TABLE OF CONTENTS
PAGE PAGE
Summary.................................5 Sales and Redemptions.........11
Risk and Investment Objectives..........5 Net Asset Value...............12
Risks and Additional Information about Performance Information ......12
Investment Policies.....................7 Tax Status, Dividends and
Principal Investment Restrictions......11 Distributions.................13
Management.............................11 General Information...........13
Appendix.....................A-1
<PAGE>
MANNING & NAPIER INSURANCE FUND, INC.
1100 CHASE SQUARE
ROCHESTER, NEW YORK 14604
1-800-466-3863
Manning & Napier Insurance Fund, Inc. (the "Fund"), is an open-end management
investment company that offers separate series, each a separate investment
portfolio having its own investment objective and policies. This Prospectus
relates to the six series of the Fund described below (the "Portfolios").
Manning & Napier Advisors, Inc. (the "Advisor") acts as investment advisor to
the Fund. Shares of the Fund are offered to life insurance companies ("Life
Companies") for allocation to certain of their variable separate accounts
established for the purpose of funding variable annuity contracts and variable
life insurance policies ("Variable Contracts"). The Portfolios and their
respective investment objectives are as follows:
MANNING & NAPIER MODERATE GROWTH PORTFOLIO - seeks with equal emphasis
long-term growth and preservation of capital.
MANNING & NAPIER GROWTH PORTFOLIO - seeks long-term growth of capital. The
secondary objective is the preservation of capital.
MANNING & NAPIER MAXIMUM HORIZON PORTFOLIO - seeks to achieve the high level
of long-term capital growth typically associated with the stock market.
MANNING & NAPIER SMALL CAP PORTFOLIO - seeks to achieve long-term growth of
capital by investing principally in the equity securities of small issuers.
MANNING & NAPIER EQUITY PORTFOLIO - seeks long-term growth of capital.
MANNING & NAPIER BOND PORTFOLIO - seeks to maximize total return in the form
of both income and capital appreciation by investing in fixed income
securities without regard to maturity.
This Prospectus provides you with the basic information you should know before
investing in the Fund. You should read this Prospectus and keep it for future
reference. A Statement of Additional Information, dated May 1, 1998,
containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is incorporated by reference in this
Prospectus in its entirety. You may obtain a copy of the Statement of
Additional Information without charge by contacting the Fund at the address or
telephone number listed above.
INVESTMENTS IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. SHARES OF THE FUND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND IS SUBJECT TO RISK THAT MAY
CAUSE THE VALUE OF THE INVESTMENT TO FLUCTUATE, AND WHEN THE INVESTMENT IS
REDEEMED, THE VALUE MAY BE HIGHER OR LOWER THAN THE AMOUNT ORIGINALLY INVESTED
BY THE INVESTOR.
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.
<PAGE>
The purchaser of a Variable Contract should read this Prospectus in
conjunction with the prospectus for his or her Variable Contract.
The date of this Prospectus is May 1, 1998.
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide selected per share data and ratios for the Bond
Portfolio, Equity Portfolio, Small Cap Portfolio, Moderate Growth Portfolio,
Growth Portfolio, and Maximum Horizon Portfolio (for a share outstanding
throughout the period for the periods shown). The table is part of the Fund's
financial statement, which is incorporated by reference into the Fund's
Statement of Additional Information. Additional performance information is
contained in the Fund's 1997 Annual Report to Shareholders and is available
upon request and without charge by calling 1-800-466-3863. These tables
should be read in conjunction with the Funds financial statements and notes
thereto.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
<S> <C> <C>
MANNING & NAPIER INSURANCE FUND, INC.
MODERATE GROWTH
PORTFOLIO
FOR THE FOR THE
YEAR PERIOD
ENDED 11/1/961 TO
12/31/97 12/31/96
PER SHARE DATA
(FOR A SHARE OUTSTANDING
THROUGHOUT EACH PERIOD):
NET ASSET VALUE - BEGINNING
OF PERIOD $10.11 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME 0.357 0.065
NET REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS 0.928 0.045
TOTAL FROM INVESTMENT 1.285 0.110
OPERATIONS
LESS DISTRIBUTIONS TO
SHAREHOLDERS:
FROM NET INVESTMENT INCOME (0.065) --
NET ASSET VALUE - END OF
PERIOD $11.33 $10.11
TOTAL RETURN 2 12.73% 1.10%
RATIOS OF EXPENSES (TO
AVERAGE NET
ASSETS) / SUPPLEMENTAL
DATA:
EXPENSES * 1.20% 1.20%3
NET INVESTMENT INCOME * 3.35% 4.08%3
PORTFOLIO TURNOVER 53% 0%
AVERAGE COMMISSION RATE PAID $0.0565 $0.0700
NET ASSETS - END OF PERIOD $144,386 $128,104
* THE INVESTMENT ADVISOR DID NOT IMPOSE ITS MANAGEMENT FEE AND PAID
A PORTION OF THE PORTFOLIO'S EXPENSES. IF THESE EXPENSES HAD BEEN
INCURRED BY THE PORTFOLIO, AND HAD 1996 EXPENSES BEEN LIMITED BY
STATE SECURITIES LAW, THE NET INVESTMENT INCOME PER SHARE AND THE
RATIOS WOULD HAVE BEEN AS FOLLOWS:
NET INVESTMENT INCOME $(1.024) $0.044
RATIOS (TO AVERAGE NET
ASSETS):
EXPENSES 14.16% 2.50%3
NET INVESTMENT INCOME (9.61)% 2.78%3
1 COMMENCEMENT OF OPERATIONS.
2 REPRESENTS AGGREGATE TOTAL RETURN FOR THE PERIOD INDICATED.
3 ANNUALIZED.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
MANNING & NAPIER INSURANCE FUND, INC.
GROWTH PORTFOLIO
FOR THE FOR THE
YEAR PERIOD
ENDED 11/1/961 TO
12/31/97 12/31/96
PER SHARE DATA (FOR A SHARE
OUTSTANDING
THROUGHOUT EACH PERIOD):
NET ASSET VALUE - BEGINNING
OF PERIOD $10.25 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME 0.166 0.050
NET REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS 1.804 0.200
TOTAL FROM INVESTMENT
OPERATIONS 1.970 0.250
LESS DISTRIBUTIONS TO
SHAREHOLDERS:
FROM NET INVESTMENT INCOME (0.050) --
NET ASSET VALUE - END OF
PERIOD $12.17 $10.25
TOTAL RETURN 2 19.23% 2.50%
RATIOS OF EXPENSES (TO
AVERAGE NET
ASSETS) / SUPPLEMENTAL
DATA:
EXPENSES * 1.20% 1.20%3
NET INVESTMENT INCOME * 2.42% 3.11%3
PORTFOLIO TURNOVER 90% 3%
AVERAGE COMMISSION RATE PAID $0.0524 $0.0696
NET ASSETS - END OF PERIOD $318,228 $129,874
* THE INVESTMENT ADVISOR DID NOT IMPOSE ITS MANAGEMENT FEE AND PAID
A PORTION OF THE PORTFOLIO'S EXPENSES. IF THESE EXPENSES HAD BEEN
INCURRED BY THE PORTFOLIO, AND HAD 1996 EXPENSES BEEN LIMITED BY
STATE SECURITIES LAW, THE NET INVESTMENT INCOME PER SHARE AND THE
RATIOS WOULD HAVE BEEN AS FOLLOWS:
NET INVESTMENT INCOME $(0.505) $0.029
RATIOS (TO AVERAGE NET
ASSETS):
EXPENSES 10.98% 2.50%3
NET INVESTMENT INCOME (7.36)% 1.81%3
1 COMMENCEMENT OF OPERATIONS.
2 REPRESENTS AGGREGATE TOTAL RETURN FOR THE PERIOD INDICATED.
3 ANNUALIZED.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
MANNING & NAPIER INSURANCE FUND, INC.
MAXIMUM HORIZON
PORTFOLIO
FOR THE FOR THE
YEAR PERIOD
ENDED 11/1/961 TO
12/31/97 12/31/96
PER SHARE DATA (FOR A SHARE
OUTSTANDING
THROUGHOUT EACH PERIOD):
NET ASSET VALUE - BEGINNING
OF PERIOD $10.44 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME 0.093 0.023
NET REALIZED AND UNREALIZED
GAIN (LOSS)
ON INVESTMENTS 2.380 0.417
TOTAL FROM INVESTMENT
OPERATIONS 2.473 0.440
LESS DISTRIBUTIONS TO
SHAREHOLDERS:
FROM NET INVESTMENT INCOME (0.023) --
NET ASSET VALUE - END OF
PERIOD $12.89 $10.44
TOTAL RETURN 2 23.69% 4.40%
RATIOS OF EXPENSES (TO
AVERAGE NET
ASSETS) / SUPPLEMENTAL
DATA:
EXPENSES * 1.20% 1.20%3
NET INVESTMENT INCOME * 0.78% 1.43%3
PORTFOLIO TURNOVER 120% 4%
AVERAGE COMMISSION RATE PAID $0.0535 $0.0691
NET ASSETS - END OF PERIOD $163,538 $132,216
* THE INVESTMENT ADVISOR DID NOT IMPOSE ITS MANAGEMENT FEE AND PAID
A PORTION OF THE PORTFOLIO'S EXPENSES. IF THESE EXPENSES HAD BEEN
INCURRED BY THE PORTFOLIO, AND HAD 1996 EXPENSES BEEN LIMITED BY
STATE SECURITIES LAW, THE NET INVESTMENT INCOME PER SHARE AND THE
RATIOS WOULD HAVE BEEN AS FOLLOWS:
NET INVESTMENT INCOME $(1.285) $0.002
RATIOS (TO AVERAGE NET
ASSETS):
EXPENSES 12.76% 2.50%3
NET INVESTMENT INCOME (10.78)% 0.13%3
1 COMMENCEMENT OF OPERATIONS.
2 REPRESENTS AGGREGATE TOTAL RETURN FOR THE PERIOD INDICATED.
3 ANNUALIZED.
<PAGE>
FINANCIAL HIGHLIGHTS
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
MANNING & NAPIER INSURANCE FUND, INC.
Small Cap Portfolio
For For the
the period
year 11/1/961
ended to
12/31/97 12/31/96
Per share data (for a share
outstanding
throughout each period):
Net asset value - Beginning
of period $10.72 $10.00
Income from investment
operations:
Net investment income (0.027) 0.009
Net realized and unrealized
gain
(loss) on investments 1.446 0.711
Total from investment 1.419 0.720
operations
Less distributions to
shareholders:
From net investment income (0.009) --
NET ASSET VALUE - END OF
PERIOD $12.13 $10.72
<PAGE>
Total return2 13.23% 7.20%
Ratios of expenses (to
average net
assets) / Supplemental
Data:
Expenses * 1.20% 1.20%3
Net investment income * (0.23%) 0.55%3
Portfolio turnover 149% 9%
Average commission rate paid $0.0200 $0.0356
NET ASSETS - END OF PERIOD $156,798 $138,374
* The investment advisor did not impose its management fee and paid
a portion of the Portfolios expenses. If these expenses had been
incurred by the Portfolio, and had 1996 expenses been limited by
state securities law, the net investment income per share and the
ratios would have been as follows:
Net Investment Income $(1.357) ($0.012)
Ratios (to average net
assets):
Expenses 12.53% 2.50%3
Net investment income (11.56)% (0.75%)3
1 Commencement of operations.
2 Represents aggregate total return for the period indicated.
3 Annualized.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
MANNING & NAPIER INSURANCE FUND, INC.
Equity Portfolio
For For the
the
year period
ended 11/1/961 to
12/31/97 12/31/96
Per share data (for a share
outstanding
throughout each period):
Net asset value - Beginning
of period $10.56 $10.00
Income from investment
operations:
Net investment income 0.048 0.047
Net realized and unrealized
gain
(loss) on investments 2.219 0.513
Total from investment
operations 2.267 0.560
Less distributions to
shareholders:
From net investment income (0.047) --
NET ASSET VALUE - END OF
PERIOD $12.78 $10.56
Total return2 21.46% 5.60%
Ratios of expenses (to
average net
assets) / Supplemental
Data:
Expenses * 1.20% 1.20%3
Net investment income * 0.41% 2.84%3
Portfolio turnover 50% 29%
Average commission rate paid $0.0602 $0.0661
NET ASSETS - END OF PERIOD $165,489 $136,267
* The investment advisor did not impose its management fee and paid
a portion of the Portfolios expenses. If these expenses had been
incurred by the Portfolio, and had 1996 expenses been limited by
state securities law, the net investment income per share and the
ratios would have been as follows:
Net Investment Income $(1.268) $0.025
Ratios (to average net
assets):
Expenses 12.44% 2.50%3
Net investment income (10.83)% 1.54%3
1 Commencement of operations.
2 Represents aggregate total return for the period indicated.
3 Annualized.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
MANNING & NAPIER INSURANCE FUND, INC.
Bond Portfolio
For the For the
year period
ended 11/1/961 to
12/31/97 12/31/96
Per share data
(for a share outstanding
throughout each period):
Net asset value - Beginning
of period $9.94 $10.00
Income from investment
operations:
Net investment income 0.538 0.062
Net realized and unrealized
gain
(loss) on investments 0.434 (0.122)
Total from investment
operations 0.972 (0.060)
Less distributions to
shareholders:
From net investment income (0.062) --
NET ASSET VALUE - END OF
PERIOD $10.85 $9.94
Total return2 9.81% (0.60%)
Ratios of expenses (to
average net
assets) / Supplemental
Data:
Expenses * 0.85% 0.85%3
Net investment income * 5.29% 3.92%3
Portfolio turnover 0% 0%
Average commission rate paid -- --
NET ASSETS - END OF PERIOD $138,242 $125,875
* The investment advisor did not impose its management fee and paid
a portion of the Portfolios expenses. If these expenses had been
incurred by the Portfolio, and had 1996 expenses been limited by
state securities law, the net investment income per share and the
ratios would have been as follows:
Net Investment Income $(0.827) $0.036
Ratios (to average net
assets):
Expenses 14.27% 2.50%3
Net investment income (8.13)% 2.27%3
1 Commencement of operations.
2 Represents aggregate total return for the period indicated.
3 Annualized.
</TABLE>
<PAGE>
SUMMARY
The Fund is an open-end management investment company incorporated under the
laws of the State of Maryland on November 1, 1995. The Fund offers separate
series of units of beneficial interest ("shares"). The Fund is currently
comprised of six separate Portfolios: Manning & Napier Moderate Growth
Portfolio; Manning & Napier Growth Portfolio; Manning & Napier Maximum Horizon
Portfolio; Manning & Napier Small Cap Portfolio; Manning & Napier Equity
Portfolio; and Manning & Napier Bond Portfolio. The Directors may provide for
additional Portfolios from time to time. Each Portfolio offers a separate
class of shares.
