MANNING & NAPIER FUND, INC.
P.O. Box 41118
Rochester, New York 14604
1-800-466-3863
DEFENSIVE SERIES
BLENDED ASSET SERIES I
BLENDED ASSET SERIES II
MAXIMUM HORIZON SERIES
Manning & Napier 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 Defensive Series, Blended Asset Series I, Blended Asset Series
II, and the Maximum Horizon Series of the Fund (individually and collectively,
the "Series").
The primary objective of the Defensive Series is preservation of capital
(i.e. to minimize the risk of negative returns), and it has with a secondary
objective of long-term growth. The Advisor will seek to achieve this
objective by using a conservative asset mix as well as conservative investment
strategies within those asset classes. This conservative investment approach
which attempts to protect capital while simultaneously seeking growth
opportunities is what is intended by use of the term "defensive".
The investment objective of the Blended Asset Series I is to seek with
equal emphasis long-term growth and preservation of capital. 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.
The primary objective of the Blended Asset Series II is to provide
long-term growth of capital. The secondary objective is the preservation of
capital.
The primary objective of the Maximum Horizon Series is to achieve the
high level of long-term capital growth typically associated with the stock
market.
This Prospectus provides you with the basic information you should know
before investing in either Series. You should read it and keep it for future
reference. A Statement of Additional Information dated November 22,
1996 , 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.
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.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 22, 1996.
<PAGE> 1
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases None
Redemption Fees (1) None
Exchange Fees (2) None
</TABLE>
(1) A wire charge, currently $15, will be deducted by the Transfer Agent
from the amount of a wire redemption payment made at the request of a
shareholder. Such amount is not included in the "Annual Operating
Expenses of the Series."
(2) A shareholder may effect up to four (4) exchanges in a twelve (12)
month period without change. Subsequent exchanges are subject to a fee of
$15.
ANNUAL OPERATING EXPENSES
The following information provides (i) a tabular summary of expenses relating
to the annual operating expenses of the Series and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment.
Annual Operating Expenses of the Series (as a percentage of average net
assets):
<TABLE>
<CAPTION>
Defensive Blended Asset Blended Asset Maximum
Series (3) Series I (3) Series II (3) Horizon Series (3)
---------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
Management Fees After Reduction of Fees (4) 0.00% 0.89% 0.98% 0.00%
12b-1 Fees None None None None
Other Expenses 1.00% 0.31% 0.22% 1.20%
----- ---------- -------------- --------------
Total Operating Expenses of the Series (4) 1.00% 1.20% 1.20% 1.20%
===== ========== ============== ==============
</TABLE>
Example
You would pay the following expenses on a $1,000 investment, assuming a) 5.0%
annual return and b) redemptions at the end of each time period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Defensive Series $ 10 $ 32 $ 55 $ 122
Blended Asset Series I 12 38 66 145
Blended Asset Series II 12 38 66 145
Maximum Horizon Series 12 38 66 145
</TABLE>
(3) Blended Asset Series I and Blended Asset Series II were engaged in
active investment operations for the ten months ended October 31, 1996;
Defensive Series and Maximum Horizon Series were engaged in active
investment operations for the year ended October 31, 1996; therefore,
actual management fees and other expenses are used above.
(4) The Investment Advisor waived a portion of its management fee for
Blended Asset Series I and Blended Asset Series II. If the full
management fee of 1.00% had been incurred by each of the two Series,
total operating expenses, as a percentage of net assets, would have been
1.31% for Blended Asset Series I and 1.22% for Blended Asset Series II.
The Investment Advisor did not impose its management fee and paid a
portion of the Funds expenses for Defensive Series and Maximum Horizon
Series. If these expenses had been incurred by each of the two Series,
expenses would have been 2.50%, the limit imposed by state securities
law. Absent the fee waiver and assumption of expenses, the expenses
paid on a $1,000 investment would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Defensive Series $ 25 $ 78 $ 133 $ 284
Blended Asset Series I 13 42 72 158
Blended Asset Series II 12 39 67 148
Maximum Horizon Series 25 78 133 284
</TABLE>
The fee waiver and assumption of expenses by the Advisor is voluntary and may
be terminated at any time. However, the Advisor has agreed to continue this
fee waiver and assumption of expenses at least throughout the Series' current
fiscal year.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses associated with investing in the Series. For a
more complete description of the various costs and expenses illustrated above,
please refer to the Management section of this Prospectus.
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide selected per share data and ratios for the
Blended Asset Series I, Blended Asset Series II, Defensive Series and Maximum
Horizon Series (for a share outstanding throughout the period for the period
shown). The tables are part of the Series' financial statements, which are
included in the Statement of Additional Information incorporated by reference
into this Prospectus.
<TABLE>
<CAPTION>
BLENDED ASSET SERIES I For the Period
9/15/93
For the Ten For the Year For the Year (commencement
Months Ended Ended Ended of operations) to
10/31/96 12/31/95 12/31/94 12/31/93
-------------- --------------- -------------- -------------------
Per share data (for a share outstanding
throughout each period):
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.72 $ 9.72 $ 10.05 $ 10.00
-------------- --------------- -------------- -------------------
Income from investment operations:
Net investment income 0.29 0.34 0.20 0.05
Net realized and unrealized gain (loss) on investments 0.31 1.70 (0.28) 0.04
-------------- --------------- -------------- -------------------
Total from investment operations 0.60 2.04 (0.08) 0.09
-------------- --------------- -------------- -------------------
Less distributions to shareholders:
From net investment income (0.09) (0.34) (0.20) (0.04)
In excess of net investment income -- (0.01) -- --
From net realized gain on investments (0.03) (0.69) (0.04) --
In excess of net realized gain -- -- (0.01) --
-------------- --------------- -------------- -------------------
Total distributions to shareholders (0.12) (1.04) (0.25) (0.04)
-------------- --------------- -------------- -------------------
NET ASSET VALUE - END OF PERIOD $ 11.20 $ 10.72 $ 9.72 $ 10.05
============== =============== ============== ===================
Total return 1 5.64% 21.08% (0.80%) 0.93%
Ratios (to average net assets) / Supplemental Data:
Expenses 1.20%2** 1.20%** 1.20%* 1.20%2*
Net investment income 3.69%2** 3.64%** 3.40%* 2.47%2*
Portfolio turnover 85% 72% 45% 1%
Average commission rate paid $ 0.0515 $ 0.0689 -- --
NET ASSETS - END OF PERIOD (000's omitted) $ 17,794 $ 9,518 $ 4,519 $ 475
============== =============== ============== ===================
*The investment advisor did not impose its management fee and paid a portion of the Fund's expenses. If these expenses
had been incurred by the Fund, expenses would have been limited to that allowed by state securities law.
** The investment advisor waived a portion of its management fee.
If the full expenses had been incurred by the Fund in either instance above, the net investment income per share and the ratios
would be as follows:
Net investment income $ 0.28 $ 0.31 $ 0.12 $ 0.02
Ratios (to average net assets):
Expenses 1.31%2 1.53% 2.50% 2.50%2
Net investment income 3.58%2 3.31% 2.10% 1.17%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
BLENDED ASSET SERIES II
For the Period
For the For the For the 10/12/93
Ten Months Year Year (commencement
Ended Ended Ended of operations) to
10/31/96 12/31/95 12/31/94 12/31/93
------------ ---------- ---------- -------------------
Per share data (for a share outstanding throughout
each period):
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 11.95 $ 10.12 $ 9.98 $ 10.00
------------ ---------- ---------- -------------------
Income from investment operations:
Net investment income 0.23 0.24 0.11 0.01
Net realized and unrealized gain (loss)
on investments 0.96 3.05 0.24 (0.03)
------------ ---------- ---------- -------------------
Total from investment operations 1.19 3.29 0.35 (0.02)
------------ ---------- ---------- -------------------
Less distributions to shareholders:
From net investment income (0.04) (0.24) (0.12) (0.00)3
From net realized gain on investments (0.06) (1.22) (0.09) --
------------ ---------- ---------- -------------------
Total distributions to shareholders (0.10) (1.46) (0.21) (0.00)
------------ ---------- ---------- -------------------
NET ASSET VALUE - END OF PERIOD $ 13.04 $ 11.95 $ 10.12 $ 9.98
============ ========== ========== ===================
Total return 1 10.01% 32.64% 3.52% (0.18%)
Ratios (to average net assets) / Supplemental Data:
Expenses 1.20%2** 1.20%** 1.20%* 1.20%2*
Net investment income 2.51%2** 2.53%** 2.12%* 1.94%2*
Portfolio turnover 57% 63% 19% 0%
Average commission rate paid $ 0.0524 $ 0.0635 -- --
NET ASSETS - END OF PERIOD (000's omitted) $ 32,999 $ 20,519 $ 7,214 $ 475
============ ========== ========== ===================
* The investment advisor did not impose its management fee and paid a portion of the Fund's expenses. If these expenses
had been incurred by the Fund for the period ended December 31,1993, expenses would have been limited to that allowed
by state securities law.
** The investment advisor waived a portion of its management fee.
If the full expenses had been incurred by the Fund in either instance above, the net investment income per share and the
ratios would have been as follows:
Net investment income $ 0.23 $ 0.23 $ 0.05 $ 0.01
Ratios (to average net assets):
Expenses 1.22%2 1.33% 2.31% 2.50%2
Net investment income 2.49%2 2.40% 1.01% 0.64%2
1 Represents aggregate total return for the period indicated
2 Annualized
3 Distribution from net investment income amounted to $0.0017 per share
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM HORIZON
DEFENSIVE SERIES SERIES
------------------ -----------------
For the Year For the Year
Ended Ended
10/31/96 10/31/96
------------------ -----------------
Per share data (for a share outstanding throughout
the period):
<S> <C> <C>
Net asset value - Beginning of period $ 10.00 $ 10.00
------------------ -----------------
Income from investment operations:
Net investment income 0.35 0.15
Net realized and unrealized gain (loss)
on investments 0.14 1.36
------------------ -----------------
Total from investment operations 0.49 1.51
------------------ -----------------
Less distributions to shareholders:
From net investment income (0.20) (0.13)
------------------ -----------------
NET ASSET VALUE - END OF PERIOD $ 10.29 $ 11.38
================== =================
Total return1 4.94% 15.21%
Ratios (to average net assets) / Supplemental Data:
Expenses* 1.00% 1.20%
Net investment income* 4.26% 1.71%
Portfolio turnover 30% 95%
Average commission rate paid $ 0.0691 $ 0.0655
NET ASSETS - END OF PERIOD (000's omitted) $ 745 $ 1,574
================== =================
*The investment advisor did not impose its management fee and paid a portion of the Fund's expenses.
If these expenses had been incurred by the Fund, expenses would have been limited to that allowed by
state securities law and the net investment income per share and the ratios would have been as follows:
Net investment income $ 0.23 $ 0.04
Ratios (to average net assets):
Expenses 2.50% 2.50%
Net investment income 2.76% 0.41%
1 Represents aggregate total return for the period indicated
</TABLE>
5
<PAGE>
THE FUND
The Fund is an open-end management investment company incorporated under
the laws of the State of Maryland on July 26, 1984. The Fund offers separate
series of units of beneficial interest ("shares"). This Prospectus relates to
the Defensive Series, Blended Asset Series I, Blended Asset Series II, and the
Maximum Horizon Series. Information regarding the Fund's other series is
contained in separate prospectuses that may be obtained from Manning & Napier
Fund, Inc., P.O. Box 41118, Rochester, New York 14604 or by calling
1-800-466-3863. The Defensive Series, Blended Asset Series I, Blended Asset
Series II, and Maximum Horizon Series are diversified funds.
RISK AND INVESTMENT OBJECTIVES AND POLICIES
DEFENSIVE SERIES
The primary objective of the Defensive Series is preservation of capital
(i.e. to minimize the risk of negative returns), and it has a secondary
objective of long-term growth. The Advisor will seek to achieve this
objective by using a conservative asset mix as well as conservative investment
strategies within those asset classes. This conservative investment approach
which attempts to protect capital while simultaneously seeking growth
opportunities is what is intended by use of the term "defensive". 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 Defensive Series' investments fluctuate in value, the Series'
shares will fluctuate in value. In pursuit of its primary objective, the
Defensive Series will, 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 traditional 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 Defensive Series will attain its objective.
The Series' investment objectives are not fundamental and may be changed
by the Board of Directors without shareholder approval; however, it is the
Board of Directors' policy to notify shareholders prior to any material change
in a Series' objective.
BLENDED ASSET SERIES I
The investment objective of the Blended Asset Series I 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 Blended Asset Series I's investments fluctuate in value, the
Blended Assets Series I 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 Blended Asset Series I will attain its objective.
The Series' investment objectives are not fundamental and may be changed
by the Board of Directors without shareholder approval; however, it is the
Board of Directors' policy to notify shareholders prior to any material change
in a Series' objective.
BLENDED ASSET SERIES II
The primary objective of the Blended Asset Series II is to provide
long-term growth of capital. The secondary objective of the Blended Asset
Series II 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
Blended Asset Series II's investments fluctuate in value, the Blended Asset
Series II shares will fluctuate in value. In pursuit of its primary
objective, the Blended Asset Series II 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 Blended Asset Series II, 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 Blended Asset
Series II will attain its objective.
The Series' investment objectives are not fundamental and may be changed
by the Board of Directors without shareholder approval; however, it is the
Board of Directors' policy to notify shareholders prior to any material change
in a Series' objective.
<PAGE> 6
MAXIMUM HORIZON SERIES
The primary objective of Maximum Horizon Series 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 Series 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 Series'
investments fluctuate in value, the shares of the Series will also fluctuate
in value. There is no assurance that the Maximum Horizon Series will attain
its objective.
The Series' investment objectives are not fundamental and may be changed
by the Board of Directors without shareholder approval; however, it is the
Board of Directors' policy to notify shareholders prior to any material change
in a Series' objective.
In pursuit of their investment objectives, the Series may invest in a
wide variety of equity and debt securities. Equity securities consist of
common stocks, securities convertible thereto, and warrants. None of the
Series intends 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 to benefit from movement in the stock price. There will be no
minimum rating standards for the debt aspects of such securities. Convertible
bonds purchased by a Series may be subject to the risk of being called by the
issuer.
The debt securities in which each Series 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. Each Series 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 Corporation ("S&P") or Baa by
Moody's Investor 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 Risk and Additional Information
about Investment Policies - High Yield Debt Securities.
For temporary defensive purposes during periods when the Advisor
determines that market conditions warrant, the Series 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 P-1 by Moody's, repurchase agreements
involving such securities and shares of other investment companies 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, each of the Series may, to varying degrees, use certain
techniques and strategies discussed below under "Risk and Additional
Information about Investment Policies".
RISK AND ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
Set forth below is further information about certain types of securities
in which the Series may invest, as well as information about additional types
of investments and certain strategies the Series 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 Series' shareholders.
Additional information concerning these strategies and their related risks is
contained in the Statement of Additional Information.
FOREIGN SECURITIES
Each Series may invest up to 25% of its assets in foreign securities
which are not publicly traded in the United States. Each Series will invest
no more than 25% of its assets in securities issued by any one foreign
government. Each Series 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. Each Series' restrictions on investment in foreign securities are
fundamental policies that cannot be changed without the approval of a
majority, as defined in the Investment Company Act of 1940 (the "1940 Act"),
of the outstanding voting securities of the Series.
With respect to the bond investments within each portfolio, each Series
generally emphasizes investments in U.S. Government securities and companies
domiciled in the United States; however, it may invest up to 25% of its assets
in foreign securities of the same types and quality as the domestic securities
in which the Series 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 objective of the Series. Foreign
securities may be denominated either in U.S. dollars or foreign currencies.
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 Series. In addition, costs
associated with transactions on foreign markets are generally higher than for
transactions in the U.S.
<PAGE> 7
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 Series may enter into repurchase agreements with respect to
portfolio securities. Under the terms of a repurchase agreement, the Series
purchases securities ("collateral") from various 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 Series 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 Series' Custodian either directly or through a securities depository.
Default by the seller would, however, expose the Series 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 Series under the 1940 Act.
SECURITIES LENDING
Each Series 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 would 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
Series.
U.S. GOVERNMENT SECURITIES
Each Series 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 Series 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 Series owns securities equivalent to those sold short. No more
than 25% of the net assets (taken at current value) of a Series may be held as
collateral for such sales at any one time. Such short sales can be used as a
hedge and as a method of deferring realized capital gains from one taxable
year to the next for tax purposes.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
Each Series 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
Series before settlement. These securities are subject to market fluctuation
due to changes in market interest rates. Each Series will enter into these
arrangements with the intention of acquiring the securities in question and
not for speculative purposes and will maintain a segregated account with its
custodian consisting of high-grade liquid debt instruments or cash in an
amount at least equal to the purchase price.
INTEREST RATE RISK
The value of the fixed income securities held by the Series will vary
inversely to changes in prevailing interest rates. Thus, if interest rates
have increased from the time a security was purchased, such security, if sold,
might be sold at a price less than its cost. Similarly, if interest rates
have declined from the time a security was purchased, such security, if sold,
might be sold at a price greater than its purchase cost. In either instance,
if the security was purchased at face value and held to maturity, no gain or
loss would be realized.
MORTGAGE-BACKED SECURITIES
Each Series 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 Series
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 is 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
Series reinvests the prepaid amounts in securities, the yield of which reflect
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 credit-worthiness. 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 the Series' 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 Series will also seek to minimize
risk by diversifying its holdings.
<PAGE> 8
ZERO-COUPON BONDS
Some of the securities in which the Series invest may include so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Each Series is required to accrue and
distribute income from zero-coupon bonds on a current basis, even though it
does not receive that income currently in cash. Thus, the Series may have to
sell investments to obtain cash needed to make income distributions. The
discount in the absence of financial difficulties of the issuer decreases as
the final maturity of the security approaches. Zero-coupon bonds can be sold
prior to their maturity date in the secondary market at the then prevailing
market value, which depends primarily on the time remaining to maturity,
prevailing level of interest rates and the perceived credit quality of the
issues. The market prices of zero-coupon securities are subject to greater
fluctuations in response to changes in market interest rates than bonds which
pay interest currently.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain of the obligations purchased by a Series 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 Series 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 Series' portfolios, i.e. to reduce the overall level of
risk that normally would be expected to be associated with their investments.
Each Series 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 Series also may purchase forward
foreign currency exchange contracts to hedge currency exchange rate risk. In
addition, each Series is authorized to purchase and sell stock index futures
contracts and options on stock index futures contracts. Each Series 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 Series 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 Series 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
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 Series 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 Series 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 Series' 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 Series' 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 high
grade liquid securities in a segregated account with its custodian in the
amount prescribed.
A Series' 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 a loss to the
Series. Certain futures exchanges or boards of trade have established daily
price limits based on the amount of the previous day's settlement price.
These daily limits may restrict the Series' ability to repurchase or sell
certain futures contracts on any particular day.
<PAGE> 9
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Series' 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 Series 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 Series 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 Series do not consider forward foreign
currency exchange contracts to be commodities or commodity contracts for
purposes of the Series' fundamental restrictions concerning investment in
commodities or commodity contracts, as set forth in the Statement of
Additional Information.
CURRENCY FUTURES CONTRACTS AND OPTIONS ON 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 Series 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
Series may purchase or sell future 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 Series' 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 Series' 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 the
Series 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 Series 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 Series' outstanding
shares.
Each Series may borrow money, but only from a bank for temporary or
emergency purposes in amounts not exceeding 10% of the Series' total assets,
and the Series will not make additional investments while borrowings greater
than 5% of its total assets are outstanding.
None of the Series 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 Series may purchase more than 10% of the outstanding voting securities of
any one issuer.
None of the Series 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 Series will invest more than 10% 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 of the Series may purchase shares of closed-end investment companies
that are traded on national exchanges to the extent permitted by applicable
law.
The Defensive Series and the Maximum Horizon Series may both invest
assets in securities of any other open-end investment company (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.
<PAGE> 10
None of the Series may make loans, but each may invest in debt securities
and repurchase agreements and may engage in securities lending.
Additional information about the Series' investment restrictions is
contained in the Statement of Additional Information.
MANAGEMENT
The overall business and affairs of the Series are managed by the Fund's
Board of Directors. The Board approves all significant agreements between the
Series and persons or companies furnishing services to the Series, including
the Series' agreements with their Investment Advisor and Custodian. The
day-to-day operations of the Fund are delegated to the Fund's officers and to
Manning & Napier Advisors, Inc. (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.
As of the date of this Prospectus, the Advisor supervised over
$6.0 billion in assets of clients, including both individuals and
institutions. For its services to the Series under the Investment Advisory
Agreement, the Fund pays the Advisor a fee, computed daily and payable
monthly, at an annual rate of .80% for the Defensive Series and 1.00% for the
Blended Asset Series I, Blended Asset Series II, and the Maximum Horizon
Series of the Series daily net assets. This fee is higher than the mean fee
paid by all other mutual funds. In addition, the Advisor is separately
compensated for acting as Transfer Agent for the Series. 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
Accounting Services Agent, if obtained for the Fund from an entity other than
the Advisor; (vii) expenses incidental to the issuance of its shares,
including issuance on the payment of, or reinvestment of, dividends and
capital gain distributions; (viii) fees and expenses incidental 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
promote the sale of the Fund, including payments to third-parties who provide
shareholder support servicing and distribution assistance. Investors may be
charged a fee if they effect transactions through a broker or agent.
YIELD AND TOTAL RETURN
From time-to-time the Series may advertise its total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of a Series
refers to the average annual compounded rates of return over one-, five-, and
ten-year periods or for the life of the Series (as stated in the
advertisement) that would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains distributions.
The "30-day yield" of a Series is calculated by dividing the net investment
income per share earned during a 30-day period by the net asset value per
share on the last day of the period. Net investment income inlcudes interest
and all recurring and nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that net investment
income earned over 30 days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields are standardized for
all stock and bond mutual funds. However, these methods differ from the
accounting methods used by a Series to maintain its books and records, and os
the advertised 30-day yield may not fully reflect the income paid to your own
account or the yield reported in a Series' reports to shareholders.
PURCHASES, EXCHANGES AND REDEMPTIONS OF SHARES
Purchases and redemptions of shares of the Series may be made on any day
the New York Stock Exchange is open for trading.
PURCHASES
The minimum initial investment in the Series is $2,000 and subsequent
purchases must be at least $100. The minimum initial investment is waived for
participants in the Automatic Investment Plan (see Automatic Investment Plan
below). These minimums may be waived at the Distributor's discretion. The
Fund has the right to refuse any order.
Payment may be made by check or readily available funds. A purchase
order will be effective as of the day the check is received by the Distributor
if the Distributor receives the check before the close of regular trading on
the New York Stock Exchange, normally 4:00 p.m., Eastern time. If payment is
received by wire, the purchase order will be effective the day payment is
received by the Series' custodian bank. The purchase price of shares of the
Series is the net asset value determined on the day the check or wire is
received.
The shares of the Series may be purchased in exchange for securities to
be included in the Series, subject to the Advisor's determination that these
securities are acceptable. Securities accepted in an exchange will be valued
at market value. All accrued interest and purchase or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Series and must be delivered by the shareholder to
the Series upon receipt from the issuer.
The Advisor will not accept securities in exchange for shares of a Series
unless (1) such securities are appropriate in the Series at the time of the
exchange; (2) the shareholder represents and agrees that all securities
offered to the Series are not subject to any restrictions upon their sale by
the Series under the Securities Act of 1933, or otherwise; and (3) prices are
available from an independent pricing service approved by the Fund's Board of
Directors.
<PAGE> 11
AUTOMATIC INVESTMENT PLAN
Shareholders may purchase shares regularly through the Automatic
Investment Plan with a pre-authorized draft drawn on a checking account.
Under this plan, the shareholder may elect to have a specified amount invested
on a regular schedule. The minimum amount of each automatic investment is
$25. The amount specified by the shareholder will be withdrawn from the
shareholder's bank account using the pre-authorized draft. This amount will
be invested at the applicable share price determined on the date the amount is
available for investment. Participation in the Automatic Investment Plan may
be discontinued either by the Fund or the shareholder upon 30 days' prior
written notice to the other party. A shareholder who wishes to enroll in the
Automatic Investment Plan may do so by completing the applicable section of
the Account Application Form or contacting the Fund for an Automatic
Investment Plan Form.
EXCHANGES BETWEEN SERIES
As permitted pursuant to any rule, regulation or order promulgated by the
Securities and Exchange Commission, some or all of the shares in an account
for which payment has been received by the Fund may be exchanged for shares of
any of the other Series of the Manning & Napier Fund, Inc. at the net asset
value next determined after an exchange order is effective. Shareholders may
effect up to 4 exchanges in a 12-month period without charge. Subsequent
exchanges are subject to a fee of $15. Exchanges will be made after
instructions in writing or by telephone are received by the Transfer Agent in
proper form (i.e., if in writing - signed by the record owner(s) exactly as
the shares are registered; if by telephone - proper account identification is
given by the shareholder) and each exchange must involve either shares having
an aggregate value of at least $1,000 or all the shares in the account. A
shareholder should read the prospectus of the other Series and consider the
differences in objectives and policies before making any exchange. The
exchange privilege may not be available in all states. For federal and state
income tax purposes, an exchange is treated as a sale of the shares exchanged,
and therefore an exchange could result in a gain or loss to the shareholder
making the exchange. The Series may modify or terminate this exchange offer
upon 60 days notice to shareholders subject to applicable law.
REDEMPTIONS
If a shareholder desires to redeem his shares at their net asset value,
the shareholder must send a written request for redemption in "Good Order" to
the Transfer Agent. "Good Order" generally means that the written request for
redemption must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed by an "eligible guarantor
institution" as that term is defined under Rule 17Ad-15(a)(2) under the
Securities Exchange Act of 1934. Currently, such procedures generally permit
guarantees by a commercial bank or trust company, a member bank of the Federal
Reserve System, or a member firm of a national securities exchange.
Redemption requirements for corporations, other organizations, trusts,
fiduciaries, and retirement plans may require additional documentation.
Please contact the Transfer Agent at 1-800-466-3863 for more information. The
Transfer Agent may make certain de minimis exceptions to the above
requirements for redemption.
Within three days after receipt of a redemption request by the Transfer
Agent in "good order", the Series will make payment in cash, except as
described below, of the net asset value of the shares next determined after
such redemption request was received, except during any period in which the
right of redemption is suspended or date of payment is postponed because the
New York Stock Exchange is closed or trading on such Exchange is restricted or
to the extent otherwise permitted by the 1940 Act if an emergency exists. For
shares purchased, or received in exchange for shares purchased, by check
(including certified checks or cashier's checks) or through the Automatic
Investment Plan,
payment of redemption proceeds may be delayed up to 15
days from the purchase date in an effort to assure that such check
or
draft
has cleared.
Subject to the Series' compliance with applicable regulations, each
Series 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
Series' 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, he could incur brokerage or transaction charges when
converting the securities to cash.
The Fund has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which the Fund is
obligated to redeem shares, with respect to any one shareholder during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period.
OTHER INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Due to the relatively high cost of maintaining small accounts, the Series
reserve the right to redeem shares in any account for their then-current value
(which will be promptly paid to the shareholder) if at any time the total
investment in such account drops below $1,000 because of redemptions (but not
due to changes in net asset value). Shareholders will be notified that the
value of their account is less than the minimum investment requirement and
allowed 60 days to make an additional investment before the redemption is
processed.
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.
<PAGE> 12
SHARE PRICE
Each Series share price or net asset value per share is determined 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 that 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 on: New Year's 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 Series' assets, less
its liabilities, divided by the number of shares of the Series outstanding.
The value of the Series' 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.
DIVIDENDS AND TAX STATUS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Each Series intends to distribute to its shareholders on a semi-annual
basis dividends substantially equal to all of its net investment income. Each
Series also intends to distribute net realized short and long-term capital
gains, if any, taking into account any available capital loss carryforwards
from prior years at least annually. Dividends and distributions will be paid
in full and fractional shares of the Series, based on the net asset value per
share at the close of business on the record date, although a shareholder may,
prior to the record date, request, by writing or by telephone call to the
Fund, that payments of either ordinary income dividends or capital gain
distributions, or both, be made in cash. The Fund will notify each
non-corporate taxable shareholder after the close of its fiscal year both of
the dollar amount and the tax status of that year's distributions. Generally,
the Fund will be required to impose backup withholding at the rate of 31% from
ordinary income dividends, capital gain distributions and redemption payments
made to non-corporate shareholders, if provisions of the law relating to the
furnishing of taxpayer identification numbers and reporting of dividends are
not complied with by such shareholders.
If a taxable shareholder invests shortly before the Series declares a
dividend, a portion of the investment will be returned as a taxable
distribution (commonly referred to as buying into a dividend). This
distribution will be taxable regardless of whether you elected to reinvest
your distribution in additional shares or take the distribution in cash. If
you would like to avoid buying into a dividend, you may contact the Fund to
find out when the Series plans to declare a distribution and invest after that
date.
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income tax
considerations affecting the Series and their shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Series or
their shareholders, and the discussion here is not intended as a substitute
for careful tax planning. These Series are not managed with respect to tax
outcomes for their shareholders.
Under Subchapter M of the Internal Revenue Code of 1986, (the Code) the
Series are treated as separate entities for tax purposes. The Series intend
to qualify each year as regulated investment companies under Subchapter M of
the Code. If the Series so qualify, they will not be subject to federal
income taxes on their net investment income and capital gains, if any, which
they distribute to their shareholders, provided that at least 90% of such
Series' "investment company taxable income" (generally, net investment income
and the excess of net short-term capital loss) for the taxable year is
distributed, and provided that the Series meet certain other requirements
imposed by the Code. All dividends paid or distributed out of investment
company taxable income will be taxable as ordinary income to the shareholders.
Any "net capital gain" (the excess of net long-term capital gain over net
short-term capital loss) distributed to shareholders is taxable as long-term
capital gain to the shareholders, regardless of the length of time a
shareholder has owned his shares. Generally, such dividends and distributions
are taxable in the year in which received, but dividends and distributions
declared in October, November or December of any year to shareholders of
record on a date in such month are treated as paid on December 31 of such year
if they are paid during January of the following calendar year. Dividends and
distributions are not taxable to shareholders that are not otherwise subject
to tax on their income, such as qualified employee benefit plans. In view of
the investment policy of the Maximum Horizon Series, ordinary income
dividends, if any, are expected to be small.
A 4% non-deductible federal excise tax is imposed on a regulated
investment company that fails to distribute substantially all of its ordinary
income and capital gain net income for each calendar year. Currently the
Series intend to make sufficient distributions of their ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Future legislative changes may materially affect the tax consequences of
investing in the Series. Shareholders are urged to consult their tax advisors
for the application of these rules (and other potentially relevant rules) to
their particular circumstances. Shareholders are also urged to consult their
tax advisors concerning the application of state and local income taxes and of
foreign taxes to investments in the Series, which may differ from the U.S.
federal income tax consequences described above.
GENERAL INFORMATION
The Fund was incorporated on July 26, 1984 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. As of
November 11, 1996, Manning & Napier Advisors, Inc., 1100 Chase Square,
Rochester, New York 14604 owns 35.25% of the Defensive Series and National
Financial Services Corporation FBO Customers, Mutual Funds 5th Floor, New
York, New York 10281 owns 47.53% of the Maximum Horizon Series, and they are
deemed under the 1940 Act to be beneficial owners of each such Series.
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 Series 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 Series. Income, direct
liabilities and direct operating expenses of a Series will be allocated
directly to the Series, and general liabilities and expenses of the Fund will
be allocated among the Series in proportion to the total net assets of the
Series 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.
All securities and cash are held by Boston Safe Deposit and Trust
Company. Deloitte & Touche, LLP serves as independent accountants for the
Series and will audit their financial statements annually.
Manning & Napier Advisors, Inc. serves as the Fund's Transfer and
Dividend Disbursing Agent. Shareholder inquiries should be directed to
Manning & Napier Fund, Inc., P.O. Box 41118, Rochester, New York 14604.
<PAGE> 13
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 and
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered 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.
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 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" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
& 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> 14
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investor Services, Inc.'s commercial paper ratings:
P-1 - Commercial papers which are rated P-1 are judged to 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.
P-2 - Commercial papers which are rated P_2 are judged to have a strong
ability for repayment for 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.
P-3 - Commercial papers which are rated P-3 are judged to 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. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B - Issues rated B are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
<PAGE>
MANNING & NAPIER FUND, INC.
P.O. Box 41118
Rochester, New York 14604
1-800-466-3863
FLEXIBLE YIELD SERIES I
FLEXIBLE YIELD SERIES II
FLEXIBLE YIELD SERIES III
Manning & Napier 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 Flexible Yield Series I, Flexible Yield Series II and the
Flexible Yield Series III of the Fund (individually and collectively, the
"Series").
The primary objective of the Flexible Yield Series I is to seek the
highest level of total return in the form of income and capital appreciation
consistent with the preservation of capital by investing in fixed income
securities with a dollar-weighted average maturity of not more than 5 years.
The primary objective of the Flexible Yield Series II 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 with a
dollar-weighted average maturity of not more than 10 years.
The primary objective of the Flexible Yield Series III 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.
This Prospectus provides you with the basic information you should know
before investing in the Series. You should read it and keep it for future
reference. A Statement of Additional Information, dated November 22,
1996, 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.
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.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 22, 1996.
<PAGE> 1
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases None
Redemption Fees (1) None
Exchange Fees (2) None
</TABLE>
(1) A wire charge, currently $15, will be deducted by the Transfer Agent
from the amount of a wire redemption payment made at the request of a
shareholder. Such amount is not included in the "Annual Operating
Expenses of the Series."
(2) A shareholder may effect up to four (4) exchanges in a twelve (12)
month period without change. Subsequent exchanges are subject to a fee of
$15.
ANNUAL OPERATING EXPENSES
The following information provides (i) a tabular summary of expenses relating
to the annual operating expenses of the Series and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment.
Annual Operating Expenses of the Series (as a percentage of average net
assets):
<TABLE>
<CAPTION>
Flexible Yield Flexible Yield Flexible Yield
Series I (3) Series II (3) Series III (3)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Management Fees After Reduction of Fees (4) 0.00% 0.00% 0.00%
12b-1 Fees None None None
Other Expenses After Expense Reimbursement 0.70% 0.80% 0.85%
---------------- ---------------- ----------------
Total Operating Expenses of the Series (4) 0.70% 0.80% 0.85%
================ ================ ================
</TABLE>
Example
You would pay the following expenses on a $1,000 investment, assuming a) 5.0%
annual return and b) redemptions at the end of each time period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Flexible Yield Series I $ 7 $ 22 $ 39 $ 87
Flexible Yield Series II 8 26 44 99
Flexible Yield Series III 9 27 47 105
</TABLE>
(3) Flexible Yield Series I, Flexible Yield Series II, and Flexible Yield
Series III were engaged in active investment operations for the ten
months ended October 31, 1996 ; therefore, actual management fees
and other expenses are used above.
(4) The Investment Advisor did not impose its management fee and paid a
portion of the Fund's expenses. If these expenses had been incurred by the
Series, expenses would have been 2.50%, the limit imposed by state
securities law. Absent the fee waiver and assumption of expenses, the
expenses paid on a $1,000 investment would have been:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Flexible Yield Series I $ 25 $ 78 $ 133 $ 284
Flexible Yield Series II 25 78 133 284
Flexible Yield Series III 25 78 133 284
</TABLE>
The fee waiver and assumption of expenses by the Advisor is voluntary and may
be terminated at any time. However, the Advisor has agreed to continue this
fee waiver and assumption of expenses at least through the Series' current
fiscal year.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses associated with investing in the Series. For a
more complete description of the various costs and expenses illustrated above,
please refer to the Management section of this Prospectus.
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables provide selected per share data and ratios for the
Flexible Yield Series I, Flexible Yield Series II, and Flexible Yield Series
III (for a share outstanding throughout the period for the period shown). The
tables are part of the Series' financial statements, which are included in the
Statement of Additional Information incorporated by reference into this
Prospectus.
