Rule 497(c)
File Number 33-81712
PROSPECTUS
DECEMBER 29, 1995
MUTUAL FUND VARIABLE ANNUITY TRUST
Mutual Fund Variable Annuity Trust (the "Trust") is an open-end management
investment company. The Trust consists of six portfolios (the "Portfolio(s)"),
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.
INTERNATIONAL EQUITY PORTFOLIO (the "International Equity Portfolio") seeks
to provide a total return on assets from long-term growth of capital and from
income principally through diversified holdings of marketable equity securities
of established foreign companies organized in countries other than the United
States and companies participating in foreign economies with prospects for
growth.
CAPITAL GROWTH PORTFOLIO (the "Capital Growth Portfolio") seeks to provide
long-term capital growth primarily through diversified holdings (i.e., at least
80% of its assets in normal circumstances) in common stocks. The Capital Growth
Portfolio will invest all of its assets in the stocks of issuers (including
foreign issuers) with small to medium capitalizations. The Adviser (as defined
below) intends to utilize both quantitative and fundamental research to identify
undervalued stocks with a catalyst for positive change. Dividend income, if any,
is a consideration incidental to the Capital Growth Portfolio's investment
objective of growth of capital. This investment policy involves the risks that
the issues identified by the Adviser will not appreciate or appreciate as
significantly as projected.
GROWTH AND INCOME PORTFOLIO (the "Growth and Income Portfolio") seeks to
provide long-term capital appreciation and to provide dividend income primarily
through diversified holdings (i.e., at least 80% of its assets under normal
circumstances) of common stocks. The Growth and Income Portfolio will invest its
assets in the stocks of issuers (including foreign issuers) ranging from small
to medium to large capitalizations. For the most part, the Adviser will pursue a
"contrary opinion" investment approach, selecting common stocks that are
currently out of favor with investors in the stock market. These securities are
usually characterized by a relatively low price/earnings ratio (using normalized
earnings), a low ratio of market price to book value, or underlying asset values
that the Adviser believes are not fully reflected in the current market price.
The Adviser believes that the risk involved in this policy will be moderated
somewhat by the anticipated dividend returns on the stocks to be held by the
Growth and Income Portfolio.
ASSET ALLOCATION PORTFOLIO (the "Asset Allocation Portfolio") seeks to
provide maximum total return through a combination of long-term growth of
capital and current income by investing in diversified holdings of equity and
debt securities, including common stocks, convertible securities and government
and corporate fixed-income obligations. Under normal market conditions, between
35%-70% of the Asset Allocation Portfolio's total assets will be invested in
common stocks and other equity investments and at least 25% of the Asset
Allocation Portfolio's assets will be invested in fixed-income senior
securities, defined for this purpose to include non-convertible corporate debt
securities and preferred stock, and government obligations. The Adviser
considers both the opportunity for gain and the risk of loss in making
investments, and may alter the relative percentages of assets invested in equity
and fixed income securities from time to time, depending on
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the judgment of the Adviser as to general market and economic conditions, trends
and yields and interest rates and changes in fiscal and monetary policies.
U.S. TREASURY INCOME PORTFOLIO (the "Treasury Income Portfolio") seeks to
provide monthly dividends as well as to protect the value of an investors'
investment (i.e., to preserve principal) by investing at least 65% of its assets
in debt obligations that are backed by the "full faith and credit" of the U.S.
government as well as by using futures contracts on fixed income securities or
indexes of fixed income securities and options on such futures contracts for the
purpose of protecting (i.e., "hedging") the value of its portfolio. Neither the
United States nor any of its agencies insures or guarantees the market value of
shares of this Treasury Income Portfolio.
MONEY MARKET PORTFOLIO (the "Money Market Portfolio") seeks to provide
maximum current income consistent with preservation of capital and maintenance
of liquidity through investments in U.S. dollar denominated commercial paper,
obligations of foreign governments, obligations guaranteed by U.S. banks, and
securities issued by the U.S. government or its agencies.
Of course, there can be no assurance that the Portfolios will achieve their
investment objectives. AN INVESTMENT IN EACH PORTFOLIO IS 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 A PORTFOLIO ARE SUBJECT TO RISK -- INCLUDING POSSIBLE LOSS
OF PRINCIPAL -- AND MAY FLUCTUATE IN VALUE. Prospective investors should
carefully consider the risks associated with an investment in a Portfolio. For a
further discussion on the risks associated with an investment in a Portfolio,
see "The Trust, Its Investment Objectives and Policies" in this Prospectus.
This Prospectus sets forth concisely the information a prospective investor
ought to know before investing in the Trust. A Statement of Additional
Information dated December 29, 1995 has been filed with the Securities and
Exchange Commission and is incorporated into this Prospectus by reference and
may be obtained upon request and without charge by telephoning 1-800-90-VISTA.
The Chase Manhattan Bank, N.A. ("Chase") is the investment adviser (the
"Adviser"), custodian (the "Custodian") and administrator ("the Administrator")
for each of the Portfolios described in this Prospectus. SHARES OF THE
PORTFOLIOS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY THE CHASE
MANHATTAN BANK, N.A. OR ANY OTHER FINANCIAL INSTITUTION, NOR ARE THEY FDIC
INSURED.
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.
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TABLE OF CONTENTS
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TOPICS PAGE
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THE TRUST, ITS INVESTMENT OBJECTIVES AND POLICIES.................................... 4
International Equity Portfolio..................................................... 5
Capital Growth Portfolio........................................................... 6
Growth and Income Portfolio........................................................ 7
Asset Allocation Portfolio......................................................... 7
U.S. Treasury Income Portfolio..................................................... 9
Money Market Portfolio............................................................. 9
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES.................................. 10
MANAGEMENT........................................................................... 14
The Adviser........................................................................ 14
International Equity Portfolio..................................................... 14
Capital Growth Portfolio........................................................... 15
Growth and Income Portfolio........................................................ 15
Asset Allocation Portfolio......................................................... 15
U.S. Treasury Income Portfolio..................................................... 15
Money Market Portfolio............................................................. 15
The Administrator.................................................................. 16
TRANSFER AGENT AND CUSTODIAN......................................................... 18
PORTFOLIO MANAGEMENT AND TURNOVER.................................................... 18
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES........................................... 19
PRICE OF SHARES...................................................................... 20
PURCHASES AND REDEMPTIONS............................................................ 20
SHAREHOLDER VOTING RIGHTS............................................................ 20
SHAREHOLDER INQUIRIES................................................................ 21
FINANCIAL INFORMATION................................................................ 21
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THE TRUST, ITS INVESTMENT OBJECTIVES AND POLICIES
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The Trust, organized as a Massachusetts business trust on April 14, 1994,
is an open-end management investment company. It was established to provide a
funding medium 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 Trust issues six separate series of shares (the "Portfolio(s)") each of
which represents a separate managed portfolio of securities with its own
investment objectives. The Board of Trustees may establish additional series in
the future. The current Portfolios are the Growth and Income Portfolio, Capital
Growth Portfolio, International Equity Portfolio, Asset Allocation Portfolio,
U.S. Treasury Income Portfolio, and Money Market Portfolio. All shares of a
Portfolio may be purchased or redeemed by the Account at net asset value without
any sales or redemption charge. Withdrawals from the Accounts may incur fees or
charges described more fully in the applicable contract prospectus.
Each Portfolio has investment objectives and certain policies set forth
herein. There can be no guarantee that any Portfolio's investment objectives
will be met or that the net return on an investment in a Portfolio will exceed
that which could have been obtained through other investment or savings
vehicles. Investors should carefully review the investment objectives and
policies of a Portfolio and consider their ability to assume the risks involved
before making an investment in a Portfolio. Each Portfolio also has certain
fundamental investment restrictions, which are described in the Statement of
Additional Information. A Portfolio's fundamental investment restrictions may
not be changed without a majority vote of shares of that Portfolio. See
"Shareholder Voting Rights." Except for its fundamental investment restrictions,
each Portfolio's investment objective and policies are not fundamental and may
be changed without a vote of the shareholders. If there is a change in a
Portfolio's investment objective, shareholders should consider whether the
Portfolio remains an appropriate investment in light of their then-current
financial positions and needs.
Each Portfolio's investment objectives and a summary of the policies
currently followed in attempting to achieve those objectives are set forth
below. Please also refer, however, to the section following, captioned
"Description of Securities and Investment Techniques," for a more detailed
description of the characteristics and risks associated with the types of
securities in which the various Portfolios invest. Reference is also made in the
following sections to ratings assigned to certain types of securities by
Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service, Inc. ("Fitch"), Duff & Phelps, Inc. ("Duff
& Phelps") and Thomson BankWatch, Inc., recognized independent securities
ratings institutions. A description of the ratings categories assigned by S&P,
Moody's, Fitch and Duff & Phelps is contained in the Statement of Additional
Information.
In addition, each Portfolio will be managed so as to satisfy current
Internal Revenue Service guidelines for the adequate diversification of
investments underlying variable annuity contracts. This means that, after a
one-year start-up period at the end of each calendar quarter, of the value of
the total assets of each Portfolio, not more than 55% will be represented by any
one investment; not more than 70% will be represented by any two investments;
not more than 80% will be represented by any three investments; and not more
than 90% will be represented by any four investments. For these purposes, all
securities of the same issuer (and all interests in the same commodity) are
treated as a single investment, but each U.S. government agency is treated as a
separate issuer.
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INTERNATIONAL EQUITY PORTFOLIO
The investment objective of the International Equity Portfolio is to
provide its shareholders with a total return on assets from long-term growth of
capital and from income principally through diversified holdings of marketable
equity securities of established foreign companies organized in countries other
than the United States and foreign companies or foreign subsidiaries of U.S.
companies participating in foreign economies with prospects for growth.
The International Equity Portfolio will invest its assets primarily in
common stocks of established non-United States companies which have potential
for growth of capital or income or both. However, there will be no requirement
that the International Equity Portfolio invest exclusively in common stocks or
other equity securities. The International Equity Portfolio may invest in any
other type of investment grade security including, but not limited to,
convertible securities, preferred stocks, bonds, notes and other debt securities
of foreign issuers (Eurodollar securities), warrants, obligations of the United
States or foreign governments and their political subdivisions, securities
purchased directly or in the form of sponsored American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs") or other similar securities
representing common stock of foreign issuers, and various derivative securities
of such securities. At least 65% of the International Equity Portfolio's assets
will be invested in equity securities, i.e., common stocks and securities
convertible into common stocks.
The International Equity Portfolio may establish and maintain temporary
cash balances up to 100% of its value for defensive purposes or to enable it to
take advantage of buying opportunities. The International Equity Portfolio's
temporary cash balances may be invested in United States, as well as foreign,
short-term, high quality money market instruments, including, but not limited
to, government obligations, certificates of deposit, bankers' acceptances,
commercial paper, short-term corporate debt securities and repurchase agreements
meeting the quality standards described under "Description of Securities and
Investment Techniques."
The International Equity 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 United States. The International Equity Portfolio may invest all
or a substantial portion of its assets in one or more of such countries.
The International Equity Portfolio may purchase or sell forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk from adverse changes in the relationship between the U.S. dollar and other
currencies. The International Equity Portfolio's dealings in forward contracts
will be limited to hedging, including cross-hedging, involving either specific
transactions or portfolio positions. The International Equity Portfolio will not
speculate in forward contracts. The International Equity Portfolio may not
position hedge with respect to the currency of a particular country to an extent
greater than the aggregate market value (at the time of making such sale) of the
securities held by the International Equity Portfolio denominated or quoted in
that particular foreign currency. In addition, the International Equity
Portfolio may enter into forward contracts in order to protect against adverse
changes in future foreign currency exchange rates. The International Equity
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 the Adviser determines that there is a pattern of
correlation between the two currencies.
The International Equity Portfolio may seek to increase income by lending
portfolio securities. However, the value of the securities loaned will not
exceed 30% of the value of the International Equity Portfolio's total assets.
The International Equity Portfolio intends to invest in companies based in
(or governments of or within) the Far East (Japan, Hong Kong, Singapore and
Malaysia), Western Europe (United Kingdom, Germany, Netherlands, France,
Switzerland), Australia, Canada and such other areas and countries as the
Adviser may determine from time to time. However, investments may be made from
time to time in companies in, or governments of, developing countries as well as
developed countries.
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In view of the planned integration of Hong Kong into China after 1997, there may
be special risks of investing in Hong Kong issuers. However, the planned
integration also calls for Hong Kong's capitalist system to remain intact for an
additional 50 years after 1997.
Investment in securities of issuers based in developing countries entails
certain risks which include (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) the small current size of markets for securities of issuers based in
developing countries and the currently low or non-existent volume of trading,
resulting in a lack of liquidity and in price volatility; (iii) certain national
policies which may restrict the investment opportunities including restrictions
on investing in issuers or industries deemed sensitive to relevant national
interest; (iv) the absence of developed legal structures governing private or
foreign investment and private property; (v) currency blockage; and (vi)
withholding of dividends at the source.
The International Equity Portfolio may enter into repurchase agreements
which are instruments through which the International Equity Portfolio purchases
a security from a bank or well established securities dealer with an agreement
by the seller to repurchase the security at the same price, plus interest at a
specified rate. The underlying securities will be limited to those which would
otherwise qualify for investment by the International Equity Portfolio. See
"Description of Securities and Investment Techniques".
Shareholder approval is not required to change any of the investment
policies described above or in "Description of Securities and Investment
Techniques". However, in the event of a change in the International Equity
Portfolio's investment objective, shareholders will be given at least 30 days'
prior written notice.
THE NET ASSET VALUE OF THE INTERNATIONAL EQUITY PORTFOLIO WILL FLUCTUATE
BASED ON THE VALUE OF THE SECURITIES IN THE PORTFOLIO.
CAPITAL GROWTH PORTFOLIO
The investment objective of the Capital Growth Portfolio is to provide its
shareholders with long-term capital growth. Dividend income, if any, is a
consideration incidental to the Capital Growth Portfolio's objective of growth
of capital. The Capital Growth Portfolio seeks to achieve its investment
objective by investing primarily (i.e., at least 80% of its assets in normal
circumstances) in common stocks. The Capital Growth Portfolio will invest all of
its assets in the stocks of issuers (including foreign issuers) with small to
medium capitalizations. The Adviser intends to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. Dividend income, if any, is a consideration incidental to the Capital
Growth Portfolio's investment objective of growth of capital. This investment
policy involves the risks that the issues identified by the Adviser will not
appreciate or appreciate as significantly as projected.
THE NET ASSET VALUE OF THE CAPITAL GROWTH PORTFOLIO WILL FLUCTUATE BASED ON
THE VALUE OF THE SECURITIES IN THE PORTFOLIO.
The Capital Growth Portfolio normally will be substantially fully invested
and, in normal circumstances, invest at least 80% of its assets in common
stocks. The Portfolio may invest up to 20% of its net assets in stock of foreign
issuers. However the Capital Growth Portfolio reserves the right to invest up to
100% of its assets in cash, cash equivalents and debt securities for temporary
defensive purposes during periods which the Adviser considers to be particularly
risky for investment in common stocks.
The Capital Growth Portfolio may enter into transactions in stock index
futures contracts, options on stock index futures contracts, options on stock
indexes and options on equity securities, for the purpose of hedging its
portfolio. "Description of Securities and Investment Techniques" and the
Statement of Additional Information contain a more complete description of the
hedging instruments to be used, as well as further information concerning the
investment policies and techniques of the Capital Growth Portfolio. In addition,
the Statement of Additional Information includes a further discussion of the
transactions in futures and option contracts to be entered into by the Capital
Growth
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Portfolio. Although the Capital Growth Portfolio will enter into transactions in
futures and option contracts for hedging purposes only, the use of such
instruments does involve transaction costs and certain risks, which are
discussed in the Statement of Additional Information.
Shareholder approval is not required to change any of the investment
policies described above or in "Description of Securities and Investment
Techniques". However, in the event of a change in the Capital Growth Portfolio's
investment objectives, shareholders will be given at least 30 days' prior
written notice.
GROWTH AND INCOME PORTFOLIO
The primary investment objective of the Growth and Income Portfolio is
long-term capital appreciation. The Growth and Income Portfolio's secondary
investment objective is to provide dividend income. The Growth and Income
Portfolio seeks to achieve its investment objectives by investing primarily
(i.e., at least 80% of its assets under normal circumstances) in common stocks.
The Growth and Income Portfolio will invest its assets in stocks of issuers
(including foreign issuers) ranging from small to medium to large
capitalizations. For the most part, the Adviser will pursue a "contrary opinion"
investment approach, selecting commons stocks that are currently out of favor
with investors in the stock market. These securities are usually characterized
by a relatively low price/earnings ratio (using normalized earnings), a low
ratio of market price to book value, or underlying asset values that the Adviser
believes are not fully reflected in the current market price. The Adviser
believes that the market risk involved in this policy will be moderated somewhat
by the anticipated dividend returns on the stocks to be held.
THE NET ASSET VALUE OF THE GROWTH AND INCOME PORTFOLIO WILL FLUCTUATE BASED
ON THE VALUE OF THE SECURITIES IN THE PORTFOLIO.
The Growth and Income Portfolio normally will be substantially fully
invested and, in normal circumstances, invest at least 80% of its assets in
common stocks. The Portfolio may invest up to 20% of its net assets in stock of
foreign issuers. However, the Growth and Income Portfolio reserves the right to
invest up to 100% of its assets in cash, cash equivalents and debt securities
for temporary defensive purposes during periods that the Adviser considers to be
particularly risky for investment in common stocks.
The Growth and Income Portfolio may enter into transactions in stock index
futures contracts, options on stock index futures contracts, options on stock
indexes and options on equity securities, for the purpose of hedging its
portfolio. "Description of Securities and Investment Techniques" and the
Statement of Additional Information contain a more complete description of the
hedging instruments to be traded, as well as further information concerning the
investment policies and techniques of the Growth and Income Portfolio. In
addition, the Statement of Additional Information includes a further discussion
of futures and option contracts to be entered into by the Growth and Income
Portfolio. Although the Growth and Income Portfolio will enter into futures and
option contracts for hedging purposes only, the use of such instruments does
involve transaction costs and certain risks, which are discussed in the
Statement of Additional Information.
Shareholder approval is not required to change any of the investment
policies described above or in "Description of Securities and Investment
Techniques." However, in the event of a change in the Growth and Income
Portfolio's investment objectives, shareholders will be given at least 30 days'
prior written notice.
ASSET ALLOCATION PORTFOLIO
The primary investment objective of the Asset Allocation Portfolio is to
maximize total return through a combination of long-term growth of capital and
current income.
The Asset Allocation Portfolio seeks to achieve this objective through a
policy of diversified investments in equity and debt securities, including
common stocks, convertible securities and government and corporate fixed-income
obligations. The Adviser considers both the opportunity for
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gain and the risk of loss in making investments, and may alter the relative
percentages of assets invested in equity and fixed income senior securities from
time to time, depending on the judgment of the Adviser as to general market and
economic conditions, trends and yields and interest rates and changes in fiscal
monetary policies.
Under normal market conditions, between 35%-70% of the Asset Allocation
Portfolio's total assets will be invested in common stocks and other equity
investments (which consists of convertible preferred stocks, convertible debt,
warrants and other securities convertible into or exchangeable for common
stocks). The majority of the Asset Allocation Portfolio's common stocks and
other equity investments will be invested in well-known and established
companies which have a market capitalization of at least $200 million and are
traded on established securities markets or over-the-counter.
In addition, at least 25% of the Asset Allocation Portfolio's assets will
be invested in fixed-income senior securities, defined for this purpose to
include non-convertible corporate debt securities, non-convertible preferred
stock, and government obligations. The average maturity of these investments
will vary from time to time depending on the Adviser's assessment of the
relative yields available on securities of different maturities. It is currently
anticipated that the average maturity of the fixed income securities in the
Asset Allocation Portfolio's portfolio will be between two and fifteen years
under normal market conditions. Non-convertible corporate debt obligations held
in the Asset Allocation Portfolio's portfolio will be rated, at the time of
purchase, BBB or higher by S&P or Baa or higher by Moody's or, if unrated,
determined to be comparable quality by the Adviser under criteria approved by
the Board of Trustees. Bonds rated BBB by S&P or Baa by Moody's may possess
speculative characteristics and may be sensitive to changes in the economy and
the financial condition of issuers.
