As filed with the Securities and Exchange Commission on April 15, 1996
Registration No. 33-13990/811-5148
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
POST-EFFECTIVE AMENDMENT NO. 30
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 30
THE WOODWARD FUNDS
(Exact Name of Registrant as Specified in Charter)
c/o NBD Bank
900 Tower Drive
P.O. Box 7058
Troy, Michigan 48007-7058
(Address of Principal Executive Offices)
Registrant's Telephone Number:
(313) 259-0729
W. Bruce McConnel, III
DRINKER BIDDLE & REATH
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 15, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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<PAGE>
Registrant has previously registered an indefinite number of its shares of
beneficial interest under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940. Registrant's Rule 24f-2 Notice
for the fiscal year ended December 31, 1995 was filed on February 27, 1996.
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<PAGE>
CROSS REFERENCE SHEET
Series B - Original Class, A - Original Class, O -
Original Class, C - Original Class, and
M - Original Class Representing Interests in the
Class A Shares of the Woodward Money Market, Government,
Treasury Money Market, Tax-Exempt Money Market and
Michigan Tax-Exempt Money Market Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page.................................... Cover page
2. Synopsis...................................... Expense Summary;
Background
3. Financial Highlights.......................... Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant.................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ..................... Management
6. Capital Stock and Other
Securities.................................... Purchase of
Shares; Redemption
of Shares;
Shareholder
Services;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered................................. Purchase of
Shares;
Shareholder
Services;
Management
8. Redemption or Repurchase...................... Redemption of
Shares;
Shareholder
Services
9. Pending Legal Proceedings..................... Inapplicable
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<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following five investment portfolios (the "Portfolios"), each having
its own investment objective and policies as described in this Prospectus:
Class A shares of the:
Woodward Money Market Fund
Woodward Government Fund
Woodward Treasury Money Market Fund
Woodward Tax-Exempt Money Market Fund
Woodward Michigan Tax-Exempt Money Market Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge by writing to The Woodward Funds at the above
address. The Statement of Additional Information bears the same date as this
Prospectus and is incorporated by reference into this Prospectus in its
entirety.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL. THERE
CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A CONSTANT
NET ASSET VALUE OF $1.00 PER SHARE.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Money Market Fund ("Money Market Portfolio"), Woodward
Government Fund ("Government Portfolio"), Woodward Treasury Money Market Fund
("Treasury Portfolio"), Woodward Tax-Exempt Money Market Fund ("Tax-Exempt
Portfolio") and Woodward Michigan Tax-Exempt Money Market Fund ("Michigan
Portfolio"). Class I shares are sold primarily to NBD and its affiliated and
correspondent banks acting on behalf of their respective customers. Class A
shares are sold to the general public primarily through financial institutions
such as banks, brokers and dealers. Class I shares are offered in a separate
Prospectus. Investors should call (800) 688-3350, a Co-Distributor or their
financial institutions if they would like to obtain more information
concerning the Class I shares and/or Class A shares of the Portfolios. The
following table is provided to assist in understanding the various costs and
expenses that an investor will indirectly incur as a beneficial owner of Class
A shares in each of the Portfolios.
<TABLE>
<CAPTION>
Michigan
Money Govern- Tax- Tax-
Market ment Treasury Exempt Exempt
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)............. None None None None None
Sales Load Imposed on
Reinvested Dividends....... None None None None None
Deferred Sales Load........ None None None None None
Redemption Fee............. None None None None None
Exchange Fee............... None None None None None
Annual Operating Expenses
(as a percentage of average
net assets)
Management Fees............... .44% .45% .45% .45% .50%
12b-1 Fees.................... .025% .007% .024% .017% .079%
Shareholder Servicing
Fees(2)..................... .25% .25% .25% .25% .25%
Other Expenses(3)
(before fee waivers
and/or expense
reimbursements)............. .043% .05% .062% .057% .176%
(after fee waivers
and/or expense
reimbursements)............. .035% .043% .026% .033% (.079)%
Total Operating Expenses
(before fee waivers
and/or expense
reimbursements)............ .758% .757% .786% .774% 1.005%
(after fee waivers
and/or expense
reimbursements)............ .75% .75% .75% .75% .75%
<FN>
- --------------------
1. The expenses for each Portfolio have been restated to reflect
current expenses.
2. The Trust has adopted a Shareholder Servicing Plan pursuant to
which the Trust may enter into agreements with institutions under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares in return for a fee of up to .25% per
annum of the value of such shares ("Servicing Fees"). For further information,
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<PAGE>
see "Shareholder Servicing Plan" and "Investment Adviser, Custodian
and Transfer Agent" under the heading "Management" in this Prospectus.
3. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
- -------------------------
</TABLE>
<TABLE>
<CAPTION>
Michigan
Money Govern- Tax- Tax-
Market ment Treasury Exempt Exempt
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
Example
You would pay the following
expenses on a $1,000 investment
assuming:
(1) a 5% annual return and
(2) redemption at the end of
each time period:
<S> <C> <C> <C> <C> <C>
One Year:................ $ 7.68 $ 7.68 $ 7.68 $ 7.68 $ 7.68
Three Years:............. $24.05 $24.05 $24.05 $24.05 $24.05
Five Years:.............. $41.83 $41.83 $41.83 $41.83 $41.83
Ten Years:............... $93.29 $93.29 $93.29 $93.29 $93.29
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE GREATER
OR LESSER THAN THOSE SHOWN.
The example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class A shares in each of the Portfolios,
based upon payment of operating expenses at the respective levels set forth
in the expense table. For more complete descriptions of Portfolio expenses,
see "Investment Adviser, Custodian and Transfer Agent," "Sponsors and
Co-Distributors," "Shareholder Servicing Plan," "Service and Distribution
Plan" and "Trust Expenses" under the heading "Management" in this Prospectus
and the financial statements and related notes contained in the Statement
of Additional Information.
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<PAGE>
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class A
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate Servicing Fees
attributable to such shares exclusively to them. See "Shareholder Servicing
Plan" and "Investment Adviser, Custodian and Transfer Agent" under
"Management," and see "Dividends and Distributions" and "Other Information"
for a description of the impact that this may have on holders of Class A
shares.
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<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of net investment
income and distributions from net investment income for each of the
Portfolios. The tables have been derived from the Portfolios' financial
statements which have been audited by Arthur Andersen, LLP, the Trust's
independent public accountants, whose report thereon is contained in the
Statement of Additional Information along with the financial statements. The
financial data included in these tables should be read in conjunction with the
financial statements and related notes included in the Statement of Additional
Information. Further information about the performance of the Portfolios is
available in annual reports to shareholders. The Statement of Additional
Information and annual reports to shareholders may be obtained from the Trust
free of charge by calling 1-800- 688-3350.
<TABLE>
<CAPTION>
Money Market Portfolio
January 4,
1988
(Commence-
Year Year Year Year Year Year Year ment of
Ended Ended Ended Ended Ended Ended Ended Operations)
Decem- Decem- Decem- Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income .. $ 0.0549 $ 0.0378 $ 0.0281 $ 0.0347 $ 0.0579 $ 0.0784 $ 0.0877 $ 0.0730
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ............ $ 0.0549 $ 0.0378 $ 0.0281 $ 0.0347 $ 0.0579 $ 0.0784 $ 0.0877 $ 0.0730
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends From Net
Investment Income ..... $(0.0549) $(0.0378) $(0.0281) $(0.0347) $(0.0579) $(0.0784) $(0.0877) $(0.0730)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions ... $(0.0549) $(0.0378) $(0.0281) $(0.0347) $(0.0579) $(0.0784) $(0.0877) $(0.0730)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period ................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total Return ............ 5.63% 3.86% 2.85% 3.58% 5.95% 8.14% 9.19% 7.55%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) .... $1,639,695 $1,323,040 $1,326,693 $1,095,354 $775,521 $717,516 $446,466 $250,182
Ratio of Expenses to
Average Net Assets ... 0.51% 0.47% 0.49% 0.52% 0.50% 0.50% 0.51% 0.49%(a)
Ratio of Net Investment
Income to Average Net
Assets .............. 5.49% 3.78% 2.81% 3.47% 5.79% 7.84% 8.77% 7.30%(a)
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Government Portfolio
January 4,
1988
(Commence-
Year Year Year Year Year Year Year ment of
Ended Ended Ended Ended Ended Ended Ended Operations)
Decem- Decem- Decem- Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income ... $ 0.0544 $ 0.0372 $ 0.0277 $ 0.0357 $ 0.0564 $ 0.0769 $ 0.0862 $ 0.0730
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ............ $ 0.0544 $ 0.0372 $ 0.0277 $ 0.0357 $ 0.0564 $ 0.0769 $ 0.0862 $ 0.0730
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends From Net
Investment Income ...... $(0.0544) $(0.0372) $(0.0277) $(0.0357) $(0.0564) $(0.0769) $(0.0862) $(0.0730)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions ..... $(0.0544) $(0.0372) $(0.0277) $(0.0357) $(0.0564) $(0.0769) $(0.0862) $(0.0730)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period .................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total Return ............. 5.57% 3.77% 2.81% 3.63% 5.79% 7.97% 8.98% 7.55%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ...... $474,377 $421,208 $346,665 $261,614 $288,369 $235,858 $196,095 $106,194
Ratio of Expenses to
Average Net Assets ..... 0.51% 0.51% 0.51% 0.51% 0.50% 0.49% 0.50% 0.50%(a)
Ratio of Net Investment
Income to Average Net
Assets ................ 5.44% 3.72% 2.77% 3.57% 5.64% 7.69% 8.62% 7.30%(a)
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Treasury Portfolio
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period ......................... $ 1.00 $ 1.00 $ 1.00
-------- -------- --------
Income from Investment
Operations:
Net Investment Income .......... $ 0.0539 $ 0.0370 $ 0.0273
-------- -------- --------
Total From Investment Operations $ 0.0539 $ 0.0370 $ 0.0273
-------- -------- --------
Less Distributions:
Dividends From Net Investment
Income ....................... $(0.0539) $(0.0370) $(0.0273)
-------- -------- --------
Total Distributions ............ $(0.0539) $(0.0370) $(0.0273)
-------- -------- --------
Net Asset Value, End of Period ... $ 1.00 $ 1.00 $ 1.00
======== ======== ========
Total Return ..................... 5.53% 3.77% 2.77%
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ............ $927,696 $785,694 $854,873
Ratio of Expenses to Average
Net Assets ................... 0.53% 0.50% 0.50%
Ratio of Net Investment
Income to Average Net Assets . 5.39% 3.70% 2.73%
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Tax-Exempt Portfolio
January 4,
1988
(Commence-
Year Year Year Year Year Year Year ment of
Ended Ended Ended Ended Ended Ended Ended Operations)
Decem- Decem- Decem- Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income ... $ 0.0335 $ 0.0242 $ 0.0196 $ 0.0264 $ 0.0422 $ 0.0553 $ 0.0595 $ 0.0498
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ............. $ 0.0355 $ 0.0242 $ 0.0196 $ 0.0264 $ 0.0422 $ 0.0553 $ 0.0595 $ 0.0498
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends From Net
Investment Income ..... $(0.0335) $(0.0242) $(0.0196) $(0.0264) $(0.0422) $(0.0553) $(0.0595) $(0.0498)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions .... $(0.0335) $(0.0242) $(0.0196) $(0.0264) $(0.0422) $(0.0553) $(0.0595) $(0.0498)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total Return ............. 3.41% 2.45% 1.98% 2.70% 4.30% 5.67% 6.11% 5.10%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ..... $564,413 $550,736 $498,706 $379,431 $227,808 $235,451 $210,028 $177,645
Ratio of Expenses to
Average Net Assets .... 0.53% 0.51% 0.51% 0.53% 0.52% 0.52% 0.51% 0.49%(a)
Ratio of Net Investment
Income to Average Net
Assets ................ 3.35% 2.42% 1.96% 2.64% 4.22% 5.53% 5.95% 4.98%(a)
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Michigan Portfolio
January 23,
1991
(Commencement
of
Year Year Year Year Operations)
Ended Ended Ended Ended to
Decem- Decem- Decem- Decem- Decem-
ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations:
Net Investment Income ... $ 0.0329 $ 0.0235 $ 0.0181 $ 0.0237 $ 0.0353
--------- --------- --------- --------- ---------
Total From Investment
Operations ............. $ 0.0329 $ 0.0235 $ 0.0181 $ 0.0237 $ 0.0353
--------- --------- --------- --------- ---------
Less Distributions:
Dividends From Net
Investment Income ...... $ (0.0329) $ (0.0235) $ (0.0181) $ (0.0237) $ (0.0353)
--------- --------- --------- --------- ---------
Total Distributions ..... $ (0.0329) $ (0.0235) $ (0.0181) $ (0.0237) $ (0.0353)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Period .................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return ............. 3.32% 2.38% 1.83% 2.40% 3.83%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ..... $ 122,057 $ 78,640 $ 52,557 $ 52,960 $ 38,885
Ratio of Expenses to
Average Net Assets .... 0.69% 0.67% 0.65% 0.64% 0.65%(a)
Ratio of Net Investment
Income to Average Net
Assets ................ 3.30% 2.35% 1.81% 2.37% 3.77%(a)
Ratio of Expenses to
Average Net Assets
Without Fee Waiver .... 0.76% 0.75% -- -- --
Ratio of Net Investment
Income to Average
Net Assets Without
Fee Waiver ............ 3.23% 2.28% -- -- --
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objective and
policies. However, only the Class A shares of the Money Market, Government,
Treasury, Tax-Exempt and Michigan Portfolios are offered pursuant to this
Prospectus. Under the 1940 Act, the Michigan Portfolio is classified as a
non-diversified investment portfolio and the other Portfolios are classified
as diversified investment portfolios.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
such Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Money Market Portfolio, Government Portfolio and Treasury Portfolio
The investment objective of the Money Market Portfolio, Government
Portfolio and Treasury Portfolio is to provide a high level of current income
consistent with the preservation of capital and liquidity.
