--17.5%
U.S. GOVERNMENT OBLIGATIONS
705,000 U.S. TREASURY BILL, DUE 9/5/96 704,803
--------
(COST $704,803)
TOTAL INVESTMENTS--99.3%
(COST $3,889,564) $4,004,681
==========
See notes to financial statements.
<PAGE>
Treasury Income Portfolio
Portfolio of Investments August 31, 1996 page 17
Principal
Amount Issuer Value
- --------- ------ ----------
LONG-TERM INVESTMENTS--77.6%
U.S. GOVERNMENT OBLIGATIONS--27.5%
U.S. TREASURY NOTES
$300,000 6.13%, DUE 09/30/00 $ 294,000
400,000 8.50% DUE 02/15/20 454,312
60,000 U.S. TREASURY BOND, 10.75%, DUE 08/15/05 74,972
--------
823,284
--------
U.S. GOVERNMENT AGENCY SPONSORED OBLIGATIONS--20.3%
200,000 FEDERAL FARM CREDIT BANK, MTN, 7.51%, DUE 02/13/98 203,188
200,000 FEDERAL HOME LOAN BANK, 7.54%, DUE 02/13/98 203,282
200,000 STUDENT LOAN MARKETING ASSOCIATION, DEBENTURE 7.00%, DUE 03/03/98 201,938
--------
608,408
--------
COLLATERALIZED MORTGAGE OBLIGATIONS--29.8%
961,641 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION, POOL #3547 6.50%, DUE
03/15/24 890,413
TOTAL LONG-TERM INVESTMENTS
(COST $2,350,737) 2,322,105
--------
SHORT-TERM INVESTMENTS--20.3%
U.S. GOVERNMENT OBLIGATIONS
U.S. TREASURY BILLS
300,000 4.99%, DUE 11/21/96 296,632
320,000 5.07%, DUE 02/20/97 312,248
--------
(COST $608,880) 608,880
--------
97.9% TOTAL INVESTMENTS--97.9%
(COST $2,959,617) $2,930,985
==========
Money Market Portfolio
Portfolio of Investments August 31, 1996
Principal
Amount Issuer Value
- -------- ------ ----------
U.S. GOVERNMENT AGENCY SPONSORED OBLIGATIONS--64.1%
$945,000 FEDERAL FARM CREDIT BANK, DISCOUNT NOTE,
5.16%, DUE 09/03/96 $ 944,730
950,000 FEDERAL HOME LOAN MORTGAGE CORP., DISCOUNT NOTE, 5.20%, DUE
09/19/96 947,530
--------
1,892,260
--------
CORPORATE BONDS & NOTES--16.2%
100,000 FORD MOTOR CREDIT CORP., 8.00%, DUE 12/01/96 100,682
125,000 INTERNATIONAL LEASE FINANCE CORP., 7.90%, DUE 10/01/96 125,198
250,000 NATIONS BANKCORP., 8.50%, DUE 11/01/96 251,055
--------
476,935
--------
19.3% COMMERCIAL PAPER
100,000 ABBEY NATIONAL PLC, 5.30%, DUE 11/27/96 (UNITED KINGDOM) 98,719
130,000 AI CREDIT CORP., 5.27%, DUE 09/18/96 129,676
100,000 EXPORT FINANCE & INSURANCE CORP., 5.31%, DUE 09/03/96 99,970
101,000 MERRILL LYNCH & CO., INC., 5.27%, DUE 09/13/96 100,823
140,000 OYSTER CREEK FUEL, 5.30%, DUE 09/05/96 139,916
--------
569,104
--------
99.6% TOTAL INVESTMENTS--99.6%
(COST $2,938,299)** $2,938,299
========
</TABLE>
** The cost of securities is substantially the same for federal income tax
purposes.
Floating Rate Notes: The maturity date shown is the next interest rest date;
the rate shown is the rate in effect at August 31, 1996.
# = Security may only be sold to institutional buyers.
* = Non-income producing securities.
ACES = Automatic CM Exchange Securities
ADR = American Depository Receipt
ADS = American Depository Security
MTN = Medium Term Note
See notes to financial statements.
<PAGE>
page 18 Statement of Assets and Liabilities
August 31, 1996
<TABLE>
<CAPTION>
Growth U.S.
and Capital International Asset Treasury Money
Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Investment securities, at value (Note 1) $ 8,063,237 $ 8,140,185 $ 3,641,119 $ 4,004,681 $ 2,930,985 $ 2,938,299
Cash -- -- -- 321 52,215 4,299
Foreign currency (Cost $164,467) -- -- 164,633 -- -- --
Other assets 452 452 234 238 3,364
216
Receivables:
Open forward foreign currency contracts -- -- 538 -- -- --
Investment securities sold -- 177,588 107,698 246,823 -- --
Dividends and Interest 19,338 1,736 11,171 28,622 23,236 13,399
Expense reimbursement from Sub-administrator -- -- 38,859 9,920 -- 13,000
Portfolio shares sold 18,828 20,161 245 5,446 11 --
----------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS 8,101,855 8,340,122 3,964,497 4,296,051 3,009,811 2,969,213
----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES:
Payable to custodian 154 16,976 3,123 -- -- --
Payable for investment securities purchased -- 385,092 29,975 249,323 -- --
Payable for Portfolio shares redeemed 5,174 3,320 2,279 2,292 3,103 8,438
Payable for open forward foreign currency
contracts -- -- 6,813 -- -- --
Accrued liabilities: (Note 2)
Custody fees 2,124 929 1,000 6,421 1,490 1,078
Other 13,062 23,850 20,540 4,798 11,205 9,367
----------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES 20,514 430,167 63,730 262,834 15,798 18,883
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS:
Paid in capital 6,700,159 6,084,530 3,554,091 3,331,790 2,803,342 2,950,330
Accumulated undistributed net investment
income 65,829 40,578 25,948 69,223 113,552 6
Accumulated net realized gain on investment
transactions 945,302 883,812 325,428 517,087 105,751 (6)
Net unrealized appreciation/depreciation of
investments and assets and liabilities
denominated in foreign currencies 370,051 901,035 (4,700) 115,117 (28,632) --
----------- ----------- ----------- ----------- ----------- -----------
NET ASSETS APPLICABLE TO INVESTORS'
BENEFICIAL INTERESTS $ 8,081,341 $ 7,909,955 $ 3,900,767 $ 4,033,217 $ 2,994,013 $ 2,950,330
=========== =========== =========== =========== =========== ===========
Shares of beneficial interest outstanding
($.001 par value; unlimited number of
shares authorized) 634,138 571,585 368,447 361,593 314,196 2,950,318
Net asset value, redemption price per share
and maximum offering price per share $ 12.74 $ 13.84 $ 10.59 $ 11.15 $ 9.53 $ 1.00
Cost of investments $ 7,693,186 $ 7,239,150 $ 3,639,722 $ 3,889,564 $ 2,959,617 $ 2,938,299
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
See notes to financial statements.
<PAGE>
Statement of Operations page 19
For the year ended August 31, 1996
<TABLE>
<CAPTION>
Growth U.S.
and Capital International Asset Treasury Money
Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME (NOTE 1C):
Interest $ 55,029 $ 59,023 $ 8,890 $ 121,958 $ 249,647 $ 201,400
Dividends 100,231 57,684 79,881 41,923 -- --
Foreign taxes withheld (373) (112) (14,196) (129) -- --
--------- --------- --------- --------- --------- ---------
TOTAL INVESTMENT INCOME 154,887 116,595 74,575 163,752 249,647 201,400
--------- --------- --------- --------- --------- ---------
EXPENSES:
Investment advisory fees (Note 2) 35,435 37,336 31,059 22,327 18,220 8,923
Administration fees (Note 2) 11,812 12,445 7,765 8,119 7,289 7,139
Accounting fees -- -- 65,000 -- -- --
Custodian fees 32,350 22,992 10,000 34,166 13,409 8,398
Professional fees 32,968 38,030 31,198 25,683 24,867 19,209
Trustees fees and expenses 861 879 545 509 426 418
Miscellaneous expenses 4,179 10,939 18,106 3,604 850 18,113
--------- --------- --------- --------- --------- ---------
TOTAL EXPENSES 117,605 122,621 163,673 94,408 65,061 62,200
--------- --------- --------- --------- --------- ---------
Less fees waived by the Advisor,
Administrator & Sub-Administrator (Note 2E) 47,247 49,781 38,824 30,446 25,509 16,062
Less amounts borne by VFD (Note 2) 16,884 16,834 82,093 29,444 10,383 26,505
--------- --------- --------- --------- --------- ---------
NET EXPENSES 53,474 56,006 42,756 34,518 29,169 19,633
--------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME 101,413 60,589 31,819 129,234 220,478 181,767
--------- --------- --------- --------- --------- ---------
REALIZED GAIN (LOSS) ON:
Investment transactions 951,933 857,222 374,008 524,469 117,161 (6)
Foreign currency transactions -- -- 1,940 -- -- --
CHANGED IN NET UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments (252,165) 60,856 (362,346) (219,331) (143,239) --
Foreign currency contracts and foreign
currency translation -- -- (16,532) -- -- --
--------- --------- --------- --------- --------- ---------
Net realized and unrealized gain (loss) 699,768 918,078 (2,930) 305,138 (26,078) (6)
--------- --------- --------- --------- --------- ---------
Net increase in net assets from operations $ 801,181 $ 978,667 $ 28,889 $ 434,372 $ 194,400 $ 181,761
========= ========= ========= ========= ========= =========
</TABLE>
See notes to financial statements.
<PAGE>
page 20 Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Growth and Income Capital Growth International Equity
Portfolio Portfolio Portfolio
----------------------- -------------------- --------------------------
3/1/95* 3/1/95* 3/1/95*
Year Ended through Year Ended through Year Ended through
8/31/96 8/31/95 8/31/96 8/31/95 8/31/96 8/31/95
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income $ 101,413 $ 59,617 $ 60,589 $ 29,126 $ 31,819 $ 50,982
Net realized gain (loss) on investment and foreign
currency transactions 951,933 72,703 857,222 100,990 375,948 18,895
Change in net unrealized appreciation/ depreciation
on investments and foreign currency translations (252,165) 622,216 60,856 840,179 (378,878) 374,178
----------- ----------- ----------- ----------- ----------- -----------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 801,181 754,536 978,667 970,295 28,889 444,055
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (95,201) -- (49,138) -- (57,394) --
Net realized gain on investment transactions (79,334) -- (74,399) -- (68,873) --
----------- ----------- ----------- ----------- ----------- -----------
(174,535) -- (123,537) -- (126,267) --
----------- ----------- ----------- ----------- ----------- -----------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS:
Proceeds from shares sold 4,085,514 5,493,551 3,666,046 5,359,497 1,419,166 5,037,711
Reinvestment of distributions 174,534 -- 123,537 -- 126,267 --
Payment for shares redeemed (3,051,969) (1,471) (3,063,335) (1,215) (3,028,834) (220)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) FROM
TRANSACTIONS IN INVESTORS'
BENEFICIAL INTERESTS: 1,208,079 5,492,080 726,248 5,358,282 (1,483,401) 5,037,491
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS 1,834,725 6,246,616 1,581,378 6,328,577 (1,580,779) 5,481,546
NET ASSETS:
Beginning of period 6,246,616 -- 6,328,577 -- 5,481,546 --
----------- ----------- ----------- ----------- ----------- -----------
End of period $ 8,081,341 $ 6,246,616 $ 7,909,955 $ 6,328,577 $ 3,900,767 $ 5,481,546
=========== =========== =========== =========== =========== ===========
</TABLE>
(restubbed table)
<TABLE>
<CAPTION>
Asset Allocation U.S. Treasruy Income Money Market
Portfolio Portfolio Portfolio
----------------------- -------------------- --------------------------
3/1/95* 3/1/95* 3/1/95*
Year Ended through Year Ended through Year Ended through
8/31/96 8/31/95 8/31/96 8/31/95 8/31/96 8/31/95
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS:
Net investment income $ 129,234 $ 102,855 $ 220,478 $ 162,500 $ 181,767 $ 141,356
Net realized gain (loss) on investment and foreign
currency transactions 524,469 81,344 117,161 69,608 (6) 134
Change in net unrealized appreciation/ depreciation
on investments and foreign currency translations (219,331) 334,448 (143,239) 114,606 -- --
----------- ----------- ----------- ----------- ----------- -----------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 434,372 518,647 194,400 346,714 181,761 141,490
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (162,866) -- (269,425) -- (181,761) (141,356)
Net realized gain on investment transactions (88,726) -- (81,018) -- (134) --
----------- ----------- ----------- ----------- ----------- -----------
(251,592) -- (350,443) -- (181,895) (141,356)
----------- ----------- ----------- ----------- ----------- -----------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS:
Proceeds from shares sold 1,061,288 5,027,177 439,144 5,043,986 1,170,389 5,295,109
Reinvestment of distributions 251,592 -- 350,442 -- 181,836 141,356
Payment for shares redeemed (3,008,177) (90) (3,029,448) (782) (3,824,113) (14,247)
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) FROM
TRANSACTIONS IN INVESTORS'
BENEFICIAL INTERESTS: (1,695,297) 5,027,087 (2,239,862) 5,043,204 (2,471,888) 5,422,218
----------- ----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS (1,512,517) 5,545,734 (2,395,905) 5,389,918 (2,472,022) 5,422,352
NET ASSETS:
Beginning of period 5,545,734 -- 5,389,918 -- 5,422,352 --
----------- ----------- ----------- ----------- ----------- -----------
End of period $ 4,033,217 $ 5,545,734 $ 2,994,013 $ 5,389,918 $ 2,950,330 $ 5,422,352
=========== =========== =========== =========== =========== ===========
</TABLE>
(end of restubbed table)
See notes to financial statements.
* Commencement of operations.