The Asset Allocation Portfolio may also purchase obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities, and may
invest in high quality, short-term debt securities such as commercial paper
rated A-1 by S&P or P-1 by Moody's. See "Description of Securities and
Investment Techniques" for more information on the Asset Allocation Portfolio's
investment policies.
THE NET ASSET VALUE FOR THE ASSET ALLOCATION PORTFOLIO WILL FLUCTUATE BASED
ON THE VALUE OF THE SECURITIES IN THE PORTFOLIO.
The Asset Allocation Portfolio normally will be substantially fully
invested. However, the Asset Allocation Portfolio reserves the right to invest
up to 100% of its assets in cash, cash equivalents, high quality, short-term
money market instruments, and in bills, notes or bonds issued by the U.S.
Treasury Department or by other agencies of the U.S. government for temporary
defensive purposes during periods that the Adviser considers to be unsuitable
for the Asset Allocation Portfolio's normal investment strategies.
The Asset Allocation Portfolio may write covered call options on its equity
securities for the purpose of hedging its portfolio. "Description of Securities
and Investment Techniques" contain a more complete description of option
contracts, as well as further information concerning the investment policies and
techniques of the Asset Allocation Portfolio. In addition, the Statement of
Additional Information includes a further discussion of option contracts to be
entered into by the Asset Allocation Portfolio. Although the Asset Allocation
Portfolio will enter into option contracts for hedging purposes only, the use of
such instruments does involve transaction costs and certain risks, which are
discussed in the Statement of Additional Information.
Shareholder approval is not required to change any of the investment
policies described above or in "Description of Securities and Investment
Techniques." However, in the event of change in the Asset Allocation Portfolio's
investment objective, shareholders will be given at least 30 days' prior written
notice.
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TREASURY INCOME PORTFOLIO
The investment objective of the Treasury Income Portfolio is to provide its
shareholders with monthly dividends as well as to protect the value of its
shareholders' investment (i.e., to preserve principal).
The Treasury Income Portfolio seeks to achieve its investment objective by
investing at least 65% of its assets in debt obligations that are backed by the
"full faith and credit" of the U.S. government as well as by using futures
contracts on fixed income securities or indexes of fixed income securities and
options on such futures contracts for the purpose of protecting (i.e.,
"hedging") the value of its portfolio. Neither the United States nor any of its
agencies insures or guarantees the market value of shares of the Treasury Income
Portfolio.
The debt obligations in which the Treasury Income Portfolio's assets will
be invested include: (1) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance, such as U.S. Treasury bills
(maturity of one year or less), U.S. Treasury notes (maturities of one to 10
years), and U.S. Treasury bonds (generally maturities of greater than 10 years);
(2) 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, e.g., direct pass-through certificates of the Government
National Mortgage Association ("GNMA"); and (3) securities issued or guaranteed
as to principal and interest by the U.S. government or by agencies or
instrumentalities thereof. For a description of such obligations, see
"Description of Securities and Investment Techniques".
Although there is no credit risk involved in the purchase of debt
obligations that are backed by the "full faith and credit" of the U.S.
government, shares of the Treasury Income Portfolio are neither insured nor
guaranteed by the U.S. government or its agencies or instrumentalities.
MOREOVER, THE NET ASSET VALUE OF THE SHARES OF AN OPEN-END INVESTMENT COMPANY
SUCH AS THE TREASURY INCOME PORTFOLIO, WHICH INVESTS IN FIXED INCOME SECURITIES,
CHANGES AS THE GENERAL LEVELS OF INTEREST RATES FLUCTUATE. WHEN INTEREST RATES
DECLINE, THE VALUE OF A PORTFOLIO CAN BE EXPECTED TO RISE. CONVERSELY, WHEN
INTEREST RATES RISE, THE VALUE OF A PORTFOLIO CAN BE EXPECTED TO DECLINE.
The Treasury Income Portfolio may invest in repurchase agreements,
"when-issued" securities and futures contracts. For a description of these types
of investments, and further information regarding the investment policies and
techniques of the Portfolio, see "Description of Securities and Investment
Techniques". In addition, the Statement of Additional Information includes a
further discussion of futures and option contracts to be entered into by the
Treasury Income Portfolio. Although the Treasury Income Portfolio will enter
into futures and option contracts for hedging purposes only, the use of such
instruments does involve transaction costs and certain risks, which are
discussed in the Statement of Additional Information.
Shareholder approval is not required to change any of the investment
policies discussed above or in "Description of Securities and Investment
Techniques".
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to seek as high a
level of current income as is consistent with high stability and liquidity of
capital.
The Money Market Portfolio seeks to achieve its investment objective by
investing in (i) U.S. dollar-denominated 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-dominated obligations of
foreign governments and supranational agencies (e.g. the International Bank for
Reconstruction and Development); (iii) U.S. dollar-denominated obligations
issued or guaranteed by U.S. banks with total assets exceeding $1 billion and by
the 75 largest foreign commercial banks (including obligations of foreign
branches of such banks) in terms of total assets as reported in recognized
financial publications, or such other U.S. or foreign commercial banks which are
judged by the Adviser to meet comparable credit standing criteria; (iv)
securities issued or guaranteed as to principal and interest by the U.S.
government or by agencies or instrumentalities thereof; and
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(v) repurchase agreements related to these securities. The securities in which
the Money Market Portfolio invests, described in greater detail under
"Description of Securities and Investment Techniques" will be of high quality
and present minimal credit risks. There can be no assurance that the Money
Market Portfolio will achieve its investment objective or that it will be able
to maintain the $1.00 net asset value per share.
It is anticipated that, in normal circumstances, the Money Market
Portfolio's assets will include securities of issuers in at least three
countries, including the United States. However, all of the Money Market
Portfolio's investments will be in U.S. dollar-denominated securities with
remaining maturities of 397 days or less. Securities in which the Money Market
Portfolio will invest may not earn as high a level of current income as
long-term or lower quality securities which generally have less liquidity,
greater market risk and more fluctuation in market value. Certain instruments
issued or guaranteed by issuers, including the U.S. government or agencies
thereof, which have a variable rate of interest readjusted no less frequently
than annually are deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate. The dollar weighted average maturity
of the Money Market Portfolio will be 90 days or less.
Shareholder approval is not required to change any of the investment
policies discussed above or in "Description of Securities and Investment
Techniques".
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DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
Each Fund, other than the Money Market Portfolio, may invest its assets in
derivative and related instruments subject only to each Fund's investment
objective and policies and the requirement that, to avoid leveraging the Fund,
the Fund 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.
The value of some derivative or similar instruments in which a Fund invests
may be particularly sensitive to changes in prevailing interest rates or other
economic factors, and -- like other investments of the Fund -- the ability to
the Fund to successfully utilize these instruments may depend in part upon the
ability of the Adviser to forecast interest rates and other economic factors
correctly. If the Adviser incorrectly forecasts such factors and has taken
positions in derivative or similar instruments contrary to prevailing market
trends, the Fund could be exposed to the risk of a loss. A FUND MIGHT NOT EMPLOY
ANY OR ALL OF THE INSTRUMENTS DESCRIBED HEREIN, AND NO ASSURANCE CAN BE GIVEN
THAT ANY STRATEGY USED WILL SUCCEED.
To the extent permitted by the investment objectives and policies of each
Fund, and as described more fully in the Fund's Statement of Additional
Information, a Fund may:
- purchase, write and exercise call and put options on securities,
securities indexes and foreign currencies (including using options in
combination with securities, other options or derivative instruments);
- enter into futures contracts and options on futures contracts;
- employ forward currency and interest-rate contracts;
- purchase and sell mortgage-backed securities; and
- purchase and sell structured products.
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RISK FACTORS
As explained more fully in the Statement of Additional Information, there
are a number of risks associated with the use of derivatives and related
instruments, including:
- 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. As incorrect correlation could result in a loss on both the hedged
assets in a Fund 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 ADVISER MAY INCORRECTLY FORECAST INTEREST RATES, MARKET VALUES
OR OTHER ECONOMIC FACTORS IN UTILIZING A DERIVATIVES STRATEGY. In such a
case, the Fund 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 FUND.
Certain strategies, such as yield enhancement, can have speculative
characteristics and may result in more risk to a Fund than hedging
strategies using the same instruments.
- THERE CAN BE NO ASSURANCE THAT A LIQUID MARKET WILL EXIST AT A TIME
WHEN A FUND 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 reached on 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.
- 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 Fund 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.
REPURCHASE AGREEMENTS. The Portfolios may, when appropriate, enter into
repurchase agreements (a purchase of and simultaneous commitment to resell a
security at an agreed-upon price and date which is usually not more than seven
days from the date of purchase) only with member banks of the Federal Reserve
System and security dealers believed creditworthy and only if fully
collateralized by U.S. government obligations or other securities in which a
Portfolio is permitted to invest. In the event the seller fails to pay the
agreed-to sum on the agreed-upon delivery date, the underlying security could be
sold by a Portfolio, but the Portfolio might incur a loss in doing so, and in
certain cases may not be permitted to sell the security. As an operating policy,
a Portfolio, through its custodian bank, takes constructive possession of the
collateral underlying repurchase agreements. Additionally, procedures have been
established for the Portfolios to monitor, on a daily basis, the market value of
the collateral underlying all repurchase agreements to ensure that the
collateral is at least 100% of the value of the repurchase agreements. Not more
than 10% of the total assets of a Portfolio will be invested in securities which
are subject to legal or contractual restrictions on resale, including securities
that are not readily marketable and repurchase agreements maturing in more than
seven days.
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SECURITIES LENDING. Although the Growth and Income Portfolio, Capital
Growth Portfolio, International Equity Portfolio, and Treasury Income Portfolio
would not intend to engage in such activity in the ordinary course of business,
such Portfolios are permitted to lend 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 a Portfolio's total
assets. In connection with such loans, the Growth and Income Portfolio, Capital
Growth Portfolio, International Equity Portfolio and Treasury Income 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
100% of the current market value of the securities loaned. A Portfolio may
increase its income through the investment of such collateral. Each Portfolio
will continue to be entitled to the interest payable or any dividend-equivalent
payments received on a loaned security and, in addition, 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. The Growth and Income Portfolio, Capital Growth Portfolio,
International Equity Portfolio, and Treasury Income Portfolio might experience
risk of loss if the institutions with which it has engaged in portfolio loan
transactions breach their agreements with a 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 be made only to firms deemed by the
Adviser to be of good standing and will not be made unless, in the judgment of
the Adviser, the consideration to be earned from such loans justifies the risk.
WHEN-ISSUED OR FORWARD DELIVERY PURCHASES. The Treasury Income Portfolio
and the Money Market Portfolio may purchase new issues of securities in which
they are permitted to invest on a "when-issued" or, with respect to existing
issues, on a "forward delivery" basis, which means that the securities will be
delivered at a future date beyond the customary settlement time. Although there
is no limit as to the amount of the commitments which may be made by a Portfolio
to purchase securities on a "when-issued" or "forward delivery" basis, it is
expected that under normal circumstances not more than 30% of a Portfolio's
total assets will be committed to such purchases. A Portfolio does not pay for
such obligations or start earning interest on them until the contractual
settlement date. Although commitments to purchase "when-issued" or "forward
delivery" securities will only be made with the intention of actually acquiring
them, these securities may be sold before the settlement date if deemed
advisable by the Adviser.
While it is not intended that such purchases would be made for speculative
purposes, purchases of securities on a "when-issued" or "forward delivery" basis
can involve more risk than other types of purchases. For example, when the time
comes to pay for a "when-issued" or "forward delivery" security, the Treasury
Income Portfolio's and the Money Market Portfolio's portfolio securities may
have to be sold in order to meet payment obligations. Also, if it is necessary
to sell the "when-issued" or "forward delivery" security before delivery, a
Portfolio may incur a loss because of market fluctuations since the time that
the commitment to purchase the "when-issued" or "forward delivery" security was
made.
U.S. GOVERNMENT SECURITIES. For purposes of the International Equity
Portfolio, U.S. government securities include (1) U.S. Treasury obligations,
which differ in their interest rates, maturities and times of issuance: U.S.
Treasury bills (maturities of one year or less), U.S. Treasury notes (maturities
of one to ten years) and U.S. Treasury bonds (generally maturities of greater
than ten years) 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 limited 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. The International Equity Portfolio may also
invest in any other security or agreement collateralized or
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otherwise secured by U.S. government securities. 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 purchased by the International Equity
Portfolio and Treasury Income Portfolio, including U.S. Treasury bills, notes
and bonds, Government National Mortgage Association ("GNMA") 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 Federal Home Loan Banks, and
obligations that are supported by the creditworthiness of the particular
instrumentality, such as obligations of Federal National Mortgage Association or
Federal Home Loan Mortgage Corporation.
If GNMA securities are purchased by a Portfolio 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 to the Portfolio 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. However, the Portfolios do not intend to hold such securities to maturity
for the purpose of achieving potential capital gains, unless current yields on
these securities remain attractive.
HIGH QUALITY DEBT SECURITIES. The International Equity Portfolio seeks to
minimize investment risk by limiting its portfolio investments in debt
securities to high quality debt securities. Accordingly, that portion of the
International Equity Portfolio's investment in debt securities consists only of:
(i) debt securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities; (ii) obligations issued or guaranteed by a foreign government
or any of its political subdivisions, authorities, agencies or
instrumentalities, or by supranational entities, all of which are rated AAA or
AA by S&P or Aaa or Aa by Moody's ("High Quality Ratings") or, if unrated,
determined by the Adviser to be of equivalent quality; (iii) corporate debt
securities having at least one High Quality Rating, or, if unrated, determined
by the Adviser to be of equivalent quality; (iv) certificates of deposit and
bankers acceptances issued or guaranteed by, or time deposits maintained at,
banks (including foreign branches of U.S. banks or U.S. or foreign branches of
foreign banks) having total assets of more than $500 million and determined by
the Adviser to be of high quality; and (v) commercial paper rated A1 or A2 by
S&P, Prime-1 or Prime-2 by Moody's, Fitch-1 or Fitch-2 by Fitch or Duff 1 or
Duff 2 by Duff and Phelps or, if not rated, issued by U.S. or foreign companies
having outstanding debt securities rated AAA or AA by S&P, or Aaa or Aa by
Moody's or determined by the Adviser to be of high quality.
CERTAIN INVESTMENT POLICIES. The Portfolios will not invest in illiquid
securities if immediately after such investment more than 15% of a Portfolio's
net assets (taken at market value) would be invested in such securities. For
this purpose, illiquid securities include (a) private placements other than Rule
144A securities (Rule 144A securities may not, however, be as liquid as similar
securities registered under the Securities Act of 1933 if, for example,
qualified Rule 144A purchasers are not interested in purchasing particular Rule
144A securities from a Portfolio), (b) other securities which are subject to
legal or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended or, in the case of
unlisted securities, market makers do not exist or will not entertain bids or
offers), (c) options purchased by a Portfolio over-the-counter and the cover for
options written by the Portfolio over-the-counter, except with respect to such
transactions entered into with primary dealers in U.S. government securities
pursuant to an agreement requiring a closing purchase transaction at a formula
price, and (d) repurchase agreements not terminable within seven days.
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NON-U.S. SECURITIES. Investing in securities issued by foreign corporations
and governments involves considerations and possible risks not typically
associated with investing in securities issued by domestic corporations and the
U.S. government. The values of foreign investments are affected by changes in
currency rates or exchange control regulations, application of foreign tax laws,
including withholding taxes, changes in governmental administration or economic
or monetary policy (in the U.S. or other countries) or changed circumstances in
dealing between countries. Costs are incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions are
generally higher than in the United States, and foreign securities markets may
be less liquid, more volatile and less subject to governmental supervision than
in the United States. Investments in foreign countries could be affected by
other factors not present in the United States, including expropriation,
confiscatory taxation, lack of uniform accounting and auditing standards and
potential difficulties in enforcing contractual obligations and could be subject
to extended settlement periods.
The International Equity Portfolio, Growth and Income Portfolio and Capital
Growth Portfolio may invest in securities denominated in the ECU, which is a
"basket" consisting of specified amounts of currencies of certain member states
of the European Community. 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. European governments and
supranational organizations (discussed below), in particular, issue
ECU-denominated securities.
The International Equity Portfolio, Growth and Income Portfolio and Capital
Growth Portfolio may invest in securities issued by supranational organizations
such as: the World Bank, which was chartered to finance development projects in
developing member countries; the European Community, which is a twelve-nation
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 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.
The International Equity Portfolio may invest its assets in securities of
foreign issuers in the form of sponsored ADRs, EDRs, or other similar securities
representing securities of foreign issuers. ADRs are receipts typically issued
by an American bank or trust company evidencing ownership of the underlying
foreign securities. EDRs are receipts issued by a European financial institution
evidencing a similar arrangement. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs, in bearer form are
designed for use in European securities markets.
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MANAGEMENT
- --------------------------------------------------------------------------------
The Trust's Board of Trustees is responsible for the overall supervision of
the operations of the Trust and performs various duties imposed on trustees of
investment companies by the Investment Company Act of 1940, as amended (the
"1940 Act").
THE ADVISER
The Chase Manhattan Bank, N.A. (the "Adviser") manages the assets of each
Portfolio pursuant to an Investment Advisory Agreement dated August 23, 1994.
Subject to such policies as the Board of Trustees may determine, the Adviser
makes investment decisions for each Portfolio.
International Equity Portfolio. Joe DeSantis, Vice President of the
Adviser, is responsible for the day-to-day management of the International
Equity Portfolio. Mr. DeSantis joined Chase in 1990 with responsibility for
research and compilation of international equity recommendations, among other
things. Mr. DeSantis was formerly a director at Strategic Research
International, Inc., and
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Institutional Research Services, Carl Marks & Company; a founding partner and
director of Strategic Research International, Inc.; and a credit analyst at
Moody's Municipal Research Department.
For its services under the Investment Advisory Agreement, the Adviser is
entitled to receive an annual fee computed daily and paid monthly based at an
annual rate equal to 0.80% of the Portfolio's average daily net assets. The fees
paid to the Adviser or an affiliate thereof are higher than the fees paid by
most other investment companies; however, the Board of Trustees believes that
these fees are comparable to those of other investment companies with similar
investment objectives. The Adviser may, from time to time, voluntarily waive all
or a portion of its fees payable under the Advisory Agreement.
Capital Growth Portfolio. Dave Klassen, Vice President of the Adviser, 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 Capital
Growth Portfolio, is responsible for managing or co-managing several pooled
equity funds including the Vista Capital Growth Fund. 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. For its
services under the Investment Advisory Agreement, the Adviser receives an annual
fee computed daily and paid monthly based at an annual rate equal to 0.60% of
the Portfolio's average daily net assets. The Adviser may, from time to time,
voluntarily waive all or a portion of its fees payable under the Advisory
Agreement.
Growth and Income Portfolio. Dave Klassen and Greg Adams, Vice Presidents
of the Advisor, co-manage the Growth and Income Portfolio. Mr. Klassen, Head of
U.S. Equity Funds Management and Research for Chase, is also primarily
responsible for the day-to-day management of the Capital Growth Portfolio, as
well as several pooled equity funds. Mr. Klassen joined Chase in March of 1992.
Prior to that he spent 11 years at Dean Witter Reynolds as Vice President and
Portfolio Manager, responsible for a number of mutual funds and other accounts.
Mr. Adams, Director of U.S. Equity Research for Chase, is also responsible for
managing the Vista Equity Fund, the Vista Equity Income Fund, and co-managing
the Vista Balanced Fund, as well as managing a number of Chase's pooled equity
funds. 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. For its services under the Investment Advisory Agreement, the Adviser
will receive an annual fee computed daily and paid monthly based at an annual
rate equal to 0.60% of the Portfolio's average daily net assets. The Adviser
may, from time to time, voluntarily waive all or a portion of its fees payable
under the Advisory Agreement.
Asset Allocation Portfolio. Greg Adams and Alex Powers, Vice Presidents of
the Adviser, are responsible for the day-to-day management of the Asset
Allocation Portfolio. Mr. Adams has been with Chase since 1987 and oversees the
equity trading for the Portfolio. He also co-manages several pooled funds
including the Vista Balanced Fund and Vista Equity Fund. Mr. Powers joined Chase
in 1988, and is responsible for the fixed income trading for the Portfolio. Mr.
Powers also manages the portfolio of the Chase Vista U.S. Government Securities
Fund, as well as individual and institutional accounts. For its services under
the Investment Advisory Agreement, the Adviser receives an annual fee computed
daily and paid monthly based at an annual rate equal to 0.55% of the Portfolio's
average daily net assets. The Adviser may, from time to time, voluntarily waive
all or a portion of its fees payable under the Advisory Agreement.