In seeking to achieve its investment objective, the Money Market
Portfolio invests in the following high quality "money market" instruments:
(1) Obligations issued or guaranteed as to payment of
principal and interest by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Obligations");
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<PAGE>
(2) U.S. dollar denominated obligations issued or guaranteed
by the government of Canada, a Province of Canada, or an
instrumentality or political subdivision thereof;
(3) Certificates of deposit, bankers' acceptances and time
deposits of U.S. banks or other U.S. financial institutions (including
foreign branches of such banks and institutions) having total assets
in excess of $1 billion and which are members of the Federal Reserve
System or the Federal Deposit Insurance Corporation ("FDIC");
(4) Certificates of deposit, bankers' acceptances and time
deposits of foreign banks and U.S. branches of foreign banks having
assets in excess of the equivalent of $1 billion;
(5) Commercial paper, other short term obligations and
variable rate master demand notes, bonds, debentures and notes; and
(6) Repurchase agreements relating to the above instruments.
In seeking to achieve its investment objective, the Government
Portfolio invests in:
(1) U.S. Government Obligations; and
(2) Repurchase agreements relating to the above obligations.
In seeking to achieve its investment objective, the Treasury Portfolio
invests in:
(1) U.S. Treasury bills, notes, and direct U.S. Treasury
obligations having remaining maturities of 13 months or less; and
(2) Repurchase agreements relating to direct U.S. Treasury
obligations.
In accordance with current SEC regulations, the Money Market,
Government and Treasury Portfolios will limit their respective purchases of
the securities of any one issuer (other than U.S. Government Obligations and
repurchase agreements collateralized by such obligations) to 5% of their
respective total assets, except that each Portfolio may invest more than 5%
but no more than 25% of its total assets in "First Tier Securities" of one
issuer for a period of up to three business days. First Tier Securities
include "eligible securities" (defined below under "Policies Applicable to all
Portfolios") that (i) if rated by more than one nationally recognized
statistical rating organization ("Rating Agency"), are rated (at the time of
purchase) by two or more Rating Agencies in the highest rating category for
such securities, (ii) if rated by only one Rating Agency, are rated by such
Rating Agency in its highest rating category for such securities, (iii) have
no short term rating but have been issued by an issuer that has other
outstanding short term obligations that have been rated in accordance with (i)
or (ii) above and are comparable in priority and security to such securities,
and (iv) are certain unrated securities that have been determined by NBD to be
of comparable quality to such securities pursuant to guidelines established by
the Trust's Board of Trustees. In addition, the Money Market and Government
Portfolios will limit their investments in "Second Tier Securities" (which are
eligible securities other than First Tier Securities) to 5% of their
respective total assets, with investments in any one issuer of such securities
being limited to no more than 1% of their respective total assets or $1
million, whichever is greater. Because of these limitations, the Money Market,
Government and Treasury Portfolios will not be able to purchase lower rated or
longer term securities from which a higher income, although a greater degree
of risk, might be derived.
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Tax-Exempt Portfolio and Michigan Portfolio
The investment objective of the Tax-Exempt Portfolio is to provide a
high level of current interest income that is exempt from federal income taxes
consistent with the preservation of capital and liquidity. In seeking to
achieve its investment objective, the Portfolio invests in high quality debt
obligations issued by states, territories and possessions of the United
States, by the District of Columbia, and by their respective political
subdivisions, agencies, instrumentalities and authorities, the interest on
which is, in the opinion of bond counsel for the issuers, exempt from regular
federal income tax ("Municipal Securities").
The investment objective of the Michigan Portfolio is to provide a
high level of current interest income that is exempt from federal and State of
Michigan income taxes, consistent with the preservation of capital and
liquidity. In seeking to achieve its investment objective, the Portfolio
invests in high quality debt obligations issued by the State of Michigan, its
political subdivisions, municipalities, corporations and authorities, the
interest on which, in the opinion of bond counsel to the issuers, is exempt
from federal and State of Michigan income taxes ("Michigan Municipal
Securities") and in related repurchase agreements. Income earned by the
Portfolio with respect to repurchase agreements is not exempt from federal
income tax. To the extent acceptable Michigan Municipal Securities are at any
time unavailable for investment by the Portfolio, the Portfolio invests
primarily in other Municipal Securities the interest on which is, in the
opinion of bond counsel, exempt from federal, but not State of Michigan,
income tax.
Municipal Securities acquired by the Tax-Exempt Portfolio or Michigan
Portfolio include:
(1) Municipal bonds;
(2) Municipal notes;
(3) Variable rate demand notes;
(4) Tax-exempt commercial paper and floating rate
instruments; and
(5) Unrated notes, paper or other instruments that are of
comparable quality as determined by the Adviser under guidelines
established by the Trust's Board of Trustees. Where necessary to
assure that an instrument is of high quality, the Portfolios may only
purchase the instrument if the issuer's obligation to pay the
principal is backed by an unconditional bank letter of credit, line of
credit, guaranty or commitment to lend.
At least 80% of each of the Tax-Exempt Portfolio's and Michigan
Portfolio's total assets will be invested in Municipal Securities except in
extraordinary circumstances, such as when the Adviser believes that market
conditions indicate that a Portfolio should adopt a temporary defensive
position by holding uninvested cash or investing in taxable short term
securities ("Taxable Investments"), such as those in which the Money Market
Portfolio may invest. This policy is fundamental with respect to the
Tax-Exempt Portfolio and Michigan Portfolio and may not be changed without the
approval of the holders of a majority of a Portfolio's outstanding shares. In
addition, with respect to the Michigan Portfolio, at least 65% of its total
assets will be invested under normal market conditions in Michigan Municipal
Securities and the remainder may be invested in securities that are not
Michigan Municipal Securities and therefore may be subject to Michigan income
taxes. See "Taxes."
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Policies Applicable To All Portfolios
Each Portfolio will only purchase "eligible securities" that present
minimal credit risks as determined by the Adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities include (i)
U.S. Government Obligations, (ii) securities that are rated (at the time of
purchase) by Rating Agencies in the two highest rating categories for such
securities, and (iii) certain securities that are not so rated but are of
comparable quality to rated eligible securities as determined by the Adviser.
See "Investment Objectives, Policies and Risk Factors" in the Statement of
Additional Information for a more complete description of eligible securities.
A description of ratings is contained in the Statement of Additional
Information.
Each Portfolio is managed so that the average maturity of all
instruments in the Portfolio (on a dollar-weighted basis) will not exceed 90
days. In no event will the Portfolios purchase any securities which are deemed
to mature more than 13 months from the date of purchase (except for certain
variable and floating rate instruments and securities underlying repurchase
agreements and collateral underlying loans of portfolio securities).
OTHER INVESTMENT POLICIES
Bank Obligations
Domestic and foreign bank obligations in which the Money Market
Portfolio may invest include certificates of deposit, bankers' acceptances and
fixed time deposits. Total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
Obligations issued or guaranteed by foreign branches of U.S. banks
(commonly known as "Eurodollar" obligations) or U.S. branches of foreign banks
(commonly known as "Yankee dollar" obligations) may be general obligations of
the parent bank or obligations only of the issuing branch. Where the
obligation is only that of the issuing branch, the parent bank has no legal
duty to pay such obligation. Such obligations would thus be subject to risks
comparable to those which would be present if the issuing branch were a
separate bank. The Money Market Portfolio will not invest in a Eurodollar
obligation if upon making such investment the total of Eurodollar obligations
which are not general obligations of domestic parent banks would thereby
exceed 25% of the total assets of the Money Market Portfolio.
Obligations of foreign issuers may involve risks that are different
than those of obligations of domestic issuers. These risks include unfavorable
political and economic developments, possible imposition of withholding taxes
on interest income, possible seizure or naturalization of foreign deposits,
possible establishment of exchange controls, or adoption of other foreign
governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting, and
recordkeeping standards than those applicable to domestic branches of U.S.
banks and, generally, there may be less publicly available information
regarding such issuers. The Trust could also encounter difficulties in
obtaining or enforcing a judgment against a foreign issuer (including a
foreign branch of a U.S. bank).
Commercial Paper
Commercial paper issued by corporations and other institutions,
including variable rate notes and other short term corporate obligations, must
be rated in one of the two highest categories by at least two Rating Agencies,
or if not
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rated, must have been independently determined by the Adviser to be of
comparable quality.
Government Obligations
The Money Market, Government and Treasury Portfolios may invest in
direct obligations of the U.S. Treasury consisting of bills, notes and bonds.
The Money Market and Government Portfolios may also invest in other
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities, such
as the Government National Mortgage Association, are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. Some of these
investments may be variable or floating rate instruments.