<PAGE>
FInancial Highlights page 21
<TABLE>
<CAPTION>
Growth and Income Capital Growth International Equity
Portfolio Portfolio Portfolio
-------------------- -------------------- --------------------
Year 03/1/95* Year 03/1/95* Year 03/01/95*
Ended through Ended through Ended through
08/31/96 08/31/95 08/31/96 08/31/95 08/31/96 08/31/95
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $11.48 $10.00 $11.90 $10.00 $10.89 $10.00
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.294 0.110 0.158 0.055 0.216 0.101
Net Gains or Losses on Investments
(both realized and unrealized) 1.516 1.370 2.139 1.845 0.034 0.789
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.810 1.480 2.297 1.900 0.250 0.890
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.300 -- 0.142 -- 0.250 --
Distributions from capital gains 0.250 -- 0.215 -- 0.300 --
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS 0.550 -- 0.357 -- 0.550 --
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $12.74 $11.48 $13.84 $11.90 $10.59 $10.89
======= ======= ======= ======= ======= =======
TOTAL RETURN 16.24% 14.80% 19.66% 19.00% 2.42% 8.90%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $8,081 $6,247 $7,910 $6,329 $3,901 $5,482
Ratios to Average Net Assets:#
Ratio of Expenses 0.90% 0.90% 0.90% 0.90% 1.10% 1.09%
Ratio of Net Investment Income 1.71% 2.14% 0.97% 1.04% 0.82% 1.92%
Ratio of expenses without waivers and
assumption of expenses 1.98% 1.80% 1.97% 1.80% 4.22% 2.90%
Ratio of net investment income without
waivers and assumption of expenses 0.63% 1.24% (0.09)% 0.14% (2.30)% 0.11%
Portfolio Turnover Rate 129% 32% 107% 28% 200% 75%
Average commission rate paid** $.0599 -- $.0604 -- $.0631 --
</TABLE>
(restubbed table)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation U.S. Government Money Market
Portfolio Income Portfolio Portfolio
-------------------- -------------------- --------------------
Year 03/01/95* Year 03/01/95* Year 03/01/95*
Ended through Ended through Ended through
08/31/96 08/31/95 08/31/96 08/31/95 08/31/96 08/31/95
------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $ 11.04 $ 10.00 $ 10.69 $ 10.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.657 0.205 1.173 0.322 0.050 0.028
Net Gains or Losses on Investments
(both realized and unrealized) 0.488 0.835 (0.858) 0.368 -- --
------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 1.145 1.040 0.315 0.690 0.050 0.028
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income 0.670 -- 1.134 -- 0.050 0.028
Distributions from capital gains 0.365 -- 0.341 -- -- --
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS 1.035 -- 1.475 -- 0.050 0.028
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $ 11.15 $ 11.04 $ 9.53 $ 10.69 $ 1.00 $ 1.00
======= ======= ======= ======= ======= =======
TOTAL RETURN 10.90 % 10.40 % 2.62 % 6.90 % 5.15 % 2.79 %
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $4,033 $5,546 $2,994 $5,390 $2,950 $5,422
Ratios to Average Net Assets:#
Ratio of Expenses 0.85 % 0.85 % 0.80 % 0.80 % 0.55 % 0.55 %
Ratio of Net Investment Income 3.18 % 3.86 % 6.06 % 6.19 % 5.10 % 5.46 %
Ratio of expenses without waivers and
assumption of expenses 2.33 % 1.65 % 1.79 % 1.62 % 1.74 % 1.21 %
Ratio of net investment income without
waivers and assumption of expenses 1.71 % 3.06 % 5.08 % 5.37 % 3.90 % 4.80 %
Portfolio Turnover Rate 155 % 45 % 83 % 46 % -- --
Average commission rate paid** $ .0598 -- -- -- -- --
</TABLE>
(end of restubbed table)
* Commencement of operations.
# Short periods have been annualized.
**Price per share required for periods commencing after 9/1/95.
See notes to financial statements.
<PAGE>
page 22 Notes to Financial Statements
1. Organization and Significant Accounting Policies--Mutual Fund Variable
Annuity Trust (the "Trust") was organized on April 14, 1994 as a
Massachusetts business trust, and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company. The Trust was established to provide a funding medium for
variable annuity contracts issued by life insurance companies. Shares of
the Trust are issued only to insurance company separate accounts in
connection with the variable annuity contracts. The Trust issues six
separate series of shares (the "Portfolio(s)") each of which represents a
separately managed portfolio of securities with its own investment
objectives. The Portfolios are the Growth and Income Portfolio ("GIP"),
Capital Growth Portfolio ("CGP"), International Equity Portfolio ("IEP"),
Asset Allocation Portfolio ("AAP"), U.S. Treasury Income Portfolio
("USTIP"), and Money Market Portfolio ("MMP"). The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
THE FOLLOWING IS A SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
FOLLOWED BY THE PORTFOLIOS:
A. Valuation of Investments--Equity securities and options are valued at
the last sale price on the exchange on which they are primarily traded,
including the NASDAQ National Market. Securities for which sale prices
are not available and other over-the-counter securities are valued at
the last quoted bid price. Bonds and other fixed income securities
(other than short-term obligations), including listed issues, are
valued on the basis of valuations furnished by a pricing service. In
making such valuations, the pricing service utilizes both dealer-
supplied valuations and electronic data processing techniques that take
into account appropriate factors such as institutional-sized trading in
similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without
exclusive reliance upon quoted prices. Short-term obligations are
valued at amortized cost if acquired with fewer than 61 days to
maturity, or at value, based on quoted exchange or over-the-counter
prices, until the 61st day prior to maturity and thereafter by
amortizing the value on the 61st day to par at maturity. Portfolio
securities for which there are no such quotations or valuations are
valued at fair value as determined in good faith by or at the direction
of the Trustees.
B. Security Transactions and Investment Income-- Investment transactions
are accounted for on the trade date (the date the order to buy or sell
is executed). Securities gains and losses are calculated on the
identified cost basis. Interest income is accrued as earned. Dividend
income is recorded on the ex-dividend date.
C. Repurchase agreements--It is the portfolios' policy that all repurchase
agreements are fully collateralized by U.S. Treasury and Government
agency securities. All collateral is held by the Trust's custodian
bank, sub-custodian or a bank with which the custodian bank has entered
into a sub-custodian agreement or is segregated in the Federal Reserve
Book Entry System. In connection with transactions in repurchase
agreements, if the seller defaults and the value of the collateral
declines, or if the seller enters into an insolvency proceeding,
realization of the collateral by the Trust may be delayed or limited.
D. Futures Contracts--When a fund enters into a futures contract, it makes
an initial margin deposit in a segregated account, either in cash or
liquid securities. Thereafter, the futures contract is marked to market
and the fund makes (or receives) additional cash payments daily to the
broker. Changes in the value of the contract are recorded as unrealized
appreciation/depreciation until the contract is closed or settled. The
Funds may enter into futures contracts only on exchanges or boards of
trade. The exchange or board of trade acts as the counterparty to each
futures transaction, therefore, the Fund's credit risk is limited to
failure of the exchange or board of trade. As of August 31, 1996, the
Funds had no outstanding futures contracts.
E. Foreign Currency Translations--The books and records of the Portfolios
are maintained in U.S. dollars. Foreign currency amounts are translated
into U.S. dollars at the official exchange rates, or at the mean of the
current bid and asked prices of such currencies against the U.S. dollar
last quoted by a major bank on the following basis:
<PAGE>
Notes to Financial Statements page 23
(1) Market value of investment securities, other assets and liabilities:
at the closing rate of exchange at the balance sheet date.
(2) Purchases and sales of investment securities and income and
expenses: at the rates of exchange prevailing on the respective dates of
such transactions.
Reported realized foreign exchange gains or losses arise from
disposition of foreign currency, currency gains or losses realized
between the trade and settlement dates on securities transactions, and
the difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the portfolios' books on the transaction
date and the U.S. dollar equivalent of the amounts actually received or
paid. Unrealized foreign exchange gains and losses arise from changes
(due to the changes in the exchange rate) in the value of foreign
currency and other assets and liabilities denominated in foreign
currencies which are held at period end.
F. Forward Foreign Currency Exchange Contracts--A forward foreign currency
contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date. Each day the forward contract is
open, changes in the value of the contract are recognized as unrealized
gains or losses by "marking to market." When the forward contract is
closed, or the delivery of the currency is made or taken, the portfolio
records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transaction and the portfolio's
basis in the contract. The portfolios are subject to off balance sheet
risk to the extent of the value of the contract for purchases of
currency and in an unlimited amount for sales of currency.
G. Federal Income Tax Status--It is the Trust's policy to comply
individually for each portfolio with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Accordingly,
no federal income tax provision is required.
H. Dividends and Distributions to Shareholders--The portfolios record
dividends and distributions to its shareholders on the record date. The
amount of dividends and distributions from net investment income and
net realized capital gains are determined in accordance with federal
income tax regulations which may differ from generally accepted
accounting principles. These differences are either considered
temporary or permanent in nature. To the extent these differences are
permanent in nature, such amounts are reclassified within the capital
accounts based on their federal tax-basis treatment. The
reclassification made for IEP is as follows: accumulated undistributed
net investment income was increased by $3,231 and an offsetting
decrease was made to accumulated net realized gain/loss on investment
transactions. The difference arises primarily due to different book and
tax treatments for net realized gains (losses) on foreign currency
transactions. Dividends and distributions which exceed net investment
income and net realized capital gains for financial reporting purposes
but not for tax purposes are reported as dividends in excess of net
investment income or distributions in excess of net realized capital
gains. To the extent they exceed net investment income and net realized
capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
I. Expenses--Direct expenses of a portfolio are charged to the respective
Portfolio and general Trust expenses are allocated on the basis of
relative net assets or on another reasonable basis.
2. Fees and Other Transactions with Affiliates
A. Investment Advisory Fees--The Chase Manhattan Bank ("Chase"), a direct
wholly-owned subsidiary of the Chase Manhattan Corporation, is the
Portfolios' investment advisor (the "Advisor") and custodian (the
"Custodian"). The Advisor manages the assets of the Portfolios pursuant
to an Advisory Agreement and, for such services, is paid an annual fee
computed daily and paid monthly based on an annual rate equal to 0.80%
of the International Equity Portfolio's, 0.60% of the Capital Growth
and Growth and Income Portfolios', 0.55% of the Asset Allocation
Portfolio's, 0.50% of the Treasury Income Portfolio's and 0.25% of the
Money Market Portfolio's average daily net assets. The Advisor
voluntarily waived all its fees. Chase Asset Management, Inc. ("CAM"),
a registered investment adviser, is the sub-investment adviser to each
Portfolio pursuant to a Sub- Investment Advisory Agreement between CAM
and Chase. CAM is a wholly owned subsidiary of Chase and is entitled to
receive a fee, payable by Chase from its advisory fee, at an annual
rate equal to 0.03% of each Fund's average daily net assets.
<PAGE>
page 24 Notes to Financial Statements
B. Administration Fee--Pursuant to an Administration Agreement, Chase (the
"Administrator") provides certain administration services to the
Portfolios. For these services, the Administrator receives from each
Portfolio a fee computed at an annual rate equal to 0.05% of the
respective Portfolio's average daily net assets. The Administrator
voluntarily waived all of its fees.
C. Sub-Administration Fees--Pursuant to a Sub- administration Agreement,
Vista Fund Distributors, Inc. ("VFD" or the "Sub-administrator"), an
indirect wholly-owned subsidiary of BISYS Group Inc., provides certain
sub-administration services to the Portfolios, including providing
officers, clerical staff and office space for an annual fee of 0.15% of
the average daily net assets of each Portfolio. The Sub- administrator
voluntarily waived all of its fees.
D. Waivers of Fees--For the year ended August 31, 1996, the Administrator
and Advisor voluntarily waived fees and the Sub-administrator assumed
expenses for the portfolios as follows:
<TABLE>
<CAPTION>
Growth U.S.
and Capital International Asset Treasury Money
Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
-------- -------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Administration/
Sub-administrator $11,812 $12,445 $ 7,765 $ 8,119 $ 7,289 $ 7,139
Advisory 35,435 37,336 31,059 22,327 18,220 8,923
-------- -------- ------------ --------- ------------ ----------
TOTAL WAIVERS $47,247 $49,781 $38,824 $30,446 $25,509 $16,062
======== ======== ============ ========= ============ ==========
The Sub-Administrator voluntarily
assumed certain expenses of
the Portfolios: $16,884 $16,834 $82,093 $29,444 $10,383 $26,505
-------- -------- ------------ --------- ------------ ----------
</TABLE>
E. Other--Chase provides portfolio custody and fund accounting services
for all of the Portfolios, with the exception of the IEP for which it
provides only the custody services. Compensation for such services from
Chase are presented in the Statement of Operations as Custodian fees.