Treasury Income Portfolio. Alex Powers, Vice President of the Adviser, is
responsible for the day-to-day management of the Treasury Income Portfolio. Mr.
Powers joined Chase in 1988, and is part of a team responsible for fixed income
strategy, research and trading within Chase. Mr. Powers also manages the
portfolio of the Chase Vista U.S. Government Securities Fund, as well as
individual and institutional accounts. For its services under the Investment
Advisory Agreement, the Adviser receives an annual fee computed daily and paid
monthly based at an annual rate equal to 0.50% of the Portfolio's average daily
net assets. The Adviser may, from time to time, voluntarily waive all or a
portion of its fees payable under the Advisory Agreement.
Money Market Portfolio. Subject to such policies as the Board of Trustees
may determine, the Adviser makes investment decisions for the Money Market
Portfolio. For its services under the
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Investment Advisory Agreement, the Adviser receives an annual fee computed daily
and paid monthly based at an annual rate equal to 0.25% of the Portfolio's
average daily net assets. However, the Adviser may, from time to time,
voluntarily waive all or a portion of its fees payable under the Investment
Advisory Agreement.
The Adviser, 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. Its headquarters are at One Chase Manhattan Plaza, New York,
NY 10081. The Adviser, including its predecessor organizations, has over 100
years of money management experience and renders investment advisory services to
others. Also included among the Adviser's accounts are commingled trust funds
and a broad spectrum of individual trust and investment management portfolios.
These accounts have varying investment objectives.
In August 1995, The Chase Manhattan Corporation and Chemical Banking
Corporation announced that they had entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which The Chase Manhattan Corporation will
merge with Chemical (the "Holding Company Merger"). Under the terms of the
Merger Agreement, Chemical will be the surviving corporation in the Holding
Company Merger and will continue its corporate existence under Delaware law
under the name "The Chase Manhattan Corporation". Subsequent to the Holding
Company Merger, The Chase Manhattan Bank, N.A. (the "Adviser"), will be merged
with and into Chemical Bank, a New York banking corporation (the "Bank Merger").
Both the Holding Company Merger and Bank Merger are subject to certain
conditions, including certain regulatory approvals.
As required by the Investment Company Act of 1940, as amended (the "1940
Act"), the current advisory agreement (the "Current Agreement") between each
Fund and the Adviser provides for its automatic termination upon its
"assignment" (as defined in the 1940 Act). Consummation of the Holding Company
Merger and the Bank Merger may be deemed to result in an assignment of each
Current Agreement and, consequently, to terminate each Current Agreement in
accordance with its terms. After the Holding Company Merger, the Adviser (or the
successor thereto) will continue rendering services to the Funds under
anticipated exemptive relief from the Securities and Exchange Commission and
advisory services will not be impaired thereby. Shareholder approval of new
advisory agreements will be solicited in the first quarter of 1996.
CERTAIN RELATIONSHIPS AND ACTIVITIES. The Adviser and its affiliates may
have deposit, loan and other commercial banking relationships with the issuers
of securities purchased on behalf 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. The Adviser 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. The Adviser and its affiliates
may sell U.S. government obligations and municipal obligations to, and purchase
them from, other investment companies sponsored by affiliates of the
Distributor. The Adviser will not invest the Portfolios' 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 the
Adviser 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 the Portfolios. The Adviser 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 the Adviser, including the division that performs
services for the Portfolios as Custodian, or in the possession of any affiliate
of the Adviser.
THE ADMINISTRATOR
Pursuant to an Administration Agreement, dated as of August 23, 1994 (the
"Administration Agreements"), Chase serves as administrator of the Trust. The
Administrator provides certain
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administrative services, including, among other responsibilities, coordinating
relationships with independent contractors and agents; preparing for signature
by officers and filing of certain documents required for compliance with
applicable laws and regulations excluding those of the securities laws of the
various states; preparing financial statements; arranging for the maintenance of
books and records; and providing office facilities necessary to carry out the
duties thereunder. The Administrator receives from each Portfolio a fee computed
daily and paid monthly at an annual rate equal to 0.05% of each Portfolio's
average daily net assets. The Administrator may, from time to time, voluntarily
waive all or a portion of its fees payable to it under the Administration
Agreement. The Administrator shall not have any responsibility or authority for
the Portfolio's investments, the determination of investment policy, or for any
matter pertaining to the distribution of shares of a Portfolio.
GLASS-STEAGALL ACT. Chase has received the opinion of its legal counsel
that it may provide the services described in the Investment Advisory and the
Administration Agreements, as described above, and the Custodian Agreement with
the Trust, as described below, without violating the federal banking law
commonly known as the Glass-Steagall Act. The Act generally bars banks from
publicly underwriting or distributing certain securities.
The U.S. Supreme Court in its 1981 decision in Board of Governors of the
Federal Reserve System v. Investment Company Institute determined that,
consistent with the requirements of the Act, a bank may serve as an investment
adviser to a registered, closed-end investment company. Other decisions of
banking regulators have supported the position that a bank may act as investment
adviser to a registered, open-end investment company. Based on the advice of its
counsel, the Adviser believes that the Court's decision and other decisions of
federal banking regulators permit it to serve as investment adviser to a
registered, open-end investment company.
Regarding the performance of custodial activities, the staff of the Office
of the Comptroller of the Currency, which supervises national banks, has issued
opinion letters stating that national banks may engage in custodial activities.
Therefore, the Adviser and the Administrator believe, based on advice of
counsel, that they may serve as Custodian to the Trust and render the services
described below and as set forth in the Custodian Agreement, as an appropriate,
incidental national banking function and as a proper adjunct to their serving as
investment adviser and administrator to each Portfolio.
Industry practice and regulatory decisions also support a bank's authority
to act as administrator for a registered investment company. Chase, on the
advice of its counsel believes that it may render the services described in its
Administration Agreement without violating the Glass-Steagall Act or other
applicable banking laws.
Possible future changes in federal law or administrative or judicial
interpretations of current or future law, however, could prevent the Adviser
from continuing to perform investment advisory, custodial or other
administrative services for each Portfolio. If that occurred, the Board of
Trustees promptly would seek to obtain for each Portfolio the services of
another qualified adviser, custodian or administrator, as necessary. Although no
assurances can be given, the Trust believes that, if necessary, the transfer to
a new adviser, custodian or administrator could be accomplished without undue
disruption to the operations of the Portfolios.
Pursuant to a Sub-Administration Agreement, dated August 23, 1994 (the
"Sub-Administration Agreement"), provides that Vista Broker-Dealer Services,
Inc. ("VBDS") will provide certain sub-administration services, including
providing officers clerical staff and office space. VBDS will receive a fee for
sub-administration from each Portfolio at an annual rate equal to 0.15% of each
Portfolio's average daily net assets, on an annualized basis for the Portfolio's
then-current fiscal year.
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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. The internal division of
Chase which serves as Custodian does not determine the investment policies of
the Portfolios or decide which securities will be bought or sold on behalf of
each Portfolio or otherwise have access to or share material inside information
with the internal division that performs advisory services for each Portfolio.
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT AND TURNOVER
- --------------------------------------------------------------------------------
It is intended that each Portfolio will be fully managed by buying and
selling securities, as well as holding securities to maturity. In managing each
Portfolio, the Adviser seeks to take advantage of market developments, yield
disparities and variations in the creditworthiness of issuers. However, the
portfolio turnover rate of a Portfolio is not expected to exceed an annual rate
of 100%. For a description of the strategies that may be used by the Adviser in
managing each Portfolio, which may include adjusting the average maturity of a
Portfolio in anticipation of a change in interest rates, see "Investment
Objectives, Policies and Restrictions -- Investment Policies: Portfolio
Management" in the Statement of Additional Information.
Generally, the primary consideration in placing securities transactions
with broker-dealers for execution is to obtain, and maintain the availability
of, execution at the most favorable prices and in the most effective manner
possible. Since money market instruments are generally purchased in principal
transactions, the Money Market Portfolio generally pays no brokerage
commissions. For a complete discussion of securities transactions and brokerage
allocation, see "Investment Objectives, Policies and Restrictions -- Investment
Policies: Portfolio Transactions and Brokerage Allocation" in the Statement of
Additional Information.
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 fund 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
18
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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.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
- --------------------------------------------------------------------------------
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 the receipt of
such distributions will be taxable to the extent that the distributing Portfolio
has 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, 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. 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).
SHARE REDEMPTIONS. Redemptions of the shares held by the Accounts
generally will not result in gain or loss for the Accounts and will not result
in gain or loss for the contract or policy holders.
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 of their respective contracts or policies for information
concerning the Federal income tax consequences of owning such contracts or
policies.
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PRICE OF SHARES
- --------------------------------------------------------------------------------
Shares of each Portfolio of the Trust are sold at the net asset value per
share calculated once daily at the close of regular trading (currently 4:00
p.m., Eastern time; however, options are normally valued at 4:15 p.m., Eastern
time) on each day the New York Stock Exchange is open. The current value of each
Portfolio's total assets, less liabilities, is divided by the total number of
shares outstanding, and the result is the net asset value per share. Assets are
generally valued at their market value, where available, except that short-term
securities with 60 days or less to maturity are valued on an amortized cost
basis. For a complete description of the procedures involved in valuing various
Portfolio assets, see the Statement of Additional Information.
- --------------------------------------------------------------------------------
PURCHASES AND REDEMPTIONS
- --------------------------------------------------------------------------------
Shares of the Trust currently are offered only to the Variable Annuity
Account II, a separate account of Anchor National Life Insurance Company and FS
Variable Annuity Account Two, a separate account of First SunAmerica Life
Insurance Company (the "Life Companies"). At present, Trust shares are used as
the investment vehicle for 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.
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.
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.
- --------------------------------------------------------------------------------
SHAREHOLDER VOTING RIGHTS
- --------------------------------------------------------------------------------
All shares of the Trust have equal voting rights and may be voted in the
election of trustees and on other matters submitted to the vote of the
shareholders. Shareholders' meetings ordinarily will not be held unless required
by the 1940 Act. As permitted by Massachusetts law, there normally will be no
shareholders' meetings for the purpose of electing trustees unless and until
such time as fewer than a majority of the trustees holding office have been
elected by shareholders. At that time, the trustees then in office will call a
shareholders' meeting for the election of trustees. The trustees must call a
meeting of shareholders for the purpose of voting upon the removal of any
trustee when requested to do so by the record holders of 10% of the outstanding
shares of the Trust. A trustee may be removed after the holders of record of not
less than two-thirds of the outstanding shares have declared that the trustee be
removed either by declaration in writing or by votes cast in person or by proxy.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees, provided that immediately after the appointment of
any successor trustee, at least two-thirds of the trustees have been elected by
the shareholders. Shares do not have cumulative voting rights. Thus, holders of
a majority of the shares voting for the election of trustees can elect all the
trustees. No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust, except
that amendments to conform the Declaration to the requirements of applicable
federal laws or regulations or the regulated investment company provisions of
the Code may
20
<PAGE>
be made by the trustees without the vote or consent of shareholders. If not
terminated by the vote or written consent of a majority of its outstanding
shares, the Trust will continue indefinitely.
The Life Companies are the legal owners of the shares and as such have the
right to vote elect the trustees, to vote upon certain matters that are required
by the 1940 Act to be approved or ratified by the shareholders of an investment
company and to vote upon any other matter that may be voted upon at a
shareholders' meeting. However, in accordance with their view of present
applicable law, the Life Companies will vote the share of the Trust at special
meetings of the Shareholders of the Trust in accordance with instructions
received from owners.
In matters affecting only a particular Portfolio, the matter shall have
been effectively acted upon by a majority vote of that Portfolio even though:
(1) the matter has not been approved by a majority vote of any other Portfolio;
or (2) the matter has not been approved by a majority vote of the Trust.
Shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Trust. The risk of a shareholder incurring any financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations. The Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of the Trust
and provides that notice of the disclaimer must be given in each agreement,
obligation or instrument entered into or executed by the Trust or Trustees. The
Declaration of Trust provides for indemnification of any shareholder held
personally liable for the obligations of the Trust and also provides for the
Trust to reimburse the shareholder for all legal and other expenses reasonably
incurred in connection with any such claim or liability.
- --------------------------------------------------------------------------------
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, 733
3rd Avenue - 4th Fl, New York, New York, 10017. All telephone inquiries may be
made to (800) 90-VISTA.
- --------------------------------------------------------------------------------
FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Further financial information can be found in the Statement of Additional
Information, which is available by calling (800) 90-VISTA.
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Rule 497(c)
File Number 33-81712
STATEMENT OF ADDITIONAL INFORMATION
MUTUAL FUND VARIABLE ANNUITY TRUST
125 WEST 55TH STREET, NEW YORK, NEW YORK 10019
THIS IS NOT A PROSPECTUS. This Statement of Additional
Information should be read in conjunction with the Prospectus for Mutual Fund
Variable Annuity Trust which is referred to herein.
Capitalized terms used herein but not defined have the same
meanings assigned to them in the Prospectus.
-------------------------------
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS DATED DECEMBER 29,
1995, CALL OR WRITE THE TRUST AT:
Anchor National Life Insurance Company
Service Center
P.O. Box 100330
Pasadena, CA 91189-0001
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
------------------------------
DATED: DECEMBER 29, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
MANAGEMENT OF THE PORTFOLIOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
APPENDIX A - DESCRIPTION OF BOND AND COMMERCIAL PAPER RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
<PAGE>
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 is comprised 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, N.A. ("Chase") is the investment adviser (the "Adviser") for each
Portfolio. Chase also serves as the Trust's administrator (the "Administrator")
and supervises the overall administration of the Trust, including the
Portfolios. The Adviser continuously manages the investments of the Portfolios
in accordance with the investment objective and policies of each Portfolio. The
selection of investments for each Portfolio and the way in which they are
managed depend on the conditions and trends in the economy and the financial
marketplaces. Occasionally, communications to shareholders may contain the views
of the investment adviser 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.
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVE
INTERNATIONAL EQUITY PORTFOLIO (the "International Equity
Portfolio") seeks to provide a total return on assets from long-term growth of
capital and income principally derived through diversified holdings of
marketable securities of established foreign companies organized in countries
other than the United States, and companies participating in foreign economies
with prospects for growth.
CAPITAL GROWTH PORTFOLIO (the "Capital Growth Portfolio")
aggressively seeks long-term capital growth, through a broad portfolio (at least
80%) in common stocks of issuers (including foreign issuers) with small to
medium capitalizations. The Adviser intends to utilize both quantitative and
fundamental research to identify undervalued stocks with a catalyst for positive
change. Dividend income, if any, is a consideration incidental to the Portfolio
s investment objective of growth of capital. This investment policy involves
risks that the issues identified by the Adviser will not appreciate or
appreciate as significantly as projected. As indicated in the Prospectus, this
Portfolio is intended for investors who understand and are willing to accept the
potential risks associated with the Portfolio's investment objective.
GROWTH AND INCOME PORTFOLIO (the "Growth and Income Portfolio")
seeks long-term capital appreciation, with dividend income as a secondary
objective, through investments primarily in common stocks.
- 2 -
<PAGE>
ASSET ALLOCATION PORTFOLIO (the "Asset Allocation Portfolio")
seeks maximum total return through a combination of long-term growth of capital
and current income.
U.S. TREASURY INCOME PORTFOLIO (the "Treasury Income
Portfolio") seeks to provide monthly dividends by investing at least 65% of
its assets in obligations backed by the full faith and credit of the U.S.
government. The Portfolio may also invest in obligations issued or guaranteed
as to principal and interest by the U.S. government or by its agencies or
instrumentalities thereof.
MONEY MARKET PORTFOLIO (the "Money Market Portfolio") seeks to
provide maximum current income consistent with the preservation of capital and
maintenance of liquidity, through investments in (i) U.S. Dollar denominated
high quality commercial paper and other high quality 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) U.S. Dollar denominated obligations issued or guaranteed by
U.S. banks with total assets exceeding $1 billion and by the 75 largest foreign
commercial banks (including obligations of foreign branches of such banks) in
terms of total assets, or such other U.S. or foreign commercial banks which are
judged by the Portfolio's investment adviser to meet comparable credit criteria;
(iv) securities issued or guaranteed by the U.S. government or by agencies and
instrumentalities thereof; and (v) repurchase agreements.
The Money Market Portfolio is a diversified series of the
Trust. The International Equity Portfolio, Capital Growth Portfolio, Growth and
Income Portfolio, Asset Allocation Portfolio (collectively, the "Equity
Portfolios") and Treasury Income Portfolio are non-diversified series of the
Trust.
INVESTMENT POLICIES
The Prospectus sets forth the various investment policies
applicable to each Portfolio. For descriptions of the ratings of bonds and
commercial paper (and short-term obligations permitted as investments) by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("Standard & Poor's"), Fitch Investors Service, Inc. ("Fitch"), Duff &
Phelps, Inc. ("Duff") and Thomson BankWatch, Inc. ("TBW"), see Appendix A.
The following information supplements and should be read in
conjunction with the sections of the Prospectus entitled "The Trust, its
Investment Objectives and Policies" and "Description of Securities and
Investment Techniques."
U.S. GOVERNMENT SECURITIES -- As indicated in the Prospectus,
the Portfolios, including the Equity Portfolios that invest primarily in common
stocks, may also maintain cash reserves and invest in a variety of short-term
debt securities, including obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities, which have remaining maturities
not exceeding one year. Agencies and instrumentalities that issue or guarantee
debt securities and have been established or sponsored by the U.S. government
include the Bank for Cooperatives, the Export-Import Bank, the Federal Farm
Credit System, the Federal Home Loan Banks, the Federal Home Loan Mortgage
Corporation, the Federal Intermediate Credit Banks, the Federal Land Banks, the
Federal National Mortgage Association and the Student Loan Marketing
Association. Certain of these securities may not be backed by the full faith and
credit of the U.S. government.
- 3 -
<PAGE>
BANK OBLIGATIONS -- Investments by the Equity Portfolios, in
short-term debt securities as described above also include investments in
obligations (including certificates of deposit and bankers' acceptances) of
those U.S. banks 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.
A certificate of deposit is an interest-bearing negotiable
certificate issued by a bank against funds deposited in the bank. A bankers'
acceptance is a short-term draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction. Although the
borrower is liable for payment of the draft, the bank unconditionally guarantees
to pay the draft at its face value on the maturity date.
COMMERCIAL PAPER -- Investments by the Equity Portfolios, in
short-term debt securities also include investments in commercial paper, which
represents short-term, unsecured promissory notes issued in bearer form by bank
holding companies, corporations and finance companies. The commercial paper
purchased for the above-referenced Portfolios will consist of direct obligations
of domestic issuers which, at the time of investment, are (i) rated "P-1" by
Moody's or "A-1" or better by Standard & Poor's, (ii) issued or guaranteed as to
principal and interest by issuers or guarantors having an existing debt security
rating of "Aa" or better by Moody's or "AA" or better by Standard & Poor's, or
(iii) securities which, if not rated, are, in Chase's opinion, of an investment
quality comparable to rated commercial paper in which the above-referenced
Portfolios may invest. The rating "P-1" is the highest commercial paper rating
assigned by Moody's and the ratings "A-1" and "A-1+" are the highest commercial
paper ratings assigned by Standard & Poor's. Debt securities rated "Aa" or
better by Moody's or "AA" or better by Standard & Poor's are generally regarded
as high-grade obligations and such ratings indicate that the ability to pay
principal and interest is very strong.
ZERO COUPON, PAYMENT IN KIND AND STRIPPED GOVERNMENT
OBLIGATIONS -- The International Equity Portfolio may invest in zero coupon
bonds, deferred interest bonds, bonds on which the interest is payable in kind
("PIK bonds") and U.S. Treasury bonds or notes and their unmatured interest
coupons which have been separated or stripped. Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from face
value. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at the
time of issuance. While zero coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. Although this period of delay is different
for each deferred interest bond, a typical period is approximately one-third of
the bond's term to maturity. 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. The Portfolio will accrue income on such investments for
tax and accounting purposes, as required, which is distributable to shareholders
and which because no cash is received at the time of accrual, may require the
liquidation of other portfolio securities to satisfy the Portfolio's
distribution obligations. Stripped obligations are created when the holder of
U.S. Treasury bonds or notes, typically a custodian bank or investment brokerage
firm, strips their unmatured interest coupons and resells each component
separately. Stripped interest coupons have been marketed in custodial receipt
programs under such names as "TIGRS" and "CATS." The underlying bonds and notes
are sold and either held in book-entry form at a Federal
- 4 -
<PAGE>
Reserve Bank or, in the case of bearer securities, in trust on behalf of the
owners thereof. The International Equity Portfolio may invest up to 5% of its
total assets in stripped obligations.