Variable and Floating Rate Obligations
Each Portfolio may purchase rated and unrated variable and floating
rate obligations which may have stated maturities in excess of 13 months but
will, in any event, permit a Portfolio to demand payment of the principal of
the instrument at least once every 13 months on not more than thirty days'
notice (unless the instrument is a U.S. Government Obligation), provided that
the demand feature may be sold, transferred, or assigned only with the
underlying instrument involved. Such instruments may include variable rate
demand notes which are unsecured instruments that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The absence of an active secondary market with respect to
particular variable and floating rate instruments could make it difficult for
a Portfolio to dispose of instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
its demand rights, and the Portfolio could, for these or other reasons, suffer
a loss with respect to such instruments. Variable and floating rate
instruments held by a Portfolio will be subject to the Portfolio's 10%
limitation on illiquid investments when the Portfolio may not demand payment
of the principal amount within seven days and a reliable trading market is
absent.
Repurchase and Reverse Repurchase Agreements
Each Portfolio may agree to purchase portfolio securities which it may
otherwise purchase from financial institutions subject to the seller's
agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). No Portfolio will enter into repurchase agreements
with the Adviser, Co-Distributors, or any of their affiliates. Although the
securities subject to repurchase agreements may bear maturities exceeding 13
months provided the repurchase agreement itself matures in one year or less,
the Portfolios generally intend to enter into repurchase agreements which
terminate within seven days after notice by the Portfolios. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
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Each Portfolio may also borrow funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase. Whenever a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets equal to the repurchase price marked to market daily (including
accrued interest) and will subsequently monitor the account to ensure such
equivalent value is maintained.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans may include cash or
securities of the U.S. Government, its agencies or instrumentalities, some of
which may bear maturities exceeding 13 months. Such loans will not be made if,
as a result, the aggregate of all outstanding loans of a particular Portfolio
exceeds one-third of the value of its total assets. Loans of securities
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or possibly loss of rights in the collateral should the
borrower of the securities become insolvent. In the event a Portfolio is
unable to recover the securities loaned in a particular transaction, it will
promptly sell any collateral which bears a maturity exceeding 13 months. Loans
will be made only to borrowers that provide the requisite collateral comprised
of liquid assets and when, in the Adviser's judgment, the income to be earned
from the loan justifies the attendant risks.
When-Issued Securities
Each Portfolio may purchase portfolio securities on a "when-issued"
basis and may purchase or sell such securities on a "forward commitment"
basis. These transactions involve commitment by a Portfolio to purchase or
sell particular securities with payment and delivery taking place in the
future, beyond the normal settlement date, at a stated price and yield.
Securities purchased on a when-issued basis or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, or if the value of the security to be sold
increases prior to the settlement date. When a Portfolio enters into such
transactions, the Custodian will maintain in a segregated account cash or
liquid portfolio securities equal to the amount of the commitment. The
Portfolios do not earn income with respect to these transactions until the
subject securities are delivered to the Portfolios. The Portfolios do not
intend to purchase when-issued securities for speculative purposes but only
for the purposes of acquiring portfolio securities. Each Portfolio's
when-issued purchases and forward commitments are not expected to exceed 25%
of the value of its total assets absent unusual market conditions.
Municipal and Related Securities
Municipal Securities may include general obligations, revenue
obligations, notes, and moral obligation bonds. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue obligations are payable only
from the revenues derived from a particular facility, class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source such as the
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user of the facility being financed. Private activity bonds (i.e. bonds issued
by industrial development authorities) are in most cases revenue securities
and are not payable from the unrestricted revenues of the issuer. Private
activity bonds are included within the term "Municipal Securities" only if the
interest paid thereon is exempt from regular federal income tax and not
treated as a specific tax preference item under the federal alternative
minimum tax. See "Taxes." Consequently, the credit quality of a private
activity bond is usually directly related to the credit standing of the
private user of the facility involved. Notes are short-term instruments which
are obligations of the issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other revenues.
Moral obligation bonds are normally issued by special purpose public
authorities. If the issuer of a moral obligation bond is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of
the state or municipality which created the issuer. Municipal Securities also
include municipal lease/purchase agreements which are similar to installment
purchase contracts for property or equipment issued by municipalities.
Municipal lease/purchase agreements may be subject to the Portfolio's 10%
limitation on illiquid investments. See "Restricted Securities."
The Michigan Portfolio may purchase from financial institutions
participation interests in Municipal Securities. A participation interest
gives the Portfolio an undivided interest in the Municipal Security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the Municipal Security. These instruments may have fixed,
floating or variable rates of interest, with remaining maturities of 13 months
or less as determined in accordance with SEC regulations (although the
securities held by the financial institution may have longer maturities). If
the participation interest is unrated, or has been given a rating below that
which otherwise is permissible for purchase by the Portfolio, the
participation interest will be backed by an irrevocable letter of credit or
guarantee of a bank that the Trust's Board of Trustees has determined meets
the prescribed quality standards for banks set forth below, or the payment
obligation otherwise will be collateralized by U.S. Government securities. For
certain participation interests, the Portfolio will have the right to demand
payment, on not more than seven days' notice, for all or any part of the
Portfolio's participation interest in the Municipal Security, plus accrued
interest. As to these instruments, the Portfolio intends to exercise its right
to demand payment only upon a default under the terms of the Municipal
Security, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of its investment portfolio. Participation interests
that do not have this demand feature will be considered illiquid investments
subject to the 10% limitation.
The Tax-Exempt and Michigan Portfolios may acquire "stand-by
commitments" with respect to Municipal Securities they hold. Under a stand-by
commitment, a dealer agrees to purchase at the Portfolio's option specified
Municipal Securities at a specified price. The acquisition of a stand-by
commitment may increase the cost, and thereby reduce the yield of the
Municipal Securities to which the commitment relates. The Portfolios will
acquire stand-by commitments solely to facilitate portfolio liquidity and do
not intend to exercise their rights thereunder for trading purposes.
The Tax-Exempt Portfolio has no policy of seeking particularly to
invest in Municipal Securities issued by or within any single state or select
group of states. However, certain states traditionally are sources of large
amounts of Municipal Securities, e.g., California, Colorado, Florida,
Michigan, New York and Texas. The Portfolio may from time to time have more
than 25% of its assets invested in securities issued by or from any of the
above states. To the extent that the Portfolio's assets are invested in
Municipal Securities issued by or from a single state or a few states, the
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such
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state or states to a greater extent than would be the case if its assets were
not so concentrated. If any state or political subdivision thereof were to
suffer serious financial difficulties jeopardizing its ability to pay its
obligations, the marketability of such obligations held by the Portfolio, and
consequently its net asset value, could be adversely affected.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to
Michigan Municipal Securities, Michigan income taxes) are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Trust
nor its Adviser will review the proceedings relating to the issuance of
Municipal Securities or the bases for such opinions.
Special Risk Considerations Applicable to the Michigan Portfolio
The Michigan Portfolio will under normal market conditions consist of
Michigan Municipal Securities to the extent of 65% or more of its total
assets. This concentration in securities issued by governmental units of only
one state exposes the Portfolio to risk of loss greater than that of a more
diversified portfolio holding securities issued by governmental units of
different states and different regions of the country.
Moreover, the economy of the State of Michigan is heavily dependent
upon the automobile manufacturing industry. This industry is highly cyclical.
This factor affects the revenue streams of the State of Michigan and its
political subdivisions because it impacts tax sources, particularly sales
taxes, income taxes, and Michigan single business taxes.
A state economy during a recessionary cycle would also, as a separate
matter, adversely affect the capacity of users of facilities constructed or
acquired through the proceeds of private activity bonds or other "revenue"
securities to make periodic payments for the use of those facilities.
The heavy concentration of the Michigan Portfolio in Michigan
Municipal Securities and the cyclical nature of the economy of the State of
Michigan may adversely affect the liquidity of the Portfolio.
In 1993 and 1994, Michigan adopted complex statutory and
constitutional changes which, among several other changes in tax methods and
rates, have the effect of imposing limits on annual assessment increases and
of transferring a significant part of the operating cost of public education
from locally based property tax sources to state based sources, including
increased sales tax. These changes will affect state and local revenues of
Michigan governmental units in future years in differing ways, not all of
which can be presently known with certainty.
Guaranteed Investment Contracts
The Money Market Portfolio may make limited investments in guaranteed
investment contracts ("GICs") issued by highly rated U.S. insurance companies.
Pursuant to such contracts, the Portfolio makes cash contributions to a
deposit fund of the insurance company's general account. The insurance company
then credits to the Portfolio on a monthly basis guaranteed interest which is
based on an index (in most cases this index will be the Salomon Brothers CD
Index). The GICs provide that this guaranteed interest will not be less than a
certain minimum rate. Generally, a GIC allows a purchaser to buy an annuity
with the monies accumulated under contract; however, the Portfolio will not
purchase any such annuity. A GIC is a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for a
GIC becomes a part of the general assets of the issuer, and the contract is
paid from the general assets
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of the issuer. The Portfolio will only purchase GICs from issuers which meet
quality and credit standards established by the Adviser. Generally, GICs are
not assignable or transferable without the permission of the issuing insurance
companies, and an active secondary market in GICs does not currently exist.
Therefore, GICs are considered by the Portfolio to be illiquid investments
subject to the limitation on illiquid investments set forth below.
Restricted Securities
In accordance with its fundamental investment limitation described
below, each Portfolio will not invest more than 10% of the value of its total
assets in securities that are illiquid. Illiquid investments may include
securities having legal or contractual restrictions on resale or no readily
available market, GICs (in the case of the Money Market Portfolio), municipal
lease/purchase agreements (in the case of the Tax-Exempt and Michigan
Portfolios) and instruments (including repurchase agreements, variable and
floating rate instruments and time deposits) that do not provide for payment
to a Portfolio within seven days after notice. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed to be illiquid for purposes of this limitation.
Each Portfolio may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop. The Board of Trustees will carefully monitor any
investments by the Portfolios in these securities.
Securities of Other Investment Companies
Within the limits prescribed by the 1940 Act, each Portfolio may
invest in securities issued by other investment companies which invest in high
quality, short term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that a Portfolio bears directly in connection with
its own operations.
Miscellaneous
The Trust will give 30 days notice to investors of any material change
in any Portfolio's investment policies.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
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investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase the securities of issuers conducting their principal
business activity in the same industry if immediately after such purchase the
value of its investments in such industry would exceed 25% of the value of its
total assets, provided that (a) utilities will be divided according to their
services, wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of their parents, the personal credit and business
credit businesses will be considered separate industries and (b) there is no
limitation with respect to or arising out of investments in Municipal
Securities in the case of the Tax-Exempt Portfolio and Michigan Portfolio,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank obligations, or repurchase agreements by any
of the foregoing.
2. Borrow money, except from banks or through reverse repurchase
agreements, and except for temporary or emergency purposes and then only in
amounts not exceeding at any one time 20% of the value of its net assets at
the time of the borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
net assets are outstanding. Borrowings will only be effected in conformity
with the requirements of the 1940 Act.
3. Make loans, except (i) through the purchase of debt obligations in
accordance with its investment objective and policies, (ii) through repurchase
agreements and (iii) through the lending of investment securities.
Each of the Money Market, Government and Tax-Exempt Portfolios may not
invest more than 10% of its total assets in illiquid investments, including
restricted securities, securities having no readily available market
quotations, non-negotiable time deposits maturing in more than seven days, and
repurchase agreements with maturities of more than seven days.