The Trust has adopted an unfunded noncontributory defined benefit
pension plan covering all independent trustees of the Trust who will
have served as an independent trustee for at least five years at the
time of retirement. Benefits under this plan are based on compensation
and years of service. Pension expenses for the year ended August 31,
1996, included in Trustees Fees and Expenses in the Statement of
Operations, prepaid pension costs and accrued pension liability
included in other assets, and other accrued liabilities, respectively,
in the Statement of Assets and Liabilities were as follows:
<TABLE>
<CAPTION>
Prepaid Accrued
Pension Pension Pension
Portfolio: Expenses Costs Liability
--------- -------- ------------
<S> <C> <C> <C>
Growth and Income Portfolio $146 $452 $598
Capital Growth Portfolio 146 452 598
International Equity Portfolio 75 234 309
Asset Allocation Portfolio 77 238 315
U.S. Treasury Income Portfolio 60 185 245
Money Market Portfolio 59 182 241
</TABLE>
3. INVESTMENT TRANSACTIONS--For the year ended August 31, 1996, purchases and
sales of investments (excluding short-term investments) were as follows:
<TABLE>
<CAPTION>
Growth & Capital Asset U.S. Treasury
Income Growth Intl. Equity Allocation Income
Portfolio Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Purchases (excluding
U.S. Government) $7,721,345 $5,523,092 $6,953,722 $2,653,220 --
Sales (excluding
U.S. Government) 6,278,316 6,458,557 8,872,072 3,704,460 --
Purchases of
U.S. Government -- -- -- 2,704,267 $2,597,354
Sales of
U.S. Government -- -- -- 3,160,359 4,910,360
</TABLE>
4. FEDERAL INCOME TAX MATTERS--For Federal income tax purposes, the cost and
unrealized appreciation/(depreciation) in value of the investment
securities at August 31, 1996 are as follows:
<TABLE>
<CAPTION>
Growth & Capital Asset U.S. Treasury
Income Growth Intl. Equity Allocation Income
Portfolio Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Aggregate Cost $7,693,186 $7,239,150 $3,639,722 $3,889,564 $2,959,617
------------ ------------ ------------ ------------ --------------
Gross Unrealized
Appreciation 523,738 1,086,176 189,387 183,231 16,491
Gross Unrealized
Depreciation (153,687) (185,141) (188,004) (68,114) (45,124)
------------ ------------ ------------ ------------ --------------
NET UNREALIZED
APPRECIATION
(DEPRECIATION) $ 370,051 $ 901,035 $ 1,383 $ 115,117 $ (28,633)
============ ============ ============ ============ ==============
</TABLE>
5. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST--Transactions in shares of
beneficial interest for the periods presented were as follows:
<TABLE>
<CAPTION>
Growth and Income Portfolio
Periods Ended August 31,
1996 1995*
--------------------- -------------------
Amount Shares Amount Shares
<S> <C> <C> <C> <C>
Shares sold $ 4,085,514 328,234 $5,493,551 544,409
Shares issued in
reinvestment
of distributions 174,534 15,050 -- --
Shares redeemed (3,051,969) (253,425) (1,471) (130)
Net increase in Trust shares 544,279
outstanding $1,208,079 89,859 $5,492,080
========== ======= ========== =======
<PAGE>
Notes to Financial Statements page 25
Capital Growth Portfolio
Periods Ended August 31,
1996 1995*
--------------------- -------------------
Amount Shares Amount Shares
Shares sold $ 3,666,046 276,967 $5,359,497 531,860
Shares issued in
reinvestment
of distributions 123,537 10,004 -- --
Shares redeemed (3,063,335) (247,141) (1,215) (105)
--------- ------ ------- ------
Net increase in Trust shares
outstanding $ 726,248 39,830 $5,358,282 531,755
========= ====== ======= ======
International Equity Portfolio
Periods Ended August 31,
1996 1995*
--------------------- -------------------
Amount Shares Amount Shares
Shares sold $ 1,419,166 130,714 $5,037,711 503,579
Shares issued in
reinvestment
of distributions 126,267 12,206 -- --
Shares redeemed (3,028,833) (278,033) (220) (20)
--------- ------ ------- ------
Net increase (decrease) in
Trust shares outstanding ($ 1,483,400) (135,113) $5,037,491 503,559
========= ====== ======= ======
Asset Allocation Portfolio
Periods Ended August 31,
1996 1995*
--------------------- -------------------
Amount Shares Amount Shares
Shares sold $ 1,061,288 96,621 $5,027,177 502,546
Shares issued in
reinvestment of
distributions 251,592 23,832 -- --
Shares redeemed (3,008,177) (261,398) (90) (8)
--------- ------ ------- ------
Net increase (decrease) in
Trust shares outstanding ($ 1,695,297) (140,945) $5,027,087 502,538
========= ====== ======= ======
U.S. Treasury Income Portfolio
Periods Ended August 31,
1996 1995*
--------------------- -------------------
Amount Shares Amount Shares
Shares sold $ 439,144 45,896 $5,043,986 504,106
Shares issued in
reinvestment of
distributions 350,442 35,888 -- --
Shares redeemed (3,029,448) (271,621) (782) (73)
--------- ------ ------- ------
Net increase (decrease) in
Trust shares outstanding ($ 2,239,862) (189,837) $5,043,204 504,033
========= ====== ======= ======
Money Market Portfolio
Periods Ended August 31,
1996 1995*
----------------------- ---------------------
Amount Shares Amount Shares
Shares sold $ 1,170,389 1,170,381 $5,295,109 5,295,101
Shares issued in
reinvestment of
distributions 181,836 181,836 141,356 141,356
Shares redeemed (3,824,113) (3,824,110) (14,247) (14,246)
--------- -------- ------- --------
Net increase (decrease) in
Trust shares outstanding ($ 2,471,888) (2,471,893) $5,422,218 5,422,211
========= ======== ======= ========
</TABLE>
* Commenced operations on March 1, 1995
6. OPEN FORWARD FOREIGN CURRENCY CONTRACTS The following forward foreign
currency contracts were held by the International Equity Portfolio at
August 31, 1996
<TABLE>
<CAPTION>
Net
Delivery Unrealized
Value Market Gain
(Local Settlement Value (Loss)
Currency) Cost(USD) Date (USD) (USD)
--------- ---------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Purchases
- ---------
Austrailian
Dollars 6,844 $ 5,418 09/03/96 $ 5,421 $ 3
German
Deutschemark 85,000 57,237 10/25/96 57,761 524
German
Deutschemark 20,000 13,580 10/25/96 13,591 11
Indonesian rupiah 3,917,906 1,674 09/03/96 1,673 (1)
Japanese Yen 15,000,000 140,528 10/09/96 138,949 (1,580)
Japanese Yen 2,613,344 24,115 09/03/96 24,084 (31)
Sales
- -----
German
Deutschemark 225,000 152,233 10/25/96 152,897 (664)
German
Deutschemark 35,000 23,518 10/15/96 23,768 (250)
Japanese Yen 30,000,000 273,610 10/09/96 277,897 (4,287)
</TABLE>
7. CONCENTRATION OF SHAREHOLDERS At August 31, 1996, all shares outstanding
for each Portfolio are owned either directly or indirectly by a single
insurance company.
<PAGE>
page 26 Report of Independent Accountants
Report of Independent Accountants
To the Trustees and Shareholders of Mutual Fund Variable Annuity Trust
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the selected data and ratios for
a share of beneficial interest outstanding present fairly, in all material
respects, the financial position of Growth and Income Portfolio, Capital
Growth Portfolio, International Equity Portfolio, Asset Allocation Portfolio,
U.S. Treasury Income Portfolio and Money Market Portfolio (separate
portfolios constituting Mutual Fund Variable Annuity Trust, hereafter
referred to as the "Trust") at August 31, 1996, the results of each of their
operations for the year then ended, and the changes in each of their net
assets and the selected data and ratios for a share of beneficial interest
outstanding for the year then ended and for the period March 1, 1995
(commencement of operations) through August 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
selected data and ratios for a share of beneficial interest outstanding
(hereafter referred to as "financial statements") are the responsibility of
the Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at August 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 18, 1996
<PAGE>
APPENDIX A
DESCRIPTION OF CERTAIN OBLIGATIONS
ISSUED OR GUARANTEED BY U.S. GOVERNMENT
AGENCIES OR INSTRUMENTALITIES
Federal Farm Credit System Notes and Bonds--are bonds issued by a
cooperatively owned nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U.S.
Government. These bonds are not guaranteed by the U.S. Government.
Maritime Administration Bonds--are bonds issued and provided by the
Department of Transportation of the U.S. Government and are guaranteed by the
U.S. Government.
FNMA Bonds--are bonds guaranteed by the Federal National Mortgage
Association. These bonds are not guaranteed by the U.S. Government.
FHA Debentures--are debentures issued by the Federal Housing
Administration of the U.S. Government and are guaranteed by the U.S. Government.
FHA Insured Notes--are bonds issued by the Farmers Home Administration
of the U.S. Government and are guaranteed by the U.S. Government.
GNMA Certificates--are mortgage-backed securities which represent a
partial ownership interest in a pool of mortgage loans issued by lenders such as
mortgage bankers, commercial banks and savings and loan associations. Each
mortgage loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration and therefore
guaranteed by the U.S. Government. As a consequence of the fees paid to GNMA and
the issuer of GNMA Certificates, the coupon rate of interest of GNMA
Certificates is lower than the interest paid on the VA-guaranteed or FHA-insured
mortgages underlying the Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures may result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool. Foreclosures impose
no risk to principal investment because of the GNMA guarantee. As the prepayment
rate of individual mortgage pools will vary widely, it is not possible to
accurately predict the average life of a particular issue of GNMA Certificates.
The yield which will be earned on GNMA Certificates may vary from their coupon
rates for the following reasons: (i) Certificates may be issued at a premium or
discount, rather than at par: (ii) Certificates may trade in the secondary
market at a premium or discount after issuance: (iii) interest is earned and
compounded monthly which has the effect of raising the effective yield earned on
the Certificates; and (iv) the actual yield of each Certificate is affected by
the prepayment of mortgages included in the mortgage pool underlying the
Certificates. Principal which is so prepaid will be reinvested although possibly
at a lower rate. In addition, prepayment of mortgages included in the mortgage
pool underlying a GNMA Certificate purchased at a premium could result in a loss
to a Portfolio. Due to the large amount of GNMA Certificates outstanding and
active participation in the secondary market by securities dealers and
investors, GNMA Certificates are highly liquid instruments. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate. If
agency securities are purchased at a premium above principal, the premium is not
guaranteed by the issuing agency and a decline in the market value to par may
result in a loss of the premium, which may be particularly likely in the event
of a prepayment. When and if available, U.S. Government obligations may be
purchased at a discount from face value.
FHLMC Certificates and FNMA Certificates--are mortgage-backed bonds
issued by the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, respectively, and are guaranteed by the U.S. Government.
A-1
<PAGE>
GSA Participation Certificates--are participation certificates issued
by the General Services Administration of the U.S. Government and are guaranteed
by the U.S. Government.
New Communities Debentures--are debentures issued in accordance with
the provisions of Title IV of the Housing and Urban Development Act of 1 968, as
supplemented and extended by Title VII of the Housing and Urban Development Act
of 1970, the payment of which is guaranteed by the U.S. Government.
Public Housing Bonds--are bonds issued by public housing and urban
renewal agencies in connection with programs administered by the Department of
Housing and Urban Development of the U.S. Government, the payment of which is
secured by the U.S. Government.
Penn Central Transportation Certificates--are certificates issued by
Penn Central Transportation and guaranteed by the U.S. Government.
SBA Debentures--are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
Washington Metropolitan Area Transit Authority Bonds--are bonds issued
by the Washington Metropolitan Area Transit Authority. Some of the bonds issued
prior to 1993 are guaranteed by the U.S. Government.
FHLMC Bonds--are bonds issued and guaranteed by the Federal Home Loan
Mortgage Corporation. These bonds are not guaranteed by the U.S. Government.
Federal Home Loan Bank Notes and Bonds--are notes and bonds issued by
the Federal Home Loan Bank System and are not guaranteed by the U.S. Government.
Student Loan Marketing Association ("Sallie Mae") Notes and Bonds--are
notes and bonds issued by the Student Loan Marketing Association and are not
guaranteed by the U.S. Government.
D.C. Armory Board Bonds--are bonds issued by the District of Columbia
Armory Board and are guaranteed by the U.S. Government.
Export-Import Bank Certificates--are certificates of beneficial
interest and participation certificates issued and guaranteed by the
Export-Import Bank of the U.S. and are guaranteed by the U.S. Government.
In the case of securities not backed by the "full faith and credit" of
the U.S. Government, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment, and may not be able to
assert a claim against the U.S. Government itself in the event the agency or
instrumentality does not meet its commitments.
Investments may also be made in obligations of U.S. Government agencies
or instrumentalities other than those listed above.
A-2
<PAGE>
APPENDIX B
DESCRIPTION OF RATINGS
A description of the rating policies of Moody's, S&P and Fitch with respect to
bonds and commercial paper appears below.
Moody's Investors Service's Corporate Bond Ratings
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2", and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's Ratings Group Corporate Bond Ratings
B-1
<PAGE>
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from "AAA" issues only in
small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C1--Bonds rated "C1" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
Moody's Investors Service's Commercial Paper Ratings
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
Prime-3--Issuers (or related supporting institutions) rated "Prime-3" have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions 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--Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
Standard & Poor's Ratings Group Commercial Paper Ratings
B-2
<PAGE>
A S&P commercial paper rating is current assessment of the likelihood of timely
payment of debt having an original maturity of no more than 365 days. Ratings
are graded in several categories, ranging from "A-1" for the highest quality
obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3--Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B--Issues rate "B" are regarded as having only speculative capacity for timely
payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
Fitch Bond Ratings
AAA--Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs, however, are not used in
the AAA category.
Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
B-3
<PAGE>
F-1+--Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-l+.
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, although near-term adverse changes
could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by a Portfolio, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by such Portfolio.
Neither event will require a sale of such security by a Portfolio. However, a
Portfolio's investment manager will consider such event in its determination of
whether such Portfolio should continue to hold the security. To the extent the
ratings given by Moody's, S&P or Fitch may change as a result of changes in such
organizations or their rating systems, a Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in this Prospectus and in the Statement of
Additional Information.
B-4
<PAGE>
84
MUTUAL FUND VARIABLE ANNUITY TRUST
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
List all financial statements and exhibits filed as part of
the Registration Statement for the Vista Funds of Mutual Fund Variable Annuity
Trust filed herein as part of this post-effective amendment.
(a) Financial statements:
In Part A: Financial Highlights
In Part B: Audited financial statements and reports
thereon for the fiscal period September 1, 1995 thrugh
August 31, 1996.
In Part C: None.
<TABLE>
<CAPTION>
Exhibit
Number
- - -------
<S> <C>
1 Declaration of Trust. (1)
2 By-laws. (1)
3 None.
4 None.
5(a) Form of Investment Advisory Agreement. (4)
5(b) Form of Sub-Advisory Agreement (4)
5(c) Form of Sub-Advisory Agreement (4)
6 None.
7 None.
8 Form of Custodian Agreement. (2)
9(a) Form of Transfer Agency Agreement. (3)
9(b) Form of Administration Agreement. (4)
9(c) Form of Sub-Administration Agreement. (2)
10 Opinion and Consent of Counsel as to Legality of Securities Being Registered. (2)
11 Consent of Price Waterhouse LLP (4)
12 None.
13 None.
14 None.
15 None.
16 Schedule for Computation of Performance Quotation. (N/A)
17 Financial Data Schedule (4)
18. None.
- - ----------------------------
</TABLE>
(1) Filed as an exhibit to the Registration Statement on Form N-1A of the
Registrant (File No. 33-81712) as filed with the Securities and
Exchange Commission on July 18, 1994.
(2) Filed as an exhibit to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and
Exchange Commission on February 22, 1994.
(3) Filed as an exhibit to Post-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A as filed with the Securities and
Exchange Commission on September 29, 1995.
(4) Filed herewith.