REPURCHASE AGREEMENTS -- Each Portfolio may, when appropriate,
enter into repurchase agreements only with member banks of the Federal Reserve
System and securities dealers believed creditworthy, and only if fully
collateralized by U.S. government obligations or other securities in which such
Portfolio is permitted to invest. Under the terms of a typical repurchase
agreement, a Portfolio would acquire an underlying debt 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 may be deemed 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 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 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 Trust's 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. A Portfolio will not be invested in a repurchase agreement
maturing in more than seven days if any such investment together with securities
subject to restrictions on transfer held by such Portfolio exceed 10% of its
total net assets. (See paragraph 5 under "Investment Restrictions" below.)
Repurchase agreements are also subject to the same risks described below with
respect to stand-by commitments.
WHEN-ISSUED OR FORWARD DELIVERY PURCHASES -- As described in
the Prospectus, each Portfolio (other than the Equity Portfolios) may purchase
new issues of securities in which it is permitted to invest on a "when-issued"
or, with respect to existing issues, on a "forward delivery" basis. In order to
invest a Portfolio's assets immediately, while awaiting delivery of securities
purchased on a "when-issued" or "forward delivery" basis, short-term obligations
that offer same-day settlement and earnings (and, with respect to the Treasury
Income Portfolio, that are backed by the full faith and credit of the U.S.
government) will normally be purchased. When a commitment to purchase a security
on a "when-issued" or "forward delivery" 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.
- 5 -
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Although it is not intended that such purchases would be made
for speculative purposes, purchases of securities on a "when-issued" or "forward
delivery" basis may involve more risk than other types of purchases. Securities
purchased on a "when-issued" or "forward delivery" basis and the securities held
in the respective Portfolio's are subject to changes in value (both generally
changing in the same way, that is, both experiencing appreciation when interest
rates decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing securities on a
"when-issued" or "forward delivery" 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 "when-issued" or "forward delivery" securities, 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 "when-issued" or "forward delivery"
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 "when-issued" or "forward
delivery" 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.
VARIABLE RATE SECURITIES AND PARTICIPATION CERTIFICATES -The
variable rate demand instruments that may be purchased by the Money Market
Portfolio provide for a periodic adjustment in the interest rate paid on the
instrument and 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. The 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 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. The above 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.
The variable rate securities in which the above-referenced
Portfolio may be invested include participation certificates, issued by a bank,
insurance company or other financial institution, in variable rate securities
owned by such institutions or affiliated organizations. A participation
certificate gives the Portfolio an undivided interest in the variable rate
security in the proportion that the Portfolio's participation interest bears to
the total principal amount of the security and 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 certificate of participation) or insurance
policy of an insurance company that the Board of Trustees of the Trust has
determined meets the prescribed quality standards for the Portfolio. The
Portfolio has 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
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amount of the Portfolio's participation interest in the security, plus accrued
interest. The Portfolio will exercise the demand feature only (i) upon a default
under the terms of the offering documentation of the security, (ii) as needed to
provide liquidity to the Portfolio in order to make redemptions of Portfolio
shares, or (iii) to maintain a high quality investment portfolio. The
institutions issuing the participation certificates will 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 Portfolio will
attempt to have the issuer of the participation certificate bear the cost of the
insurance, although the Portfolio retains the option to purchase insurance if
necessary. The Adviser has been instructed by the Trust's Board of Trustees to
monitor continually the pricing, quality and liquidity of the variable rate
securities held by the above-referenced Portfolio, including the participation
certificates, on the basis of published financial information and reports of the
rating agencies and other bank analytical services to which the Portfolio may
subscribe. Although these instruments may be sold by the Portfolio, it is
intended that they be held until maturity, except under the circumstances stated
above. No Portfolio will invest more than 5% of its total assets (taken at the
greater of cost or market value) in participation certificates.
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 variable rate securities may change with changes in interest
rates generally, the variable rate nature of the underlying variable rate
securities should minimize changes in value of the instruments. 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. The Portfolios may contain 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 variable rate securities are not comparable to long-term
fixed rate securities. Accordingly, interest rates on the 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. 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.
ILLIQUID SECURITIES -- Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended ("Securities Act"), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are
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* The "prime rate" is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular
bank may differ from other banks and will be the rate announced by each
bank on a particular day. Changes in the prime rate may occur with great
frequency and generally become effective on the date announced.
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purchased directly from the issuer or in the secondary market. Mutual funds do
not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act, including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale of such
investments to the general public or to certain institutions may not be
indicative of their liquidity.
Each Portfolio may invest up to 5% of its total assets in
restricted securities issued under Section 4(2) of the Securities Act, which
exempts from registration "transactions by an issuer not involving any public
offering." Section 4(2) instruments are restricted in the sense that they can
only be resold through the issuing dealer and only to institutional investors;
they cannot be resold to the general public without registration. Restricted
securities issued under Section 4(2) of the Securities Act will be treated as
illiquid and subject to each Portfolio's overall 15% limitation on illiquid
securities or the Money Market Portfolio s overall 10% limitation on illiquid
securities.
The Securities and Exchange Commission has recently adopted
Rule 144A, which allows a broader institutional trading market for securities
otherwise subject to restriction on their resale to the general public. Rule
144A establishes a "safe harbor" from the registration requirements of the
Securities Act for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this new regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
The Board of Trustees of the Portfolios, which has the ultimate
responsibility for determinations as to liquidity of portfolio securities, has
adopted guidelines and procedures for determining the liquidity of Rule 144A
securities and monitoring the Adviser's implementation thereof.
PORTFOLIO MANAGEMENT -- It is intended that the Treasury Income
Portfolio will be fully managed by buying and selling securities, as well as
holding securities to maturity. In managing this Portfolio, the Adviser seeks to
take advantage of market developments, yield disparities and variations in the
creditworthiness of issuers, which may include use of the following strategies:
(1) shortening the average maturity of a portfolio in
anticipation of a rise in interest rates so as to
minimize depreciation of principal;
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(2) lengthening the average maturity of a portfolio in
anticipation of a decline in interest rates so as to
maximize the Treasury Income Portfolio's appreciation of
principal;
(3) selling one type of debt security (e.g., revenue bonds) or
U.S. government obligation (e.g., Treasury bonds), as the
case may be, and buying another (e.g., general obligation
bonds or GNMA direct pass-through certificates,
respectively, as the case may be) when disparities arise
in the relative values of each; and
(4) changing from one debt security or U.S. government
obligation, as the case may be, to an essentially
similar debt security or U.S. government obligation when
their respective yields are distorted due to market
factors.
These strategies may result in increases or decreases in
current income available for distribution to its shareholders and in the holding
by the Portfolio of securities which sell at moderate to substantial premiums or
discounts from face value. Moreover, if the expectation of changes in interest
rates or the evaluation of the normal yield relationship between two securities
proves to be incorrect, the Portfolio's income, net asset value per share and
potential capital gain may be decreased, or its potential capital loss may be
increased.
LOANS OF PORTFOLIO SECURITIES -- Certain securities dealers who
make "short sales" or who wish to obtain particular securities for short periods
may seek to borrow them from institutional investors such as the Portfolios.
Each Portfolio reserves the right to seek to increase its income by lending its
portfolio securities. Under present regulatory policies, including those of the
Board of Governors of the Federal Reserve System and the Securities and Exchange
Commission, such loans may be made only to member firms of the New York Stock
Exchange, and are required to be secured continuously by collateral in cash,
cash equivalents, or U.S. government securities maintained on a current basis in
an amount at least equal to the market value of the securities loaned. Under a
loan, a Portfolio has the right to call a loan and obtain the securities loaned
at any time on five days' notice.
During the existence of a loan, a Portfolio continues to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and also receives compensation based on investment of the
collateral. A Portfolio does not, however, have the right to vote any securities
having voting rights during the existence of the loan, but can call the loan in
anticipation of an important vote to be taken among holders of the securities or
of the giving or withholding of their consent on a material matter affecting the
investment.
As with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the collateral if the borrower of the
securities experiences financial difficulty. However, the loans will be made
only to dealers deemed by a Portfolio to be of good standing, and when, in the
judgment of the Portfolio, the consideration that can be earned currently from
securities loans of this type justifies the attendant risk. In the event a
Portfolio makes securities loans, it is not intended that the value of the
securities loaned would exceed 30% of the value of the Portfolio's total assets.
NON-DIVERSIFICATION -- Each Portfolio, other than the Money
Market Portfolio, is a "non-diversified" investment company. However, each
Portfolio is subject to diversification requirements under federal tax laws. At
present, these requirements do not permit more than 25% of the value of a
Portfolio's total assets to be invested in securities (other than various
securities issued or guaranteed by the
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United States or its agencies or instrumentalities) of any one issuer, at the
close of any calendar quarter. Since a relatively high percentage of the assets
of each Portfolio may be invested in the Equity Portfolio will invest in
securities with issuers located in at least five different foreign countries at
all times with no country representing more than 20% of the Portfolio's assets.
An additional 15% of the Portfolio's assets may be invested in securities of
issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom or West Germany. This policy is not deemed a
fundamental policy and therefore may be changed without shareholder approval.
ADDITIONAL POLICIES REGARDING DERIVATIVE AND RELATED TRANSACTIONS
INTRODUCTION
As explained more fully below, several of the Vista Funds (the
Funds ) 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 Fund.
Each Fund, other than the Money Market Portfolio may invest its
assets in derivative and related instruments subject only to the Fund s
investment objective and policies and the requirement that the Fund 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 Fund.
The value of some derivative or similar instruments in which
the Funds invest may be particularly sensitive to changes in prevailing interest
rates or other economic factors, and--like other investments of the Funds--the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of the Adviser to forecast interest rates and other economic
factors correctly. If the Adviser incorrectly forecasts such factors and has
taken positions in derivative or similar instruments contrary to prevailing
market trends, the Funds could be exposed to the risk of a loss. THE FUNDS 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 Funds may employ along with risks or
special attributes associated with them. This discussion is intended to
supplement the Funds current prospectuses as well as provide useful information
to prospective investors.
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DERIVATIVE AND RELATED INSTRUMENTS
To the extent permitted by the investment objectives and
policies of each Fund, and as described more fully below, a Fund may:
o purchase, write and exercise call and put options on
securities, securities indexes and foreign currencies
(including using options in combination with securities,
other options or derivative instruments);
o enter into futures contracts and options on futures
contracts;
o employ forward currency and interest-rate contracts;
o purchase and sell mortgage-backed and asset-backed
securities; and
o purchase and sell structured products.
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:
o 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. As
incorrect correlation could result in a loss on both
the hedged assets in a Fund 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.
o THE ADVISER MAY INCORRECTLY FORECAST INTEREST RATES,
MARKET VALUES OR OTHER ECONOMIC FACTORS IN UTILIZING A
DERIVATIVES STRATEGY. In such a case, the Fund may have
been in a better position had it not entered into such
strategy.
o 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.
o STRATEGIES NOT INVOLVING HEDGING MAY INCREASE THE RISK TO
A FUND. Certain strategies, such as yield enhancement, can
have speculative characteristics and may result in more
risk to a Fund than hedging strategies using the same
instruments.
o THERE CAN BE NO ASSURANCE THAT A LIQUID MARKET WILL
EXIST AT A TIME WHEN A FUND 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 reached on 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
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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 Fund from liquidating
an unfavorable position.
o 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.
o 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 Fund may experience a loss.
o 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 the Funds use of various
strategies involving derivatives and related instruments.
OPTIONS ON SECURITIES, SECURITIES INDEXES, CURRENCIES AND
DEBT INSTRUMENTS. The Funds may PURCHASE, SELL or EXERCISE call and put
options on:
o securities;
o securities indexes;
o currencies; or
o debt instruments.
Although in most cases these options will be exchange-traded,
the Funds 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 Fund intends to purchase pending its
ability to invest in such securities in an orderly manner. A Fund 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 Fund 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
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option which is sold. A Fund 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.
In addition to the general risk factors noted above, the
purchase and writing of options involve certain special risks. During the option
period, a fund writing a covered call (i.e., where the underlying securities are
held by the fund) 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 the Fund 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, the Fund
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 Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds
may purchase or sell:
o interest-rate futures contracts;
o stock index futures contracts;
o foreign currency futures contracts;
o futures contracts on specified instruments; and
o options on these futures contracts (futures options).
The futures contracts and futures options may be based on
various securities in which the Funds 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) and other financial instruments and indices.
These instruments may be used to hedge portfolio positions and
transactions as well as to gain exposure to markets. For example, a Fund 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 Fund intends to acquire an instrument or enter
into a position. For example, a Fund 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.
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When writing or purchasing options, the Funds 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. Funds 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
Funds will only enter into futures contracts or options or futures contracts
which are standardized and traded on a U.S. or foreign exchange or board of
trade, or similar entity, or quoted on an automated quotation system.
FORWARD CONTRACTS. Funds 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. All
Funds 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, the Fund 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 Fund 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 Fund 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 Fund may enter into these contracts for the purpose of
hedging against foreign exchange risk arising from the Fund s investments or
anticipated investments in securities denominated in foreign currencies. A Fund
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.
A Fund 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.
MORTGAGE-BACKED SECURITIES. The Funds 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
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<PAGE>
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 YIELD OF
A MORTGAGE-BACKED SECURITY MAY BE ADVERSELY AFFECTED BY THE PREPAYMENT OF
MORTGAGES INCLUDED IN THE MORTGAGE POOL UNDERLYING THE SECURITY.
The Funds 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, semi-annually. CMOs are 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 first returned
to investors holding the shortest maturity class. Investors holding the longer
maturity classes receive principal only after the first class has been retired.
An investor is partially protected against a sooner than desired return of
principal because of the sequential payments.
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.
STRUCTURED PRODUCTS. The Funds may purchase interests in
entities organized and operated solely for the purpose of restructuring the
investment characteristics of certain debt obligations, thereby creating
structured products. 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. THE EXTENT OF THE PAYMENTS MADE WITH
RESPECT TO STRUCTURED PRODUCTS IS DEPENDENT ON THE EXTENT OF THE CASH FLOW ON
THE UNDERLYING INSTRUMENTS.
The Fund may also invest in other types of structured products,
including among others, spread trades and notes linked by a formula (e.g., a
multiple) to the price of an underlying instrument or currency. A spread trade
is an investment position relating to a difference in the prices or interest
rates of two securities or currencies 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 or currencies.
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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RESTRICTIONS ON THE USE OF FUTURES AND OPTION CONTRACTS
Regulations of the CFTC require that the Portfolios enter into
transactions in futures contracts and options thereon for hedging purposes only,
in order to assure that they are not deemed to be a "commodity pools" under such
regulations. In particular, CFTC regulations require that all short futures
positions be entered into for the purpose of hedging the value of securities
held in a portfolio, and that all long futures positions either constitute bona
fide hedging transactions, as defined in such regulations, or have a total value
not in excess of an amount determined by reference to certain cash and
securities positions maintained for the Portfolio, and accrued profits on such
positions. In addition, a Portfolio may not purchase or sell such instruments
if, immediately thereafter, the sum of the amount of initial margin deposits on
its existing futures positions and premiums paid for options on futures
contracts would exceed 5% of the market value of the Portfolio's total assets.
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 the Portfolio's 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.
The 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.
In addition to the foregoing requirements, the Board of
Trustees has adopted an additional restriction on the use of futures contracts
and options thereon, requiring that the aggregate market value of the futures
contracts held by a Portfolio not exceed 50% of the market value of its total
assets. Neither this restriction nor any policy with respect to the
above-referenced restrictions, would be changed by the Trust's Board of Trustees
without considering the policies and concerns of the various federal and state
regulatory agencies.
Shareholder approval is not required to change any of the
investment policies discussed above, except as otherwise noted herein and in the
Prospectus.
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 the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding shares of the 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 or pledge, mortgage or hypothecate its assets,
except that, as a temporary measure for extraordinary or emergency
purposes (with respect to all of the Portfolios) it may borrow in an
amount not to exceed 1/3 of the current value of its net assets
including the amount borrowed, and may pledge, mortgage or hypothecate
not more than 1/3 of such assets to secure such borrowings (it is
intended that money would be borrowed by a Portfolio only from banks
and only to accommodate requests for the
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repurchase of shares of the Portfolio while effecting an orderly
liquidation of portfolio securities), provided that collateral
arrangements with respect to a Portfolio's permissible futures and
options transactions, including initial and variation margin, are not
considered to be a pledge of assets for purposes of this restriction;
no Portfolio will purchase investment securities if its outstanding
borrowing, including repurchase agreements, exceeds 5% of the value of
the Portfolio's total assets; for additional related restrictions, see
clause (i) under the caption "State and Federal Restrictions"
hereafter, provided, however that for liquidity and cash management,
the Money Market Portfolio may enter into reverse repurchase agreements
to the extent permitted by the 1940 Act and other applicable
regulations;
(2) purchase any security or evidence of interest therein on
margin, except that such short-term credit may be obtained as may be
necessary for the clearance of purchases and sales of securities and
except that, with respect to a Portfolio's permissible options and
futures transactions, deposits of initial and variation margin may be
made in connection with the purchase, ownership, holding or sale of
futures or options positions;
(3) 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;
(4) 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 U.S. government 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;
(5) knowingly invest in securities which are subject to legal
or contractual restrictions on resale (including securities that are
not readily marketable, but not including repurchase agreements
maturing in not more than seven days) if, as a result thereof, more
than 15% of the Portfolio's total assets (taken at market value) would
be so invested (including repurchase agreements maturing in more than
seven days);
(6) purchase or sell real estate (including limited partnership
interests but excluding securities secured by real estate or interests
therein), interests in oil, gas or mineral leases, commodities or
commodity contracts in the ordinary course of business, other than (i)
with respect to a Portfolio's permissible futures and options
transactions or (ii) with respect to the Growth and Income Portfolio,
the Capital Growth Portfolio, and International Equity Portfolio only,
forward purchases and sales of foreign currencies or securities (each
Portfolio reserves the freedom of action to hold and to sell real
estate acquired as a result of its ownership of securities);
(7) purchase securities of any issuer if such purchase at the
time thereof would cause more than 10% of the voting securities of such
issuer to be held by the Portfolio or, with respect to the Money Market
Portfolio only, purchase any voting securities;
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(8) make short sales of securities or maintain a short
position; except that all Portfolios other than the Money Market
Portfolio, may only make such short sales of securities or maintain a
short position if when a short position is open such Portfolio owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short, and unless not more than 10% of the Portfolio's net assets
(taken at market value) is held as collateral for such sales at any one
time (it is the present intention of management to make such sales only
for the purpose of deferring realization of gain or loss for federal
income tax purposes; such sales would not be made of securities subject
to outstanding options);
(9) concentrate its investments in any particular industry,
except that, with respect to a Portfolio's permissible futures and
options transactions, positions in options and futures shall not be
subject to this restriction, and except that 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; or
(10) issue any senior security (as that term is defined in the
1940 Act) if such issuance is specifically prohibited by the 1940 Act
or the rules and regulations promulgated thereunder, provided that
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 for purposes of this restriction.
Each Portfolio is not permitted to make loans to other persons,
except (i) through the lending of its portfolio securities and provided that any
such loans not exceed 30% of the Portfolio's total assets (taken at market
value), (ii) through the use of repurchase agreements or the purchase of
short-term obligations and provided that not more than 10% of the Portfolio's
total assets will be invested in repurchase agreements maturing in more than
seven days, or (iii) by purchasing, subject to the limitation in paragraph 5
above, a portion of an issue of debt securities of types commonly distributed
privately to financial institutions, for which purposes the purchase of
short-term commercial paper or a portion of an issue of debt securities which
are part of an issue to the public shall not be considered the making of a loan.
The Asset Allocation Portfolio may not purchase the securities
of other investment companies except as part of a merger, consolidation or other
acquisition involving such Portfolio.