<TABLE>
<CAPTION>
FLEXIBLE YIELD SERIES I For the Period
2/15/94
For the Ten For the Year (commencement
Months Ended Ended of operations)
10/31/96 12/31/95 to 12/31/94
-------------- -------------- ----------------
Per share data (for a share outstanding throughout
each period):
<S> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.26 $ 9.69 $ 10.00
-------------- -------------- ----------------
Income from investment operations:
Net investment income 0.41 0.46 0.24
Net realized and unrealized gain (loss)
on investments (0.10) 0.57 (0.32)
-------------- -------------- ----------------
Total from investment operations 0.31 1.03 (0.08)
-------------- -------------- ----------------
Less distributions to shareholders:
From net investment income (0.30) (0.46) (0.23)
-------------- -------------- ----------------
NET ASSET VALUE - END OF PERIOD $ 10.27 $ 10.26 $ 9.69
============== ============== ================
Total return 1 3.11% 10.79% (0.76)%
Ratios (to average net assets) / Supplemental Data:
Expenses* 0.70%2 0.70% 0.70%2
Net investment income* 5.25%2 4.99% 4.41%2
Portfolio turnover 36% 60% 38%
NET ASSETS - END OF PERIOD (000's omitted) $ 493 $ 256 $ 231
============== ============== ================
* The investment advisor did not impose its management fee and paid a portion of the Fund's expenses. If these expenses had
been incurred by the Fund, expenses would have been limited to that allowed by state securities law and the net investment
income per share and the ratios would have been as follows:
Net investment income $ 0.27 $ 0.30 $ 0.14
Ratios (to average net assets):
Expenses 2.50%2 2.50% 2.50%2
Net investment income 3.45%2 3.19% 2.61%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FLEXIBLE YIELD SERIES II For the Period
For the Ten For the 2/15/94
Months Year (commencement
Ended Ended of operations) to
10/31/96 12/31/95 12/31/94
------------- ---------- -------------------
Per share data (for a share outstanding throughout
each period):
<S> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.30 $ 9.27 $ 10.00
------------- ---------- -------------------
Income from investment operations:
Net investment income 0.45 0.56 0.27
Net realized and unrealized gain (loss)
on investments (0.32) 1.02 (0.74)
------------- ---------- -------------------
Total from investment operations 0.13 1.58 (0.47)
------------- ---------- -------------------
Less distributions to shareholders:
From net investment income (0.27) (0.55) (0.26)
From net realized gain on investments (0.06) -- --
------------- ---------- -------------------
Total distributions to shareholders (0.33) (0.55) (0.26)
------------- ---------- -------------------
NET ASSET VALUE - END OF PERIOD $ 10.10 $ 10.30 $ 9.27
============= ========== ===================
Total return 1 1.38% 17.33% (4.69%)
Ratios (to average net assets) / Supplemental Data:
Expenses* 0.80%2 0.80% 0.80%2
Net investment income* 5.55%2 5.38% 5.40%2
Portfolio turnover 5% 35% 0%
NET ASSETS - END OF PERIOD (000's omitted) $ 481 $ 438 $ 396
============= ========== ===================
* The investment advisor did not impose its management fee and paid a portion of the Funds expenses. If these expenses had been
incurred by the Fund, expenses would have been limited to that allowed by state securities law and the net investment income per
share and the ratios would have been as follows:
Net investment income $ 0.31 $ 0.38 $ 0.18
Ratios (to average net assets):
Expenses 2.50%2 2.50% 2.50%2
Net investment income 3.85%2 3.68% 3.70%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FLEXIBLE YIELD SERIES III
For the Period
For the For the For the 12/20/93
Ten Months Year Year (commencement
Ended Ended Ended of operations) to
10/31/96 12/31/95 12/31/94 12/31/93
------------ ---------- ---------- -------------------
Per share data (for a share outstanding throughout
each period):
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.51 $ 9.11 $ 9.95 $ 10.00
------------ ---------- ---------- -------------------
Income from investment operations:
Net investment income 0.50 0.58 0.26 0.01
Net realized and unrealized gain (loss)
on investments (0.53) 1.40 (0.84) (0.05)
------------ ---------- ---------- -------------------
Total from investment operations (0.03) 1.98 (0.58) (0.04)
------------ ---------- ---------- -------------------
Less distributions to shareholders:
From net investment income (0.35) (0.58) (0.26) (0.01)
------------ ---------- ---------- -------------------
NET ASSET VALUE - END OF PERIOD $ 10.13 $ 10.51 $ 9.11 $ 9.95
============ ========== ========== ===================
Total return 1 (0.18%) 22.09% (5.83%) (0.40%)
Ratios (to average net assets)/Supplemental Data:
Expenses* 0.85%2 0.85% 0.85% 0.85%2
Net investment income* 5.98%2 6.13% 6.22% 3.85%2
Portfolio turnover 5% 6% 1% 0%
NET ASSETS - END OF PERIOD (000's omitted) $ 1,098 $ 1,159 $ 748 $ 75
============ ========== ========== ===================
* The investment advisor did not impose its management fee and paid a portion of the Funds expenses. If these expenses
had been incurred by the Fund for the periods ended December 31, 1993, December 31, 1994, and October 31, 1996,
expenses would have been limited to that allowed by state securities law. If the full expenses allowed by state securities law
had been incurred by the Fund, the net investment income per share and the ratios would have been as follows:
Net investment income $ 0.36 $ 0.43 $ 0.19 $ 0.01
Ratios(to average net assets):
Expenses 2.50%2 2.46% 2.50% 2.50%2
Net investment income 4.33%2 4.52% 4.57% 2.20%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
5
<PAGE>
THE FUND
The Fund is an open-end management investment company incorporated under
the laws of the State of Maryland on July 26, 1984. The Fund offers separate
series of units of beneficial interest ("shares"). This Prospectus relates to
the Flexible Yield Series I, Flexible Yield Series II and Flexible Yield
Series III. Information regarding the Fund's other series is contained in
separate prospectuses that may be obtained from Manning & Napier Fund, Inc.,
P.O. Box 41118, Rochester, New York 14604 or by calling 1-800-466-3863. The
Flexible Yield Series I, Flexible Yield Series II and Flexible Yield Series
III are diversified funds.
RISK AND INVESTMENT OBJECTIVES AND POLICIES
FLEXIBLE YIELD SERIES I
The objective of the Flexible Yield Series I is to seek the highest level
of total return in the form of income and capital appreciation consistent with
the preservation of capital by investing in fixed income securities with a
dollar weighted average maturity of not more than 5 years. The Flexible Yield
Series I 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 Flexible Yield Series I may be held
in cash or high quality "money market securities", convertible debt, preferred
stock, futures contracts, and related options. There can be no assurance that
the investment objective will be met.
The Advisor may vary the maturities of the Series' securities depending
on its evaluation of interest rate trends and other factors affecting the
fixed income markets. This Flexible Yield Series I 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 Flexible Yield Series
I will invest primarily in fixed income securities rated in the four highest
rating categories (Baa or higher by Moody's Investors Service, Inc. or BBB or
higher by Standard & Poor's Corporation) 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
Risk and Additional Information about Investment Policies - High Yield Debt
Securities.
FLEXIBLE YIELD SERIES II
The primary objective of the Flexible Yield Series II 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 with a
dollar-weighted average maturity of not more than 10 years. The Flexible
Yield Series II 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 Flexible Yield Series II
may be held in cash or high quality "money market securities", convertible
debt, preferred stock, futures contracts, and related options. There can be
no assurance that the investment objective will be met.
The Advisor may vary the maturities of the Series' securities depending
on its evaluation of interest rate trends and other factors affecting the
fixed income markets. This Flexible Yield Series II 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 Flexible Yield Series
II will invest primarily in fixed income securities rated in the four highest
rating categories (Baa or higher by Moody's Investors Service, Inc. or BBB or
higher by Standard & Poor's Corporation) 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
Risk and Additional Information about Investment Policies - High Yield Debt
Securities.
FLEXIBLE YIELD SERIES III
The primary objective of the Flexible Yield Series III 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 Flexible Yield Series III 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 Series may be held in cash or high quality "money market securities",
convertible debt, preferred stock, futures contracts, and related options.
There can be no assurance that the investment objective will be met.
The Advisor may vary the maturities of the Series' securities without
restriction, depending on its evaluation of interest rate trends and other
factors affecting the fixed income markets. The Flexible Yield Series III
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
Flexible Yield Series III will invest primarily in fixed income securities
rated in the four highest rating categories (Baa or higher by Moody's
Investors Service, Inc. or BBB or higher by Standard & Poor's Corporation) 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 Risk and Additional Information about
Investment Policies - High Yield Debt Securities.
<PAGE> 6
GENERAL
For temporary defensive purposes during periods when the Advisor
determines that market conditions warrant, a Series may invest up to 100% of
its assets in money market instruments (consisting of 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 P-1 by Moody's, repurchase agreements
involving such securities and other shares of 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.
RISK AND ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
Set forth below is further information about certain types of securities,
in which each Series may invest, as well as information about additional types
of investments and certain strategies each Series may pursue. 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 a Series' shareholders. Additional
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
FOREIGN SECURITIES
While each Series generally emphasizes investments in U.S. Government
securities and companies domiciled in the United States, it may invest up to
25% in foreign securities of the same types and quality as the domestic
securities in which the Series 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 objective of the Series.
Foreign securities may be denominated either in U.S. dollars or foreign
currencies. Each Series will invest no more than 25% of its assets in
securities issued by any one foreign government. Each Series may invest
without limit in securities of foreign issuers that are listed on a domestic
securities exchange or are traded in the United States on the over-the-counter
market. The Series' 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 (the "1940 Act"), of the
outstanding voting securities of a Series.
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 Series. 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 Series may enter into repurchase agreements with respect to
portfolio securities. Under the terms of a repurchase agreement, the Series
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
Series 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 Series' Custodian either directly or through a securities depository.
Default by the seller would, however, expose the Series 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 Series under the 1940 Act.
SECURITIES LENDING
Each Series 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 will not exceed 30% of the value of the total assets of the
Series.
U.S. GOVERNMENT SECURITIES
Each Series 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' rights to borrow from the U.S. Treasury. The
issues of other agencies are supported only by the credit of the agency (e.g.,
the Federal National Mortgage Association).
<PAGE> 7
SHORT SALES
Each Series 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 Series owns securities equivalent to those sold short. No more
than 25% of the net assets (taken at current value) of a Series may be held as
collateral for such sales at any one time. Such short sales can be used as a
hedge and as a method of deferring realized capital gains from one taxable
year to the next for tax purposes.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
Each Series 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
Series before settlement. These securities are subject to market fluctuation
due to changes in market interest rates. Each Series 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 Series 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 Series
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' values, 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. When the Advisor is
determining the maturity of pass-through certificates the Advisor will
consider the maturity to be equal to the average life rather than the stated
maturity. 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 Series 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 credit-worthiness. 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 the Series' 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 Series will also seek to minimize
risk by diversifying its holdings.
ZERO-COUPON BONDS
Some of the securities in which the Series invest may include so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. Each Series is required to accrue and
distribute income from zero-coupon bonds on a current basis, even though it
does not receive that income currently in cash. Thus, the Series may have to
sell investments to obtain cash needed to make income distributions. The
discount in the absence of financial difficulties of the issuer decreases as
the final maturity of the security approaches. Zero-coupon bonds can be sold
prior to their maturity date in the secondary market at the then prevailing
market value, which depends primarily on the time remaining to maturity,
prevailing level of interest rates and the perceived credit quality of the
issues. The market prices of zero-coupon securities are subject to greater
fluctuations in response to changes in market interest rates than bonds which
pay interest currently.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain of the obligations purchased by a Series 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 on charges.
There is a risk that the current interest rate on such obligations may not
accurately reflect existing market interest rates.
<PAGE> 8
HEDGING TECHNIQUES
Each Series 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 Series' portfolios, that is, to reduce the overall level
of risk that normally would be expected to be associated with their
investments. The Series 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 Series also may
purchase forward foreign currency exchange contracts to hedge currency
exchange rate risk. In addition, each Series is authorized to purchase and
sell stock index futures contracts and options on stock index futures
contracts. Each Series 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 Series 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 Series 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".
FUTURES CONTRACTS
Each Series 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 Series may purchase or sell future 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 Commodity Futures Trading Commission ("CFTC") rules would
exceed 5% of the liquidation value of the Series' 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 Series' portfolio. The Series 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 high
grade securities in a segregated account with its Custodian in the amount
prescribed.
A Series' 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 a loss to the
Series. 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 Series' ability to repurchase for sale certain
futures contracts on any particular day.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Series' 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 Series 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 Series 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 Series do not consider forward foreign
currency exchange contracts to be commodities or commodity contracts for
purposes of the Series' fundamental restrictions concerning investment in
commodities or commodity contracts, as set forth in the Statement of
Additional Information.
<PAGE> 9
CURRENCY FUTURES CONTRACTS AND OPTIONS ON 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 means the 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 means the obligation to acquire the foreign
currencies called for by the contract at a specified price on a specified
date. A Series 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
Series may purchase or sell future 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 Series' 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 Series' 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 the
Series 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 "regulated 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 Series 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 Series' outstanding
shares.
Each Series may borrow money, but only from a bank for temporary or
emergency purposes in amounts not exceeding 10% of its total assets and the
Series will not make additional investments while borrowings greater than 5%
of its total assets are outstanding.
None of the Series 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 Series may purchase more than 10% of the outstanding voting securities of
any one issuer.
None of the Series 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 Series will invest more than 10% 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 Series may purchase shares of closed-end investment companies that
are traded on national exchanges to the extent permitted by applicable law.
None of the Series may make loans, except that each may invest in debt
securities and repurchase agreements and may engage in securities lending.
Additional information about the Series' investment restrictions is
contained in the Statement of Additional Information.
MANAGEMENT
The overall business and affairs of the Series are managed by its Board
of Directors. The Board approves all significant agreements between the
Series and persons or companies furnishing services to the Series, including
the Series' agreements with its Investment Advisor and Custodian. The
day-to-day operations of the Series are delegated to the Fund's officers and
to Manning & Napier Advisors, Inc. (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.
As of the date of this Prospectus, the Advisor supervised over $6.0
billion in assets of clients, including both individuals and
institutions. For its services to the Fund under the Investment Advisory
Agreement, the Fund pays the Advisor a fee, computed daily and payable
monthly, at an annual rate of .35% for the Flexible Yield Series I, .45%
for the Flexible Yield Series II, and .50% for the Flexible Yield Series III
of the Fund's daily net assets. In addition , the Advisor is separately
compensated for acting as Transfer Agent for the Series. 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 Accounting Services Agent, if obtained for the Fund from an entity other
than the Advisor; (vii) expenses incidental to the issuance of its shares,
including issuance on the payment of, or reinvestment of, dividends and
capital gain distributions; (viii) fees and expenses incidental 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 servicing or with respect to
which the Fund may have to indemnify its officers and directors.
<PAGE> 10
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. Investors may be
charged a fee if they effect transactions through a broker or agent.
YIELD AND TOTAL RETURN
From time-to-time the Series may advertise its yield and total return.
Both yield and total return figures are based on historical earnings and are
not intended to indicate future performance. The "total return" of a Series
refers to the average annual compounded rates of return over one-, five-, and
ten-year periods or for the life of the Series (as stated in the
advertisement) that would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains distributions.
The "30-day yield" of a series is calculated by dividing the net
investment income per share earned during a 30-day period by the net asset
value per share on the last day of the period. Net investment income includes
interest and dividend income earned on a Series' securities; it is net of all
expenses and all recurring and nonrecurring charges that have been applied to
all shareholder accounts. The yield calculation assumes that net investment
income earned over 30 days is compounded monthly for six months and then
annualized. Methods used to calculate advertised yields are standardized for
all stock and bond mutual funds. However, these methods differ from the
accounting methods used by a Series to maintain its books and records, and so
the advertised 30-day yield may not fully reflect the income paid to your own
account or the yield reported in a Series' reports to shareholders.
PURCHASES, EXCHANGES AND REDEMPTIONS OF SHARES
Purchases and redemptions of shares of the Series may be made on any day
the New York Stock Exchange is open for trading.
PURCHASES
The minimum initial investment in the Series is $2,000 and subsequent
purchases must be at least $100. The minimum initial investment is waived
for participants in the Automatic Investment Plan (see "Automatic Investment
Plan" below). These minimums may be waived at the Distributor's
discretion. The Fund has the right to refuse any order.
Payment may be made by check or readily available funds. A purchase
order will be effective as of the day the check is received by the Distributor
if the Distributor receives the check before the close of regular trading
on the New York Stock Exchange, normally 4:00 p.m., Eastern time. If
payment is received by wire, the purchase order will be effective the day the
payment is received by the Series custodian bank. The purchase price of
shares of the Series is the net asset value determined on the day the check or
wire is received.
The shares of the Series may be purchased in exchange for securities to
be included in the Series, subject to the Advisor's determination that these
securities are acceptable. Securities accepted in an exchange will be valued
at market value. All accrued interest and purchase or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Series and must be delivered by the shareholder to
the Series upon receipt from the issuer.
The Advisor will not accept securities for the Series unless: (1) such
securities are appropriate in the Series at the time of the exchange; (2) the
shareholder represents and agrees that all securities offered to the Series
are not subject to any restrictions upon their sale by the Series under the
Securities Act of 1933, or otherwise; and, (3) prices are available from an
independent pricing service approved by the Fund's Board of Directors.
AUTOMATIC INVESTMENT PLAN
Shareholders may purchase shares regularly through the Automatic
Investment Plan with a pre-authorized draft drawn on a checking account.
Under this plan, the shareholder may elect to have a specified amount invested
on a regular schedule. The minimum amount of each automatic investment is
$25. The amount specified by the shareholder will be withdrawn from the
shareholder's bank account using the pre-authorized draft. This amount will
be invested at the applicable share price determined on the date the amount is
available for investment. Participation in the Automatic Investment Plan may
be discontinued either by the Fund or the Shareholder upon 30 days' prior
written notice to the other party. A shareholder who wishes to enroll in the
Automatic Investment Plan may do so by completing the applicable section of
the Account Application Form or contacting the Fund for an Automatic
Investment Plan Form.
EXCHANGES BETWEEN SERIES
As permitted pursuant to any rule, regulation or order promulgated by the
Securities and Exchange Commission, some or all of the shares in an account
with the Fund for which payment has been received by the Fund may be exchanged
for shares of any of the other Manning & Napier Fund, Inc. Series at net asset
value. Shareholders may effect up to 4 exchanges in a 12-month period without
charge. Subsequent exchanges are subject to a fee of $15. Exchanges will be
made after instructions in writing or by telephone are received by the
Transfer Agent in proper form (i.e., if in writing - signed by the record
owner(s) exactly as the shares are registered; if by telephone - proper
account identification is given by the shareholder) and each exchange must
involve either shares having an aggregate value of at least $1,000 or all the
shares in the account. A shareholder should read the prospectus of the other
Series and consider the differences in objectives and policies before making
any exchange. The exchange privilege may not be available in all states. For
federal and state income tax purposes, an exchange is treated as a sale of the
shares exchanged, and therefore an exchange could result in a gain or loss to
the shareholder making the exchange. The Series may modify or terminate this
exchange offer upon 60 days' notice to shareholders subject to applicable law.
<PAGE> 11
REDEMPTIONS
If a shareholder desires to redeem his shares at their net asset value,
the shareholder must send a written request for redemption in "Good Order" to
the Transfer Agent. "Good Order" generally means that the written request for
redemption must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed by an "eligible guarantor
institution" as the term is defined under Rule 17Ad-15(a)(2) under the
Securities Exchange Act of 1934. Currently, such procedures generally permit
guarantees by a commercial bank or trust company, a member bank of the Federal
Reserve System, or a member firm of a national securities exchange.
Redemption requirements for corporations, other organizations, trusts,
fiduciaries, and retirement plans may require additional documentation.
Please contact the Transfer Agent at 1-800-466-3863 for more information. The
Transfer Agent may make certain de minimis exceptions to the above
requirements for redemption.
Within three days after receipt of a redemption request by the Transfer
Agent in "good order", the Series will make payment in cash, except as
described below, of the net asset value of the shares next determined after
such redemption request was received, except during any period in which the
right of redemption is suspended or date of payment is postponed because the
New York Stock Exchange is closed or trading on such Exchange is restricted or
to the extent otherwise permitted by the 1940 Act if an emergency exists. For
shares purchased, or received in exchange for shares purchased, by check
(including certified checks or cashier's checks), or through the Automatic
Investment Plan, payment of redemption proceeds may be delayed up to 15
days from the purchase date in an effort to assure that such check or
draft has cleared.
Subject to the Series' compliance with applicable regulations, each
Series 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
Series' 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, he could incur brokerage or transaction charges when
converting the securities to cash. The Fund has elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which the Fund is
obligated to redeem shares, with respect to any one shareholder during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period.
OTHER INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Due to the relatively high cost of maintaining small accounts, the Series
reserve the right to redeem shares in any account for their then-current value
(which will be promptly paid to the shareholder) if at any time the total
investment in such account drops below $1,000 (but not due to changes in net
asset value). Shareholders will be notified that the value of their account
is less than the minimum investment requirement and allowed 60 days to make an
additional investment before the redemption is processed.
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.
SHARE PRICE
Each Series' share price or "net asset value" per share is determined as
of the closing time of the New York Stock Exchange or, in the absence of a
closing time, 4:00 p.m. Eastern Standard time on each day that 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 on: New Year's 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 Series' assets, less
its liabilities, divided by the number of shares of the Series outstanding.
The value of the Series' 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.
DIVIDENDS AND TAX STATUS
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Each Series intends to distribute to its shareholders on an quarterly
basis dividends substantially equal to all of its net investment income. Each
Series also intends to distribute net realized short and long-term capital
gains, if any, taking into account any available capital loss carryforwards
from prior years at least annually. Dividends and distributions will be paid
in full and fractional shares of the Series, based on the net asset value per
share at the close of business on the record date, although a shareholder may,
prior to the record date, request, by writing or by telephone call to the
Fund, that payments of either ordinary income dividends or capital gain
distributions, or both, be made in cash. The Fund will notify each
non-corporate taxable shareholder after the close of its fiscal year both of
the dollar amount and the tax status of that year's distributions. Generally,
the Fund will be required to impose backup withholding at the rate of 31% from
ordinary income dividends, capital gain distributions and redemption payments
made to non-corporate shareholders, if provisions of the law relating to the
furnishing of taxpayer identification numbers and reporting of dividends are
not complied with by such shareholders.
If a taxable shareholder invests shortly before the Series declares a
dividend, a portion of the investment will be returned as a taxable
distribution (commonly referred to as "buying into a dividend"). This
distribution will be taxable regardless of whether you elected to reinvest
your distribution in additional shares or take the distribution in cash. If
you would like to avoid buying into a dividend, you may contact the Fund to
find out when the Series plans to declare a distribution and invest after that
date.
<PAGE> 12
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income tax
considerations affecting the Series and their shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Series or
their shareholders, and the discussion here is not intended as a substitute
for careful tax planning. These Series are not managed with respect to tax
outcomes for their shareholders.
Under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), the Series is treated as a separate entity for federal income tax
purposes. The Series intend to qualify each year as regulated investment
companies under Subchapter M of the Code. If the Series so qualify, they will
not be subject to federal income taxes on their net investment income and
capital gains, if any, which the Series distribute to their shareholders,
provided that at least 90% of such Series' "investment company taxable income"
(generally, net investment income and the excess of net short-term capital
loss) for the taxable year is distributed, and provided that the Series meets
certain other requirements imposed by the Code. All dividends paid or
distributed out of investment company taxable income will be taxable as
ordinary income to the shareholders. Any "net capital gain" (the excess of
net long-term capital gain over net short-term capital loss) distributed to
shareholders is taxable as long-term capital gain to the shareholders,
regardless of the length of time a shareholder has owned his shares.
Generally, such dividends and distributions are taxable in the year in which
received, but dividends and distributions declared in October, November or
December of any year to shareholders of record on a date in such month are
treated as paid on December 31 of such year if they are paid during January of
the following calendar year. Dividends and distributions are not taxable to
shareholders that are not otherwise subject to tax on their income, such as
qualified employee benefit plans.
A 4% non-deductible federal excise tax is imposed on a regulated
investment company that fails to distribute substantially all of its ordinary
income and capital gain net income for each calendar year. Currently, the
Series intend to make sufficient distributions of its ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
Future legislative changes may materially affect the tax consequences of
investing in the Series. Shareholders are urged to consult their tax advisors
for the application of these rules (and other potentially relevant rules) to
their particular circumstances. Shareholders are also urged to consult their
tax advisors concerning the application of state and local income taxes and of
foreign taxes to investments in the Series, which may differ from the U.S.
federal income tax consequences described above.
GENERAL INFORMATION
The Fund was incorporated on July 26, 1984 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. As of
November 11, 1996, Manning & Napier Advisors, Inc., 1100 Chase Square,
Rochester, New York 14604 owns 29.02% of the Flexible Yield Series II and is
deemed under the 1940 Act to be a beneficial owner of such Series.
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 Series 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 Series. Income, direct
liabilities and direct operating expenses of a Series will be allocated
directly to the Series, while general liabilities and expenses of the Fund
will be allocated among the Series. 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.
All securities and cash are held by Boston Safe Deposit and Trust
Company. Deloitte & Touche, LLP serves as independent accountants for the
Series and will audit its financial statements annually.
Manning & Napier Advisors, Inc. serves as the Fund's Transfer and
Dividend Disbursing Agent. Shareholder inquiries should be directed to
Manning & Napier Fund, Inc., P.O. Box 41118, Rochester, New York 14604.
<PAGE> 13
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 and
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered 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.
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 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" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's 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> 14
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investor Services, Inc.'s commercial paper ratings:
P-1 - Commercial papers which are rated P-1 are judged to 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.
P-2 - Commercial papers which are rated P-2 are judged to 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.
P-3 - Commercial papers which are rated P-3 are judged to 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. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B - Issues rated B are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
<PAGE> 15
MANNING & NAPIER FUND, INC.
P.O. Box 41118
Rochester, New York 14604
1-800-466-3863
TAX MANAGED SERIES
Manning & Napier Fund, Inc.(the "Fund") is an open-end management
investment company consisting of multiple Series, each a separate portfolio
having its own investment objective and policies. This Prospectus relates to
the Tax Managed Series of the Fund (the "Series").
The Series seeks to achieve its objective by a) investing primarily in
equity securities which by nature generate a lower level of current income; b)
minimizing portfolio turnover which limits the amount of realized gains; and
c) reducing distributions of taxable income as permitted by the Internal
Revenue Code (the "Code"). The Advisor anticipates this strategy will result
in tax efficiencies (i.e. a lower percentage of the return is subject to
taxes) that are superior to other mutual funds. The Series is designed only
for long-term investors who expect to own shares of the Series for five years
or more. The Series is not intended to provide investors with a means of
speculating on short-term market movements. Investors who engage in excessive
account activity generate additional costs and may cause the Series to
recognize capital gains which are borne by the Series' remaining shareholders.
The Prospectus is designed to provide you with information you should
know before investing. Please retain this document for future reference.
The Series is a no-load, continuously offered, diversified mutual fund.
A Statement of Additional Information dated November 22, 1996
for the Series, 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.
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.
The date of this Prospectus is November 22, 1996.
<PAGE> 1
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases None
Redemption Fees (1) None
Exchange Fees (2) None
</TABLE>
(1) A wire charge, currently $15, will be deducted by the Transfer Agent
from the amount of a wire redemption payment made at the request of a
shareholder. Such amount is not included in the "Annual Operating
Expenses of the Series."
(2) A shareholder may effect up to four (4) exchanges in a twelve (12)
month period without change. Subsequent exchanges are subject to a fee of
$15.
ANNUAL OPERATING EXPENSES
The following information provides (i) a tabular summary of expenses relating
to the annual operating expenses of the Series and (ii) an example
illustrating the dollar cost of such expenses on a $1,000 investment.
Annual Operating Expenses of the Series (as a percentage of average net
assets):
<TABLE>
<CAPTION>
Tax Managed
Series (3)
------------
<S> <C>
Management Fees After Reduction of Fees (4) 0.00%
12b-1 Fees None
Other Expenses 1.20%
------------
Total Operating Expenses of the Series (4) 1.20%
============
</TABLE>
You would pay the following expenses on a $1,000 investment, assuming a) 5.0%
annual return and b) redemptions at the end of each time period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Tax Managed Series $ 12 $ 38 $ 66 $ 145
</TABLE>
(3) Tax Managed Series was engaged in active investment operations for the
year ended October 31, 1996; therefore, actual management fees and other
expenses are used above.
(4) The Investment Advisor did not impose its management fee and paid a
portion of the Fund's expenses. If these expenses had been incurred by
the Series, expenses would have been 2.50%, the limit imposed by state
securities law. Absent the fee waiver and assumption of expenses, the
expenses paid on a $1,000 investment would have been:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Tax Managed Series $ 25 $ 78 $ 133 $ 284
</TABLE>
The fee waiver and assumption of expenses by the Advisor is voluntary and
may be terminated at any time. However, the Advisor has agreed to continue
this waiver and assumption of expenses at least through the Series current
fiscal year.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses associated with investing in the Series. For a
more complete description of the various costs and expenses illustrated above,
please refer to the Management section of this Prospectus.
THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides selected per share data and ratios for the Tax
Managed Series. The table is part of the Series' financial statements, which
are included in the Statement of Additional Information incorporated by
reference into this Prospectus.
<TABLE>
<CAPTION>
TAX MANAGED SERIES For the Year
Ended
10/31/96
--------------
Per share data (for a share outstanding throughout
the period):
<S> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.00
--------------
Income from investment operations:
Net investment loss (0.02)
Net realized and unrealized gain (loss)
on investments 1.65
--------------
Total from investment operations 1.63
--------------
NET ASSET VALUE - END OF PERIOD $ 11.63
==============
Total return 1 > 16.30%
Ratios (to average net assets) / Supplemental Data:
Expenses* 1.20%
Net investment loss* (0.21%)
Portfolio turnover 78%
Average commission rate paid $ 0.0757
NET ASSETS - END OF PERIOD (000's omitted) $ 224
==============
* The investment advisor did not impose its management fee and paid a portion
of the Funds expenses. If these expenses had been incurred by the Fund,
expenses would have been limited to that allowed by state securities law and
the net investment income per share and the ratios would have been as follows:
Net investment loss ($0.14)
Ratios (to average net assets):
Expenses 2.50%
Net investment loss (1.51%)
1 Represents aggregate total return for the period indicated
</TABLE>
3
<PAGE>
THE SERIES
The Tax Managed Series (the "Series") is a series of Manning & Napier
Fund, Inc. (the "Fund"). The Fund is an open-end management investment company
incorporated under the laws of the State of Maryland on July 26, 1984. The
Fund offers separate series of units of beneficial interest ("shares").
Information regarding the Fund's other Series is contained in separate
prospectuses that may be obtained from Manning & Napier Fund, Inc., P.O. Box
41118, Rochester, New York 14604 or by calling 1-800-466-3863.
The Series is an open-end diversified investment company designed for
investors seeking long term growth while minimizing the impact of state and
federal taxes. The Series utilizes an active management approach towards
investment management.
RISK AND INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVE
The Series seeks to maximize long term growth while minimizing the impact
of taxes on the Series' total return. The Series will attempt to meet its
objective by a) investing primarily in equity securities which by nature
generate a lower level of current income; b) minimizing portfolio turnover
which limits the amount of realized gains; and c) reducing distributions of
taxable income as permitted by the Internal Revenue Code ("the Code"). The
Advisor anticipates this strategy will result in tax efficiencies (i.e. a
lower percentage of the return is subject to taxes) that are superior to other
mutual funds. The Series is designed only for long-term investors who expect
to own shares of the Series for five years or more. The Series is not
intended to provide investors with a means of speculating on short-term market
movements. Investors who engage in excessive account activity generate
additional costs and may cause the Series to recognize capital gains which are
borne by the Series' remaining shareholders.
There is no assurance that the Series will achieve its stated objectives.
The Series from time to time will declare dividends to ensure its continued
qualification as a regulated investment company. These dividends will result
in taxable income to the shareholders. However, the Advisor anticipates
dividend distributions made to shareholders will be small compared to the
distributions paid by managed or indexed funds investing in similar
securities. These dividends will be smaller because of the active approach
the Advisor takes to minimizing tax liability when managing the Series. The
active approach will consist of the items outlined in the sections "Management
of Realization Events" and "Management of Dividend Distributions".
The Series' investment objectives are not fundamental and may be changed
by the Board of Directors without shareholder approval; however, it is the
Board of Directors' policy to notify shareholders prior to a material change
in a Series' objective.
INVESTMENT POLICIES
The Series will invest primarily in equity securities of companies which
the Advisor believes have attractive long term growth potential and attractive
valuations. The Advisor's intent is to identify those companies that will
make attractive long term investments, and as a result offer the potential for
attractive returns while limiting the need for continual portfolio turnover.
The Series may invest (up to 35% of its assets) in other than equity
securities. See "Risk and Additional Information about Investment Policies"
for a description of these securities and their associated risks. The Series
may invest in securities of issuers outside the United States. The Series may
invest a portion of its assets in put and call options on securities, futures
contracts and related options thereon and various foreign currency
transactions, including forward contracts, futures and options. The Series
may also lend its securities or sell securities short "against the box".
In order to minimize the impact of taxes on investors' returns, the
Advisor will seek to reduce the amount of gains realized and dividends that
must be distributed. Generally speaking, the Advisor will keep portfolio
turnover low and utilize certain tax strategies available to mutual funds
under the Code. See "Management of Realization Events" and "Management of
Dividend Distributions". The Series employs an active management strategy
which seeks to maximize shareholders' after-tax returns through a combination
of individual security selection and the use of the unique tax strategies
allowed mutual funds under the Code.
The Series investment policies are not fundamental policies and may be
changed by the Board of Directors without shareholder approval. It is the
Board of Directors' policy to notify shareholders prior to any material
change.
<PAGE> 4
GENERAL
In pursuit of its investment objective, the Series intends to invest
predominantly in equity securities that the Advisor believes offer attractive
long term potential. Equity securities consist of common stocks,
securities convertible thereto, and warrants. The Series does not intend to
invest more than 5% of the value of its total net assets in warrants.
Additionally, the Series may invest in a variety of non-equity securities
either for defensive purposes or when the Advisor believes that the potential
incremental return of such investments outweighs their tax implications.
The debt securities in which the Series may invest in 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. Each Series 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 Corporation ("S&P") or
Baa by Moody's Investor 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 Additional Information about
Investment Policies - High Yield Debt Securities.
For temporary defensive purposes during periods when the Advisor
determines that market conditions warrant, the Series 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 P-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.
WHO SHOULD INVEST
LONG-TERM TAXABLE INVESTORS SEEKING TO MINIMIZE TAXABLE DISTRIBUTIONS
The Series is designed for long-term taxable investors who seek to
minimize receipt of taxable distributions. The Series may not be
suitable for Individual Retirement Accounts (IRAs) or other tax-deferred
retirement plans such as Keoghs, 401(k), 403(b), or money purchase plans.
The Series is designed for investors seeking current low taxable
distributions, with the potential for favorable long term appreciation.
The share price of the Series is expected to be volatile, and investors
should be able to tolerate sudden, sometimes substantial fluctuations in the
value of their investments. No assurance can be given that the Series will
achieve its stated objectives or that shareholders will be protected from the
risks inherent in the markets in which they invest. Investors may wish to
purchase shares on a regular, periodic basis (dollar-cost averaging) rather
than investing in one lump sum in order to reduce the risk of investing at a
particularly unfavorable time.
The Series is designed only for long-term investors who expect to own
shares of the Series for five years or more. The Series is not intended to
provide investors with a means of speculating on short-term market movements.
Investors who engage in excessive account activity generate additional costs
and may cause the Series to recognize capital gains which are borne by the
Series' remaining shareholders.
The Series reserves the right to suspend the offering of its shares.
Investors should not consider the Series a complete investment program,
but should maintain holdings of securities with different risk
characteristics-including common stocks, bonds and money market instruments.
Investors may also wish to complement an investment in the Series with other
types of common stock investments.
MANAGEMENT OF REALIZATION EVENTS
The Series' portfolio will be actively managed to minimize both the
number and amount of realization events.
Low portfolio turnover - It is anticipated that the annual portfolio
turnover rate for the Series will not exceed 50%. By minimizing portfolio
turnover, the Series will attempt to defer the realization of capital gains,
thereby reducing or deferring the distribution of capital gains which are
taxable to the shareholders. While the Series intends to minimize portfolio
turnover, there may be times that the Advisor will sell securities to realize
losses or gains depending on the particular circumstances confronting the
Series. These losses will offset any current or future capital gains thereby
reducing the Series' requirement to distribute such capital gains.
Specific Identification of Security Shares Sold - Federal Income tax
law allows the Series to specify which shares of stock the Series will treat
as being sold. While most mutual funds use First-in, First-out (FIFO), the
Series will individually analyze which shares to sell. The following example
will further explain the technique:
During year 1, the Series purchases 100 shares of XYZ Corp on two separate
occasions. The first purchase of 100 shares cost $10/share and the second
purchase of 100 shares cost $12.50/share. In year 2, the Series decides to
sell 100 shares of XYZ Corp at $15/share. If the Series used FIFO, the
realized gain would be $500, but since the Series analyzes each sale, the
shares with a cost of $12.50/share would have been sold, resulting in a
realized gain of only $250. This would have resulted in a deferral of tax of
$99 using a marginal tax rate of 39.6%.
Deferring amount of gain (or accelerating loss) realized on each sale is
maximized by the use of the Highest-In, First-Out (HIFO) method of identifying
which shares to sell. The expectation is that any capital gain is minimized
(or capital loss is maximized) since the difference between the proceeds on
the sale of the shares and the cost of those shares is also minimized.
However, if the Series has a loss to offset, low-cost securities may be sold
for profit and may also then be reacquired in order to "step up" the basis in
those securities. There will be times when it will be more advantageous for
the Series to identify shares without the highest cost. This may occur, for
example, when shares with the highest cost result in the realization of
short-term capital gains while shares with a lower cost result in a long-term
gain. Since short-term capital gains are generally subject to higher rates of
tax, the lower cost may be chosen due to the tax benefits of the lower tax
rate.
<PAGE> 5
MANAGEMENT OF DIVIDEND DISTRIBUTIONS
The Series will minimize dividend distributions to the extent permitted
to maintain regulated investment company status under the Code.