ITEM 25. Persons Controlled by or Under Common
Control with Registrant
Not applicable
C-1
<PAGE>
85
ITEM 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record
Holders as of
Title of Series September 30, 1996
--------------- ------------------
<S> <C>
International Equity Portfolio 2
Capital Growth Portfolio 2
Growth and Income Portfolio 2
Asset Allocation Portfolio 2
Treasury Income Portfolio 2
Money Market Portfolio 2
</TABLE>
ITEM 27. Indemnification
Reference is hereby made to Article V of the Registrant's Declaration
of Trust.
The Trustees and officers of the Registrant and the personnel of the
Registrant's investment adviser, administrator and distributor are insured
under an errors and omissions liability insurance policy. The Registrant and
its officers are also insured under the fidelity bond required by Rule 17g-1
under the Investment Company Act of 1940.
Under the terms of the Registrant's Declaration of Trust, the
Registrant may indemnify any person who was or is a Trustee, officer or
employee of the Registrant to the maximum extent permitted by law; provided,
however, that any such indemnification (unless ordered by a court) shall be
made by the Registrant only as authorized in the specific case upon a
determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Trustees, by a
majority vote of a quorum which consists of Trustees who are neither in Section
2(a)(19) of the Investment Company Act of 1940, nor parties to the proceeding,
or (ii) if the required quorum is not obtainable or, if a quorum of such
Trustees so directs, by independent legal counsel in a written opinion. No
indemnification will be provided by the Registrant to any Trustee or officer of
the Registrant for any liability to the Registrant or shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
Insofar as the conditional advancing of indemnification monies
for actions based upon the Investment Company Act of 1940 may be concerned,
such payments will be made only on the following conditions: (i) the advances
must be limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds that amount to which it is ultimately determined that he
is entitled to receive from the Registrant by reason of indemnification; and
(iii) (a) such promise must be secured by a surety bond, other suitable
insurance or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which bond,
insurance or other form of security must be provided by the recipient of the
advance, or (b) a majority of a quorum of the Registrant's disinterested,
non-party Trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a
C-2
<PAGE>
86
trustee, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of it counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28(a). Business and Other Connections of Investment Adviser
The Chase Manhattan Bank (the "Adviser") is a commercial bank
providing a wide range of banking and investment services.
To the knowledge of the Registrant, none of the Directors or executive
officers of the Adviser, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain Directors
and executive officers of the Adviser also hold or have held various positions
with bank and non-bank affiliates of the Adviser, including its parent, The
Chase Manhattan Corporation. Each Director listed below is also a Director of
The Chase Manhattan Corporation.
<TABLE>
<CAPTION>
Principal Occupation or Other
Position with Employment of a Substantial
Name the Adviser Nature During Past Two Years
- ---- ------------- -----------------------------
<S> <C> <C>
Thomas G. Labreque President and Chief Operating Officer Chairman, Chief Executive Officer
and Director and a Director of The Chase
Manhattan Corporation and a
Director of AMAX, Inc.
M. Anthony Burns Director Chairman of the Board, President
and Chief Executive Officer of
Ryder System, Inc.
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
H. Laurance Fuller Director Chairman, President, Chief
Executive Officer and Director of
Amoco Corporation and Director of
Abbott Laboratories
Paul W. MacAvoy Director Dean of Yale School of
Organization and Management
David T. McLaughlin Director President and Chief Executive
Officer of The Aspen Institute,
Chairman of Standard Fuse
Corporation and a Director of each
of ARCO Chemical Company and
Westinghouse Electric Corporation
Edmund T. Pratt, Jr. Director Chairman Emeritus, formerly
Chairman and Chief Executive
Officer, of Pfizer Inc. and a
Director of each of Pfizer, Inc.,
Celgene Corp., General Motors
Corporation and International Paper
Company
Henry B. Schacht Director Chairman and Chief Executive
Officer of Cummins Engine
Company, Inc. and a Director of
each of American Telephone and
Telegraph Company and CBS Inc.
Donald H. Trautlein Director Retired Chairman and
Chief Executive Officer
of Bethlehem Steel
Corporation
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
James L. Ferguson Director Retired Chairman and Chief
Executive Officer of General Foods
Corporation
William H. Gray III Director President and Chief Executive
Officer of the United Negro College
Fund, Inc.
David T. Kearns Director Retired Chairman and Chief
Executive Officer of the Xerox
Corporation
Delano E. Lewis Director President and Chief Executive
Officer of National Public Radio
John H. McArthur Director Dean of the Harvard Graduate
School of Business Administration
Frank A. Bennack, Jr. Director President and Chief Executive Officer
The Hearst Corporation
Michael C. Bergerac Director Chairman of the Board and
Chief Executive Officer Bergerac & Co., Inc.
Susan V. Berresford Director President, The Ford Foundation
Randolph W. Bromery Director President, Springfield College; President,
Geoscience Engineering Corporation
Charles W. Duncan, Jr. Director Private Investor
Melvin R. Goodes Director Chairman of the Board and Chief Executive
Officer, The Warner-Lambert Company
George V. Grune Director Retired Chairman and Chief Executive
Officer, The Reader's Digest Association,
Inc.; Chairman, The DeWitt Wallace-
Reader's Digest Fund; The Lila-Wallace
Reader's Digest Fund
William B. Harrison, Jr. Vice Chairman of the Board
Harold S. Hook Director Chairman and Chief Executive Officer,
General Corporation
Helen L. Kaplan Director Of Counsel, Skadden, Arps, Slate, Meagher
& Flom
E. Michael Kruse Vice Chairman of the Board
J. Bruce Llewellyn Director Chairman of the Board, The Philadelphia
Coca-Cola Bottling Company, The Coca-
Cola Bottling Company of Wilmington,
Inc., Queen City Broadcasting, Inc.
John P. Mascotte Director Chairman, The Missouri Corporation of
Johnson & Higgins
John F. McGillicuddy Director Retired Chairman of the Board and
Chief Executive Officer
Edward D. Miller Senior Vice Chairman
of the Board
Walter V. Shipley Chairman of the Board and
Chief Executive Officer
Andrew C. Sigler Director Chairman of the Board and Chief
Executive Officer, Champion International
Corporation
Michael I. Sovern Director President, Emeritus and Chancellor Kent,
Professor of Law, Columbia University
John R. Stafford Director Chairman, President and Chief Executive
Officer, American Home Products
Corporation
W. Bruce Thomas Director Private Investor
Marina v. N. Whitman Director Professor of Business Administration and
Public Policy, University of Michigan
Richard D. Wood Director Retired Chairman of the Board, Eli Lilly
and Company
</TABLE>
C-5
<PAGE>
Item 28(b)
Chase Asset Management ("CAM") is an Investment Advisor providing investment
services to institutional clients.
To the knowledge of the Registrant, none of the Directors or executive
officers of the CAM, except those described below, are or have been, at any time
during the past two years, engaged in any other business, profession, vocation
or employment of a substantial nature, except that certain Directors and
executive officers of the CAM also hold or have held various positions with bank
and non-bank affiliates of the Advisor, including its parent, The Chase
Manhattan Corporation.
Principal Occupation or Other
Position with Employment of a Substantial
Name the Sub-Advisor Nature During Past Two Years
- ---- --------------- ----------------------------
James Zeigon Chairman and Director Director of Chase
Asset Management
(London) Limited
Steven Prostano Executive Vice President Chief Operating Officer
and Chief Operating Officer and Director of Chase
Asset Management
(London) Limited
Mark Richardson President and Chief Chief Investment Officer
Investment Officer and Director of Chase
Asset Management
(London) Limited
Item 28(c)
Chase Asset Management (London) Limited ("CAM London") is an Investment
Advisor providing investment services to institutional clients.
To the knowledge of the Registrant, none of the Directors or executive
officers of CAM London, except those described below, are or have been, at any
time during the past two years, engaged in any other business, profession,
vocation or employment of a substantial nature, except that certain Directors
and executive officers of CAM London also hold or have held various positions
with bank and non-bank affiliates of the Advisor, including its parent, The
Chase Manhattan Corporation.
Principal Occupation or Other
Position with Employment of a Substantial
Name the Sub-Advisor Nature During Past Two Years
- ---- --------------- ----------------------------
Michael Browne Director Fund Manager, The Chase Manhattan
Bank, N.A.; Fund Manager, BZW
Investment Management
David Gordon Ross Director Head of Global Fixed Income
Management, Chase Asset
Management, Inc.; Vice President,
The Chase Manhattan Bank, N.A.
Brian Harte Director Investment Manager, The Chase
Manhattan Bank, N.A.
Cornelia L. Kiley Director
James Zeigon Director Chairman and Director of Chase
Asset Management, Inc.
Mark Richardson Chief Investment Director, President and Chief
Officer and Director Operating Officer of Chase Asset
Management, Inc.
Steve Prostano Chief Operating Director, Executive Vice President
Officer and and Chief Operating Officer of Chase
Director Asset Management, Inc.
C-6
<PAGE>
ITEM 29. Principal Underwriters
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
ITEM 30. Location of Accounts and Records
The accounts and records of the Registrant are located, in whole or
in part, at the office of the Registrant and the following locations:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
State Street Bank & Trust Company 1 Heritage Drive
Quincey, Mass 02171
The Chase Manhattan Bank 270 Park Avenue,
New York, NY 10017
Chase Asset Management, Inc. 1211 Avenue of the Americas,
New York, NY 10036
Chase Asset Management, Ltd. (London) Colvile House
32 Curzon Street
London, England W1Y8AL
Chase Manhattan Bank One Chase Square
(administrator) Rochester, NY 14363
Vista Fund Distributors, Inc. a wholly-owned 101 Park Avenue
subsidiary of BISYS Fund Services, Inc. (sub-administrator) New York, NY 10178
</TABLE>
ITEM 31. Management Services
Not applicable
ITEM 32. Undertakings
Registrant undertakes that its trustees shall promptly call a meeting
of shareholders of the Trust for the purpose of voting upon the question of
removal of any such trustee or trustees when requested in writing so to do by
the record holders of not less than 10 per centum of the outstanding shares of
the Trust. In addition, the Registrant shall, in certain circumstances, give
such shareholders assistance in communicating with other shareholders of a fund
as required by Section 16(c) of the Investment Company Act of 1940.
C-7
<PAGE>
89
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York and the State of New York on the 29th day of October, 1996.
MUTUAL FUND VARIABLE
ANNUITY TRUST
By /s/ H. Richard Vartabedian
-----------------------------
H. Richard Vartabedian
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Fergus Reid, III Chairman and Trustee October 29, 1996
- - -------------------------------
Fergus Reid, III
/s/ William J. Armstrong Trustee October 29, 1996
- - -------------------------------
William J. Armstrong
/s/ John R.H. Blum Trustee October 29, 1996
- - -------------------------------
John R.H. Blum
/s/ Joseph J. Harkins Trustee October 29, 1996
- - -------------------------------
Joseph J. Harkins
/s/ Richard E. Ten Haken Trustee October 29, 1996
- - -------------------------------
Richard E. Ten Haken
/s/ H. Richard Vartebedian Trustee October 29, 1996
- - -------------------------------
H. Richard Vartebedian
/s/ Irv Thode Trustee October 29, 1996
- - -------------------------------
Irv Thode
/s/ Stuart W. Cragin, Jr. Trustee October 29, 1996
- - -------------------------------
Stuart W. Cragin
/s/ W. Perry Neff Trustee October 29, 1996
- - -------------------------------
W. Perry Neff
/s/ Roland R. Eppley Trustee October 29, 1996
- - -------------------------------
Roland R. Eppley
/s/ W. D. McCallan Trustee October 29, 1996
- - -------------------------------
W. D. McCallan
/s/ Martin R. Dean Treasurer and October 29, 1996
- - ------------------------------- Principal Financial
Martin R. Dean Officer
</TABLE>
<PAGE>
90
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
- - -------
<S> <C>
5(a) Form of Investment Advisory Agreement
5(b) Form of Sub-Advisory Agreement
5(c) Form of Sub-Advisory Agreement
9(b) Form of Administration Agreement
11 Consent of Price Waterhouse LLP
</TABLE>
INVESTMENT ADVISORY AGREEMENT
BETWEEN
MUTUAL FUND VARIABLE ANNUITY TRUST
AND
THE CHASE MANHATTAN BANK, N.A.
AND ITS SUCCESSOR
AGREEMENT made as of the 6th day of May, 1996, by and between Mutual
Fund Variable Annuity Trust, a Massachusetts business trust which may issue one
or more series of shares (hereinafter the "Trust"), and The Chase Manhattan
Bank, N.A., a national banking association, and its successor, The Chase
Manhattan Bank, a New York state chartered bank (hereinafter the "Adviser").
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
and serves as the underlying investment for certain variable annuity contracts
issued by insurance company separate accounts; and
WHEREAS, the Trust desires to retain the Adviser to furnish investment
advisory services in connection with the series of the Trust listed on Schedule
A (each, a "Portfolio" and collectively, the "Portfolios"), and the Adviser
represents that it is willing and possesses legal authority to so furnish such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Structure of Agreement. The Trust is entering into this Agreement on behalf
of the Portfolios severally and not jointly. The responsibilities and benefits
set forth in this Agreement shall refer to each Portfolio severally and not
jointly. No individual Portfolio shall have any responsibility for any
obligation with respect to any other Portfolio arising out of this Agreement.
Without otherwise limiting the generality of the foregoing,
(a) any breach of any term of this Agreement regarding the Trust
with respect to any one Portfolio shall not create a right or
obligation with respect to any other Portfolio;
(b) under no circumstances shall the Adviser have the right to set
off claims relating to a Portfolio by applying property of any
other Portfolio; and
<PAGE>
(c) the business and contractual relationships created by this
Agreement, the consideration for entering into this Agreement,
and the consequences of such relationships and consideration
relate solely to the Trust and the particular Portfolio to
which such relationship and consideration applies.
2. Delivery of Documents. The Trust has delivered to the Adviser copies
of each of the following documents and will deliver to it all future amendments
and supplements thereto, if any:
(a) The Trust's Declaration of Trust;
(b) The By-Laws of the Trust;
(c) Resolutions of the Board of Trustees of the Trust authorizing
the execution and delivery of this Agreement;
(d) The most recent Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), and the Investment
Company Act of 1940, as amended (the "1940 Act"), on Form N-1A
as filed with the Securities and Exchange Commission (the
"Commission") (the "Registration Statement");
(e) Notification of Registration of the Trust under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) Prospectuses and Statements of Additional Information of the
Portfolios (collectively, the "Prospectuses").