Each of the Treasury and Michigan Portfolios may not invest more than
10% of its total assets in illiquid investments. See "Restricted Securities"
above.
With respect to 75% of its assets, the Tax-Exempt Portfolio may not
invest more than 5% of its assets in the securities of any one issuer, except
U.S. Government obligations. In addition, the Tax-Exempt Portfolio may not
invest less than 80% of its net assets in securities the interest on which is
exempt from federal income tax, except during temporary defensive periods.
The Michigan Portfolio may not:
1. Invest less than 80% of its net assets in securities the interest
on which is exempt from federal income tax, except during temporary defensive
periods or periods of unusual market conditions. For purposes of this
investment limitation, securities the interest on which is treated as a
specific tax preference item under the federal alternative minimum tax are
considered taxable.
2. With respect to 50% of its total assets, invest more than 5% of
its assets in the securities of any one issuer, except U.S. Government
Obligations or securities of other regulated investment companies.
For purposes of the Investment Limitation above applicable to the
Money Market, Government, Treasury and Tax-Exempt Portfolios and No. 2 above
applicable to the Michigan Portfolio: (i) a security is considered to be
issued by the government entity (or entities) whose assets and revenues back
the security, or,
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with respect to a private activity bond that is backed only by the assets and
revenues of a nongovernmental user, a security is considered to be issued by
such non-governmental user; (ii) in certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection with
such guarantee; and (iii) U.S. Government Obligations (including securities
backed by the full faith and credit of the United States) are deemed to be
U.S. Government obligations for purposes of the 1940 Act.
Generally, a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of a Portfolio's securities will not constitute a violation of
the limitation for purposes of the 1940 Act.
PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class A shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers. Investors may purchase Class
A shares directly in accordance with the procedures set forth below or through
procedures established by their financial institutions in connection with the
requirements of their accounts.
Financial institutions may impose different minimum investment and
other requirements on their customers and may charge additional fees in
connection with the establishment of accounts with the institutions and
purchase and redemption of Class A shares. Persons wishing to purchase Class A
shares through their accounts at an institution or a Co-Distributor should
contact the institution or Co-Distributor directly for appropriate
instructions and fee information. In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby they
would perform various administrative support services for their customers who
are the beneficial owners of Class A shares in return for fees from the
Portfolio. See "Shareholder Servicing Plan" under the heading "Management" in
this Prospectus.
All shareholders of record will receive confirmations of share
purchases and redemptions. Class A shares purchased by institutions on behalf
of their customers will normally be held of record by them. Institutions will
record their customers' beneficial ownership of such shares and provide
regular account statements reflecting such beneficial ownership.
Institutions will be responsible for transmitting purchase and
redemption orders to FoM, Essex or NBD acting as transfer agent (the "Transfer
Agent") on a timely basis in accordance with the procedures stated below.
Purchase Procedures
The minimum initial investment is $500 for each Portfolio, except for
purchases through an institution whose clients have invested an aggregate
minimum of $500 or for investments made through a Co-Distributor's or an
institution's sweep privilege, the Trust's Automatic Investment Plan described
below or the Trust's IRA program described below. There is no minimum for
subsequent investments other than those made pursuant to the Automatic
Investment Plan. The Trust reserves the right to reject any purchase order.
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Orders for Class A shares may be placed by telephone (by calling
(800) 688-3350 (provided an investor has made the appropriate election in his
account application)) or by mail (by completing the account application which
accompanies this Prospectus and mailing the completed form and the payment for
shares to FoM, Essex or the Transfer Agent). Orders received by FoM, Essex or
the Transfer Agent for purchase accompanied by a check or other negotiable
draft will be accepted and executed at the time the net asset value is next
determined after conversion to federal funds, normally two Business Days after
receipt. All checks must be drawn on a bank located within the United States
and must be payable in U.S. dollars. Subsequent investments in an existing
account in a Portfolio may be made at any time by sending a check or money
order along with either (a) the detachable form that regularly accompanies the
Trust's confirmation of a prior transaction, (b) a subsequent order form which
may be obtained from the Trust, or (c) a letter stating the amount of the
investment, the name of the Portfolio and the account number in which the
investment is to be made. If any check used for investment in an account does
not clear, the order will be cancelled and notice thereof will be given; in
such event the account will be responsible for any loss to the Trust as well
as a $15 fee imposed by the Transfer Agent.
In order to afford the Trust a reasonable opportunity to invest funds
that are received on the same day, purchase orders received by a
Co-Distributor or the Transfer Agent with respect to the Tax-Exempt and
Michigan Portfolios by noon, Eastern time, and with respect to the Money
Market, Government and Treasury Portfolios, by 3:00 p.m., Eastern time, will
be executed the same day if NBD, acting as the Portfolios' custodian (the
"Custodian"), has received confirmation of receipt of a wire transfer of
federal funds prior to noon and 3:00 p.m., Eastern time, respectively, and the
shares purchased will thus be eligible for that day's dividend; and otherwise
such purchase will be effected, and dividends will begin to accrue, on the
following Business Day (as defined below). With the exception of the customers
of FoM, Class A shares may also be paid for by wiring federal funds to the
Transfer Agent, NBD Bank, ABA 072000326, for the account of The Woodward
Funds, Account Number GL 325612, and identifying the customer name and account
number. Before wiring payment, customers should notify the Transfer Agent by
calling (800) 688-3350.
If customers of FoM wire payment in federal funds, they should direct
payment to NBD Bank, ABA 072000326, for the Account of First of Michigan
Corporation re: The Woodward Funds, Account Number 059-41, and should identify
the customer name and account number. Before wiring payment, customers of FoM
should call FoM at (800)544-8275 (outside Michigan) or (800)852-7730 (within
Michigan).
The Trust will not accept payment in cash or third party checks for
the purchase of shares. Federal regulations require that each shareholder
provide a certified taxpayer identification number upon opening or reopening
an account. Applications without a taxpayer identification number will not be
accepted. See the account application for further information about this
requirement.
Net Asset Value and Pricing of Shares
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of noon and as of 5:00
p.m., Eastern time, on each day on which the New York Stock Exchange
("Exchange") and NBD Bank or its bank affiliates are open for business
("Business Day"). Currently, one or both of these institutions are closed on
the customary national business holidays of New Year's Day, Dr. Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day (observed), Veterans' Day,
Thanksgiving Day and Christmas Day. During those business days on which the
Exchange closes prior to the close of its regular trading hours (currently
4:00 p.m. Eastern Time) ("Early Closing Time"), the net asset value of
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each Portfolio will be determined and its shares will be Priced as of such
Early Closing Time. Net asset value per Class A share of a Portfolio is
calculated by dividing the value of all securities and other assets belonging
to the Portfolio allocable to that Class A, less the liabilities charged to
that Class A, by the number of the outstanding shares of such Class A.
The assets in each Portfolio are valued based upon the amortized cost
method. Although the Trust seeks to maintain the net asset value per share of
the Portfolios at $1.00, there can be no assurance that the net asset value
will not vary.
REDEMPTION OF SHARES
In General
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption in
accordance with the procedures set forth below.
Redemption orders must be placed with or through the same financial
institution that placed the original purchase order. It is the responsibility
of the financial institutions to transmit redemption orders to the Transfer
Agent. Redemption proceeds are paid by check or credited to the investor's
account with his financial institution. Investors who purchased shares
directly from the Trust should follow the redemption procedures set forth
below.
Redemption Procedures
Written and telephone redemption requests will be effected on the same
Business Day if the request is received by the Transfer Agent with respect to
the Tax-Exempt and Michigan Portfolios before noon, Eastern time, and with
respect to the Money Market, Government and Treasury Portfolios, before 3:00
p.m. Eastern time. Redemption requests received after noon and 3:00 p.m.,
Eastern time, respectively, will normally be effected on the next Business Day
(and in any event within seven calendar days).
A shareholder of record may redeem shares in any amount by calling
(800) 688-3350 (provided he has made the appropriate election in his account
application) (or by sending a written request to The Woodward Funds, c/o NBD
Bank, P.O. Box 7058, Troy, Michigan 48007-7058. Written requests to redeem
shares having a net asset value of more than $50,000 must have all signatures
of the registered owner(s) or their authorized legal representative guaranteed
by a commercial bank or trust company which is a member of the Federal Reserve
System or FDIC, a member firm of a national securities exchange or a savings
and loan association. A signature guaranteed by a savings bank or notarized by
a notary public is not acceptable. A signature guarantee will also be required
for redemption requests (in any amount) if the address of record for the
account has been changed within the previous 15 days or which requests that
the proceeds be paid to an account other than the one preauthorized on the
application, a payee or payees other than the registered owners of the
account, or an address other than the address of record. The Trust may require
additional supporting documents for redemptions made by corporations,
fiduciaries, executors, administrators, trustees, guardians and institutional
investors.
Redemption orders for Class A shares may be placed through an
institution or directly by telephone by calling (800) 688-3350. During periods
of unusual economic or market changes, telephone redemptions may be difficult
to implement. In such event, shareholders should mail their redemption
requests to their financial institutions or The Woodward Funds, c/o NBD Bank
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed
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to be genuine. In attempting to confirm that telephone instructions are
genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (including, but not limited to, the
name in which an account is registered, the account number, or recent
transactions in the account). To the extent that the Trust and its Transfer
Agent fail to use reasonable procedures to verify the genuineness of telephone
instructions, they may be liable for such instructions that prove to be
fraudulent and unauthorized. In all other cases, shareholders will bear the
risk of loss for fraudulent telephone transactions.
Shareholders will not be credited with dividends on shares being
redeemed on the date of redemption. If a shareholder redeems all of his shares
in a Portfolio (which must be effected through a written redemption request),
he will receive, in addition to the net asset value of the shares, all
declared but unpaid dividends thereon.
Other Redemption Information
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities Exchange Act of
1934. After receipt by the Transfer Agent of a request in proper form, except
as provided by the rules of the SEC. If shares to be redeemed were purchased
by check, the Trust will transmit the redemption proceeds promptly upon
clearance of such check, which could take up to fifteen days from the purchase
date. A shareholder having purchased shares by wire must have filed an account
application before any redemption requests can be honored.
Currently, the Trust imposes no charge when shares are redeemed.
However, institutions may charge a fee for providing services in connection
with investments in Portfolio shares; NBD currently charges $16 for wire
transactions. The Trust reserves the right to redeem accounts involuntarily,
after sixty days' notice, if redemptions cause the account's value to remain
at $400 or less. The Trust may also redeem shares of the Portfolio
involuntarily or make payment for redemption in securities or other property
if it is appropriate to do so in light of the Trust's responsibilities under
the 1940 Act.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800) 688-3350 or an investor's institution.
Redemption Draft Privilege
The Trust will provide each shareholder, upon request with drafts
("Redemption Drafts") which may be drawn on a Portfolio. Redemption Drafts may
be made payable to the order of any person in any amount not less than $500.
This privilege does not constitute a banking function and owning shares in a
Portfolio is not equivalent to a bank checking account. When a shareholder
presents a Redemption Draft for payment, a sufficient number of whole and
fractional shares in his Portfolio account will be redeemed to cover the
amount of the Redemption Draft. To use this method of redemption, a
shareholder must complete and file an authorization form contained in the
account application; an initial supply of Redemption Drafts will be mailed
within two or three weeks thereafter. At the date of this Prospectus there is
no charge for this service.