Equalization Accounting - Under current law, the Series intends, for
tax purposes, to treat as a distribution of investment company taxable income
or net capital gain the portion of redemption proceeds paid to redeeming
shareholders that represents the redeeming shareholders' portion of the
Series' undistributed investment company taxable income and net capital gain.
This practice will have the effect of reducing the amount of income and gains
that the Series is required to distribute as dividends to shareholders in
order for the Series to avoid federal income and excise tax. This practice
may also reduce the amount of distributions required to be made to
non-redeeming shareholders and defer the recognition of taxable income by such
shareholders. However, since the amount of any undistributed income will be
reflected in the value of the Series' shares, the total return on a
shareholder's investment will not be reduced as a result of the Series'
distribution policy. Under the Code, equalization payments may be used in
lieu of dividend distributions of either ordinary taxable income or net
capital gains. The Series will designate equalization payments as being made
in lieu of ordinary taxable dividends before net capital gains.
Deliberate Minimization of Cash Dividends - The Series will minimize
the amount it distributes as ordinary income dividends. It may not,
therefore, distribute all investment company taxable income or ordinary
income. It will, however, distribute dividends sufficient to maintain its
status as a regulated investment company. In addition, the Series may retain
income for excise tax purposes (and then incur excise tax) if it anticipates
such retention will enhance shareholders' after-tax total returns.
MANAGEMENT
The overall business and affairs of the Series are managed by its Board
of Directors. The Board approves all significant agreements between the
Series and persons or companies furnishing services to the Series, including
the Series' agreements with its Investment Advisor and Custodian. The
day-to-day operations of the Series are delegated to the Fund's officers and
to Manning & Napier Advisors, Inc. (the "Advisor"), 1100 Chase Square,
Rochester, New York 14604. A committee made up of investment professionals and
analysts makes all investment decisions for the Series.
The Advisor acts as the investment advisor to the Series. 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 Series including supervision of service
providers of the Series and the direction of the Advisor's directors, officers
or employees who may be elected as officers of the Series to serve as such.
As of the date of this Prospectus, the Advisor supervise over
$6.0 billion in assets of clients, including both individuals and
institutions. For its services to the Series under the Investment Advisory
Agreement, the Series pays the Advisor a fee, computed daily and payable
monthly, at an annual rate of 1% of the Series daily net assets. This fee is
higher than the mean fee paid by all other mutual funds. In addition, the
Advisor is separately compensated for acting as Transfer Agent for the Series.
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 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
promote the sale of the Fund, including payments to third parties who provide
shareholder support, servicing and distribution assistance. Investors may
be charged a fee if they effect transactions through a broker or agent.
RISKS AND ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
Set forth below is further information regarding certain types of
securities the Series may invest in, as well as information about additional
types of investment strategies the Series may pursue. 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 Series' shareholders. Additional
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
FOREIGN SECURITIES
While the Series generally emphasizes investments in companies domiciled
in the United States, it may invest up to 25% of its assets in foreign
securities of the same types and quality as the domestic securities in which
the Series 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 objective of the Series. Foreign securities
may be denominated either in U.S. dollars or foreign currencies.
The Series 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.
The Series' restrictions on investment in foreign securities are not
fundamental policies and may be changed by the Board of Directors without
shareholder approval; however, it is the Board of Directors' policy to notify
shareholders prior to any material change.
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 Series. 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.
<PAGE> 6
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements with respect to portfolio
securities. Under the terms of a repurchase agreement, the Series purchases
securities ("collateral") from financial institutions such as banks and
broker-dealers (the "seller") which the Advisor deems to be credit-worthy,
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
Series 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 Series' Custodian either directly or through a securities depository.
Default by the seller would, however, expose the Series 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 Series under the 1940 Act.
U.S. GOVERNMENT SECURITIES
The Series 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 are supported only by the credit of the agency (e.g.,
the Federal National Mortgage Association).
MORTGAGE-BACKED SECURITIES
The Series 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"). The Series
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 is 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
Series 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 credit-worthiness. 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 the Series' 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. The Series will also seek to minimize
risk by diversifying its holdings.
<PAGE> 7
ZERO-COUPON BONDS
Some of the securities in which the Series invests may include so-called
"zero-coupon" bonds. Zero-coupon bonds are issued at a significant discount
from face value and pay interest only at maturity rather than at intervals
during the life of the security. The Series is required to accrue and
distribute income from zero-coupon bonds on a current basis, even though it
does not receive that income currently in cash. Thus, the Series may have to
sell investments to obtain cash needed to make income distributions. The
discount in the absence of financial difficulties of the issuer decreases as
the final maturity of the security approaches. Zero-coupon bonds can be sold
prior to their maturity date in the secondary market at the then prevailing
market value, which depends primarily on the time remaining to maturity,
prevailing level of interest rates and the perceived credit quality of the
issues. The market prices of zero-coupon securities are subject to greater
fluctuations in response to changes in market interest rates than bonds which
pay interest currently.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain of the obligations purchased by a Series 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.
SECURITIES LENDING
The Series 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 would 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
Series.
SHORT SALES
The Series 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 the Series owns securities equivalent to those sold short. No more
than 25% of the net assets (taken at current value) of the Series may be held
as collateral for such sales at any one time. Such short sales can be used as
a hedge and as a method of deferring realized capital gains from one taxable
year to the next for tax purposes.
FORWARD COMMITMENTS OR PURCHASES ON A WHEN-ISSUED BASIS
The Series 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 Series before
settlement. These securities are subject to market fluctuation due to changes
in market interest rates. The series 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 its custodian consisting of
high-grade liquid debt instruments or cash in an amount at least equal to the
purchase price.
HEDGING TECHNIQUES
The Series 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 Series' portfolio, to reduce the overall level of risk
that normally would be expected to be associated with its investments. The
Series 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. The Series also may purchase forward foreign
currency exchange contracts to hedge currency exchange rate risk. In
addition, the Series is authorized to purchase and sell stock index futures
contracts and options on stock index futures contracts. The series 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.
<PAGE> 8
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. The series 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. The series 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
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
gives the purchaser the right, in return for the premium paid, to assume a
long or short position in a futures contract.
FUTURES CONTRACTS
The Series 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. The
Series may not 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 Series' 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
Series' 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 high grade
securities in a segregated account with its custodian in the amount
prescribed.
The Series' 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 a loss to the
Series. Certain futures exchanges or boards of trade have established daily
price limits based on the amount of the previous day's settlement price.
These daily limits may restrict the Series' ability to repurchase or sell
certain futures contracts on any particular day.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Series' 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 Series 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 Series 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 Series does not consider forward foreign
currency exchange contracts to be commodities or commodity contracts for
purposes of the Series' fundamental restrictions concerning investment in
commodities or commodity contracts, as set forth in the Statement of
Additional Information.
<PAGE> 9
CURRENCY FUTURES CONTRACTS AND OPTIONS ON 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. The series 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 gives the purchaser the right, in return for the premium
paid, to assume a long or short position in the futures contract. The Series
may not purchase or sell future 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 Series' 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 Series' 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 the
Series 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 "regulated investment
company" under the Code, may restrict trading in forward currency contracts,
options, futures contracts and futures options.
PRINCIPAL INVESTMENT RESTRICTIONS
The Series 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 Series' outstanding
shares.
The Series may borrow money, but only from a bank for temporary or
emergency purposes in amounts not exceeding 10% of the Series' total assets,
and the Series will not make additional investments while borrowings greater
than 5% of its total assets are outstanding.
The Series may not, 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). The
series may not purchase more than 10% of the outstanding voting securities of
any one issuer.
The Series may not 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).
The Series will not invest more than 10% of its 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.
The Series may invest its assets in securities of any other investment
company (closed-end and 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.
The Series may not make loans, but it may invest in debt securities and
repurchase agreements and may engage in securities lending.
Additional information about the Series' investment restrictions is
contained in the Statement of Additional Information.
<PAGE> 10
TAXES AND DISTRIBUTIONS
The Series has elected to be treated, and intends to continue to qualify
each year as a regulated investment company under the Code. Accordingly, the
Series intends to satisfy certain requirements relating to sources of its
income and diversification of its assets and to distribute an amount of its
net investment income to ensure constant qualification.
While the Series seeks to minimize taxable distributions, the Series may
earn taxable income and gains that will be distributed to shareholders. These
distributions will be taxable to the shareholders. Distributions, if
necessary, will be made on an annual basis. Additional distributions will be
made only if necessary to comply with distribution requirements of the Code.
The Series' distributions may be reinvested in additional shares of the
Series or may be taken in cash. If you elect to receive distributions in
cash, instead of reinvesting them in additional shares, you are in effect
reducing the amount of capital at work for you in the Series. If you invest
shortly before the Series declares a dividend, a portion of your investment
will be returned to you as a taxable distribution (commonly referred to as
"buying into a dividend"). This distribution will be taxable regardless of
whether you elected to reinvest your distribution in additional shares or take
the distribution in cash. If you would like to avoid buying into a dividend,
you may contact the Fund to find out when the Series plans to declare a
dividend and invest after that date.
Your redemptions, including exchanges to other Manning & Napier Series,
are subject to capital gains tax. A capital gain or loss is the difference
between the proceeds from the sale of the shares and the amount you paid for
such shares.
Each January, the Series will send to non-corporate taxable shareholders
Form 1099-DIV to assist the shareholder in reporting their previous year's
distribution(s) on their federal and state income tax returns. The Series
will also send to shareholders who redeemed shares a copy of Form 1099-B
showing the total proceeds received by the shareholder. The shareholder will
be responsible for calculating the gain or loss as a result of the redemption.
TOTAL RETURN
From time-to-time the Series may advertise its total return. Total
return figures are based on historical earnings and are not intended to
indicate future performance. The "total return" of a Series refers to the
average annual compounded rates of return over one-, five-, and ten-year
periods or for the life of the Series (as stated in the advertisement) that
would equate an initial amount invested at the beginning of a stated period to
the ending redeemable value of the investment, assuming the reinvestment of
all dividend and capital gains distributions.
PURCHASES, EXCHANGES, AND REDEMPTIONS OF SHARES
Purchases and redemptions of shares of the Series may be made on any day
the New York Stock Exchange is open for trading.
PURCHASES
The minimum initial investment in the Series is $2,000 and subsequent
purchases must be at least $100. The minimum initial investment is waived for
participants in the Automatic Investment Plan (see "Automatic Investment Plan"
below). These minimums may be waived at the Distributor's discretion. The
Fund has the right to refuse any order.
Payment may be made by check or readily available funds. A purchase
order will be effective as of the day your check is received by the
Distributor if the Distributor receives the check before the close of regular
trading on the New York Stock Exchange, normally 4:00 p.m., Eastern time. If
payment is received by wire, the purchase order will be effective the day the
payment is received by the Series' custodian bank. The purchase price of
shares of the Series is the net asset value determined on the day the wire is
received.
The shares of the Series may be purchased in exchange for securities to
be included in the Series, subject to the Advisor's determination that these
securities are acceptable. Securities accepted in an exchange will be valued
at market value. All accrued interest and purchase or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Series and must be delivered by the shareholder to
the Series upon receipt from the issuer.
The Advisor will not accept securities for the Series unless (1) such
securities are appropriate in the Series at the time of the exchange; (2) the
shareholder represents and agrees that all securities offered to the Series
are not subject to any restrictions upon their sale by the Series under the
Securities Act of 1933, or otherwise; and (3) prices are available from an
independent pricing service approved by the Fund's Board of Directors.
AUTOMATIC INVESTMENT PLAN
Shareholders may purchase shares regularly through the Automatic
Investment Plan with a pre-authorized draft drawn on a checking account.
Under this plan, the shareholder may elect to have a specified amount invested
on a regular schedule. The minimum amount of each automatic investment is
$25. The amount specified by the shareholder will be withdrawn from the
shareholder's bank account using the pre-authorized draft. This amount will
be invested at the applicable share price determined on the date the amount is
available for investment. Participation in the Automatic Investment Plan may
be discontinued either by the Fund or the Shareholder upon 30 days' prior
written notice to the other party. A shareholder who wishes to enroll in the
Automatic Investment Plan may do so by completing the applicable section of
the Account Application Form or contacting the Fund for an Automatic
Investment Plan Form.
EXCHANGES BETWEEN SERIES
As permitted pursuant to any rule, regulation or order promulgated by the
Securities and Exchange Commission, some or all of the shares in an account
for which payment has been received by the Fund may be exchanged for shares of
any of the other Manning & Napier Fund, Inc. Series at the net asset value
next determined after an exchange order is effective. Shareholders may effect
up to 4 exchanges in a 12-month period without charge. Subsequent exchanges
are subject to a fee of $15. Exchanges will be made after instructions in
writing or by telephone are received by the Transfer Agent in proper form
(i.e., if in writing - signed by the record owner(s) exactly as the shares are
registered; if by telephone - proper account identification is given by the
shareholder) and each exchange must involve either shares having an aggregate
value of at least $1,000 or all the shares in the account. A shareholder
should read the prospectus of the other Series and consider the differences in
objectives and policies before making any exchange. The exchange
privilege may not be available in all states. For federal and state
income tax purposes, an exchange is treated as a sale of the shares exchanged,
and therefore an exchange could result in a gain or loss to the shareholder
making the exchange. The Series may modify or terminate this exchange offer
upon 60 days notice to shareholders subject to applicable law.
REDEMPTIONS
If a shareholder desires to redeem his shares at their net asset value,
the shareholder must send a written request for redemption in "Good Order" to
the Transfer Agent. "Good Order" generally means that the written request for
redemption must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed by an "eligible guarantor
institution" as that term is defined under Rule 17Ad-15(a)(2) under the
Securities Exchange Act of 1934. Currently, such procedures generally permit
guarantees by a commercial bank or trust company, a member bank of the Federal
Reserve System, or a member firm of a national securities exchange.
Redemption requirements for corporations, other organizations, trusts,
fiduciaries, and retirement plans may require additional documentation.
Please contact the Transfer Agent at 1-800-466-3863 for more information. The
Transfer Agent may make certain de minimis exceptions to the above
requirements for redemption.
Within three days after receipt of a redemption request by the Transfer
Agent in "good order", the Series will make payment in cash, except as
described below, of the net asset value of the shares next determined after
such redemption request was received, except during any period in which the
right of redemption is suspended or date of payment is postponed because the
New York Stock Exchange is closed or trading on such Exchange is restricted or
to the extent otherwise permitted by the 1940 Act if an emergency exists. For
shares purchased, or received in exchange for shares purchased, by check
(including certified checks or cashier's checks), or through the Automatic
Investment Plan, payment of redemption proceeds may be delayed up to 15 days
from the purchase date in an effort to assure that such check or draft has
cleared.
Subject to the Series' compliance with applicable regulations, the Series
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 Series'
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,
he could incur brokerage or transaction charges when converting the securities
to cash. The Fund has elected, however, to be governed by Rule 18f-1 under
the 1940 Act as a result of which the Fund is obligated to redeem shares, with
respect to any one shareholder during any 90-day period, solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of the period.
<PAGE> 11
OTHER INFORMATION ABOUT PURCHASES AND REDEMPTIONS
Due to the relatively high cost of maintaining small accounts, the Series
reserves the right to redeem shares in any account for their then-current
value (which will be promptly paid to the shareholder) if at any time the
total investment in such account drops below $1,000 because of redemptions
(but not due to changes in net asset value). Shareholders will be notified
that the value of their account is less than the minimum investment
requirement and allowed 60 days to make an additional investment before the
redemption is processed.
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.
SHARE PRICE
The share price or "net asset value" per share of the Series is
determined by dividing the total market value of the Series' investments and
other assets, less any liabilities, by the number of outstanding shares of the
Series. Net asset value per share is determined once daily at the close of
regular trading on the New York Stock Exchange (generally 4:00 p.m. Eastern
time).
Series' security holdings that are listed on a securities exchange are
valued at the last quoted sales price on the day the valuation is made. Price
information on listed securities is taken from the exchange where the security
is primarily traded by the Portfolio. Securities which are listed on an
exchange and which are not traded on the valuation date are valued at the mean
of the bid and ask prices. Unlisted securities for which market quotations
are not readily available are valued at the latest quoted bid price.
Temporary cash investments are valued at amortized cost which approximates
market value. Equity securities for which no current quotations are readily
available are valued at fair market value as determined in good faith by or at
the discretion of the Board of Directors. Equity securities may be valued on
the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such securities.
When approved by the Board of Directors, bonds and other fixed income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities. (In estimating a security's price, a pricing service takes into
account institutional-size trading in similar groups of securities and any
developments related to specific securities.) The methods used by the pricing
service and the valuations so established are reviewed by the officers of the
Fund under policies determined by the Directors. There are a number of
pricing services available and the Directors, as part of an on-going
evaluation of these services, may authorize the use of other pricing services
or discontinue the use of any service in whole or in part.
GENERAL INFORMATION
The Fund was incorporated on July 26, 1984 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. As of
November 11, 1996 Manning & Napier Advisors, Inc., 1100 Chase Square,
Rochester, New York 14604 owns 64.58% of the Tax Managed Series and is deemed
under the 1940 Act to be a beneficial owner of such Series.
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 Series 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 Series. Income, direct
liabilities and direct operating expenses of a Series will be allocated
directly to the Series, and general liabilities and expenses of the Fund will
be allocated among the Series in proportion to the total net assets of the
Series 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.
All securities and cash are held by Boston Safe Deposit and Trust
Company. Deloitte & Touche, LLP serves as independent accountants for the
Series and will audit its financial statements annually.
Manning & Napier Advisors, Inc. serves as the Fund's Transfer and
Dividend Disbursing Agent. Shareholder inquiries should be directed to
Manning & Napier Fund, Inc., P.O. Box 41118, Rochester, New York 14604.
<PAGE> 12
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 and
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered 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.
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 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" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Standard & Poor's 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> 13
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Moody's Investor Services, Inc.'s commercial paper ratings:
P-1 - Commercial papers which are rated P-1 are judged to 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.
P-2 - Commercial papers which are rated P-2 are judged to have a strong
ability for repayment for 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.
P-3 - Commercial papers which are rated P-3 are judged to 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. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3 - Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B - Issues rated B are regarded as having only speculative capacity for
timely payment.
C - This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D - Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
<PAGE> 14
MANNING & NAPIER FUND, INC.
Statement of Additional Information dated November 22, 1996
This Statement of Additional Information is not a Prospectus, and it should be
read in conjunction with each Series' Prospectus for the Small Cap Series,
Energy Series, Technology Series, Financial Services Series, International
Series, Life Sciences Series, Global Fixed Income Series, Blended Asset Series
I, Blended Asset Series II, Flexible Yield Series I, Flexible Yield Series II,
Flexible Yield Series III, New York Tax Exempt Series, Ohio Tax Exempt Series,
Diversified Tax Exempt Series, Tax Managed Series, Defensive Series, Maximum
Horizon Series and the World Opportunities Series, copies of which may be
obtained from Manning & Napier Advisors, Inc., 1100 Chase Square, Rochester,
NY 14604.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
----
Investment Objective, Policies and
Restrictions of the Fund B-2
Risk and Investment Policies B-2
Investment Restrictions B-17
Portfolio Turnover B-19
Management B-19
The Advisor B-25
Custodian and Independent Accountant B-27
Portfolio Transactions and Brokerage B-27
Net Asset Value B-29
Redemption of Shares B-29
Payment for Shares Received B-29
Redemption in Kind B-29
Federal Tax Treatment of Dividends and
Distributions B-30
Qualification as Regulated Investment
Company B-30
Fund Distributions B-32
Other Considerations B-34
</TABLE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE FUND
Each Series' portfolio and strategies with respect to the composition of
their respective portfolios are described in the prospectus. If there is a
change in the Series' investment objective, shareholders will be notified
thirty (30) days prior to any such change and will be advised to consider
whether the fund remains an appropriate investment in light of their then
current financial position and needs. Convertible bonds purchased by the
Series may have a call feature. Warrants purchased by the Fund may or may not
be listed on a national securities exchange. The Fund has no current
intention to engage in "short sales against the box". All of the Series'
policies regarding options discussed below are fundamental.
<PAGE>
RISK AND INVESTMENT POLICIES
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 Series 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 Series 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 Series
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 Series 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 Series 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.
A Series will write only covered call options which are traded on
national securities exchanges. Currently, call options on stocks 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 ("OCC"), which also serves as the clearing house
for transactions with respect to standardized or listed 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 OCC 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.
A Series 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, has 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 marked-to-market
daily. A Series will not 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 Series 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 Series 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 Series 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 Series 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.
<PAGE> B-2
Call options may also be purchased by a Series, but only to terminate
(entirely or in part) a Series' 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. A Series may enter into a closing purchase
transaction, for example, 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 Series may also permit
the call option to be exercised. A closing transaction cannot be effected
with respect to an optioned security once a Series has received a notice that
the option is to be exercised.
The cost to a Series of such a closing transaction may be greater than
the net premium received by a Series 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
Series 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 Series may also write secured put options and enter into closing
purchase transactions with respect to such options. A Series 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. The Fund will establish a separate account with the Fund's custodian
consisting of cash or U.S. Government or other high grade liquid debt
obligations equal to the amount of the Series assets that could be required to
consummate the put options. For purposes of determining the adequacy of the
securities in the account, the deposited securities will be valued at fair
market value. If the 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 Series.
A put option is secured if a Series maintains in a segregated account
with its 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 Series may write secured put options when the Advisor wishes to purchase the
underlying security for a Series' portfolio at a price lower than the current
market price of the security. In such event a Series 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 Series 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").
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 Series 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.
<PAGE> B-3
A Series 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 Series 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 Series, will be
reduced by the amount of premium paid for the put option. At the same time, a
Series will continue to own the security. Should the security decline in
value below the exercise price of the put option, however, a Series may elect
to exercise the option and "put" or sell the security to the party that sold
the put option to that Series, at the exercise price. In this case a Series
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 Series
will write options only when the Advisor believes a liquid secondary market
will exist on an exchange for options of the same series, 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 Series may not be able to close an option position, which
will prevent that Series 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 OCC 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 Series and certain other accounts managed by
the Fund's Investment Advisor, Manning & Napier Advisors, Inc., may constitute
such a group. If so, the options positions of the Series may be aggregated
with those of other clients of the Advisor.
If Series writes an over-the-counter ("OTC") option, it will enter into
an arrangement with a primary U.S. government securities dealer, which would
establish a formula price at which the Series 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 10% net asset limitation 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 ("SEC") 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 OCC 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 OCC 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.
<PAGE> B-4
The Series will pay brokerage and other transaction costs to write and
purchase options on securities, including any closing transactions which the
Series may execute. The Fund'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 Series.
Stock Index Futures Contracts and Options on Stock Index Futures Contracts
Each Series, except for the Flexible Yield Series I, Flexible Yield
Series II and Flexible Yield Series III of the Fund, may enter into Stock
Index Futures Contracts to provide: (1) a hedge for a portion of the Series'
portfolio; (2) a cash management tool; (3) as an efficient way to implement
either an increase or decrease in portfolio market exposure in response to
changing market conditions. The Series may also use Stock Index Futures as a
substitute for 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 the Series' portfolio,
the Series may be able to do so more efficiently and 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. The
Series intend to purchase and sell futures contracts on the stock index for
which it can obtain the best price with consideration also given to liquidity.
The Series 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 CFTC rules would exceed 5% of the
liquidation value of the Series' 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
Series' portfolio. The Fund will comply with guidelines established by the
Securities and Exchange Commission with respect to the 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.
Unlike the purchase or sale of an equity security, no price is paid or
received by the Series upon the purchase or sale of a Stock Index Futures
Contract. Upon entering into a Futures Contract, the Series would be required
to deposit with its 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." This amount is required by the rules of the exchanges and is subject
to change. The nature of initial margin in futures transactions is different
from that of margin in security transactions in that futures margin does not
involve the borrowing of funds by the Series 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 Series upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, called "variation margin", to and from the futures
broker, are 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-market". For example, when
the Series has purchased a Stock Index Futures Contract and the price of the
underlying stock index has risen, that futures position will have increased in
value and the Series will receive from the broker a variation margin payment
equal to that increase in value. Conversely, when the Series has purchased a
Stock Index Futures Contract and the price of the stock index has declined,
the position would be less valuable and the Series would be required to make a
variation payment to the broker.
<PAGE> B-5
The Series 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 Series may, however, purchase or sell Stock
Index Futures Contracts with respect to any stock index. Nevertheless, to
hedge the Series' 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
Series' 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 identical securities
with the same delivery date. If the offsetting purchase price is less than
the original sale price, the Series realize a gain; if it is more, the Series
realize a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Series realize a gain; if it is less, the Series
realize a loss. The Series 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 Series are not able to enter into an offsetting
transaction, the Series will continue to be required to maintain the margin
deposits on the Stock Index Futures Contract.
The Series may elect to close out some or all of their futures positions
at any time prior to 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 Series
may close their positions by taking opposite positions which would operate to
terminate the Series' 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 Series, and the Series would realize
a loss or a gain.
Stock Index Futures Contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded. Although the Series
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
Series 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 Series 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 Series 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 Series'
portfolio securities sought to be hedged.
Successful use of Stock Index Futures Contracts by the Series 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
Series 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 Series' portfolio might decline. If
this were to occur, the Series 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 Series' 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 Series 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 Series 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
<PAGE> B-6
situations, if the Series 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). Moreover, the Series 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. 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.
Options on Futures give the purchaser the right, in return for a premium
paid, to assume a position in a Futures Contract (a long position if a call
option and a short position if a put option), 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 Series 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) insufficient trading in certain options;
(ii) restrictions that may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions that may be imposed with respect to particular classes or series
of options, or underlying securities; (iv) unusual or unforeseen circumstances
that may interrupt normal operations on an exchange; (v) the facilities of an
exchange or a clearing corporation may not be adequate to handle unusual
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 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. Futures contracts, by law are not permitted on
individual corporate securities and municipal securities but instead are
traded on exempt securities, such as government securities and broad-based
indexes of securities.
<PAGE> B-7
Accordingly these futures contracts will primarily consist of futures based on
government 0securities (i.e., Treasury Bonds). By purchasing futures on
securities, the Fund 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 Fund'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 Fund 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.
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 Series except the Tax Exempt Series of the Fund is
authorized to enter into forward foreign currency exchange contracts. In
addition, each Series, 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 Series
to establish a rate of exchange for a future point in time. A Series may
enter into forward foreign currency exchange contracts when deemed advisable
by the Advisor under only two circumstances.
First, when entering into a contract for the purchase or sale of a
security in a foreign currency, a Series 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 Series 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 Series
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 Series consisting of cash or high-grade liquid
securities equal to the amount of that Series' assets that would be required
to consummate forward contracts entered into under the second circumstance, as
set forth above, will be established with the Series' 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 Series.
<PAGE> B-8
Currency Futures Contracts and Options on Futures Contracts
Each Series, 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 (i.e., short) means the
acquisition of a contractual obligation to deliver the foreign currencies
called (i.e., long) 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 the Series or adversely affect the prices of
securities which the Series intend 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 Series will not enter
in a currency 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 CFTC rules will not exceed 5% of the liquidation value of the Series'
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 Series' 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 Series 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 Series' 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. 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 such hedge.
Brokerage fees are incurred when a futures contract is bought or sold and
margin deposits must be maintained for such contract. 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 Series realizes a gain; if it is
more, a Series realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, a Series realizes a gain; if it is
less, a Series realizes a loss. Transaction costs must also be included in
these calculations. There can be no assurance, however, that a Series will be
able to enter into an offsetting transaction with respect to a particular
contract at a particular time. If a Series is not able to enter into an
offsetting transaction, a Series 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 a liquid market will
develop for any particular futures contracts. Reasons for the absence of a
liquid secondary market on an exchange include the following: (i) insufficient
trading; (ii) restrictions that may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions that may be imposed with respect to futures contracts or
the underlying security or asset; (iv) unusual or unforeseen circumstances
that may interrupt normal operations on an exchange; (v) the facilities of an
exchange or a clearing corporation may not be adequate to handle unusual
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 certain futures, 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> B-9
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 a call option and a short position if a put option) 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 a call option and a long position if a put option). 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 Series 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 high-grade liquid securities in a segregated account to fulfill the
obligations undertaken by the futures contract. A put option sold by the
Series is covered when, among other things, cash or high-grade liquid
securities are placed in a segregated account to fulfill the obligations
undertaken.
Foreign Currency Options
Each Series, except for the tax-exempt series of the Fund, are
authorized to purchase and write put and call options on foreign currencies.
A call option is a contract whereby the purchaser, in return for a premium,
has the right, but not the obligation, to buy the currency underlying the
option at a specified price during the exercise period. The writer of the
call option, who receives the premium, has the obligation, upon exercise of
the option during the exercise 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 Series will use currency options only 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 the factors which influence foreign exchange
rates and investments generally.
Obligations of Supranational Agencies
Currently, the Global Fixed Income Series, Flexible Yield Series I,
Flexible Yield Series II and the Flexible Series Yield III 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 Series 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> B-10
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 Series will invest in securities of such instrumentality only
when the Advisor is satisfied that the credit risk with respect to any
instrumentality is minimal.
Tax-exempt Securities
The New York Tax Exempt Series, the Ohio Tax Exempt Series and the
Diversified Tax Exempt Series may invest in tax-exempt securities issued by
New York, Ohio or any State of the United States, respectively, and such
State's political subdivisions, agencies and instrumentalities, the interest
from which is, in the opinion of bond counsel, exempt from federal income tax.
Each tax-exempt series is a "diversified" investment company under the
Investment Company Act of 1940. This means that with respect to 75% of its
total assets the Series may not invest more than 5% of its total assets in the
securities of any one issuer (except U.S. government securities). The other
25% of each Series' total assets may be in the securities of any one issuer.
Each Series will not invest more than 25% of its total assets in any
industry. Governmental issuers of tax-exempt securities are not considered
part of any "industry." However, Tax Exempt Securities backed only by the
assets and revenues of nongovernmental users may for this purpose (and for the
diversification purposes discussed above) be deemed to be issued by such
nongovernmental users, and the 25% limitation would apply to such obligations.
Each of the tax-exempt series believes that in general the secondary
market for tax-exempt securities is less liquid than that for taxable
fixed-income securities. Accordingly, the ability of the Series to buy and
sell securities may, at any particular time and with respect to any particular
securities, be limited.
It is nonetheless possible that a Series may invest more than 25% of its
assets in a broader segment of the market (but not in one industry) for
tax-exempt securities, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations, or transportation
revenue obligations. This would be the case only if the Advisor determined
that the yields available from obligations in a particular segment of the
market justified the additional risks associated with such concentration.
Although such obligations could be supported by the credit of governmental
users or by the credit of nongovernmental users engaged in a number of
industries, economic, business, political and other developments generally
affecting the revenues of issuers (for example, proposed legislation or
pending court decisions affecting the financing of such projects and market
factors affecting the demand for their services or products) may have a
general adverse effect on all tax-exempt securities in such a market segment.
Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages originated
by the authority using the proceeds of the bond issue. Because of the
impossibility of precisely predicting demand for mortgages from the proceeds
of such an issue, there is a risk that the proceeds of the issue will be in
excess of demand, which would result in early retirement of the bonds by the
issuer. Moreover, such housing revenue bonds depend for their repayment in
part upon the cash flow from the underlying mortgages, which cannot be
precisely predicted when the bonds are issued. The financing of multi-family
housing projects is affected by a variety of factors, including satisfactory
completion of construction, a sufficient level of occupancy, sound management,
adequate rent to cover operating expenses, changes in applicable laws and
governmental regulations and social and economic trends.
<PAGE> B-11
Health care facilities include life care facilities, nursing homes and
hospitals. Bonds to finance these facilities are issued by various
authorities. The bonds are typically secured by the revenues of each facility
and not be state or local government tax payments. The projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure future liabilities. Life care facilities and
nursing homes may be affected by regulatory cost restrictions applied to
health care delivery in general, restrictions imposed by medical insurance
companies and competition from alternative health care or conventional housing
facilities. Hospital bond ratings are often based on feasibility studies
which contain projections of expenses, revenues and occupancy levels. A
hospital's income available to service its debt may be influenced by demand
for hospital services, management capabilities, the service area economy,
efforts by insurers and government agencies to limit rates and expenses,
competition, availability and expense of malpractice insurance, and Medicaid
and Medicare funding.
In recent years, nationally recognized rating organizations have reduced
their ratings of a substantial number of the obligations of issuers in the
health care sector of the tax exempt securities market. Reform of the health
care system is a topic of increasing discussion in the United States, with
proposals ranging from reform of the existing employer-based system of
insurance to a single-payer, public program. Depending upon their terms,
certain reform proposals could have an adverse impact on certain health care
sector issuers of tax-exempt securities. Because the outcome of current
discussions concerning health care, including the deliberations of President
Clinton's task force on health care reform, is highly uncertain, the Advisor
cannot predict the likely impact of reform initiatives.
Mortgage-Backed Securities
Each Series, except for the Tax Exempt Series, 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 Series, except for the Tax Exempt Series, 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 ("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 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> B-12
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.
Risk Factors Relating to New York Tax Exempt Securities
General. The following information as to certain New York risk factors
have been provided in view of the New York Tax Exempt Series' policy of
concentrating in New York Municipal Securities. This information constitutes
only a brief summary, does not purport to be a complete description of New
York risk factors, and is principally drawn from official statements relating
to securities offerings of the State of New York that have come to the
Portfolio's attention and were available as of the date of this Statement of
Additional Information. The New York Tax Exempt Series has not independently
verified any of the information contained in the official statement, but is
not aware of any fact which would render such information inaccurate.
The economy of New York is diverse with a comparatively large share of
the nation's finance, insurance, transportation, communications and services
employment, and a comparatively small share of the nation's farming and mining
activity. In the calendar years of 1984 through 1991, the State's rate of
economic expansion was somewhat slower than that of the nation. Accordingly,
unemployment in the State rose drastically in the late 1980's and early
1990's. However, since November 1992, employment growth resumed and the State
has gained approximately 185,000 jobs. During recent years, the State has
been hindered by significant cutbacks in computers and instrument
manufacturing, utility, defensive and banking industries.
Revenues and Expenditures. New York's Governmental Funds receive over
52% of their revenues from the personal income tax levied by the State.
Investment income, fees and assessments, abandoned property collections, and
other varied resources supply the balance of the receipts for these funds.
New York's major expenditures are grants to local governments, which are
projected to account for 69%, or $22.910 billion, of all Governmental Funds
expenditures in fiscal 1995-1996. These grants include disbursements for
elementary, secondary and higher education, social services, drug abuse
control, and mass transportation programs. The State's 1996-1997 fiscal year
budget reflects a continuing strategy of substantially reduced State spending,
including program restructurings, reductions in social welfare spending and
efficiency and productivity initiatives.
Fiscal 1994-1995. The State completed its 1994-1995 fiscal year with the
General Fund (the major operating fund of the State) in balance on a
cash-basis. The closing balance of $158 million reflected $157 million in the
Tax Stabilization Reserve Fund and $1 million in its Contingency Reserve Fund.
The State's 1995-1996 Financial Plan projects a balanced General Fund. In
addition, the State's 1996-1997 Financial Plan projects a closing fund balance
in the General Fund to be $272 million.
State Debt. Under the State Constitution, the State may not, with
limited exceptions for emergencies, undertake long term borrowing (i.e.,
borrowing for more than one year) unless the borrowing is authorized in a
specific amount for a single work or purpose by the Legislature and approved
by the voters. There is no limitation on the amount of long term debt that
may be so authorized and subsequently incurred by the State. The State may
undertake short term borrowings without voter approval (i) in the anticipation
of the receipt of taxes and revenues, by issuing tax and revenue anticipation
notes, and (ii) in anticipation of the receipt of proceeds from the sale of
duly authorized by unissued bonds, by issuing bond anticipation notes. The
State Constitution provides that the State may guarantee the repayment of
certain borrowings to carry out designated projects by the New York State
Thruway Authority, the Job Development Authority and the Port Authority of New
York and New Jersey.
<PAGE> B-13
Debt Ratings. Due primarily to the deteriorating economy and recurring
deficits, Moody's lowered its ratings on New York State general obligations in
1990 from A1 to A. In January 1992, Moody's lowered the ratings on a
substantial number of the State's appropriation-backed debt from A to Baa1,
and stated that it had put the State's general obligations under review for
possible downgrade in the future. S&P lowered its ratings on the State's
general obligations in March 1990 from AA- to A, and in January 1992, S&P
further lowered the rating to A-. In January 1992, S&P also downgraded to A-
various agency debt, State moral obligations, contractual obligations, lease
purchase obligations, guarantees and school district debt. S&P currently
assesses the rating outlook for New York obligations as "negative". Fitch
maintains an A+ rating for New York State general obligations. Future
negative rating actions would tend to increase the State's borrowing costs as
well as to negatively effect the prices of bonds held by the New York Tax
Exempt Series.
Litigation. Certain litigation is pending against New York that could
adversely affect the financial condition of the State in fiscal 1995-1996 or
thereafter. These legal proceedings involve State finances, State programs
and miscellaneous tort, real property, and contract claims in which the State
is defendant and the monetary damages sought are substantial.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1995-1996 State
Financial Plan.