3. Appointment.
(a) General. The Trust hereby appoints the Adviser to act as
investment adviser to the Portfolios for the period and on the
terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the
employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Trust under
applicable laws and are under the control of The Chase
Manhattan Corporation, the parent of the Adviser; provided
that (i) all persons, when providing services hereunder, are
functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by
authorized officers of the Adviser.
-2-
<PAGE>
(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities
or persons as the Adviser believes appropriate to assist in
the performance of this Agreement with respect to a particular
Portfolio or Portfolios (each a "Sub-Adviser"), and that any
such Sub- Adviser shall have all of the rights and powers of
the Adviser set forth in this Agreement; provided that a
Portfolio shall not pay any additional compensation for any
Sub-Adviser and the Adviser shall be as fully responsible to
the Trust for the acts and omissions of the Sub-Adviser as it
is for its own acts and omissions; and provided further that
the retention of any Sub-Adviser shall be approved in advance
by (i) the Board of Trustees of the Trust and (ii) the
shareholders of the relevant Portfolio if required under any
applicable provisions of the 1940 Act. The Adviser will
review, monitor and report to the Trust's Board of Trustees
regarding the performance and investment procedures of any
Sub-Adviser. In the event that the services of any Sub-Adviser
are terminated, the Adviser may provide investment advisory
services pursuant to this Agreement to the Portfolio without a
Sub-Adviser and without further shareholder approval, to the
extent consistent with the 1940 Act. A Sub-Adviser may be an
affiliate of the Adviser.
4. Investment Advisory Services.
(a) Management of the Portfolios. The Adviser hereby undertakes to
act as investment adviser to the Portfolios. The Adviser shall
regularly provide investment advice to the Portfolios and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Portfolios and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the Trust
and each Portfolio;
(ii) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Portfolios' investment programs, and
the issuers of securities included in the Portfolios'
portfolios and the industries in which they engage,
or which may relate to securities or other
investments which the Adviser may deem desirable for
inclusion in a Portfolio's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of each Portfolio;
(iv) furnish a continuous investment program for each
Portfolio;
-3-
<PAGE>
(v) in its discretion and without prior consultation with
the Trust, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of each Portfolio; and
(vi) take, on behalf of each Portfolio, all actions the
Adviser may deem necessary in order to carry into
effect such investment program and the Adviser's
functions as provided above, including the making of
appropriate periodic reports to the Trust's Board of
Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) each Portfolio's Prospectus and Statement of
Additional Information as revised and in effect from time to
time; (ii) the Trust's Declaration of Trust, By-Laws or other
governing instruments, as amended from time to time; (iii) the
1940 Act; (iv) the provisions of the Internal Revenue Code of
1986, as amended, including Subchapters L and M, relating to
Variable Contracts and regulated investment companies,
respectively, (v) other applicable laws; and (vi) such other
investment policies, procedures and/or limitations as may be
adopted by the Trust with respect to a Portfolio and provided
to the Adviser in writing. The management of the Portfolios by
the Adviser shall at all times be subject to the review of the
Trust's Board of Trustees.
(c) Books and Records. The Adviser shall keep each Portfolio's
books and records required by applicable law to be maintained
by the Portfolios with respect to advisory services. The
Adviser agrees that all records which it maintains for a
Portfolio are the property of the Portfolio and it will
promptly surrender any of such records to the Portfolio upon
the Portfolio's request. The Adviser further agrees to
preserve for the periods prescribed by the 1940 Act any such
records of the Portfolio required to be preserved by such
Rule.
(d) Reports, Evaluations and other services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Trust with respect to the Portfolios and in connection with
the Adviser's services hereunder as the Trust's Board of
Trustees may request from time to time or as the Adviser may
otherwise deem to be desirable. The Adviser shall make
recommendations to the Trust's Board of Trustees with respect
to Trust policies, and shall carry out such policies as are
adopted by the Board of Trustees. The Adviser shall, subject
to review by the Board of Trustees, furnish such other
services as the Adviser shall from time to time determine to
be necessary or useful to perform its obligations under this
Agreement.
-4-
<PAGE>
(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
each Portfolio with brokers or dealers selected by the
Adviser, which may include brokers or dealers affiliated with
the Adviser to the extent permitted by the 1940 Act and the
Trust's policies and procedures applicable to the Portfolios.
The Adviser shall execute portfolio transactions for the
Portfolios in such a manner that the Portfolio's total cost or
proceeds in each transaction is the most favorable to the
Portfolio under the circumstances. The Trust understands that
a substantial majority of each Portfolio's portfolio
transactions will be transacted with primary market makers
acting as principal on a net basis, with no brokerage
commissions being paid by the Portfolio. Such principal
transactions may, however, result in a profit to the market
makers. In certain instances the Adviser may make purchases of
underwritten issues at prices which include underwriting fees.
In assessing the best overall terms available for any
transaction, the Adviser shall consider all factors it deems
relevant, including the breadth of the market in the security,
the price of the security, the financial condition and
execution capability of the broker or dealer, research
services provided to the Adviser, and the reasonableness of
the commission, if any, both for the specific transaction and
on a continuing basis. In no event shall the Adviser be under
any duty to obtain the lowest commission or the best net price
for any Portfolio on any particular transaction, nor shall the
Adviser be under any duty to execute any order in a fashion
either preferential to any Portfolio relative to other
accounts managed by the Adviser or otherwise materially
adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Adviser, the
Portfolios and/or the other accounts over which the Adviser
exercises investment discretion. The Adviser is authorized to
pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio
transaction for a Portfolio which is in excess of the amount
of commission another broker or dealer would have charged for
effecting that transaction if the Adviser determines in good
faith that the total commission is reasonable in relation to
the value of the brokerage and research services provided by
such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the
Adviser with respect to accounts over which it exercises
investment discretion. The Adviser shall report to the Board
of Trustees of the Trust regarding overall commissions paid by
the Portfolios and their reasonableness in relation to the
benefits to the Portfolios.
-5-
<PAGE>
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Portfolio, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Portfolios or its other clients if, in the
Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Portfolio, taking
into consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Trust's registration statement and the
Portfolio's Prospectus and Statement of Additional
Information. In such event, the Adviser will allocate the
securities so purchased or sold, and the expenses incurred in
the transaction, in an equitable manner, consistent with its
fiduciary obligations to the Portfolio and such other clients.
5. Expenses. (a) The Adviser shall, at its expense, provide the
Portfolios with office space, furnishings and equipment and personnel required
by it to perform the services to be provided by the Adviser pursuant to this
Agreement. The Adviser also hereby agrees that it will supply to any sub-adviser
or administrator (the "Administrator") of a Portfolio all necessary financial
information in connection with the Administrator's duties under any Agreement
between the Administrator and the Trust.
(b) Except as provided in subparagraph (a), the Trust shall be
responsible for all of the Portfolios' expenses and liabilities, including, but
not limited to, taxes; interest; fees (including fees paid to its trustees who
are not affiliated with the Adviser or any of its affiliates); fees payable to
the Securities and Exchange Commission; state securities qualification fees;
association membership dues; costs of preparing and printing Prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian and transfer agent; insurance
premiums; auditing and legal expenses; costs of shareholders' reports and
shareholders' meetings; any extraordinary expenses; and brokerage fees and
commissions, if any, in connection with the purchase or sale of portfolio
securities.
6. Compensation. (a) In consideration of the services to be rendered by
the Adviser under this Agreement, the Trust shall pay the Adviser monthly fees
on the first Business Day (as defined in the Prospectuses) of each month based
upon the average daily net assets of each Portfolio during the preceding month
(as determined on the days and at the time set forth in the Prospectuses for
determining net asset value per share) at the annual rate set forth opposite the
Portfolio's name on Schedule A attached hereto. If the fees payable to the
Adviser pursuant to this paragraph begin to accrue before the end of any month
or if this Agreement terminates before the end of any month, the fees for the
period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Portfolios' net assets shall be computed in the
manner specified in the Prospectuses and the
-6-
<PAGE>
Articles for the computation of the value of the Portfolios' net assets in
connection with the determination of the net asset value of shares of the
Portfolios' capital stock.
(b) If the aggregate expenses incurred by, or allocated to, each
Portfolio in any fiscal year shall exceed the lowest expense limitation, if
applicable to such Portfolio, imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Adviser shall reduce its investment advisory fee, but not below zero, to the
extent of its share of such excess expenses; provided, however, there shall be
excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Portfolio. Such reduction, if any, shall be
computed and accrued daily, shall be settled on a monthly basis and shall be
based upon the expense limitation applicable to the Portfolio as at the end of
the last business day of the month. Should two or more of such expense
limitations be applicable at the end of the last business day of the month, that
expense limitation which results in the largest reduction in the Adviser's fee
shall be applicable. For the purposes of this paragraph, the Adviser's share of
any excess expenses shall be computed by multiplying such excess expenses by a
fraction, the numerator of which is the amount of the investment advisory fee
which would otherwise be payable to the Adviser for such fiscal year were it not
for this subsection 6(b) and the denominator of which is the sum of all
investment advisory and administrative fees which would otherwise be payable by
the Portfolio were it not for the expense limitation provisions of any
investment advisory or administrative agreement to which the Portfolio is a
party.
(c) In consideration of the Adviser's undertaking to render the
services described in this Agreement, the Trust agrees that the Adviser shall
not be liable under this Agreement for any error of judgment or mistake of law
or for any act or omission or loss suffered by the Trust in connection with the
performance of this Agreement, provided that nothing in this Agreement shall be
deemed to protect or purport to protect the Investment Adviser against any
liability to the Trust or its stockholders to which the Adviser would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of the Adviser's duties under this Agreement or by reason of the
Adviser's reckless disregard of its obligations and duties hereunder or breach
of fiduciary duty with respect to receipt of compensation.
7. Non-Exclusive Services. Except to the extent necessary to perform
the Investment Adviser's obligations under this Agreement, nothing herein shall
be deemed to limit or restrict the right of the Adviser, or any affiliate of the
Adviser, including any employee of the Adviser, to engage in any other business
or to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, firm, individual or association.
-7-
<PAGE>
8. Effective Date; Modifications; Termination. This Agreement shall
become effective on the date hereof (the "Effective Date"), provided that it
shall have been approved by a majority of the outstanding voting securities of
each Portfolio, in accordance with the requirements of the 1940 Act, or such
later date as may be agreed by the parties following such shareholder approval.
(a) Subject to prior termination as provided in sub-paragraph (d) of
this paragraph, this Agreement shall continue in force for two years from the
Effective Date and shall continue in effect from year to year thereafter, but
only so long as the continuance after such date shall be specifically approved
at least annually by vote of the Trustees of the Trust or by vote of a majority
of the outstanding voting securities of each Portfolio.
(b) This Agreement may be modified by mutual consent, such consent on
the part of the Trust to be authorized by vote of a majority of the outstanding
voting securities of each Portfolio.
(c) In addition to the requirements of sub-paragraphs (a) and (b) of
this paragraph, the terms of any continuance or modification of this Agreement
must have been approved by the vote of a majority of those Trustees of the Trust
who are not parties to this Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
(d) Either party hereto may, at any time on sixty (60) days prior
written notice to the other, terminate this Agreement, without payment of any
penalty, by action of its Trustees or Board of Trustees, as the case may be, or
by action of its authorized officers or, with respect to a Portfolio, by vote of
a majority of the outstanding voting securities of that Portfolio. This
Agreement may remain in effect with respect to a Portfolio even if it has been
terminated in accordance with this paragraph with respect to the other
Portfolios. This Agreement shall terminate automatically in the event of its
assignment as that term is defined under the 1940 Act.
9. Board of Trustees Meetings. The Trust agrees that notice of each
meeting of the Board of Trustees of the Trust will be sent to the Adviser and
that the Trust will make appropriate arrangements for the attendance (as persons
present by invitation) of such person or persons as the Adviser may designate.
10. Governing Law. This Agreement shall be governed by the laws of the
State of New York.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, and their
respective seals to be hereunto affixed, all as of the date written above.
THE CHASE MANHATTAN BANK, N.A. MUTUAL FUND VARIABLE
ANNUITY TRUST
By: _________________________ By:_______________________
Name: Name:
Title: Title:
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<PAGE>
Schedule A
Portfolio: Fee:
International Equity Portfolio 0.80%
Capital Growth Portfolio 0.60
Growth and Income Portfolio 0.60
Asset Allocation Portfolio 0.55
U.S. Treasury Income Portfolio 0.50
Money Market Portfolio 0.25
-i-
INVESTMENT SUBADVISORY AGREEMENT
between
THE CHASE MANHATTAN BANK, N.A.
AND ITS SUCCESSOR
and
CHASE ASSET MANAGEMENT, INC.
AGREEMENT made as of the 6th day of May, 1996, by and between The Chase
Manhattan Bank, N.A., a national banking association and its successor, a New
York State chartered bank (the "Adviser"), and Chase Asset Management, Inc., a
Delaware corporation (the "Sub-Adviser").
WHEREAS, the Adviser provides investment advisory services to the
series of Mutual Fund Variable Annuity Trust, a Massachusetts business trust
(the "Trust"), an open-end, management investment company registered under the
Investment Trust Act of 1940, as amended (the "1940 Act") which serves as the
underlying investment for certain variable annuity contracts issued by insurance
company separate accounts, pursuant to an Investment Advisory Agreement dated as
of May 6, 1996 (the "Advisory Agreement"); and
WHEREAS, the Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with the series of the Trust
listed on Schedule A (each, a "Portfolio" and collectively, the "Portfolios"),
and the Sub-Adviser represents that it is willing and possesses legal authority
to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) General. The Adviser hereby appoints the Sub-Adviser to act as
investment subadviser to the Portfolios for the period and on
the terms set forth in this Agreement. The Sub-Adviser accepts
such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Sub-Adviser may, in its
discretion, provide such services through its own employees or
the employees of one or more affiliated companies that are
qualified to act as an investment subadviser to the Portfolios
under applicable laws and are under the control of New Chase,
the parent of the Sub-Adviser; provided that (i) all persons,
when providing services hereunder, are
<PAGE>
functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser.