SHAREHOLDER SERVICES
The shareholder services and privileges under this heading may not be
available to certain clients of particular financial institutions, and some
may impose conditions on their clients that are different from those described
below.
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Investors should consult their own financial institutions in this regard.
Other investors should direct any questions to the Transfer Agent. The Trust
may modify or terminate any of the following services and privileges at any
time.
Exchange Privilege
Investors may exchange Class A shares which have been owned for at
least thirty days of the Money Market, Government, Treasury, Tax-Exempt and
Michigan Portfolios, of the Woodward Equity Index Fund and of other investment
portfolios of the Trust which may be offered in the future and sold without a
sales charge (each a "no load portfolio") and Class A shares which have been
owned for at least thirty days of the Woodward Growth/Value, Opportunity,
Intrinsic Value, Capital Growth, Balanced, International Equity, Intermediate
Bond, Bond, Short Bond, Municipal Bond or Michigan Municipal Bond Funds and of
other investment portfolios of the Trust which may be offered in the future
and sold with a sales charge (each a "load portfolio"). The cost of the
acquired Class A shares will be their net asset value plus the applicable
sales load, if any. Class A shares of a no load portfolio may be exchanged for
Class A shares of another no load portfolio without payment of any sales load.
Any exchange of Class A shares of a no load portfolio for Class A shares of a
load portfolio will be subject to the payment of the applicable sales load,
unless the investor is exchanging shares of a no load portfolio which were
received in a previous exchange transaction involving Class A shares of a load
portfolio. In such case, the investor will receive the appropriate credit for
the sales load previously paid. Shareholders contemplating an exchange should
carefully review the Prospectus of the portfolio into which the exchange is
being considered which may be obtained from an investor's financial
institution or from the Transfer Agent by calling (800) 688-3350.
Exchanges will be effected by a redemption of Class A shares of the
portfolio held and the purchase of Class A shares of the portfolio acquired.
Investors should make their exchange requests in writing or by telephone to
the financial institutions through which they purchased their original Class A
shares. It is the responsibility of financial institutions to transmit
exchange requests to the Transfer Agent. Other investors should transmit
exchange requests directly to the Transfer Agent. The total value of shares
being exchanged must at least equal the minimum investment requirement of the
portfolio whose shares are being acquired in the exchange. Only one exchange
in any thirty-day period is permitted and only Class A shares that may be
legally sold in the state of the investor's residence may be acquired in an
exchange. The Trust reserves the right to reject any exchange request.
Investors wishing to make an exchange should contact their financial
institutions or the Transfer Agent (as appropriate). Exchange requests in the
required form which are received by the Transfer Agent with respect to the
Tax-Exempt and Michigan Portfolios prior to noon, Eastern time, and with
respect to the Money Market, Government and Treasury Portfolios, prior to
3:00 p.m., Eastern time, will be effected on the same Business Day after such
request is received. Requests received after noon and 3:00 p.m., Eastern time,
respectively, will be effected on the next Business Day after such request is
received. During periods of significant economic or market change, telephone
exchanges may be difficult to complete. In such event, an investor should mail
the exchange request to his financial institution or the Transfer Agent.
Neither the Trust nor the Transfer Agent will be responsible for the
authenticity of instructions received by telephone that are reasonably
believed to be genuine. In attempting to confirm that telephone instructions
are genuine, the Trust and its Transfer Agent will use such procedures as are
considered reasonable, including recording those instructions and requesting
information as to account registration (including, but not limited to, the
name in which an account is registered, the account number, or recent
transactions in the account). To the extent that the Trust and its Transfer
Agent fail to use reasonable procedures to verify the genuineness
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of telephone instructions, they may be liable for such instructions that prove
to be fraudulent and unauthorized. In all other cases, shareholders will bear
the risk of loss for fraudulent telephone transactions. The Trust reserves the
right to modify or terminate its exchange procedures upon sixty days' notice
to shareholders.
Option to Make Systematic Withdrawals
The Trust has available to shareholders a Systematic Withdrawal Plan
pursuant to which a shareholder who owns Class A shares of any investment
portfolio having a minimum value of $5,000 at the time he elects under the
Plan may have a fixed sum distributed in redemption at regular intervals. An
application form and additional information regarding this service may be
obtained from an investor's financial institution or the Transfer Agent (by
calling (800) 688-3350).
Automatic Investment
The Trust offers an Automatic Investment Plan (the "Plan") whereby a
shareholder may automatically purchase Class A shares on a regular basis in
accordance with an election in his account application. An application may be
obtained from the Transfer Agent by calling (800) 688-3350. Under the Plan, a
shareholder's financial institution debits a pre-authorized amount from his
account and applies the amount to the purchase of Class A shares. The minimum
per transaction is $25. The minimum initial investment in a Portfolio is also
$25 for the following shareholders who elect the Plan: (1) current and retired
directors, officers and employees of NBD or any of its affiliates; (2) the
trustees, former trustees and officers of the Trust; (3) broker/dealers which
have entered into an agreement with a Co-Distributor or the Trust pursuant to
the Trust's Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (4) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in paragraphs (1), (2) and (3) above. An NAV Account Application
may be obtained from the Transfer Agent by calling (800) 688-3350. The Plan
can be implemented with any financial institution that is a member of the
Automated Clearing House. No service fee is currently charged by the Trust for
participating in the Plan. Death or legal incapacity will terminate a
shareholder's participation in the Plan. Deposits, withdrawals and adjustments
will be made electronically under the rules of the Automated Clearing House
Association.
Cross Reinvestment of Dividend Plan
The Trust makes available to shareholders a Cross Reinvestment of
Dividend Plan (the "Plan") pursuant to which a shareholder who owns Class A
shares of any portfolio with a minimum value of $10,000 at the time he elects
under the Plan may have dividends paid by such portfolio automatically
reinvested into Class A shares of another portfolio in which he has invested a
minimum of $500. Shareholders may obtain an application and additional
information from an investor's financial institution or the Transfer Agent by
calling (800) 688-3350.
The Woodward Funds Individual Retirement Custodial Account
Class A shares may be purchased in conjunction with the Trust's
Individual Retirement Custodial Account program ("IRA") where NBD acts as
custodian. Investors should consult their institutions or a Co-Distributor for
information as to applications and annual fees. The minimum investment for an
IRA is $250 for investors who are not employees of NBD and $25 for investors
who are
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employees of NBD. Investors should also consult their tax advisers to
determine whether the benefits of an IRA are available or appropriate.
Other Retirement Plans
NBD and its affiliates offer a variety of pension and profit sharing
plans including IRAs, defined contribution plans, 401(k) Plans, 403(b)(7)
Plans and 451 Plans through which shareholders may purchase Class A shares.
The minimum investment for these Plans may differ from the minimum discussed
above in "Purchase of Shares." For details concerning any of the retirement
plans, please call the Transfer Agent or a Co-Distributor.
Direct Deposit Program
If an investor receives federal salary, social security, or certain
veteran's, military or other payments from the federal government or elects to
use his employer's payroll deposit program, he is eligible for the Direct
Deposit Program. With this Program, an investor may purchase Class A shares
(minimum of $25) by having these payments automatically deposited into his
Portfolio account. For instructions on how to enroll in the Direct Deposit
Program, an investor should call his institution or the Transfer Agent. Death
or legal incapacity will terminate an investor's participation in the Program.
An investor may elect at any time to terminate his participation by notifying
in writing the appropriate federal agency. Further, the Trust may terminate an
investor's participation upon thirty days' notice to him.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance and yields of each class of shares of the Portfolios may be quoted
and compared to those of other mutual funds with similar investment objectives
and to stock or other relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the yields of the Money Market,
Government and Treasury Portfolios may be compared to the Donoghue's Money
Fund Average, Donoghue's Government Money Fund Average and Donoghue's Treasury
Money Fund Average, respectively, which are averages compiled by
IBC/Donoghue's Money Fund Report, a widely recognized independent publication
that monitors the performance of money market funds, or to the average yields
reported by the Bank Rate Monitor for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas. The yields of the Tax-Exempt Portfolio and
Michigan Portfolio may be compared to the Donoghue's Tax-Free Money Fund
Average. Performance and yield data as reported in national financial
publications including, but not limited to, Money Magazine, Forbes, Barron's,
The Wall Street Journal and The New York Times, or in publications of a local
or regional nature, may also be used in comparing the performance and yields
of the Portfolios.
"Yield" refers to the income generated in a class of shares of a
Portfolio over a seven-day period identified in the advertisement. This income
is annualized, i.e., the income during a particular week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. Each Portfolio may also advertise its "effective yield" which is
calculated similarly but, when annualized, income is assumed to be reinvested,
thereby making the "effective yield" slightly higher because of the
compounding effect of the assumed reinvestment. The Tax-Exempt Portfolio and
Michigan Portfolio may from time to time advertise a "tax-equivalent yield" to
demonstrate the level of taxable yield necessary to produce an after-tax yield
equivalent to that achieved by the Portfolios. The "tax-equivalent yield" will
be computed by dividing the
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tax-exempt portion of a Portfolio's yield by a denominator consisting of one
minus a stated federal (and/or Michigan) income tax rate and adding the
product to that portion, if any, of the Portfolio's yield which is not
tax-exempt.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. Since
yields fluctuate, yield data cannot necessarily be used to compare an
investment in a class' shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed
yield for a stated period of time. Performance and yield are generally
functions of kind and quality of the instruments held in a portfolio,
portfolio maturity, operating expenses, and market conditions. Any fees
charged by financial institutions directly to their customer accounts in
connection with investments in shares will not be reflected in performance
calculations.
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio's net investment income will be declared daily as a
dividend to shareholders of record at the close of business on the day of
declaration. Shareholders will receive dividends in additional Class A shares
of the applicable Portfolio unless they elect to receive cash. Shareholders
must make such election, or any revocation thereof, in writing to their
financial institutions or the Transfer Agent. The election will become
effective with respect to dividends paid after its receipt. If an account is
established with telephone privileges, the registered owner or his
preauthorized legal representative may change the election to receive
dividends in cash to an election to receive dividends in shares by telephoning
the Transfer Agent at 800- 688-3350. Reinvestment or payment of dividends will
be effected monthly at the net asset value per Class A share of the applicable
Portfolio on the date effected, and will include fractional shares if
necessary. If cash payment is requested, checks will be mailed within five
Business Days after the last day of each month.
TAXES
Federal Taxes
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Portfolio of liability for federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company for a taxable year
requires, among other things, that each Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of its tax-exempt
interest income net of certain deductions and 90% of its investment company
taxable income for each taxable year. In general, a Portfolio's investment
company taxable income will be its taxable income, including interest, subject
to certain adjustments and excluding the excess of any net long term capital
gain for the taxable year over the net short term capital loss, if any, for
such year. Each Portfolio's policy is to distribute as dividends substantially
all of its investment company taxable income each year. Such dividends will be
taxable as ordinary income to the Portfolio's shareholders who are not
currently exempt from federal income taxes, whether such income or gain is
received in cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) In the case of the
Tax-Exempt Portfolio and Michigan Portfolio, dividends derived from tax-exempt
interest income ("exempt-interest dividends") may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a)
of the Code unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. (See Statement of
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Additional Information under "Additional Information Concerning Taxes.") An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by the Tax-Exempt Portfolio or Michigan Portfolio and
designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than sixty days after the close of the Portfolio's
taxable year which does not exceed in its aggregate the net Municipal
Securities interest received by the Portfolio for the taxable year. It is
anticipated that no part of any distribution by the Portfolios will be
eligible for the dividends received deduction for corporations. In addition,
none of the Portfolios expects to pay capital gain dividends within the
meaning of the Code.