New York City. The fiscal health of the State is closely related to the
fiscal health of its localities, particularly the City, which has required and
continues to require significant financial assistance from the State. The
City depends on State aid both to enable the City to balance it's budget and
to meet its cash requirements. The City achieved balanced operating results
for the 1994-1995 fiscal year as reported in accordance with GAAP. On January
31, 1996, the City published the Financial Plans for the fiscal years
1996-1999, a modification to a financial plan submitted on July 11, 1995. The
financial plan projects balanced budget for the fiscal years 1996-1999. The
projections for its 1996 fiscal year reflect proposed actions to close a
previously projected gap of approximately $3.1 billion.
Convertible Securities
Convertible Securities in which the Series' 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 it entitles the holder to purchase, and
(2) do not represent any rights in the assets of the issuer.
Investment in Restricted Securities
Each Series may invest in "restricted securities" subject to the 10% net
asset 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.
<PAGE> B-14
RESTRICTIONS
Each Series has adopted certain restrictions set forth below (in addition
to those indicated in the prospectus) as fundamental policies, which may not
be changed without the favorable vote of the holders of a "majority" of the
Fund's outstanding voting securities, which means a vote of the holders of the
lesser of (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares.
A Series may not:
1. Purchase securities on margin (but a Series 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 Series' 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
Series, may invest in futures contracts and related options;
4. Buy or sell commodities or commodity contracts (the Small Cap
Series, Energy Series, Technology Series, Financial Services Series,
International Series, Life Sciences Series, Global Fixed Income Series, Tax
Managed Series and the World Opportunities Series, also expressly provide that
forward foreign currency contracts are not considered commodities or commodity
contracts for purposes of this restriction) or real estate or interest 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. The
Blended Asset Series I, Blended Asset Series II, Flexible Yield Series I,
Flexible Yield Series II, Flexible Yield Series III, Defensive Series, and the
Maximum Horizon Series may not buy or sell commodities or commodity contracts,
provided that the Series 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 Series is prohibited from acquiring the
securities of other investment companies if, as a result of such acquisition,
such Series owns more than 3% of the total voting stock of the company;
securities issued by any one investment company represent more than 5% of its
total assets; or securities (other than treasury stock) issued by all
investment companies represent more than 10% of the total assets of a Series.
A Series' purchase of such investment companies would indirectly bear a
proportionate share of the operating expenses of such investment companies,
including advisory fees. All Series, Except the Tax Managed Series and World
Opportunities Series, 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;
<PAGE> B-15
10. Purchase foreign securities if as a result of the purchase of such
securities more than 10% of a Series' assets (25% in the case of the Tax
Managed Series, Life Sciences Series, Blended Asset Series I, Blended Asset
Series II, Flexible Yield Series I, Flexible Yield Series II, Flexible Yield
Series III, Defensive Series, Maximum Horizon Series and 100% in the case of
the International Series, Global Fixed Income Series and World Opportunities
Series) 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.
11. The Fund's investment policies with respect to options on
securities and with respect to stock index and currency futures and related
options are subject to the following fundamental limitations: (1) with
respect to any Series, 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 Series; (2) a Series 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 Series; (3) the aggregate margin deposits required on
all futures or options thereon held at any time by a Series will not exceed 5%
of the total assets of the Series; (4) the security underlying the put or call
is within the investment policies of each Series and the option is issued by
the Options Clearing Corporations; and (5) the Series 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.
12. The Fund will not purchase or retain securities of an issuer if an
officer or director of such issuer is an officer or director of the Fund or
its investment adviser and one or more of such officers or directors of the
Fund or its investment adviser owns beneficially more than 1/2% of the shares
or securities of such issuer and all such directors and officers owning more
than 1/2% of such shares or securities together own more than 5% of such
shares or securities.
13. The Fund will not purchase securities of any company which has
(with predecessors) a record of less than three years continuous operation if
as a result more than 5% of the Portfolio's assets would be invested in
securities of such companies.
14. Invest more than 5% of the value of its total net assets in
warrants (except for the Flexible Yield Series I, Flexible Yield Series II,
Flexible Yield Series III, Global Fixed Income Series, New York Tax Exempt
Series, Ohio Tax Exempt Series and the Diversified Series). Included within
that amount, but not to exceed 2% of the value of the Series' net assets, may
be warrants which are not listed on the New York or American Stock Exchange.
Two Series are subject to the following investment limitations which are
not fundamental:
1. In the case of the Energy Series, the Public Utility Holding Company
Act of 1935 ("PUHCA") places certain restrictions on affiliates of public
utility companies as defined in PUHCA. The Energy Series will not acquire 5%
or more of the outstanding voting securities of a public utility in order to
avoid imposition of these restrictions.
2. The Financial Services Series may purchase securities of an issuer
which derived more than 15% of its gross revenues in its most recent fiscal
year from securities_related activities, subject to the following conditions
and applicable SEC regulations:
a. the purchase cannot cause more than 5% of the Series' total assets
to be invested in all securities of that issuer;
b. for an equity security--(i) the purchase cannot result in the
Series' owning more than 5% of the issuer's outstanding securities in that
class; and (ii) at the time of purchase, the security must meet the Federal
Reserve Board's definition of a margin security (i.e., registration on a
national securities exchange or listing by the Federal Reserve Board of
Governors on the current OTC Margin Stock list).
<PAGE> B-16
c. for a debt security--(i) the purchase cannot result in the Series
owning more than 10% of the outstanding principal amount of the issuers debt
securities; and (ii) at the time of purchase, the security must be of at least
investment grade quality (i.e., at least BBB/Baa as determined by one of the
major rating services or, if not rated, judged to be equivalent by the Series'
Directors). See the Appendix to the Prospectus for an explanation of these
ratings.
All of the above percentage limitations, as well as the issuer's gross
revenue test, are applicable at the time of purchase. With respect to
warrants, rights, and convertible securities, a determination of compliance
with the above limitations shall be made as though such warrant, right, or
conversion privilege had been exercised. The Financial Services Series will
not be required to divest its holdings of a particular issuer when
circumstances subsequent to the purchase would cause one of the above
conditions to not be met. The purchase of a general partnership interest in a
securities-related business is prohibited.
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. Each Series
expects that its turnover rate will be less than 100%, except for the Tax
Managed Series which expects its turnover rate will be no more than 50%.
However, turnover will in fact be determined by market conditions and
opportunities, and therefore it is impossible to estimate the turnover rate
with confidence.
<TABLE>
<CAPTION>
MANAGEMENT
The Directors and officers of the Fund are:
<S> <C> <C>
Position Principal occupations
Name and address with Fund During past five years
- ------------------------------------------- ---------------------- --------------------
B. Reuben Auspitz* Vice Executive Vice President, Manning
1100 Chase Square President & & Napier Advisors, Inc., since 1983;
Rochester, NY 14604 Director President and Director, Manning &
Napier Investor Services, Inc. since
1990; Director, President and
Treasurer, Manning & Napier Advisory
Advantage Corporation, since 1990;
Director, Manning & Napier Leveraged
Investment Co., since 1994; Director,
Chairman and Treasurer, Exeter Trust
Co., since 1994; Member, Fiduciary
Services, L.L.C. since 1995; Member,
Manning & Napier Associates, L.L.C.
since 1995; Member, Manning & Napier
Capital Co., L.L.C. since 1995;
President and Director, Manning &
Napier Insurance Fund, Inc. since 1995
Martin Birmingham Director Trustee, The Freedom Forum, since 1980;
Lincoln Tower, 16th FLR Director Emeritus, ACC Corporation
Rochester, NY 14604 since 1994; Director Manning & Napier
Insurance Fund, Inc. since 1995
Harris H. Rusitzky Director Formerly Director and Corporate
One Grove Street Executive, Serv-Rite Corporation from
Pittsford, NY 14534 1965-1994; President, Blimpie of
Central New York and The Greening Group
since 1994; Director, Manning & Napier
Insurance Fund, Inc., since 1995
Peter L. Faber* Director Former Partner, Kaye, Scholer, Fierman,
50 Rockefeller Plaza Hays & Handler from 1984-1995; Partner
New York, NY 10020-1605 McDermott, Will & Emery since 1995;
Director, Manning & Napier Insurance
Fund, Inc., since 1995
<PAGE> B-17
Stephen B. Ashley Director Chairman and Chief Executive Officer,
600 Powers Building Sibley Real Estate Services, Inc. since
116 West Main Street 1975; Chairman and Chief Executive
Rochester, NY 14614 Officer, Sibley Mortgage Corp. since
1975; Director, Genesee Corp. since
1987; Director, Hahn Automotive since
1994; Director, Fannie Mae since 1995;
Director, Manning & Napier Insurance
Fund, Inc. since 1996
William Manning President President, Director and co-founder,
1100 Chase Square Manning & Napier Advisors, Inc., since
Rochester, NY 14604 1970; President, Manning & Napier Fund,
Inc., since 1985; President, Director,
Founder & CEO, Manning Ventures, Inc.,
since 1992; President, Director,
Founder & CEO, KSDS, Inc., since 1992;
President, Kent Display Systems, Inc.,
since 1992; President, Director,
Founder & CEO, Synmatix Corporation,
since 1993; President, Director,
Founder & CEO, Manning Leasing, Inc.,
since 1994; President/Treasurer,
Manning & Napier Leveraged Investing
Company, Inc., since 1994; Member,
Manning & Napier Capital Co., L.L.C.,
since 1994; Member, Fiduciary Services,
L.L.C., since 1995
Timothy P. Mullaney, CPA Treasurer & Chief Fin. Senior Tax Associate, Coopers &
1100 Chase Square Officer Lybrand, LLP from 1990-1994; Tax
Rochester, NY 14604 Manager, Investors Bank & Trust from
1/94-7/94; Mutual Fund Chief Financial
Officer, Manning & Napier Advisors,
Inc. since 1994; Treasurer and Chief
Financial Officer, Manning & Napier
Insurance Fund, Inc., since 1995
Barbara A. Lapple Corporate Compliance Officer, Manning & Napier
1100 Chase Square Secretary Advisors, Inc. since 1984; Corporate
Rochester, NY 14604 Secretary & Compliance Officer, Manning
& Napier Investor Services, Inc. since
1990; Corporate Secretary & Compliance
Officer, Manning & Napier Leveraged
Investing Company, Inc. since 1994;
Corporate Secretary & Compliance
Officer, Manning & Napier Insurance
Fund, Inc., since 1995
</TABLE>
* Interested Director, 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 and Harris H. Rusitzky.
Directors affiliated with the Advisor do not receive fees from the Fund.
Mr. Faber is deemed to be an interested person of the investment advisor
because his firm provides legal services to the Advisor. 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 Series of the Fund, plus $500 for any Committee Meeting
held on a day on which a Board Meeting is not held.
<TABLE>
<CAPTION>
COMPENSATION TABLE FOR FISCAL YEAR ENDED OCTOBER 31, 1996>/R>
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Est. Annual Total
Name Position Aggregate Pension Benefits upon Compensation
from Registrant Compensation Retirement from Registrant
B. Reuben Director $ 0 N/A N/A $ 0
Auspitz*
Martin Director $18,000 N/A N/A $18,000
Birmingham
Harris H. Director $18,500 N/A N/A $18,500
Rusitzky
Peter L. Director $18,000 N/A N/A $18,000
Faber*
Stephen B. Director $18,000 N/A N/A $18,000
Ashley
</TABLE>
*Interested Director, within the meaning of the Investment Company Act of 1940
(the "1940 Act").
<PAGE> B-18
The following persons were known by the Fund to own of record 5% or more
of the outstanding voting securities of each Series on October 31,
1996:
NAME AND ADDRESS OF HOLDER OF RECORD PERCENTAGE OF SERIES
International Series
Manning & Napier Advisors, Inc. 6.88%
FBO American Electric Power Co.
Pension Plan
1100 Chase Sqaure
Rochester, NY 14604
Technology Series
Manning & Napier Advisors, Inc. 7.98%
FBO American Electric Power Co.
Pension Plan
1100 Chase Square
Rochester, NY 14604
Blended Asset Series I
Manning & Napier Advisor, Inc. 5.63%
FBO National Financial Services
1100 Chase Square
Rochester, NY 14604
Flexible Yield Series I
Elaine P. Tecler IRA 5.22%
132 Clintwood Circle
Rochester, NY 14620
Flexible Yield Series II
Kent Hudson IRA 5.35%
508 Jackson Avenue
Warren, PA 16365
Richard & June Dahlin JTWROS 6.12%
1425 2nd Avenue
Apt. 206
Chula Vista, CA 91911
Jerry Vasicek IRA 8.07%
65 Coventry Road
Endicott, NY 13760
Penfield Fire Company 8.13%
1838 Penfield Road
Penfield, NY 14526
Constance Aquavella 8.81%
1286 East Avenue
Rochester, NY 14610
Charles E. Lucas IRA 18.39%
9 Southland Avenue
Lakewood, NY 14750
Manning & Napier Advisors, Inc. 29.01%
1100 Chase Square
Rochester, NY 14604
<PAGE> B-19
Flexible Yield Series III
Hoselton Foundation 5.11%
909 Fairport Road
East Rochester, NY 14445
Perry's Ice Cream, Inc. Deferred Salary P/S Bond Fund 6.03%
One Ice Cream Plaza
Akron, NY 14001
Walter D. & Bethel H. Kogut JTWROS 6.25%
8066 Irish Mist Lane
Manlius, NY 13104
Peter L. Kogut Jr. & Christine Kogut JTWROS 6.25%
77 Old Stonfield Way
Pittsford, NY 14534
Snyder Tank Corporation 7.31%
3774 Lakeshore Road
Buffalo, NY 14219
Boy Scouts of America Troop 31 9.31%
909 Fairport Road
East Rochester, NY 14445
Manning & Napier Advisors, Inc. 9.93%
1100 Chase Square
Rochester, NY 14604
George T. & Jacqueline A. Golebiewski JTWROS 17.69%
4693 Pinecrest Terrace
Eden, NY 14057-9757
New York Tax Exempt Series
Manning & Napier Advisors, Inc. 5.65%
FBO William B. Hale
1100 Chase Square
Rochester, NY 14604
Small Cap Series
Manning & Napier Advisors, Inc. 6.35%
FBO American Electric Power Co.
Pension Plan
1100 Chase Square
Rochester, NY 14604
Maximum Horizon Series
Manning & Napier Advisors, Inc. 47.53%
FBO National Financial Services
1100 Chase Square
Rochester, NY 14604
Manning & Napier Advisors, Inc. 9.09%
1100 Chase Square
Rochester, NY 14604
<PAGE> B-20
Defensive Series
CAI Wireless Systems 6.22%
18 Corporate Woods Blvd.
Albany, NY 12211
Brook Anco Corporation 401(k) 6.23%
3495 Winton Place, Building B
Rochester, NY 14623
Updike, Kelly, & Spellacy P/S-DG 6.34%
One State Street
P.O. Box 231277
Hartford, CT 06123
Manning & Napier Advisors, Inc. 13.97%
FBO National Financial Services
1100 Chase Square
Rochester, NY 14604
Conklin Instrument Corporation P/S Plan 24.48%
West Road
Pleasant Valley, NY 12569
Manning & Napier Advisors, Inc. 35.24%
1100 Chase Square
Rochester, NY 14604
Tax Managed Series
Amanda J. McKnight 5.20%
600 Centerville Pike
Slippery Rock, PA 16057
Emily A. McKnight 6.50%
600 Centerville Pike
Slippery Rock, PA 16057
Manning & Napier Advisors, Inc. 64.58%
1100 Chase Square
Rochester, NY 14604
Ohio Tax Exempt Series
Franklin Eck 12.38%
3300 Riverside Drive
Columbus, OH 43221
Ms. Nancy Peterson, Trust 16.48%
3873 Ridgeway Road
Kettering, OH 45429
The Advisor
Manning & Napier Advisors, Inc. acts as the Fund's investment advisor.
The Fund pays the Advisor for the services performed a fee at the annual rate
of 1% of the Fund's daily net assets for the Small Cap Series, Energy Series,
Technology Series, Maximum Horizon Series, Financial Services Series,
International Series, Tax Managed Series, Life Sciences Series, Global Fixed
Income Series, Blended Asset Series I, Blended Asset Series II, World
Opportunities Series, .80% for the Defensive Series, .35% for the Flexible
Yield Series I, .45% for the Flexible Yield Series II, .50% for the Flexible
Yield Series III, New York Tax Exempt Series, Ohio Tax Exempt Series and the
Diversified Tax Exempt Series. For fiscal years ended December 31, 1987,
December 31, 1988, December 31, 1989, December 31, 1992, December 31, 1993,
<PAGE> B-21
December 31, 1994, and December 31, 1995, the aggregate total of fees paid by
the Small Cap Series to the Advisor were $34,211, $114,125, $0, $184,465,
$582,365, $931,789 and $1,296,858, respectively. For the period November 4,
1988, (Commencement of Investment Operations) to December 31, 1988 and for the
fiscal years ended December 31, 1989, December 31, 1990, December 31, 1991,
and December 31, 1992, the aggregate total of fees paid by the Technology
Series to the Advisor were $87,931, $660,878 $573,333, $603,370, and $249,485
respectively and for the period August 29, 1994 (Commencement of Operations)
to December 31, 1994 and for the fiscal years ended December 31, 1995, the
aggregate total fees were $151, 936 and $557,701, respectively. For the
period August 27, 1992, (Commencement of Investment Operations) to
December31, 1992 and for the fiscal years ended December 31, 1993, December
31, 1994 and December 31, 1995, the aggregate total fees paid by the
International Series to the Advisor were $282,754, $868,462, $870,103 and
$1,084,583. For the period October 7, 1992, (Commencement of Investment
Operations) to December 31, 1992 and for the fiscal years ended December 31,
1993, December 31, 1994, and December 31, 1995, the aggregate total fees paid
by the Life Sciences Series to the Advisor were $30,001, $560,977, $749,795
and $451,038. For the fiscal years ended December 31, 1987, December 31, 1988
and December 31, 1989, the advisory fees waived by the Advisor for the Small
Cap Series were $500, $707, and $489 respectively. For the period September
15, 1993, (Commencement of Operations) to December 31, 1993 and for the fiscal
years ended December 31, 1994, December 31, 1995, and October 31,
1996 the advisory fees waived by the Advisor for the Blended Asset Series
I were $891, $26,034, $23,407 and $13,439, and the aggregate total
fees paid for the periods ended December 31, 1995, and October
31, 1996 were $46,543 and $108,485. For the period October 12,
1993, (Commencement of Operations) to December 31, 1993 and for the
periods ended December 31, 1994, December 31,1995, and October
31, 1996 the advisory fees waived by the Advisor for the Blended Asset
Series II were $393, $37,315, $17,669 and $3,528, and the aggregate
total fees paid for the fiscal year ended December 31, 1995 and October
31, 1996 were $114,026 and $222,302 . For the period February
15, 1994 (Commencement of Operations) to December 31, 1994 and for the
periods ended December 31, 1995, and October 31, 1996 the
advisory fees waived by the Advisor for the Flexible Yield Series II were
$905, $2,160, and $1,688. For the period February 15, 1994 (Commencement
of Operations) to December 31, 1994 and the periods ended December 31,
1995, and October 31, 1996 the advisory fees waived by the Advisor
for the Flexible Yield Series I were $443, $1,221 and $1,057 . For
the period December 20, 1993, (Commencement of Operations) to December 31,
1993 and for the periods ended December 31, 1994, December 31, 1995,
and October 31, 1996 the advisory fees waived by the Advisor for the
Flexible Yield Series III were $11, $1,683, $4,767 and $4,454 . For
the period January 17, 1994 (Commencement of Operations) to December 31, 1994
and for the period ended December 31, 1995, the advisory fees paid to
the Advisor for the New York Tax Exempt Series were $82,497 and $114,847. For
the period February 14, 1994 (Commencement of Operations) to December 31, 1994
and for the period ended December 31, 1995, the advisory fees waived
by the Advisor for the Ohio Tax Exempt Series were $11,101 and $4,398 and the
aggregate total fees paid for the period ended December 31, 1995 was
$19,239. For the period February 14, 1994 (Commencement of Operations) to
December 31, 1994 and for the period ended December 31, 1995,
advisory fees waived by the Advisor for the Diversified Tax Exempt Series were
$22,494 and $0 and the aggregate total fees paid were $2,983 and $50,130.
For the period November 1, 1995 (Commencement of Operation) to October 31,
1996, the advisory fees waived by the Advisor for the Tax Managed Series were
$1,867. For the period November 1, 1995 (Commencement of Operations) to
October 31, 1996, the advisory fees waived by the Advisor for the Defensive
Series were $3,940. For the period November 1, 1995 (Commencement of
Operations) to October 31, 1996, the advisory fees waived by the Advisor for
the Maximum Horizon Series were $4,377. All fees are reported for the
Series that have commenced operations except, for the World Opportunities
Series which has not reached a reporting period. The Investment Advisory
Agreement (the "Agreement") between the Fund and the Advisor provides that in
the event the expenses of the Fund (including the fee of the Advisor but
excluding: (i)brokerage commissions; (ii) interest; (iii) taxes; and (iv)
extraordinary expenses except for those incurred by the Fund as a result of
litigation in connection with a suit involving a claim for recovery by the
Fund, or as a result of litigation involving a defense against a liability
asserted against the Fund, provided that, if the adviser made the decision or
took the action which resulted in such claim the adviser acted in good faith
without gross negligence or misconduct, and for any indemnification paid by
<PAGE> B-22
the Fund to its officers, directors and advisers in accordance with applicable
state and federal laws as a result of such litigation) for any fiscal year
exceed the limits set by applicable regulations of state securities
commissions, the Advisor will reduce its fee by the amount of such excess.
Any such reductions or refunds are accrued and paid in the same manner as the
Advisor's fee and are subject to readjustment during the year.
The Agreement 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 is derived from the name of the Advisor and is 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.
On April 30, 1993, the Advisor became the Fund's Transfer Agent. For
servicing the Blended Asset Series I , Blended Asset Series II, Flexible Yield
Series I, Flexible Yield Series II, Flexible Yield Series III, New York Tax
Exempt Series, Ohio Tax Exempt Series, Diversified Tax Exempt Series, in this
capacity, for the fiscal years ended December 31, 1993, December 31, 1994 and
December 31, 1995, the Advisor received $29.87, $7,396, and $14,322 from the
Fund. For servicing the Tax Managed Series, Defensive Series, Maximum
Horizon Series, Blended Asset Series I, Blended Asset Series II, Flexible
Yield Series I, Flexible Yield Series II, and the Flexible Yield Series III,
in this capacity, for the fiscal year ended October 31, 1996, the Advisor
received $8,990 from the Fund. The World Opportunities Series
is not included since the series has not reached a reporting period. The
Advisor will not charge for its Transfer Agent services to the other Series.
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 to clients for this service. The Advisor may
impose separate requirements in connection with employee purchases of the
Fund.
Custodian and Independent Accountant
The custodian for the Energy Series, the Technology Series, the Financial
Services Series, the Life Sciences Series, and the Global Fixed Income Series
is Fleet Bank, N.A., 45 East Avenue, Rochester, N.Y. 14604, with the exception
of the foreign securities held by the Fund, whose custodian is Boston Safe
Deposit and Trust Company, One Cabot Road, 3rd Floor, Medford, MA 02155-5159.
The custodian for the Small Cap Series, International Series, Blended Asset
Series I, Blended Asset Series II, Flexible Yield Series I, Flexible Yield
Series II, Flexible Yield Series III, New York Tax Exempt Series, Ohio Tax
Exempt Series, Diversified Tax Exempt Series, Tax Managed Series, Defensive
Series, Maximum Horizon Series and the World Opportunities Series 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. Coopers & Lybrand L.L.P, One Post Office Square,
Boston, MA 02109 are the Fund's independent accountants for the Fund, with the
exception of the Blended Asset Series I, Blended Asset Series II, Flexible
Yield Series I, Flexible Yield Series II, Flexible Yield Series III, Tax
Managed Series, Defensive Series and the Maximum Horizon Series for which the
independent accountants are Deloitte & Touche LLP, 125 Summer Street, Boston,
MA 02110.
<PAGE> B-23
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 portfolio 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 are
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. For
the fiscal years ending December 31, 1987, December 31, 1988, December31,
1989, December 31, 1992, December 31, 1993, December 31, 1994 and December 31,
1995, the brokerage commissions incurred by the Small Cap Series were $90,216,
$82,149, $0, $42,285, $60,820, $90,860 and $327,763, respectively. For the
period November 4, 1988 (Commencement of Operations) to December 31, 1988 and
the fiscal years ended December 31, 1989, December 31, 1990, December 31, 1991
and December 31,1992, the brokerage commissions incurred by the Technology
Series were $123,896, $80,326, $11,415, $5,795 and $137,000, respectively and
for the period August 29, 1994 (Commencement of Operations) to December 31,
1994 and the fiscal year ended December31, 1995, were $13,693 and $73,963.
For the period August 27, 1992 (Commencement of Operations) to December 31,
1992 and the fiscal years ended December 31, 1993, December 31, 1994 and
December 31, 1995, the brokerage commissions incurred by the International
Series were $219,814, $49,000, $151,987 and $157,084. For the period October
7, 1992 (Commencement of Operations) to December 31, 1992 and the fiscal years
ended December 31, 1993, December 31, 1994 and December 31, 1995, the
brokerage commissions incurred by the Life Sciences Series were $10,670,
$144,225, $85,230 and $132,203. For the period September 15, 1993
(Commencement of Operations) to December 31, 1993 and for the fiscal years
ended December 31, 1994, December 31, 1995, and October 31, 1996 the
brokerage commissions incurred by the Blended Asset Series I were $431,
$4,270, $8,775 and $13,656. For the period October 12, 1993
(Commencement of Operations) to December 31, 1993 and for the fiscal years
ended December 31, 1994, December 31, 1995, and October 31, 1996 the
brokerage commissions incurred by the Blended Asset Series II were $506,
$8,525, $23,410 and $36,256. For the period February 15, 1994
(Commencement of Operations) to December 31, 1994, and the fiscal years ended
December 31, 1995, and October 31, 1996 there were no brokerage
commissions incurred by the Flexible Yield Series I. For the period February
<PAGE> B-24
15, 1994 (Commencement of Operations) to December 31, 1994 and the fiscal
years ended December 31, 1995, and October 31, 1996 there were no
brokerage commissions incurred by the Flexible Yield Series II. For the
period December 20, 1993 (Commencement of Operations) to December 31, 1993 and
for the fiscal years ended December 31, 1994, December 31, 1995, and
October 31, 1996 there were no brokerage commissions incurred by the
Flexible Yield Series III. For the period January 17, 1994 (Commencement of
Operations) to December 31, 1994 and the fiscal year ended December 31, 1995,
there were no brokerage commissions incurred by the New York Tax Exempt
Series. For the period February 14, 1994 (Commencement of Operations) to
December 31, 1994 and the fiscal year ended December 31, 1995, there were no
brokerage commissions incurred by the Ohio Tax Exempt Series. For the period
February 14, 1994 (Commencement of Operations) to December 31, 1994 and the
fiscal year ended December 31, 1995, there were no brokerage commissions
incurred by the Diversified Tax Exempt Series. For the period November 1,
1995 (Commencement of Operations) to October 31, 1996 the brokerage
commissions incurred by the Tax Managed Series were $837. For the period
November 1, 1995 (Commencement of Operations) to October 31, 1996, the
brokerage commissions incurred by the Defensive Series were $335. For the
period November 1, 1995 (Commencement of Operations) to October 31, 1996, the
brokerage commissions incurred by the Maximum Horizon Series were $2,753.
All brokerage commissions are reported for all Series that have commenced
operations except, for the World Opportunities Series which has not
reached a reporting period. There were no brokerage commissions paid to
affiliates during the last five fiscal years.
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 National
Market System 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 week-end 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 Fund is obligated to redeem
<PAGE> B-25
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.
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in
the Fund's Prospectus. No attempt is made to present a detailed explanation
of the tax treatment of the Fund or its shareholders, and the discussion here
and in the Fund's Prospectus is not intended as a substitute for careful tax
planning.
The following discussion of federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated
herein.
Qualification as Regulated Investment Company
As a regulated investment company ("RIC") under Subchapter M of the Code,
each Series is exempt from federal income tax on its net investment income and
capital gains which it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (generally,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the year (the "Distribution Requirement") and
satisfies certain other requirements of the Code that are described below.
Distributions of investment company taxable income made during the taxable
year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement each Series
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stocks, securities or foreign currencies, or from other income
(including but not limited to gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies ("Qualifying Income") and derive less than 30% of its
gross income from the sale or other disposition of stocks, securities and
certain other investments held for less than three months including foreign
currencies (or options, futures or forward contracts on foreign currencies)
but only if such currencies (or options, futures or forward contracts) are not
directly related to the Series' principal business of investing in stock or
securities or options and futures with respect to stocks or securities (the
so-called "Short-Short Gain Rule"). Moreover, at the close of each quarter
of its taxable year, at least 50% of the value of a Series' assets must
consist of cash and cash items, Government securities, securities of other
RICs, and securities of other issuers (as to which such Series has not
invested more than 5% of the value of its total assets in any one issuer and
as to which such Series does not hold more than 10% of the outstanding voting
securities of any one issuer), and no more than 25% of the value of its total
assets may be invested in the securities of any one issuer (other than
Government securities and securities of other RICs), or in two or more issuers
which the Fund controls and which are engaged in the same, similar or related
trades or businesses (the "Asset Diversification Test").
<PAGE> B-26
The foregoing requirements of the Code may inhibit the Series in their
efforts to achieve their investment objectives.
1. a. Qualifying Income
It is not clear to what extent income derived by a Series from
foreign currency gains will, under future Treasury regulations, be treated by
the Internal Revenue Service (the "Service") as Qualifying Income.
Consequently, each Series will take appropriate actions to limit such
transactions, where necessary, until such time as applicable U.S.
Treasury regulations are issued or a Series receives a satisfactory opinion of
counsel or private letter ruling from the Service that income from such
currency transactions constitutes Qualifying Income.
1. b. Currency Transactions
Transactions in forward currency contracts, currency futures
contracts, options on currencies, and certain other instruments are subject to
special rules which may affect the timing and character of distributions to
shareholders by accelerating income to the Series, deferring Series' losses,
causing adjustments in the holding periods of Series' securities, and
converting capital gains into ordinary income. For example, certain foreign
currency gains realized by a Series will be treated as ordinary income rather
than capital gain under Section 988 of the Code. The tax treatment of certain
foreign currency contracts, futures contracts, and options on futures
contracts entered into by a Series will be governed by Section 1256 of the
Code. In general, each such position held by the Series will be marked to
market (i.e., treated as if it were closed out on the last business day of
each taxable year of the Series), and all gain or loss associated with such
marking to market or other transactions in such positions will be treated as
60% long-term and 40% short-term capital gain or loss.
When a Series holds an option or contract governed by Section 1256
which substantially diminishes the Series' risk of loss with respect to
another position held by the Series which is not governed by Section 1256,
this combination of positions could be a "mixed straddle" that is generally
subject to Section 1092 of the Code in addition to Section 1256 of the Code.
The Series may make certain tax elections for its "mixed straddles" which
could eliminate the effects of Section 1256. In addition, a Series'
activities in foreign currency contracts, futures contracts and options may be
limited by the requirements for qualification as a regulated investment
company and by future legislative or regulatory changes in these requirements.
2. Short-Short Gain Rule
Because of the Short-Short Gain Rule, a Series may have to:
(1) limit the sale of appreciated securities held for less than
three months;
(2) limit the short sale of, or the acquisition of put options on,
appreciated securities held for one year or less;
(3) limit the closing of call options or secured put options it has
written or of appreciated put options it has held for less than three months;
and
(4) limit writing options that expire in less than three months and
covered call options on securities that have been held for less than three
months and are likely to appreciate significantly during the option period.
To the extent a Series is able to identify and designate offsetting
positions as "hedges," increases and decreases in the value of such positions
will be netted for purposes of determining whether the Short-Short Gain Rule
has been satisfied. In addition, the Short-Short Gain Rule will not prevent a
Series from disposing of investments at a loss, since the recognition of a
loss before the expiration of the three-month holding period has no impact.
3. Asset Diversification Test
The Service has ruled (1) that the issuer of a call option written on a
security is the issuer of the underlying security and (2) that, where the
writer of a call option owns the underlying security, the Asset
Diversification Test will be applied solely to such security and that the
value of the option will not be counted.
The Service has informally ruled for purposes of the Asset
Diversification Test that (1) a put option on a security is itself a
"security", (2) the issuer of a put option on a security is the issuer of the
underlying security, (3) the market value of a purchased put option should be
the measure of the investment in the instrument as a "security", and (4) the
market value of the underlying security should be the measure of the
investment in a written put option as a "security".
By law, the Series may not rely on informal rulings of the Service.
Consequently, a Series may find it necessary to seek its own ruling from the
Service on these issues or to curtail its options trading in order to stay
within the limits of the Asset Diversification Test.
<PAGE> B-27
It is unclear under present law who should be treated as the issuer of
foreign currency exchange contracts, although it has been suggested that the
issuer in each case would be the foreign central bank or foreign government
backing the particular currency. A Series may find it necessary to curtail
trading in forward foreign currency contracts or seek a ruling on this issue.
A Series may also find it necessary to seek rulings with respect to other
financial instruments, or curtail trading therein, for purposes of the Asset
Diversification Test.
Fund Distributions
Investors should be careful to consider the tax implications of buying
shares of a Series just prior to the record date of an ordinary income
dividend or capital gain distribution. The price of shares purchased at that
time may reflect the amount of the forthcoming ordinary income dividend or
capital gain distribution. Those purchasing just prior to an ordinary income
dividend or capital gain distribution will nevertheless be taxable on the
entire amount of the distribution received.
In the event a Series elects to retain its net capital gain, it is
expected that such Series also will elect to have shareholders treated as
having received a distribution of such gain, with the result that they will be
required to report their respective shares of such gain on their returns as
long-term capital gain, will receive a refundable tax credit for their
allocable share of capital gain tax paid by such Series on the gain, and will
increase the tax basis for their shares by an amount equal to 65% of the
deemed distribution.
Investors should be aware that any loss realized upon the sale, exchange
or redemption of Series shares held for six months or less will be treated as
a long-term capital loss to the extent any capital gain distributions have
been paid with respect to such shares or any amounts have been treated as
long-term capital gains with respect to such shares pursuant to the election
described in the preceding paragraph. Investors should also be aware that the
maximum federal tax rate on long-term capital gains has been increased to 35%
for corporate taxpayers and to 28% for non-corporate taxpayers.
In some circumstances the Series' use of short sales, writing of covered
call options and acquisitions of put options to further its investment
objectives may reduce the portion of its distributions that qualify for the
corporate dividends received deduction.
Except in the case of the International Series and Global Fixed Income
Series, the Code allows a 70% dividends-received deduction (the "deduction")
to corporate shareholders of any Series. Special provisions are contained in
the Code as to the eligibility of payments to such shareholders for the
deduction. The extent to which the ordinary income dividends paid by a Series
are eligible for the deduction is determined by the ratio of the aggregate
dividends received by such Series from domestic corporations in any fiscal
year to the ordinary income dividends paid by such Series for that year. For
purposes of determining the deduction, a Series may not take into account any
amount received as a dividend with respect to any security unless such Series
has held the security with respect to which the dividend has been paid for a
minimum period, generally 46 days. Moreover, corporate taxpayers will have to
take into account the entire amount of any dividend received from a Series for
purposes of the alternative minimum tax and environmental tax. Capital gains
distributions are not eligible for the dividends received deduction.
As noted in the Prospectuses for the New York Tax Exempt Series, the Ohio
Tax Exempt Series and the Diversified Tax Exempt Series, exempt-interest
dividends are excludable from a shareholder's gross income for federal income
tax purposes. Exempt-interest dividends may nevertheless be subject to the
alternative minimum tax (the "Alternative Minimum Tax") imposed by Section 55
of the Code or the environmental tax (the "Environmental Tax") imposed by
Section 59A of the Code to corporate taxpayers. The Alternative
Minimum Tax and the Environmental Tax may be imposed in two circumstances.
First, exempt-interest dividends derived from certain "private activity bonds"
issued after August 7, 1986, will generally be an item of tax preference and
therefore potentially subject to the Alternative Minimum Tax and the
Environmental Tax. Each Tax Exempt Series intends, when possible, to avoid
investing in private activity bonds. Second, in the case of exempt-interest
dividends received by corporate shareholders, all exempt-interest dividends,
regardless of when the bonds from which they are derived were issued or
whether they are derived from private activity bonds, will be included in the
corporation's "adjusted current earnings" as defined in Section 56(g) of the
Code, in calculating the corporation's alternative minimum taxable income for
purposes of determining the Alternative Minimum Tax and the Environmental Tax.
<PAGE> B-28
The percentage of income that constitutes "exempt-interest dividends"
will be determined for each year for each Tax Exempt Series will be applied
uniformly to all dividends declared with respect to the Series during that
year. This percentage may differ from the actual percentage for any
particular day.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of a Tax Exempt Series will not be deductible for federal income tax
purposes. The deduction otherwise allowable to property and casualty
insurance companies for "losses incurred" will be reduced by an amount equal
to a portion of exempt-interest dividends received or accrued during any
taxable year. Foreign corporations engaged in a trade or business in the
United States will be subject to a "branch profits tax" on their "dividend
equivalent amount" for the taxable year, which will include exempt-interest
dividends. Certain Subchapter S corporations may also be subject to taxes on
their "passive investment income," which could include exempt-interest
dividends. Up to 85% of the Social Security benefits or railroad retirement
benefits received by an individual during any taxable year will be included in
the gross income of such individual if the individual's "modified adjusted
gross income" (which includes exempt-interest dividends) plus one-half of the
Social Security benefits or railroad retirement benefits received by such
individual during that taxable year exceeds the base amount described in
Section 86 of the Code.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
shares of a Tax Exempt Series.