2. Delivery of Documents. The Adviser has delivered to the Sub-Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Trust's Declaration of Trust;
(b) the By-Laws of the Trust;
(c) resolutions of the Board of Trustees of the Trust authorizing
the execution and delivery of the Advisory Agreement and this
Agreement;
(d) the most recent Post-Effective Amendment to the Trust's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Trust under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectuses and Statements of
Additional Information of the Portfolios.
3. Investment Advisory Services.
(a) Management of the Portfolios. The Sub-Adviser hereby
undertakes to act as investment subadviser to the Portfolios.
The Sub-Adviser shall regularly provide investment advice to
the Portfolios and continuously supervise the investment and
reinvestment of cash, securities and other property composing
the assets of the Portfolios and, in furtherance thereof,
shall:
(i) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Portfolios' investment programs, and
the issuers of securities included in the portfolio
of each Portfolio and the industries in which they
engage, or which may relate to securities or other
investments which the Sub-Adviser may deem desirable
for inclusion in a Portfolio's portfolio;
(ii) determine which issuers and securities shall be
included in the portfolio of each Portfolio;
- 2 -
<PAGE>
(iii) furnish a continuous investment program for each
Portfolio;
(iv) in its discretion, and without prior consultation,
buy, sell, lend and otherwise trade any stocks, bonds
and other securities and investment instruments on
behalf of each Portfolio; and
(v) take, on behalf of each Portfolio, all actions the
Sub-Adviser may deem necessary in order to carry into
effect such investment program and the Sub-Adviser's
functions as provided above, including the making of
appropriate periodic reports to the Adviser and the
Trust's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment
subadvisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in:
(i) each Portfolio's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Trust's Declaration of Trust, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) the provisions of the Internal Revenue Code of 1986, as
amended, including Subchapters L and M, relating to Variable
Contracts and regulated investment companies, respectively,
(v) other applicable laws; and (vi) such other investment
policies, procedures and/or limitations as may be adopted by
the Trust with respect to a Portfolio and provided to the
Adviser in writing. The management of the Portfolios by the
Adviser shall at all times be subject to the review of the
Trust's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Sub-Adviser
shall keep each Portfolio's books and records required to be
maintained by, or on behalf of, the Portfolios with respect to
subadvisory services rendered hereunder. The Sub-Adviser
agrees that all records which it maintains for a Portfolio are
the property of the Portfolio and it will promptly surrender
any of such records to the Portfolio upon the Portfolio's
request. The Sub-Adviser further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act any such
records of the Portfolio required to be preserved by such
Rule.
(d) Reports, Evaluations and other services. The Sub-Adviser shall
furnish reports, evaluations, information or analyses to the
Adviser and the Trust with respect to the Portfolios and in
connection with the Sub-Adviser's services hereunder as the
Adviser and/or the Trust's Board of Trustees may request from
time to time or as the Sub-Adviser may otherwise deem to be
desirable. The Sub-Adviser shall make recommendations to the
Adviser and the Trust's Board of Trustees with respect to the
Trust's policies, and shall carry out such policies as are
adopted by the Board of Trustees. The Sub-Adviser may, subject
to review by the Adviser, furnish such other services as the
Sub-Adviser shall from time to time determine to be necessary
or useful to perform its obligations under this Agreement.
- 3 -
<PAGE>
(e) Purchase and Sale of Securities. The Sub-Adviser shall place
all orders for the purchase and sale of portfolio securities
for each Portfolio with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated
with the Adviser or the Sub-Adviser to the extent permitted by
the 1940 Act and the Trust's policies and procedures
applicable to the Portfolios. The Sub-Adviser shall use its
best efforts to seek to execute portfolio transactions at
prices which, under the circumstances, result in total costs
or proceeds being the most favorable to the Portfolios. In
assessing the best overall terms available for any
transaction, the Sub- Adviser shall consider all factors it
deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition
and execution capability of the broker or dealer, research
services provided to the Sub-Adviser, and the reasonableness
of the commission, if any, both for the specific transaction
and on a continuing basis. In no event shall the Sub-Adviser
be under any duty to obtain the lowest commission or the best
net price for any Portfolio on any particular transaction, nor
shall the Sub-Adviser be under any duty to execute any order
in a fashion either preferential to any Portfolio relative to
other accounts managed by the Sub-Adviser or otherwise
materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Sub-Adviser,
the Portfolios, and/or the other accounts over which the
Sub-Adviser exercises investment discretion. The Sub- Adviser
is authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a
portfolio transaction for a Portfolio which is in excess of
the amount of commission another broker or dealer would have
charged for effecting that transaction if the Sub-Adviser
determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall
responsibilities of the Sub-Adviser with respect to accounts
over which it exercises investment discretion. The Sub-Adviser
shall report to the Board of Trustees of the Trust regarding
overall commissions paid by the Portfolios and their
reasonableness in relation to their benefits to the
Portfolios.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Portfolio, the Sub-Adviser may, to the
extent permitted by applicable laws and regulations, but shall
not be obligated to, aggregate the securities to be sold or
purchased with those of other Portfolios or its other clients
if, in the Sub-Adviser's reasonable judgment, such aggregation
(i) will result in an overall economic benefit to the
Portfolio, taking into consideration the advantageous selling
or purchase price, brokerage commission and other expenses,
and trading requirements, and (ii) is not inconsistent with
the policies set forth in the Trust's registration statement
and the Portfolio's Prospectus and Statement of Additional
Information. In such event, the Sub-Adviser will allocate the
securities so purchased or sold, and the expenses
- 4 -
<PAGE>
incurred in the transaction, in an equitable manner,
consistent with its fiduciary obligations to the Portfolio and
such other clients.
4. Representations and Warranties.
(a) The Sub-Adviser hereby represents and warrants to the Adviser
as follows:
(i) The Sub-Adviser is a corporation duly organized and
in good standing under the laws of the State of
Delaware and is fully authorized to enter into this
Agreement and carry out its duties and obligations
hereunder.
(ii) The Sub-Adviser is registered as an investment
adviser with the Commission under the Advisers Act,
and is registered or licensed as an investment
adviser under the laws of all applicable
jurisdictions. The Sub-Adviser shall maintain such
registrations or licenses in effect at all times
during the term of this Agreement.
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out
the Sub-Adviser's obligations hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser
as follows:
(i) The Adviser is a national banking association duly
organized and in good standing under the laws of the
United States of America and is fully authorized to
enter into this Agreement and carry out its duties
and obligations hereunder.
(ii) The Trust has been duly organized as a business trust
under the laws of the State of Massachusetts.
(iii) The Trust is registered as an investment company with
the Commission under the 1940 Act, and shares of the
each Portfolio are registered for offer and sale to
the public under the 1933 Act and all applicable
state securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. Compensation. (a) As compensation for the services which the
Sub-Adviser is to provide or cause to be provided pursuant to Paragraph 3, with
respect to each Portfolio, the Adviser shall pay to the Sub-Adviser (or cause to
be paid by the Trust directly to the Sub-Adviser) a fee, which shall be accrued
daily and paid in arrears on the first business day of each month, at an annual
rate to be determined between the parties hereto from time to time, as a
percentage of the average daily net assets of the Portfolio during the preceding
month (computed in the manner set forth in the
- 5 -
<PAGE>
Portfolio's most recent Prospectus and Statement of Additional Information).
Average daily net assets shall be based upon determinations of net assets made
as of the close of business on each business day throughout such month. The fee
for any partial month shall be calculated on a proportionate basis, based upon
average daily net assets for such partial month.
(b) The Sub-Adviser shall have the right, but not the
obligation, to voluntarily waive any portion of the sub-advisory fee from time
to time. Any such voluntary waiver will be irrevocable and determined in advance
of rendering sub-investment advisory services by the Sub-Adviser, and shall be
in writing and signed by the parties hereto.
(c) If the aggregate expenses incurred by, or allocated to,
each Portfolio in any fiscal year shall exceed the lowest expense limitation, if
applicable to such Portfolio, imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Sub-Adviser shall reduce its investment advisory fee, but not below zero, to the
extent of its share of such excess expenses; provided, however, there shall be
excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Portfolio. Such reduction, if any, shall be
computed and accrued daily, shall be settled on a monthly basis and shall be
based upon the expense limitation applicable to the Portfolio as at the end of
the last business day of the month. Should two or more of such expense
limitations be applicable at the end of the last business day of the month, that
expense limitation which results in the largest reduction in the Sub-Adviser's
fee shall be applicable. For the purposes of this paragraph, the Sub-Adviser's
share of any excess expenses shall be computed by multiplying such excess
expenses by a fraction, the numerator of which is the amount of the investment
advisory fee which would otherwise be payable to the Sub-Adviser for such fiscal
year were it not for this subsection 5(b) and the denominator of which is the
sum of all investment advisory and administrative fees which would otherwise be
payable by the Portfolio were it not for the expense limitation provisions of
any investment advisory or administrative agreement to which the Portfolio is a
party.
6. Interested Persons. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Trust or
the Adviser are or may be or become interested in the Sub-Adviser as directors,
officers or otherwise and that directors, officers and shareholders of the
Sub-Adviser are or may be or become similarly interested in the Trust or the
Adviser.
7. Expenses. The Sub-Adviser will pay all expenses incurred by it in
connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions) purchased for or sold by the
Portfolios.
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<PAGE>
8. Non-Exclusive Services; Limitation of Sub-Adviser's Liability. The
services of the Sub-Adviser hereunder are not to be deemed exclusive, and the
Sub-Adviser may render similar services to others and engage in other
activities. The Sub-Adviser and its affiliates may enter into other agreements
with the Portfolios, the Trust or the Adviser for providing additional services
to the Portfolios, the Trust or the Adviser which are not covered by this
Agreement, and to receive additional compensation for such services. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties hereunder on the part of the Sub-Adviser, or
a breach of fiduciary duty with respect to receipt of compensation, neither the
Sub-Adviser nor any of its directors, officers, shareholders, agents, or
employees shall be liable or responsible to the Adviser, the Trust, the
Portfolios or to any shareholder of the Portfolios for any error of judgment or
mistake of law or for any act or omission in the course of, or connected with,
rendering services hereunder or for any loss suffered by the Adviser, the Trust,
a Portfolio, or any shareholder of a Portfolio in connection with the
performance of this Agreement.
9. Effective Date; Modifications; Termination. This Agreement shall
become effective on the date hereof (the "Effective Date") provided that it
shall have been approved by a majority of the outstanding voting securities of
each Portfolio, in accordance with the requirements of the 1940 Act, or such
later date as may be agreed by the parties following such shareholder approval.
(a) This Agreement shall continue in force for two years from the
Effective Date. Thereafter, this Agreement shall continue in
effect as to each Portfolio for successive annual periods,
provided such continuance is specifically approved at least
annually (i) by a vote of the majority of the Trustees of the
Trust who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (ii) by a vote
of the Board of Trustees of the Trust or a majority of the
outstanding voting securities of the Portfolio.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Trust who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement as to any
Portfolio(s) at any time on sixty (60) days' prior written
notice to the other, without payment of any penalty. A
termination of the Sub-Adviser may be effected as to any
particular Portfolio by the Adviser, by a vote of the Trust's
Board of Trustees, or by vote of a majority of the outstanding
voting securities of the Portfolio. This Agreement shall
terminate automatically in the event of its assignment.
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<PAGE>
10. Limitation of Liability of Trustees and Shareholders. The
Sub-Adviser acknowledges the following limitation of liability:
The terms "Mutual Fund Variable Annuity Trust" and "Trustees of Mutual
Fund Variable Annuity Trust" refer, respectively, to the trust created and the
Trustees, as trustees but not individually or personally, acting from time to
time under the Declaration of Trust, to which reference is hereby made and a
copy of which is on file at the office of the Secretary of State of the State of
Massachusetts, such reference being inclusive of any and all amendments thereto
so filed or hereafter filed. The obligations of "Mutual Fund Variable Annuity
Trust" entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities and
are not binding upon any of the Trustees, shareholders or representatives of the
Trust personally, but bind only the assets of the Trust, and all persons dealing
with the Trust or a Portfolio must look solely to the assets of the Trust or
Portfolio for the enforcement of any claims against the Trust or Portfolio.
11. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
12. Independent Contractor. The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees of the Trust
from time to time, have no authority to act for or represent a Portfolio in any
way or otherwise be deemed an agent of a Portfolio.
13. Structure of Agreement. The Adviser and Sub-Adviser are entering
into this Agreement with regard to the respective Portfolios severally and not
jointly. The responsibilities and benefits set forth in this Agreement shall be
deemed to be effective as between the Adviser and Sub-Adviser in connection with
each Portfolio severally and not jointly. This Agreement is intended to govern
only the relationships between the Adviser, on the one hand, and the
Sub-Adviser, on the other hand, and is not intended to and shall not govern (i)
the relationship between the Adviser or Sub-Adviser and any Portfolio, or (ii)
the relationships among the respective Portfolios.
14. Governing Law. This Agreement shall be governed by the laws of the
State of New York, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
15. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
- 8 -
<PAGE>
16. Notices. Notices of any kind to be given to the Adviser hereunder
by the Sub-Adviser shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 270 Park Avenue, New York, New York 10017 or at such
other address or to such individual as shall be so specified by the Adviser to
the Sub-Adviser. Notices of any kind to be given to the Sub-Adviser hereunder by
the Adviser shall be in writing and shall be duly given if mailed or delivered
to the Sub-Adviser at 1211 Avenue of the Americas, New York, New York 10036 or
at such other address or to such individual as shall be so specified by the
Sub-Adviser to the Adviser. Notices shall be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
CHASE ASSET MANAGEMENT, INC. THE CHASE MANHATTAN BANK, N.A.
By:_______________________________________ By:_______________________________
Name: Name:
Title: Title:
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<PAGE>
Schedule A
Portfolio:
International Equity Portfolio
Capital Growth Portfolio
Growth and Income Portfolio
Asset Allocation Portfolio
U.S. Treasury Income Portfolio
Money Market Portfolio
i
INVESTMENT SUBADVISORY AGREEMENT
between
THE CHASE MANHATTAN BANK, N.A.