If the Tax-Exempt Portfolio or Michigan Portfolio should hold certain
private activity bonds issued after August 7, 1986, shareholders must include,
as an item of tax preference, the portion of dividends paid by the Portfolio
that is attributable to interest on such bonds in their federal alternative
minimum taxable income for purposes of determining liability (if any) for the
alternative minimum tax applicable to individuals and corporations and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for alternative minimum and environmental tax purposes.
Shareholders receiving Social Security benefits should note that all
exempt-interest dividends will be taken into account in determining the
taxability of such benefits.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Portfolio on
December 31 of such year if such dividends are actually paid during January of
the following year.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made each year.
State and Local Taxes
Dividends paid by the Tax-Exempt Portfolio and Michigan Portfolio that
are derived from interest attributable to tax-exempt Michigan Municipal
Securities will be exempt from Michigan income tax, Michigan intangibles tax
and Michigan single business tax. Conversely, to the extent that the
Portfolios' dividends are derived from interest on obligations other than
Michigan Municipal Securities or certain U.S. Government Obligations (or are
derived from short term or long term gains), such dividends will be subject to
Michigan income tax, Michigan intangibles tax and Michigan single business
tax, even though the dividends may be exempt for federal income tax purposes.
The Portfolios are unable to predict in advance the portion of their dividends
that will be derived from interest on Michigan Municipal Securities, but will
mail to their respective shareholders not later than sixty days after the
close of the Portfolios' taxable year a written notice containing information
as to the interest derived from Michigan obligations and exempt from Michigan
income tax, Michigan intangibles tax and Michigan single business tax.
Except as noted above with respect to Michigan income taxation,
distributions of net income may be taxable to investors as dividend income
under other state or local laws even though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust
and its shareholders under such laws may differ from treatment under federal
income tax laws. In certain states, review with a shareholder's tax adviser of
the effect of portfolio investments in repurchase agreements and U.S.
Government Obligations
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upon state income taxation may be appropriate. Shareholders are advised to
consult their tax advisers concerning the application of state and local
taxes, which may have different tax consequences from those of the federal
income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Senior Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
- -----------------------------
* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
-30-
<PAGE>
Investment Adviser; Custodian and Transfer Agent
The investment adviser of the Trust is NBD, a wholly owned subsidiary
of First Chicago NBD Corporation, a bank holding company. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion of which in excess of $3.7
billion were money market instruments. NBD has been in the business of
providing such services since 1933. Included among NBD's accounts are pension
and profit sharing funds for major corporations and state and local
governments, as well as commingled trust funds and a variety of institutional
and personal advisory accounts, estates and trusts, all of which are potential
customers for shares of the Trust. NBD also acts as investment adviser for
other registered investment company portfolios.
Under the Advisory Agreement, NBD is subject to the general
supervision of the Trust's Board of Trustees and manages each Portfolio in
conformance with the stated policies of the Trust. In this regard, it is the
responsibility of NBD to make investment decisions for the Trust and to place
all purchase and sale orders for its portfolio transactions. Under the
Advisory Agreement, NBD also provides the Trust with certain administrative
services, such as maintaining the Trust's general ledger and assisting in the
preparation of various regulatory reports.
NBD is entitled to receive fees for advisory and administrative
services provided to the Portfolios, computed daily and payable monthly, at
annual rates of: (i) .45% of the first $1.0 billion of each of the Money
Market, Government, Treasury and Tax-Exempt Portfolio's average daily net
assets, .425% of the next $1.0 billion, and .40% of each such Portfolio's
average daily net assets in excess of $2.0 billion; and (ii) .50% of the
average daily net assets of the Michigan Portfolio. In addition, NBD is
entitled to 4/10ths of the gross income earned by a Portfolio on each loan of
securities (excluding capital gains and losses, if any). NBD may, however,
waive its fees in whole or in part. (The Trust will give 30 days notice to
investors of the discontinuance of advisory fee waivers.)
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
NBD is reimbursed for postage and other out-of-pocket expenses in
connection with the above duties and also receives compensation from the Trust
for costs associated with clearing redemption drafts through NBD, and for its
standard bank charges for processing lock box deposits, processing redemption
drafts, and performing other services.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered, open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from underwriting securities, but
do not prohibit such a bank holding company or affiliate from acting as
adviser, transfer agent, or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of a
customer. NBD and the Trust believe that NBD may perform the advisory,
custodial and transfer agency services for the Trust described in this
Prospectus, and that NBD, subject to such banking laws and regulations, may
perform the shareholder services contemplated by this Prospectus, without
violation of such banking laws or regulations. However, future changes in
legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent NBD from continuing to perform investment advisory, custodial or
transfer agency services for the Trust or require NBD to alter or discontinue
the services it provides to shareholders.
-31-
<PAGE>
If NBD were prohibited from performing investment advisory, custodial
or transfer agency services for the Trust, it is expected that the Board of
Trustees of the Trust would recommend that shareholders approve new agreements
with another entity or entities qualified to perform such services and
selected by the Board. If NBD or its affiliates were required to discontinue
all or part of its shareholder servicing activities, their customers would be
permitted to remain the beneficial owners of Trust shares and alternative
means for continuing the servicing of such customers would be sought. The
Trust does not anticipate that investors would suffer any adverse financial
consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below. Neither FoM
nor Essex receives a sales load in connection with the sale of the Portfolios'
shares.
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of the Portfolios: (i) fees payable
to the Co-Distributors pursuant to the Distribution Agreement; (ii) the
actual costs and expenses in connection with advertising and marketing the
Portfolios' shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions, and other professionals ("Service Agents")
for administration or servicing of Portfolio shareholders ("Servicing").
Servicing may include, among other things: answering client inquiries
regarding the Trust and the Portfolios; assisting clients in changing dividend
options, account designations and addresses; performing sub-accounting;
establishing and maintaining shareholder accounts and records; processing
purchase and redemption transactions; investing client cash account balances
automatically in Portfolio shares; providing periodic statements showing a
client's account balance and integrating such statements with those of other
transactions and balances in the client's other accounts serviced by the
Service Agent; arranging for bank wires; and such other services as the Trust
may request, to the extent the Service Agent is permitted by applicable
statute, rule or regulation. Under the Plan, the Trust also bears the cost of
preparing and printing Prospectuses for use in selling shares of the
-32-
<PAGE>
Trust and costs associated with implementing and operating the Plan. These
costs are included in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .025% of the aggregate average net assets invested
in the Portfolios up to $400,000,000 and .005% of such assets in excess of
$400,000,000, and Essex is entitled to receive a fee at the annual rate of
.10% of the aggregate average net assets of the Trust's investment portfolios
attributable to investments by clients of Essex. The payments to be made to
the Co-Distributors which are based on a percentage of the net assets of the
Portfolios are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolios' shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Shareholder Servicing Plan
Pursuant to a Shareholder Servicing Plan ("Servicing Plan") adopted by
its Board of Trustees, the Trust may enter into agreements with banks and
financial institutions, which may include the Adviser and its affiliates
("Shareholder Servicing Agents"), under which they will render shareholder
administrative support services for their customers who beneficially own Class
A shares of the Portfolios. Such services, which are described more fully in
the Statement of Additional Information, may include processing purchase and
redemption requests from customers, placing net purchase and redemption orders
with the Co- Distributors; processing, among other things, distribution
payments from the Trust, providing necessary personnel and facilities to
establish and maintain customer accounts and records, and providing
information periodically to customers showing their positions in Class A
shares.
For these services, the Trust will pay fees to Shareholder Servicing
Agents at an annual rate of up to .25% of the average daily net asset value of
Class A shares held by such Shareholder Servicing Agents for the benefit of
their customers and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Shareholder Servicing Agents are
required to provide their customers with a schedule of any credits, fees or
other conditions that may be applicable to the investment of customer assets
in Class A shares. The fees payable under such servicing agreements will be
allocated exclusively to the Class A shares in each Portfolio.
Conflict of interest restrictions may apply to the receipt of
compensation paid by the Trust to a Shareholder Servicing Agent in connection
with the investment of fiduciary funds in Portfolio shares. Banks and other
institutions regulated by the Comptroller of the Currency or other federal or
state regulatory agencies, and investment advisers and other money managers
subject to the
-33-
<PAGE>
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal counsel before entering into servicing
agreements.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets, the fees and expenses of NBD as the Trust's Custodian and
as its Transfer Agent, the fees payable to the Co-Distributors under the
Distribution Agreement, the fees and expenses of Trustees, expenses associated
with the Trust's Distribution Plan and Shareholder Servicing Plan, outside
auditing and legal expenses, all taxes and corporate fees payable by the
Trust, SEC fees, state securities qualification fees, costs of preparing and
printing prospectuses for regulatory purposes and for distribution to
shareholders, costs to shareholder reports and shareholder meetings, and any
extraordinary expenses. Each Portfolio also pays for brokerage commissions and
transfer taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular portfolio of the Trust will
be charged to that portfolio, and expenses not readily identifiable as
belonging to a particular portfolio will be allocated by the Board of Trustees
among one or more portfolios in such a manner as it deems fair and equitable.
For the fiscal year ended December 31, 1995, the Money Market, Government,
Treasury, Tax-Exempt and Michigan Portfolios' total expenses were .51%, .51%,
.53%, .53% and .69% (after fee waivers), if any of their average net assets,
respectively. The Statement of Additional Information describes in more detail
the fees and expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust, which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Intermediate Bond Fund, Bond Fund, Short
Bond Fund, Municipal Bond Fund, Michigan Municipal Bond Fund, Growth/Value
Fund, Opportunity Fund, Intrinsic Value Fund, Capital Growth Fund, Balanced
Fund, International Equity Fund and Equity Index Fund. The Trust has
established the following two distinct classes of shares within each
Portfolio described herein: Class I shares (Special Class 1 Class) and
Class A shares (Original Class). A sales person and any other person or
institution entitled to receive compensation for selling or servicing shares
may receive different compensation with respect to different classes of shares
in the Series.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determine that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly, the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
-34-
<PAGE>
As of February 29, 1996, NBD held beneficially or of record
approximately 30.87%, 26.47%, 7.38%, 44.92% and 14.86% of the outstanding
shares of the Money Market, Government, Treasury, Tax-Exempt and Michigan
Portfolios, respectively, and therefore may be considered to be a controlling
person of the Portfolios for purposes of the 1940 Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
-35-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give any information or to
make any representations not contained in this Prospectus, or in the
Portfolios' Statement of Additional Information incorporated herein by
reference, in connection with the offering made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust, Adviser or Sponsors and Co- Distributors.
This Prospectus does not constitute an offering by the Portfolios or by their
Co-Distributors in any jurisdiction in which such offering may not lawfully
be made.