RISK AND INVESTMENT OBJECTIVES
Each Portfolio of the Fund has a different investment objective which it
pursues through separate investment policies as described below. The risks and
opportunities of each Portfolio should be examined separately. The differences
in objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk of each
Portfolio.
MANNING & NAPIER MODERATE GROWTH PORTFOLIO
The investment objective of the Manning & Napier Moderate Growth Portfolio
(the "Moderate Growth Portfolio") is to seek with equal emphasis long-term
growth and preservation of capital. From time to time, the Advisor will vary
the proportions invested in common stocks, income-producing securities (e.g.,
debt securities and preferred stock) or cash (including foreign currency) and
cash equivalents depending on its view of their relative attractiveness in
light of market and economic conditions. Because the Moderate Growth
Portfolio's investments fluctuate in value, the Portfolio's shares will
fluctuate in value. The Advisor seeks to reduce the risk of negative returns
while seeking to obtain capital growth when it believes valuations and market
conditions are favorable. In this process the Advisor will work to try to
dampen the year-to-year swings in the market value in order to generate a more
stable rate of growth for this Portfolio relative to an investment in the
general stock market. There is no assurance that the Moderate Growth Portfolio
will attain its objective.
In pursuit of its investment objective, the Portfolio may invest in a wide
variety of equity and debt securities. Equity securities consist of common
stocks, securities convertible thereto, and warrants. The Portfolio does not
intend to invest more than 5% of the value of its total net assets in
warrants. The principal factor in selecting convertible bonds will be the
potential opportunity to benefit from movement in the stock price. There will
be no minimum rating standards for debt aspects of such securities.
Convertible bonds purchased by the Portfolio may be subject to the risk of
being called by the issuer. However, the Portfolio would not buy bonds if they
were in default as to payment of principal or interest.
The debt securities in which the Portfolio may invest consist of corporate
debt securities, mortgage-backed securities and obligations issued or
guaranteed as to payment of principal and interest by the U.S. Government or
its agencies or instrumentalities. The Portfolio may invest in such securities
without regard to term or rating and may, from time to time, invest up to 20%
of its assets in corporate debt securities rated below investment grade, i.e.,
rated lower than BBB by Standard & Poor's Ratings Group ("S&P") or Baa by
Moody's Investors Service, Inc. ("Moody's"), or unrated securities of
comparable quality as determined by the Advisor. These securities are commonly
known as "junk bonds". Ratings of corporate bonds including lower rated bonds
are included in the Appendix. See "Risks and Additional Information about
Investment Policies - High Yield Debt Securities".
MANNING & NAPIER GROWTH PORTFOLIO
The primary investment objective of the Manning & Napier Growth Portfolio (the
"Growth Portfolio") is to provide long term growth of capital. The secondary
objective of the Growth Portfolio is the preservation of capital. From time to
time, the Advisor will vary the proportions invested in common stocks,
income-producing securities (e.g., debt securities and preferred stock) or
cash (including foreign currency) and cash equivalents depending on its view
of their relative attractiveness in light of market and economic conditions.
Because the Growth Portfolio's investments fluctuate in value, the Portfolio
shares will fluctuate in value. In pursuit of its primary objective, the
Growth Portfolio will often invest more than 50% in common stocks, and
securities convertible into common stocks, of companies the Advisor believes
have long-term growth potential. However, in light of the secondary objective
of the Growth Portfolio, it may, even under normal circumstances, invest a
substantial portion of its assets in certain debt securities, preferred stocks
or common stocks whose principal characteristic is income production rather
than growth. Such securities afford less opportunity for growth than common
stocks but they entail less risk of loss and may also offer some opportunity
for growth of capital as well as for income and relative stability. There is
no assurance that the Growth Portfolio will attain its objective.
In pursuit of its investment objective, the Growth Portfolio may invest in a
wide variety of equity and debt securities. Equity securities consist of
common stocks, securities convertible thereto, and warrants. The Portfolio
does not intend to invest more than 5% of the value of its total net assets in
warrants. The principal factor in selecting convertible bonds will be the
potential opportunity to benefit from movement in the stock price. There will
be no minimum rating standards for debt aspects of such securities.
Convertible bonds purchased by the Portfolio may be subject to the risk of
being called by the issuer. However, the Portfolio would not buy bonds if they
were in default as to payment of principal or interest.
The debt securities in which the Portfolio may invest consist of corporate
debt securities, mortgage-backed securities and obligations issued or
guaranteed as to payment of principal and interest by the U.S. Government or
its agencies or instrumentalities. The Portfolio may invest in such securities
without regard to term or rating and may, from time to time, invest up to 20%
of its assets in corporate debt securities rated below investment grade, i.e.,
rated lower than BBB by S&P or Baa by Moody's, or unrated securities of
comparable quality as determined by the Advisor. These securities are commonly
known as "junk bonds". Ratings of corporate bonds including lower rated bonds
are included in the Appendix. See "Risks and Additional Information about
Investment Policies - High Yield Debt Securities".
MANNING & NAPIER MAXIMUM HORIZON PORTFOLIO
The primary objective of the Manning & Napier Maximum Horizon Portfolio (the
"Maximum Horizon Portfolio") is to achieve the high level of long-term capital
growth typically associated with the stock market. The Advisor will normally
concentrate the investments of the Portfolio in common stocks, but may also
utilize income-producing securities (e.g., debt securities and preferred
stock) or cash (including foreign currency) and cash equivalents depending on
its view of their relative attractiveness in light of market and economic
conditions. Because the Maximum Horizon Portfolio's investments fluctuate in
value, the shares of the Portfolio will also fluctuate in value. There is no
assurance that the Maximum Horizon Portfolio will attain its objective.
In pursuit of its investment objective, the Maximum Horizon Portfolio may
invest in a wide variety of equity and debt securities. Equity securities
consist of common stocks, securities convertible thereto, and warrants. The
Portfolio does not intend to invest more than 5% of the value of its total net
assets in warrants. The Portfolio may purchase convertible securities when the
Advisor believes the securities will provide preservation of capital as a
result of their fixed income characteristics and have the potential to provide
long-term growth due to their equity conversion feature. There will be no
minimum rating standards for the debt aspects of such securities. Convertible
bonds purchased by the Portfolio may be subject to the risk of being called by
the issuer. However, the Portfolio would not buy bonds if they were in default
as to payment of principal or interest.
The debt securities in which the Portfolio may invest consist of corporate
debt securities, mortgage-backed securities and obligations issued or
guaranteed as to payment of principal and interest by the U.S. Government or
its agencies or instrumentalities. The Portfolio may invest in such securities
without regard to term or rating and may, from time to time, invest up to 20%
of its assets in corporate debt securities rated below investment grade, i.e.,
rated lower than BBB by S&P or Baa by Moody's, or unrated securities of
comparable quality as determined by the Advisor. These securities are commonly
known as "junk bonds". Ratings of corporate bonds including lower rated bonds
are included in the Appendix. See "Risks and Additional Information about
Investment Policies - High Yield Debt Securities".
MANNING & NAPIER SMALL CAP PORTFOLIO
The investment objective of the Manning & Napier Small Cap Portfolio (the
"Small Cap Portfolio") is to provide long-term growth of capital. The
Portfolio seeks to achieve its investment objective by investing principally
in equity securities of small issuers. In general, a small issuer is one which
has a market capitalization of less than $700 million, or less than the median
market capitalization of the S&P Midcap Index (the median market
capitalization of the S&P Midcap Index as of the close on December 31, 1997
was approximately $1,834 million), whichever is greater at the time of
investment. The Portfolio will, under normal circumstances, have at least 65%
of the value of its total net assets invested in such securities; the balance,
if any, will be invested in equity securities of other than small issuers
considered appropriate by the Advisor. Current income is not a factor in
pursuing the Small Cap Portfolio's objective. There is no assurance that the
Small Cap Portfolio will attain its objective.
The Portfolio will attempt to achieve its objective by investing primarily in
equity securities as described below. Equity securities consist of common
stocks and other securities having some of the characteristics of common
stocks, such as convertible preferred stocks, convertible bonds and warrants.
The Portfolio does not intend to invest more than 5% of the value of its total
net assets in warrants. The principal factor in selecting convertible bonds
will be the potential opportunity to benefit from movement in the stock price.
There will be no minimum rating standards for debt aspects of such securities.
Convertible bonds purchased by the Portfolio may be subject to the risk of
being called by the issuer. However, the Portfolio would not buy bonds if they
were in default as to payment of principal or interest.
Investing in the equity securities of small companies involves greater risk
than investing in such securities of larger companies, because the equity
securities of small companies may have less marketability and may be subject
to more abrupt or erratic market movements than the equity securities of
larger companies. The debt securities in which the Portfolio may invest
consist of corporate debt securities, mortgage-backed securities and
obligations issued or guaranteed as to payment of principal and interest by
the U.S. Government or its agencies or instrumentalities. The Portfolio may
invest in such securities without regard to term or rating and may, from time
to time, invest up to 20% of its assets in corporate debt securities rated
below investment grade, i.e., rated lower than BBB by S&P or Baa by Moody's,
or unrated securities of comparable quality as determined by the Advisor.
These securities are commonly known as "junk bonds". Ratings of corporate
bonds including lower rated bonds are included in the Appendix. See "Risks and
Additional Information about Investment Policies - High Yield Debt
Securities".
MANNING & NAPIER EQUITY PORTFOLIO
The investment objective of the Manning & Napier Equity Portfolio (the "Equity
Portfolio") is long-term growth of capital. The Advisor will, under normal
circumstances, seek to increase shareholders' capital by investing principally
in common stocks of domestic and foreign issuers. The Portfolio will seek
investment opportunities principally in common stocks of domestic and foreign
issuers which the Advisor believes have the potential for above average and
predictable earnings growth or where the Advisor believes the investment is
under-valued for either company-specific, industry-specific, or macro-economic
reasons. Under normal circumstances, the Portfolio will seek to have a
minimum of 90% of its assets invested in equity securities. However, the
Portfolio would not buy bonds if they were in default as to payment of
principal or interest. There is no assurance that the Equity Portfolio will
attain its objective.
The Portfolio's investment program involves greater risks and share price
volatility than programs that invest in more conservative securities. Further,
the Portfolio does not follow a policy of active trading for short-term
profits. Therefore, the Portfolio may be more appropriate for investors with a
longer-range perspective. The debt securities in which the Portfolio may
invest consist of corporate debt securities, mortgage-backed securities and
obligations issued or guaranteed as to payment of principal and interest by
the U.S. Government or its agencies or instrumentalities. The Portfolio may
invest in such securities without regard to term or rating and may, from time
to time, invest up to 20% of its assets in corporate debt securities rated
below investment grade, i.e., rated lower than BBB by S&P or Baa by Moody's,
or unrated securities of comparable quality as determined by the Advisor.
These securities are commonly known as "junk bonds". Ratings of corporate
bonds including lower rated bonds are included in the Appendix. See "Risks and
Additional Information about Investment Policies - High Yield Debt
Securities".
MANNING & NAPIER BOND PORTFOLIO
The primary objective of the Manning & Napier Bond Portfolio (the "Bond
Portfolio") is to maximize total return in the form of income and capital
appreciation consistent with the preservation of capital by investing in fixed
income securities without regard to maturity. The Bond Portfolio will, under
normal circumstances, have at least 65% of the value of its total assets
invested in a diversified portfolio consisting of the following U.S.
dollar-denominated fixed income securities: non-convertible corporate debt
securities, mortgage backed securities and government obligations. Any
remaining assets in the Bond Portfolio may be held in cash or high quality
"money market securities," convertible debt, preferred stock, futures
contracts, and related options. However, the Portfolio would not buy bonds if
they were in default as to payment of principal or interest. There is no
assurance that the Bond Portfolio will attain its objective.
The Advisor may vary the maturities of the Bond Portfolio's securities without
restriction, depending on its evaluation of interest rate trends and other
factors affecting the fixed income markets. The Bond Portfolio will purchase
short-term securities when the risk of negative returns is high as determined
by the Advisor. Generally, the shorter the maturity of a fixed income security
the lower its yield and the lower its price volatility. The Bond Portfolio
will invest primarily in fixed income securities rated in the four highest
rating categories (Baa or higher by Moody's or BBB or higher by S&P) but may
invest up to 20% of its assets in lower-rated securities. These securities are
commonly known as "junk bonds". Securities rated Baa or BBB are considered
investment grade but may have speculative characteristics and changes in
economic conditions or circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with more
highly rated securities. See "Risks and Additional Information about
Investment Policies - High Yield Debt Securities".
<PAGE>
General
For temporary defensive purposes during periods when the Advisor determines
that market conditions warrant, each Portfolio may invest up to 100% of its
assets in money market instruments (including securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities, certificates of
deposit, time deposits and bankers' acceptances issued by banks or savings and
loan associations deemed creditworthy by the Advisor, commercial paper rated
A-1 by S&P or Prime-1 by Moody's, repurchase agreements involving such
securities and other investment companies investing solely in such securities
as permitted by applicable law) and may hold a portion of its assets in cash.
For a description of the above ratings, see the Appendix and the Statement of
Additional Information.
In addition, the Portfolio may to varying degrees use certain techniques and
strategies discussed below under "Risks and Additional Information about
Investment Policies".
RISKS AND ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
Set forth below is further information about certain types of securities in
which the Portfolios may invest, as well as information about additional types
of investments and certain strategies the Portfolios may pursue. Unless
otherwise noted, these policies have been voluntarily adopted by the Board of
Directors based upon current circumstances and may be changed or amended by
action of the Board of Directors without prior approval of the Portfolios'
shareholders. Additional information concerning these strategies and their
related risks is contained in the Statement of Additional Information.
FOREIGN SECURITIES
Each Portfolio may invest up to 25% of its assets in foreign securities which
are not publicly traded in the United States. While the Bond Portfolio and the
bond portion of the other Portfolios generally emphasize investments in U.S.
Government securities and companies domiciled in the United States, each may
invest up to 25% in foreign securities of the same types and quality as the
domestic securities in which each Portfolio may invest when the anticipated
performance of foreign securities is believed by the Advisor to offer more
potential than domestic alternatives in keeping with the investment objectives
of each Portfolio. None of the Portfolios will invest more than 25% of its
assets in securities issued by any one foreign government. Each Portfolio may
invest without limit in equity securities of foreign issuers that are listed
on a domestic securities exchange or are represented by American Depository
Receipts that are listed on a domestic securities exchange or are traded in
the United States on the over-the-counter market. Foreign securities may be
denominated either in U.S. dollars or foreign currencies.