"Substantial user" is defined generally for these purposes as including a
"non-exempt person" who regularly uses in trade or business a part of a
facility financed from the proceeds of such bonds.
Issuers of bonds purchased by a Tax Exempt Series (or the beneficiary of
such bonds) may have made certain representations or covenants in connection
with the issuance of such bonds to satisfy certain requirements of the Code
that must be satisfied subsequent to the issuance of such bonds. Investors
should be aware that exempt-interest dividends derived from such bonds may
become subject to federal income taxation retroactively to the date thereof if
such representations are determined to have been inaccurate or if the issuer
of such bonds (or the beneficiary of such bonds) fails to comply with such
covenants.
From time to time, the Fund may present its performance in communications
to shareholders, sales literature, and advertising. Performance measurements
will be presented by average annual total return, total return, and/or
cumulative total return. All measurements will be based upon the change in
net assets resulting from all Fund operations, including the reinvestment of
dividends and distributions, if any, for the specified periods.
The Fund's performance will vary from time to time depending on market
conditions, the composition of its portfolio, and its level of operation
expenses. Consequently, any performance figures should not be considered
representative of the future performance of the Fund. The Fund may include in
performance advertisements rankings or similar information provided by
Morningstar or other organizations.
Other Considerations
A 4% non-deductible excise tax is imposed on RICs that fail to distribute
in each calendar year an amount equal to 98% of their ordinary income for the
calendar year and 98% of their "capital gain net income" (excess of capital
gains over capital losses) for the one-year period ending on October 31 of
such calendar year, even if they satisfy the Distribution Requirement. The
balance of such income must be distributed during the next calendar year.
Each Series intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax. However, investors should note that a Series
may in certain circumstances be required to liquidate portfolio investments in
order to make sufficient distributions to avoid excise tax liability.
<PAGE> B-29
For purposes of the excise tax, a RIC must (1) offset a net ordinary loss
for any calendar year in determining its capital gain net income, but only to
the extent the capital gain net income for the one-year period ending on
October 31 of such calendar year exceeds the net capital gains for said period
and (2) exclude certain foreign currency gains and losses incurred after
October 31 of any year in determining the amount of ordinary taxable income
for the current calendar year (and, instead include such gains and losses in
determining ordinary taxable income for the succeeding calendar year).
Rules of state and local taxation of ordinary income dividends and
capital gain distributions from regulated investment companies often differ
from the rules for federal income taxation described above. Shareholders are
urged to consult their tax advisors for the application of the federal rules
outlined above to their particular circumstances and for the application of
state and local tax rules affecting investment in the Fund. Foreign
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax.
<PAGE> B-30
Manning & Napier Fund, Inc.
Blended Asset Series I
Annual Report
October 31, 1996
Management Discussion and Analysis
Dear Shareholders:
Since we last reported to you six months ago, the markets have again exhibited
the upward and downward swings akin to the later stages of economic and market
cycles. Midway through this period we saw the Dow Jones Industrial Average
take a considerable dive, only to end this semi-annual reporting cycle above
the record-breaking 6000 mark. Likewise, the 30-year U.S. Treasury yield rose
to over 7% during this period, but bonds recovered nicely by the end of
October. However, as we have anticipated thus far, economic growth has
remained moderate and inflation has remained in check, allowing us to take
advantage of the buying opportunities that present themselves.
These gyrations were caused by overreaction to short-term economic data. Much
as happened in March of this year, the news again raised fears of higher
inflation and sent the Dow Jones Industrial Average plunging down 115 points
on July 5th in what was only a half-day of trading due to the holiday. Bonds
followed suit with the yield on the 30-year U.S. Treasury surging 25
basis-points. Many were left wondering whether the Federal Reserve Board
would raise the Fed Funds rate. However, additional evidence throughout the
summer that inflation and economic growth are under control led the Fed to
again leave rates unchanged when they met during the last week of September.
As we continue to adhere to our long-term overview for low inflation and lower
interest rates, the July 5th correction created a buying opportunity in which
we were able to lengthen the maturity of the bonds in the portfolio and move
into equity sectors where valuations proved attractive. The stock portion of
the portfolio has continued emphasis in small ticket consumer stocks which we
believe have been branded with the same iron as more cyclical consumer stocks,
thus creating a buying opportunity. In addition, we have increased our
exposure to the health care sector as valuations in that area have proved
attractive as well.
B-31
<PAGE>
Management Discussion and Analysis (continued)
At a time when market valuations in
general are high and the bull market is aging, it is important to be
discriminating about the levels of risk acceptable in funds with different
tolerances for volatility. Your Series places a high priority on dampening
market volatility, so even though we see a number of long-term positives in
0he investment picture, we must be sensitive to the possibility of cyclical
disruptions. With valuations currently very high, you should expect this
Series to be conservatively positioned, and indeed, that is the case. As we
continue to move through this mature bull market, we will hold fast to our
disciplines of attempting to identify stocks of companies with strong
strategic positioning in their industry at attractive valuations versus
long-term U.S. Treasury bonds.
We wish you and yours all the best during this holiday season.
Sincerely,
Manning & Napier Advisors, Inc.
[GRAPHIC]
[Pie Chart]
Asset Allocation - As of 10/31/96
Bonds - 66%
Stocks - 20%
Cash & Equivalents - 14%
B-32
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. - Blended
Asset Series I from its inception (9/15/93) to present (10/31/96) as compared
to the Lehman Brothers Intermediate Bond Index and a Balanced Index. 1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Blended Asset Series I
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,837 8.37% 8.37%
Inception 2 $ 12,806 28.06% 8.22%
</TABLE>
<TABLE>
<CAPTION>
Lehman Brothers Intermediate Bond Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,581 5.81% 5.81%
Inception 2 $ 11,728 17.28% 5.22%
</TABLE>
<TABLE>
<CAPTION>
Balanced Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 11,115 11.15% 11.15%
Inception 2 $ 13,040 30.40% 8.85%
</TABLE>
1 The Lehman Brothers Intermediate Bond Index is a market value weighted
measure of approximately 3,425 corporate and government securities. The
Index is comprised of investment grade securities with maturities greater than
one year but less than ten years. The Balanced Index is 30% Standard & Poor's
(S&P) 500 Total Return Index and 70% Lehman Brothers Intermediate Bond
Index. The S&P 500 Total Return Index is an unmanaged capitalization-
weighted measure of 500 widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange, and Over-the-Counter market.
Both Indices' returns assume reinvestment of income and, unlike Fund returns,
do not reflect any fees or expenses.
2 Performance numbers for the Fund and Indices are calculated from
September 15, 1993, the Fund's inception date. The Fund's performance is
historical and may not be indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Lehman Brothers Balanced
Blended Asset Series I Intermediate Bond Index Index
<S> <C> <C> <C>
09/15/93 $ 10,000 $ 10,000 $ 10,000
12/31/93 10,092 10,032 10,081
06/30/94 9,671 9,770 9,795
12/31/94 10,012 9,838 9,986
06/30/95 11,578 10,783 11,256
12/31/95 12,123 11,347 12,151
04/30/96 12,292 11,213 12,303
10/31/96 12,806 11,728 13,040
</TABLE>
B-33
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - OCTOBER 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
COMMON STOCK - 20.10%
AIR TRANSPORTATION- 2.19%
Federal Express Corp.* 4,850 $390,425
APPAREL- 2.47%
VF Corp. 6,725 439,647
CHEMICALS & ALLIED PRODUCTS- 0.06%
Varitronix International Ltd. (Note 7) 6,000 10,941
COMMUNICATIONS- 2.42%
Stet Societa' Finanziaria Telefonica S.p.A. - ADR 4,975 172,259
Telefonica de Espana - ADR 4,300 259,075
---------
431,334
---------
COMPUTER EQUIPMENT- 0.12%
Cisco Systems, Inc.* 200 12,375
Digital Equipment Corp.* 300 8,850
---------
21,225
---------
ELECTROMEDICAL APPARATUS- 1.79%
Nellcor Puritan Bennett, Inc.* 16,300 317,850
ELECTRONICS & ELECTRICAL EQUIPMENT- 0.92%
SEMICONDUCTOR- 0.14%
Altera Corp.* 250 15,500
Texas Instruments, Inc. 200 9,625
---------
25,125
---------
TELECOMMUNICATIONS EQUIPMENT- 0.78%
ADC Telecommunications, Inc.* 150 10,256
BroadBand Technologies, Inc.* 1,050 18,769
DSC Communications Corp.* 325 4,509
ECI Telecommunications, Ltd. 625 12,500
General Instrument Corp.* 3,875 77,984
Northern Telecom Ltd. 225 14,653
---------
138,671
---------
163,796
---------
ENGINEERING SERVICES- 0.47%
Jacobs Engineering Group, Inc.* 3,775 83,522
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-34
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - OCTOBER 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
FABRICATED METAL PRODUCTS- 0.19%
Keystone International, Inc. 875 $ 15,750
Material Sciences Corp.* 1,175 17,919
---------
33,669
---------
FOOD & BEVERAGES- 0.03%
Canandaigua Wine Co., Inc. - Class A* 250 5,625
GLASS PRODUCTS- 0.06%
Libbey, Inc. 425 10,200
HEALTH SERVICES- 1.55%
MedPartners, Inc.* 12,276 259,331
RehabCare Group, Inc.* 800 14,300
U.S. Physical Therapy, Inc.* 225 2,081
---------
275,712
---------
HOLDING COMPANIES - 0.02%
Ek Chor China Motorcycle Co. Ltd. 500 2,938
INFORMATION RETRIEVAL SERVICES- 0.02%
America OnLine, Inc.* 125 3,391
PLASTIC PRODUCTS- 0.03%
Sun Coast Industries, Inc.* 1,525 5,909
PRIMARY METAL INDUSTRIES- 0.17%
American Superconductor Corp.* 875 10,828
Gibraltar Steel Corp.* 775 18,794
---------
29,622
---------
PRINTING & PUBLISHING - 0.04%
Playboy Enterprises, Inc. - Class A* 225 2,700
Playboy Enterprises, Inc. - Class B* 300 3,600
6,300
RESTAURANTS- 0.78%
McDonald's Corp. 2,775 123,141
Morton's Restaurant Group, Inc.* 1,025 15,759
---------
138,900
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-35
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - OCTOBER 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
RETAIL- 4.98%
RETAIL - HOME FURNISHING STORES- 0.10%
Pier 1 Imports, Inc. 1,238 17,332
RETAIL - SHOE STORES- 0.11%
Brown Group, Inc. 950 19,594
RETAIL - SPECIALTY STORES- 4.58%
Fabri-Centers of America - Class A* 8,250 107,250
Fabri-Centers of America - Class B* 7,250 94,250
Fingerhut Companies, Inc. 18,475 274,816
Hancock Fabrics, Inc. 10,525 89,463
Tandy Corp. 6,625 249,266
----------
815,045
----------
RETAIL - VARIETY STORES- 0.09%
Family Dollar Stores, Inc. 975 16,575
RETAIL - WHOLESALE- 0.10%
Coleman Company, Inc.* 1,300 17,225
885,771
SOFTWARE- 0.43%
Electronic Arts, Inc.* 725 27,188
Founder Hong Kong Ltd.* (Note 7) 18,000 6,984
Informix Corp.* 425 9,430
Microsoft Corp.* 100 13,725
Parametric Technology Corp.* 150 7,331
Symantec Corp.* 1,175 12,778
----------
77,436
----------
TECHNICAL INSTRUMENTS & SUPPLIES- 1.36%
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 1.32%
Eastman Kodak Co. 2,950 235,261
SURGICAL & MEDICAL INSTRUMENTS - 0.04%
Allied Healthcare Products, Inc.* 1,100 7,424
242,685
TOTAL COMMON STOCK
(Identified Cost $3,403,092) 3,576,898
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-36
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - OCTOBER 31, 1996
PRINCIPAL VALUE
AMOUNT (NOTE 2)
<S> <C> <C>
U.S. TREASURY SECURITIES - 65.42%
U.S. TREASURY BONDS - 19.75%
U.S. Treasury Bond, 7.25%, 5/15/2016 $ 45,000 $ 47,475
U.S. Treasury Bond, 7.25%, 8/15/2022 555,000 587,259
U.S. Treasury Bond, 7.50%, 11/15/2024 2,625,000 2,880,116
------------
TOTAL U.S. TREASURY BONDS 3,514,850
------------
(Identified Cost $3,361,358)
U.S. TREASURY NOTES - 45.67%
U.S. Treasury Note, 5.875%, 4/30/1998 3,640,000 3,651,375
U.S. Treasury Note, 5.125%, 12/31/1998 595,000 586,819
U.S. Treasury Note, 6.875%, 8/31/1999 450,000 461,162
U.S. Treasury Note, 7.75%, 12/31/1999 20,000 21,013
U.S. Treasury Note, 6.625%, 7/31/2001 3,335,000 3,406,259
------------
TOTAL U.S. TREASURY NOTES
(Identified Cost $8,067,272) 8,126,628
------------
TOTAL U.S. TREASURY SECURITIES
(Identified Cost $11,428,630) 11,641,478
U.S. GOVERNMENT AGENCIES - 0.76%
MORTGAGE BACKED SECURITIES
GNMA POOL#174225, 9.50%, 8/15/2016 5,293 5,709
GNMA POOL#286310, 9.00%, 2/15/2020 42,520 44,939
GNMA POOL#385753, 9.00%, 7/15/2024 80,601 85,186
------------
TOTAL U.S. GOVERNMENT AGENCIES
(Identified Cost $134,042 ) 135,834
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-37
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - OCTOBER 31, 1996
Principal Amount/ Value
Shares (NOTE 2)
<S> <C> <C>
SHORT-TERM INVESTMENTS - 4.16%
U.S. Treasury Bill, 11/29/1996 $ 1,600,000 $ 1,594,008
Dreyfus U.S. Treasury Money Market Reserves 739,029 739,029
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $2,333,037) 2,333,037
------------
TOTAL INVESTMENTS - 99.40%
(Identified Cost $17,298,801) 17,687,247
------------
OTHER ASSETS, LESS LIABILITIES - 0.60% 106,261
NET ASSETS - 100% $17,793,508
------------
</TABLE>
*Non-income producing security.
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $17,305,735 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value over
tax cost $ 553,706
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value (172,194)
UNREALIZED APPRECIATION - NET $ 381,512
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-38
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
OCTOBER 31, 1996
<S> <C>
ASSETS:
Investments, at value (Identified Cost $17,298,801)(Note 2) $17,687,247
Interest receivable 174,470
Dividends receivable 739
TOTAL ASSETS 17,862,456
LIABILITIES:
Accrued management fees (Note 3) 18,484
Accrued Directors' fees (Note 3) 1,648
Transfer agent fees payable (Note 3) 345
Payable for fund shares redeemed 35,728
Audit fee payable 10,750
Other payables and accrued expenses 1,993
TOTAL LIABILITIES 68,948
NET ASSETS FOR 1,588,453 SHARES OUTSTANDING $17,793,508
NET ASSETS CONSIST OF:
Capital stock $ 15,885
Additional paid-in-capital 16,776,541
Undistributed net investment income 319,657
Accumulated net realized gain on investments 292,979
Net unrealized appreciation on investments 388,446
TOTAL NET ASSETS $17,793,508
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($17,793,508/1,588,453 shares) $ 11.20
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-39
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
For the Ten For the
Months Year
Ended Ended
10/31/96 12/31/95
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 555,989 $ 294,411
Dividends 41,029 44,454
Total Investment Income 597,018 338,865
EXPENSES:
Management fees (Note 3) 121,924 69,950
Directors' fees (Note 3) 5,071 6,875
Transfer agent fees (Note 3) 2,926 1,679
Audit fee 12,450 14,625
Custodian fee 6,540 7,480
Registration & filing fees 7,497 6,384
Miscellaneous 3,561 354
Total Expenses 159,969 107,347
Less Waiver of Expenses (Note 3) (13,439) (23,407)
Net Expenses 146,530 83,940
NET INVESTMENT INCOME 450,488 254,925
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments (identified cost basis) 299,745 608,702
Net change in unrealized appreciation on investments 105,808 341,625
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS 405,553 950,327
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 856,041 $1,205,252
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-40
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Ten For the Year For the Year
Months Ended Ended Ended
10/31/96 12/31/95 12/31/94
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
<S> <C> <C> <C>
Net investment income $ 450,488 $ 254,925 $ 88,876
Net realized gain on investments 299,745 608,702 18,293
Net change in unrealized appreciation on investments 105,808 341,625 (59,823)
Net increase in net assets from operations 856,041 1,205,252 47,346
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (130,831) (254,925) (88,431)
In excess of net investment income - (3,886) -
From net realized gain on investments (39,818) (564,923) (18,074)
In excess of net realized gain - - (3,332)
Total distributions to shareholders (170,649) (823,734) (109,837)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase in net assets from capital share
transactions (Note 5) 7,589,621 4,617,621 4,106,508
Net increase in net assets 8,275,013 4,999,139 4,044,017
NET ASSETS:
Beginning of period 9,518,495 4,519,356 475,339
End of period (including undistributed net investment
income of $319,657, $0, and $665 respectively) $ 17,793,508 $ 9,518,495 $ 4,519,356
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-41
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the Period
9/15/93
For the Ten For the Year For the Year (commencement
Months Ended Ended Ended of operations) to
10/31/96 12/31/95 12/31/94 12/31/93
Per share data (for a share outstanding throughout
each period):
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.72 $ 9.72 $ 10.05 $ 10.00
Income from investment operations:
Net investment income 0.293 0.342 0.200 0.045
Net realized and unrealized gain (loss)
on investments 0.307 1.698 (0.280) 0.045
Total from investment operations 0.600 2.040 (0.080) 0.090
Less distributions to shareholders:
From net investment income (0.092) (0.342) (0.203) (0.040)
In excess of net investment income - (0.005) - -
From net realized gain on investments (0.028) (0.693) (0.040) -
In excess of net realized gain - - (0.007) -
Total distributions to shareholders (0.120) (1.040) (0.250) (0.040)
NET ASSET VALUE - END OF PERIOD $ 11.20 $ 10.72 $ 9.72 $ 10.05
Total return1 5.64% 21.08% (0.80%) 0.93%
Ratios (to average net assets) / Supplemental Data:
Expenses 1.20%2** 1.20%** 1.20%* 1.20%2*
Net investment income 3.69%2** 3.64%** 3.40%* 2.47%2*
Portfolio turnover 85% 72% 45% 1%
Average commission rate paid $ 0.0515 $ 0.0689 - -
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 17,794 $ 9,518 $ 4,519 $ 475
*The investment advisor did not impose its management fee and paid a portion of the Fund's expenses. If these
expenses had been incurred by the Fund, expenses would have been limited to that allowed by state securities law.
** The investment advisor waived a portion of its management fee.
If the full expenses had been incurred by the Fund in either instance above, the net investment income per share and
the ratios would be as follows:
Net investment income $ 0.284 $ 0.311 $ 0.124 $ 0.021
Ratios (to average net assets):
Expenses 1.31%2 1.53% 2.50% 2.50%2
Net investment income 3.58%2 3.31% 2.10% 1.17%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-42
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Blended Asset Series I (the "Fund") is a no-load diversified series of
Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is
organized as a Maryland Corporation and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Blended Asset Series I
Class K Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities, including domestic equities, foreign equities,
options and corporate bonds, listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not
listed on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are valued
at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
B-43
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains
on investments in accordance with requirements of the Internal Revenue Code.
Accordingly, no provision for federal income tax or excise tax has been made
in the financial statements.
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
semi-annually. Distributions are recorded on the ex-dividend date.
Distributions of net realized gains are distributed annually. An additional
distribution may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, foreign denominated investments, or
character reclassification between net income and net gains. As a result,
net investment income (loss) and net investment gain (loss) on investment
transactions for a reporting period may differ significantly from
distributions to shareholders during such period. As a result, the Fund may
periodically make reclassifications among its capital accounts without
impacting the Fund's net asset value.
The Fund hereby designates $19,854 as capital gain dividends for the
period ended October 31, 1996.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars.
Foreign currency amounts are translated into U.S. dollars on the following
basis: a) investment securities, other assets and liabilities are converted
to U.S. dollars based upon current exchange rates; and b) purchases and sales
of securities and income and expenses are converted into U.S. dollars based
upon the currency exchange rates prevailing on the respective dates of such
transactions.
B-44
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
FOREIGN CURRENCY TRANSLATION (continued)
Gains and losses attributable to foreign currency exchange rates are
recorded for financial statement purposes as net realized gains and losses on
investments. The portion of both realized and unrealized gains and losses on
investments that result from fluctuations in foreign currency exchange rates
is not separately stated.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 1.0% of the Fund's
average daily net assets. The fee amounted to $121,924 for the ten months
ended October 31, 1996 and $69,950 for the year ended December 31, 1995.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 1.20% of average daily net assets each year.
Accordingly, the Advisor waived fees of $13,439 for the ten months ended
October 31, 1996 and $23,407 for the year ended December 31, 1995, which are
reflected as a reduction of expenses on the Statement of Operations. The fee
waiver and assumption of expenses by the Advisor is voluntary and may be
terminated at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $2,926 for the ten months ended October
31, 1996 and $1,679 for the year ended December 31, 1995.
B-45
<PAGE>
Notes to Financial Statements
2. TRANSACTIONS WITH AFFILIATES (continued)
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $5,071 for the
ten months ended October 31, 1996 and $6,875 for the year ended December 31,
1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$17,340,767 and $11,470,757, respectively, for the ten months ended October
31, 1996.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Blended Asset Series I Class K Common Stock
were:
<TABLE>
<CAPTION>
For the Ten For the Year For the Year
Months Ended Ended Ended
10/31/96 12/31/95 12/31/94
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Sold 940,658 $10,210,779 406,586 $4,437,737 481,619 $4,726,025
Reinvested 15,624 169,059 75,731 811,707 11,251 109,832
Repurchased (255,975) (2,790,217) (58,913) (631,823) (75,443) (729,349)
Total 700,307 $ 7,589,621 423,404 $4,617,621 417,427 $4,106,508
</TABLE>
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written
options, forward foreign currency exchange contracts, and futures contracts
and may involve, to a varying degree, elements of risk in excess of the
amounts recognized for financial statement purposes. No such investments were
held by the Fund on October 31, 1996.
B-46
<PAGE>
Notes to Financial Statements
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in securities of U.S. companies and the United States government.
These risks include revaluation of currencies and potential adverse political
and economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the United
States government.
8. CHANGE IN FISCAL YEAR END
Effective January 1, 1996, the Fund changed its fiscal year end from
December 31 to October 31.
B-47
<PAGE>
Independent Auditors' Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF BLENDED ASSET SERIES I:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Blended Asset Series I (one of the
series constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the
related statement of operations for the ten months then ended and the year
ended December 31, 1995, the statement of changes in net assets for the ten
months ended October 31, 1996 and the years ended December 31, 1995 and 1994,
and the financial highlights for each of the periods indicated in the
financial highlights table herein. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at October 31, 1996 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Blended
Asset Series I at October 31, 1996, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-48
<PAGE>
Manning & Napier Fund, Inc.
Blended Asset Series II
Annual Report
October 31, 1996
<PAGE>
Management Discussion and Analysis
Dear Shareholders:
Since we last reported to you six months ago, the markets have again
exhibited the upward and downward swings akin to the later stages of economic
and market cycles. Midway through this period we saw the Dow Jones Industrial
Average take a considerable dive, only to end this semi-annual reporting cycle
above the record-breaking 6000 mark. Likewise, the 30-year U.S. Treasury
yield rose to over 7% during this period, but bonds recovered nicely by the
end of October. However, as we have anticipated thus far, economic growth has
remained moderate and inflation has remained in check, allowing us to take
advantage of the buying opportunities that present themselves.
These gyrations were caused by overreaction to short-term economic data.
Much as happened in March of this year, the news again raised fears of higher
inflation and sent the Dow Jones Industrial Average plunging down 115 points
on July 5th in what was only a half-day of trading due to the holiday. Bonds
followed suit with the yield on the 30-year U.S. Treasury surging 25
basis-points. Many were left wondering whether the Federal Reserve Board
would raise the Fed Funds rate. However, additional evidence throughout the
summer that inflation and economic growth are under control led the Fed to
again leave rates unchanged when they met during the last week of September.
As we continue to adhere to our long-term overview for low inflation and
lower interest rates, the July 5th correction created a buying opportunity in
which we were able to lengthen the maturity of the bonds in the portfolio and
move into equity sectors where valuations proved attractive. We boosted our
exposure to the technology sector, which was the hardest hit by the July
decline, and semiconductor stocks wound up posting the largest gains of any
sector during the third quarter of this year. The stock portion of the
portfolio has continued emphasis in small ticket consumer stocks which we
believe have been branded with the same iron as more cyclical consumer stocks,
thus creating a buying opportunity. In addition, we have increased our
exposure to the health care sector as valuations in that area have proved
attractive as well.
B-49
<PAGE>
Management Discussion and Analysis (continued)
At a time when market valuations in general are high and the bull market
is aging, it is important to be discriminating about the levels of risk
acceptable in funds with different tolerances for volatility. While this
Series has asset allocation discretion, it is designed to place greater
emphasis on growth than on dampening volatility. As a result, even though
high market valuations bring the threat of cyclical volatility, the series
remains fairly heavily invested because, a) we are able to find individual
securities at more attractive valuations than the market as a whole, and b)
looking past the immediate cycle, we see long-term positive trends that should
help the market. As we continue to move through this mature bull market, we
will hold fast to our disciplines of attempting to identify stocks of
companies with strong strategic positioning in their industry at attractive
valuations versus long-term U.S. Treasury bonds.
We wish you and yours all the best during this holiday season.
Sincerely,
Manning & Napier Advisors, Inc.
[GRAPHIC]
[Pie Chart]
Asset Allocation - As of 10/31/96
Stocks - 50%
Bonds - 38%
Cash & Equivalents - 12%
B-50
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. -
Blended Asset Series II from its inception (10/12/93) to present (10/31/96) as
compared to the Lehman Brothers Intermediate Bond Index and a Balanced Index.
1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Blended Asset Series II
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 11,589 15.89% 15.89%
Inception 2 $ 15,078 50.78% 14.38%
</TABLE>
<TABLE>
<CAPTION>
Lehman Brothers Intermediate Bond Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,581 5.81% 5.81%
Inception 2 $ 11,639 16.39% 5.09%
</TABLE>
<TABLE>
<CAPTION>
Balanced Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 11,478 14.78% 14.78%
Inception 2 $ 13,978 39.78% 11.58%
</TABLE>
1 The Lehman Brothers Intermediate Bond Index is a market value weighted
measure of approximately 3,425 corporate and government securities. The Index
is comprised of investment grade securities with maturities greater than one
year but less than ten years. The Balanced Index is 50% Standard & Poor's
(S&P) 500 Total Return Index and 50% Lehman Brothers Aggregate Bond Index. The
S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of
500 widely held common stocks listed on the New York Stock Exchange, American
Stock Exchange, and Over-the-Counter market. The Lehman Brothers
Aggregate Bond Index is a market value weighted measure of approximately
5,570 corporate, government, and mortgage backed securities. The Index is
comprised of investment grade securities with maturities greater than one year.
Both Indices' returns assume reinvestment of income and, unlike Fund
returns, do not reflect any fees or expenses.
2 Performance numbers for the Fund and Indices are calculated from October 12,
1993, the Fund's inception date. The Fund's performance is historical and may
not be indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Lehman Brothers Balanced
Blended Asset Series II Intermediate Bond Index Index
<S> <C> <C> <C>
10/12/93 $ 10,000 $ 10,000 $ 10,000
12/31/93 9,982 9,956 10,056
06/30/94 9,662 9,695 9,693
12/31/94 10,333 9,764 9,978
06/30/95 12,621 10,701 11,550
12/31/95 13,707 11,261 12,743
04/30/96 14,016 11,127 13,035
10/31/96 15,078 11,639 13,978
</TABLE>
B-51
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
COMMON STOCK - 49.61%
AIR TRANSPORTATION - 2.33%
Federal Express Corp.* 9,550 768,775
APPAREL - 3.02%
VF Corp. 15,200 993,700
CHEMICALS & ALLIED PRODUCTS - 1.21%
BIOLOGICAL PRODUCTS - 0.24%
Alliance Pharmaceutical Corp.* 5,575 78,050
HOUSEHOLD PRODUCTS - 0.64%
Procter & Gamble Co. 2,125 210,375
INDUSTRIAL ORGANIC CHEMICALS - 0.33%
International Specialty Products, Inc.* 7,025 76,397
Varitronix International Ltd. (Note 7) 18,000 32,824
109,221
397,646
COMMUNICATIONS - 2.69%
Stet Societa' Finanziaria Telefonica S.p.A. - ADR 11,475 397,322
Telefonica de Espana - ADR 8,125 489,531
886,853
COMPUTER EQUIPMENT - 0.27%
Cisco Systems, Inc.* 800 49,500
Digital Equipment Corp.* 1,275 37,612
87,112
CRUDE PETROLEUM & NATURAL GAS - 1.35%
YPF Sociedad Anonima - ADR 19,500 443,625
ELECTROMEDICAL APPARATUS - 1.79%
Nellcor Puritan Bennett, Inc.* 30,225 589,388
ELECTRONICS & ELECTRICAL EQUIPMENT - 6.98%
HOUSEHOLD APPLIANCES - 1.09%
Sunbeam Corporation, Inc. 14,600 359,525
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-52
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
ELECTRONICS & ELECTRICAL EQUIPMENT (CONTINUED)
SEMICONDUCTOR - 4.21%
Altera Corp.* 1,150 71,300
Intel Corp. 7,375 810,328
Texas Instruments, Inc. 10,550 507,719
1,389,347
TELECOMMUNICATIONS EQUIPMENT - 1.68%
ADC Telecommunications, Inc.* 700 47,863
BroadBand Technologies, Inc.* 3,625 64,797
DSC Communications Corp.* 1,400 19,425
ECI Telecommunications, Ltd. 2,375 47,500
General Instrument Corp.* 17,675 355,709
Northern Telecom Ltd. 250 16,281
551,575
2,300,447
ENGINEERING SERVICES - 0.47%
Jacobs Engineering Group, Inc.* 7,025 155,428
FABRICATED METAL PRODUCTS - 0.24%
Keystone International, Inc. 2,175 39,150
Material Sciences Corp.* 2,650 40,413
79,563
FOOD & BEVERAGES - 0.05%
Canandaigua Wine Co., Inc. - Class A* 750 16,875
GLASS PRODUCTS - 0.09%
Libbey, Inc. 1,225 29,400
HEALTH SERVICES - 2.96%
MedPartners, Inc.* 43,771 924,662
RehabCare Group, Inc.* 2,400 42,900
U.S. Physical Therapy, Inc.* 650 6,012
973,574
HOLDING COMPANIES - 0.03%
Ek Chor China Motorcycle Co. Ltd. 1,325 7,784
INFORMATION RETRIEVAL SERVICES 0.04%
America OnLine, Inc.* 475 12,884
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-53
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
PAPER MILLS - 2.03%
Kimberly-Clark Corp. 7,500 $ 699,375
PLASTIC PRODUCTS - 0.05%
Sun Coast Industries, Inc.* 3,950 15,306
PRIMARY METAL INDUSTRIES - 0.26%
American Superconductor Corp.* 3,075 38,053
Gibraltar Steel Corp.* 1,925 46,681
84,734
PRINTING & PUBLISHING - 0.07%
Playboy Enterprises, Inc. - Class A* 825 9,900
Playboy Enterprises, Inc. - Class B* 900 10,800
20,700
RESTAURANTS - 3.49%
McDonald's Corp. 25,050 1,111,594
Morton's Restaurant Group, Inc.* 2,525 38,822
1,150,416
RETAIL - 9.98%
RETAIL - HOME FURNISHING STORES - 0.14%
Pier 1 Imports, Inc. 3,311 46,354
RETAIL - SHOE STORES - 1.00%
Brown Group, Inc. 15,900 327,938
RETAIL - SPECIALTY STORES - 8.60%
Fabri-Centers of America - Class A* 16,375 212,875
Fabri-Centers of America - Class B* 13,925 181,025
Fingerhut Companies, Inc. 31,600 470,050
Hancock Fabrics, Inc. 20,175 171,487
Home Depot, Inc. 13,500 739,125
Office Depot, Inc.* 13,900 272,788
Tandy Corp. 21,000 790,125
2,837,475
RETAIL - VARIETY STORES - 0.11%
Family Dollar Stores, Inc. 2,000 34,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-54
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
SHARES/ VALUE
PRINCIPAL AMOUNT (NOTE 2)
<S> <C> <C>
Retail (continued)
RETAIL - WHOLESALE - 0.13%
Coleman Company, Inc.* 3,200 $ 42,400
3,288,167
SOFTWARE - 4.85%
Electronic Arts, Inc.* 2,600 97,500
Founder Hong Kong Ltd.* (Note 7) 50,000 19,400
Informix Corp.* 13,500 299,531
Microsoft Corp.* 375 51,469
Oracle Corp.* 25,275 1,069,448
Parametric Technology Corp.* 625 30,547
Symantec Corp.* 3,050 33,169
1,601,064
TECHNICAL INSTRUMENTS & SUPPLIES - 4.16%
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 4.10%
Eastman Kodak Co. 16,950 1,351,763
SURGICAL & MEDICAL INSTRUMENTS - 0.06%
Allied Healthcare Products, Inc.* 2,750 18,562
1,370,325
UTILITIES - ELECTRIC - 1.20%
Enersis S.A. - ADR 13,500 396,563
TOTAL COMMON STOCK
(Identified Cost $14,298,086) 16,369,704
U.S. TREASURY SECURITIES - 38.27%
U.S. TREASURY BONDS - 30.60%
U.S. Treasury Bond, 7.25%, 8/15/2022 $ 2,585,000 2,735,253
U.S. Treasury Bond, 7.50%, 11/15/2024 3,100,000 3,401,280
U.S. Treasury Bond, 6.875%, 8/15/2025 3,875,000 3,960,975
TOTAL U.S. TREASURY BONDS
(Identified Cost $9,721,951) 10,097,508
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-55
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
PRINCIPAL VALUE
AMOUNT/SHARES (NOTE 2)
<S> <C> <C>
U.S. TREASURY NOTES - 7.67%
U.S. Treasury Note, 4.75%, 10/31/1998 $ 45,000 $ 44,114
U.S. Treasury Note, 5.125%, 11/30/1998 415,000 409,780
U.S. Treasury Note, 7.75%, 12/31/1999 20,000 21,012
U.S. Treasury Note, 6.25%, 5/31/2000 2,045,000 2,058,419
TOTAL U.S. TREASURY NOTES
(Identified Cost $2,519,517) 2,533,325
TOTAL U.S. TREASURY SECURITIES
(Identified Cost $12,241,468) 12,630,833
SHORT-TERM INVESTMENTS - 10.73%
U.S. Treasury Bill, 11/29/1996 2,500,000 2,490,570
Dreyfus U.S. Treasury Money Market Reserves 1,048,699 1,048,699
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $3,539,269) 3,539,269
TOTAL INVESTMENTS - 98.61%
(Identified Cost $30,078,823) 32,539,806
OTHER ASSETS, LESS LIABILITIES - 1.39% 458,892
NET ASSETS - 100% $32,998,698
</TABLE>
*Non-income producing security
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $30,093,619 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost $2,957,835
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value (511,648)
UNREALIZED APPRECIATION - NET $2,446,187
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-56
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
OCTOBER 31, 1996
ASSETS:
<S> <C>
Investments, at value (Identified Cost $30,078,823)(Note 2) $32,539,806
Cash 251,260
Interest receivable 266,853
Dividends receivable 2,589
TOTAL ASSETS 33,060,508
LIABILITIES:
Accrued management fees (Note 3) 39,303
Accrued Directors' fees (Note 3) 1,649
Transfer agent fees payable (Note 3) 651
Audit fee payable 10,750
Payable for securities purchased 3,705
Other payables and accrued expenses 5,752
TOTAL LIABILITIES 61,810
NET ASSETS FOR 2,529,773 SHARES OUTSTANDING $32,998,698
NET ASSETS CONSIST OF:
Capital stock $ 25,298
Additional paid-in-capital 28,987,158
Undistributed net investment income 475,782
Accumulated net realized gain on investments 1,049,477
Net unrealized appreciation on investments 2,460,983
TOTAL NET ASSETS $32,998,698
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($32,998,698/2,529,773 shares) $ 13.04
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-57
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
For the Ten Months For the Year
Ended 10/31/96 Ended 12/31/95
INVESTMENT INCOME:
<S> <C> <C>
Interest $ 711,893 $ 376,523
Dividends 126,421 115,733
Total Investment Income 838,314 492,256
EXPENSES:
Management fees (Note 3) 225,830 131,695
Directors' fees (Note 3) 5,071 7,297
Transfer agent fees (Note 3) 5,420 3,161
Audit fee 12,450 14,725
Registration & filing fees 9,026 7,461
Custodian fee 9,000 9,600
Miscellaneous 8,152 1,763
Total Expenses 274,949 175,702
Less Waiver of Expenses (Note 3) (3,528) (17,669)
Net Expenses 271,421 158,033
NET INVESTMENT INCOME 566,893 334,223
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments (identified cost basis) 1,053,546 1,934,431
Net change in unrealized appreciation on investments 1,209,793 1,107,105
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,263,339 3,041,536
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 2,830,232 $ 3,375,759
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-58
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the For the For the
Ten Months Year Ended Year Ended
Ended 10/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 566,893 $ 334,223 $ 79,300
Net realized gain on investments 1,053,546 1,934,431 82,328
Net change in unrealized appreciation on investments 1,209,793 1,107,105 144,417
Net increase in net assets from operations 2,830,232 3,375,759 306,045
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (92,412) (330,774) (78,792)
From net realized gain on investments (138,618) (1,817,057) (64,338)
Total distributions to shareholders (231,030) (2,147,831) (143,130)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase in net assets from capital share
transactions (Note 5) 9,880,561 12,077,417 6,575,676
Net increase in net assets 12,479,763 13,305,345 6,738,591
NET ASSETS:
Beginning of period 20,518,935 7,213,590 474,999
End of period (including undistributed net investment
income of $475,782, $1,301, and $1,098 respectively) $ 32,998,698 $20,518,935 $ 7,213,590
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-59
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
For the
Ten For the
Months Year
Ended Ended
10/31/96 12/31/95
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
NET ASSET VALUE - BEGINNING OF PERIOD $ 11.95 $ 10.12
Income from investment operations:
Net investment income 0.227 0.238
Net realized and unrealized gain (loss)
on investments 0.963 3.052
Total from investment operations 1.190 3.290
Less distributions to shareholders:
From net investment income (0.040) (0.237)
From net realized gain on investments (0.060) (1.223)
Total distributions to shareholders (0.100) (1.460)
NET ASSET VALUE - END OF PERIOD $ 13.04 $ 11.95
Total return1 10.01% 32.64%
Ratios (to average net assets) / Supplemental Data:
Expenses 1.20%2** 1.20%**
Net investment income 2.51%2** 2.53%**
Portfolio turnover 57% 63%
Average commission rate paid $ 0.0524 $ 0.0635
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 32,999 $ 20,519
* The investment advisor did not impose its management fee and paid a portion of the Fund's
expenses. If these expenses had been incurred by the Fund for the period ended December 31,
1993, expenses would have been limited to that allowed by state securities law.