TABLE OF CONTENTS age
EXPENSE SUMMARY................................. 2
FINANCIAL HIGHLIGHTS............................ 5
INTRODUCTION.................................... 10
PROPOSED REORGANIZATION......................... 10
INVESTMENT OBJECTIVES,
POLICIES AND RISK
FACTORS................................. 10
OTHER INVESTMENT POLICIES....................... 12
PURCHASE OF SHARES.............................. 19
REDEMPTION OF SHARES............................ 21
SHAREHOLDER SERVICES............................ 23
PERFORMANCE AND YIELD
INFORMATION............................. 25
DIVIDENDS AND DISTRIBUTIONS..................... 26
TAXES ........................................ 27
MANAGEMENT...................................... 28
OTHER INFORMATION............................... 34
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, PA 19107
<PAGE>
[ BACK COVER, COLUMN 2 ]
CLASS A SHARES IN THE:
WOODWARD MONEY MARKET FUND
WOODWARD GOVERNMENT FUND
WOODWARD TREASURY MONEY MARKET FUND
WOODWARD TAX-EXEMPT MONEY
MARKET FUND
WOODWARD MICHIGAN TAX-EXEMPT
MONEY MARKET FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-36-
<PAGE>
CROSS REFERENCE SHEET
Series B - Special Class 1, A - Special Class 1, O - Special
Class 1, C - Special Class 1 and M - Special Class 1 Representing Interests
in the Class I Shares of the Woodward Money Market,
Government, Treasury Money Market, Tax-Exempt Money Market,
and Michigan Tax-Exempt Money Market
Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page...................................... Cover page
2. Synopsis........................................ Expense Summary;
Background
3. Financial Highlights............................ Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant...................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ....................... Management
6. Capital Stock and Other
Securities...................................... Purchase of
Shares; Redemption
of Shares;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered................................... Purchase of
Shares;
Management
8. Redemption or Repurchase........................ Redemption of
Shares
9. Pending Legal Proceedings....................... Inapplicable
-4-
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following five investment portfolios (the "Portfolios"), each having
its own investment objective and policies as described in this Prospectus:
Class I shares of the:
Woodward Money Market Fund
Woodward Government Fund
Woodward Treasury Money Market Fund
Woodward Tax-Exempt Money Market Fund
Woodward Michigan Tax-Exempt Money Market Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge by writing to The Woodward Funds at the above
address. The Statement of Additional Information bears the same date as this
Prospectus and is incorporated by reference into this Prospectus in its
entirety.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL. THERE
CAN BE NO ASSURANCE THAT THE PORTFOLIOS WILL BE ABLE TO MAINTAIN A CONSTANT
NET ASSET VALUE OF $1.00 PER SHARE.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Money Market Fund ("Money Market Portfolio"), Woodward
Government Fund ("Government Portfolio"), Woodward Treasury Money Market Fund
("Treasury Portfolio"), Woodward Tax-Exempt Money Market Fund ("Tax-Exempt
Portfolio") and Woodward Michigan Tax-Exempt Fund ("Michigan Portfolio").
Class I shares are sold primarily to NBD and its affiliated and correspondent
banks acting on behalf of their respective customers. Class A shares are sold
to the general public primarily through financial institutions such as banks,
brokers and dealers. Class A shares are offered in a separate Prospectus.
Investors should call (800) 688-3350, a Co-Distributor or their financial
institutions if they would like to obtain more information concerning the
Class I shares and/or Class A shares of the Portfolios. The following table is
provided to assist in understanding the various costs and expenses that an
investor will indirectly incur as a beneficial owner of Class I shares in each
of the Portfolios.
<TABLE>
<CAPTION>
Money Govern- Tax-
Market ment Treasury Exempt Michigan
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases........................ None None None None None
(as a percentage of
offering price)
Sales Load
Imposed on Reinvested
Dividends....................... None None None None None
Deferred Sales Load................ None None None None None
Redemption Fee..................... None None None None None
Exchange Fee....................... None None None None None
ANNUAL FUND OPERATING EXPENSES(1)
(as a percentage of average
net assets)
Management Fees.................... .44% .45% .45% .45% 0.50%
12b-1 Fees......................... .025% .007% .024% .017% 0.079%
Other Expenses(2).................. .055% .085% .076% .053% .121%
Total Operating Expenses........... .52% .54% .55% .52% 0.70%
<FN>
- --------------------
1. The expenses for each of the Portfolios have been restated to
reflect current expenses.
2. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Money Govern- Tax-
Market ment Treasury Exempt Michigan
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Example
You would pay the following
expenses on a $1,000 investment
assuming:
(1) a 5% annual return and
(2) redemption at the end of
each time period:
One Year:..................... $ 5.33 $ 5.53 $ 5.64 $ 5.33 $ 7.17
Three Years:.................. 16.71 17.35 17.67 16.71 22.46
Five Years:................... 29.14 30.24 30.80 29.14 39.08
Ten Years:.................... 65.40 67.84 69.07 65.40 87.28
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE GREATER
OR LESSER THAN THOSE SHOWN.
The example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class I shares in each of the Portfolios,
based upon payment of operating expenses at the respective levels set forth in
the expense table. For more complete descriptions of Portfolio expenses, see
"Investment Adviser, Custodian and Transfer Agent," "Sponsors and Co-
Distributors," "Service and Distribution Plan" and "Trust Expenses" under the
heading "Management" in this Prospectus and the financial statements and
related notes contained in the Statement of Additional Information.
-3-
<PAGE>
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class I
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate servicing fees payable
under the plan exclusively to such shares.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of net investment
income and distributions from net investment income for each of the
Portfolios. The tables have been derived from the Portfolios' financial
statements which have been audited by Arthur Andersen LLP, the Trust's
independent public accountants, whose report thereon is contained in the
Statement of Additional Information along with the financial statements. The
financial data included in these tables should be read in conjunction with the
financial statements and related notes included in the Statement of Additional
Information. Further information about the performance of the Portfolios is
available in annual reports to shareholders. The Statement of Additional
Information and annual reports to shareholders may be obtained from the Trust
free of charge by calling (800) 688-3350.
<TABLE>
<CAPTION>
Money Market Portfolio
January 4,
1988
(Commence-
Year Year Year Year Year Year Year ment of
Ended Ended Ended Ended Ended Ended Ended Operations)
Decem- Decem- Decem- Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- ---------- ---------- ---------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income ... $ 0.0549 $ 0.0378 $ 0.0281 $ 0.0347 $ 0.0579 $ 0.0784 $ 0.0877 $ 0.0730
---------- ---------- ---------- ---------- -------- -------- -------- --------
Total From Investment
Operations ............. $ 0.0549 $ 0.0378 $ 0.0281 $ 0.0347 $ 0.0579 $ 0.0784 $ 0.0877 $ 0.0730
---------- ---------- ---------- ---------- -------- -------- -------- --------
Less Distributions:
Dividends From Net
Investment Income...... $ (0.0549) $ (0.0378) $ (0.0281) $ (0.0347) $(0.0579) $(0.0784) $(0.0877) $(0.0730)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Total Distributions..... $ (0.0549) $ (0.0378) $ (0.0281) $ (0.0347) $(0.0579) $(0.0784) $(0.0877) $(0.0730)
---------- ---------- ---------- ---------- -------- -------- -------- --------
Net Asset Value, End of
Period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ======== ======== ======== ========
Total Return ............. 5.63% 3.86% 2.85% 3.58% 5.95% 8.14% 9.19% 7.55%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ..... $1,639,695 $1,323,040 $1,326,693 $1,095,354 $775,521 $717,516 $446,466 $250,182
Ratio of Expenses to
Average Net Assets .... 0.51% 0.47% 0.49% 0.52% 0.50% 0.50% 0.51% 0.49%(a)
Ratio of Net Investment
Income to Average Net
Assets ............... 5.49% 3.78% 2.81% 3.47% 5.79% 7.84% 8.77% 7.30%(a)
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Government Portfolio
January 4,
1988
(Commence-
Year Year Year Year Year Year Year ment of
Ended Ended Ended Ended Ended Ended Ended Operations)
Decem- Decem- Decem- Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
of Period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income .. $ 0.0544 $ 0.0372 $ 0.0277 $ 0.0357 $ 0.0564 $ 0.0769 $ 0.0862 $ 0.0730
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ........... $ 0.0544 $ 0.0372 $ 0.0277 $ 0.0357 $ 0.0564 $ 0.0769 $ 0.0862 $ 0.0730
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends From Net
Investment Income ..... $(0.0544) $(0.0372) $(0.0277) $(0.0357) $(0.0564) $(0.0769) $(0.0862) $(0.0730)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions .... $(0.0544) $(0.0372) $(0.0277) $(0.0357) $(0.0564) $(0.0769) $(0.0862) $(0.0730)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total Return ............ 5.57% 3.77% 2.81% 3.63% 5.79% 7.97% 8.98% 7.55%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ..... $474,377 $421,208 $346,665 $261,614 $288,369 $235,858 $196,095 $106,194
Ratio of Expenses to
Average Net Assets .... 0.51% 0.51% 0.51% 0.51% 0.50% 0.49% 0.50% 0.50%(a)
Ratio of Net Investment
Income to Average Net
Assets ............... 5.44% 3.72% 2.77% 3.57% 5.64% 7.69% 8.62% 7.30%(a)
<FN>
- ---------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Treasury Portfolio
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
-------------- -------------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period................... $ 1.00 $ 1.00 $ 1.00
------- ------- -------
Income from Investment
Operations:
Net Investment Income.... $0.0539 $0.0370 $0.0273
------- ------- -------
Total From Investment Operations $0.0539 $0.0370 $0.0273
------- ------- -------
Less Distributions:
Dividends From Net Investment
Income................. $ (0.0539) $(0.0370) $(0.0273)
--------- --------- ---------
Total Distributions...... $ (0.0539) $(0.0370) $(0.0273)
--------- --------- ---------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00
========= ========= =========
Total Return............... 5.53% 3.77% 2.77%
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's)...... $ 927,696 $ 785,694 $ 854,873
Ratio of Expenses to Average
Net Assets............. 0.53% 0.50% 0.50%
Ratio of Net Investment
Income to Average Net Assets 5.39% 3.70% 2.73%
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Tax-Exempt Portfolio
January 4,
1988
(Commence-
Year Year Year Year Year Year Year ment of
Ended Ended Ended Ended Ended Ended Ended Operations)
Decem- Decem- Decem- Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- --------
Income From Investment
Operations:
Net Investment Income ... $ 0.0335 $ 0.0242 $ 0.0196 $ 0.0264 $ 0.0422 $ 0.0553 $ 0.0595 $ 0.0498
-------- -------- -------- -------- -------- -------- -------- --------
Total From Investment
Operations ............. $ 0.0335 $ 0.0242 $ 0.0196 $ 0.0264 $ 0.0422 $ 0.0553 $ 0.0595 $ 0.0498
-------- -------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends From Net
Investment Income ..... $(0.0335) $(0.0242) $(0.0196) $(0.0264) $(0.0422) $(0.0553) $(0.0595) $(0.0498)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions .... $(0.0335) $(0.0242) $(0.0196) $(0.0264) $(0.0422) $(0.0553) $(0.0595) $(0.0498)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ======== ========
Total Return ............. 3.41% 2.45% 1.98% 2.70% 4.30% 5.67% 6.11% 5.10%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's) ..... $564,413 $550,736 $498,706 $379,431 $227,808 $235,451 $210,028 $177,645
Ratio of Expenses to
Average Net Assets .... 0.53% 0.51% 0.51% 0.53% 0.52% 0.52% 0.51% 0.49%(a)
Ratio of Net Investment
Income to Average
Net Assets ............ 3.35% 2.42% 1.96% 2.64% 4.22% 5.53% 5.95% 4.98%(a)
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Michigan Portfolio
January 23, 1991
Year Year Year Year (Commencement
Ended Ended Ended Ended of Operations)
Decem- Decem- Decem- Decem- to Decem-
ber 31, ber 31, ber 31, ber 31, ber 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------- --------- --------- --------- ---------
Income From Investment
Operations:
Net Investment Income..... $ 0.0329 $ 0.0235 $ 0.0181 $ 0.0237 $ 0.0353
--------- --------- --------- --------- ---------
Total From Investment
Operations............... $ 0.0329 $ 0.0235 $ 0.0181 $ 0.0237 $ 0.0353
--------- --------- --------- --------- ---------
Less Distributions:
Dividends From Net
Investment Income........ $ (0.0329) $ (0.0235) $ (0.0181) $ (0.0237) $ (0.0353)
--------- --------- --------- --------- ---------
Total Distributions....... $ (0.0329) $ (0.0235) $ (0.0181) $ (0.0237) $ (0.0353)
--------- --------- --------- --------- ---------
Net Asset Value, End of
Period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= =========
Total Return............... 3.32% 2.38% 1.83% 2.40% 3.83%(a)
Ratios/Supplemental Data
Net Assets, End of
Period (in 000's)....... $ 122,057 $ 78,640 $ 52,557 $ 52,960 $ 38,885
Ratio of Expenses to
Average Net Assets...... 0.69% 0.67% 0.65% 0.64% 0.65%(a)
Ratio of Net Investment
Income to Average Net
Assets.................. 3.30% 2.35% 1.81% 2.37% 3.77%(a)
Ratio of Expenses to
Average Net Assets
Without Fee Waiver...... 0.76% 0.75% 0.00% 0.00% 0.00%
Ratio of Net Investment
Income to Average
Net Assets
Without Fee Waiver...... 3.23% 2.28% 0.00% 0.00% 0.00%
<FN>
- ---------------------
(a) Total returns and ratios are annualized for periods less than one
year for comparability purposes. Actual annual returns and ratios may be less
than or greater than those shown.