The Treasury Income Portfolio has also adopted a fundamental
policy which provides that at least 65% of its assets will be invested in
obligations that are backed by the full faith and credit of the U.S. government
or in repurchase agreements fully collateralized by U.S. government obligations,
except that up to 5% of the Portfolio's assets may be invested in futures
contracts (and related options thereon) based on U.S. government obligations,
including any index of government obligations that may be available for trading.
The Treasury Income Portfolio may also invest in obligations issued or
guaranteed by U.S. government agencies or instrumentalities which are backed by
the full faith and credit of the U.S. Treasury, as well as securities issued or
guaranteed as to principal and interest by the U.S. government or by its
agencies or instrumentalities thereof.
In addition, the Portfolios that are permitted to enter into
repurchase agreements have adopted the following operating policy with respect
to such activity, which is not fundamental and which may be changed without
shareholder approval. Such Portfolios may enter into repurchase agreements (a
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purchase of and a simultaneous commitment to resell a security at an agreed-upon
price on an agreed-upon date) only with member banks of the Federal Reserve
System and securities dealers believed creditworthy and only if fully
collateralized by U.S. government obligations or other securities in which such
Portfolios are permitted to invest. If the vendor of a repurchase agreement
fails to pay the sum agreed to on the agreed-upon delivery date, a Portfolio
would have the right to sell the securities constituting the collateral;
however, the Portfolio might thereby incur a loss and in certain cases may not
be permitted to sell such securities. Moreover, as noted above in paragraph 5, a
Portfolio that is permitted to invest in repurchase agreements may not, as a
matter of fundamental policy, invest more than 10% (15% with respect to the
Asset Allocation Portfolio) of its total assets in repurchase agreements
maturing in more than seven days.
The Portfolios have no current intention of engaging in the
following activities in the foreseeable future: (i) writing, purchasing or
selling puts, calls or combinations thereof with respect to U.S. government
securities; (ii) making short sales of securities or maintaining a short
position; or other than with respect to the Equity Portfolios, (iii) purchasing
voting securities of any issuer.
OTHER RESTRICTIONS: In order to comply with certain federal and
state statutes and regulatory policies, as a matter of operating policy, each
Portfolio will not: (i) sell any security which it does not own unless by virtue
of its ownership of other securities the Portfolio has at the time of sale a
right to obtain securities, without payment of further consideration, equivalent
in kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions, (ii) invest for the
purpose of exercising control or management, (iii) purchase securities issued by
any registered investment company except by purchase in the open market where no
commission or profit to a sponsor or dealer results from such purchase other
than the customary broker's commission, or except when such purchase, though not
made in the open market, is part of plan of merger or consolidation; provided,
however, that the securities of any registered investment company will not be
purchased on behalf of the Portfolio if such purchase at the time thereof would
cause more than 5% or 10% of the Portfolio's total assets (taken at the greater
of cost or market value) to be invested in the securities of such issuer or the
securities of registered investment companies, respectively, or would cause more
than 3% of the outstanding voting securities of any such issuer to be held by
the Portfolio; and provided, further, that securities issued by any open-end
investment company shall not be purchased on behalf of the Portfolio, (iv)
invest more than 15% of the Portfolio's, or 10% in the case of the Money Market
Portfolio, total assets (taken at the greater of cost or market value) in
securities that are not readily marketable, (v) as to 50% of a Portfolio's total
assets, except that with respect to Money Market Portfolio as to 100% of such
Portfolio's total assets, purchase securities of any issuer if such purchase at
the time thereof would cause the Portfolio to hold more than 10% (5% for Money
Market Portfolio) of any class of securities of such issuer, for which purposes
all indebtedness of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class, (vi) invest more than 5% of
the Portfolio's assets in companies which, including predecessors, have a record
of less than three years continuous operation, (vii) invest in warrants valued
at the lower of cost or market, in excess of 5% of the value of the Portfolio's
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, or (viii) purchase or retain
in the 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. These policies are not
fundamental and may be changed by the Trust's or Portfolio Board of Trustees
without shareholder approval.
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PERCENTAGE AND RATING RESTRICTIONS: If a percentage or rating
restriction on investment or utilization of assets set forth above or referred
to in the Prospectus is adhered to at the time an investment is made or assets
are so utilized, a later change in percentage resulting from changes in the
value of the portfolio securities or a later change in the rating of a portfolio
security of a Portfolio will not be considered a violation of policy.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
Specific decisions to purchase or sell securities for the
Portfolios that invest in equity and debt securities are made by a portfolio
manager who is an employee of the Adviser to such Portfolios and who is
appointed and supervised by senior officers of such Adviser. Changes in the
Portfolios' investments are reviewed by the Board of Trustees. The portfolio
managers may serve other clients of the Adviser in a similar capacity. Money
market instruments are generally purchased in principal transactions; thus, the
Money Market Portfolio generally would pay no brokerage commissions.
The frequency of a Portfolio's, other than the Money Market
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
(see "Tax Matters" in the Prospectus), the Adviser will weigh the added costs of
short-term investment against anticipated gains.
The primary consideration in placing portfolio security
transactions with broker-dealers for execution is to obtain and maintain the
availability of execution at the most favorable prices and in the most effective
manner possible. The Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Portfolios and
other clients of the Adviser on the basis of their professional capability, the
value and quality of their brokerage services, and the level of their brokerage
commissions. 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 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 on the tender of the portfolio
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Portfolios by the Adviser.
Under the Portfolios' Investment Advisory Agreements and as
permitted by Section 28(e) of the Securities Exchange Act of 1934, the Adviser
may cause the Portfolios to pay a broker-dealer which provides brokerage and
research services to the Adviser an amount of commission for effecting a
securities transaction for the Portfolios in excess of the amount other
broker-dealers would have charged for the transaction if the Adviser determines
in good faith that the greater 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 a particular transaction or the Adviser's overall
responsibilities to the Portfolios or to its clients. Not all of such services
are useful or of value in advising 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,
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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.
Although commissions paid on every transaction will, in the
judgment of the Adviser, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers who were selected to execute transactions on
behalf of the Portfolios and the Adviser's other clients as part of providing
advice as to the availability of securities or of purchasers or sellers of
securities and services in effecting securities transactions and performing
functions incidental thereto, such as clearance and settlement.
Broker-dealers may be willing to furnish statistical research
and other factual information or services ("Research") to the Adviser for no
consideration other than brokerage or underwriting commissions.
The Adviser's investment management personnel will attempt to
evaluate the quality of Research provided by brokers. Results of this effort are
sometimes used by the Adviser as a consideration in the selection of brokers to
execute portfolio transactions. However, the Adviser may be unable to quantify
the amount of commissions which are paid as a result of such Research because a
substantial number of transactions are effected through brokers which provide
Research but which are selected principally because of their execution
capabilities.
The management fees that the Portfolios pay to the Adviser will
not be reduced as a consequence of the Adviser's 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 may
exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services may be useful and of value to the Adviser 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 may be
useful to the Adviser in carrying out its obligations to a Portfolio. While such
services are not expected to reduce the expenses of the Adviser, the Adviser
may, through use of the services, avoid the additional expenses which would be
incurred if it should attempt to develop comparable information through its own
staff.
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 other
clients. Investment decisions for the Portfolios and for the Adviser's 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 Adviser, or
with any affiliate of the Adviser acting either as principal or as broker.
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PERFORMANCE INFORMATION
TOTAL RATE OF RETURN
A Portfolio's 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.
YIELD QUOTATIONS
Any current "yield" quotation of the Shares of a Portfolio,
other than the Money Market Portfolio, 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" of the Shares of a 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 of the 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 changes 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, the Trust.
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DETERMINATION OF NET ASSET VALUE
Each Portfolio determines its net asset value per Share each
day (2:00 p.m., Eastern time for the Money Market Portfolio, and as of the
regular close of the Exchange, or 4:15 p.m., Eastern time for the Portfolio
holding options, in the case of the Treasury Income Portfolio or Equity
Portfolio) during which the New York Stock Exchange is open for trading (a
"Portfolio Business Day"), by dividing the value of its net assets (i.e., the
value of its securities and other assets less its liabilities, including
expenses payable or accrued) by the number of its shares outstanding at the time
the determination is made. (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.)
Purchases and redemptions will be effected at the time of determination of net
asset value next following the receipt of any purchase or redemption order. (See
"Purchases and Redemptions of Shares" in the Prospectus.)
The Money Market Portfolio's securities are valued at their
amortized cost. Amortized cost valuation involves valuing an instrument at its
cost and thereafter accruing interest and accreting discounts at a constant rate
to maturity less the amortization of any premium. 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 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 will maintain a
dollar-weighted average portfolio maturity of 90 days or less, will not purchase
any instrument with a remaining maturity greater than 397 days or subject to a
repurchase agreement having a duration of greater than one year, will limit
portfolio investments, including repurchase agreements, to those U.S.
dollar-denominated instruments that are determined by the Board of Trustees to
present minimal credit risks and will comply with certain reporting and
record-keeping procedures. The Money Market Portfolio has also established
procedures to ensure that their portfolio securities meet their high quality
criteria. (See "Investment Objectives, Policies and Restrictions -- Investment
Policies" above.)
Equity securities in a Portfolio are valued at the last sale
price on the exchange on which they are primarily traded or on the NASDAQ system
for unlisted national market issues, or at the last quoted bid price for
securities in which there were no sales during the day or for unlisted
securities not reported on the NASDAQ system. Bonds and other fixed income
securities (other than short-term obligations, but including listed issues) in a
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
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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 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.
Subject to compliance with applicable regulations, each
Portfolio has reserved the right to pay the redemption price of its Shares,
either totally or partially, by a distribution in kind of portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting each Portfolio and its shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Portfolio or its shareholders, and the
discussions here and in the 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, or
redemptions of, 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
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., taxable interest, dividends and other taxable
ordinary income, net of expenses) and capital gain net income (i.e., the excess
of capital gains over 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.
- 24 -
<PAGE>
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 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
- 25 -
<PAGE>
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.
- 26 -
<PAGE>
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) 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 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.
- 27 -
<PAGE>
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. Treasury 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 affect 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. Treasury.
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.
- 28 -
<PAGE>
MANAGEMENT OF THE PORTFOLIOS
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers and their principal occupations for
at least the past five years are set forth below. Their titles may have varied
during that period. Asterisks indicate those Trustees and officers that are
"interested persons" (as defined in the 1940 Act). Unless otherwise indicated
below, the address of each officer is 125 W. 55th Street, New York, New York
10019.
TRUSTEES
FERGUS REID, III - Chairman of the Board of Trustees; Chairman and Chief
Executive Officer, Lumelite Corporation, since September 1985. Address: 971
West Road, New Canaan, Connecticut 06840.
RICHARD E. TEN HAKEN - Former District Superintendent of Schools, Monroe No. 2
and Orleans Counties, New York; Chairman of the Finance and the Audit and
Accounting Committees, Member of the Executive Committee and Vice President,
New York State Teachers' Retirement System. Address: 4 Barnfield Road,
Pittsford, New York 14534.
WILLIAM J. ARMSTRONG - Vice President and Treasurer, Ingersoll-Rand Company
(Woodcliff Lake, New Jersey). Address: 49 Aspen Way, Upper Saddle River, New
Jersey 07458.
JOHN R.H. BLUM - Partner in the law firm of Richards, O'Neil & Allegaert;
Commissioner of Agriculture - State of Connecticut. Address: 1 John Street,
Millerton, New York 12546.
JOSEPH J. HARKINS* - 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 Nationar. Address: 257 Plantation Circle
South, Ponte Vedra Beach, FL 32082
H. RICHARD VARTABEDIAN* - Retired; Senior Investment Officer, Division
Executive of the Investment Management Division of The Chase Manhattan Bank,
N.A., 1980-1991; responsible for investment research, trading and
portfolio management for commingled funds and high net worth individuals
within the U.S. Employed by Chase in various investment oriented capacities
since 1960, primarily as a senior portfolio manager for institutional, ERISA
and high net worth portfolios. Address: P.O. Box 296, Beach Road, Hendrick's
Head, Southport, Maine 04576.
STUART W. CRAGIN, JR. - President, Fairfeild 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
Canover Industries.
- 29 -
<PAGE>
IRVING L. THODE - Retired, Vice President of Quotron Systems. He has previously
served in a number of executive positions with Control Data Corp., including
President of their Latin American operations, and General Manager of their Data
Services business.
- 30 -
<PAGE>
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 Adviser 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 Adviser. Each Trustee
receives a fee, allocated among all investment companies for which 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. Prior
to August 21, 1995, the quarterly retainer was $9,000 and the per-meeting fee
was $1,000. 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
year ended December 31, 1995 for each Trustee of the Trust:
<TABLE>
<CAPTION>
Aggregate
Compensation Aggregate Pension or
from Mutual Aggregate Compensation Retirement Total Compensation
Fund Variable Compensation from from Mutual Benefits Accrued from
Annuity Trust Mutual Fund Trust Fund Group as Fund Expenses "Fund Complex"(1)
--------------- ------------ ------------ ------------- ------------------
<S> <C> <C> <C> <C> <C>
Fergus Reid, III, Trustee 0 $48,730.51 $29,726.14 0 $78,456.65
Richard E. Ten Haken, Trustee 0 32,487.00 19,817.39 0 52,304.39
William J. Armstrong, Trustee 0 26,814.95 19,817.39 0 46,632.34
John R.H. Blum, Trustee 0 31,857.95 19,446.42 0 51,304.37
Joseph J. Harkins, Trustee 0 32,487.00 19,817.39 0 52,304.39
H. Richard Vartabedian, Trustee 0 37,265.41 37,539.03* 0 74,804.44
Stuart W. Cragin, Jr., Trustee 0 32,487.00 19,817.39 0 52,304.39
Irving L. Thode, Trustee 0 32,487.00 19,817.39 0 52,304.39
</TABLE>
* Included in this amount is $15,000 Mr. Vartabedian receives per year
for serving as Trustee of International Equity Portfolio, Global Fixed
Income Portfolio, Growth and Income Portfolio and Capital Growth
Portfolio.
(1) Data reflects total compensation earned during the period January 1,
1995 to December 31, 1995.
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<PAGE>
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 Funds, the Adviser, 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 below are the estimated annual benefits payable to
an eligible Trustee upon retirement assuming various compensation and years of
service classifications. The estimated credited years of service for Messrs.
Reid, Ten Haken, Armstrong, Blum, Harkins, Vartabedian, Cragin, and Thode are
11, 11, 8, 11, 3, 3 and 3 respectively.
<TABLE>
<CAPTION>
Years of
Service Highest Annual Compensation Paid by All Vista Funds
<S> <C> <C> <C> <C> <C>
40,000 45,000 50,000 55,000
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
</TABLE>
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 Funds, the Adviser, Administrator
or Distributor or any of their affiliates) may enter into agreements with the
Funds whereby payment of the Trustees' 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 the Fund on whose Board the Trustee
sits. 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. It is anticipated that each Eligible Trustee
will execute a deferred compensation agreement for the 1996 calendar year.
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<PAGE>
OFFICERS
MARTIN R. DEAN* - Treasurer and Assistant Secretary of the Trust; Vice
President, BYSYS Fund Group, Inc.
ANN BERGIN* - Secretary; Vice President, BYSYS Fund Group, Inc.; and Chief
Compliance Officer and Secretary, Vista Broker-Dealer Services, Inc.
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.
The Portfolios pay no direct remuneration to any officer of the
Trust. As of March 1, 1995, the Trustees and officers as a group owned of record
less than 1% of each Portfolio's outstanding shares, all of which were acquired
for investment purposes.
ADVISER
The Adviser manages the assets of each Portfolio pursuant to
Investment Advisory Agreements, dated as of August 23, 1994 for each of the
Portfolios (the "Advisory Agreements"). Subject to such policies as the Board of
Trustees may determine, Chase makes investment decisions for each Portfolio.
Pursuant to the terms of the Advisory Agreements, the Adviser provides each
Portfolio with such investment advice and supervision as it deems necessary for
the proper supervision of each Portfolio's investments. The Adviser continuously
provides investment programs and determines from time to time what securities
shall be purchased, sold or exchanged and what portion of each Portfolio's
assets shall be held uninvested. The Adviser furnishes, at its own expense, all
services, facilities and personnel necessary in connection with managing the
investments and effecting portfolio transactions for the Portfolios. The
Advisory Agreement for each Portfolio 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 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 Advisory Agreement or interested persons
of any such party, at a meeting called for the purpose of voting on such
Advisory Agreement.
Pursuant to the terms of each of the Advisory Agreements, the
Adviser is permitted to render services to others. Each Advisory Agreement is
terminable without penalty by the Trust on behalf of each Portfolio on not more
than 60 days, nor less than 30 days, written notice when authorized either by a
majority vote of such Portfolio's shareholders or by a vote of a majority of the
Board of Trustees of
- 33 -
<PAGE>
the Trust, or by the 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). Each Advisory Agreement provides that
the 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.
In consideration of the services provided by the Adviser
pursuant to the Advisory Agreements, each Portfolio pays an investment advisory
fee computed and paid monthly based on a rate equal to a specified percentage
(.25% for the Money Market Portfolio; .50% for the Treasury Income Portfolio;
.60% for the Growth and Income Portfolio and the Capital Growth Portfolio; .55%
for the Asset Allocation Portfolio; and .80% for the International Equity
Portfolio) with respect to each Portfolio's average daily net assets, on an
annualized basis for such Portfolio's then-current fiscal year. However, each
Adviser may voluntarily agree to waive a portion of the fees payable to it on a
month-to-month basis.
ADMINISTRATOR
Chase will serve as administrator of the Portfolios. 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 Portfolio's independent
contractors and agents; preparation for signature by an officer of the
Portfolios of all documents required to be filed for compliance by the
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. The 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 renders
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 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
agreement 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 Portfolios, or by the Administrator
on 60 days' written notice, and will automatically terminate in the event of its
"assignment" (as defined in the 1940 Act). The administration agreement also
provides that 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 or management
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,
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<PAGE>
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 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
and paid monthly at an annual rate equal to .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.
SUB-ADMINISTRATION AGREEMENT
The Trust has entered into a Sub-Administration Agreement (the
"Sub-Administration Agreement") with Vista Broker-Dealer Services, Inc.
("VBDS"), pursuant to which VBDS provides certain administration services,
including providing officers, clerical staff and office space. VBDS is a
wholly-owned subsidiary of Concord Financial Group.
The Sub-Administration Agreement is currently in effect until
August 23, 1996, 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 VBDS 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 VBDS
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 consideration of the sub-administration services provided by
VBDS pursuant to the Sub-Administration Agreement, VBDS receives an annual fee,
payable monthly, of .15% of the net assets of each Portfolio. VBDS 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.
- 35 -
<PAGE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York,
New York 10036, as independent accountants of the Portfolios, 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.
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. Because certain Portfolios in the
Trust are "non-diversified", more than 5% of any of the assets of any such
Portfolio may be invested in the obligations of any single issuer, which may
make the value of the shares in such a Portfolio more susceptible to certain
risks than shares of a diversified mutual fund.
The Trust currently consists of six Portfolios of shares of
beneficial interest without par value. 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 separately, for example to approve
investment advisory agreements or distribution plans, but shares of all series
and classes vote together, to the extent required under the 1940 Act, in the
election or selection of Trustees and independent accountants. 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
- 36 -
<PAGE>
by written notice to the series' or class' shareholders. Unless each series and
class is so terminated, the Trust will continue indefinitely.
The Trust is an entity of the type commonly known as a
"Massachusetts business 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 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 of Ethics substantially conforms to the
recommendations made by the Investment Company Institute ("ICI") (except where
noted) and includes such provisions as:
o Prohibitions on investment personnel acquiring securities
in initial offerings;
o A requirement that access persons obtain prior to
acquiring securities in a private placement and that the
officer granting such approval have no interest in the
issuer making the private placement;
o A restriction on access persons executing transactions for
securities on a recommended list until 14 days after
distribution of that list;
o A prohibition on access persons acquiring securities that
are pending execution by one of the Portfolios until 7
days after the transactions of the Portfolios are
completed;
o A prohibition of any buy or sell transaction in a
particular security in a 30-day period, except as may be
permitted in certain hardship cases or exigent
circumstances where prior approval is obtained. This
provision differs slightly from the ICI recommendation;
o A requirement for pre-clearance of any buy or sell
transaction in a particular security after 30 days,
but within 60 days;
o A requirement that any gift exceeding $75.00 from a
customer must be reported to the appropriate compliance
officer;
o A requirement that access persons submit in writing any
request to serve as a director or trustee of a publicly
traded company;
o A requirement that all securities transactions in excess
of $1,000 be pre-cleared, except that if a person has
engaged in more than $10,000 of securities transactions
- 37 -
<PAGE>
in a calendar quarter all securities of such person
require pre-clearance (this de minimus exception differs
slightly from the ICI recommendations);
o A requirement that all access persons direct their
broker-dealer to submit duplicate confirmation and
customer statements to the appropriate compliance unit;
and
o A requirement that all access persons sign a Code of
Ethics acknowledgment, affirming that they have read and
understood the Code and submit a personal security
holdings report upon commencement of employment or status
and a personal security transaction report within 10 days
of each calendar quarter thereafter.