** The investment advisor waived a portion of its management fee.
If the full expenses had been incurred by the Fund in either instance above, the net investment
income per share and the ratios would have been as follows:
Net investment income $ 0.225 $ 0.226
Ratios (to average net assets):
Expenses 1.22%2 1.33%
Net investment income 2.49%2 2.40%
1 Represents aggregate total return for the period indicated
2 Annualized
For the Period
For the 10/12/93
Year (commencement
Ended of operations) to
12/31/94 12/31/93
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
NET ASSET VALUE - BEGINNING OF PERIOD $ 9.98 $ 10.00
Income from investment operations:
Net investment income 0.108 0.014
Net realized and unrealized gain (loss)
on investments 0.243 (0.032)
Total from investment operations 0.351 (0.018)
Less distributions to shareholders:
From net investment income (0.119) (0.002)
From net realized gain on investments (0.092) -
Total distributions to shareholders (0.211) (0.002)
NET ASSET VALUE - END OF PERIOD $ 10.12 $ 9.98
Total return1 3.52% (0.18%)
Ratios (to average net assets) / Supplemental Data:
Expenses 1.20%* 1.20%2*
Net investment income 2.12%* 1.94%2*
Portfolio turnover 19% 0%
Average commission rate paid - -
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 7,214 $ 475
* The investment advisor did not impose its management fee and paid a portion of the Fund's
expenses. If these expenses had been incurred by the Fund for the period ended December 31,
1993, expenses would have been limited to that allowed by state securities law.
** The investment advisor waived a portion of its management fee.
If the full expenses had been incurred by the Fund in either instance above, the net investment
income per share and the ratios would have been as follows:
Net investment income $ 0.051 $ 0.005
Ratios (to average net assets):
Expenses 2.31% 2.50%2
Net investment income 1.01% 0.64%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-60
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Blended Asset Series II (the "Fund") is a no-load diversified series of
Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is organized
as a Maryland Corporation and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Blended Asset Series II
Class L Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities, including domestic equities, foreign equities,
options and corporate bonds, listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not listed
on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are valued
at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains on
investments in accordance with requirements of the Internal Revenue Code.
Accordingly, no provision for federal
B-61
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES (CONTINUED)
income tax or excise tax has been made in the financial statements.
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
semi-annually. Distributions are recorded on the ex-dividend date.
Distributions of net realized gains are distributed annually. An additional
distribution may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, foreign denominated investments, or
character reclassification between net income and net gains. As a result, net
investment income (loss) and net investment gain (loss) on investment
transactions for a reporting period may differ significantly from
distributions to shareholders during such period. As a result, the Fund may
periodically make reclassifications among its capital accounts without
impacting the Fund's net asset value.
The Fund hereby designated $94,722 as capital gains dividends for the
period ended October 31, 1996.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reorted amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars.
Foreign currency amounts are translated into U.S. dollars on the following
basis: a) investment securities, other assets and liabilities are converted to
U.S. dollars based upon current exchange rates; and b) purchases and sales of
securities and income and expenses are converted into U.S. dollars based upon
the currency exchange rates prevailing on the respective dates of such
transactions.
B-62
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION (CONTINUED)
Gains and losses attributable to foreign currency exchange rates are
recorded for financial statement purposes as net realized gains and losses on
investments. The portion of both realized and unrealized gains and losses on
investments that result from fluctuations in foreign currency exchange rates
is not separately stated.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 1.0% of the Fund's
average daily net assets. The fee amounted to $225,830 for the ten months
ended October 31, 1996 and $131,695 for the year ended December 31, 1995.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 1.20% of average daily net assets each year.
Accordingly, the Advisor waived fees of $3,528 for the ten months ended
October 31, 1996 and $17,669 for the year ended December 31, 1995, which are
reflected as a reduction of expenses on the Statement of Operations. The fee
waiver and assumption of expenses by the Advisor is voluntary and may be
terminated at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $5,420 for the ten months ended October
31, 1996 and $3,161 for the year ended December 31, 1995.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $5,071 for the
ten months ended October 31, 1996 and $7,297 for the year ended December 31,
1995.
B-63
<PAGE>
Notes to Financial Statements
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$22,106,807 and $14,391,013, respectively, for the ten months ended October
31, 1996.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Blended Asset Series II Class L Common
Stock were:
<TABLE>
<CAPTION>
For the Ten For the Year For the Year
Months Ended Ended Ended
10/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C> <C> <C>
Shares Amount Shares Amount Shares Amount
------------- ------------ ------------- ------------ ------------- ----------
Sold 1,030,732 $12,602,396 891,550 $10,731,657 661,133 $6,534,790
Reinvested 18,786 230,877 180,298 2,145,684 14,156 143,210
Repurchased (237,451) (2,952,712) (66,963) (799,924) (10,085) (102,324)
Total 812,067 $ 9,880,561 1,004,885 $12,077,417 665,204 $6,575,676
</TABLE>
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written
options, forward foreign currency exchange contracts, and futures contracts
and may involve, to a varying degree, elements of risk in excess of the
amounts recognized for financial statement purposes. No such investments were
held by the Fund on October 31, 1996.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in securities of U.S. companies and the United States government.
These risks include revaluation of currencies and potential adverse political
and economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the United
States government.
8. CHANGE IN FISCAL YEAR END
Effective January 1, 1996, the Fund changed its fiscal year end from
December 31 to October 31.
B-64
<PAGE>
Independent Auditors' Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF BLENDED ASSET SERIES II:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Blended Asset Series II (one of the
series constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the
related statement of operations for the ten months then ended and the year
ended December 31, 1995, the statement of changes in net assets for the ten
months ended October 31, 1996 and the years ended December 31, 1995 and 1994,
and the financial highlights for each of the periods indicated in the
financial highlights table herein. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned at October 31, 1996
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Blended
Asset Series II at October 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-65
<PAGE>
Manning & Napier Fund, Inc.
Flexible Yield Series I
Annual Report
October 31, 1996
<PAGE>
Management Discussion and Analysis
Dear Shareholders:
During 1996, we have experienced what Manning & Napier feels to be a
temporary setback in the bond market. Short-term factors, including
speculation in the bond market, inflation fears, and political uncertainty
have led to a difficult year in the bond market. Especially when contrasted
with the extraordinary returns earned by bonds and bond funds in 1995, the
luster appears to have worn off the bond market. Our experience, however,
teaches us that short-term situations such as this provide opportunities to
position the portfolio to benefit from the long-term trends which are the most
important determinants of returns in the bond market.
At the end of 1995, the bond market looked about as good as it could get.
Economic growth was slowing, some were even calling for a recession later in
1996, and inflation worries were non_existent. These factors pushed long_term
interest rates down through the 6% level, and they finished 1995 at 5.95%.
The tide began to turn rather quickly right at the start of 1996. One of
the reasons why the market rallied so strongly during the second half of 1995
can be traced to speculative investments in U.S. Treasury securities.
Speculators were borrowing Japanese yen at extraordinarily low Japanese
short_term interest rates (0.3% to 0.5%), converting the yen into U.S.
dollars, and investing the proceeds in U.S. Treasury securities. As long as
Japanese short rates were expected to stay low or the yen was expected to slip
versus the U.S. dollar, this trade worked quite well. Unfortunately, once the
tide began to turn (i.e. people thought Japanese short-term interest rates
might rise), the selling it created snowballed due to the leverage inherent in
the trade. That happened during the early part of 1996, and short to
intermediate interest rates rose rather quickly.
As spring started to roll in, the bond market was shocked by the February
employment report issued by the Bureau of Labor Statistics. The number of new
jobs created during the month of February was an eye_popping 705,000 at the
time of the first release. Subsequent releases revised the number modestly
lower, but those same releases reported job gains that were much stronger than
what had been the case in 1995. The probability of a recession became remote,
and fears of inflation began to surface once again. Strong consumer
expenditures during the first half of 1996, solid capital spending, and a
surprisingly resilient housing sector simply added to the markets concerns,
driving long_term interest rates close to 7.25%. As the summer ended,
concerns seem to be somewhat assuaged, but rates remained stubbornly close to
7%.
It is important to note, however, that throughout all of this, inflation
itself remained very much in check. The most common measures, the Producer
Price Index (PPI) and the Consumer Price Index (CPI), both remained at or
below 3.0% on a year-over-year basis throughout 1996. An even more accurate
measure of inflation, the GDP deflator, remained closer to 2.0%. That means
real interest rates (nominal rates less the rate of inflation) exceeded 4%_5%,
depending upon which measure of inflation was used.
In the near_term, no one likes to see rising interest rates, but if one
expects inflation to remain under control over the longer_term, rising
interest rates can create compelling fixed income buying opportunities. In
the fixed income markets, 1996 has been a stern test, but in the long run,
only those who acted during these difficult times will be positioned to
benefit from the long-term trends of moderate growth and low inflation.
B-66
<PAGE>
Management Discussion and Analysis (continued)
As everyone is quite aware, 1996 is an election year, and the market
reacted to the uncertainty of the countrys political future. The political
posturing started at the end of last year when the Republican Congress and the
Democratic White House shut down the government and threatened to default on
U.S. Treasury securities. It veered off to the right with the rise and fall
of Steve Forbes and his call for a flat income tax. It focused on the
Republican primaries in the spring with Bob Dole being the ultimate winner.
And it has continued throughout the election season as the incumbent,
President Clinton, maintained a double digit lead in the polls.
In the short_term, elections do introduce volatility in the marketplace.
This year saw a marked acceleration in the growth rate of government
expenditures, which comprise about 20% of this country's GDP. This was a big
contributor to the acceleration in overall economic growth during the first
half of 1996, and that acceleration contributed to this years increase in
interest rates.
Elections also introduce uncertainty. Who will win the election? Who
will control the House? The Senate? What issues will galvanize the public?
Financial markets, as a general rule, do not like uncertainty and this year
was no exception. Given the sizable lead the President held in the polls
throughout the campaign, the biggest uncertainty seemed to relate to which
party would control the Congress. Historically, the financial markets seem to
prefer split control -- one party in control of one branch of the government
and the other in control of another.
In the long run, however, the election results may not be of major
importance. With the growth of the global financial markets and the influence
they wield on a country's interest and exchange rates, who is in the White
House or who controls Congress becomes less significant. The financial
markets are in effect pulling all parties to the right, specifically toward
fiscally sound policies. Witness what has occurred with a Democrat in the
White House over the last four years. The budget deficit has shrunk from $300
billion to just over $100 billion, the debate has shifted away from where
government moneys should be spent to what spending cuts should be made, and
the two parties debated whether the budget should be balanced in seven years
or in ten. Beyond that, we had a presidential campaign in which the
Republican challenger was calling for a tax cut and the Democratic incumbent
attacked it for being budgetarily imprudent. The new reality is that the only
poll that really seems to matter is the one being taken in the global
financial markets; sound policies are rewarded, unsound policies are not.
All the factors that have influenced the bond market over the past year
have the effect of diverting attention from the larger trends, but the larger
trends are of the most importance in determining investment success over the
long- term. At Manning & Napier, we view the big picture items as the most
important. The growth in international trade, the subsequent increase in
international competition, the need for policy makers, producers, and
consumers to adjust to this new economic reality, and the impact their actions
have had on the economy, inflation, and interest rates are what drives our
fixed income process. These are long_term, secular influences that have
brought down interest rates, have capped inflation expectations, and have
allowed longer_term, non_callable securities to provide strong investment
returns.
As in previous years, we have positioned the Series portfolio in
accordance with our overview. Within the framework of the maturity guidelines
set down for the Series, Manning & Napier weighted the portfolio toward the
longer end of the maturity spectrum. During the first half of 1996 when
interest rates were rising, that
B-67
<PAGE>
Management Discussion and Analysis (continued)
weighting was amplified. An emphasis was also placed on non_callable
securities. Corporate bonds were unaffected by the overview. The sector was
avoided, however, because the credit spreads associated with corporate bonds
were so narrow relative to U.S. Treasury securities that Manning & Napier felt
that investors were not being paid for the credit risk inherent in investments
in corporate bonds.
While 1996 has been a difficult year for the bond market, it is important
to realize that the causes of the difficulty were essentially shorter_term in
nature. Speculative excesses, a cyclical growth scare and the associated
inflation worries, and the uncertainty associated with an election all
combined to push interest rates higher. It is also worthwhile noting that the
shorter_term problems that plagued 1996 are needed to create the quality
longer_term investment opportunities that will benefit the Series going
forward. In addition, the uncertainties that the election introduced are
becoming even more short-lived given the growing importance of the financial
markets. Beyond all of this, Manning & Napier believes that the adherence to
a long_term investment overview and investment process is what separates the
good funds from the bad ones.
We wish you and yours all the best during this holiday season.
Sincerely,
MANNING & NAPIER ADVISORS, INC.
[GRAPHIC]
[PIE CHART]
Effective Maturity - As of 10/31/96
1 - 2 Years - 13%
2 - 3 Years - 21%
3 - 4 Years - 39%
More than 4 Years - 27%
B-68
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. -
Flexible Yield Series I from its inception (2/15/94) to present (10/31/96) as
compared to the Merrill Lynch U.S. Treasury Short-Term Index. 1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Flexible Yield Series I
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,504 5.04% 5.04%
Inception 2 $ 11,337 13.37% 4.74%
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch U.S. Treasury Short-Term Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,591 5.91% 5.91%
Inception 2 $ 11,598 15.98% 5.62%
</TABLE>
1 The Merrill Lynch U.S. Treasury Short-Term Index is a market value weighted
measure of approximately 59 U.S. Treasury Securities. The Index is comprised
of U.S. Treasury securities with maturities greater than one year but less than
three years. The Index returns assume reinvestment of coupons and, unlike Fund
returns, do not reflect any fees or expenses.
2 The Fund and Index performance are calculated from February 15, 1994, the
Fund's inception date. The Fund's performance is historical and may not be
indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Merrill Lynch U.S. Treasury
Flexible Yield Series I Short-Term Index
<S> <C> <C>
02/15/94 $ 10,000 $ 10,000
06/30/94 9,860 9,931
12/31/94 9,924 10,030
06/30/95 10,573 10,699
12/31/95 10,995 11,133
04/30/96 10,931 11,179
10/31/96 11,337 11,598
</TABLE>
B-69
<PAGE>
Investment Portfolio - October 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT/SHARES (NOTE 2)
<S> <C> <C>
U.S. TREASURY NOTES - 95.18%
U.S. Treasury Note, 4.75%, 2/15/1997 $ 14,000 $ 13,970
U.S. Treasury Note, 6.50%, 4/30/1997 45,000 45,244
U.S. Treasury Note, 5.125%, 2/28/1998 40,000 39,730
U.S. Treasury Note, 6.125%, 5/15/1998 60,000 60,387
U.S. Treasury Note, 6.50%, 4/30/1999 95,000 96,432
U.S. Treasury Note, 6.75%, 4/30/2000 85,000 86,939
U.S. Treasury Note, 6.375%, 3/31/2001 125,000 126,445
TOTAL U.S. TREASURY NOTES
(Identified Cost $465,566 ) 469,147
SHORT-TERM INVESTMENTS - 4.57%
Dreyfus U.S. Treasury Money Market Reserves
(Identified Cost $22,514 ) 22,514 22,514
TOTAL INVESTMENTS - 99.75%
(Identified Cost $488,080 ) 491,661
OTHER ASSETS, LESS LIABILITIES - 0.25% 1,236
NET ASSETS - 100% $492,897
</TABLE>
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $488,374 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost $3,287
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value 0
UNREALIZED APPRECIATION - NET $3,287
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-70
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
OCTOBER 31, 1996
ASSETS:
<S> <C>
Investments, at value (Identified Cost $488,080)(Note 2) $491,661
Interest receivable 2,910
Receivable from investment advisor (Note 3) 16,323
TOTAL ASSETS 510,894
LIABILITIES:
Accrued Directors' fees (Note 3) 5,071
Audit fee payable 7,750
Other payables and accrued expenses 5,176
TOTAL LIABILITIES 17,997
NET ASSETS FOR 47,974 SHARES OUTSTANDING $492,897
NET ASSETS CONSIST OF:
Capital stock $ 480
Additional paid-in-capital 481,108
Undistributed net investment income 5,336
Accumulated net realized gain on investments 2,392
Net unrealized appreciation on investments 3,581
TOTAL NET ASSETS $492,897
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($492,897 / 47,974 shares) $ 10.27
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
For the Ten Months For the Year
Ended 10/31/96 Ended 12/31/95
INVESTMENT INCOME:
<S> <C> <C>
Interest $ 17,994 $ 19,872
EXPENSES:
Management fee (Note 3) 1,057 1,221
Directors' fees (Note 3) 5,071 6,791
Transfer agent fees (Note 3) 72 84
Audit fee 8,114 10,400
Custodian fee 297 600
Miscellaneous 4,884 608
Total Expenses 19,495 19,704
Less Waiver of Expenses (Note 3) (17,380) (17,244)
Net Expenses 2,115 2,460
NET INVESTMENT INCOME 15,879 17,412
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments (identified cost basis) 2,919 321
Net change in unrealized appreciation on investments (3,729) 12,825
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (810) 13,146
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 15,069 $ 30,558
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-71
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
2/15/94
For the Ten For the (commencement
Months Ended Year Ended of operations)
10/31/96 12/31/95 to 12/31/94
-------------- ------------ ----------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
<S> <C> <C> <C>
Net investment income $ 15,879 $ 17,412 $ 5,603
Net realized gain (loss) on investments 2,919 321 (848)
Net change in unrealized appreciation (depreciation)
on investments (3,729) 12,825 (5,515)
Net increase (decrease) in net assets from operations 15,069 30,558 (760)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (10,555) (17,292) (5,444)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase in net assets from capital share
transactions (Note 5) 231,929 12,347 237,045
Net increase in net assets 236,443 25,613 230,841
NET ASSETS:
Beginning of period 256,454 230,841 -
End of period (including undistributed net investment
income of $5,336, $12, and $159 respectively) $ 492,897 $ 256,454 $ 230,841
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-72
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
For the
For the Ten Year
Months Ended Ended
10/31/96 12/31/95
Per share data (for a share outstanding throughout
each period ):
<S> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.26 $ 9.69
Income from investment operations:
Net investment income 0.411 0.464
Net realized and unrealized gain (loss)
on investments (0.101) 0.566
Total from investment operations 0.310 1.030
Less distributions to shareholders:
From net investment income (0.300) (0.460)
NET ASSET VALUE - END OF PERIOD $ 10.27 $ 10.26
Total return 1 3.11% 10.79%
Ratios (to average net assets) / Supplemental Data:
Expenses* 0.70%2 0.70%
Net investment income* 5.25%2 4.99%
Portfolio turnover 36% 60%
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 493 $ 256
* The investment advisor did not impose its management fee and paid a portion of the Fund's
expenses. If these expenses had been incurred by the Fund, expenses would have been limited to
that allowed by state securities law and the net investment income per share and the ratios would
have been as follows:
Net investment income $ 0.270 $ 0.297
Ratios (to average net assets):
Expenses 2.50%2 2.50%
Net investment income 3.45%2 3.19%
1 Represents aggregate total return for the period indicated
2 Annualized
For the
Period
2/15/94
(commencement
of operations)
to 12/31/94
Per share data (for a share outstanding throughout
each period ):
<S> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.00
Income from investment operations:
Net investment income 0.241
Net realized and unrealized gain (loss)
on investments (0.317)
Total from investment operations (0.076)
Less distributions to shareholders:
From net investment income (0.234)
NET ASSET VALUE - END OF PERIOD $ 9.69
Total return 1 (0.76)%
Ratios (to average net assets) / Supplemental Data:
Expenses* 0.70%2
Net investment income* 4.41%2
Portfolio turnover 38%
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 231
* The investment advisor did not impose its management fee and paid a portion of the Fund's
expenses. If these expenses had been incurred by the Fund, expenses would have been limited to
that allowed by state securities law and the net investment income per share and the ratios would
have been as follows:
Net investment income $ 0.143
Ratios (to average net assets):
Expenses 2.50%2
Net investment income 2.61%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-73
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Flexible Yield Series I (the "Fund") is a no-load diversified series
of Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is
organized as a Maryland Corporation and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Flexible Yield Series I
Class M Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not listed
on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are
valued at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
B-74
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains on
investments in accordance with requirements of the Internal Revenue Code.
Accordingly, no provision for federal income tax or excise tax has been made
in the financial statements.
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
quarterly. Distributions are recorded on the ex-dividend date. Distributions
of net realized gains are distributed annually. An additional distribution
may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, character reclassification between net
income and net gains, or other required tax adjustments. As a result, net
investment income (loss) and net investment gain (loss) on investment
transactions for a reporting period may differ significantly from
distributions to shareholders during such period. As a result, the Fund may
periodically make reclassifications among its capital accounts without
impacting the Fund's net asset value.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B-75
<PAGE>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 0.35% of the Fund's
average daily net assets. The fee amounted to $1,057 for the ten months ended
October 31, 1996 and $1,221 for the year ended December 31, 1995.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 0.70% of average daily net assets each year.
Accordingly, the Advisor did not impose any of its fee and paid expenses
amounting to $16,323 for the ten months ended October 31, 1996 and $16,023
for the year ended December 31, 1995, which are reflected as a reduction of
expenses on the Statement of Operations. The fee waiver and assumption of
expenses by the Advisor is voluntary and may be terminated at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $72 for the ten months ended October 31,
1996 and $84 for the year ended December 31, 1995.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $5,071 for the
ten months ended October 31, 1996 and $6,791 for the year ended December 31,
1995.
B-76
<PAGE>
Notes to Financial Statements
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$330,613 and $132,098, respectively, for the ten months ended October 31,
1996.
5. CAPITAL STOCK TRANSACTIONS
<TABLE>
<CAPTION>
Transactions in shares of Flexible Yield Series I Class M Common Stock were:
For the Ten For the Year
Months Ended Ended
10/31/96 12/31/95
------------- -------------
Shares Amount Shares Amount
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Sold 46,304 $ 468,224 42,563 $ 433,846
Reinvested 1,049 10,556 1,658 16,778
Repurchased (24,368) (246,851) (43,058) (438,277)
Total 22,985 $ 231,929 1,163 $ 12,347
Transactions in shares of Flexible Yield Series I Class M Common Stock were:
For the Period 2/15/94
(commencement of operations)
to 12/31/94
Shares Amount
------------------ ---------
<S> <C> <C>
Sold 31,143 $309,689
Reinvested 562 5,444
Repurchased (7,879) (78,088)
Total 23,826 $237,045
</TABLE>
The Advisor owned 4,042 shares on October 31, 1996, 3,924 on December 31, 1995
and 3,750 shares on December 31, 1994.
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk in the
normal course of its investing activities to assist in managing exposure to
various market risks. These financial instruments include written options and
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. No such
investments were held by the Fund on October 31, 1996.
7. CHANGE IN FISCAL YEAR END
Effective January 1, 1996, the Fund changed its fiscal year end from December
31 to October 31.
B-77
<PAGE>
Independent Auditors' Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF FLEXIBLE YIELD SERIES I:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Flexible Yield Series I (one of the
series constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the
related statement of operations for the ten months then ended and the year
ended December 31, 1995, the statement of changes in net assets for the ten
months ended October 31, 1996 and the years ended December 31, 1995 and 1994,
and the financial highlights for each of the periods indicated in the
financial highlights table herein. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at October 31, 1996 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Flexible
Yield Series I at October 31, 1996, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-78
<PAGE>
Manning & Napier Fund, Inc.
Flexible Yield Series II
Annual Report
October 31, 1996
<PAGE>
Management Discussion and Analysis
Dear Shareholders:
During 1996, we have experienced what Manning & Napier feels to be a
temporary setback in the bond market. Short-term factors, including
speculation in the bond market, inflation fears, and political uncertainty
have led to a difficult year in the bond market. Especially when contrasted
with the extraordinary returns earned by bonds and bond funds in 1995, the
luster appears to have worn off the bond market. Our experience, however,
teaches us that short-term situations such as this provide opportunities to
position the portfolio to benefit from the long-term trends which are the most
important determinants of returns in the bond market.
At the end of 1995, the bond market looked about as good as it could get.
Economic growth was slowing, some were even calling for a recession later in
1996, and inflation worries were non_existent. These factors pushed long_term
interest rates down through the 6% level, and they finished 1995 at 5.95%.
The tide began to turn rather quickly right at the start of 1996. One of
the reasons why the market rallied so strongly during the second half of 1995
can be traced to speculative investments in U.S. Treasury securities.
Speculators were borrowing Japanese yen at extraordinarily low Japanese
short_term interest rates (0.3% to 0.5%), converting the yen into U.S.
dollars, and investing the proceeds in U.S. Treasury securities. As long as
Japanese short rates were expected to stay low or the yen was expected to slip
versus the U.S. dollar, this trade worked quite well. Unfortunately, once the
tide began to turn (i.e. people thought Japanese short-term interest rates
might rise), the selling it created snowballed due to the leverage inherent in
the trade. That happened during the early part of 1996, and short to
intermediate interest rates rose rather quickly.
As spring started to roll in, the bond market was shocked by the February
employment report issued by the Bureau of Labor Statistics. The number of new
jobs created during the month of February was an eye_popping 705,000 at the
time of the first release. Subsequent releases revised the number modestly
lower, but those same releases reported job gains that were much stronger than
what had been the case in 1995. The probability of a recession became remote,
and fears of inflation began to surface once again. Strong consumer
expenditures during the first half of 1996, solid capital spending, and a
surprisingly resilient housing sector simply added to the markets concerns,
driving long_term interest rates close to 7.25%. As the summer ended,
concerns seem to be somewhat assuaged, but rates remained stubbornly close to
7%.
It is important to note, however, that throughout all of this, inflation
itself remained very much in check. The most common measures, the Producer
Price Index (PPI) and the Consumer Price Index (CPI), both remained at or
below 3.0% on a year-over-year basis throughout 1996. An even more accurate
measure of inflation, the GDP deflator, remained closer to 2.0%. That means
real interest rates (nominal rates less the rate of inflation) exceeded 4%_5%,
depending upon which measure of inflation was used.
In the near_term, no one likes to see rising interest rates, but if one
expects inflation to remain under control over the longer_term, rising
interest rates can create compelling fixed income buying opportunities. In
the fixed income markets, 1996 has been a stern test, but in the long run,
only those who acted during these difficult times will be positioned to
benefit from the long-term trends of moderate growth and low inflation.
B-79
<PAGE>
Management Discussion and Analysis (continued)
As everyone is quite aware, 1996 is an election year, and the market
reacted to the uncertainty of the countrys political future. The political
posturing started at the end of last year when the Republican Congress and the
Democratic White House shut down the government and threatened to default on
U.S. Treasury securities. It veered off to the right with the rise and fall
of Steve Forbes and his call for a flat income tax. It focused on the
Republican primaries in the spring with Bob Dole being the ultimate winner.
And it has continued throughout the election season as the incumbent,
President Clinton, maintained a double digit lead in the polls.
In the short_term, elections do introduce volatility in the marketplace.
This year saw a marked acceleration in the growth rate of government
expenditures, which comprise about 20% of this country's GDP. This was a big
contributor to the acceleration in overall economic growth during the first
half of 1996, and that acceleration contributed to this years increase in
interest rates.
Elections also introduce uncertainty. Who will win the election? Who
will control the House? The Senate? What issues will galvanize the public?
Financial markets, as a general rule, do not like uncertainty and this year
was no exception. Given the sizable lead the President held in the polls
throughout the campaign, the biggest uncertainty seemed to relate to which
party would control the Congress. Historically, the financial markets seem to
prefer split control -- one party in control of one branch of the government
and the other in control of another.
In the long run, however, the election results may not be of major
importance. With the growth of the global financial markets and the influence
they wield on a country's interest and exchange rates, who is in the White
House or who controls Congress becomes less significant. The financial
markets are in effect pulling all parties to the right, specifically toward
fiscally sound policies. Witness what has occurred with a Democrat in the
White House over the last four years. The budget deficit has shrunk from $300
billion to just over $100 billion, the debate has shifted away from where
government moneys should be spent to what spending cuts should be made, and
the two parties debated whether the budget should be balanced in seven years
or in ten. Beyond that, we had a presidential campaign in which the
Republican challenger was calling for a tax cut and the Democratic incumbent
attacked it for being budgetarily imprudent. The new reality is that the only
poll that really seems to matter is the one being taken in the global
financial markets; sound policies are rewarded, unsound policies are not.
All the factors that have influenced the bond market over the past year
have the effect of diverting attention from the larger trends, but the larger
trends are of the most importance in determining investment success over the
long- term. At Manning & Napier, we view the big picture items as the most
important. The growth in international trade, the subsequent increase in
international competition, the need for policy makers, producers, and
consumers to adjust to this new economic reality, and the impact their actions
have had on the economy, inflation, and interest rates are what drives our
fixed income process. These are long_term, secular influences that have
brought down interest rates, have capped inflation expectations, and have
allowed longer_term, non_callable securities to provide strong investment
returns.
As in previous years, we have positioned the Series portfolio in
accordance with our overview. Within the framework of the maturity guidelines
set down for the Series, Manning & Napier weighted the portfolio toward the
longer end of the maturity spectrum. During the first half of 1996 when
interest rates were rising, that
B-80
<PAGE>
Management Discussion and Analysis (continued)
weighting was amplified. An emphasis was also placed on non_callable
securities. Given that, the mortgage_backed sector of the fixed income
marketplace was underweighted. Small positions were established, but they
totaled less than 10% of the Series portfolio. Corporate bonds were
unaffected by the overview. The sector was avoided, however, because the
credit spreads associated with corporate bonds were so narrow relative to U.S.
Treasury securities that Manning & Napier felt that investors were not being
paid for the credit risk inherent in investments in corporate bonds.
While 1996 has been a difficult year for the bond market, it is important
to realize that the causes of the difficulty were essentially shorter_term in
nature. Speculative excesses, a cyclical growth scare and the associated
inflation worries, and the uncertainty associated with an election all
combined to push interest rates higher. It is also worthwhile noting that the
shorter_term problems that plagued 1996 are needed to create the quality
longer_term investment opportunities that will benefit the Series going
forward. In addition, the uncertainties that the election introduced are
becoming even more short-lived given the growing importance of the financial
markets. Beyond all of this, Manning & Napier believes that the adherence to
a long_term investment overview and investment process is what separates the
good funds from the bad ones.
We wish you and yours all the best during this holiday season.
MANNING & NAPIER ADVISORS, INC.
[GRAPHIC]
[PIE CHART]
Effective Maturity - As of 10/31/96
Less than 1 Year - 15%
1 - 2 Years - 5%
2 - 3 Years - 13%
3 - 5 Years - 22%
5 - 7 Years - 9%
More than 7 Years - 36%
B-80
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. -
Flexible Yield Series II from its inception (2/15/94) to present (10/31/96) as
compared to the Merrill Lynch Corporate/Government Intermediate Index. 1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Flexible Yield Series II
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,427 4.27% 4.27%
Inception 2 $ 11,336 13.36% 4.73%
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Corporate/Government Intermediate Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,574 5.74% 5.74%
Inception 2 $ 11,672 16.72% 5.87%
</TABLE>
1 The Merrill Lynch Corporate/Government Intermediate Index is a market
value weighted measure of approximately 3,360 corporate and government bonds.
The Index is comprised of investment grade bonds with maturities greater than
one year but less than ten years. The Index returns assume reinvestment of
coupons and, unlike Fund returns, do not reflect any fees or expenses.
2 The Fund and Index performance are calculated from February 15, 1994,
the Fund's inception date. The Fund's performance is historical and may
not be indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Merrill Lynch Corporate/Government
Flexible Yield Series II Intermediate Index
<S> <C> <C>
02/15/94 10,000 10,000
06/30/94 9,510 9,727
12/31/94 9,531 9,799
06/30/95 10,576 10,737
12/31/95 11,182 11,301
04/30/96 10,889 11,167
10/31/96 11,336 11,672
</TABLE>
B-81
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO - OCTOBER 31, 1996
Shares/Principal VALUE
Amount (NOTE 2)
<S> <C> <C>
U.S. TREASURY NOTES - 96.2%
U.S. Treasury Note, 7.50%, 1/31/1997 $ 10,000 $ 10,056
U.S. Treasury Note, 4.75%, 2/15/1997 10,000 9,978
U.S. Treasury Note, 6.875%, 2/28/1997 30,000 30,150
U.S. Treasury Note, 6.00%, 8/31/1997 20,000 20,075
U.S. Treasury Note, 5.875%, 4/30/1998 25,000 25,078
U.S. Treasury Note, 5.125%, 11/30/1998 20,000 19,748
U.S. Treasury Note, 5.00%, 1/31/1999 15,000 14,752
U.S. Treasury Note, 6.50%, 4/30/1999 25,000 25,377
U.S. Treasury Note, 5.50%, 4/15/2000 30,000 29,527
U.S. Treasury Note, 6.75%, 4/30/2000 25,000 25,570
U.S. Treasury Note, 7.875%, 8/15/2001 45,000 48,263
U.S. Treasury Note, 6.25%, 2/15/2003 40,000 40,137
U.S. Treasury Note, 5.875%, 2/15/2004 60,000 58,594
U.S. Treasury Note, 7.25%, 5/15/2004 100,000 105,625
TOTAL U.S. TREASURY NOTES
(Identified Cost $446,830) 462,930
SHORT-TERM INVESTMENTS - 3.0%
Dreyfus U.S. Treasury Money Market Reserves
(Identified Cost $14,323) 14,323 14,323
TOTAL INVESTMENTS - 99.2%
(Identified Cost $461,153) 477,253
OTHER ASSETS, LESS LIABILITIES - 0.8% 4,041
NET ASSETS - 100% $481,294
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-82
<PAGE>
Federal Tax Information - October 31, 1996
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $461,153 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost $16,103
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value (3)
UNREALIZED APPRECIATION - NET $16,100
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-83
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
OCTOBER 31, 1996
<S> <C>
ASSETS:
Investments, at value (Identified Cost $461,153)(Note 2) $477,253
Interest receivable 6,938
Receivable from investment advisor (Note 3) 14,712
TOTAL ASSETS 498,903
LIABILITIES:
Accrued Directors' fees (Note 3) 5,072
Transfer agent fees payable (Note 3) 90
Audit fee payable 7,750
Other payables and accrued expenses 4,697
TOTAL LIABILITIES 17,609
NET ASSETS FOR 47,655 SHARES OUTSTANDING $481,294
NET ASSETS CONSIST OF:
Capital stock $ 476
Additional paid-in-capital 455,681
Undistributed net investment income 8,750
Accumulated net realized gain on investments 287
Net unrealized appreciation on investments 16,100
TOTAL NET ASSETS $481,294
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($481,294 / 47,655 shares) $ 10.10
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-84
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
For the For the
Ten Months Year
Ended 10/31/96 Ended 12/31/95
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 23,842 $ 29,659
EXPENSES:
Management fees (Note 3) 1,688 2,160
Directors' fees (Note 3) 5,072 6,792
Transfer agent fees (Note 3) 90 115
Audit fee 7,808 10,400
Registration and filing fees 3,929 2,453
Custodian fee 150 600
Miscellaneous 665 -
Total Expenses 19,402 22,520
Less Waiver of Expenses (Note 3) (16,400) (18,679)
Net Expenses 3,002 3,841
NET INVESTMENT INCOME 20,840 25,818
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments (identified cost basis) 289 2,582
Net change in unrealized appreciation on investments (12,780) 45,414
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (12,491) 47,996
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 8,349 $ 73,814
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-85
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Period
2/15/94
For the Ten For the (commencement
Months Ended Year Ended of operations)
10/31/96 12/31/95 to 12/31/94
-------------- ------------ ----------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 20,840 $ 25,818 $ 10,888
Net realized gain on investments 289 2,582 -
Net change in unrealized appreciation (depreciation)
on investments (12,780) 45,414 (16,534)
Net increase (decrease) in net assets from operations 8,349 73,814 (5,646)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (12,453) (25,351) (10,558)
From net realized gain on investments (2,503) - -
Total distributions to shareholders (14,956) (25,351) (10,558)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase (decrease) in net assets from capital share
transactions (Note 5) 49,875 (5,951) 411,718
Net increase in net assets 43,268 42,512 395,514
NET ASSETS:
Beginning of period 438,026 395,514 -
End of period (including undistributed net investment
income of $8,750, $363 and $330 respectively) $ 481,294 $ 438,026 $ 395,514
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-86
<PAGE>
<TABLE>
<CAPTION>
For the
Ten For the
Months Year
Ended Ended
10/31/96 12/31/95
---------- ----------
<S> <C> <C>
Per share data (for a share outstanding throughout
each period ):
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.30 $ 9.27
Income from investment operations:
Net investment income 0.445 0.561
Net realized and unrealized gain (loss)
on investments (0.315) 1.019
Total from investment operations 0.130 1.580
Less distributions to shareholders:
From net investment income (0.270) (0.550)
From net realized gain on investments (0.060) -
Total distributions to shareholders (0.330) (0.550)
NET ASSET VALUE - END OF PERIOD $ 10.10 $ 10.30
Total return 1 1.38% 17.33%
Ratios (to average net assets) / Supplemental Data:
Expenses* 0.80%2 0.80%
Net investment income* 5.55%2 5.38%
Portfolio turnover 5% 35%
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 481 $ 438
* The investment advisor did not impose its management fee and paid a portion of the Fund's expenses.