AND ITS SUCCESSOR
and
CHASE ASSET MANAGEMENT (LONDON) LIMITED
AGREEMENT made as of the 14th day of July, 1996, by and between The
Chase Manhattan Bank, N.A., a national banking association and its successor,
The Chase Manhattan Bank, a New York State chartered bank (the "Adviser"), and
Chase Asset Management (London) Limited, an English corporation (the
"Sub-Adviser").
WHEREAS, the Adviser provides investment advisory services to the
series of Mutual Fund Variable Annuity Trust, a Massachusetts business trust
(the "Trust"), which is registered as an open-end, management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), pursuant
to an Investment Advisory Agreement dated May 6, 1996 (the "Advisory
Agreement"); and
WHEREAS, the Sub-Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with the series of the Trust
listed on Schedule A (each, a "Fund" and collectively, the "Funds"), and the
Sub-Adviser represents that it is willing and possesses legal authority to so
furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment.
(a) General. The Adviser hereby appoints the Sub-Adviser to act as
investment subadviser to the Funds for the period and on the
terms set forth in this Agreement. The Sub-Adviser accepts
such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Sub-Adviser may, in its
discretion, provide such services through its own employees or
the employees of one or more affiliated companies that are
qualified to act as an investment subadviser to the Funds
under applicable laws and are under the control of The Chase
Manhattan Corporation, the indirect parent of the Sub-Adviser;
provided that (i) all persons, when providing services
hereunder, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed
at all times by authorized officers of the Sub-Adviser.
<PAGE>
2
2. Delivery of Documents. The Adviser has delivered to the Sub-Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Trust's Declaration of Trust ;
(b) the By-Laws of the Trust;
(c) resolutions of the Board of Trustees of the Trust authorizing
the execution and delivery of the Advisory Agreement and this
Agreement;
(d) the most recent Post-Effective Amendment to the Trust's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Trust under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the Prospectuses and Statements of Additional Information of
the Funds.
3. Investment Advisory Services.
(a) Management of the Funds. The Sub-Adviser hereby undertakes to
act as investment subadviser to the Funds. The Sub-Adviser
shall regularly provide investment advice to the Funds and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Funds and, in furtherance thereof, shall:
(i) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Funds' investment programs, and the
issuers of securities included in the Funds'
portfolios and the industries in which they engage,
or which may relate to securities or other
investments which the Sub-Adviser may deem desirable
for inclusion in a Fund's portfolio;
(ii) determine which issuers and securities shall be
included in the portfolio of each Fund;
(iii) furnish a continuous investment program for each
Fund;
(iv) in its discretion, and without prior consultation,
buy, sell, lend and otherwise trade any stocks, bonds
and other securities and investment instruments on
behalf of each Fund; and
<PAGE>
3
(v) take, on behalf of each Fund, all actions the
Sub-Adviser may deem necessary in order to carry into
effect such investment program and the Sub-Adviser's
functions as provided above, including the making of
appropriate periodic reports to the Adviser and the
Trust's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment
subadvisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in:
(i) each Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Trust's Declaration of Trust, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Trust or the Adviser with respect to a Fund and provided
to the Sub-Adviser in writing. The Sub-Adviser agrees to use
reasonable efforts to manage each Fund so that it will
qualify, and continue to qualify, as a regulated investment
company under Subchapter M of the Internal Revenue Code of
1986, as amended, and regulations issued thereunder (the
"Code"), except as may be authorized to the contrary by the
Trust's Board of Trustees. The management of the Funds by the
Sub-Adviser shall at all times be subject to the review of the
Adviser and the Trust's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Sub-Adviser
shall keep each Fund's books and records required to be
maintained by, or on behalf of, the Funds with respect to
subadvisory services rendered hereunder. The Sub-Adviser
agrees that all records which it maintains for a Fund are the
property of the Fund and it will promptly surrender any of
such records to the Fund upon the Fund's request. The
Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records
of the Fund required to be preserved by such Rule.
(d) Reports, Evaluations and other services. The Sub-Adviser shall
furnish reports, evaluations, information or analyses to the
Adviser and the Trust with respect to the Funds and in
connection with the Sub-Adviser's services hereunder as the
Adviser and/or the Trust's Board of Trustees may request from
time to time or as the Sub-Adviser may otherwise deem to be
desirable. The Sub-Adviser shall make recommendations to the
Adviser and the Trust's Board of Trustees with respect to the
Trust's policies, and shall carry out such policies as are
adopted by the Board of Trustees. The Sub-Adviser may, subject
to review by the Adviser, furnish such other services as the
Sub-Adviser shall from time to time determine to be necessary
or useful to perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Sub-Adviser shall place
all orders for the purchase and sale of portfolio securities
for each Fund with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated
with the Adviser or the Sub-Adviser to the extent permitted by
the 1940 Act and the
<PAGE>
4
Trust's policies and procedures applicable to the Funds. The
Sub-Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Funds. In assessing the best overall
terms available for any transaction, the Sub-Adviser shall
consider all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the
financial condition and execution capability of the broker or
dealer, research services provided to the Sub-Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Sub-Adviser be under any duty to obtain the lowest
commission or the best net price for any Fund on any
particular transaction, nor shall the Sub-Adviser be under any
duty to execute any order in a fashion either preferential to
any Fund relative to other accounts managed by the Sub-Adviser
or otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Sub-Adviser,
the Funds, and/or the other accounts over which the
Sub-Adviser exercises investment discretion. The Sub-Adviser
is authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a
portfolio transaction for a Fund which is in excess of the
amount of commission another broker or dealer would have
charged for effecting that transaction if the Sub- Adviser
determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall
responsibilities of the Sub-Adviser with respect to accounts
over which it exercises investment discretion. The Sub-Adviser
shall report to the Board of Trustees of the Trust regarding
overall commissions paid by the Funds and their reasonableness
in relation to their benefits to the Funds.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Sub-Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Sub-Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Trust's registration statement and the Fund's
Prospectus and Statement of Additional Information. In such
event, the Sub-Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its
fiduciary obligations to the Fund and such other clients.
<PAGE>
5
4. Representations and Warranties.
(a) The Sub-Adviser hereby represents and warrants to the Adviser
as follows:
(i) The Sub-Adviser is a company duly organized and
validly existing under the laws of England and is
fully authorized to enter into this Agreement and
carry out its duties and obligations hereunder.
(ii) The Sub-Adviser is registered as an investment
adviser with the Commission under the Advisers Act,
and is registered or licensed as an investment
adviser under the laws of all applicable
jurisdictions. The Sub-Adviser shall maintain such
registrations or licenses in effect at all times
during the term of this Agreement.
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out
the Sub-Adviser's obligations hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser
as follows:
(i) The Adviser is a national banking association duly
organized and in good standing under the laws of the
United States of America and is fully authorized to
enter into this Agreement and carry out its duties
and obligations hereunder.
(ii) The Trust has been duly organized as a business trust
under the laws of the State of Massachusetts.
(iii) The Trust is registered as an investment company with
the Commission under the 1940 Act, and shares of the
each Fund are registered for offer and sale to the
public under the 1933 Act and all applicable state
securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. Compensation. (a) As compensation for the services which the
Sub-Adviser is to provide or cause to be provided pursuant to Paragraph 3, with
respect to each Fund, the Adviser shall pay to the Sub-Adviser (or cause to be
paid by the Trust directly to the Sub-Adviser) a fee, which shall be accrued
daily and paid in arrears on the first business day of each month, at an annual
rate set forth in Schedule A, as a percentage of the average daily net assets of
the Fund during the preceding month (computed in the manner set forth in the
Fund's most recent Prospectus and Statement of Additional Information). Average
daily net assets shall be based upon determinations of net assets made as of the
close of business on each business day
<PAGE>
6
throughout such month. The fee for any partial month shall be calculated on a
proportionate basis, based upon average daily net assets for such partial month.
(b) The Sub-Adviser shall have the right, but not the
obligation, to voluntarily waive any portion of the sub-advisory fee from time
to time. Any such voluntary waiver will be irrevocable and determined in advance
of rendering sub-investment advisory services by the Sub-Adviser, and shall be
in writing and signed by the parties hereto.
(c) If the aggregate expenses incurred by, or allocated to,
each Fund in any fiscal year shall exceed the lowest expense limitation, if
applicable to such Fund, imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Sub-Adviser shall reduce its investment advisory fee, but not below zero, to the
extent of its share of such excess expenses; provided, however, there shall be
excluded from such expenses the amount of any interest, taxes, brokerage
commissions and extraordinary expenses (including but not limited to legal
claims and liabilities and litigation costs and any indemnification related
thereto) paid or payable by the Fund. Such reduction, if any, shall be computed
and accrued daily, shall be settled on a monthly basis and shall be based upon
the expense limitation applicable to the Fund as at the end of the last business
day of the month. Should two or more of such expense limitations be applicable
at the end of the last business day of the month, that expense limitation which
results in the largest reduction in the Sub-Adviser's fee shall be applicable.
For the purposes of this paragraph, the Sub-Adviser's share of any excess
expenses shall be computed by multiplying such excess expenses by a fraction,
the numerator of which is the amount of the investment advisory fee which would
otherwise be payable to the Sub-Adviser for such fiscal year were it not for
this subsection 5(b) and the denominator of which is the sum of all investment
advisory and administrative fees which would otherwise be payable by the Fund
were it not for the expense limitation provisions of any investment advisory or
administrative agreement to which the Fund is a party.
6. Interested Persons. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Trust or
the Adviser are or may be or become interested in the Sub-Adviser as directors,
officers or otherwise and that directors, officers and shareholders of the
Sub-Adviser are or may be or become similarly interested in the Trust or the
Adviser.
7. Expenses. The Sub-Adviser will pay all expenses incurred by it in
connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions) purchased for or sold by the Funds.
8. Non-Exclusive Services; Limitation of Sub-Adviser's Liability. The
services of the Sub-Adviser hereunder are not to be deemed exclusive, and the
Sub-Adviser may render
<PAGE>
7
similar services to others and engage in other activities. The Sub-Adviser and
its affiliates may enter into other agreements with the Funds, the Trust or the
Adviser for providing additional services to the Funds, the Trust or the Adviser
which are not covered by this Agreement, and to receive additional compensation
for such services. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Sub-Adviser, or a breach of fiduciary duty with respect to receipt of
compensation, neither the Sub-Adviser nor any of its directors, officers,
shareholders, agents, or employees shall be liable or responsible to the
Adviser, the Trust, the Funds or to any shareholder of the Funds for any error
of judgment or mistake of law or for any act or omission in the course of, or
connected with, rendering services hereunder or for any loss suffered by the
Adviser, the Trust, a Fund, or any shareholder of a Fund in connection with the
performance of this Agreement.
9. Effective Date; Modifications; Termination. This Agreement shall
become effective on the date hereof (the "Effective Date") provided that it
shall have been approved by a majority of the outstanding voting securities of
each Fund, in accordance with the requirements of the 1940 Act, or such later
date as may be agreed by the parties following such shareholder approval.
(a) This Agreement shall continue in force for two years from the
Effective Date and shall continue in effect from year to year
thereafter as to each Fund for successive annual periods,
provided such continuance is specifically approved at least
annually (i) by a vote of the majority of the Trustees of the
Trust who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (ii) by a vote
of the Board of Trustees of the Trust or a majority of the
outstanding voting securities of the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Trust who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement as to any
Fund(s) at any time on sixty (60) days' prior written notice
to the other, without payment of any penalty. A termination of
the Sub-Adviser may be effected as to any particular Fund by
the Adviser, by a vote of the Trust's Board of Trustees, or by
vote of a majority of the outstanding voting securities of the
Fund. This Agreement shall terminate automatically in the
event of its assignment.
<PAGE>
8
10. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
11. Independent Contractor. The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees of the Trust
from time to time, have no authority to act for or represent a Fund in any way
or otherwise be deemed an agent of a Fund.
12. Structure of Agreement. The Adviser and Sub-Adviser are entering
into this Agreement with regard to the respective Funds severally and not
jointly. The responsibilities and benefits set forth in this Agreement shall be
deemed to be effective as between the Adviser and Sub-Adviser in connection with
each Fund severally and not jointly. This Agreement is intended to govern only
the relationships between the Adviser, on the one hand, and the Sub-Adviser, on
the other hand, and is not intended to and shall not govern (i) the relationship
between the Adviser or Sub-Adviser and any Fund, or (ii) the relationships among
the respective Funds.
13. Governing Law. This Agreement shall be governed by the laws of the
State of New York, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
14. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
15. Notices. Notices of any kind to be given to the Adviser hereunder
by the Sub-Adviser shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 270 Park Avenue, New York, New York 10017 or at such
other address or to such individual as shall be so specified by the Adviser to
the Sub-Adviser. Notices of any kind to be given to the Sub-Adviser hereunder by
the Adviser shall be in writing and shall be duly given if mailed or delivered
to the Sub-Adviser at Colvile House, 32 Curzon Street, London W1Y 8AL or at such
other address or to such individual as shall be so specified by the Sub-Adviser
to the Adviser. Notices shall be effective upon delivery.
<PAGE>
9
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
CHASE ASSET MANAGEMENT THE CHASE MANHATTAN BANK, N.A.
(LONDON) LIMITED
By: ___________________________ By:___________________________
Name: Name:
Title: Title:
<PAGE>
10
Schedule A to the Investment Sub-Advisory Agreement
between The Chase Manhattan Bank and its successor and
Chase Asset Management (London) Limited
Fund: Fee:
1. International Equity Portfolio 0.40%
ADMINISTRATION AGREEMENT
THIS AGREEMENT made this 31st day of March, 1996, by and between MUTUAL
FUND VARIABLE ANNUITY TRUST (the "Trust"), a Massachusetts business trust and
THE CHASE MANHATTAN BANK, N.A.
(the "Administrator").
WITNESSETH:
In consideration of the mutual covenants herein contained and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
FIRST: The Trust on behalf of each of its series and any new series to
be created hereby authorizes the Administrator to provide administrative
services to the Trust in accordance with the terms and conditions of this
Agreement. The Administrator's services shall be subject to the direction and
control of the Board of Trustees of the Trust and shall be performed under the
direction of the appropriate Trust officers. The Administrator's functions shall
be entirely ministerial in nature, and it shall not have any responsibility or
authority for the management of the Trust, the determination of its policies, or
for any matter pertaining to the distribution of securities issued by the Trust.