Each Portfolio's restriction on investment in foreign securities is a
fundamental policy that cannot be changed without the approval of a majority,
as defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
of the outstanding voting securities of a Portfolio.
There are risks in investing in foreign securities not typically involved in
domestic investing. An investment in foreign securities may be affected by
changes in currency rates and in exchange control regulations. Foreign
companies are frequently not subject to the accounting and financial reporting
standards applicable to domestic companies, and there may be less information
available about foreign issuers. There is frequently less government
regulation of foreign issuers than in the United States. In addition,
investments in foreign countries are subject to the possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect the value of those
investments. There may also be imposition of withholding taxes. Foreign
financial markets may have less volume and longer settlement periods than U.S.
markets which may cause liquidity problems for a Portfolio. In addition, costs
associated with transactions on foreign markets are generally higher than for
transactions in the U.S.
Obligations of foreign governmental entities are subject to various types of
governmental support and may or may not be supported by the full faith and
credit of a foreign government.
REPURCHASE AGREEMENTS
Each Portfolio may enter into repurchase agreements with respect to portfolio
securities. Under the terms of a repurchase agreement, the Portfolio purchases
securities ("collateral") from financial institutions such as banks and
broker-dealers (the "seller") which the Advisor deems to be creditworthy,
subject to the seller's agreement to repurchase them at a mutually agreed-upon
date and price. The repurchase price generally equals the price paid by the
Portfolio plus interest negotiated on the basis of current short-term rates
(which may be more or less than the rate on the underlying portfolio
securities).
The seller under a repurchase agreement is required to maintain the value of
the collateral held pursuant to the agreement at not less than 100% of the
repurchase price, and securities subject to repurchase agreements are held by
the Portfolio's Custodian either directly or through a securities depository.
Default by the seller would, however, expose the Portfolio to possible loss
because of adverse market action or delay in connection with the disposition
of the underlying securities. Repurchase agreements are considered to be loans
by the Portfolio under the 1940 Act.
SECURITIES LENDING
Each Portfolio may seek to increase its income by lending portfolio
securities. Such loans will usually be made to member firms (and subsidiaries
thereof) of the New York Stock Exchange and to member banks of the Federal
Reserve System, and will be required to be secured continuously by collateral
in cash, cash equivalents or U.S. Treasury securities maintained on a current
basis at an amount at least equal to the market value of the securities
loaned. If the Advisor determines to make securities loans, the value of the
securities loaned would not exceed 30% of the value of the total assets of the
Portfolio.
U.S. GOVERNMENT SECURITIES
Each Portfolio may purchase securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Direct obligations of the U.S.
Government include bills, notes and bonds issued by the U.S. Treasury and
obligations issued or guaranteed by U.S. agencies or instrumentalities. The
obligations of certain U.S. agencies (e.g., the Government National Mortgage
Association) are backed by the full faith and credit of the U.S. Government or
are supported by the agencies' right to borrow from the U.S. Treasury. The
issues of other agencies (e.g., the Federal National Mortgage Association) are
supported only by the credit of the agency.
SHORT SALES
Each Portfolio may within limits engage in short sales "against the box." A
short sale is the sale of borrowed securities; a short sale against the box
means that a Portfolio owns securities equivalent to those sold short. No more
than 25% of the net assets (taken at current value) of a Portfolio may be held
as collateral for such sales at any one time. Such short sales can be used as
a hedge.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
Each Portfolio may enter into forward commitments or purchase securities on a
when-issued basis. These securities normally are subject to settlement within
45 days of the purchase date. The interest rate realized on these securities
is fixed as of the purchase date and no interest accrues to the Portfolio
before settlement. These securities are subject to market fluctuation due to
changes in market interest rates. Each Portfolio will enter into these
arrangements with the intention of acquiring the securities in question and
not for speculative purposes and will maintain a separate account with a
segregated portfolio of high quality liquid debt instruments or cash in an
amount at least equal to the purchase price.
MORTGAGE-BACKED SECURITIES
Each Portfolio may purchase mortgage-backed securities which represent an
interest in a pool of mortgage loans. The primary government issuers or
guarantors of mortgage-backed securities are the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation. Mortgage-backed securities may
also be issued by other U.S. and foreign government agencies and
non-governmental entities which consist of collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs"). Each
Portfolio may purchase CMOs that are rated in one of the top two rating
categories by S&P or Moody's. The mortgages backing these securities include
conventional thirty-year fixed rate mortgages, graduated payment mortgages,
and adjustable rate mortgages. CMOs and REMICs backed solely by GNMA
certificates or other mortgage pass-throughs issued or guaranteed by the U.S.
Government or its agencies and instrumentalities may be supported by various
types of insurance. However, the guarantees or insurance do not extend to the
mortgage-backed securities' value, which are likely to vary inversely with
fluctuations in interest rates.
Mortgage-backed securities are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal
payments from the mortgages underlying the certificate. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to
predict accurately the average life or realized yield of a particular issue of
pass-through certificates. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected
to accelerate. When the mortgage obligations are prepaid, the Portfolio
reinvests the prepaid amounts in securities, the yield of which reflects
interest rates prevailing at the time. Moreover, prepayment of mortgages which
underlie securities purchased at a premium could result in capital losses.
HIGH YIELD DEBT SECURITIES
High risk, high yield securities rated below BBB or lower by S&P or Baa or
lower by Moody's are considered to have speculative characteristics and
involve greater risk of default or price changes due to changes in the
issuer's creditworthiness. Market prices of these securities may fluctuate
more than high-rated securities, and they are difficult to price at times
because they are more thinly traded and less liquid securities. Market prices
may decline significantly in periods of general economic difficulty which may
follow periods of rising interest rates. Securities in the lowest rating
category may be in default. For these reasons, it is each Portfolio's policy
not to rely primarily on ratings issued by established credit rating agencies,
but to utilize such ratings in conjunction with the Advisor's own independent
and ongoing review of credit quality. In the event a security is downgraded
below these ratings after purchase, the Advisor will review and take
appropriate action with regard to the security. Each Portfolio will also seek
to minimize risk by diversifying its holdings.
ZERO-COUPON BONDS
Debt securities in which the Portfolios may invest also include zero-coupon
bonds. Zero-coupon bonds do not require the periodic payment of interest and
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 at a rate of interest reflecting the market
rate of the security at the time of issuance. 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 may experience greater volatility in market
value than debt obligations which make regular payments of interest. Each
Portfolio will accrue income on such investments for tax and accounting
purposes; this income is distributable to shareholders. Each Portfolio may
have to sell other securities to raise cash to satisfy this distribution
requirement.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain of the obligations purchased by a Portfolio may carry variable or
floating rates of interest, may involve a conditional or unconditional demand
feature and may include variable amount master demand notes. Such instruments
bear interest at rates which are not fixed, but which vary with changes in
specified market rates or indices, such as a Federal Reserve composite index.
The interest rate on these securities may be reset daily, weekly, quarterly,
or at some other interval, and it may have a floor or ceiling rate. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates.
HEDGING TECHNIQUES
Each Portfolio has reserved the right, subject to authorization by the Board
of Directors prior to implementation, to engage in certain strategies in an
attempt to hedge the Portfolio's portfolio, to reduce the overall level of
risk that normally would be expected to be associated with its investments.
Each Portfolio may write covered call options on common stocks, may purchase
and sell (on a secured basis) put options, and may engage in closing
transactions with respect to put and call options. Each Portfolio also may
purchase forward foreign currency exchange contracts to hedge currency
exchange rate risk. In addition, each Portfolio is authorized to purchase and
sell stock index futures contracts and options on stock index futures
contracts. Each Portfolio is also authorized to conduct spot (i.e., cash
basis) currency transactions or to use currency futures contracts and options
on futures contracts and foreign currencies in order to protect against
uncertainty in the future levels of foreign currency exchange rates. These
strategies are primarily used for hedging purposes; nevertheless, there are
risks associated with these strategies as described below.
Options on Securities
A call option is a short-term contract pursuant to which the purchaser of the
option, in return for a premium, has the right to buy the security underlying
the option at a specified price at any time during the term of the option. The
writer of a call option, who receives the premium, has the obligation, upon
exercise during the option term, to deliver the underlying security against
payment of the exercise price. Conversely, a put option gives its purchaser,
in return for a premium, the right to sell the underlying equity security at a
specified price during the option term to the writer of the put option, who
receives the premium. Each Portfolio will sell call options only on a
"covered" basis, i.e., it will own the underlying security at all times, and
will write put options only on a secured basis, i.e., it will maintain an
amount equal to the exercise price in a segregated account at all times. Each
Portfolio may engage in option transactions for hedging purposes and to
realize a greater current return, through the receipt of premiums, than would
be earned on the underlying securities alone. Options traded in the
over-the-counter market will be considered illiquid unless the Fund has
entered into arrangements with U.S. Government securities dealers to dispose
of such options at a formula price based on a multiple of the original premium
plus the amount for which the option is "in the money".
Stock Index Futures Contracts and Options on Stock Index Futures Contracts
Each Portfolio, except the Bond Portfolio, may invest in stock index futures
contracts and options on stock index futures contracts. A stock index futures
contract is a bilateral agreement pursuant to which one party agrees to
accept, and the other party agrees to make, delivery of an amount of cash
equal to a specified dollar amount times the difference between the stock
index value at the close of trading of the contract and the price at which the
futures contract is originally struck. No physical delivery of the stocks
comprising the index is made. Options on stock index futures contracts give
the purchaser the right, in return for the premium paid, to assume a long or
short position in a futures contract.
Futures Contracts
Each Portfolio may purchase and sell financial futures contracts on debt
securities on a commodities exchange or board of trade for certain hedging,
return enhancement and risk management purposes in accordance with applicable
regulations. A financial futures contract is an agreement to purchase or sell
an agreed amount of securities at a set price for delivery in the future. None
of the Portfolios may purchase or sell futures contracts if immediately
thereafter the sum of the amount of initial margin deposits on any such
futures (plus deposits on any other futures contracts and premiums paid in
connection with any options or futures contracts) that do not constitute "bona
fide hedging" under the Commodity Futures Trading Commission ("CFTC") rules
would exceed 5% of the liquidation value of the Portfolio's total assets after
taking into account unrealized profits and losses on such contracts. In
addition, the value of all futures contracts sold will not exceed the total
market value of the Portfolio's portfolio. The Fund will comply with
guidelines established by the Securities and Exchange Commission with respect
to covering of obligations under futures contracts and will set aside cash
and/or liquid securities in a segregated account with its custodian in the
amount prescribed.
A Portfolio's successful use of futures contracts depends on the Advisor's
ability to predict the direction of the market and is subject to various
additional risks. The correlation between movements in the price of a futures
contract and the price of the security being hedged is imperfect and there is
a risk that the value of the security being hedged may increase or decrease at
a greater rate than the related futures contract, resulting in losses to the
Portfolio. Certain futures exchanges or boards of trade have established daily
limits based on the amount of the previous day's settlement price. These daily
limits may restrict the Portfolio's ability to repurchase or sell certain
futures contracts on any particular day.
Forward Foreign Currency Exchange Contracts
A Portfolio's use of forward foreign currency contracts is limited to hedging
against movements in the value of foreign currencies relative to the U.S.
dollar in connection with specific portfolio transactions or with respect to
existing portfolio positions denominated in such currencies. A transaction
hedge involves the purchase or sale of a forward contract with respect to a
specific receivable or payable of the Portfolio while a position hedge relates
to a specific portfolio holding. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specified currency at a future
date at a price set at the time of the contract. Foreign currency exchange
contracts do not eliminate fluctuations in the values of portfolio securities
but rather allow the Portfolio to establish a rate of exchange for a future
point in time. With respect to any such forward foreign currency contract, it
will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date the
forward contract is entered into and the date it matures. In addition, while
forward contracts may offer protection from losses resulting from declines in
the value of a particular foreign currency, they also limit potential gains
which might result from increases in the value of such currency. Based on
current legal interpretation, the Portfolios do not consider forward foreign
currency exchange contracts to be commodities or commodity contracts for
purposes of the Portfolios' fundamental restrictions concerning investment in
commodities or commodity contracts, as set forth in the Statement of
Additional Information.
Currency Futures Contracts and Options on Currency Futures Contracts
A currency futures contract is an agreement for the purchase or sale for
future delivery of foreign currencies. A "sale" of a currency futures contract
creates an obligation to deliver the foreign currencies called for by the
contract at a specified price on a specified date while a "purchase" of a
currency futures contract creates an obligation to acquire the foreign
currencies called for by the contract at a specified price on a specified
date. Each Portfolio will only enter into futures contracts which are traded
on national or foreign futures exchanges and which are standardized as to
maturity date and the underlying financial instrument. Options on currency
futures contracts give the purchaser the right, in return for the premium
paid, to assume a long or short position in the futures contract. None of the
Portfolios may purchase or sell futures contracts if immediately thereafter
the sum of the amount of initial margin deposits on any such futures (plus
deposits on any other futures contracts and premiums paid in connection with
any options or futures contracts) that do not constitute "bona fide hedging"
under CFTC rules would exceed 5% of the liquidation value of the Portfolio's
total assets after taking into account unrealized profits and losses on such
contracts. In addition, the value of all futures contracts sold will not
exceed the total market value of the Portfolio's portfolio.
Foreign Currency Options
A call option on a foreign currency is a short-term contract pursuant to which
the purchaser of the option, in return for a premium, has the right to buy the
currency underlying the option at a specified price at any time during the
term of the option. The writer of a call option, who receives the premium, has
the obligation, upon exercise of the option during the option term, to deliver
the underlying currency against payment of the exercise price. Conversely, a
put option on a foreign currency gives its purchaser, in return for a premium,
the right to sell the underlying currency at a specified price during the
option term to the writer of the put option, who receives the premium.
Risks Associated with Hedging Strategies
There are risks associated with the hedging strategies described above,
including the following: (1) the success of a hedging strategy may depend on
the ability of the Advisor to predict movements in the prices of individual
securities, fluctuations in domestic and foreign markets and currency exchange
rates, and movements in interest rates; (2) there may be an imperfect
correlation between the changes in market value of the securities held by a
Portfolio and the prices of currency contracts, options, futures and options
on futures; (3) there may not be a liquid secondary market for a currency
contract, option, futures contract or futures option; (4) trading restrictions
or limitations may be imposed by an exchange; and (5) government regulations,
particularly requirements for qualification as a "registered investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), may
restrict trading in forward currency contracts, options, futures contracts and
futures options.
PRINCIPAL INVESTMENT RESTRICTIONS
Each Portfolio is subject to certain investment restrictions which are
fundamental policies that cannot be changed without the approval of the
holders of a majority, as defined in the 1940 Act, of the Portfolio's
outstanding shares.