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.
- 38 -
<PAGE>
APPENDIX A
DESCRIPTION OF BOND AND COMMERCIAL PAPER RATINGS
BOND RATINGS
Moody's Investors Service, Inc. _____ Bonds which are rated Aaa
are judged to be the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
positions of such issues. Bonds which are rated Aa are judged to be of high
quality by all standards. Together with 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
fluctuations 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. Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate but elements may be present which suggest a susceptibility to
impairment sometime in the future. Moody's applies numerical modifiers "1," "2"
and "3" in each generic rating classification from Aa through B in its corporate
bond rating system. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's Corporation_- Bonds rated AAA have the
highest rating assigned by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong. Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from AAA issues only in small degree.
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of change in
circumstances and economic conditions than bonds in higher rated categories.
Bonds rated AAA by Fitch are judged by Fitch to be strictly
high grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions liable to but slight market fluctuation other than
through changes in the money rate. The prime feature of an AAA bond is showing
of earnings several times or many times interest requirements, with such
stability of applicable earnings that safety is beyond reasonable question
whatever changes occur in conditions. Bonds rated AA by Fitch are judged by
Fitch to be of safety virtually beyond question and are readily salable, whose
merits are not unlike those of the AAA class, but whose margin of safety is less
strikingly broad. The issue may be the obligation of a small company, strongly
secured but influenced as to rating by the lesser financial power of the
enterprise and more local type market.
Bonds rated Duff-1 are judged by Duff to be of the highest
credit quality with negligible risk factors; only slightly more than U.S.
Treasury debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high
credit quality with strong protection factors. Risk is modest but may vary
slightly from time to time because of economic conditions.
Bonds rated TBW-1 are judged by Thomson BankWatch, Inc. to be
of the highest credit quality with a very high degree of likelihood that
principal and income will be paid on a timely basis.
A-1
<PAGE>
Bonds rated TBW-2 offer a strong degree of safety regarding repayment. The
relative degree of safety, however, is not as high as TBW-1.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations. Moody's employs the
following three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers: Prime 1-Highest Quality; Prime
2-Higher Quality; Prime 3-High Quality.
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment. Ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest.
Issues assigned the highest rating, A, are regarded as having
the greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2, and 3 to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess safety characteristics. Capacity for timely payment on
issues with the designation A-2 is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Issues carrying the
designation A-3 have a satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
The rating Fitch-1 (Highest Grade) is the highest commercial
rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the
strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good
Grade) is the second highest commercial paper rating assigned by Fitch which
reflects an assurance of timely payment only slightly less in degree than the
strongest issues.
The rating Duff-1 is the highest commercial paper rating
assigned by Duff. Paper rated Duff-1 is regarded as having very high certainty
of timely payment with excellent liquidity factors which are supported by ample
asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as
having good certainty of timely payment, good access to capital markets and
sound liquidity factors and company fundamentals. Risk factors are small.
A-2
<PAGE>
[LOGO]
ANNUAL REPORT
AUGUST 31, 1995
[Vista Capital Advantage LOGO]
Mutual Fund Variable Annuity Trust
Vista Broker-Dealer Services, Inc., distributor
This report must be accompanied or preceded by a current
prospectus for Vista Capital Advantage
<PAGE>
[LOGO]
TABLE OF CONTENTS
Letter from the Chairman 3
Performance & Commentary
Growth and Income 4
Capital Growth 4
International Equity 5
Asset Allocation 5
U.S. Treasury Income 6
Money Market 6
Portfolio of Investments
Growth and Income 7
Capital Growth 8
International Equity 9
Asset Allocation 10
U.S. Treasury Income 11
Money Market 11
Mutual Fund Variable Annuity Trust
Statement of Assets & Liabilities 12
Statement of Operations 13
Statement of Changes in Net Assets 14
Selected Per Share Data and Ratios 15
Notes to Financial Statements 16-18
Report of Independent Accountants 19
INVESTMENTS IN VISTA CAPITAL ADVANTAGE ARE NOT INSURED BY THE FDIC, FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT DEPOSITS OF, ENDORSED
BY, OR GUARANTEED BY, CHASE. INVESTMENTS IN VISTA CAPITAL ADVANTAGE, INCLUDING
THE UNDERLYING VARIABLE INVESTMENT OPTIONS, ARE SUBJECT TO RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
page 3
[LOGO]
LETTER FROM THE CHAIRMAN
DEAR INVESTOR:
We are very pleased to provide you with performance and financial information on
the Mutual Fund Variable Annuity Trust portfolios that underlie your Vista
Capital Advantage variable annuity for the period from inception on March 1,
1995, through August 31, 1995. Look for a similar update and performance report
from Vista Investment Services every six months.
U.S. INVESTORS WATCH MARKETS CLIMB
The U.S. equity and bond markets enjoyed a sustained rally during the period
under review as a result of moderate economic growth and a change in the Federal
Reserve's monetary policy from tightening to easing. The yield curve shifted
dramatically lower from early March to the end of August, providing profits for
bond investors. Declining interest rates and solid corporate earnings results
enabled the equity markets to push higher, with all the major U.S. stock indices
posting double-digit gains.
OVERSEAS MARKETS BUOYED BY ECONOMIC REPORTS
The overseas stock and bond markets benefited from the general downward trend in
global interest rates and the strength in the U.S. equity and fixed income
markets. The European securities markets were buoyed by economic reports showing
a combination of moderate inflation and sustained, albeit tepid growth and
expectations of monetary easing. In April, the U.S. dollar started to reverse
its long-term decline against the yen, which contributed heavily to a resurgence
in the Japanese equity market. The Latin American markets bounced back strongly
from their sharp correction earlier this year, while the smaller Asian markets
held on to early gains to also finish higher.
The commentaries beginning on page 4 provide brief summaries on individual
portfolio performance from each fund manager's perspective. Also included is
performance since inception for each portfolio.
In summary, your variable annuity portfolio's performance benefited from the
positive climate for the global financial markets in recent months. As always,
however, we recommend that you take a long- term, disciplined approach to
investing -- a strategy that we believe will help deliver the strong investment
returns you seek.
Sincerely,
[signature of Fergus Reid]
Fergus Reid
Chairman
<PAGE>
page 4
[LOGO]
PERFORMANCE & COMMENTARY
[begin text in box]
GROWTH & INCOME PORTFOLIO
objective:
seeks long-term capital
appreciation and dividend
income through diversified
holdings of common stocks.
pursues a "contrary opinion"
approach, selecting common
stocks that are currently out
of favor with investors.
[end text in box]
The GROWTH & INCOME PORTFOLIO'S performance for the fiscal period ended August
31, 1995, was helped by the U.S. stock market's record-breaking climb. We also
benefited from our sector weighting decisions, including an emphasis on cyclical
issues, and timely stock selection. The Portfolio achieved a 14.80% total return
for the period since its inception on March 1, 1995, through August 31, 1995.
Contributing to the market's overall strength during the period were two main
factors: 1) the Federal Reserve's decision to reverse interest rate policy in
July 1995; and 2) strong corporate earnings. The Portfolio's total return was
enhanced by its investments in cyclical issues and emphasis on such sectors as
basic industry, capital goods, transportation and technology. Some exposure to
small-capitalization issues also benefited the Portfolio.
We expect the economy to slow this autumn but believe it will pick up its pace
in late 1995. We will remain focused on cyclical issues, which we believe have
the potential to outperform other sectors.
[begin text in shaded box]
VISTA INVESTMENT SERVICES IS PLEASED TO PROVIDE THE PERFORMANCE AND COMMENTARIES
FOR THE SIX PORTFOLIOS THAT UNDERLIE THE VISTA CAPITAL ADVANTAGE VARIABLE
ANNUITY FOR THE PERIOD ENDED AUGUST 31, 1995. THE PERFORMANCE INFORMATION
PROVIDED ON THE PORTFOLIOS INCLUDES TRUST EXPENSES, BUT DOES NOT INCLUDE
INSURANCE COMPANY EXPENSES OR WITHDRAWAL CHARGES ASSOCIATED WITH YOUR VARIABLE
ANNUITY. TOTAL RETURNS ARE NOT ANNUALIZED SINCE THE PORTFOLIOS HAVE BEEN IN
EXISTENCE FOR LESS THAN ONE YEAR. ALL DIVIDENDS ARE ASSUMED TO BE REINVESTED.
PLEASE NOTE THAT PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S UNITS, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THE ORIGINAL COST.
[end text in shaded box]
The CAPITAL GROWTH PORTFOLIO benefited during the fiscal period ended August 31,
1995, as the U.S. stock market rallied in a conducive environment for equity
investing. For the period under review, the Portfolio achieved a 19.00% total
return.
A number of factors contributed to the stock market's strong showing. Initially,
the market reacted positively as the economy continued to slow to a sustainable
pace while inflation remained moderate. In late spring of this year, however,
concerns began to surface that the anticipated "soft landing" for the economy
might not occur, with market watchers fearing a possible recession. However, the
stock market rebounded when the Federal Reserve decided to reverse its monetary
policy and began lowering interest rates in an effort to revive the sluggish
economy. Toward the end of August, signs of economic strength reappeared
throughout the economy and a wave of solid earnings reports also lent support to
stocks.
The Portfolio benefited during the period from participating in such sectors as
basic industry, capital goods, transportation and technology, which all
performed well. Timely stock selection and the Portfolio's small- and
mid-capitalization orientation also added to the total return.
We expect the economy to gain strength in late 1995. We also expect the Fed to
continue to ease interest rates to spark economic growth. Given this scenario,
we plan to emphasize cyclical issues, which tend to benefit from a growing
economy.
[begin text in box]
CAPITAL GROWTH PORTFOLIO
objective:
seeks long-term capital growth
primarily through diversified
holdings in common stocks.
[end text in box]
<PAGE>
page 5
[LOGO]
PERFORMANCE & COMMENTARY
The INTERNATIONAL EQUITY PORTFOLIO had a total return of 8.90% for the period
ended August 31, 1995, as overseas equity markets posted strong gains in part
due to declines in global interest rates and strength in the U.S. equity and
fixed income markets.
[begin text in box]
INTERNATIONAL EQUITY
PORTFOLIO
objective:
seeks long-term growth
of capital and income by
investing in equity securities
of established foreign companies
and foreign subsidiaries of
U.S. companies participating
in foreign economies with
prospects for growth.
international investing is subject to
special risks, including currency
fluctuations and differences in
accounting and taxation standards
and political instability.
[end text in box]
The overseas stock and bond markets benefited from the general downward trend in
global interest rates and the strength in the U.S. equity and fixed income
markets. The European securities markets were buoyed by economic reports showing
a combination of moderate inflation and tepid growth, and expectations of
monetary easing. In April, the U.S. dollar started to reverse its long-term
decline against the yen, which contributed heavily to a resurgence in the
Japanese equity market. The Latin American markets bounced back strongly from
their sharp correction earlier this year, while the smaller Asian markets held
on to early gains to also finish higher.
In the near term, international equities remain vulnerable to a possible
correction on Wall Street. However, based on the current global economic and
interest rate environment, this would represent an opportunity to add to the
Portfolio's holdings. Europe is entering a period of transition from export-led
to domestically-driven economic growth, and we will take advantage of this
theme. We believe Japanese equities are likely to track movements in the
yen/dollar exchange until a definitive bailout package to address Japan's bad
debt situation is announced. However, we anticipate that an agreement will come
sooner rather than later. Finally, we are comfortable with our positions in the
smaller Asian markets, as the macroeconomic fundamentals remain solid, and, in
our opinion, fair valuations exist.
The ASSET ALLOCATION PORTFOLIO benefited from strong performances overall in the
U.S. stock and bond markets during the fiscal year ended August 31, 1995,
achieving a 10.40% total return.
March began with relative stability for the U.S. bond market. However, signs
began to emerge that the pace of economic activity was beginning to slow and
downturns were registered in some sectors, such as construction spending and
retail sales. To spark economic activity, the Federal Reserve lowered the
Federal funds rate by 25 basis points on July 6.
A number of factors contributed to the stock market's strong showing during the
period. Initially, the market reacted positively as the economy continued to
slow while inflation remained moderate. In late spring of this year, however,
concerns began to surface that the anticipated "soft landing" for the economy
might not occur, with market watchers fearing a possible recession. However, the
stock market rebounded when the Federal Reserve decided to reverse its monetary
policy and began lowering interest rates in an effort to revive the sluggish
economy. Toward the end of the fiscal year, signs of economic strength
reappeared throughout the economy and a wave of solid earnings reports also lent
support to stocks.
Going forward, we expect corporate profits to grow but with less momentum as the
economy contracts. We also believe that the economy will re-accelerate in the
fourth quarter -- with or without a catalyst from the Fed.
[begin text in box]
ASSET ALLOCATION PORTFOLIO
objective:
seeks a combination of long-term
capital growth and current income
by investing in common stocks,
convertible securities and
government and corporate
fixed-income obligations.
[end text in box]
<PAGE>
page 6
[LOGO]
PERFORMANCE & COMMENTARY
The yield curve shifted dramatically lower during the period under review, which
benefited U.S. bond market participants. For the fiscal year ended August 31,
1995, the U.S. TREASURY INCOME PORTFOLIO had a total return of 6.90%.
The fiscal year began with relative stability for the U.S. bond market. However,
signs began to emerge that the pace of economic activity was beginning to slow
and downturns were registered in some sectors, such as construction spending and
retail sales. To spark economic activity, the Federal Reserve lowered the
Federal funds rate by 25 basis points on July 6. This rate cut pushed the price
of bonds higher.
Going forward, we expect corporate profits to grow but with less momentum as the
economy contracts. We also believe that the economy will slow in the near term
but then re-accelerate in the fourth quarter -- with or without assistance from
the Fed.
[begin text in box]
U.S. TREASURY INCOME PORTFOLIO
objective:
seeks current income as well
as preservation of investors'
principal by investing in debt
obligations backed by the full faith
and credit of the U.S. government.
shares of the portfolio are neither
insured nor guaranteed by the U.S.
government or any other entity.
[end text in box]
[begin text in box]
MONEY MARKET PORTFOLIO
objective:
seeks to preserve capital and
maintain liquidity while offering
investors the opportunity for
maximum current income.
invests in obligations issued or
guaranteed by U.S. banks,
securities issued by the U.S.
government or its agencies, dollar-
denominated commercial paper and
obligations of foreign
governments.
there is no assurance that the
underlying portfolio will maintain
an NAV of $1.00 per share, nor is
it insured or guaranteed by the
U.S. government.
[end text in box]
March began on a relatively stable note for the MONEY MARKET Portfolio, with
declines in some rates, such as one-year Treasury bills. This decline occurred
despite a 50 basis point increase in the Federal funds rate, to 6%, and a 50
basis point rise in the Fed's discount rate, to 5.25%, in February 1995.
A shift in investor psychology occurred at midyear as economic indicators began
to show a possible slowing in the pace of activity. In some sectors, such as
construction spending and retail sales, slight downturns were registered. Noting
these developments, the Fed reduced the Federal funds rate by 25 basis points on
July 6.
The Money Market Portfolio's 7-day current yield and total return as of August
31, 1995 was 5.30% and 2.79%, respectively.
Many market watchers contend that the Fed must ease interest rates again to
prevent the economy from stalling. While the economy may slow in the near
future, we expect it to gain momentum in the fourth quarter.
<PAGE>
page 7
[LOGO]
GROWTH & INCOME PORTFOLIO
Portfolio of Investments August 31, 1995
LONG-TERM INVESTMENTS 87.4%
COMMON STOCK 82.7%
<TABLE>
<CAPTION>
Issuer Shares $ Value $ Subtotal
- ------ ------ ------- ----------
<S> <C> <C> <C>
AEROSPACE 3.4%
AlliedSignal, Inc., 1,900 84,312
United Technologies, Corp. 1,500 125,063 209,375
---------
AIRLINES 0.9%
AMR Corp.* 800 56,400 56,400
---------
AUTOMOTIVE 1.8%
Chrysler Corp. 1,217 65,566
Echlin, Inc. 1,400 48,300 113,866
---------
BANKING 4.7%
Bank of New York Company, Inc., 1,200 52,200
Citicorp 1,600 106,200
First Bank System Inc. 1,500 68,438
NationsBank Corp. 1,100 67,512 294,350
---------
CHEMICALS 2.7%
Air Products and Chemicals, Inc., 700 37,538
duPont (EI) deNemours 2,000 130,750 168,288
---------
COMPUTER SOFTWARE 0.8%
General Motors Corp., Class E 1,100 51,286 51,286
---------
COMPUTERS/COMPUTER HARDWARE 5.0%
Apple Computer Inc. 1,100 47,300
Compaq Computer* 2,900 138,475
SCI Systems, Inc.* 1,200 37,200
Sun Microsystems, Inc.* 1,500 86,813 309,788
---------
CONSTRUCTION MACHINERY 1.0%
Caterpillar Inc. 900 60,413 60,413
---------
CONSUMER PRODUCTS 1.5%
Whirlpool Corp. 1,700 92,650 92,650
---------
ELECTRONICS 8.0%
Eaton Corp. 1,600 86,600
General Instrument Corp.* 3,400 124,100
General Motors Class H 3,500 139,562
Texas Instruments 2,000 149,750 500,012
---------
ENTERTAINMENT 1.3%
Time Warner, Inc. 1,900 80,038 80,038
---------
ENVIORNMENTAL SERVICES 1.2%
BrowningFerris Industries, Inc. 2,300 77,338 77,338
---------
FINANCIAL SERVICES 1.6%
Federal National Mortgage Assoc. 600 57,225
Household International, Inc. 800 44,900 102,125
---------
FOOD/BEVERAGE PRODUCTS 3.0%
IBP, Inc. 1,700 83,725
PepsiCo., Inc. 2,300 104,075 187,800
---------
HEALTH CARE 3.3%
Baxter International Inc. 1,500 58,500
Beverly Enterprises* 5,200 68,900
Tenet Healthcare Corp. * 4,800 76,200 203,600
---------
INSURANCE 4.6%
American General Corp. 2,200 77,550
American International Group 1,050 84,656
Chubb Corp. 500 45,625
Mid Ocean, Ltd. 2,300 78,775 286,606
---------
MANUFACTURING 3.3%
Aluminum Company of America 1,100 62,838
Johnson Controls 1,200 73,050
Varity Corp.* 1,600 72,800 208,688
---------
METALS/MINING 2.1%
Inco, Ltd., 1,400 49,000
Phelps Dodge Corp. 1,300 82,387 131,387
---------
OIL & GAS 7.6%
Amoco Corp. 1,300 82,875
Halliburton Company 1,900 80,513
Mobil Corp. 500 47,625
Panhandle Eastern Corp. 3,100 77,500
Phillips Petroleum Co. 1,200 39,450
Smith International * 3,100 54,250
Williams Companies, Inc. 2,500 91,563 473,776
---------
PAPER/FOREST PRODUCTS 3.5%
Champion International Corp. 1,800 101,925
Willamette Industries 1,700 116,875 218,800
---------
PHARMACEUTICALS 0.7%
Upjohn Company 1,000 42,375 42,375
---------
PRINTING & PUBLISHING 1.3%
Harcourt General, Inc. 2,000 83,250 83,250
---------
RETAILING 7.5%
American Stores 2,500 73,437
Circuit City Stores, Inc. 1,500 51,750
DaytonHudson Corp. 1,800 131,625
Kroger Co.* 2,500 81,562
May Department Stores 3,100 131,363 469,737
---------
SHIPPING/TRANSPORTATION 2.0%
CSX Corp. 1,500 123,750 123,750
---------
STEEL 1.4%
USX-US Steel Group, Inc. 2,600 85,150 85,150
---------
TELECOMMUNICATIONS 3.1%
A T & T Corp., 1,200 67,800
GTE Corp. 1,500 54,937
U S West, Inc. 1,700 73,950 196,687
---------
UTILITIES 5.4%
CMS Energy Corp. 3,100 76,337
FPL Group Inc. 3,300 128,287
Nipsco Industries Inc., 1,600 52,400
Pinnacle West Capital Corp. 3,300 82,088 339,112
---------
TOTAL COMMON STOCK
(COST $4,538,200) 5,166,647
---------
CONVERTIBLE PREFERRED STOCK 2.4%
FINANCIAL SERVICES 0.9%
St. Paul Capital Corp., 6.50% 1,000 55,375
PAPER/FOREST PRODUCTS 1.5%
Intl. Paper Capital Corp., 5.25%# 2,000 94,352
TOTAL CONVERTIBLE PREFERRED STOCK
(COST $150,000) 149,727
---------
Principal
Amount (USD)