SECOND: The Administrator shall provide certain administration services
including:
(A) arranging for the maintenance of the Trust's books and
records except for: accounting books and records, sales literature and other
documents relating to the sale of securities issued by the Trust (other than
copies of such documents preserved as a record of presentations to the Board of
Trustees or Trust officers), and records pertaining to the ownership of
securities issued by the Trust;
(B) preparing applications for insurance for the Trust and
claims under any insurance policy;
<PAGE>
(C) preparing for the signature of the appropriate Trust
officer (or assist counsel and auditors in the preparation of) all required
Trust tax returns, proxy statements, semiannual reports to the Trust's
shareholders, semiannual reports to be filed with the Securities and Exchange
Commission, and updates to the Trust's Registration Statement under the
Investment Company Act of 1940 (the "Act");
(D) arranging for the printing and mailing (at the Trust's
expense) of proxy statements and other reports or other materials provided to
the Trust's shareholders;
(E) preparing applications and reports which may be necessary
to maintain on behalf of the Trust any registration of the Trust and/or the
shares of any series of the Trust under the securities or "bluesky" laws of any
state, province, or foreign country (the Trust shall pay for any filing or legal
fees in connection with such filings);
(F) preparing agendas and supporting documentation for, and
minutes of, Trustee and shareholder meetings;
(G) arranging for the computation of performance data
including net asset value and yield;
(H) arranging for the publication of current price information
in newspapers and publications;
(I) responding to all inquires or other communications from
shareholders of the Trust and other parties or, if the inquiry is more properly
responded to by the Trust's transfer agent or distributor, referring the
individual making the inquiry to the appropriate person;
(J) reviewing from time to time the portfolios of each series
of the Trust and transactions with brokers and dealers for compliance with
applicable law and Trust policy;
(K) coordinating all relationships between the Trust and its
contractors, including coordinating the negotiation of agreements, the review of
performance of agreements, and the exchange of information, provided that
coordination with the distributor shall be limited to the exchange of
information
- 2 -
<PAGE>
necessary for the administration of the Trust and the reporting of that
information to the Board of Trustees and Trust officers.
THIRD: Any activities performed by the Administrator under this
Agreement shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the Act and of any rules or
regulations in force thereunder; (2) any other applicable provision of law; (3)
the provisions of the Agreement and Declaration of Trust and By-Laws of the
Trust as amended from time to time; (4) any policies of each series of the
Trust, as reflected in the then current Registration Statement of the Trust. As
used in this Agreement, the term "Registration Statement" shall mean the
Registration Statement most recently filed by the Trust with the Securities and
Exchange Commission and effective under the Securities Act of 1933, as amended,
as such Registration Statement is amended at such time, and the term
"Prospectus" and "Statement of Additional Information" shall mean for the
purposes of this Agreement the form of the then current prospectus and statement
of additional information for each series of the Trust.
FOURTH: Nothing in this Agreement shall prevent the Administrator or
any officer thereof from acting as administrator for any other person, firm or
corporation and shall not in any way limit or restrict the Administrator or any
of its directors, officers, employees or affiliates from buying, selling or
trading any securities for its own or their own accounts or for the accounts of
others for whom it or they may be acting, provided, however, that the
Administrator expressly represents that it will undertake no activities which,
in its judgment, will adversely affect the performance of its obligations to the
Trust under the Agreement.
FIFTH: The Administrator shall, at its own expense, provide
office space and facilities, equipment and personnel for the
performance of its functions hereunder.
- 3 -
<PAGE>
SIXTH: The Trust shall pay the Administrator, as full compensation for
all services rendered hereunder, an annual fee on behalf of each series payable
monthly and computed on the net asset value of the series at the end of each
business day at the annual rates set forth in Exhibit A hereto.
SEVENTH: In the event the operating expenses of any series of the
Trust, including all investment advisory, administration and sub-administrator
fees, but excluding brokerage commissions and fees, taxes, interest and
extraordinary expenses such as litigation, for any fiscal year ending on a date
on which this Agreement is in effect exceed the most restrictive expense
limitation applicable to the series imposed by the securities laws or
regulations thereunder of any state in which the shares of the series are
qualified for sale, as such limitations may be raised or lowered from time to
time, the Administrator shall reduce its administration fee to the extent of its
share of such excess expenses. The amount of any such reduction to be borne by
the Administrator shall be deducted from the monthly administration fee
otherwise payable to the Administrator during such fiscal year; and if such
amounts should exceed the monthly fee, the Administrator shall pay to such
series its share of such excess expenses no later than the last day of the first
month of the next succeeding fiscal year. For the purposes of this paragraph,
the term "fiscal year" shall exclude the portion of the current fiscal year
which shall have elapsed prior to the date hereof and shall include the portion
of the then current fiscal year which shall have elapsed at the date of
termination of this Agreement.
EIGHTH:
(A) This Agreement shall go into effect at the close of the
business on the date hereof, and, unless terminated as hereinafter provided,
shall continue in effect for two years thereafter and from year to year
thereafter, but only so long as
- 4 -
<PAGE>
such continuance is specifically approved at least annually by the Trust's Board
of Trustees, including the vote of a majority of the Trustees who are not
parties to this Agreement or "interested persons" (as defined in the Act) of any
such party cast in person at a meeting called for the purpose of voting on such
approval, or by the vote of the holders of a "majority" (as so defined) of the
outstanding voting securities of the applicable series and by such vote of the
Trustees.
(B) This Agreement may be terminated by the Administrator at
any time without penalty upon giving the Board of Trustees of the Trust sixty
(60) days' written notice (which notice may be waived by the Trust) and may be
terminated by the Board of Trustees of the Trust at any time without penalty
upon giving the Administrator sixty (60) days' written notice (which notice may
be waived by the Administrator), provided that such termination by the Board of
Trustees of the Trust shall be directed or approved by the vote of a majority of
all of its Trustees in office at the time, including a majority of the Trustees
who are not interested persons (as defined in the Act) of the Trust, or by the
vote of the holders of a majority (as defined in the Act) of the voting
securities of each series of the Trust at the time outstanding and entitled to
vote. This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning defined in
Section 2(a)(4) of the Act.
NINTH: In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Administrator or any of its officers, directors or employees, the Trust
shall indemnify the Administrator which the Administrator may incur based on any
omission in the course of, or connected with, rendering services hereunder.
TENTH: A copy of the Agreement and Declaration of Trust of
the Trust is on file with the Secretary of the Commonwealth of
- 5 -
<PAGE>
Massachusetts, and notice is hereby given that this instrument is executed on
behalf of the Trustees of the Trust as Trustees and not individually, and that
the obligations of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
the Trust.
ELEVENTH: Any notice under this Agreement shall be in writing,
addressed and delivered, or mailed, postage paid, to the other party at such
address as such other party may designate for the receipt of such notices. Until
further notice to the other party, it is agreed that the address of the Trust
shall be 125 West 55th Street, New York, NY 10019, and the address of the
Administrator shall be 1 Chase Square, Rochester, NY 14643.
IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
ATTEST: MUTUAL FUND VARIABLE ANNUITY TRUST
____________________ By:___________________________
ATTEST: THE CHASE MANHATTAN BANK, N.A.
____________________ By:___________________________
- 6 -
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 4 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated October 18, 1996, relating to the financial
statements and selected per share data and ratios for a share of beneficial
interest outstanding of Growth and Income Portfolio, Capital Growth Portfolio,
International Equity Portfolio, Asset Allocation Portfolio, U.S. Government
Income Portfolio and Money Market portfolio (separately managed portfolios of
Mutual Fund Variable Annuity Trust), appearing in the August 31, 1996 Annual
Report to Shareholders of Mutual Fund Variable Annuity Trust, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the Prospectus
and under the heading "Independent Accountants" in the Statement of Additional
Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 30, 1996
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<NAME> ASSET ALLOCATION PORTFOLIO
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<NUMBER> 011
<NAME> ASSET ALLOCATION PORTFOLIO
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 3,889,564
<INVESTMENTS-AT-VALUE> 4,004,681
<RECEIVABLES> 290,811
<ASSETS-OTHER> 238
<OTHER-ITEMS-ASSETS> 321
<TOTAL-ASSETS> 4,296,051
<PAYABLE-FOR-SECURITIES> 249,323
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,511
<TOTAL-LIABILITIES> 262,834
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<SHARES-COMMON-PRIOR> 502,538
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<ACCUMULATED-NET-GAINS> 517,087
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 115,117
<NET-ASSETS> 4,033,217
<DIVIDEND-INCOME> 41,794
<INTEREST-INCOME> 121,958
<OTHER-INCOME> 0
<EXPENSES-NET> 34,518
<NET-INVESTMENT-INCOME> 129,234
<REALIZED-GAINS-CURRENT> 524,469
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<NET-CHANGE-FROM-OPS> 434,372
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<DISTRIBUTIONS-OF-INCOME> 162,866
<DISTRIBUTIONS-OF-GAINS> 88,726
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<NUMBER-OF-SHARES-SOLD> 96,621
<NUMBER-OF-SHARES-REDEEMED> 261,398
<SHARES-REINVESTED> 23,832
<NET-CHANGE-IN-ASSETS> (1,512,517)
<ACCUMULATED-NII-PRIOR> 102,855
<ACCUMULATED-GAINS-PRIOR> 81,344
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<GROSS-ADVISORY-FEES> 22,327
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<GROSS-EXPENSE> 94,408
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<PER-SHARE-NII> .657
<PER-SHARE-GAIN-APPREC> .488
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<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> CAPITAL GROWTH PORTFOLIO
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<NUMBER> 021
<NAME> CAPITAL GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 7,239,150
<INVESTMENTS-AT-VALUE> 8,140,185
<RECEIVABLES> 199,485
<ASSETS-OTHER> 452
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,340,122
<PAYABLE-FOR-SECURITIES> 385,092
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 45,105
<TOTAL-LIABILITIES> 430,197
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,084,530
<SHARES-COMMON-STOCK> 571,585
<SHARES-COMMON-PRIOR> 531,755
<ACCUMULATED-NII-CURRENT> 40,578
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 883,812
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 901,035
<NET-ASSETS> 7,909,955
<DIVIDEND-INCOME> 57,572
<INTEREST-INCOME> 59,023
<OTHER-INCOME> 0
<EXPENSES-NET> 56,006
<NET-INVESTMENT-INCOME> 60,589
<REALIZED-GAINS-CURRENT> 857,222
<APPREC-INCREASE-CURRENT> 60,856
<NET-CHANGE-FROM-OPS> 978,667
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 49,138
<DISTRIBUTIONS-OF-GAINS> 74,399
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 276,967
<NUMBER-OF-SHARES-REDEEMED> 247,141
<SHARES-REINVESTED> 10,004
<NET-CHANGE-IN-ASSETS> 1,581,378
<ACCUMULATED-NII-PRIOR> 29,126
<ACCUMULATED-GAINS-PRIOR> 100,990
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 37,336
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 122,621
<AVERAGE-NET-ASSETS> 6,216,482
<PER-SHARE-NAV-BEGIN> 11.90
<PER-SHARE-NII> .158
<PER-SHARE-GAIN-APPREC> 2.139
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<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927053
<NAME> GROWTH & INCOME PORTFOLIO
<SERIES>
<NUMBER> 031
<NAME> GROWTH & INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 7,693,186
<INVESTMENTS-AT-VALUE> 8,063,237
<RECEIVABLES> 38,166
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<TOTAL-ASSETS> 8,101,855
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<PAID-IN-CAPITAL-COMMON> 6,700,159
<SHARES-COMMON-STOCK> 634,138
<SHARES-COMMON-PRIOR> 544,279
<ACCUMULATED-NII-CURRENT> 65,829
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 945,302
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 370,051
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<DIVIDEND-INCOME> 99,858
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<EXPENSES-NET> 53,474
<NET-INVESTMENT-INCOME> 101,413
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<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
<ARTICLE> 6
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<NAME> INTERNATIONAL EQUITY PORTFOLIO
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<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 325,428
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,700)
<NET-ASSETS> 3,900,767
<DIVIDEND-INCOME> 65,685
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<EXPENSES-NET> 42,756
<NET-INVESTMENT-INCOME> 31,819
<REALIZED-GAINS-CURRENT> 375,948
<APPREC-INCREASE-CURRENT> (378,878)
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<DISTRIBUTIONS-OF-GAINS> 68,873
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927053
<NAME> MONEY MARKET PORTFOLIO
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<NUMBER> 051
<NAME> MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 2,938,299
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<SHARES-COMMON-PRIOR> 5,422,211
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<ACCUMULATED-NET-GAINS> (6)
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<NET-CHANGE-IN-ASSETS> (2,472,022)
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<GROSS-EXPENSE> 62,200
<AVERAGE-NET-ASSETS> 3,564,441
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> .00
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000927053
<NAME> U S TREASURY INCOME PORTFOLIO
<SERIES>
<NUMBER> 061
<NAME> U S TREASURY INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 2,959,617
<INVESTMENTS-AT-VALUE> 2,930,985
<RECEIVABLES> 23,247
<ASSETS-OTHER> 3,364
<OTHER-ITEMS-ASSETS> 52,215
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,798
<TOTAL-LIABILITIES> 15,798
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,803,342
<SHARES-COMMON-STOCK> 314,196
<SHARES-COMMON-PRIOR> 504,033
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<OVERDISTRIBUTION-GAINS> 0
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<APPREC-INCREASE-CURRENT> (143,239)
<NET-CHANGE-FROM-OPS> 194,400
<EQUALIZATION> 0
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<NET-CHANGE-IN-ASSETS> (2,395,905)
<ACCUMULATED-NII-PRIOR> 162,500
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<AVERAGE-NET-ASSETS> 3,639,169
<PER-SHARE-NAV-BEGIN> 10.69
<PER-SHARE-NII> 1.173
<PER-SHARE-GAIN-APPREC> (.850)
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<PER-SHARE-DISTRIBUTIONS> .341
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<PER-SHARE-NAV-END> 9.53
<EXPENSE-RATIO> .80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