Each Portfolio may borrow money, but only from a bank for temporary or
emergency purposes in amounts not exceeding 10% of the Portfolio's total
assets and a borrowing Portfolio will not make additional investments while
borrowings greater than 5% of its total assets are outstanding.
None of the Portfolios may, with respect to 75% of its total assets, invest
more than 5% of the value of its total assets at the time of investment in
securities of any one issuer (other than obligations issued or guaranteed by
the United States Government, its agencies or its instrumentalities). None of
the Portfolios may purchase more than 10% of the outstanding voting securities
of any one issuer.
None of the Portfolios may invest 25% or more of the value of its total assets
in securities of issuers in any one industry (other than U.S. Government
securities).
None of the Portfolios will invest more than 15% of its total net assets in
securities of issuers that are restricted from being sold to the public
without registration under the Securities Act of 1933 and illiquid securities,
including repurchase agreements with maturities of greater than seven days.
Each Portfolio may invest its assets in securities of any other investment
company (closed-end or open-end) (1) by purchase in the open market involving
only customary brokers' commissions, (2) in connection with mergers,
acquisitions of assets, or consolidation, or (3) as otherwise permitted by
law, including the 1940 Act. Each of the Portfolios may purchase shares of
closed-end investment companies that are traded on national exchanges to the
extent permitted by applicable law.
None of the Portfolios may make loans, except that each Portfolio may invest
in debt securities and repurchase agreements and may engage in securities
lending.
Additional information about the Portfolios' investment restrictions is
contained in the Statement of Additional Information.
MANAGEMENT
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor and custodian. The day-to-day
operations of the Fund are delegated to the Fund's officers and to the
Advisor, 1100 Chase Square, Rochester, New York 14604. A committee made up of
investment professionals and analysts makes all the investment decisions for
the Fund.
The Advisor acts as investment advisor to the Fund. Mr. William Manning
controls the Advisor by virtue of his ownership of the securities of the
Advisor. The Advisor also is generally responsible for supervision of the
overall business affairs of the Fund including supervision of service
providers to the Fund and direction of the Advisor's directors, officers or
employees who may be elected as officers of the Fund to serve as such.
of the date of this Prospectus, the Advisor supervised approximately $7.5
billion in assets of clients, including both individuals and institutions.
For its services to the Fund under the investment advisory agreement, the
Portfolios pay the Advisor the following fees, computed daily and payable
monthly:
<TABLE>
<CAPTION>
<S> <C> <C>
PORTFOLIO PER ANNUM EXPENSE CAP
Moderate Growth Portfolio 1.00% 1.2%
Growth Portfolio 1.00% 1.2%
Maximum Horizon Portfolio 1.00% 1.2%
Small Cap Portfolio 1.00% 1.2%
Equity Portfolio 1.00% 1.2%
Bond Portfolio .50% .85%
</TABLE>
The Fund is responsible for its operating expenses, including: (i) interest
and taxes; (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses of its Directors other than those affiliated with
the Advisor; (v) legal and audit expenses; (vi) fees and expenses of the
Fund's custodian, and shareholder servicing or transfer agent and accounting
services agent, if obtained for the Fund from an entity other than the
Advisor; (vii) expenses incident to the issuance of its shares, including
issuance on the payment of, or reinvestment of, dividends and capital gain
distributions; (viii) fees and expenses incident to the registration under
federal or state securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy material to
shareholders of the Fund; (x) all other expenses incidental to holding
meetings of the Fund's shareholders; (xi) dues or assessments of or
contributions to the Investment Company Institute or any successor; and (xii)
such non-recurring expenses as may arise, including litigation affecting the
Fund and the legal obligations with respect to which the Fund may have to
indemnify its officers and directors.
The Advisor may use its own resources to engage in activities that may promote
the sale of the Fund, including payments to third-parties who provide
shareholder support servicing and distribution assistance.
SALES AND REDEMPTIONS
The separate accounts of the Life Companies place orders to purchase and
redeem shares of each Portfolio based on, among other things, the amount of
premium payments to be invested and surrender and transfer requests to be
effected on that day pursuant to the Variable Contracts issued by the Life
Companies. Orders received by the Fund are effected on days on which the New
York Stock Exchange is open for trading, at the net asset value per share next
determined after receipt of the order. Orders received before the close of
regular trading on the New York Stock Exchange, normally 4:00 p.m. Eastern
time, are effected at the respective net asset values per share determined as
of 4:00 p.m. Eastern time on that day. See "Net Asset Value", below and
"Determination of Net Asset Value" in the Fund's Statement of Additional
Information. Payment for redemptions will be made within three days after
receipt of a redemption request in good order. No fee is charged the separate
accounts of the Life Companies when they redeem Portfolio shares. The Fund
may suspend the sale of shares at any time and may refuse any order to
purchase shares.
The Fund may suspend the right of redemption of shares of any Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than for customary weekend and holiday closings or
during which trading on the New York Stock Exchange is restricted; (ii) when
the Securities and Exchange Commission determines that a state of emergency
exists which makes the sale of portfolio securities or the determination of
net asset value not reasonably practicable; (iii) as the Securities and
Exchange Commission may by order permit for the protection of the security
holders of the Fund; or (iv) at any time when the Fund may, under applicable
laws and regulations, suspend payment on the redemption of its shares.
Subject to each Portfolios compliance with applicable regulations, each
Portfolio has reserved the right to pay the redemption price either totally or
partially by a distribution in-kind of securities (instead of cash) from the
Portfolios portfolio. The securities distributed in such a distribution 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, it could incur brokerage or transaction charges when
converting the securities to cash.
Manning & Napier Investor Services, Inc. acts as Distributor of the Fund
shares and is located at the same address as the Advisor and the Fund. The
Distributor receives no fee from the Fund and there are no additional costs to
shareholders for this service. The Advisor may, from its own resources,
defray or absorb costs related to distribution, including compensation of
employees who are involved in distribution.
The Fund does not foresee any disadvantage to Variable Contract owners arising
out of the fact that the Fund offers its shares for products offered by the
Life Companies which may or may not be affiliated with each other.
Nevertheless, the Fund's Board of Directors intends to monitor events in order
to identify any material irreconcilable conflicts which may possibly arise and
to determine what action, if any, should be taken in response thereto. If
such a conflict were to occur, one or more insurance company separate accounts
might withdraw its investment in the Fund. This might force the Fund to sell
portfolio securities at disadvantageous prices.
NET ASSET VALUE
Each Portfolio calculates the net asset value of a share by dividing the total
value of its assets, less liabilities, by the number of shares outstanding.
Shares are valued as of the closing time of the New York Stock Exchange, or in
the absence of a closing time, 4:00 p.m. Eastern time on each day the New York
Stock Exchange is open for trading. The exchange annually announces the days
on which it will not be open for trading; the most recent announcement
indicates that it will not be open when the following holidays are observed:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share is the value of the Portfolios assets, less its
liabilities, divided by the number of shares of the Portfolio outstanding.
The value of each Portfolios portfolio securities will be the market value of
such securities as determined based on quotes provided by a pricing service
(which uses the methodology outlined in the "Net Asset Value" section of the
Statement of Additional Information) approved by the Board of Directors, or,
in the absence of market quotations, fair value as determined in good faith by
or under the direction and control of the Board of Directors. Short-term
investments which mature in less than 60 days are normally valued at amortized
cost. Assets initially expressed in foreign currencies will be converted into
U.S. dollars as of the exchange rates quoted by any major bank. If such
quotes are not available, the exchange rates will be determined in accordance
with policies established in good faith by the Board of Directors. See the
Statement of Additional Information for further information.
<PAGE>
PERFORMANCE INFORMATION
Performance information for each of the Portfolios may be presented from time
to time in advertisements and sales literature. The Portfolios may advertise
several types of performance information. These are the "yield," "average
annual total return" and "aggregate total return". Each of these figures is
based upon historical results and is not necessarily representative of the
future performance of any Portfolio.
The yield of a Portfolio's shares is determined by annualizing net investment
income earned per share for a stated period (normally one month or thirty
days) and dividing the result by the net asset value per share at the end of
the valuation period. The average annual total return and aggregate total
return figures measure both the net investment income generated by, and the
effect of any realized or unrealized appreciation or depreciation of the
underlying investments in, the Portfolio's portfolio for the period in
question, assuming the reinvestment of all dividends. Thus, these figures
reflect the change in the value of an investment in a Portfolio's shares
during a specified period. Average annual total return will be quoted for at
least the one, five and ten year periods ending on a recent calendar quarter
(or if such periods have not yet elapsed, at the end of a shorter period
corresponding to the life of the Portfolio). Average annual total return
figures are annualized and, therefore, represent the average annual percentage
change over the period in question. Total return figures are not annualized
and represent the aggregate percentage or dollar value change over the period
in question. For more information regarding the computation of yield, average
annual total return and aggregate total return, see "Performance Information"
in the Statement of Additional Information.
Any Fund performance information presented will also include performance
information for the insurance company separate accounts investing in the Fund
which will take into account insurance-related charges and expenses under such
insurance policies and contracts.
Advertisements concerning the Fund may from time to time compare the
performance of one or more Portfolios to various indices. Advertisements may
also contain the performance rankings assigned certain Portfolios or the
Advisor by various publications and statistical services, including, for
example, SEI, Lipper Analytical Services Mutual Funds Survey, Lipper Variable
Insurance Products Performance Analysis Service, Morningstar, Intersec
Research Survey of Non-U.S. Equity Fund Returns, Frank Russell International
Universe, Kiplinger's Personal Finance, and Financial Services Week. Any such
comparisons or rankings are based on past performance and the statistical
computations performed by publications and services, and are not necessarily
indications of future performance. Because the Portfolios are managed
investment vehicles investing in a wide variety of securities, the securities
owned by a Portfolio will not match those making up an index.
TAX STATUS, DIVIDENDS, AND DISTRIBUTIONS
Each Portfolio of the Fund intends to qualify and elect to be treated as a
regulated investment company that is taxed under the rules of Subchapter M of
the Code. As such an electing regulated investment company, a Portfolio will
not be subject to federal income tax on its net ordinary income and net
realized capital gains to the extent such income and gains are distributed to
the separate accounts of the Life Companies which hold its shares. For
further information concerning federal income tax consequences for the holders
of the Variable Contracts of the Life Companies, investors should consult the
prospectus used in connection with the issuance of their Variable Contracts.
Each of the Portfolios will declare and distribute dividends from net ordinary
income at least annually and will distribute its net realized capital gains,
if any, at least annually. Distributions of ordinary income and capital gains
will be made in shares of such Portfolios unless an election is made on behalf
of a separate account to receive distributions in cash. The Life Companies
will be informed at least annually about the amount and character of
distributions from the Fund for federal income tax purposes.
See the Statement of Additional Information for a further discussion of taxes.
GENERAL INFORMATION
The Fund was incorporated on November 1, 1995 as a Maryland corporation. The
Board of Directors may, at its own discretion, create additional series of
shares, each of which would have separate assets and liabilities.
The Fund does not expect to hold annual meetings of shareholders but special
meetings of shareholders may be held under certain circumstances.
Shareholders of the Fund retain the right, under certain circumstances, to
request that a meeting of shareholders be held for the purpose of considering
the removal of a Director from office, and if such a request is made, the Fund
will assist with shareholder communications in connection with the meeting.
The shares of the Fund have equal rights with regard to voting, redemption,
dividends, distributions and liquidations. The Fund's shareholders will vote
in the aggregate and not by Portfolio except as otherwise expressly required
by law or when the Board of Directors determines that the matter to be voted
upon affects only the interests of the shareholders of a Portfolio. Income,
direct liabilities and direct operating expenses of a Portfolio will be
allocated directly to the Portfolio, and general liabilities and expenses of
the Fund will be allocated among the Portfolios in proportion to the total net
assets of the Fund by the Board of Directors. The holders of shares have no
preemptive or conversion rights. Shares when issued are fully paid and
non-assessable and do not have cumulative voting rights.
Coopers & Lybrand, L.L.P. has been selected as the independent accountants of
each Portfolio and performs an annual audit of the Portfolios' accounts and
reviews the Fund's tax returns.
Boston Safe Deposit and Trust Company is the Fund's Custodian. The Advisor,
acting as Transfer Agent, maintains its own shareholder account records, and
shareholder inquiries should be directed to Manning & Napier Fund Services,
P.O. Box 40610, Rochester, New York 14604.
<PAGE>
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
Moody's Investors Services, Inc.'s corporate bond ratings:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred
to as gilt-edged. Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than Aaa
securities.
A - 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 some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
rating in the lower end of that generic rating category.
<PAGE>
Standard & Poor's Corporation's corporate bond ratings:
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only to a small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated categories.
Debt rated BB, B, CCC and CC is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree
of speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
The C rating is reserved for income bonds on which no interest is being paid.
Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
<PAGE>
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.'s commercial paper ratings:
PRIME-1 - Issues rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 - Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3 - Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Standard & Poor's Corporation's commercial paper ratings:
A-1 - This is the highest category and indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory and the obligation is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
in higher rating categories.
A-3 - Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B - Issues rated B are regarded as having significant speculative
characteristics for timely payment.
C - This rating is assigned to short-term debt obligations that are
currently vulnerable to nonpayment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
MANNING & NAPIER INSURANCE FUND, INC.
<PAGE>
Statement of Additional Information dated May 1, 1998
This Statement of Additional Information is not a Prospectus, and it should be
read in conjunction with the Fund's Prospectus dated May 1, 1998, copies of
which may be obtained from Manning & Napier Advisors, Inc., 1100 Chase Square,
Rochester, NY 14604.
TABLE OF CONTENTS
Page
DEFINITIONS B-2
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS OF THE FUND B-2
RISK AND INVESTMENT POLICIES B-2
INVESTMENT RESTRICTIONS B-17
MANAGEMENT B-19
NET ASSET VALUE B-24
REDEMPTION OF SHARES B-24
TAXES B-25
SPECIAL CONSIDERATIONS B-26
DIVIDENDS AND DISTRIBUTIONS B-27
PERFORMANCE INFORMATION B-27
SHAREHOLDER COMMUNICATIONS B-27
ORGANIZATION AND CAPITALIZATION B-28
FINANCIAL STATEMENTS B-28
<PAGE>
DEFINITIONS
The "Fund" - Manning & Napier Insurance Fund, Inc.
"Advisor" - Manning & Napier Advisors, Inc., the Fund's investment advisor.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS OF THE FUND
The Fund currently offers shares of beneficial interest of six Portfolios (the
"Portfolios") with separate investment objectives and policies. The investment
objectives and policies of each of the Portfolios of the Fund are described in
the Prospectus. This Statement contains additional information concerning
certain investment practices and investment restrictions of the Fund.