If these expenses had been incurred by the Fund, expenses would have been limited to that allowed
by state securities law and the net investment income per share and the ratios would have been as
follows:
Net investment income $ 0.309 $ 0.384
Ratios (to average net assets):
Expenses 2.50%2 2.50%
Net investment income 3.85%2 3.68%
1 Represents aggregate total return for the period indicated
2 Annualized
For the Period
2/15/94
(commencement
of operations) to
12/31/94
-------------------
<S> <C>
Per share data (for a share outstanding throughout
each period ):
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.00
Income from investment operations:
Net investment income 0.269
Net realized and unrealized gain (loss)
on investments (0.738)
Total from investment operations (0.469)
Less distributions to shareholders:
From net investment income (0.261)
From net realized gain on investments -
Total distributions to shareholders (0.261)
NET ASSET VALUE - END OF PERIOD $ 9.27
Total return 1 (4.69%)
Ratios (to average net assets) / Supplemental Data:
Expenses* 0.80%2
Net investment income* 5.40%2
Portfolio turnover 0%
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 396
* The investment advisor did not impose its management fee and paid a portion of the Fund's expenses.
If these expenses had been incurred by the Fund, expenses would have been limited to that allowed
by state securities law and the net investment income per share and the ratios would have been as
follows:
Net investment income $ 0.184
Ratios (to average net assets):
Expenses 2.50%2
Net investment income 3.70%2
1 Represents aggregate total return for the period indicated
2 Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-87
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Flexible Yield Series II (the "Fund") is a no-load diversified
series of Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is
organized as a Maryland Corporation and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Flexible Yield Series II
Class N Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not listed
on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are
valued at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains on
investments in accordance with
B-88
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES (CONTINUED)
requirements of the Internal Revenue Code. Accordingly, no provision for
federal income tax or excise tax has been made in the financial statements.
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
quarterly. Distributions are recorded on the ex-dividend date. Distributions
of net realized gains are distributed annually. An additional distribution
may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, or character reclassification between
net income and net gains, or other required tax adjustments. As a result, net
investment income (loss) and net investment gain (loss) on investment
transactions for a reporting period may differ significantly from
distributions to shareholders during such period. As a result, the Fund may
periodically make reclassifications among its capital accounts without
impacting the Fund's net asset value.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reorted amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 0.45% of the Fund's
average daily net assets. The fee amounted to $1,688 for the ten months ended
October 31, 1996 and $2,160 for the year ended December 31, 1995.
B-89
<PAGE>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 0.80% of average daily net assets each year.
Accordingly, the Advisor did not impose any of its fee and paid expenses
amounting to $14,712 for the ten months ended October 31, 1996 and $16,519 for
the year ended December 31, 1995, which are reflected as a reduction of
expenses on the Statement of Operations. The fee waiver and assumption of
expenses by the Advisor is voluntary and may be terminated at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $90 for the ten months ended October 31,
1996 and $115 for the year ended December 31, 1995.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $5,072 for the
ten months ended October 31, 1996 and $6,792 for the year ended December 31,
1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$64,125 and $20,181 respectively, for the ten months ended October 31,
1996.
B-90
<PAGE>
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Flexible Yield Series II Class N Common Stock were:
<TABLE>
<CAPTION>
For the Period 2/15/94
For the Ten Months For the Year (commencement of
Ended 10/31/96 Ended 12/31/95 operations) to 12/31/94
Shares Amount Shares Amount Shares Amount
------------------- --------- --------------- ---------- ----------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Sold 7,361 $ 72,902 17,414 $ 173,234 41,530 $401,160
Reinvested 1,460 14,399 2,527 25,352 1,139 10,558
Repurchased (3,711) (37,426) (20,065) (204,537) - -
Total 5,110 $ 49,875 (124) $ (5,951) 42,669 $411,718
</TABLE>
The Advisor owned 13,836 shares on October 31, 1996 and 13,383 shares on
December 31, 1995 and 12,674 shares on December 31, 1994.
6. FINANCIAL INSTRUMENTS
the Fund may trade in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include
written options and futures contracts and may involve, to a varying
degree, elements of risk in excess of the amounts recognized for financial
statement purposes. No such investments were held by the Fund on October
31, 1996.
7. CHANGE IN FISCAL YEAR END
Effective January 1, 1996, the Fund changed its fiscal year end from
December 31 to October 31.
B-91
<PAGE>
Independent Auditors' Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF FLEXIBLE YIELD SERIES II:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Flexible Yield Series II (one of the
series constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the
related statement of operations for the ten months then ended and the year
ended December 31, 1995, the statement of changes in net assets for the ten
months ended October 31, 1996 and the years ended December 31, 1995 and 1994,
and the financial highlights for each of the periods indicated in the
financial highlights table herein. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at October 31, 1996 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Flexible
Yield Series II at October 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-92
<PAGE>
Manning & Napier Fund, Inc.
Flexible Yield Series III
Annual Report
October 31, 1996
<PAGE>
Management Discussion and Analysis
Dear Shareholders:
During 1996, we have experienced what Manning & Napier feels to be a
temporary setback in the bond market. Short-term factors, including
speculation in the bond market, inflation fears, and political uncertainty
have led to a difficult year in the bond market. Especially when contrasted
with the extraordinary returns earned by bonds and bond funds in 1995, the
luster appears to have worn off the bond market. Our experience, however,
teaches us that short-term situations such as this provide opportunities to
position the portfolio to benefit from the long-term trends which are the most
important determinants of returns in the bond market.
At the end of 1995, the bond market looked about as good as it could
get. Economic growth was slowing, some were even calling for a recession
later in 1996, and inflation worries were non_existent. These factors pushed
long_term interest rates down through the 6% level, and they finished 1995 at
5.95%.
The tide began to turn rather quickly right at the start of 1996.
One of the reasons why the market rallied so strongly during the second half
of 1995 can be traced to speculative investments in U.S. Treasury securities.
Speculators were borrowing Japanese yen at extraordinarily low Japanese
short_term interest rates (0.3% to 0.5%), converting the yen into U.S.
dollars, and investing the proceeds in U.S. Treasury securities. As long as
Japanese short rates were expected to stay low or the yen was expected to slip
versus the U.S. dollar, this trade worked quite well. Unfortunately, once the
tide began to turn (i.e. people thought Japanese short-term interest rates
might rise), the selling it created snowballed due to the leverage inherent in
the trade. That happened during the early part of 1996, and short to
intermediate interest rates rose rather quickly.
As spring started to roll in, the bond market was shocked by the
February employment report issued by the Bureau of Labor Statistics. The
number of new jobs created during the month of February was an eye_popping
705,000 at the time of the first release. Subsequent releases revised the
number modestly lower, but those same releases reported job gains that were
much stronger than what had been the case in 1995. The probability of a
recession became remote, and fears of inflation began to surface once again.
Strong consumer expenditures during the first half of 1996, solid capital
spending, and a surprisingly resilient housing sector simply added to the
markets concerns, driving long_term interest rates close to 7.25%. As the
summer ended, concerns seem to be somewhat assuaged, but rates remained
stubbornly close to 7%.
It is important to note, however, that throughout all of this,
inflation itself remained very much in check. The most common measures, the
Producer Price Index (PPI) and the Consumer Price Index (CPI), both remained
at or below 3.0% on a year-over-year basis throughout 1996. An even more
accurate measure of inflation, the GDP deflator, remained closer to 2.0%.
That means real interest rates (nominal rates less the rate of inflation)
exceeded 4%_5%, depending upon which measure of inflation was used.
In the near_term, no one likes to see rising interest rates, but if
one expects inflation to remain under control over the longer_term, rising
interest rates can create compelling fixed income buying opportunities. In
the fixed income markets, 1996 has been a stern test, but in the long run,
only those who acted during these difficult times will be positioned to
benefit from the long-term trends of moderate growth and low inflation.
As everyone is quite aware, 1996 is an election year, and the market
reacted to the uncertainty of the countrys political future. The political
posturing started at the end of last year when the Republican Congress and the
Democratic White House shut down the government and threatened to default on
U.S. Treasury securities.
B-93
<PAGE>
Management Discussion and Analysis (continued)
It veered off to the right with the rise and fall of Steve Forbes and
his call for a flat income tax. It focused on the Republican primaries in the
spring with Bob Dole being the ultimate winner. And it has continued
throughout the election season as the incumbent, President Clinton, maintained
a double digit lead in the polls.
In the short_term, elections do introduce volatility in the
marketplace. This year saw a marked acceleration in the growth rate of
government expenditures, which comprise about 20% of this country's GDP. This
was a big contributor to the acceleration in overall economic growth during
the first half of 1996, and that acceleration contributed to this years
increase in interest rates.
Elections also introduce uncertainty. Who will win the election?
Who will control the House? The Senate? What issues will galvanize the public?
Financial markets, as a general rule, do not like uncertainty and this year
was no exception. Given the sizable lead the President held in the polls
throughout the campaign, the biggest uncertainty seemed to relate to which
party would control the Congress. Historically, the financial markets seem to
prefer split control -- one party in control of one branch of the government
and the other in control of another.
In the long run, however, the election results may not be of major
importance. With the growth of the global financial markets and the influence
they wield on a country's interest and exchange rates, who is in the White
House or who controls Congress becomes less significant. The financial
markets are in effect pulling all parties to the right, specifically toward
fiscally sound policies. Witness what has occurred with a Democrat in the
White House over the last four years. The budget deficit has shrunk from $300
billion to just over $100 billion, the debate has shifted away from where
government moneys should be spent to what spending cuts should be made, and
the two parties debated whether the budget should be balanced in seven years
or in ten. Beyond that, we had a presidential campaign in which the
Republican challenger was calling for a tax cut and the Democratic incumbent
attacked it for being budgetarily imprudent. The new reality is that the only
poll that really seems to matter is the one being taken in the global
financial markets; sound policies are rewarded, unsound policies are not.
All the factors that have influenced the bond market over the past
year have the effect of diverting attention from the larger trends, but the
larger trends are of the most importance in determining investment success
over the long- term. At Manning & Napier, we view the big picture items as
the most important. The growth in international trade, the subsequent
increase in international competition, the need for policy makers, producers,
and consumers to adjust to this new economic reality, and the impact their
actions have had on the economy, inflation, and interest rates are what drives
our fixed income process. These are long-term, secular influences that have
brought down interest rates, have capped inflation expectations, and have
allowed longer-term, non-callable securities to provide strong investment
returns.
As in previous years, we have positioned the Series portfolio in
accordance with our overview. Within the framework of the maturity guidelines
set down for the Series, Manning & Napier weighted the portfolio toward the
longer end of the maturity spectrum. During the first half of 1996 when
interest rates were rising, that weighting was amplified. An emphasis was
also placed on non-callable securities. Given that, the mortgage-backed
sector of the fixed income marketplace was underweighted. Small positions
were established, but they totaled less than 10% of the Series portfolio.
Corporate bonds were unaffected by the overview. The sector
B-94
<PAGE>
Management Discussion and Analysis (continued)
was avoided, however, because the credit spreads associated with
corporate bonds were so narrow relative to U.S. Treasury securities that
Manning & Napier felt that investors were not being paid for the credit risk
inherent in investments in corporate bonds.
While 1996 has been a difficult year for the bond market, it is
important to realize that the causes of the difficulty were essentially
shorter-term in nature. Speculative excesses, a cyclical growth scare and the
associated inflation worries, and the uncertainty associated with an election
all combined to push interest rates higher. It is also worthwhile noting that
the shorter-term problems that plagued 1996 are needed to create the quality
longer-term investment opportunities that will benefit the Series going
forward. In addition, the uncertainties that the election introduced are
becoming even more short-lived given the growing importance of the financial
markets. Beyond all of this, Manning & Napier believes that the adherence to
a long-term investment overview and investment process is what separates the
good funds from the bad ones.
We wish you and yours all the best during this holiday season.
MANNING & NAPIER ADVISORS, INC.
[GRAPHIC]
[PIE CHART]
Effective Maturity - As of 10/31/96
Less than 1 year - 9%
1 - 2 Years - 5%
2 - 3 Years - 6%
3 - 5 Years -12%
5 - 7 Years - 19%
7 - 10 Years - 16%
Over 10 Years - 33%
[GRAPHIC]
[PIE CHART]
Portfolio Composition - As of 10/31/96
U.S. Treasury Securities - 91%
Mortgage Backed Securities - 6%
Cash & Equivalents - 3%
B-95
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. -
Flexible Yield Series III from its inception (12/20/93) to present (10/31/96)
as compared to the Merrill Lynch Corporate/Government Bond Index. 1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Flexible Yield Series III
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,361 3.61% 3.61%
Inception 2 $ 11,431 14.31% 4.77%
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Corporate/Government Bond Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
One Year $ 10,529 5.29% 5.29%
Inception 2 $ 11,778 17.78% 5.87%
</TABLE>
1 The Merrill Lynch Corporate/Government Bond Index is a market
value weighted measure of approximately 4,775 corporate and
government bonds. The Index is comprised of investment grade
securities with maturities greater than one year. The Index returns
assume reinvestment of coupons and, unlike Fund returns, do not reflect
any fees or expenses.
2 The Fund and Index performance are calculated from December 20,
1993, the Fund's inception date. The Fund's performance is historical
and may not be indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Merrill Lynch Corporate/
Flexible Yield Series III Government Bond Index
<S> <C> <C>
12/20/93 $ 10,000 $ 10,000
12/31/93 9,960 10,013
06/30/94 9,349 9,602
12/31/94 9,380 9,686
06/30/95 10,634 10,815
12/31/95 11,451 11,532
04/30/96 10,868 11,191
10/31/96 11,431 11,778
</TABLE>
B-96
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
PRINCIPAL VALUE
AMOUNT (NOTE 2)
U.S. TREASURY SECURITIES - 90.83%
<S> <C> <C>
U.S. TREASURY BONDS - 19.28%
U.S. Treasury Bond, 7.25%, 8/15/2022
(Identified Cost $186,166 ) $ 200,000 $211,625
U.S. TREASURY NOTES - 64.94%
U.S. Treasury Note, 4.375%, 11/15/1996 25,000 24,984
U.S. Treasury Note, 7.50%, 1/31/1997 40,000 40,225
U.S. Treasury Note, 6.875%, 2/28/1997 35,000 35,175
U.S. Treasury Note, 5.00%, 1/31/1998 50,000 49,617
U.S. Treasury Note, 5.125%, 11/30/1998 60,000 59,245
U.S. Treasury Note, 7.75%, 11/30/1999 40,000 42,000
U.S. Treasury Note, 5.50%, 4/15/2000 25,000 24,606
U.S. Treasury Note, 6.25%, 8/31/2000 60,000 60,432
U.S. Treasury Note, 7.50%, 11/15/2001 35,000 37,052
U.S. Treasury Note, 6.375%, 8/15/2002 150,000 151,623
U.S. Treasury Note, 5.75%, 8/15/2003 15,000 14,607
U.S. Treasury Note, 5.875%, 2/15/2004 100,000 97,656
U.S. Treasury Note, 6.50%, 8/15/2005 75,000 75,773
TOTAL U.S. TREASURY NOTES
(Identified Cost $755,476) 712,995
U.S. TREASURY STRIPPED SECURITIES- 6.61%
Interest Stripped - Principal Payment, 5/15/2014 98,000 29,822
Interest Stripped - Principal Payment, 8/15/2014 143,000 42,784
TOTAL U.S. TREASURY STRIPPED SECURITIES
(Identified Cost $21,905 ) 72,606
TOTAL U.S. TREASURY SECURITIES
(Identified Cost $963,547) 997,226
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-97
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
Principal
Amount/ Value
Shares (Note 2)
U.S. GOVERNMENT AGENCIES - 6.27%
<S> <C> <C>
MORTGAGE BACKED SECURITIES
GNMA, Pool #224199, 9.50%, 7/15/2018 $16,138 $ 17,404
GNMA, Pool #299164, 9.00%, 12/15/2020 16,634 17,580
GNMA, Pool #376345, 6.50%, 12/15/2023 35,398 33,817
TOTAL U.S. GOVERNMENT AGENCIES
(Identified Cost $64,597 ) 68,801
SHORT-TERM INVESTMENTS - 2.04%
Dreyfus U.S. Treasury Money Market Reserves
(Identified Cost $22,359 ) 22,359 22,359
TOTAL INVESTMENTS - 99.14%
(Identified Cost $1,050,503 ) 1,088,386
OTHER ASSETS, LESS LIABILITIES - 0.86% 9,478
NET ASSETS - 100% $1,097,864
</TABLE>
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $1,050,503 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost $45,831
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value (7,948)
UNREALIZED APPRECIATION - NET $37,883
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-98
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
OCTOBER 31, 1996
<S> <C>
ASSETS:
Investments, at value (Identified Cost $1,050,503)(Note 2) $1,088,386
Interest receivable 14,831
Receivable from investment advisor (Note 3) 12,396
TOTAL ASSETS 1,115,613
LIABILITIES:
Accrued Directors' fees (Note 3) 5,072
Audit fee payable 7,750
Other payables and accrued expenses 4,927
TOTAL LIABILITIES 17,749
NET ASSETS FOR 108,427 SHARES OUTSTANDING $1,097,864
NET ASSETS CONSIST OF:
Capital stock $ 1,084
Additional paid-in-capital 1,037,339
Undistributed net investment income 16,958
Accumulated net realized gain on investments 4,600
Net unrealized appreciation on investments 37,883
TOTAL NET ASSETS $1,097,864
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($1,097,864/108,427 shares) $ 10.13
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-99
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
For the Ten Months For the Year
Ended 10/31/96 Ended 12/31/95
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 60,867 $ 66,467
EXPENSES:
Management fees (Note 3) 4,454 4,767
Directors' fees (Note 3) 5,072 6,832
Transfer agent fees (Note 3) 214 229
Audit fee 9,425 8,600
Custodian fee 500 600
Miscellaneous 4,754 2,424
Total Expenses 24,419 23,452
Less Waiver of Expenses (Note 3) (16,850) (15,349)
Net Expenses 7,569 8,103
NET INVESTMENT INCOME 53,298 58,364
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) on investments (identified cost basis) 4,772 (132)
Net change in unrealized appreciation on investments (60,560) 128,849
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (55,788) 128,717
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS ($2,490) $ 187,081
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-100
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Ten For the For the
Months Ended Year Ended Year Ended
10/31/96 12/31/95 12/31/94
-------------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
<S> <C> <C> <C>
OPERATIONS:
Net investment income $ 53,298 $ 58,364 $ 21,040
Net realized gain (loss) on investments 4,772 (132) (28)
Net change in unrealized appreciation (depreciation)
on investments (60,560) 128,849 (30,063)
Net increase (decrease) in net assets from operations (2,490) 187,081 (9,051)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (36,728) (57,528) (20,952)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase (decrease) in net assets from capital share
transactions (Note 5) (22,142) 282,134 702,883
Net increase (decrease) in net assets (61,360) 411,687 672,880
NET ASSETS:
Beginning of period 1,159,224 747,537 74,657
End of period (including undistributed net investment
income of $16,958, $388, and $88, respectively) $ 1,097,864 $ 1,159,224 $ 747,537
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-101
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
For the For the
Ten Months Year
Ended Ended
10/31/96 12/31/95
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.51 $ 9.11
Income from investment operations:
Net investment income 0.497 0.582
Net realized and unrealized gain (loss)
on investments (0.532) 1.393
Total from investment operations (0.035) 1.975
Less distributions to shareholders:
From net investment income (0.345) (0.575)
NET ASSET VALUE - END OF PERIOD $ 10.13 $ 10.51
Total return 1 (0.18%) 22.09%
Ratios (to average net assets)/Supplemental Data:
Expenses* 0.85%2 0.85%
Net investment income* 5.98%2 6.13%
Portfolio turnover 5% 6%
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 1,098 $ 1,159
* The investment advisor did not impose its management fee and paid a portion of the Fund's
expenses. If these expenses had been incurred by the Fund for the periods ended December 31,
1993, December 31, 1994, and October 31, 1996, expenses would have been limited to that
allowed by state securities law. If the full expenses allowed by state securities law had been
incurred by the Fund, the net investment income per share and the ratios would have been as
follows:
Net investment income $ 0.360 $ 0.429
Ratios(to average net assets):
Expenses 2.50%2 2.46%
Net investment income 4.33%2 4.52%
1 Represents aggregate total return for the period indicated.
2 Annualized.
For the Period
For the 12/20/93
Year (commencement
Ended of operations) to
12/31/94 12/31/93
---------- -------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
NET ASSET VALUE - BEGINNING OF PERIOD $ 9.95 $ 10.00
Income from investment operations:
Net investment income 0.262 0.010
Net realized and unrealized gain (loss)
on investments (0.841) (0.050)
Total from investment operations (0.579) (0.040)
Less distributions to shareholders:
From net investment income (0.261) (0.010)
NET ASSET VALUE - END OF PERIOD $ 9.11 $ 9.95
Total return 1 (5.83%) (0.40%)
Ratios (to average net assets)/Supplemental Data:
Expenses* 0.85% 0.85%2
Net investment income* 6.22% 3.85%2
Portfolio turnover 1% 0%
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 748 $ 75
* The investment advisor did not impose its management fee and paid a portion of the Fund's
expenses. If these expenses had been incurred by the Fund for the periods ended December 31,
1993, December 31, 1994, and October 31, 1996, expenses would have been limited to that
allowed by state securities law. If the full expenses allowed by state securities law had been
incurred by the Fund, the net investment income per share and the ratios would have been as
follows:
Net investment income $ 0.192 $ 0.010
Ratios(to average net assets):
Expenses 2.50% 2.50%2
Net investment income 4.57% 2.20%2
1 Represents aggregate total return for the period indicated.
2 Annualized.
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-102
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Flexible Yield Series III (the "Fund") is a no-load diversified series of
Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is organized
as a Maryland Corporation and is registered under the Investment Company Act
of 1940, as amended, as an open-end management investment company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Flexible Yield Series III
Class O Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not
listed on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from
the Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are
valued at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities
are purchased or sold. Dividend income is recorded on the ex-dividend
date. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific
fund. Expenses which cannot be directly attributed are apportioned among
the funds in the Corporation.
B-103
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is
not subject to federal income or excise tax to the extent the Fund
distributes to shareholders each year its taxable income, including any
net realized gains on investments in accordance with requirements of the
Internal Revenue Code. Accordingly, no provision for federal income tax
or excise tax has been made in the financial statements.
The Fund uses the identified cost method for determining realized
gain or loss on investments for both financial statement and federal
income tax reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
quarterly. Distributions are recorded on the ex-dividend date.
Distributions of net realized gains are distributed annually. An
additional distribution may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains
are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. The differences may
be a result of deferral of certain losses, character reclassification
between net income and net gains, or other tax adjustments. As a result, net
investment income (loss) and net investment gain (loss) on investment
transactions for a reporting period may differ significantly from
distributions to shareholders during such period. As a result, the
Fund may periodically make reclassifications among its capital
accounts without impacting the Fund's net asset value.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reorted amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
B-104
<PAGE>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a
fee, computed daily and payable monthly, at an annual rate of 0.50% of
the Fund's average daily net assets. The fee amounted to $4,454 for the
ten months ended October 31, 1996 and $4,767 for the year ended December
31, 1995.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in
the choice of investments and the execution of securities transactions,
and otherwise maintain the Fund's organization. The Advisor also provides
the Fund with necessary office space and portfolio accounting and
bookkeeping services. The salaries of all officers of the Fund and of all
Directors who are "affiliated persons" of the Fund or of the Advisor, and
all personnel of the Fund or of the Advisor performing services
relating to research, statistical and investment activities are paid
by the Advisor.
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 0.85% of average daily net assets each year.
Accordingly, the Advisor did not impose any of its fee and paid expenses
amounting to $12,396 for the ten months ended October 31, 1996 and $10,582 for
the year ended December 31, 1995, which are reflected as a reduction of
expenses on the Statement of Operations. The fee waiver and assumption of
expenses by the Advisor is voluntary and may be terminated at any time.
The Advisor also acts as the transfer, dividend paying and
shareholder servicing agent for the Fund. For these services, the Fund
pays a fee which is calculated as a percentage of the average daily net
assets at an annual rate of 0.024%;this fee amounted to $214 for the ten
months ended October 31, 1996 and $229 for the year ended December 31, 1995.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $5,072 for
the ten months ended October 31, 1996 and $6,832 for the year ended
December 31, 1995.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$49,235 and $73,092, respectively, for the ten months ended October 31, 1996.
B-105
<PAGE>
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Flexible Yield Series III Class O Common Stock
were:
<TABLE>
<CAPTION>
For the Ten Months For the Year For the Year
Ended 10/31/96 Ended 12/31/95 Ended 12/31/94
------------------- --------------- --------------
Shares Amount Shares Amount Shares Amount
------------------- ---------- --------------- --------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Sold 6,096 $ 60,715 23,843 $236,968 72,768 $686,867
Reinvested 3,073 30,104 4,597 46,488 1,752 16,016
Repurchased (11,073) (112,961) (129) (1,322) - -
Total (1,904) $ (22,142) 28,311 $282,134 74,520 $702,883
</TABLE>
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in
managing exposure to various market risks. These financial instruments
include written options and futures contracts and may involve, to a
varying degree, elements of risk in excess of the amounts recognized for
financial statement purposes. No such investments were held by the Fund
on October 31, 1996.
7. CHANGE IN FISCAL YEAR END
Effective January 1, 1996, the Fund changed its fiscal year end from
December 31 to October 31.
B-106
<PAGE>
Independedt Auditors' Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF FLEXIBLE YIELD SERIES III:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Flexible Yield Series III (one of the
series constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the
related statement of operations for the ten months then ended and the year
ended December 31, 1995, the statement of changes in net assets for the ten
months ended October 31, 1996 and the years ended December 31, 1995 and 1994,
and the financial highlights for each of the periods indicated in the
financial highlights table herein. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments owned at October 31, 1996 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Flexible
Yield Series III at October 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-107
<PAGE>
Manning & Napier Fund, Inc.
Defensive Series
Annual Report
October 31, 1996
<PAGE>
Management Discussion and Analysis
Dear Shareholders:
Since we last reported to you six months ago, the markets have again
exhibited the upward and downward swings akin to the later stages of economic
and market cycles. Midway through this period we saw the Dow Jones Industrial
Average take a considerable dive, only to end this semi-annual reporting cycle
above the record-breaking 6000 mark. Likewise, the 30-year U.S.. Treasury
yield rose to over 7% during this period, but bonds recovered nicely by the
end of October. However, as we have anticipated thus far, economic growth
has remained moderate and inflation has remained in check, allowing us to take
advantage of the buying opportunities that present themselves.
These gyrations were caused by overreaction to short-term economic data.
Much as happened in March of this year, the news again raised fears of higher
inflation and sent the Dow Jones Industrial Average plunging down 115 points
on July 5th in what was only a half-day of trading due to the holiday. Bonds
followed suit with the yield on the 30-year U.S. Treasury surging 25
basis-points. Many were left wondering whether the Federal Reserve Board
would raise the Fed Funds rate. However, additional evidence throughout the
summer that inflation and economic growth are under control led the Fed to
again leave rates unchanged when they met during the last week of September.
As we continue to adhere to our long-term overview for low inflation and
lower interest rates, the July 5th correction created a buying opportunity in
which we were able to slightly lengthen the maturity of the bonds in the
portfolio and move into equity sectors where valuations proved attractive.
The stock portion of the portfolio has continued emphasis in small ticket
consumer stocks which we believe have been branded with the same iron as more
cyclical consumer stocks, thus creating a buying opportunity. In addition, we
have increased our exposure to the health care sector as valuations in that
area have proved attractive as well.
B-108
<PAGE>
Management Discussion and Analysis (continued)
At a time when market valuations in general are high and the bull market
is aging, it is important to be discriminating about the levels of risk
acceptable in funds with different tolerances for volatility. Your Series
places a high priority on dampening market volatility, so even though we see a
number of long-term positives in the investment picture, we must be sensitive
to the possibility of cyclical disruptions. With valuations currently very
high, you should expect this Series to be conservatively positioned, and
indeed, that is the case. As we continue to move through this mature bull
market, we will hold fast to our disciplines of attempting to identify stocks
of companies with strong strategic positioning in their industry at attractive
valuations versus long-term U.S. Treasury bonds.
We wish you and yours all the best during this holiday season.
Sincerely,
Manning & Napier Advisors, Inc.
[GRAPHIC]
[PIE CHART]
Portfolio Composition - As of 10/31/96
Bonds - 88%
Stocks - 7%
Cash & Equivalents - 5%
B-109
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. -
Defensive Series from its inception (11/1/95) to present (10/31/96) as
compared to the Lehman Brothers Intermediate Bond Index and a Balanced Index.
1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Defensive Series
Total Return
Through Growth of $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 10,494 4.94% 4.94%
</TABLE>
<TABLE>
<CAPTION>
Lehman Brothers Intermediate Bond Index
Total Return
Through Growth of $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 10,581 5.81% 5.81%
</TABLE>
<TABLE>
<CAPTION>
Balanced Index
Total Return
Through Growth of $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 10,847 8.47% 8.47%
</TABLE>
1 The Lehman Brothers Intermediate Bond Index is a market value weighted
measure of approximately 3,425 corporate and government securities. The Index
is comprised of investment grade securities with maturities greater than one
year but less than ten years. The Balanced Index is 15% Standard & Poor's
(S&P) 500 Total Return Index and 85% Lehman Brothers Intermediate Bond Index.
The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure
of 500 widely held common stocks listed on the New York Stock Exchange, American
Stock Exchange, and Over-the-Counter market. Both Indices returns assume
reinvestment of income and, unlike Fund returns, do not reflect any fees or
expenses.
2 Performance numbers for the Fund and Indices are calculated from November
1, 1995, the Fund's inception date. The Fund's performance is historical and
may not be indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Lehman Brothers
Defensive Series Intermediate Bond Index Balanced Index
<S> <C> <C> <C>
11/01/95 $ 10,000 $ 10,000 $ 10,000
01/31/96 10,287 10,326 10,425
04/30/96 10,116 10,116 10,301
07/31/96 10,137 10,246 10,389
10/31/96 10,494 10,581 10,847
</TABLE>
B-110
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
COMMON STOCK - 7.43%
<S> <C> <C>
AIR TRANSPORTATION- 0.81%
Federal Express Corp.* 75 $6,038
---------
APPAREL- 0.44%
VF Corp. 50 3,269
---------
COMMUNICATIONS- 0.35%
Stet Societa' Finanziaria Telefonica S.p.A. - ADR 75 2,597
---------
ELECTROMEDICAL APPARATUS- 0.79%
Nellcor Puritan Bennett, Inc.* 300 5,850
---------
ENGINEERING SERVICES - 0.38%
Jacobs Engineering Group, Inc.* 125 2,766
---------
HEALTH SERVICES- 0.69%
MedPartners, Inc.* 242 5,112
---------
PHOTOGRAPHIC EQUIPMENT & SUPPLIES- 0.54%
Eastman Kodak Co. 50 3,987
---------
RESTAURANTS - 0.89%
McDonald's Corp. 150 6,656
---------
RETAIL - 2.01%
Fabri-Centers of America - Class A* 125 1,625
Fabri-Centers of America - Class B* 125 1,625
Fingerhut Companies, Inc. 325 4,834
Hancock Fabrics, Inc. 175 1,488
Tandy Corp. 150 5,643
---------
15,215
---------
TELECOMMUNICATIONS EQUIPMENT - 0.14%
General Instrument Corp.* 50 1,006
---------
UTILITIES-ELECTRIC- 0.39%
Enersis S.A.- ADR 100 2,938
---------
TOTAL COMMON STOCK
(Identified Cost $54,658) 55,434
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-111
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
PRINCIPAL VALUE
AMOUNT/SHARES (NOTE 2)
<S> <C> <C>
U.S. TREASURY SECURITIES- 87.80%
U.S. TREASURY BONDS - 28.57%
U.S. Treasury Bond, 6.50%, 5/15/2005 $ 150,000 $151,605
U.S. Treasury Bond, 6.875%, 8/15/2025 60,000 61,331
TOTAL U.S. TREASURY BONDS
(Identified Cost $213,904) 212,936
---------
U.S. TREASURY NOTES - 59.23%
U.S. Treasury Note, 6.00%, 8/31/1997 50,000 50,188
U.S. Treasury Note, 6.00%, 8/15/1999 170,000 170,478
U.S. Treasury Note, 6.125%, 9/30/2000 115,000 115,323
U.S. Treasury Note, 6.25%, 2/15/2003 105,000 105,361
---------
TOTAL U.S. TREASURY NOTES
(Identified Cost $442,294) 441,350
TOTAL U.S. TREASURY SECURITIES
(Identified Cost $656,198) 654,286
---------
SHORT-TERM INVESTMENTS - 3.04%
U.S. Treasury Bill, 11/29/1996 15,000 14,945
Dreyfus U.S. Treasury Money Market Reserves 7,660 7,660
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $22,605) 22,605
TOTAL INVESTMENTS - 98.27%
(Identified Cost $733,461 ) 732,325
OTHER ASSETS, LESS LIABILITIES - 1.73% 12,880
NET ASSETS - 100% $745,205
</TABLE>
*Non-income producing security
The accompanying notes are an integral part of the financial statements.