-------------
CONVERTIBLE CORPORATE BONDS 2.3%
ELECTRONICS / ELECTRICAL
EQUIPMENT 0.8%
Sanmina Corp. 5.50%,
due 8/15/02# 50,000 50,991
MANUFACTURING 0.8%
Waban Inc., 6.50%,
due 7/2/02 50,000 49,250
RETAILING 0.7%
Baker J. Inc., 7.00%,
due 6/1/02 50,000 42,500
TOTAL CONVERTIBLE CORPORATE BONDS
(COST $148,699) 142,741
---------
TOTAL LONG-TERM INVESTMENTS
(COST $4,836,899) 5,459,115
---------
SHORT-TERM INVESTMENTS 12.6%
COMMERCIAL PAPER
Household Finance Corp., 5.75%,
due 9/1/95 (Cost $788,000) 788,000 788,000 788,000
---------
TOTAL INVESTMENTS
(COST $5,624,899) 100.0% 6,247,115
---------
</TABLE>
# Security may only be sold to institutional buyers.
*Non income producing securities. See NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 8
[LOGO]
CAPITAL GROWTH PORTFOLIO
Portfolio of Investments August 31, 1995
LONG-TERM INVESTMENTS 92.8%
COMMON STOCK 92.8%
<TABLE>
<CAPTION>
Issuer Shares $ Value $ Subtotal
- ------ ------ ------- ---------
<S> <C> <C> <C>
BANKING 5.0%
BayBanks, Inc., 1,500 120,375
Standard Federal Bancorporation 5,000 195,000 315,375
---------
CHEMICALS 3.3%
Arcadian Corp.* 5,000 93,125
Material Sciences Corp.* 6,000 115,500 208,625
---------
COMPUTER SOFTWARE 4.0%
American Mgmt.Systems, Inc.* 3,500 89,250
Reynolds & Reynolds, Inc., Class A 5,300 170,262 259,512
---------
COMPUTERS/COMPUTER HARDWARE 3.8%
Comdisco, Inc. 5,700 173,850
On Technology Corp.* 4,000 64,000 237,850
---------
CONSTRUCTION MATERIALS 3.1%
Texas Industries Inc. 4,000 197,500 197,500
---------
CONSUMER PRODUCTS 6.6%
Danaher Corp. 4,900 161,700
Lancaster Colony Corp. 3,000 104,250
Toro Co. 5,000 149,375 415,325
---------
ELECTRONICS / ELECTRICAL
EQUIPMENT 11.2%
Integrated Device Technology, Inc.* 2,500 144,062
Microchip Technology, Inc.* 5,700 216,600
Pioneer Standard Electronics, Inc. 6,500 167,375
Recoton Corp.* 9,000 177,750 705,787
---------
FINANCIAL SERVICES 3.2%
Green Tree Financial Corp. 1,500 87,375
Olympic Financing Ltd.* 5,000 114,375 201,750
---------
FOOD/BEVERAGE PRODUCTS 3.5%
IBP, Inc. 4,500 221,625 221,625
---------
HEALTH CARE 5.1%
FHP International Corp.* 6,000 148,500
HealthCare COMPARE * 4,600 173,075 321,575
---------
INSURANCE 5.7%
Mid Ocean, Ltd. 5,700 195,225
Reliastar Financial Corp. 4,300 163,400 358,625
---------
MANUFACTURING 13.9%
AGCO Corp. 5,600 272,300
Elsag Bailey* 4,000 121,500
Kennametal Inc. 5,000 190,000
Modine Manufacturing Co. 4,500 136,125
NACCO Industries, Inc. Class A 2,800 161,000 880,925
---------
OIL & GAS 4.2%
Smith International * 9,000 157,500
Total Petroleum of North America 10,000 110,000 267,500
---------
REAL ESTATE INVESTMENT TRUST 2.4%
Oasis Residential, Inc. 6,600 149,325 149,325
---------
RETAILING 2.8%
Caldor, Inc.* 6,300 48,825
Ethan Allen Interiors, Inc.* 6,100 128,862 177,687
---------
SHIPPING / TRANSPORTATION 7.6%
Consolidated Freightways 6,100 157,838
GATX Corp. 3,300 170,363
Pittston Services Group 6,000 152,250 480,451
---------
STEEL 2.3%
LTV Corp.* 9,500 148,438 148,438
---------
UTILITIES 5.1%
CMS Energy Corp. 6,000 147,750
Oklahoma Gas & Electric Co. 5,000 176,875 324,625
---------
TOTAL LONG-TERM INVESTMENTS
(Cost $5,032,321) 5,872,500
---------
Principal
Amount (USD)
-------------
SHORT-TERM INVESTMENTS 7.1%
COMMERCIAL PAPER
Household Finance Corp., 5.75%,
due 9/1/95 (Cost $448,000) 448,000 448,000
---------
TOTAL INVESTMENTS
(Cost $5,480,321) 99.9% 6,320,500
=========
</TABLE>
*Non-income producing securities. See NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 9
[LOGO]
INTERNATIONAL EQUITY PORTFOLIO
Portfolio of Investments August 31, 1995
COMMON STOCK 97.7%
<TABLE>
<CAPTION>
Issuer Shares $ Value $ Subtotal
- ------ ------ ------- ---------
<S> <C> <C> <C>
AUSTRALIA 1.5%
BANKING
Australia & New Zealand
Banking Grp. Ltd. 20,000 81,336 81,336
---------
FINLAND 2.0%
ELECTRICAL & ELECTRONIC EQUIPMENT
Nokia AB, Ser. A 750 51,261
PAPER/FOREST PRODUCTS
Kymmene OY* 2,080 61,131 112,392
---------
FRANCE 6.0%
AUTOMOTIVE
Peugeot S.A. 36 4,755
BROADCASTING & PUBLISHING
TV Francaise (TF1) 470 47,656
CONSUMER PRODUCTS
SEITA 1,550 54,823
FINANCIAL SERVICES
Cetelem Group* 300 46,460
LEISURE
Salomon S.A. 121 57,990
OIL & GAS
Total Cie Francaise Petroles, Ser. B 400 23,480
PHARMACEUTICALS
RousselUclaf 200 31,924
RETAILING
Docks De France 453 66,746 333,834
---------
GERMANY 6.7%
AIRLINES
Lufthansa 639 94,112
AUTOMOTIVE
Kiekert AG* 1,000 52,066
BANKING
Commerzbank AG 170 38,390
ELECTRICAL & ELECTRONIC EQUIPMENT
Siemens AG 127 64,585
RETAILING
Asko Deutsche Kaufhaus AG 80 48,948
Karstadt AG 96 42,502
UTILITIES
VEBA AG 670 25,600 366,203
---------
HONG KONG 6.3%
CONGLOMERATE
Swire Pacific Ltd. Ser, A* 9,000 67,438
Jardine Matheson Holdings 7,000 50,400
DIVERSIFIED
Hutchison Whampoa 15,000 72,282
REAL ESTATE
Hong Kong Land Holdings Ltd. 34,000 61,880
UTILITIES
China Light & Power Co. 13,000 63,819
Consolid. Elec. Power Asia Ltd. 13,600 28,024 343,843
---------
ITALY 2.0%
COMPUTERS/COMPUTER HARDWARE
Olivetti Group* 38,000 32,307
TELECOMMUNICATIONS
Telecom Italia Mobile SPA* 51,946 76,423 108,730
---------
JAPAN 30.8%
AUTOMOTIVE
Mazda Motor Corp.* 44,000 182,565
Nissan Motor Co, Ltd.* 10,000 76,648
BANKING
Sanwa Bank Ltd. 3,000 57,333
Yasuda Trust & Banking 7,000 45,498
ENGINEERING SERVICES
JGC Corp. 6,000 71,129
ELECTRICAL & ELECTRONIC EQUIPMENT
Advantest Corp. 2,000 114,870
Mitsubishi Electric Corp. 10,000 74,911
Murata Manuf. Co., Ltd. 2,000 79,918
NEC Corp. 7,000 91,568
Rohm Company 2,000 121,615
Tokyo Electron Ltd. 2,000 80,531
Toshiba Corp. 10,000 72,151
Ushio Inc. 7,000 79,407
MACHINERY & ENGINEERING EQUIPMENT
Hitachi Zosen Corp. 47,000 220,952
Komori Corp. 4,000 96,883
Makino Milling Machine* 8,000 59,683
PRINTING & PUBLISHING
Toppan Printing Co. 6,000 82,167
TELECOMMUNICATIONS
Tamura Electric Works* 6,000 80,940 1,688,769
---------
MALAYSIA 6.0%
CONSTRUCTION MATERIALS
Sungei Way Holdings Bhd. 19,000 71,598
DIVERSIFIED
IOI Corporation Bhd. 47,000 58,031
Westmont Industries Bhd. 10,000 42,493
FINANCIAL SERVICES
Untd. Merchant Grp Bhd. 35,000 55,842
PACKAGING
Kian Joo Can Fact.Bhd. 23,000 98,656 326,620
---------
NETHERLANDS 4.6%
APPLIANCES & HOUSEHOLD DURABLES
Philips Gloeilampen 1,910 85,647
BROADCASTING & PUBLISHING
Verenigde Nederlandse
Uitgevbedri Verigd Bezit (VNU) 359 42,514
CHEMICALS
Europn. Vinyls Corp. Intl. N.V. 832 35,336
FOOD/BEVERAGE PRODUCTS
Heineken NV 315 47,619
PAPER/FOREST PRODUCTS
N V Koninklijke 1,250 39,419 250,535
---------
SPAIN 2.5%
BANKING
Banco De Santander 508 20,778
STEEL
Acerinox S.A. 514 65,411
UTILITIES
Iberdrola S.A. 6,798 52,196 138,385
---------
SWEDEN 3.1%
AUTOMOTIVE
Autoliv AB* 1,075 64,871
BIOTECHNOLOGY
Pharmacia AB, Series A 597 16,297
MACHINERY & ENGINEERING
EQUIPMENT
Svedala Industri ABFree 1,572 43,344
RETAILING
Lindex AB* 1,585 18,327
STEEL
AvestaSheffield 2,480 26,300 169,139
---------
SWITZERLAND 4.5%
PHARMACEUTICALS
CibaGeigy AG, Class B 30 21,251
CibaGeigy AG, Class R 62 43,816
Roche Holding AG 16 106,976
Sandoz AG, 100 73,074 245,117
---------
THAILAND 5.6%
BANKING
Bangkok Metropolitan Bank
(Foreign) 77,000 86,071
Krung Thai Bank Ltd.(Foreign), 24,000 92,935
METALS/MINING
Loxley Company Ltd (Foreign) 3,600 73,006
STEEL
Sahavira Steel Industry (Foreign)* 23,500 54,879 306,891
---------
UNITED KINGDOM 16.1%
AIRLINES
British Airways PLC 4,000 26,395
AUTOMOTIVE
Cowie Group PLC 6,333 29,135
BANKING
Bank of Ireland, 8,300 47,570
HSBC Holdings PLC 5,193 69,781
CHEMICALS
Albright & Wilson PLC* 5,226 15,300
COMPUTERS/COMPUTER HARDWARE
Amstrad PLC 7,123 28,852
CONSUMER PRODUCTS
B.A.T. Industries PLC 4,102 32,024
Pentland Group PLC 13,327 26,423
ELECTRICAL & ELECTRONIC EQUIPMENT
Electrocomponents PLC 1,494 14,811
General Electric Co. PLC 3,174 15,340
ENTERTAINMENT
Thorn EMI PLC 671 15,357
HOTELS/OTHER LODGING
Greenalls Group PLC 7,262 56,863
McKechnie Group PLC 4,728 32,590
INSURANCE
General Accident PLC 3,531 32,543
Ocean Group PLC 5,708 29,355
Royal Ins. Holdings PLC 10,129 52,874
MANUFACTURING
Vickers PLC 4,123 14,881
METALS/MINING
RJB Mining PLC 9,084 57,551
OIL & GAS
Shell Transprt & Tradg PLC 1,000 11,393
PHARMACEUTICALS
Glaxo Wellcome PLC 2,501 29,656
RETAILING
House of Fraser PLC 6,510 13,765
Tesco PLC 12,251 61,959
TELECOMMUNICATIONS
British Telecommunications PLC 2,423 15,182
UTILITIES
Anglian Water PLC 6,448 54,434
National Power PLC 14,559 52,770
South West Water PLC 1,608 12,603
Thames Water PLC* 4,085 34,201 883,608
----------
TOTAL COMMON STOCK
(Cost $4,991,673) 5,355,402
----------
Principal
Amount (USD)
-------------
COMMERCIAL PAPER 0.5%
UNITED STATES
Household Finance Corp., 5.75%,
due 9/1/95 (Cost $28,000) 28,000 28,000
---------
TOTAL INVESTMENTS
(COST $5,019,673) 98.2% 5,383,402
=========
</TABLE>
*Non-income producing securities. See NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 10
[LOGO]