Except as described below under "Investment Restrictions", the investment
objectives and policies described in the Prospectus and in this Statement of
Additional Information are not fundamental, and the Directors may change the
investment objectives and policies of a Portfolio without an affirmative vote
of shareholders of the Portfolio. Except as otherwise noted below, the
following descriptions of certain investment policies and techniques are
applicable to all of the Portfolios.
Convertible bonds purchased by the Portfolios may have a call feature.
Warrants purchased by each Portfolio may or may not be listed on a national
securities exchange. None of the portfolios currently intends to engage in
"short sales against the box". All of the Portfolios' policies regarding
options discussed below are fundamental.
RISK AND INVESTMENT POLICIES
YEAR 2000 TECHNOLOGY RISK
Like most investment companies, the Fund and the Portfolio rely on computers
in conducting daily business and processing information. There is a concern
that on January 1, 2000 some computer programs will be unable to recognize the
new year and as a consequence computer malfunctions will occur. The
Administrator is taking steps that it believes are reasonably designed to
address this potential problem and to obtain satisfactory assurance from other
service providers to the Fund and Portfolio that they are also taking steps to
address the issue. There can, however, be no assurance that these steps will
be sufficient to avoid any adverse impact of the Fund, the Portfolio or
shareholders.
WRITING COVERED CALL AND SECURED PUT OPTIONS
As a means of protecting their assets against market declines, and in an
attempt to earn additional income, each Portfolio may write covered call
option contracts on its securities and may purchase call options for the
purpose of terminating its outstanding obligations with respect to securities
upon which covered call option contracts have been written.
As described in the Prospectus, when a Portfolio writes a call option on
securities which it owns, it gives the purchaser of the option the right to
buy the securities at an exercise price specified in the option at any time
prior to the expiration of the option. If any option is exercised, a Portfolio
will realize the gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received
on the sale of the option. By writing a covered call option, a Portfolio may
forego, in exchange for the net premium, the opportunity to profit from an
increase in the price of the underlying security above the option's exercise
price. A Portfolio will have kept the risk of loss if the price of the
security declines, but will have reduced the effect of that risk to the extent
of the premium it received when the option was written.
<PAGE>
Each Portfolio will write only covered call options which are traded on
national securities exchanges. Currently, call options on a stock may be
traded on the Chicago Board Options Exchange and the New York, American,
Pacific and Philadelphia Stock Exchanges. Call options are issued by the
Options Clearing Corporation, which also serves as the clearing house for
transactions with respect to options. The price of a call option is paid to
the writer without refund on expiration or exercise, and no portion of the
price is retained by the Options Clearing Corporation or the exchanges listed
above. Writers and purchasers of options pay the transaction costs, which may
include commissions charged or incurred in connection with such option
transactions.
Each Portfolio may write only covered call options. A call option is
considered to be covered if the option writer owns the security underlying the
call or has an absolute and immediate right to acquire that security without
payment of additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian) upon conversion or exchange of
other securities. A call option is also considered to be covered if the writer
holds on a unit-for-unit basis a call on the same security as the call
written, with the same expiration date and the exercise price of the call
purchased is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained in cash, Treasury bills or other liquid high grade short-term
obligations in a segregated account with its custodian, and marks the same to
market daily, all in accordance with the rules of the clearing corporations
and of the exchanges and securities laws.
None of the Portfolios will sell (uncover) the securities against which
options have been written until after the option period has expired, the
option has been exercised or a closing purchase has been executed.
Options written by a Portfolio will have exercise prices which may be below
("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money") the
market price of the underlying security at the time the options are written.
However, a Portfolio generally will not write so-called "deep-in-the-money"
options.
The market value of a call option generally reflects the market price of the
underlying security. Other principal factors affecting market value include
supply and demand, dividend yield and interest rates, the price volatility of
the underlying security and the time remaining until the expiration date.
If a call option on a security expires unexercised, a Portfolio will realize a
short-term capital gain in the amount of the premium on the option, less all
commissions paid. Such a gain, however, may be offset by a decline in the
value of the underlying security during the option period. If a call option is
exercised, a Portfolio will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security (exercise price minus
commission) plus the amount of the premium on the option, less all commissions
paid.
Call options may also be purchased by a Portfolio, but only to terminate
(entirely or in part) a Portfolio's obligation as a writer of a call option.
This is accomplished by making a closing purchase transaction; that is, the
purchase of a call option on the same security with the same exercise price
and expiration date as specified in the call option which had been written
previously. A closing purchase transaction with respect to calls traded on a
national securities exchange has the effect of extinguishing the obligation of
the writer of a call option. For example, a Portfolio may enter into a closing
purchase transaction to realize a profit on an option it had previously
written, to enable it to sell the security which underlies the option, to free
itself to sell another option or to prevent its portfolio securities from
being purchased pursuant to the exercise of a call. A Portfolio may also
permit the call option to be exercised. A closing transaction cannot be
effected with respect to an optioned security once a Portfolio has received a
notice that the option is to be exercised.
<PAGE>
The cost to a Portfolio of such a closing transaction may be greater than the
net premium received by a Portfolio upon writing the original call option. A
profit or loss from a closing purchase transaction will be realized depending
on whether the amount paid to purchase a call to close a position is less or
more than the amount received from writing the call. Any profit realized by a
Portfolio from the execution of a closing transaction may be partly or
completely offset by a reduction in the market price of the underlying
security.
A Portfolio may also write secured put options and enter into closing purchase
transactions with respect to such options. A Portfolio may write secured put
options on national securities exchanges to obtain, through the receipt of
premiums, a greater return than would be realized on the underlying securities
alone. A put option gives the purchaser of the option the right to sell, and
the writer has the obligation to buy, the underlying security at the stated
exercise price during the option period. The secured put writer retains the
risk of loss should the market value of the underlying security decline below
the exercise price of the option.
During the option period, the writer of a put option may be required at any
time to make payment of the exercise price against delivery of the underlying
security. The operation of put options in other respects is substantially
identical to that of call options. A separate account is established with the
Fund's custodian with securities consisting of cash or U.S. Government or
other high grade liquid debt obligations equal to the amount of the assets
that could be required to consummate put options. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in
the account daily so that the value of the account will equal the amount of
such commitments by the Fund.
A put option is secured if a Portfolio maintains in a segregated account with
the Funds Custodian cash or U.S. Government securities in an amount not less
than the exercise price of the option at all times during the option period.
A Portfolio may write secured put options when the Advisor wishes to purchase
the underlying security for a Portfolio's portfolio at a price lower than the
current market price of the security. In such event a Portfolio would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay. The potential
gain on a secured put option is limited to the interest earned on the amount
held in U.S. Government securities plus the premium received on the option
(less the commissions paid on the transaction) while the potential loss equals
the difference between the exercise price of the option and the current market
price of the underlying securities when the put is exercised, offset by the
premium received (less the commissions paid on the transaction) and interest
earned on the amount held in U.S. Government securities.
A Portfolio may purchase put options on national securities exchanges in an
attempt to hedge against fluctuations in the value of its portfolio securities
and to protect against declines in the value of individual securities.
Purchasing a put option allows the purchaser to sell the particular security
covered by the option at a certain price (the "exercise price") at any time up
to a specified future date (the "expiration date").
<PAGE>
Purchase of a put option creates a "hedge" against a decline in the value of
the underlying security by creating the right to sell the security at a
specified price. Purchase of a put option requires payment of a premium to the
seller of that option. Payment of this premium necessarily reduces the return
available on the individual security should that security continue to
appreciate in value. In return for the premium paid, a Portfolio protects
itself against substantial losses should the security suffer a sharp decline
in value. In contrast to covered call option writing, where one obtains
greater current income at the risk of foregoing potential future gains, one
purchasing put options is in effect foregoing current income in return for
reducing the risk of potential future losses.
A Portfolio will purchase put options as a means of "locking in" profits on
securities held in the portfolio. Should a security increase in value from the
time it is initially purchased, a Portfolio may seek to lock in a certain
profit level by purchasing a put option. Should the security thereafter
continue to appreciate in value the put option will expire unexercised and the
total return on the security, if it continues to be held by a Portfolio, will
be reduced by the amount of premium paid for the put option. At the same time,
a Portfolio will continue to own the security. Should the security decline in
value below the exercise price of the put option, however, a Portfolio
may elect to exercise the option and "put" or sell the security to the party
that sold the put option to that Portfolio, at the exercise price. In this
case a Portfolio would have a higher return on the security than would have
been possible if a put option had not been purchased.
Certain Risk and Other Factors Respecting Options
As stated in the Prospectus, positions in options on securities may be closed
only by a closing transaction, which may be made only on an exchange which
provides a liquid secondary market for such options. Although a Portfolio will
write options only when the Advisor believes a liquid secondary market will
exist on an exchange for options of the same Portfolio, there can be no
assurance that a liquid secondary market will exist for any particular
security option. If no liquid secondary market exists respecting an option
position held, a Portfolio may not be able to close an option position, which
will prevent that Portfolio from selling any security position underlying an
option until the option expires and may have an adverse effect on its ability
effectively to hedge its security positions. A secured put option writer who
is unable to effect a closing purchase transaction would continue to bear the
risk of decline in the market price of the underlying security until the
option expires or is exercised. In addition, a secured put writer would be
unable to use the amount held in cash or U.S. Government securities as
security for the put option for other investment purposes until the exercise
or expiration of the option.
Possible reasons for the absence of a liquid secondary market on an exchange
for an option include the following: (a) insufficient trading interest in
certain options; (b) restrictions on transactions imposed by an exchange; (c)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (d)
inadequacy of the facilities of an exchange or the Options Clearing
Corporation to handle trading volume; or (e) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
types of orders.
Each of the exchanges on which options on securities are traded has
established limitations on the number of options which may be written by any
one investor or group of investors. These limitations apply regardless of
whether the options are written in different accounts or through different
brokers. It is possible that a Portfolio and certain other accounts managed by
the Advisor may constitute such a group. If so, the options positions of the
Portfolio may be aggregated with those of other clients of the Advisor.
<PAGE>
When the Portfolio writes an over-the-counter ("OTC") option, it will enter
into a arrangement with a primary U.S. government securities dealer, which
would establish a formula price at which the Portfolio would have the absolute
right to repurchase that OTC option. This formula price would generally be
based on a multiple of the premium received for the option, plus the amount by
which the option is exercisable below the marked price of the underlying
security ("in-the-money"). For an OTC option the Fund writes, it will treat as
illiquid (for purposes of the 15% of net assets restriction on illiquid
securities, stated in the Prospectus) an amount of assets used to cover
written OTC options, equal to the formula price for the repurchase of the OTC
option less the amount by which the OTC option is "in-the-money". The Fund
will also treat as illiquid any OTC option held by it. The Securities and
Exchange Commission is evaluating the general issue of whether or not the OTC
options should be considered to be liquid securities, and the procedure
described above could be affected by the outcome of that evaluation.
Although the Options Clearing Corporation has stated that it believes (based
on forecasts provided by the exchanges on which options are traded), that its
facilities are adequate to handle the volume of reasonably anticipated options
transactions, and although each exchange has advised the Options Clearing
Corporation that it believes that its facilities will also be adequate to
handle reasonably anticipated volume, there can be no assurance that higher
than anticipated trading activity or order flow or other unforeseen events
might not at times render certain of these facilities inadequate and thereby
result in the institution of special trading procedures or restrictions.
Portfolio will pay brokerage and other transaction costs to write and purchase
options on securities, including any closing transactions which the Portfolio
may execute. A Portfolio's program of writing and/or purchasing such options
with respect to as much of its portfolio as possible will increase the
transaction costs borne by the Portfolio.
STOCK INDEX FUTURES CONTRACTS AND OPTIONS ON STOCK INDEX FUTURES CONTRACTS
Each Portfolio, except for the Bond Portfolio, may enter into Stock Index
Futures Contracts to provide a hedge for a portion of the Portfolio's
portfolio, as a cash management tool, or as an efficient way to implement
either an increase or decrease in portfolio market exposure in response to
changing market conditions. A Portfolio may also use Index Futures as a
substitute of a comparable market position in the underlying securities.
Although techniques other than the sale and purchase of Stock Index Futures
Contracts could be used to adjust the exposure or hedge a Portfolio's
portfolio, a Portfolio may be able to do so more effectively and, perhaps, at
a lower cost through the use of Stock Index Futures Contracts.
A Stock Index Futures Contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. Entering into a contract to buy units of a stock index is commonly
referred to as buying or purchasing a contract or holding a long position in
the index. Entering into a contract to sell units of a stock index is commonly
referred to as selling a contract or holding a short position. A stock index
future obligates the seller to deliver (and the purchaser to take) an amount
of cash equal to a specific dollar amount times the difference between the
value of a specific stock index at the close of the last trading day of the
contract and the price at which the agreement is made. No physical delivery
of the underlying stocks in the index is made. Each Portfolio intends to
purchase and sell futures contracts on the stock index for which it can obtain
the best price with consideration also given to liquidity.
A Portfolio will not enter into a Stock Index Futures Contract or option
thereon if, as a result thereof: the sum of the amount of initial margin
deposits on any such futures (plus deposits on any other futures contracts and
premiums paid in connection with any options or futures contracts) that do not
constitute "bona fide hedging" under the Commodity Futures Trading Commission
(CFTC) rules would exceed 5% of the liquidation value of the Portfolio's total
assets after taking into account unrealized profits and losses on such
contracts. In addition, the value of all futures contracts sold will not
exceed the total market value of the Portfolio's portfolio. Each Fund will
comply with guidelines established by the Securities and Exchange Commission
with respect to covering of obligations under future contracts and will set
aside cash and/or liquid high grade securities in a segregated account with
the Funds custodian in the amount prescribed.
<PAGE>
Unlike when the Portfolios purchase or sell an equity security, no price would
be paid or received by the Portfolios upon the purchase or sale of a Stock
Index Futures Contract. Upon entering into a Futures Contract, the Portfolio
would be required to deposit with the Funds custodian in a segregated account
in the name of the futures broker an amount of cash or U.S. Treasury bills
known as "initial margin". The amount of initial margin required by the rules
of the exchanges is subject to change. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
a Futures Contract margin does not involve the borrowing of Funds by the
Portfolio to finance the transactions. Rather, initial margin is in the nature
of a performance bond or good faith deposit on the contract that is returned
to the Portfolio upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
Subsequent payments, called "variation margin", to and from the futures
broker, would be made on a daily basis as the price of the underlying stock
index fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as "marking to the market". For
example, when the Portfolio has purchased a Stock Index Futures Contract and
the price of that underlying stock index has risen, that futures position will
have increased in value and the Portfolio will receive from the broker a
variation margin payment equal to that increase in value. Conversely, when the
Portfolio has purchased a Stock Index Futures Contract and the price of the
stock index has declined, the position would be less valuable and the
Portfolio would be required to make a variation margin payment to the broker.