B-112
<PAGE>
<TABLE>
<CAPTION>
Federal Tax Information - October 31, 1996
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized depreciation based on identified cost for
federal income tax purposes of $733,461 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost $ 4,714
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value (5,850)
UNREALIZED DEPRECIATION - NET $(1,136)
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-113
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
OCTOBER 31, 1996
<S> <C>
ASSETS:
Investments, at value (Identified Cost $733,461)(Note 2) $732,325
Interest receivable 10,065
Receivable for securities sold 4,863
Dividends receivable 13
Receivable from investment advisor (Note 3) 17,893
TOTAL ASSETS 765,159
LIABILITIES:
Accrued Directors' fees (Note 3) 6,840
Transfer agent fees payable (Note 3) 118
Audit fee payable 7,225
Other payables and accrued expenses 5,771
TOTAL LIABILITIES 19,954
NET ASSETS FOR 72,442 SHARES OUTSTANDING $745,205
NET ASSETS CONSIST OF:
Capital stock $ 724
Additional paid-in-capital 728,060
Undistributed net investment income 11,048
Accumulated net realized gain on investments 6,509
Net unrealized depreciation on investments (1,136)
TOTAL NET ASSETS $745,205
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($745,205/72,442 shares) $ 10.29
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-114
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
FOR THE YEAR ENDED OCTOBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Interest $ 25,219
Dividends 798
Total Investment Income 26,017
EXPENSES:
Management fees (Note 3) 3,940
Directors' fees (Note 3) 6,840
Transfer agent fees (Note 3) 118
Audit fee 8,000
Registration and filing fees 4,550
Custodian fee 2,439
Miscellaneous 884
Total Expenses 26,771
Less Waiver of Expenses (Note 3) (21,833)
Net Expenses 4,938
NET INVESTMENT INCOME 21,079
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments (identified cost basis) 6,509
Net change in unrealized depreciation on investments (1,136)
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 5,373
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 26,452
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-115
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes In Net Assets
For the Year
Ended
10/31/96
INCREASE (DECREASE) IN NET ASSETS:
<S> <C>
OPERATIONS:
Net investment income $ 21,079
Net realized gain on investments 6,509
Net change in unrealized depreciation on investments (1,136)
Net increase in net assets from operations 26,452
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (10,031)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase in net assets from capital share
transactions (Note 5) 728,784
Net increase in net assets 745,205
NET ASSETS:
Beginning of period -
End of period (including undistributed net investment
income of $11,048) $ 745,205
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-116
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the Year
Ended
10/31/96
Per share data (for a share outstanding throughout
the period )
<S> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $10.00
Income from investment operations:
Net investment income 0.349
Net realized and unrealized gain on investments 0.137
Total from investment operations 0.486
Less distributions to shareholders:
From net investment income (0.196)
NET ASSET VALUE - END OF PERIOD $10.29
Total return1 4.94%
Ratios (to average net assets) / Supplemental Data:
Expenses* 1.00%
Net investment income* 4.26%
Portfolio turnover 30%
Average commission rate paid $0.0691
NET ASSETS - END OF PERIOD (000'S OMITTED) $745
*The investment advisor did not impose its management fee and paid a
portion of the Fund's expenses. If these expenses had been incurred by the
Fund, expenses would have been limited to that allowed by state securities
law and the net investment income per share and the ratios would have been
as follows:
Net investment income $0.226
Ratios (to average net assets):
Expenses 2.50%
Net investment income 2.76%
1 Represents aggregate total return for the period indicated
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-117
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Defensive Series (the "Fund") is a no-load diversified series of Manning
& Napier Fund, Inc.(the "Corporation"). The Corporation is organized as a
Maryland Corporation and is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Defensive Series Class
E Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities, including domestic equities, foreign equities,
options and corporate bonds, listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not
listed on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are valued
at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains
on investments in accordance with requirements of the Internal Revenue Code.
Accordingly, no provision for federal income tax or excise tax has been made
in the financial statements.
B-118
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES (CONTINUED)
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
semi-annually. Distributions are recorded on the ex-dividend date.
Distributions of net realized gains are distributed annually. An additional
distribution may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, character reclassification between net
income and net gains, or other tax adjustments. As a result, net investment
income (loss) and net investment gain (loss) on investment transactions for a
reporting period may differ significantly from distributions to shareholders
during such period. As a result, the Fund may periodically make
reclassifications among its capital accounts without impacting the Fund's net
asset value.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 0.8% of the Fund's
average daily net assets. The fee amounted to $3,940 for the year ended
October 31, 1996.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
B-119
<PAGE>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 1.0% of average daily net assets each year.
Accordingly, the Advisor did not impose any of its fee and paid expenses
amounting to $17,893 for the year ended October 31, 1996, which is reflected
as a reduction of expenses on the Statement of Operations. The fee waiver
and assumption of expenses by the Advisor is voluntary and may be terminated
at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $118 for the year ended October 31,
1996.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $6,840 for the
year ended October 31, 1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$833,564 and $127,622, respectively, for the year ended October 31, 1996.
<TABLE>
<CAPTION>
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Defensive Series Class E Common Stock were:
For the Year
Ended 10/31/96
Shares Amount
--------------- ---------
<S> <C> <C>
Sold 76,159 $766,290
Reinvested 1,010 10,030
Repurchased (4,727) (47,536)
Total 72,442 728,784
</TABLE>
The Advisor owned 12,747 shares on October 31, 1996.
B-120
<PAGE>
Notes to Financial Statements
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include
written options, forward foreign currency exchange contracts, and futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. No such investments
were held by the Fund on October 31, 1996.
B-121
<PAGE>
Independent Auditors'Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF DEFENSIVE SERIES:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Defensive Series (one of the series
constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the related
statements of operations and changes in net assets and the financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of October 31,
1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Defensive
Series at October 31, 1996, the results of its operations, the changes in its
net assets and its financial highlights for the respective stated period in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-122
<PAGE>
Manning & Napier Fund, Inc.
Maximum Horizon Series
Annual Report
October 31, 1996
Management Discussion and Analysis
Dear Shareholders:
Since we last reported to you six months ago, the markets have again
exhibited the upward and downward swings akin to the later stages of economic
and market cycles. Midway through this period we saw the Dow Jones
Industrial Average take a considerable dive, only to end this semi-annual
reporting cycle above the record-breaking 6000 mark. Likewise, the 30-year
U.S. Treasury yield rose to over 7% during this period, but bonds recovered
nicely by the end of October. However, as we have anticipated thus far,
economic growth has remained moderate and inflation has remained in check,
allowing us to take advantage of the buying opportunities that present
themselves.
These gyrations were caused by overreaction to short-term economic data.
Much as happened in March of this year, the news again raised fears of higher
inflation and sent the Dow Jones Industrial Average plunging down 115 points
on July 5th in what was only a half-day of trading due to the holiday. Bonds
followed suit with the yield on the 30-year U.S. Treasury surging 25
basis-points. Many were left wondering whether the Federal Reserve Board
would raise the Fed Funds rate. However, additional evidence throughout the
summer that inflation and economic growth are under control led the Fed to
again leave rates unchanged when they met during the last week of September.
As we continue to adhere to our long-term overview for low inflation and
lower interest rates, the July 5th correction created a buying opportunity in
which we were able to lengthen the maturity of the bonds in the portfolio and
move into equity sectors where valuations proved attractive. We boosted our
exposure to the technology sector, which was the hardest hit by the July
decline, and semiconductor stocks wound up posting the largest gains of any
sector during the third quarter of this year. The stock portion of the
portfolio has continued emphasis in small ticket consumer stocks which we
believe have been branded with the same iron as more cyclical consumer
stocks, thus creating a buying opportunity. In addition, we have increased
our exposure to the health care sector as valuations in that area have proved
attractive as well.
B-123
<PAGE>
Management Discussion and Analysis (continued)
At a time when market valuations in general are high and the bull market
is aging, it is important to be discriminating about the levels of risk
acceptable in funds with different tolerances for volatility. While this
Series has asset allocation discretion, it is designed to place emphasis on
growth rather than on dampening volatility. As a result, even though high
market valuations bring the threat of cyclical volatility, the Series remains
fairly heavily invested because, a) we are able to find individual securities
at more attractive valuations than the market as a whole, and b) looking past
the immediate cycle, we see long-term positive trends that should help the
market. As we continue to move through this mature bull market, we will hold
fast to our disciplines of attempting to identify stocks of companies with
strong strategic positioning in their industry at attractive valuations
versus long-term U.S. Treasury bonds.
We wish you and yours all the best during this holiday season.
Sincerely,
Manning & Napier Advisors, Inc.
[GRAPHIC]
[PIE CHART]
Portfolio Composition - As of 10/31/96
Stocks - 72%
Bonds - 20%
Cash & Equivalents - 8%
B-124
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. - Maximum
Horizon Series from its inception (11/1/95) to present (10/31/96) as
compared to the Standard & Poor's (S&P) 500 Total Return Index. 1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Maximum Horizon Series
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 11,521 15.21% 15.21%
</TABLE>
<TABLE>
<CAPTION>
Standard & Poor's 500 Total Return Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 12,408 24.08% 24.08%
</TABLE>
1 The Standard & Poor's (S&P) 500 Total Return Index is an unmanaged
capitalization-weighted measure of approximately 500 widely held common
stocks listed on the New York Stock Exchange, American Stock Exchange, and
Over-the-Counter market. The Index returns assume reinvestment of income
and, unlike Fund returns, do not reflect any fees or expenses.
2 The Fund and Index performance are calculated from November 1, 1995, the
Fund's inception date. The Fund's performance is historical and may not be
indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Standard & Poors (S&P) 500
Maximum Horizon Series Total Return Index
<S> <C> <C>
11/01/95 $ 10,000 $ 10,000
01/31/96 10,492 11,001
04/30/96 10,753 11,376
07/31/96 10,640 11,196
10/31/96 11,521 12,408
</TABLE>
B-125
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
COMMON STOCK - 72.40%
<S> <C> <C>
AIR TRANSPORTATION- 2.43%
Federal Express Corp.* 475 $ 38,237
APPAREL - 4.05%
VF Corp. 975 63,741
CHEMICAL & ALLIED PRODUCTS - 2.88%
BIOLOGICAL PRODUCTS - 0.18%
Alliance Pharmaceutical Corp.* 200 2,800
HOUSEHOLD PRODUCTS -2.05%
Procter & Gamble Co. 325 32,175
INDUSTRIAL ORGANIC CHEMICALS - 0.65%
International Specialty Products, Inc.* 600 6,525
Varitronix International Ltd. (Note 7) 2,000 3,647
10,172
45,147
COMMUNICATIONS - 4.01%
Stet Societa' Finanziaria Telefonica S.p.A. - ADR 950 32,894
Telefonica de Espana - ADR 500 30,125
63,019
COMPUTER EQUIPMENT - 0.19%
Cisco Systems, Inc.* 25 1,547
Digital Equipment, Corp.* 50 1,475
3,022
CRUDE PETROLEUM & NATURAL GAS - 2.60%
Seagull Energy Corp.* 125 2,703
YPF Sociedad Anonima - ADR 1,675 38,106
40,809
ELECTROMEDICAL APPARATUS - 3.78%
Nellcor Puritan Bennett, Inc.* 3,050 59,475
ELECTRONICS & ELECTRICAL EQUIPMENT - 7.04%
HOUSEHOLD APPLIANCES - 0.35%
Sunbeam Corporation, Inc. 225 5,541
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-126
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
ELECTRONICS & ELECTRICAL EQUIPMENT (CONTINUED)
SEMICONDUCTORS - 5.33%
Altera Corp.* 50 $ 3,100
Intel Corp. 275 30,216
Texas Instruments, Inc. 1,050 50,531
83,847
TELECOMMUNICATION EQUIPMENT - 1.36%
BroadBand Technologies, Inc.* 225 4,022
DSC Communications Corp.* 50 694
General Instrument Corp.* 825 16,603
21,319
110,707
ENGINEERING SERVICES - 0.60%
Jacobs Engineering Group, Inc.* 425 9,403
FABRICATED METAL PRODUCTS - 0.40%
Keystone International, Inc. 175 3,150
Material Sciences Corp.* 200 3,050
6,200
FOOD & BEVERAGES - 0.07%
Canandaigua Wine Co., Inc. - Class A* 50 1,125
GLASS PRODUCTS - 0.15%
Libbey, Inc. 100 2,400
HEALTH SERVICES - 3.29%
MedPartners, Inc.* 2,300 48,588
RehabCare Group, Inc.* 150 2,681
U. S. Physical Therapy, Inc.* 50 462
51,731
HOLDING COMPANIES - 0.04%
Ek Chor China Motorcycle Co. Ltd. 100 588
PAPER & ALLIED PRODUCTS - 5.51%
Alco Standard Corp. 725 33,622
Fort Howard Corp.* 1,250 32,031
Kimberly-Clark Corp. 225 20,981
86,634
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-127
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
PLASTIC PRODUCTS - 0.01%
Sun Coast Industries, Inc.* 325 $ 1,259
PRIMARY METAL INDUSTRIES - 0.16%
American Superconductor Corp.* 200 2,475
RESTAURANTS - 4.43%
McDonald's Corp. 1,500 66,562
Morton's Restaurant Group, Inc.* 200 3,075
69,637
RETAIL - 18.99%
RETAIL - DEPARTMENT STORES - 3.15%
Nordstrom, Inc. 1,375 49,586
RETAIL - HOME FURNISHING STORES - 0.25%
Pier 1 Imports, Inc. 275 3,850
RETAIL - SHOE STORES - 0.30%
Brown Group, Inc. 225 4,641
RETAIL - SPECIALTY STORES - 13.50%
Fabri-Centers of America - Class A* 1,075 13,975
Fabri-Centers of America - Class B* 900 11,700
Fingerhut Companies, Inc. 1,450 21,569
Hancock Fabrics, Inc. 1,250 10,625
Home Depot, Inc. 925 50,644
Office Depot, Inc.* 725 14,228
Tandy Corp. 1,575 59,259
Toys "R" Us, Inc.* 900 30,488
212,488
RETAIL - WHOLESALE - 1.79%
Coleman Company, Inc.* 2,125 28,156
298,721
SOFTWARE - 4.69%
Founder Hong Kong Ltd.* (Note 7) 3,000 1,164
Informix Corp.* 1,100 24,406
Oracle Corp.* 1,075 45,486
Symantec Corp.* 250 2,719
73,775
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-128
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
Principal Amount/ VALUE
SHARES (NOTE 2)
<S> <C> <C>
TECHNICAL INSTRUMENTS & SUPPLIES - 5.17%
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 5.07%
Eastman Kodak Co. 1,000 $ 79,750
SURGICAL & MEDICAL INSTRUMENTS - 0.10%
Allied Healthcare Products, Inc.* 225 1,519
81,269
UTILITIES-ELECTRIC - 1.91%
Enersis S.A.- ADR 1,025 30,109
TOTAL COMMON STOCK
(Identified Cost $1,108,840) 1,139,483
U.S. TREASURY BONDS - 20.13%
U.S. Treasury Bond, 6.875%, 8/15/2025
(Identified Cost $308,435) $ 310,000 316,878
SHORT-TERM INVESTMENTS - 7.45%
U.S. Treasury Bill, 11/29/1996 40,000 39,849
Dreyfus U.S. Treasury Money Market Reserves 77,394 77,394
TOTAL SHORT-TERM INVESTMENTS
(Identified Cost $117,243 ) 117,243
TOTAL INVESTMENTS - 99.98%
(Identified Cost $1,534,518 ) 1,573,604
OTHER ASSETS, LESS LIABILITIES - 0.02% 387
NET ASSETS - 100% $1,573,991
</TABLE>
*Non-income producing security
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $1,536,040 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost $ 68,096
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value (30,532)
UNREALIZED APPRECIATION - NET $ 37,564
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-129
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
OCTOBER 31, 1996
<S> <C>
ASSETS:
Investments, at value (Identified Cost $1,534,518)(Note 2) $1,573,604
Interest receivable 4,517
Dividends receivable 218
Receivable from investment advisor (Note 3) 19,574
TOTAL ASSETS 1,597,913
LIABILITIES:
Accrued Directors' fees (Note 3) 6,839
Transfer agent fees payable (Note 3) 105
Audit fee payable 7,225
Other payables and accrued expenses 6,105
Payable for securities purchased 3,648
TOTAL LIABILITIES 23,922
NET ASSETS FOR 138,282 SHARES OUTSTANDING $1,573,991
NET ASSETS CONSIST OF:
Capital stock $ 1,383
Additional paid-in-capital 1,519,745
Undistributed net investment income 3,342
Accumulated net realized gain on investments 10,435
Net unrealized appreciation on investments 39,086
TOTAL NET ASSETS $1,573,991
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($1,573,991/138,282 shares) $ 11.38
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-130
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
FOR THE YEAR ENDED OCTOBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Interest $ 9,431
Dividends 3,422
Total Investment Income 12,853
EXPENSES:
Management fees (Note 3) 4,377
Directors' fees (Note 3) 6,839
Transfer agent fees (Note 3) 105
Audit fee 8,000
Registration and filing fees 4,550
Custodian fee 4,237
Miscellaneous 1,146
Total Expenses 29,254
Less Waiver of Expenses (Note 3) (23,951)
Net Expenses 5,303
NET INVESTMENT INCOME 7,550
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments (identified cost basis) 10,435
Net change in unrealized appreciation on investments 39,086
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 49,521
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 57,071
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-131
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Year
Ended
10/31/96
INCREASE (DECREASE) IN NET ASSETS:
<S> <C>
OPERATIONS:
Net investment income $ 7,550
Net realized gain on investments 10,435
Net change in unrealized appreciation on investments 39,086
Net increase in net assets from operations 57,071
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (4,208)
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase in net assets from capital share
transactions (Note 5) 1,521,128
Net increase in net assets 1,573,991
NET ASSETS:
Beginning of period -
End of period (including undistributed net investment
income of $3,342) $ 1,573,991
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-132
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the Year
Ended
10/31/96
Per share data (for a share outstanding throughout
the period):
<S> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.00
Income from investment operations:
Net investment income 0.155
Net realized and unrealized gain on investments 1.356
Total from investment operations 1.511
Less distributions to shareholders:
From net investment income (0.131)
NET ASSET VALUE - END OF PERIOD $ 11.38
Total return 1 15.21%
Ratios (to average net assets) / Supplemental Data:
Expenses* 1.20%
Net investment income* 1.71%
Portfolio turnover 95%
Average commission rate paid $ 0.0655
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 1,574
* The investment advisor did not impose its management fee and paid a portion of
the Fund's expenses. If these expenses had been incurred by the Fund, expenses
would have been limited to that allowed by state securities law and the net
investment income per share and the ratios would have been as follows:
Net investment income $ 0.037
Ratios (to average net assets):
Expenses 2.50%
Net investment income 0.41%
1 Represents aggregate total return for the period indicated
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-133
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Maximum Horizon Series (the "Fund") is a no-load diversified series of
Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is
organized as a Maryland Corporation and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 100 million have been designated as Maximum Horizon Series
Class B Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities, including domestic equities, foreign equities,
options and corporate bonds, listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not
listed on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are valued
at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
B-133
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains
on investments in accordance with requirements of the Internal Revenue Code.
Accordingly, no provision for federal income tax or excise tax has been made
in the financial statements.
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made
semi-annually. Distributions are recorded on the ex-dividend date.
Distributions of net realized gains are distributed annually. An additional
distribution may be necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, character reclassification between net
income and net gains, or other tax adjustments. As a result, net investment
income (loss) and net investment gain (loss) on investment transactions for a
reporting period may differ significantly from distributions to shareholders
during such period. As a result, the Fund may periodically make
reclassifications among its capital accounts without impacting the Fund's net
asset value.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars.
Foreign currency amounts are translated into U.S. dollars on the following
basis: a) investment securities, other assets and liabilities are converted
to U.S. dollars based upon current exchange rates; and b) purchases and sales
of securities and income and expenses are converted into U.S. dollars based
upon the currency exchange rates prevailing on the respective dates of such
transactions.
Gains and losses attributable to foreign currency exchange rates are
recorded for financial statement purposes as net realized gains and losses on
investments. The portion of both realized and unrealized gains and losses on
investments that result from fluctuations in foreign currency exchange rates
is not separately stated.
B-134
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reorted amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 1.0% of the Fund's
average daily net assets. The fee amounted to $4,377 for the year ended
October 31, 1996.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 1.2% of average daily net assets each year.
Accordingly, the Advisor did not impose any of its fee and paid expenses
amounting to $19,574 for the year ended October 31, 1996, which is reflected
as a reduction of expenses on the Statement of Operations. The fee waiver
and assumption of expenses by the Advisor is voluntary and may be terminated
at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $105 for the year ended October 31,
1996.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $6,839 for the
year ended October 31, 1996.
B-135
<PAGE>
Notes to Financial Statements
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$1,833,788 and $426,775, respectively, for the year ended October 31, 1996.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Maximum Horizon Series Class B Common Stock were:
<TABLE>
<CAPTION>
For the Year
Ended 10/31/96
Shares Amount
--------------- -----------
<S> <C> <C>
Sold 148,143 $1,624,294
Reinvested 390 4,209
Repurchased (10,251) (107,375)
Total 138,282 $1,521,128
The Advisor owned 12,654 shares on October 31, 1996.
</TABLE>
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include
written options, forward foreign currency exchange contracts, and futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. No such investments
were held by the Fund on October 31, 1996.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in securities of U.S. companies and the United States government.
These risks include revaluation of currencies and potential adverse political
and economic developments. Moreover, securities of many foreign companies
and foreign governments and their markets may be less liquid and their prices
more volatile than those of securities of comparable U.S. companies and the
United States government.
B-136
<PAGE>
Independent Auditors'Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF MAXIMUM HORIZON SERIES:
We have audited the accompanying statement of assets and liabilities,
including the investment portfolio, of Maximum Horizon Series (one of the
series constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the
related statements of operations and changes in net assets and the financial
highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Funds management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of October 31,
1996 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Maximum
Horizon Series at October 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-137
<PAGE>
Manning & Napier Fund, Inc.
Tax Managed Series
Annual Report
October 31, 1996
<PAGE>
Management Discussion and Analysis
Dear Shareholders:
We have reached the close of the first fiscal year for the Tax Managed
Series of the Manning & Napier Fund. By drawing upon the investment
strategies and disciplines of the Funds Advisor, the Series has pursued
levels of return associated with the stock market while minimizing the impact
of taxes.
Given the ultimate goal of this Series and the long-term investment time
horizon of the shareholders, we have continued to adhere to our buy and hold
strategy that aims to minimize the amount of realized gains. Our turnover
rate during the past six months is relatively low, with steps taken to offset
taxable gains by realizing losses when the Advisor deems it to be prudent.
In addition, the Series did not pay out any dividends during this period,
another factor that can impact taxes. The Series has also continued to
invest its assets in equity securities, selecting companies that meet our
investment strategies and have strong long-term business prospects. Of
course, the goals of the Series are long-term, so performance should be
evaluated over the long-term. However, this approach has worked well for the
Series thus far, with satisfying short-term performance results.
We will continue to look for the best long-term equity investments that
present attractive valuations and to strive to minimize realized gains. We
expect this strategy to prove itself to your taxation concerns and your
ong-term performance goals.
We wish you and yours all the best during this holiday season.
Sincerely,
Manning & Napier Advisors, Inc.
B-138
<PAGE>
[GRAPHIC]
[PIE CHART]
Portfolio Composition - As of 10/31/96
Apparel - 3%
Air Transportation - 4%
Chemicals & Allied Products - 8%
Communications - 3%
Electromedical Apparatus - 3%
Electronics & Electrical Equipment - 23%
Health Services - 5%
Paper Mills - 6%
Photographic Equipment & Supplies - 5%
Restaurants - 5%
Retail - 19%
Software - 4%
Miscellaneous* - 12%
* Miscellaneous includes:
Computer Equipment
Fabricated Metal Products
Glass Products
Primary Metal Industries
Printing & Publishing
Utilities - Electric
Cash & Equivalents
B-139
<PAGE>
Performance Update as of October 31, 1996
The value of a $10,000 investment in the Manning & Napier Fund, Inc. -
Tax Managed Series from its inception (11/1/95) to present (10/31/96) as
compared to the Standard & Poor's (S&P) 500 Total Return Index. 1
<TABLE>
<CAPTION>
Manning & Napier Fund, Inc. - Tax Managed Series
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 11,630 16.30% 16.30%
</TABLE>
<TABLE>
<CAPTION>
Standard & Poor's (S&P) 500 Total Return Index
Total Return
Growth of
Through $10,000 Average
10/31/96 Investment Cumulative Annual
<S> <C> <C> <C>
Inception 2 $ 12,408 24.08% 24.08%
</TABLE>
1The Standard & Poor's (S&P) 500 Total Return Index is an unmanaged
capitalization-weighted measure of 500 widely held common stocks
listed on the New York Stock Exchange, American Stock Exchange,
and the Over-the-Counter Market. The Index returns assume
reinvestment of income and, unlike Fund returns, do not reflect any fees
or expenses.
2 The Fund and Index performance are calculated from November 1,
1995, the Fund's inception date. The Fund's performance is historical
and may not be indicative of future results.
[GRAPHIC]
LINE CHART
Data for Line Chart to follow:
<TABLE>
<CAPTION>
Manning & Napier Standard & Poors (S&P) 500
Tax Managed Series Total Return Index
<S> <C> <C>
11/01/95 $ 10,000 $ 10,000
01/31/96 10,100 11,001
04/30/96 10,980 11,376
07/31/96 10770 11,196
10/31/96 11,630 12,408
</TABLE>
B-140
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
COMMON STOCK - 97.50%
<S> <C> <C>
AIR TRANSPORTATION - 3.59%
Federal Express Corp.* 100 $ 8,050
---------
APPAREL - 2.91%
VF Corp. 100 6,537
---------
CHEMICAL & ALLIED PRODUCTS - 8.34%
BIOLOGICAL PRODUCTS - 2.03%
Alliance Pharmaceutical Corp.* 325 4,550
---------
HOUSEHOLD PRODUCTS - 6.31%
Colgate-Palmolive Co. 100 9,200
Procter & Gamble Co. 50 4,950
14,150
18,700
COMMUNICATIONS - 2.69%
Telefonica de Espana - ADR 100 6,025
---------
COMPUTER EQUIPMENT - 1.31%
Digital Equipment, Corp.* 100 2,950
---------
ELECTROMEDICAL APPARATUS - 2.61%
Nellcor Puritan Bennett, Inc.* 300 5,850
---------
ELECTRONICS & ELECTRICAL EQUIPMENT - 22.72%
HOUSEHOLD APPLIANCES - 4.39%
Sunbeam Corporation, Inc. 400 9,850
---------
SEMICONDUCTORS - 14.33%
Altera Corp.* 175 10,850
Intel Corp. 150 16,481
Texas Instruments, Inc. 100 4,812
32,143
TELECOMMUNICATION EQUIPMENT - 4.00%
BroadBand Technologies, Inc.* 250 4,469
General Instrument Corp.* 225 4,528
8,997
50,990
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-141
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
FABRICATED METAL PRODUCTS - 1.53%
Material Sciences Corp.* 225 $3,431
GLASS PRODUCTS - 1.34%
Libbey, Inc. 125 3,000
HEALTH SERVICES - 5.16%
MedPartners, Inc.* 302 6,380
RehabCare Group, Inc.* 175 3,128
U. S. Physical Therapy, Inc.* 225 2,081
11,589
PAPER MILLS - 6.15%
Fort Howard Corp.* 175 4,484
Kimberly-Clark Corp. 100 9,325
13,809
PHOTOGRAPHIC EQUIPMENT & SUPPLIES - 5.33%
Eastman Kodak Co. 150 11,962
--------
PRIMARY METAL INDUSTRIES - 2.16%
Gibraltar Steel Corp.* 200 4,850
--------
PRINTING & PUBLISHING - 1.60%
Playboy Enterprises, Inc. - Class B* 300 3,600
--------
RESTAURANTS - 5.33%
McDonald's Corp. 200 8,875
Morton's Restaurant Group, Inc.* 200 3,075
11,950
RETAIL - 18.84%
RETAIL - HOME FURNISHING STORES - 2.18%
Pier 1 Imports, Inc. 350 4,900
RETAIL - SPECIALTY STORES - 14.00%
Fingerhut Companies, Inc. 500 7,438
Home Depot, Inc. 175 9,581
Office Depot, Inc.* 350 6,869
Tandy Corp. 200 7,525
31,413
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-142
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio - October 31, 1996
VALUE
SHARES (NOTE 2)
<S> <C> <C>
RETAIL (CONTINUED)
RETAIL - VARIETY STORES - 2.66%
Family Dollar Stores, Inc. 350 $ 5,950
42,263
SOFTWARE - 3.93%
Informix Corp.* 250 5,549
Symantec Corp.* 300 3,263
8,812
UTILITIES-ELECTRIC - 1.96%
Enersis S.A.- ADR 150 4,406
---------
TOTAL COMMON STOCK
(Identified Cost $187,623) 218,774
---------
SHORT-TERM INVESTMENTS - 2.30%
Dreyfus U.S. Treasury Money Market Reserves
(Identified Cost $5,148) 5,148 5,148
---------
TOTAL INVESTMENTS - 99.80%
(Identified Cost $192,771) 223,922
OTHER ASSETS, LESS LIABILITIES - 0.20% 458
---------
NET ASSETS - 100% $224,380
=========
</TABLE>
*Non-income producing security
<TABLE>
<CAPTION>
FEDERAL TAX INFORMATION:
At October 31, 1996, the net unrealized appreciation based on identified cost for
federal income tax purposes of $192,771 was as follows:
<S> <C>
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost $37,610
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost value (6,459)
UNREALIZED APPRECIATION - NET $31,151
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-143
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
OCTOBER 31, 1996
<S> <C>
ASSETS:
Investments, at value (Identified Cost $192,771)(Note 2) $223,922
Dividends receivable 97
Receivable from investment advisor (Note 3) 20,327
TOTAL ASSETS 244,346
LIABILITIES:
Accrued Directors' fees (Note 3) 6,840
Transfer agent fees payable (Note 3) 45
Audit fee payable 7,225
Other payables and accrued expenses 5,856
TOTAL LIABILITIES 19,966
NET ASSETS FOR 19,300 SHARES OUTSTANDING $224,380
NET ASSETS CONSIST OF:
Capital stock $ 193
Additional paid-in-capital 193,281
Accumulated net realized loss on investments (245)
Net unrealized appreciation on investments 31,151
TOTAL NET ASSETS $224,380
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PRICE PER SHARE
($224,380 / 19,300 shares) $ 11.63
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-144
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations
FOR THE YEAR ENDED OCTOBER 31, 1996
<S> <C>
INVESTMENT INCOME:
Dividends $ 1,477
Interest 381
Total Investment Income 1,858
EXPENSES:
Management fees (Note 3) 1,867
Directors' fees (Note 3) 6,840
Transfer agent fees (Note 3) 45
Audit fee 8,000
Custodian fee 2,254
Miscellaneous 5,436
Total Expenses 24,442
Less Waiver of Expenses (Note 3) (22,194)
Net Expenses 2,248
NET INVESTMENT LOSS (390)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments (identified cost basis) (245)
Net change in unrealized appreciation on investments 31,151
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS 30,906
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $ 30,516
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-145
<PAGE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Year
Ended
10/31/96
--------------
INCREASE (DECREASE) IN NET ASSETS:
<S> <C>
OPERATIONS:
Net investment loss $ (390)
Net realized loss on investments (245)
Net change in unrealized appreciation on investments 31,151
Net increase in net assets from operations 30,516
CAPITAL STOCK ISSUED AND REDEEMED:
Net increase in net assets from capital share
transactions (Note 5) 193,864
Net increase in net assets 224,380
NET ASSETS:
Beginning of period -
End of period (including accumulated net investment
loss of $0) $ 224,380
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-146
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
For the Year
Ended
10/31/96
--------------
Per share data (for a share outstanding throughout
the period):
<S> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 10.00
Income from investment operations:
Net investment loss (0.020)
Net realized and unrealized gain (loss)
on investments 1.650
Total from investment operations 1.630
NET ASSET VALUE - END OF PERIOD $ 11.63
Total return 1 16.30%
Ratios (to average net assets) / Supplemental Data:
Expenses* 1.20%
Net investment loss* (0.21%)
Portfolio turnover 78%
Average commission rate paid $ 0.0757
NET ASSETS - END OF PERIOD (000'S OMITTED) $ 224
* The investment advisor did not impose its management fee and paid a
portion of the Fund's expenses. If these expenses had been incurred by the
Fund, expenses would have been limited to that allowed by state securities law
and the net investment income per share and the ratios would have been
as follows:
Net investment loss ($0.144)
Ratios (to average net assets):
Expenses 2.50%
Net investment loss (1.51%)
1 Represents aggregate total return for the period indicated
</TABLE>
The accompanying notes are an integral part of the financial statements.
B-147
<PAGE>
Notes to Financial Statements
1. ORGANIZATION
Tax Managed Series (the "Fund") is a no-load diversified series of
Manning & Napier Fund, Inc. (the "Corporation"). The Corporation is
organized as a Maryland Corporation and is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment
company.
The total authorized capital stock of the Corporation consists of one
billion shares of common stock each having a par value of $0.01. As of
October 31, 1996, 940 million shares have been designated in total among 19
series, of which 50 million have been designated as Tax Managed Series Class
H Common Stock.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Portfolio securities, including domestic equities, foreign equities,
options and corporate bonds, listed on an exchange are valued at the latest
quoted sales price of the exchange on which the security is traded most
extensively. Securities not traded on valuation date or securities not
listed on an exchange are valued at the latest quoted bid price.
Debt securities, including government bonds and mortgage backed
securities, will normally be valued on the basis of evaluated bid prices.
Securities for which representative prices are not available from the
Fund's pricing service are valued at 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.
Short-term investments that mature in sixty (60) days or less are valued
at amortized cost.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND EXPENSES
Security transactions are accounted for on the date the securities are
purchased or sold. Dividend income is recorded on the ex-dividend date.
Interest income and expenses are recorded on an accrual basis.
Most expenses of the Corporation can be attributed to a specific fund.
Expenses which cannot be directly attributed are apportioned among the funds
in the Corporation.
FEDERAL INCOME TAXES
The Fund's policy is to comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies. The Fund is not
subject to federal income or excise tax to the extent the Fund distributes to
shareholders each year its taxable income, including any net realized gains
on investments in accordance with requirements of the Internal Revenue Code.
Accordingly, no provision for federal income tax or excise tax has been made
in the financial statements.
B-148
<PAGE>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES (CONTINUED)
At October 31, 1996, the Fund, for federal income tax purposes, has a
capital loss carry forward of $245 which will expire on October 31, 2004.
The Fund uses the identified cost method for determining realized gain or
loss on investments for both financial statement and federal income tax
reporting purposes.
DISTRIBUTION OF INCOME AND GAINS
Distributions to shareholders of net investment income are made annually.
Distributions are recorded on the ex-dividend date. Distributions of net
realized gains are distributed annually. An additional distribution may be
necessary to avoid taxation of the Fund.
The timing and characterization of certain income and capital gains are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. The differences may be a
result of deferral of certain losses, character reclassification between net
income and net gains, or other tax adjustments. As a result, net investment
income (loss) and net investment gain (loss) on investment transactions for a
reporting period may differ significantly from distributions to shareholders
during such period. As a result, the Fund may periodically make
reclassifications among its capital accounts without impacting the Fund's net
asset value.
During the year ended October 31, 1996, $390 was reclassified from
accumulated net investment loss to additional paid-in-capital.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
eporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an investment advisory agreement with Manning & Napier
Advisors, Inc. (the "Advisor"), for which the Fund pays the Advisor a fee,
computed daily and payable monthly, at an annual rate of 1.0% of the Fund's
average daily net assets. The fee amounted to $1,867 for the year ended
October 31, 1996.
Under the Fund's Investment Advisory Agreement (the "Agreement"),
personnel of the Advisor provide the Fund with advice and assistance in the
choice of investments and the execution of securities transactions, and
otherwise maintain the Fund's organization. The Advisor also provides the
Fund with necessary office space and portfolio accounting and bookkeeping
services. The salaries of all officers of the Fund and of all Directors who
are "affiliated persons" of the Fund or of the Advisor, and all personnel of
the Fund or of the Advisor performing services relating to research,
statistical and investment activities are paid by the Advisor.
B-149
<PAGE>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
The Advisor has voluntarily agreed to waive its fee and, if necessary,
pay other expenses of the Fund in order to maintain total expenses for the
Fund at no more than 1.2% of average daily net assets each year.
Accordingly, the Advisor did not impose any of its fee and paid expenses
amounting to $20,327 for the year ended October 31, 1996, which is reflected
as a reduction of expenses on the Statement of Operations. The fee waiver
and assumption of expenses by the Advisor is voluntary and may be terminated
at any time.
The Advisor also acts as the transfer, dividend paying and shareholder
servicing agent for the Fund. For these services, the Fund pays a fee which
is calculated as a percentage of the average daily net assets at an annual
rate of 0.024%; this fee amounted to $45 for the year ended October 31, 1996.
Manning & Napier Investor Services, Inc., a registered broker-dealer
affiliate of the Advisor, acts as distributor for the Fund's shares. The
services of Manning & Napier Investor Services, Inc. are provided at no
additional cost to the Fund.
The compensation of the non-affiliated Directors totaled $6,840 for the
year ended October 31, 1996.
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities, other than short-term securities, were
$321,147 and $133,279, respectively, for the year ended October 31, 1996.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Tax Managed Series Class H Common Stock were:
<TABLE>
<CAPTION>
For the Year
Ended 10/31/96
---------------
Shares Amount
--------------- ---------
<S> <C> <C>
Sold 23,344 $235,926
Repurchased (4,044) (42,062)
Total 19,300 193,864
</TABLE>
The Advisor owned 12,500 shares on October 31, 1996.
B-150
<PAGE>
Notes to Financial Statements
6. FINANCIAL INSTRUMENTS
The Fund may trade in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include
written options, forward foreign currency exchange contracts, and futures
contracts and may involve, to a varying degree, elements of risk in excess of
the amounts recognized for financial statement purposes. No such investments
were held by the Fund on October 31, 1996.
B-151
<PAGE>
Independent Auditors' Report
TO THE DIRECTORS OF MANNING & NAPIER FUND, INC.
AND SHAREHOLDERS OF TAX MANAGED SERIES:
We have audited the accompanying statement of assets and liabilities,
icluding the investment portfolio, of Tax Managed Series (one of the series
constituting Manning & Napier Fund, Inc.) as of October 31, 1996, the related
statements of operations and changes in net assets and the financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Funds management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of investments owned as of October 31,
1996 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of Tax
Managed Series at October 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 19, 1996
B-152