ASSET ALLOCATION PORTFOLIO
Portfolio of Investments August 31, 1995
LONG-TERM INVESTMENTS 81.0%
COMMON STOCK 45.6%
<TABLE>
<CAPTION>
Issuer Shares $ Value $ Subtotal
- ------ ------ ------- ----------
<S> <C> <C> <C>
AEROSPACE 1.8%
Allied Signal, Inc., 900 39,938
United Technologies, Corp. 700 58,362 98,300
--------
AIRLINES 0.5%
AMR Corp.* 400 28,200 28,200
--------
AUTOMOTIVE 1.0%
Chrysler Corp. 609 32,810
Echlin, Inc. 700 24,150 56,960
--------
BANKING 2.7%
Bank of New York Company, Inc. 600 26,100
Citicorp 800 53,100
First Bank System Inc. 800 36,500
NationsBank Corp. 500 30,687 146,387
--------
CHEMICALS 1.5%
Air Products and Chemicals, Inc. 300 16,087
duPont (EI) deNemours 1,000 65,375 81,462
--------
COMPUTER SOFTWARE 0.7%
General Motors Corp., Class E 800 37,300 37,300
--------
COMPUTERS/COMPUTER HARDWARE 2.8%
Apple Computer Inc. 500 21,500
Compaq Computer* 1,400 66,850
SCI Systems, Inc.* 600 18,600
Sun Microsystems, Inc.* 800 46,300 153,250
--------
CONSTRUCTION MACHINERY 0.5%
Caterpillar Inc. 400 26,850 26,850
--------
CONSUMER PRODUCTS 0.8%
Whirlpool Corp. 800 43,600 43,600
--------
ELECTRONICS 4.4%
Eaton Corp. 700 37,888
General Instrument Corp.* 1,700 62,050
General Motors Class H 1,700 67,787
Texas Instruments 1,000 74,875 242,600
--------
ENTERTAINMENT 0.7%
Time Warner, Inc. 900 37,913 37,913
--------
ENVIRONMENTAL SERVICES 0.7%
Browning Ferris Industries, Inc. 1,100 36,987 36,987
--------
FINANCIAL SERVICES 0.8%
Federal National Mortgage Assoc. 300 28,612
Household International, Inc .300 16,838 45,450
--------
FOOD/BEVERAGE PRODUCTS 1.6%
IBP, Inc. 800 39,400
PepsiCo., Inc. 1,100 49,775 89,175
--------
HEALTH CARE 1.7%
Baxter International Inc. 700 27,300
Beverly Enterprises* 2,500 33,125
Tenet Healthcare Corp.* 2,300 36,512 96,937
--------
INSURANCE 2.6%
American General Corp 1,100 38,775
American International Group 600 48,375
Chubb Corp. 200 18,250
Mid Ocean, Ltd. 1,100 37,675 143,075
--------
MANUFACTURING 1.8%
Aluminum Company of America 500 28,562
Johnson Controls 600 36,525
Varity Corp.* 800 36,400 101,487
--------
METALS/MINING 1.1%
Inco, Ltd. 700 24,500
Phelps Dodge Corp. 600 38,025 62,525
--------
OIL & GAS 4.3%
Amoco Corp. 600 38,250
Halliburton Company 1,000 42,375
Mobil Corp. 300 28,575
Panhandle Eastern Corp. 1,600 40,000
Phillips Petroleum Co. 500 16,438
Smith International* 1,500 26,250
Williams Companies, Inc. 1,200 43,950 235,838
--------
PAPER/FOREST PRODUCTS 1.9%
Champion International Corp. 900 50,963
Willamette Industries 800 55,000 105,963
--------
PHARMACEUTICALS 0.4%
Upjohn Company 500 21,187 21,187
--------
PRINTING & PUBLISHING 0.8%
Harcourt General, Inc. 1,000 41,625 41,625
--------
RETAILING 4.2%
American Stores 1,100 32,313
Circuit City Stores, Inc. 800 27,600
DaytonHudson Corp. 900 65,812
Kroger Co.* 1,300 42,412
May Department Stores 1,500 63,563 231,700
--------
SHIPPING/TRANSPORTATION 1.0%
CSX Corp. 700 57,750 57,750
--------
STEEL 0.7%
US-US Steel Group, Inc. 1,200 39,300 39,300
--------
TELECOMMUNICATIONS 1.7%
A T & T Corp. 500 28,250
GTE Corp. 700 25,638
U S West, Inc. 900 39,150 93,038
--------
UTILITIES 2.9%
CMS Energy Corp. 1,400 34,475
FPL Group Inc. 1,600 62,200
Nipsco Industries Inc. 800 26,200
Pinnacle West Capital Corp. 1,600 39,800 162,675
--------
TOTAL COMMON STOCK
(Cost $2,211,044) 2,517,534
---------
CONVERTIBLE PREFERRED STOCK 1.8%
FINANCIAL SERVICES
St. Paul Capital Corp., 6.50% 1,000 55,375
Paper/Forest Products
Intl. Paper Capital Corp., 5.25%# 1,000 47,176
--------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $100,000) 102,551
U.S. GOVERNMENT &
AGENCY OBLIGATIONS 26.5%
U.S Treas. Notes, 8.50%,
due 2/15/20 500,000 600,470
U.S Treas. Notes, 6.00%,
due 9/31/97 350,000 350,931
--------
951,401
--------
Fed. Home Loan Bank, 7.54%,
due 2/13/98 500,000 516,170
--------
TOTAL U.S. GOVERNMENT &
AGENCY OBLIGATIONS (Cost $1,441,976) 1,467,571
---------
CONVERTIBLE CORPORATE DEBT 3.6%
Electronic / Electrical Equipment
Sanmina Corp., 5.50%,
due 8/15/02 # 50,000 50,992
Manufacturing
Integrated Device Technology,
5.50% due 6/1/02 50,000 59,835
Waban Inc., 6.50%,
due 7/2/02 50,000 49,250
Retailing
Baker J. Inc., 7.00%,
due 6/1/02 50,000 42,500
--------
TOTAL CONVERTIBLE CORPORATE DEBT
(Cost $198,699) 202,577
--------
ASSET BACKED SECURITIES 3.5%
MBNA Corp.,Master Credit Card
Trust, Ser. 1995C, C (Cost $199,566) 200,000 195,500
--------
TOTAL LONG TERM INVESTMENTS
(Cost $4,151,285) 4,485,733
---------
SHORT-TERM INVESTMENTS 25.4%
COMMERCIAL PAPER
Household Finance Corp.,
5.75%, due 9/1/95
(Cost $1,412,000) 1,412,000 1,412,000
---------
TOTAL INVESTMENTS
(Cost $5,563,285) 106.4% 5,897,733
=========
</TABLE>
# Security may only be sold to institutional buyers.
*Non income producing securities. See NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 11
[LOGO]
U.S. TREASURY INCOME PORTFOLIO
Portfolio of Investments August 31, 1995
LONG-TERM INVESTMENTS 87.7%
<TABLE>
<CAPTION>
Principal
Issuer Amount $ $ Value
- ------ ---------- -------
<S> <C> <C> <C>
U.S. TREASURY OBLIGATIONS 26.5%
U.S. Treasury Notes 6.500%, due 05/15/05 300,000 303,798
6.500%, due 08/15/05 300,000 304,593
U.S. Treasury Bond 8.500%, due 02/15/20 680,000 816,639
---------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $1,431,595) 1,425,030
---------
U.S. GOVERNMENT AGENCY &
AGENCY SPONSORED OBLIGATIONS 28.6%
Federal Farm Credit Bank 7.510%, due 02/13/98 500,000 516,060
Federal Home Loan Bank 7.540%, due 02/13/98 500,000 516,170
Student Loan Marketing Association 7.000%, due 03/03/98 500,000 510,310
---------
TOTAL U.S. GOVERNMENT AGENCY &
AGENCY SPONSORED OBLIGATIONS (Cost $1,511,044) 1,542,540
---------
COLLATERALIZED MORTGAGE OBLIGATIONS 32.6%
Government National Mortgage Association
Collateralized Mortgage Obligations
(Cost $1,669,186) 6.500%, due 03/15/24 1,835,148 1,758,861
---------
TOTAL LONG-TERM INVESTMENTS (Cost $4,611,825) 4,726,431
---------
SHORT-TERM INVESTMENTS 17.6%
U.S. TREASURY OBLIGATIONS 6.4%
U.S. Treasury Bills 5.320%, due 11/24/95 100,000 98,758
5.400%, due 09/21/95 37,000 36,890
5.380%, due 11/24/95 210,000 207,364
---------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $343,012) 343,012
---------
U.S. GOVERNMENT AGENCY &
AGENCY SPONSORED OBLIGATIONS 11.2%
Federal Farm Credit Bank Discount Notes,
5.650%, due 09/13/95 105,000 104,803
Federal Farm Credit Bank Discount Notes,
5.600%, due 09/18/95 500,000 498,678
---------
TOTAL SHORT-TERM U.S. GOVERNMENT AGENCY &
AGENCY SPONSORED OBLIGATIONS (Cost $603,481) 603,481
---------
TOTAL SHORT-TERM INVESTMENTS (Cost $946,493) 946,493
---------
TOTAL INVESTMENTS (Cost $5,558,318) 105.3% 5,672,924
=========
</TABLE>
MONEY MARKET PORTFOLIO
Portfolio of Investments August 31, 1995
<TABLE>
<CAPTION>
Principal
Issuer Amount $ $ Value
- ------ ---------- -------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY &
AGENCY SPONSORED OBLIGATIONS 41.7%
Fed. Home Loan Bank, Discount Note 5.670%, due 09/01/95 960,000 960,000
Fed. Home Loan Mortgage Corp.,FRN 6.110%, due 09/01/95 1,000,000 1,000,000
Student Loan Marketing Assoc., FRN 5.650%, due 09/05/95 300,000 299,597
---------
TOTAL U. S. GOVERNMENT AGENCY &
AGENCY SPONSORED OBLIGATIONS (Cost $2,259,597) 2,259,597
---------
COMMERCIAL PAPER 53.4%
American Express Credit Corp. 5.730%, due 09/20/95 250,000 249,244
Associates Corp. of North America 5.730%, due 09/25/95 250,000 249,045
Broadway Capital Corp.# 5.780%, due 09/13/95 200,000 199,615
Ciesco, LP 5.720%, due 10/06/95 255,000 253,582
Corporate Asset Funding, Co. Inc. 5.730%, due 09/01/95 230,000 230,000
C.I.T. Group Holdings Inc. 5.720%, due 09/22/95 265,000 264,116
Ford Motor Credit Corp. 5.730%, due 09/18/95 250,000 249,323
General Electric Capital Corp. 5.730%, due 09/18/95 250,000 249,323
Norwest Financial Inc. 5.730%, due 09/28/95 250,000 248,926
Orix America Inc.# 5.770%, due 11/01/95 250,000 247,556
Orix America Inc.# 5.820%, due 10/02/95 210,000 208,948
Questar Corp. 5.750%, due 09/20/95 250,000 249,241
---------
TOTAL COMMERCIAL PAPER (Cost $2,898,919) 2,898,919
---------
CORPORATE FLOATING RATE DEMAND NOTE 4.6%
Avco Financial Services Inc.
(Cost $249,970) 6.030%, due 09/01/95 250,000 249,970
---------
TOTAL INVESTMENTS (Cost $5,408,486) 99.7% 5,408,486
=========
</TABLE>
# Security may only be sold to institutional buyers.
See NOTES TO FINANCIAL STATEMENTS.
FRN = Floating Rate Notes: The maturity date shown is the next interest reset
date and the interest rate shown is the rate in effect at August 31, 1995.
<PAGE>
page 12
[LOGO]
STATEMENT OF ASSETS & LIABILITIES
August 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. 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) $6,247,115 $6,320,500 $5,383,402 $5,897,733 $5,672,924 $5,408,486
Cash 331 627 -- 144 285 3,614
Foreign currency (Cost $47,639) -- -- 47,639 -- -- --
Receivable for open forward foreign currency contracts -- -- 31,138 -- -- --
Receivable for investment securities sold -- -- 74,570 -- -- --
Dividends and interest receivable 18,955 5,060 9,120 15,732 40,355 20,749
Receivable from VBDS -- -- -- -- -- 4,000
Receivable for shares of beneficial interest sold -- 22,500 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 6,266,401 6,348,687 5,545,869 5,913,609 5,713,564 5,436,849
========== ========== ========== ========== ========== ==========
LIABILITIES:
Payable for investment securities purchased -- -- 24,033 350,933 304,978 --
Payable for shares of beneficial interest redeemed -- 13 -- -- 352 11
Payable for open forward foreign currency contracts -- -- 20,689 -- -- --
Accrued liabilities:
Custodian fees 7,036 7,309 1,916 6,138 3,015 3,753
Other accrued expenses 12,749 12,788 17,685 10,804 15,301 10,733
========== ========== ========== ========== ========== ==========
TOTAL LIABILITIES 19,785 20,110 64,323 367,875 323,646 14,497
========== ========== ========== ========== ========== ==========
NET ASSETS:
Paid in capital 5,492,080 5,358,282 5,037,491 5,027,087 5,043,204 5,422,218
Accumulated undistributed net investment income 59,617 29,126 48,292 102,855 162,500 --
Accumulated undistributed net realized gain on
investment transactions 72,703 100,990 21,585 81,344 69,608 134
Net unrealized appreciation/depreciation of
investments and forward foreign currency contracts 622,216 840,179 374,178 334,448 114,606 --
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS APPLICABLE TO INVESTORS'
BENEFICIAL INTERESTS $6,246,616 $6,328,577 $5,481,546 $5,545,734 $5,389,918 $5,422,352
========== ========== ========== ========== ========== ==========
Shares of beneficial interest outstanding
(no par value; unlimited number of shares authorized) 544,279 531,755 503,559 502,538 504,033 5,422,211
Net asset value, redemption price per share and
maximum offer price per share $11.48 11.90 10.89 11.04 10.69 1.00
Cost of Investments $5,624,899 $5,480,321 $5,019,67 $5,563,285 $5,558,318 $5,408,486
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 13
[LOGO]
STATEMENT OF OPERATIONS
MARCH 1, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. 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 1):
Interest $29,737 $13,633 $32,678 $98,569 $183,503 $155,585
Dividends 54,887 40,914 60,413 26,907 -- --
Foreign taxes withheld -- (156) (13,098) -- -- --
--------- --------- --------- ---------- ---------- ---------
TOTAL INVESTMENT INCOME 84,624 54,391 79,993 125,476 183,502 155,585
========= ========= ========= ========== ========== =========
EXPENSES:
Administration fees (Note 2) 1,389 1,403 1,319 1,331 1,313 1,294
Advisory fees (Note 2) 16,671 16,843 21,099 14,637 13,126 6,468
Custodian fees 11,114 11,229 5,014 10,645 4,501 6,348
Sub-administration fees (Note 2) 4,168 4,211 3,956 3,991 3,938 3,880
Professional fees 10,501 10,505 9,351 10,492 10,489 10,436
Accounting fees -- -- 32,589 -- -- --
Trustee fees 167 168 152 160 158 155
Registration fees 504 504 501 504 504 504
Miscellaneous expense 5,570 5,708 2,928 2,221 8,560 2,144
--------- --------- --------- ---------- ---------- ---------
TOTAL EXPENSES 50,084 50,571 76,909 43,981 42,589 31,229
========= ========= ========= ========== ========== =========
Less fees waived by the Advisor, Administrator & Sub-
Administrator 22,228 22,457 26,374 19,959 18,377 11,642
Less expenses borne by VBDS (Note 2) 2,849 2,849 21,524 1,401 3,210 5,358
--------- --------- --------- ---------- ---------- ---------
NET EXPENSES 25,007 25,265 29,011 22,621 21,002 14,229
========= ========= ========= ========== ========== =========
NET INVESTMENT INCOME 59,617 29,126 50,982 102,855 162,500 141,356
========= ========= ========= ========== ========== =========
REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN (LOSS) ON:
Investments 72,703 100,990 21,585 81,344 69,608 134
Foreign currency transactions -- -- (2,690) -- -- --
CHANGE IN NET UNREALIZED APPRECIATION/
DEPRECIATION ON:
Investments 622,216 840,179 363,729 334,448 114,606 --
Foreign currency contracts and foreign
currency translation -- -- 10,449 -- -- --
--------- --------- --------- ---------- ---------- ---------
Net realized and unrealized gain (loss) 694,919 941,169 393,073 415,792 184,214 134
========= ========= ========= ========== ========== =========
Net increase in net assets resulting from operations $754,536 $970,295 $444,055 $518,647 $346,714 $141,490
========= ========= ========= ========== ========== =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 14
[LOGO]
STATEMENT OF CHANGES IN NET ASSETS
MARCH 1, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. Asset Treasury Money
& Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income $59,617 $29,126 $50,982 $203,855 $162,500 $141,356
Net realized gain (loss) on investments
and foreign currency transactions 72,703 100,990 18,895 81,344 69,608 134
Change in net unrealized appreciation/depreciation on
investments and foreign currency translations 622,216 840,279 374,178 334,448 114,606 --
---------- ---------- --------- ---------- ---------- ----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 754,536 970,179 444,055 518,647 346,714 141,490
========== ========== ========= ========== ========== ==========
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment Income: -- -- -- -- -- (141,490)
---------- ---------- --------- ---------- ---------- ----------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS:
Proceeds from shares sold 5,493,551 5,359,497 5,037,711 5,027,177 5,043,986 5,295,109
Reinvestment of dividends -- -- -- -- -- 141.356
Payments for shares redeemed (1,471) (1,215) (220) (90) (782) (14,247)
---------- ---------- --------- ---------- ---------- ----------
NET INCREASE FROM TRANSACTIONS
IN INVESTORS' BENEFICIAL INTERESTS 5,492,080 4,358,282 5,037,491 5,027,087 5,043,204 5,422,218
========== ========== ========= ========== ========== ==========
NET INCREASE IN NET ASSETS 6,246,616 6,328,282 5,481,546 5,545,734 5,386,918 5,422,352
NET ASSETS:
Beginning of period -- -- -- -- -- --
========== ========== ========== ========== ========== ==========
END OF PERIOD $6,246,616 $6,328,577 $5,481,546 $5,545,734 $5,386,918 $5,422,352
========== ========== ========== ========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
page 15
[LOGO]
SELECTED PER SHARE DATA AND RATIOS
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
MARCH 1, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 1995
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. Asset Treasury Money
& Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period $10.00 $10.00 $10,00 $10.00 $10.00 $1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.110 0.055 0.101 0.205 0.322 0.028
Net Gains or Losses in Securities
(both realized and unrealized) 1.370 1.845 0.789 0.835 0.368 --
------ ------ ------ ------ ------ -----
TOTAL FROM INVESTMENT OPERATIONS 1.480 1.900 0.890 1.040 0.690 0.028
------ ------ ------ ------ ------ -----
LESS:
Dividends from net investment income -- -- -- -- -- 0.028
------ ------ ------ ------ ------ -----
NET ASSET VALUE, END OF PERIOD $11.48 $11.90 $10.89 $11.04 $10.69 $1.00
------ ------ ------ ------ ------ -----
TOTAL RETURN 14.80% 19.00% 8.90% 10.40% 6.90% 2.79%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000 omitted) $6,247 $6,329 $5,482 $5,546 $5,390 $5,422
RATIOS TO AVERAGE NET ASSETS:#
RATIO OF EXPENSES 0.09% 0.90% 1.09% 0.85% 0.80% 0.55%
RATIO OF NET INVESTMENT INCOME 2.14% 1.04% 1.92% 3.86% 6.19% 5.46%
RATIO OF EXPENSES WITHOUT WAIVERS AND
ASSUMPTION OF EXPENSES 1.80% 1.80% 2.90% 1.65% 1.62% 1.21%
RATIO OF NET INVESTMENT INCOME WITHOUT
WAIVERS AND ASSUMPTION OF EXPENSES 1.24% 0.14% 0.11% 3.06% 5.37% 4.80%
PORTFOLIO TURNOVER RATE 32% 28% 75% 45% 46% --
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS. #SHORT PERIODS HAVE BEEN ANNUALIZED
<PAGE>
page 16
[LOGO]
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 FOLLOWING IS A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FOLLOWED BY THE PORTFOLIOS:
A. Valuation of Investments Equity securities 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. 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:
(a) Market value of investment securities and other assets
and liabilities: at the closing rate of exchange at the balance
sheet date.
(b) 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.
E. 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.
F. 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.
<PAGE>
page 17
[LOGO]
NOTES TO FINANCIAL STATEMENTS
G. Dividends and Distributions to Shareholders The Portfolios record
dividends and distributions to 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 "book/tax" differences are considered
either 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 decreased by $2,690 and an
offsetting increase was made to accumulated undistributed net realized
gain (loss) on investment transactions. The difference arises 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.
H. Expenses Direct expenses of a Portfolio are charged to the respective
Portfolio and 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,
N.A. ("Chase"), a direct wholly-owned subsidiary of the Chase
Manhattan Corporation (see Note 7.), is the Portfolios' investment
adviser (the "Adviser") and custodian. The Adviser 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
U.S. Treasury Income Portfolio's and 0.25% of the Money Market
Portfolio's average daily net assets. For the period ended August 31,
1995, the Adviser voluntarily waived all or a portion of its fees as
outlined in Note 2D below.
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. For the period ended
August 31, 1995, the Administrator voluntarily waived all or a portion
of its fees as outlined in Note 2D below.
C. Sub-Administration fees Pursuant to a Sub-administration Agreement,
Vista Broker-Dealer Services, Inc. ("VBDS" 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 asssets of each Portfolio. For the
period ended August 31, 1995, the Sub-administrator voluntarily waived
all or a portion of its fees as outlined in Note 2D below.
D. Waivers of fees For the period ended August 31, 1995, the
Administrator, Advisor, and Sub-administrator voluntarily waived fees
and the Sub-administrator assumed expenses for the Portfolios as
follows:
[begin table in box]
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. Asset Treasury Money
& Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Administration $ 1,389 $ 1,403 $ 1,319 $ 1,331 $ 1,313 $ 1,294
Advisory 16,671 16,843 21,099 14,637 13,126 6,468
Sub-administration 4,168 4,211 3,956 3,991 3,938 3,880
------- ------- ------- ------- ------- -------
TOTAL WAIVERS $22,228 $22,457 $26,374 $19,959 $18,377 $11,642
------- ------- ------- ------- ------- -------
ASSUMED EXPENSES $2,849 $2,849 $21,524 $1,401 $3,210 $5,358
------- ------- ------- ------- ------- -------
</TABLE>
[end table in box]
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.
During the year ended August 31, 1995, the Trust adopted an unfunded
noncontributory defined benefit pension plan covering all indepedent
directors of the Trust who have served as an independent director of
the Trust or any of the other Vista funds for at least five years at
the time of retirement. Benefits under this plan are based on
compensation and years of service. Management has determined that the
accrual for prior service costs is not material.
<PAGE>
page 18
[LOGO]
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT TRANSACTIONS Purchases and Sales of Investments
(excluding short-term investments) were as follows:
[begin table in box]
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. Asset Treasury
& Income Growth Equity Allocation Income
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Purchases (excluding
U.S. Government) $6,117,155 $6,223,998 $7,612,892 $3,350,177 --
Sales (excluding
U.S. Government) 1,350,457 1,292,666 2,642,804 676,537 --
Purchases of U.S. Govt. -- -- -- 2,255,199 $6,663,535
Sales of U.S. Govt. -- -- -- 854,928 2,064,859
</TABLE>
[end table in box]
4. FEDERAL INCOME TAX MATTERS For Federal income tax purposes, the cost and
unrealized appreciation/(depreciation) in value of the investment securities
at August 31,1995 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
U.S.
Growth Capital Intl. Asset Treasury Money
& Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Cost $5,624,899 $5,480,321 $5,019,673 $5,563,285 $5,558,318 $5,408,486
Gross Unrealized
Appreciation $652,494 $980,054 $468,334 $361,162 $122,976 --
Gross Unrealized
Depreciation (30,278) (139,875) (104,605) (26,714) (8,370) --
---------- ---------- ---------- ---------- ---------- ----------
NET UNREALIZED
APPRECIATION
(DEPRECIATION) $622,216 $840,179 $363,729 $334,448 $114,606 --
========== ========== ========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------
</TABLE>
5. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST Transactions in shares of
beneficial interest for the period March 1, 1995* through August 31, 1995,
were as follows:
[begin table in box]
<TABLE>
<CAPTION>
U.S.
Growth Capital Intl. Asset Treasury Money
& Income Growth Equity Allocation Income Market
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 544,409 531,860 503,579 502,546 504,106 5,295,101
Shares issued in re-
investment of distributions -- -- -- -- -- 141,356
Shares redeemed (130) (105) (20) (8) (73) (14,246)
------- ------- ------- ------- ------- ---------
Net increase (decrease)
in Trust shares 544,279 531,755 503,559 502,538 504,033 5,422,211
Outstandiang shares at:
Beginning of period -- -- -- -- -- --
------- ------- ------- ------- ------- ---------
END OF PERIOD 544,279 531,755 503,559 502,538 504,033 5,422,211
======= ======= ======= ======= ======= =========
</TABLE>
[end table in box]
* Commencement of operations.
6. OPEN FORWARD FOREIGN CURRENCY CONTRACTS
The following forward foreign currency contracts were held by the
International Equity Portfolio at August 31, 1995:
[begin table in box]
<TABLE>
<CAPTION>
Net
Delivery Market Unrealized
Value (Local Cost Settlmnt. Value Gain (Loss)
Currency) USD Date USD USD
-------- --- ---- --- ---
<S> <C> <C> <C> <C> <C>
PURCHASES
JPY 17,354,000 $198,547 9/20/95 $177,858 ($20,689)
-------- --------
SALES
GDM 470,000 322,072 10/17/95 320,553 1.519
GDM 135,000 92,289 10/26/95 92,289 0
JPY 17,354,000 199,334 9/20/95 177,858 21,476
JPY 15,000,000 158,865 10/17/95 154,350 4,515
JPY 15,000,000 157,978 10/17/95 154,350 3,628
-------- --------
$930,538 $899,400
-------- --------
</TABLE>
[end table in box]
GDM -- German Deutschemark
JPY -- Japanese yen
USD -- United States dollar
7. OTHER On August 27, 1995, the Chase Manhattan Corporation and Chemical
Banking Corporation announced an agreement in principle to merge subject to
the shareholder approval of the respective corporations. Shareholder vote on
the agreement is expected to occur in the first quarter of 1996.
<PAGE>
page 19
[LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------------------------------------------------
TO THE TRUSTEES AND SHAREHOLDERS OF MUTUAL FUND VARIABLE ANNUITY TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the selected per share 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,
1995, and the results of each of their operations, the changes in each of their
net assets and the selected per share data and ratios for a share of beneficial
interest outstanding 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 per share 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, 1995 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, NY 10036
October 13, 1995
- ---------------------------------------------------------------------------
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(C) The Chase Manhattan Bank, 1995 Vista Investment Services
A-7036-CRT F-7036(CMB)
VCA-2 1195