A Portfolio will not enter into Stock Index Futures Contracts for speculation
and will only enter into Futures Contracts which are traded on established
futures markets. The Portfolio may, however, purchase or sell Stock Index
Futures Contracts with respect to any stock index. Nevertheless, to hedge a
Portfolio's portfolio successfully, the Advisor must sell Stock Index Futures
Contracts with respect to indices whose movements will, in its judgment, have
a significant correlation with movements in the prices of the Portfolio's
portfolio securities.
Closing out an open Stock Index Futures Contract sale or purchase is effected
by entering into an offsetting Stock Index Futures Contract purchase or sale,
respectively, for the same aggregate amount of the identical securities and
the same delivery date. If the offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain; if it is more, the
Portfolio realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, the Portfolio realizes a gain; if it is
less, the Portfolio realizes a loss. The Portfolios must also be able to enter
into an offsetting transaction with respect to a particular Stock Index
Futures Contract at a particular time. If the Portfolios are not able to enter
into an offsetting transaction, the Portfolios will continue to be required to
maintain the margin deposits on the Stock Index Futures Contract.
The Portfolios may elect to close out some or all of their futures positions
at any time prior to their expiration. The purpose of making such a move would
be either to reduce equity exposure represented by long futures positions or
increase equity exposure represented by short futures positions. The
Portfolios may close their positions by taking opposite positions which would
operate to terminate the Portfolios' position in the Stock Index Futures
Contracts. Final determinations of variation margin would then be made,
additional cash would be required to be paid or released to the Portfolio, and
the Portfolio would realize a loss or a gain.
<PAGE>
Stock Index Futures Contracts may be closed out only on the exchange or board
of trade where the contracts were initially traded. Although the Portfolios
intend to purchase or sell Stock Index Futures Contracts only on exchanges or
boards of trade where there appears to be an active market, there is no
assurance that a liquid market on an exchange or board of trade will exist for
any particular time. In such an event, it might not be possible to close a
Stock Index Futures Contract, and in the event of adverse price movements, the
Portfolio would continue to be required to make daily cash payments of
variation margin. However, in the event Stock Index Futures Contracts have
been used to hedge portfolio securities, the Portfolio would continue to hold
securities subject to the hedge until the Stock Index Futures Contracts could
be terminated. In such circumstances, an increase in the price of the
securities, if any, might partially or completely offset losses on the Stock
Index Futures Contract. However, as described below, there is no guarantee
that the price of the securities will, in fact, correlate with price movements
in the Futures Contract and thus provide an offset to losses on a Stock Index
Futures Contract.
There are several risks in connection with the use by the Portfolios of Stock
Index Futures Contracts as a hedging device. One risk arises because of the
imperfect correlation between movements in the prices of the Futures Contracts
and movements in the prices of securities which are the subject of the hedge.
The Advisor will, however, attempt to reduce this risk by entering into Stock
Index Futures Contracts on indices whose movements, in its judgment, will have
a significant correlation with movements in the prices of the Portfolio's
portfolio securities sought to be hedged.
Successful use of Stock Index Futures Contracts by the Portfolios for hedging
purposes is also subject to the Advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when the
Portfolios have sold Futures to hedge their portfolios against a decline in
the market, the index or indices on which the Futures are written might
advance and the value of securities held in the Portfolio's portfolio might
decline. If this were to occur, the Portfolio would lose money on the Futures
and also would experience a decline in value in its portfolio securities.
However, while this might occur to a certain degree, the Advisor believes that
over time the value of the Portfolio's portfolio will tend to move in the same
direction as the securities underlying the Futures, which are intended to
correlate to the price movements of the portfolio securities sought to be
hedged. It is also possible that if the Portfolios were to hedge against the
possibility of a decline in the market (adversely affecting stocks held in
their portfolios) and stock prices instead increased, the Portfolios would
lose part or all of the benefit of increased value of those stocks that it had
hedged, because it would have offsetting losses in their Futures positions.
In addition, in such situations, if the Portfolios had insufficient cash, they
might have to sell securities to meet their daily variation margin
requirements. Such sales of securities might be, but would not necessarily be,
at increased prices (which would reflect the rising market). The Portfolios
might have to sell securities at a time when it would be disadvantageous to do
so.
In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the Stock Index Futures
Contracts and the portion of the portfolio to be hedged, the price movements
in the Futures Contracts might not correlate perfectly with price movements in
the underlying stock index due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close Stock Index Futures Contracts through
offsetting transactions which could distort the normal relationship between
the index and futures markets. Second, the margin requirements in the futures
market are less onerous than margin requirements in the securities markets,
and as a result the futures market might attract more speculators than the
stock market does. Increased participation by speculators in the futures
market might also cause temporary price distortions. Due to the possibility of
price distortion in the futures market and also because of the imperfect
correlation between price movements in the stock index and movements in the
prices of Stock Index Futures Contracts, even a correct forecast of general
market trends by the Advisor might not result in a successful hedging
transaction over a very short time period.
<PAGE>
Options on Futures give the purchaser the right, in return for the premium
paid, to assume a position in a Futures Contract (a long position if the
option is call and a short position if the option is a put), rather than to
purchase or sell the Stock Index Futures Contract, at a specified exercise
price at any time during the period of the option. Upon exercise of the
option, the delivery of the Futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's Futures margin account which represents the amount by
which the market price of the Stock Index Futures Contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the Futures Contract. Alternatively,
settlement may be made totally in cash.
The Portfolios may seek to close out an option position on an index by writing
or buying an offsetting option covering the same index or contract and having
the same exercise price and expiration date. The ability to establish and
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading in
certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange would cease to
exist, although outstanding options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to
be exercisable in accordance with their terms. There is no assurance that
higher than anticipated trading activity or other unforeseen events might not,
at times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with timely execution of customers' orders.
FUTURES ON SECURITIES
A futures contract on a security is a binding contractual commitment which, if
held to maturity, will result in an obligation to make or accept delivery,
during a particular month, of securities having a standardized face value and
rate of return. By purchasing futures on securities, a Portfolio will legally
obligate itself to accept delivery of the underlying security and pay the
agreed price; by selling futures on securities, it will legally obligate
itself to make delivery of the security against payment of the agreed price.
Open futures positions on securities are valued at the most recent settlement
price, unless such price does not reflect the fair value of the contract, in
which case the positions will be valued by or under the direction of the Board
of Directors.
Positions taken in the futures markets are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While the Portfolio's futures contracts on securities will
usually be liquidated in this manner, it may instead make or take delivery of
the underlying securities whenever it appears economically advantageous for
the Portfolio to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
In order to protect against a possible loss on investments resulting from a
decline in a particular foreign currency against the U.S. dollar or another
foreign currency, each Portfolio is authorized to enter into forward foreign
currency exchange contracts. In addition, each Portfolio is authorized to
conduct spot (i.e., cash basis) currency transactions or to use currency
futures contracts, options on such futures contracts, and options on foreign
currencies in order to protect against uncertainty in the future levels of
currency exchange rates.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Forward foreign currency exchange contracts involve an obligation to purchase
or sell a specified currency at a future date at a price set at the time of
the contract. Forward currency contracts do not eliminate fluctuations in the
values of portfolio securities but rather allow a Portfolio to establish a
rate of exchange for a future point in time. A Portfolio may enter into
forward foreign currency exchange contracts when deemed advisable by the
Advisor under only two circumstances.when entering into a contract for the
purchase or sale of a security in a foreign currency, a Portfolio may enter
into a forward foreign currency exchange contract for the amount of the
purchase or sale price to protect against variations, between the date the
security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency. This hedging technique is known as transaction
hedging.
Second, when the Advisor anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, a Portfolio may enter into a forward contract to
sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of its portfolio securities denominated in such foreign
currency. This hedging technique is known as position hedging. With respect to
any such forward foreign currency contract, it will not generally be possible
to match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is
entered into and the date it matures. In addition, while forward contracts may
offer protection from losses resulting from declines in the value of a
particular foreign currency, they also limit potential gains which might
result from increases in the value of such currency. A Portfolio will also
incur costs in connection with forward foreign currency exchange contracts and
conversions of foreign currencies and U.S. dollars.
A separate account of each Portfolio consisting of cash or liquid securities
equal to the amount of that Portfolio's assets that would be required to
consummate forward contracts entered into under the second circumstance, as
set forth above, will be established with the Fund's custodian. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional cash or securities will be
placed in the account daily so that the value of the account will equal the
amount of such commitments by such Portfolios.
<PAGE>
CURRENCY FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Portfolio is authorized to purchase and sell currency futures contracts
and options thereon. Currency futures contracts involve entering into
contracts for the purchase or sale for future delivery of foreign currencies.
A "sale" of a currency futures contract means the acquisition of a contractual
obligation to deliver the foreign currencies called for by the contract at a
specified price on a specified date. A "purchase" of a futures contract means
the acquisition of a contractual obligation to acquire the foreign currencies
called for by the contract at a specified price on a specified date. These
investment techniques will be used only to hedge against anticipated future
changes in exchange rates which otherwise might either adversely affect the
value of portfolio securities held by a Portfolio or adversely affect the
prices of securities which a Portfolio intends to purchase at a later date.
Such instruments will be used only in connection with permitted transaction or
position hedging and not for speculative purposes. The sum of the amount of
initial margin deposits on any such futures (plus deposits on any other
futures contracts and premiums paid in connection with any options or futures
contracts) that do not constitute "bona fide hedging" under CFTC rules will
not exceed 5% of the liquidation value of a Portfolio's total assets after
taking into account unrealized profits and losses on such contracts. In
addition, the value of all futures contracts sold will not exceed the total
market value of a Portfolio's portfolio. The Fund will comply with guidelines
established by the Securities and Exchange Commission with respect to covering
of obligations under future contracts and will set aside cash and/or liquid
high grade securities in a segregated account with its custodian in the amount
prescribed. Although the Portfolios intend to purchase or sell futures
contracts only if there is an active market for such contracts, no assurance
can be given that a liquid market will exist for any particular contract at
any particular time. In addition, due to the risk of an imperfect correlation
between securities in the Portfolio's portfolio that are the subject of a
hedging transaction and the futures contract used as a hedging device, it is
possible that the hedge will not be fully effective in that, for example,
losses on the portfolio securities may be in excess of gains on the futures
contract or losses on the futures contract may be in excess of the gains on
the portfolio securities that were the subject of the hedge.
Brokerage fees are incurred when a futures contract is bought or sold and
margin deposits must be maintained. Although futures contracts typically
require actual delivery of and payment for financial instruments or
currencies, the contracts are usually closed out before the delivery date.
Closing out an open futures contract sale or purchase is effected by entering
into an offsetting futures contract purchase or sale, respectively, for the
same aggregate amount of the identical type of financial instrument or
currency and the same delivery date. If the offsetting purchase price is less
than the original sale price, a Portfolio realizes a gain; if it is more, a
Portfolio realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, a Portfolio realizes a gain; if it is less,
a Portfolio realizes a loss. The transaction costs must also be included in
these calculations. There can be no assurance, however, that a Portfolio will
be able to enter into an offsetting transaction with respect to a particular
contract at a particular time. If a Portfolio is not able to enter into an
offsetting transaction, a Portfolio will continue to be required to maintain
the margin deposits on the contract. The ability to establish and close out
positions on such options will be subject to the development and maintenance
of a liquid secondary market. It is not certain that this market will develop.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading in certain options; (ii)
restrictions may be imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options, or
underlying securities;(iv) unusual or unforeseen circumstances may interrupt
normal operations on an exchange; (v) the facilities of an exchange or a
clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with timely execution of customers' orders.
<PAGE>
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at a
specified price at any time during the option exercise period. The writer of
the option is required upon exercise to assume an offsetting futures position
(a short position if the option is a call and a long position if the option is
a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account which represents the amount by which the market price of the futures
contract, at exercise, exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
Call options sold by the Portfolios with respect to futures contracts will be
covered by, among other things, entering into a long position in the same
contract at a price no higher than the strike price of the call option, or by
ownership of the instruments underlying the futures contract, or the placement
of cash or liquid securities in a segregated account to fulfill the
obligations undertaken by the futures contract. A put option sold by the
Portfolio is covered when, among other things, cash or liquid securities are
placed in a segregated account to fulfill the obligations undertaken.
FOREIGN CURRENCY OPTIONS
Each Portfolio is authorized to purchase and write put and call options on
foreign currencies. A call option is a short-term contract pursuant to which
the purchaser, in return for a premium, has the right to buy the currency
underlying the option at a specified price at any time during the term of the
option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option during the option period, to deliver
the underlying currency against payment of the exercise price. A put option is
a similar contract that gives its purchaser, in return for a premium, the
right to sell the underlying currency at a specified price during the term of
the option. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option period, to buy the
underlying currency at the exercise price. The Portfolio will use currency
options only in order to hedge against the risk of fluctuations of foreign
exchange rates related to securities held in its portfolio or which it intends
to purchase and to earn a high return by receiving a premium for writing
options. Options on foreign currencies are affected by all of those factors
which influence foreign exchange rates and investments generally.
OBLIGATIONS OF SUPRANATIONAL AGENCIES
Currently, the Bond Portfolio and the Equity Portfolio may purchase securities
issued or guaranteed by supranational agencies including, but not limited to,
the following: Asian Development Bank, Inter-American Development Bank,
International Bank for Reconstruction and Development (World Bank), African
Development Bank, European Coal and Steel Community, European Economic
Community, European Investment Bank and the Nordic Investment Bank. For
concentration purposes, supranational entities are considered an industry.
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in debt obligations of varying maturities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Direct
obligations of the U.S. Treasury which are backed by the full faith and credit
of the U.S. Government, include a variety of Treasury securities that differ
only in their interest rates, maturities and dates of issuance. U.S.
Government agencies or instrumentalities which issue or guarantee securities
include, but are not limited to, the Federal Housing Administration, Federal
National Mortgage Association, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Governmental National
Mortgage Association, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime
Administration, the Tennessee Valley Authority, District of Columbia Armory
Board and the Student Loan Marketing Association.
<PAGE>
Obligations of U.S. Government agencies and instrumentalities may or may not
be supported by the full faith and credit of the United States. Some are
backed by the right of the issuer to borrow from the U.S. Treasury; others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations; while still others, such as the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. In the
case of securities not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitment. A Portfolio will
invest in securities of such instrumentality only when the Advisor is
satisfied that the credit risk with respect to any instrumentality is minimal.
MORTGAGE-BACKED SECURITIES
Each Portfolio may invest in mortgage-backed securities issued or guaranteed
by U.S. Government agencies or instrumentalities such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation
("FHLMC"). Obligations of GNMA are backed by the full faith and credit of the
United States Government. Obligations of FNMA and FHLMC are not backed by the
full faith and credit of the United States Government but are considered to be
of high quality since they are considered to be instrumentalities of the
United States. The market value and interest yield of these mortgage-backed
securities can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages. These securities represent ownership in a
pool of federally insured mortgage loans with a maximum maturity of 30 years.
However, due to scheduled and unscheduled principal payments on the underlying
loans, these securities have a shorter average maturity and, therefore, less
principal volatility than a comparable 30-year bond. Since prepayment rates
vary widely, it is not possible to accurately predict the average maturity of
a particular mortgage-backed security. The scheduled monthly interest and
principal payments relating to mortgages in the pool will be "passed through"
to investors. Government mortgage-backed securities differ from conventional
bonds in that principal is paid back to the certificate holders over the life
of the loan rather than at maturity. As a result, there will be monthly
scheduled payments of principal and interest. In addition, there may be
unscheduled principal payments representing prepayments on the underlying
mortgages. Although these securities may offer yields higher than those
available from other types of U.S. Government securities, mortgage-backed
securities may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because of the prepayment feature.
For instance, when interest rates decline, the value of these securities
likely will not rise as much as comparable debt securities due to the
prepayment feature. In addition, these prepayments can cause the price of a
mortgage-backed security originally purchased at a premium to decline in price
to its par value, which may result in a loss.
Each Portfolio may also invest in collateralized mortgage obligations ("CMOs")
and real estate mortgage investment conduits ("REMICs"), which are rated in
one of the two top categories by Standard & Poor's Corporation ("S&P") or
Moody's Investors Service, Inc. ("Moody's"). CMOs are securities
collateralized by mortgages, mortgage pass-throughs, mortgage pay-through
bonds (bonds representing an interest in a pool of mortgages where the cash
flow generated from the mortgage collateral pool is dedicated to bond
repayment), and mortgage-backed bonds (general obligations of the issuers
payable out of the issuer's general funds and additionally secured by a first
lien on a pool of single family detached properties). Many CMOs are issued
with a number of classes or series which have different maturities and are
retired in sequence. Investors purchasing such CMOs in the shortest maturities
receive or are credited with their pro rata portion of the scheduled payments
of interest and principal on the underlying mortgages plus all unscheduled
prepayments of principal up to a predetermined portion of the total CMO
obligation. Until that portion of such CMO obligation is repaid, investors in
the longer maturities receive interest only. Accordingly, the CMOs in the
longer maturity series are less likely than other mortgage pass-throughs to be
prepaid prior to their stated maturity. Although some of the mortgages
underlying CMOs may be supported by various types of insurance, and some CMOs
may be backed by GNMA certificates of other mortgage pass-throughs issued or
guaranteed by U.S. Government agencies or instrumentalities, the CMOs
themselves are not generally guaranteed.
<PAGE>
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding 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.
CONVERTIBLE SECURITIES
Convertible securities in which the Portfolios invest may be converted at
either a stated price or stated rate into underlying shares of common stock
thus enabling the investor to benefit from increases in the market price of
the common stock. Convertible securities provide higher yields than the
underlying equity, but generally offer lower yields than non-convertible
securities of similar quality. Like bonds, the value of convertible securities
fluctuates in relation to changes in interest rates and, in addition, also
fluctuates in relation to the underlying common stock.
WARRANTS
Warrants may be considered more speculative than certain other types of
investments because they (1) do not carry rights to dividends or voting rights
with respect to the securities which they entitle the holder to purchase, and
(2) do not represent any rights in the assets of the issuer.
INVESTMENT IN RESTRICTED SECURITIES
Each Portfolio may invest in "restricted securities" subject to the 15% of net
assets limitation regarding illiquid securities. Restricted securities are
securities which were originally sold in private placements and which have not
been registered under the Securities Act of 1933, as amended (the "1933 Act").
Such securities generally have been considered illiquid because they may be
resold only subject to statutory restrictions and delays or if registered
under the 1933 Act. The Securities and Exchange Commission ("SEC") adopted
Rule 144A to provide for a safe harbor exemption from the registration
requirements of the 1933 Act for resales of restricted securities to
"qualified institutional buyers". The result has been the development of a
more liquid and efficient institutional resale market for restricted
securities. Rule 144A securities may be liquid if properly determined by the
Board of Directors.
The expenses of registration of restricted securities will be negotiated at
the time the securities are purchased by a Portfolio. When registration is
required, a considerable period may elapse between a decision to sell the
securities and the time the sale would be permitted. Thus, a Portfolio may not
be able to obtain as favorable a price as that prevailing at the time of the
decision to sell. A Portfolio may also acquire through private placements
securities having contractual resale restrictions, which might prevent the
sale of such securities at a time when such a sale otherwise would be
desirable.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental and may not be changed
with respect to any Portfolio without the approval of a majority of the
outstanding voting securities of that Portfolio. Under the Investment Company
Act of 1940 and the rules thereunder, "majority of the outstanding voting
securities" of a Portfolio means the lesser of (1) 67% of the shares of that
Portfolio present at a meeting if the holders of more than 50% of the
outstanding shares of that Portfolio are present in person or by proxy, and
(2) more than 50% of the outstanding shares of that Portfolio. Any investment
restrictions which involve a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by or on behalf of, a Portfolio, as the
case may be.
<PAGE>
The Fund may not, on behalf of a Portfolio:
1. Purchase securities on margin (but a Portfolio may obtain such
short-term credits as may be necessary for the clearance of transactions);
2. Make short sales of securities or maintain a short position, unless
at all times when a short position is open it 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 (short sale "against-the-box"), and
unless not more than 25% of a Portfolio's net assets (taken at a current
value) are held as collateral for such sales at any one time;
3. Issue senior securities or pledge its assets, except that each
Portfolio may invest in futures contracts and related options;
4. Buy or sell commodities or commodity contracts, provided that each
Portfolio may enter into all types of futures and forward contracts on
currency, securities, economic and other indices and may purchase and sell
options on such futures contracts, or buy or sell real estate or interests in
real estate, although it may purchase and sell securities which are secured by
real estate and securities of companies which invest or deal in real estate.
5. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws;
6. Make investments for the purpose of exercising control or management;
7. Participate on a joint or joint and several basis in any trading
account in securities;
8. Under the Investment Company Act of 1940 and the rules and
regulations thereunder, each Portfolio is prohibited from acquiring the
securities of other investment companies if, as a result of such acquisition,
such Portfolio will own more than 3% of the total voting stock of the company;
securities issued by any one investment company will represent more than 5% of
its total assets; or securities (other than treasury stock) issued by all
investment companies will represent more than 10% of the total assets of a
Portfolio. These investment companies typically incur fees that are separate
from those fees incurred directly by the Portfolio. A Portfolio's purchase of
such investment companies would indirectly bear a proportionate share of the
operating expenses of such investment companies, including advisory fees. The
Portfolios will not purchase or retain securities issued by open-end
investment companies (other than money market funds for temporary investment).
9. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stocks of companies
which invest in or sponsor such programs;
10. Purchase foreign securities if as a result of the purchase of such
securities more than 25% of a Portfolio's assets would be invested in
foreign securities provided that this restriction shall not apply to foreign
securities that are listed on a domestic securities exchange or represented by
American depository receipts that are traded either on a domestic securities
exchange or in the United States on the over-the-counter market.
<PAGE>
11. The Portfolio's investment policies with respect to options and with
respect to stock and currency futures and options on either are subject to the
following fundamental limitations: (1) with respect to any Portfolio, the
aggregate value of the securities underlying calls or obligations underlying
puts determined as of the date options are sold shall not exceed 25% of the
assets of the Portfolio; (2) a Portfolio will not enter into any option
transaction if immediately thereafter, the aggregate premiums paid on all such
options which are held at any time would exceed 20% of the total net assets of
the Portfolio; (3) the aggregate margin deposits required on all futures or
options thereon held at any time by a Portfolio will not exceed 5% of the
total assets of the Portfolio; (4) the security underlying the put or call is
within the investment policies of each Portfolio and the option is issued by
the Options Clearing Corporation; and (5) the Portfolio may buy and sell puts
and calls on securities and options on financial futures if such options are
listed on a national securities or commodities exchange.
PORTFOLIO TURNOVER
An annual portfolio turnover rate is, in general, the percentage computed by
taking the lesser of purchases or sales of portfolio securities (excluding
certain debt securities) for a year and dividing that amount by the monthly
average of the market value of such securities during the year. The Fund
expects that its turnover rate generally will be less than 100%. However,
turnover will in fact be determined by market conditions and opportunities,
and therefore it is impossible to estimate the turnover rate with confidence.
MANAGEMENT
The Directors and officers of the Fund are:
<TABLE>
<CAPTION>
<S> <C>
Position Principal occupations
Name, address and age with Fund During past five years
B. Reuben Auspitz* President Executive Vice President, Manning
1100 Chase Square & Director & Napier Advisors, Inc. since
Rochester, NY 14604 1983; Vice President and Director,
DOB: 3/18/47 Exeter Fund, Inc. since 1985;
President and Director, Manning &
Napier Investor Services, Inc.
since 1990; Director and
Treasurer since 1990, President
from 1990 to 1998, Chairman since
March 1998, Manning & Napier
Advisory Advantage Corporation;
Director, Manning & Napier
Leveraged Investing Co. since
1994; Director and Chairman,
Exeter Trust Co. since 1994;
Member, Qualified Plan Services,
L.L.C. since 1995; Member,;
Member, Manning & Napier Capital
Co., L.L.C. since 1995
Martin Birmingham Director Trustee, The Freedom Forum since
21 Brookwood Road 1980; Director,Exeter Fund, Inc.
Pittsford, NY 14604 since 1994; Director Emeritus,
DOB: 10/30/21 ACC Corporation since 1994
Stephen B. Ashley Director Chairman and Chief Executive
600 Powers Building Officer Sibley Real Estate
16 West Main Street Services, Inc., 1975 to 1996;
Rochester, NY 14604 Chairman and Chief Executive
DOB: 03/22/40 Officer, Sibley Mortgage
Corp.,1975 to 1996; Director,
Genesee Corp. since 1987;
Director, Hahn Automotive since
1994; Director, Fannie Mae since
1995; Director,Exeter Fund, Inc.
since 1996; Chairman and Chief
Executive Officer, The Ashley
Group since 1997.
Harris H. Rusitzky Director Formerly Director and Corporate
One Grove Street Executive, Serv-Rite Corporation
Pittsford, NY 14534 from 1965-1994; Director, Exeter
DOB: 1/9/35 Fund, Inc. since 1985; President,
Blimpie of Central New York and
The Greening Group since 1994
Peter L. Faber Director Former Partner, Kaye, Scholer,
1211 Avenue of the Fierman, Hays & Handler from 1984-
Americas 1995; Director, Exeter Fund, Inc.
New York, New York 10036 since 1987; Partner,
DOB: 4/29/38 McDermott, Will & Emery since 1995
Jodi Hedberg Corporate Compliance Administrator, Manning
1100 Chase Square Secretary & Napier Advisors, Inc. from 1991-
Rochester, New York 14604 1994; Senior Compliance
DOB: 11/26/67 Administrator, Manning & Napier
Advisors, Inc. from 1994-1995;
Compliance Manager, Manning &
Napier Advisors, Inc. since 1995;
Corporate Secretary, Exeter Fund,
Inc. since 1997.
Beth Hendershot Galusha Chief Chief Financial Officer, Manning &
1100 Chase Square Financial & Napier Advisors, Inc. since 1987;
Rochester, NY 14604 Accounting Treasurer, Manning & Napier
DOB: 6/23/61 Officer, Investor Services, Inc. since
Treasurer 1990; Director, Manning & Napier
Advisory Advantage Corporation
since 1993; Member, Manning &
Napier Capital Co., L.L.C. since
1995; Treasurer, Exeter Trust
Company since 1995; Chief
Financial & Accounting Officer,
Exeter Fund, Inc. since 1997.
</TABLE>
* Interested Director of the Fund within the meaning of the Investment
Company Act of 1940 (the "1940 Act").
The only Committee of the Corporation is an Audit Committee whose members are
B. Reuben Auspitz, Harris H. Rusitzky and Stephen B. Ashley.
Directors affiliated with the Advisor do not receive fees from the Fund. Each
Director who is not affiliated with the Advisor shall receive an annual fee of
$2,500. Annual fees will be calculated monthly and prorated. Each Director
who is not affiliated with the Advisor shall receive $375 per Board Meeting
attended for each active Portfolio of the Fund, plus $500 for any Committee
Meeting held on a day on which a Board Meeting is not held.
COMPENSATION TABLE FOR FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Name Position Aggregate Pension Est. Annual Total
from Compensation Benefits Compensation
Registrant upon from
Retirement Registrant
B. Reuben
Auspitz* Director $ -0- N/A N/A $ -0-
Martin
Birmingham Director $11,500 N/A N/A $11,500
Harris H.
Rusitzky Director $11,875 N/A N/A $11,875
Peter L.
Faber Director $11,500 N/A N/A $11,500
Stephen B.
Ashley Director $11,875 N/A N/A $11,875
</TABLE>
*Interested Director, within the meaning of the Investment Company Act of 1940
(the 1940 Act).
THE ADVISOR
Manning & Napier Advisors, Inc. ("Advisor") acts as the Fund's investment
advisor. For the services performed, each Portfolio pays the Advisor a fee as
set forth in the Prospectus.
The Investment Advisory Agreement (the Agreement) between the Fund and the
Advisor states that the Advisor shall give the Fund the benefit of its best
judgment and effort in rendering services thereunder, but the Advisor shall
not be liable for any loss sustained by reason of the purchase, sale or
retention of any security, whether or not such purchase, sale or retention
shall have been based upon its own investigation and research or upon
investigation and research made by any other individual, firm or corporation,
if such purchase, sale or retention shall have been made and such other
individual, firm or corporation shall have been selected in good faith. The
Agreement also states that nothing contained therein shall, however, be
construed to protect the Advisor against any liability to the Fund or its
security holders by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations and duties under the Agreement.
In the Agreement, the Fund agrees that the words "Manning & Napier" in its
name are derived from the name of the Advisor and are the property of the
Advisor for copyright and all other purposes and that therefore such words may
be freely used by the Advisor as to other investment companies or other
investment products; the Fund further agrees that, in the event that the
Advisor ceases to be the Fund's investment advisor for any reason, the Fund
will (unless the Advisor otherwise consents in writing) promptly take all
necessary steps to change its name to a name not including the words "Manning
& Napier". The Agreement also provides that it is agreed that the Advisor
shall have no responsibility or liability for the accuracy or completeness of
the Fund's Registration Statement under the 1940 Act or the Securities Act of
1933 except for information supplied by the Advisor for inclusion therein; the
Fund agrees to indemnify the Advisor to the full extent permitted by the
Fund's Articles of Incorporation. The Advisor is the Fund's Transfer Agent.
For Period ended December 31, 1997 (unless otherwise indicated), the aggregate
total of fees paid by the Portfolios to the Advisor were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Portfolio 1997
Fees Paid Fees Waived
Bond Portfolio N/A $ 649
Maximum Horizon Portfolio N/A $1,519
Growth Portfolio N/A $1,789
Moderate Growth Portfolio N/A $1,358
Equity Portfolio N/A $1,561
Small Cap Portfolio N/A $1,548
</TABLE>
Manning & Napier Investor Services, Inc., acts as Distributor of the Fund
shares and is located at the same address as the Advisor and the Fund. There
will be no additional costs for this service.
PRINCIPAL SHAREHOLDERS
As of April 1, 1998, the outstanding shares were allocated as follows:
the Advisor owns all of the outstanding shares of the Moderate Growth
Portfolio, Maximum Horizon Portfolio, Bond Portfolio; 98.1% of the Small Cap
Portfolio and Equity Portfolio; and 29.1% of the Growth Portfolio. Variable
Account A, a segregated asset account of Keyport Life Insurance Company, 125
High Street, Boston, MA 02110 owns: 36.8% of the Growth Portfolio; 1.9% of the
Small Cap Portfolio; and 1.9% of the Equity Portfolio. Variable Account J, a
segregated asset account of Liberty Life Assurance Company, 125 High Street,
Boston, MA 02110 owns: 34.1% of the Growth Portfolio.
CUSTODIAN AND INDEPENDENT ACCOUNTANT
The custodian is Boston Safe Deposit and Trust Company, One Cabot Road, 3rd
Floor, Medford, MA 02155-5159. Boston Safe Deposit and Trust Company may, at
its own expense, employ a sub-custodian on behalf of the foreign securities
held by the Fund, provided that Boston Safe Deposit and Trust Company shall
remain liable for all its duties as custodian. The Fund's independent
accountants are Coopers & Lybrand, L.L.P., One Post Office Square, Boston, MA
02109.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Agreement states that in connection with its duties to arrange for the
purchase and the sale of securities held in the Portfolios of the Fund by
placing purchase and sale orders for the Fund, the Advisor shall select such
broker-dealers ("brokers") as shall, in the Advisor's judgment, implement the
policy of the Fund to achieve "best execution", i.e., prompt and efficient
execution at the most favorable securities price. In making such selection,
the Advisor is authorized in the Agreement to consider the reliability,
integrity and financial condition of the broker, the size and difficulty in
executing the order and the value of the expected contribution of the broker
to the investment performance of the Fund on a continuing basis. The Advisor
is also authorized to consider whether a broker provides brokerage and/or
research services to the Fund and/or other accounts of the Advisor. The Fund
understands that a substantial amount of its portfolio transactions may be
transacted with primary market makers acting as principal on a net basis, with
no brokerage commissions being paid by the Fund. Such principal transactions
may, however, result in a profit to market makers. In certain instances the
Advisor may make purchases of underwritten issues for the Fund at prices which
include underwriting fees. The Agreement states that the commissions paid to
such brokers may be higher than another broker would have charged if a good
faith determination is made by the Advisor that the commission is reasonable
in relation to the services provided, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities as to the
accounts as to which it exercises investment discretion and that the Advisor
shall use its judgment in determining that the amount of commissions paid is
reasonable in relation to the value of brokerage and research services
provided. The Advisor is further authorized to allocate the orders placed by
it on behalf of the Fund to such brokers or dealers who also provide research
or statistical material, or other services, to the Fund, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions
as the Advisor shall determine, and the Advisor shall report on such
allocations regularly to the Fund, indicating the broker-dealers to whom such
allocations have been made and the basis therefore.
The research services discussed above may be in written form or through direct
contact with individuals and may include information as to particular
companies and securities as well as market, economic or institutional areas
and information assisting the Fund in the valuation of its investments. The
research which the Advisor receives for the Fund's brokerage commissions,
whether or not useful to the Fund may be useful to the Advisor in managing the
accounts of the Advisor's other advisory clients. Similarly, the research
received for the commissions of such accounts may be useful to the Fund.
The aggregate total brokerage commissions paid by the Portfolios were as
follows:
<TABLE>
<CAPTION>
<S> <C>
Portfolio 1997
Bond Portfolio N/A
Maximum Horizon Portfolio $ 288
Growth Portfolio $ 277
Moderate Growth Portfolio $ 98
Equity Portfolio $ 164
Small Cap Portfolio $ 472
</TABLE>
NET ASSET VALUE
The net asset value is determined on each day that the New York Stock Exchange
is open for trading. In determining the net asset value of the Fund's shares,
common stocks that are listed on national securities exchanges or the NASDAQ
National Market System are valued at the last sale price on the exchange on
which each stock is principally traded as of the close of the New York Stock
Exchange (which is currently 4:00 p.m., Eastern time), or, in the absence of
recorded sales, at the closing bid prices on such exchanges or on such System.
Unlisted securities that are not included in such NASDAQ are valued at the
quoted bid prices in the over-the-counter market. All securities initially
expressed in foreign currencies will be converted to U.S. dollars at the
exchange rates quoted at the close of the New York markets. Short securities
positions are accounted for at value, using the same method of valuation
described above. Securities and other assets for which market quotations are
not readily available are valued by appraisal at their fair value as
determined in good faith by the Advisor under procedures established by and
under the general supervision and responsibility of the Fund's Board of
Directors. The Advisor may use a pricing service to obtain the value of the
Fund's portfolio securities where the prices provided by such pricing service
are believed to reflect the fair market value of such securities. The methods
used by the pricing service and the valuations so established will be reviewed
by the Advisor under the general supervision of the Fund's Board of Directors.
Several pricing services are available, one or more of which may be used as
approved by the Fund's Board of Directors.
REDEMPTION OF SHARES
PAYMENT FOR SHARES REDEEMED
Payment for shares presented for redemption may be delayed more than three
days only for (1) any period (A) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings or (B) during which
trading on the New York Stock Exchange is restricted; (2) for any period
during which an emergency exists as a result of which (A) disposal by the Fund
of securities owned by it is not reasonably practicable or (B) it is not
reasonably practicable for the Fund to determine the value of its net assets;
or (3) for such other periods as the Securities and Exchange Commission may by
order permit.
REDEMPTION IN KIND
If the Board of Directors determines that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment wholly or
partly in cash, the Fund may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund, in lieu of
cash in conformity with applicable rules of the Securities and Exchange
Commission. The Fund, however, has elected to be governed by Rule 18f-1 under
the 1940 Act pursuant to which the Portfolio is obligated to redeem shares
solely in cash up to the lesser of $250,000 or one per cent of the net asset
value of the Fund during any 90 day period for any one shareholder. Should
redemptions by any shareholder exceed such limitation, the Fund will have the
option of redeeming the excess in cash or in kind. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash.
TAXES
Each Portfolio of the Fund intends to qualify each year and elect to be taxed
as a regulated investment company under Subchapter M of the United States
Internal Revenue Code of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, a Portfolio will not be subject to federal
income tax on any of its net investment income or net realized capital gains
that are distributed to the separate accounts of the Life Companies. In
order to qualify as a "regulated investment company," a Portfolio must,
among other things, (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities, or foreign currencies, and
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities,
or currencies and (b) diversify its holdings so that, at the close of each
quarter of its taxable year, (i) at least 50% of the value of its total assets
consists of cash, cash items, U.S. Government Securities, and other securities
limited generally with respect to any one issuer to not more than 5% of the
total assets of the Portfolio and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any issuer (other than U.S. Government
Securities). In order to receive the favorable tax treatment accorded
regulated investment companies and their shareholders, moreover, a Portfolio
must in general distribute at least 90% of its interest, dividends, net
short-term capital gains, and certain other income each year.
With respect to investment income and gains received by a Portfolio from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. The effective rate of foreign
taxes in which a Portfolio will be subject depends on the specific countries
in which its assets will be invested and the extent of the assets invested in
each such country and therefore cannot be determined in advance.
A Portfolio's ability to use options, futures, and forward contracts and other
hedging techniques, and to engage in certain other transactions, may be
limited by tax considerations. A Portfolio's transactions in
foreign-currency-denominated debt instruments and its hedging activities will
likely produce a difference between its book income and its taxable income.
This difference may cause a portion of the Portfolio's distributions of book
income to constitute returns of capital for tax purposes or require the
Portfolio to make distributions exceeding book income in order to permit the
Portfolio tocontinue to qualify, and be taxed under Subchapter M of the
Code, as a regulated investment company.
Under federal income tax law, a portion of the difference between the purchase
price of zero-coupon securities in which a Portfolio has invested and their
face value ("original issue discount") is considered to be income to the
Portfolio each year, even though the Portfolio will not receive cash interest
payments from these securities. This original issue discount (imputed income)
will comprise a part of the net investment income of the Portfolio which must
be distributed to shareholders in order to maintain the qualification of the
Portfolio as a regulated investment company and to avoid federal income tax at
the level of the Portfolio.
This discussion of the federal income tax treatment of the Fund and its
shareholders is based on the law as of the date of this Statement of
Additional Information. It does not describe in any respect the tax treatment
of any insurance or other product pursuant to which investments in the Fund
may be made.
SPECIAL CONSIDERATIONS
The Portfolios serve as the underlying investments for Variable Contracts
issued through separate accounts of the Life Companies which may or may not be
affiliated.
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of segregated asset accounts that fund contracts such as the
Variable Contracts, which are in addition to the diversification requirements
imposed on the Portfolios by the 1940 Act and Subchapter M. Failure to satisfy
those standards would result in imposition of federal income tax on a Variable
Contract owner with respect to earnings allocable to the Variable Contract
prior to the receipt of payments thereunder. Section 817(h)(2) provides that a
segregated asset account that funds contracts such as the Variable Contracts
is treated as meeting the diversification standards if, as of the close of
each quarter, the assets in the account meet the diversification requirements
for a regulated investment company and no more than 55% of those assets
consist of cash, cash items, U.S. Government securities and securities of
other regulated investment companies. There is an exception for securities
issued by the Treasury Department in connection with variable life insurance
policies.
Treasury Regulations amplify the diversification standards set forth in
Section 817(h) and provide an alternative to the provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (i) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (ii) no more than 70% of such
value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of
such value is represented by any four investments. For purposes of these
Regulations all securities of the same issuer are treated as a single
investment, and each United States government agency or instrumentality shall
be treated as a separate issuer.
Each Portfolio will be managed in such a manner as to comply with these
diversification requirements. It is possible that, in order to comply with
these requirements, less desirable investment decisions may be made which
would affect the investment performance of a Portfolio.
DIVIDENDS AND DISTRIBUTIONS
Each of the Portfolios will declare and distribute dividends from net
investment income, if any, and will distribute its net realized capital gains,
if any, at least annually. Both dividends and capital gain distributions will
be made in shares of such Portfolios unless an election is made on behalf of a
separate account to receive dividends and capital gain distributions in cash.
PERFORMANCE INFORMATION
A Portfolio's yield is presented for a specified 30-day period (the "base
period"). Yield is based on the amount determined by (i) calculating the
aggregate of dividends and interest earned by the Portfolio during the base
period less expenses accrued for that period, and (ii) dividing that amount by
the product of (A) the average daily number of shares of the Portfolio
outstanding during the base period and entitled to receive dividends and (B)
the net asset value per share of the Portfolio on the last day of the base
period. The result is annualized on a compounding basis to determine the
Portfolio's yield. For this calculation, interest earned on debt obligations
held by a Portfolio is generally calculated using the yield to maturity (or
first expected call date) of such obligations based on their market values
(or, in the case of receivables-backed securities such as GNMAs, based on
cost). Dividends on equity securities are accrued daily at their stated
dividend rates.
Total return of a Portfolio for periods longer than one year is determined by
calculating the actual dollar amount of investment return on a $1,000
investment in the Portfolio made at the beginning of each period, then
calculating the average annual compounded rate of return which would produce
the same investment return on the $1,000 investment over the same period.
Total return for a period of one year or less is equal to the actual
investment return on a $1,000 investment in the Portfolio during that period.
Total return calculations assume that all Portfolio distributions are
reinvested at net asset value on their respective reinvestment dates.
From time to time, the Advisor may reduce its compensation or assume expenses
in respect of the operations of a Portfolio in order to reduce the Portfolio's
expenses. Any such waiver or assumption would increase a Portfolio's yield
and total return during the period of the waiver or assumption.
<PAGE>
SHAREHOLDER COMMUNICATIONS
Owners of Variable Contracts issued by the Life Companies for which shares of
one or more Portfolios are the investment vehicle are entitled to receive from
the Life Companies unaudited semi-annual financial statements and audited
year-end financial statements certified by the Fund's independent public
accountants. Each report will show the investments owned by the Portfolios
and the market value thereof and will provide other information about the Fund
and its operations.
ORGANIZATION AND CAPITALIZATION
The Fund is an open-end investment company incorporated under the laws of the
State of Maryland on November 1, 1995.
Shares entitle their holders to one vote per share, with fractional shares
voting proportionally; however, a separate vote will be taken by each
Portfolio on matters affecting an individual Portfolio. For example, a change
in a fundamental investment policy for the Manning & Napier Growth Portfolio
would be voted upon only by shareholders of that Portfolio. Additionally,
approval of the Investment Advisory Agreement is a matter to be determined
separately by each Portfolio. Approval by the shareholders of one Portfolio is
effective as to that Portfolio. Shares have noncumulative voting rights.
Additional Portfolios may be created from time to time with different
investment objectives or for use as funding vehicles for different variable
life insurance policies or variable annuity contracts. Any additional
Portfolios may be managed by investment advisers other than the current
Advisor. In addition, the Directors have the right, subject to any necessary
regulatory approvals, to create more than one class of shares in a Portfolio,
with the classes being subject to different charges and expenses and having
such other different rights as the Directors may prescribe and to terminate
any Portfolio of the Fund.
FINANCIAL STATEMENTS
The financial statements of the Fund are incorporated by reference into this
Statement of Additional Information. The financial statements with respect to
the Portfolios have been audited by, Coopers & Lybrand L.L.P., independent
public accountants to such Portfolios. The Funds annual report(s) are
incorporated herein by reference in reliance upon their authority as experts
in accounting and auditing. A copy of the 1997 Annual Report(s) to
Shareholders must accompany the delivery of this Statement of Additional