</TABLE>
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<PAGE>
INTRODUCTION
The Trust is an open-end, management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objectives and
policies. However, only the Class I shares of the Money Market, Government,
Treasury, Tax-Exempt and Michigan Portfolios are offered pursuant to this
Prospectus. Under the 1940 Act, the Michigan Portfolio is classified as a
non-diversified investment portfolio and the other Portfolios are classified
as diversified investment portfolios.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
such Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Money Market Portfolio, Government Portfolio and Treasury Portfolio
The investment objective of the Money Market Portfolio, Government
Portfolio and Treasury Portfolio is to provide a high level of current income
consistent with the preservation of capital and liquidity.
In seeking to achieve its investment objective, the Money Market
Portfolio invests in the following high quality "money market" instruments:
(1) Obligations issued or guaranteed as to payment of
principal and interest by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Obligations");
(2) U.S. dollar denominated obligations issued or guaranteed
by the government of Canada, a Province of Canada, or an
instrumentality or political subdivision thereof;
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<PAGE>
(3) Certificates of deposit, bankers' acceptances and time
deposits of U.S. banks or other U.S. financial institutions (including
foreign branches of such banks and institutions) having total assets
in excess of $1 billion and which are members of the Federal Reserve
System or the Federal Deposit Insurance Corporation ("FDIC");
(4) Certificates of deposit, bankers' acceptances and time
deposits of foreign banks and U.S. branches of foreign banks having
assets in excess of the equivalent of $1 billion;
(5) Commercial paper, other short term obligations and
variable rate master demand notes, bonds, debentures and notes; and
(6) Repurchase agreements relating to the above instruments.
In seeking to achieve its investment objective, the Government
Portfolio invests in:
(1) U.S. Government Obligations; and
(2) Repurchase agreements relating to the above obligations.
In seeking to achieve its investment objective, the Treasury Portfolio
invests in:
(1) U.S. Treasury bills, notes, and direct U.S. Treasury
obligations having remaining maturities of 13 months or less; and
(2) Repurchase agreements relating to direct U.S. Treasury
obligations.
In accordance with current SEC regulations, the Money Market,
Government and Treasury Portfolios will limit their respective purchases of
the securities of any one issuer (other than U.S. Government Obligations and
repurchase agreements collateralized by such obligations) to 5% of their
respective total assets, except that each Portfolio may invest more than 5%
but no more than 25% of its total assets in "First Tier Securities" of one
issuer for a period of up to three business days. First Tier Securities
include "eligible securities" (defined below under "Policies Applicable to all
Portfolios") that (i) if rated by more than one nationally recognized
statistical rating organization ("Rating Agency"), are rated (at the time of
purchase) by two or more Rating Agencies in the highest rating category for
such securities, (ii) if rated by only one Rating Agency, are rated by such
Rating Agency in its highest rating category for such securities, (iii) have
no short term rating but have been issued by an issuer that has other
outstanding short term obligations that have been rated in accordance with (i)
or (ii) above and are comparable in priority and security to such securities,
and (iv) are certain unrated securities that have been determined by NBD to be
of comparable quality to such securities pursuant to guidelines established by
the Trust's Board of Trustees. In addition, the Money Market and Government
Portfolios will limit their investments in "Second Tier Securities" (which are
eligible securities other than First Tier Securities) to 5% of their
respective total assets, with investments in any one issuer of such securities
being limited to no more than 1% of their respective total assets or $1
million, whichever is greater. Because of these limitations, the Money Market,
Government and Treasury Portfolios will not be able to purchase lower rated or
longer term securities from which a higher income, although a greater degree
of risk, might be derived.
Tax-Exempt Portfolio and Michigan Portfolio
The investment objective of the Tax-Exempt Portfolio is to provide a
high level of current interest income that is exempt from federal income taxes
consistent with the preservation of capital and liquidity. In seeking to
achieve its investment objective, the Portfolio invests in high quality debt
obligations issued by states, territories and possessions of the United
States, by the District of Columbia, and by their respective political
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<PAGE>
subdivisions, agencies, instrumentalities and authorities, the interest on
which is, in the opinion of bond counsel for the issuers, exempt from regular
federal income tax ("Municipal Securities").
The investment objective of the Michigan Portfolio is to provide a
high level of current interest income that is exempt from federal and State of
Michigan income taxes, consistent with the preservation of capital and
liquidity. In seeking to achieve its investment objective, the Portfolio
invests in high quality debt obligations issued by the State of Michigan, its
political subdivisions, municipalities, corporations and authorities, the
interest on which, in the opinion of bond counsel to the issuers, is exempt
from federal and State of Michigan income taxes ("Michigan Municipal
Securities") and in related repurchase agreements. Income earned by the
Portfolio with respect to repurchase agreements and securities lending
transactions is not exempt from federal income tax. To the extent acceptable
Michigan Municipal Securities are at any time unavailable for investment by
the Portfolio, the Portfolio invests primarily in other Municipal Securities
the interest on which is, in the opinion of bond counsel, exempt from federal,
but not State of Michigan, income tax.
Municipal Securities acquired by the Tax-Exempt Portfolio or Michigan
Portfolio include:
(1) Municipal bonds;
(2) Municipal notes;
(3) Variable rate demand notes;
(4) Tax-exempt commercial paper and floating rate
instruments; and
(5) Unrated notes, paper or other instruments that are of
comparable quality as determined by the Adviser under guidelines
established by the Trust's Board of Trustees. Where necessary to
assure that an instrument is of high quality, the Portfolios may only
purchase the instrument if the issuer's obligation to pay the
principal is backed by an unconditional bank letter of credit, line of
credit, guaranty or commitment to lend.
At least 80% of each of the Tax-Exempt Portfolio's and Michigan
Portfolio's total assets will be invested in Municipal Securities, except in
extraordinary circumstances, such as when the Adviser believes that market
conditions indicate that a Portfolio should adopt a temporary defensive
position by holding uninvested cash or investing in taxable short term
securities ("Taxable Investments"), such as those in which the Money Market
Portfolio may invest. This policy is fundamental with respect to the Tax-
Exempt Portfolio and Michigan Portfolio and may not be changed without the
approval of the holders of a majority of a Portfolio's outstanding shares. In
addition, with respect to the Michigan Portfolio, at least 65% of its total
assets will be invested under normal market conditions in Michigan Municipal
Securities and the remainder may be invested in securities that are not
Michigan Municipal Securities and therefore may be subject to Michigan income
taxes. A security is included within the term "Municipal Securities" only if
the interest paid thereon is exempt from regular federal income tax and not
treated as a specific tax preference item under the federal alternative
minimum tax. See "Taxes."
Policies Applicable To All Portfolios
Each Portfolio will only purchase "eligible securities" that present
minimal credit risks as determined by the Adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities include (i)
U.S. Government Obligations, (ii) securities that are rated (at the time of
purchase) by Rating Agencies in the two highest rating categories for such
securities, and (iii) certain securities that are not so rated but are of
comparable quality to rated eligible securities as determined by the Adviser.
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<PAGE>
See "Investment Objectives, Policies and Risk Factors" in the Statement of
Additional Information for a more complete description of eligible securities.
A description of ratings is contained in the Statement of Additional
Information.
Each Portfolio is managed so that the average maturity of all
instruments in the Portfolio (on a dollar-weighted basis) will not exceed 90
days. In no event will the Portfolios purchase any securities which are deemed
to mature more than 13 months from the date of purchase (except for certain
variable and floating rate instruments and securities underlying repurchase
agreements and collateral underlying loans of portfolio securities).
OTHER INVESTMENT POLICIES
Bank Obligations
Domestic and foreign bank obligations in which the Money Market
Portfolio may invest include certificates of deposit, bankers' acceptances and
fixed time deposits. Total assets of a bank are determined on the basis of the
bank's most recent annual financial statements.
Obligations issued or guaranteed by foreign branches of U.S. banks
(commonly known as "Eurodollar" obligations) or U.S. branches of foreign banks
(commonly known as "Yankee dollar" obligations) may be general obligations of
the parent bank or obligations only of the issuing branch. Where the
obligation is only that of the issuing branch, the parent bank has no legal
duty to pay such obligation. Such obligations would thus be subject to risks
comparable to those which would be present if the issuing branch were a
separate bank. The Money Market Portfolio will not invest in a Eurodollar
obligation if upon making such investment the total of Eurodollar obligations
which are not general obligations of domestic parent banks would thereby
exceed 25% of the total assets of the Money Market Portfolio.
Obligations of foreign issuers may involve risks that are different
than those of obligations of domestic issuers. These risks include unfavorable
political and economic developments, possible imposition of withholding taxes
on interest income, possible seizure or naturalization of foreign deposits,
possible establishment of exchange controls, or adoption of other foreign
governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. In addition, foreign branches of
U.S. banks and foreign banks may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting, and
recordkeeping standards than those applicable to domestic branches of U.S.
banks and, generally, there may be less publicly available information
regarding such issuers. The Trust could also encounter difficulties in
obtaining or enforcing a judgment against a foreign issuer (including a
foreign branch of a U.S. bank).
Commercial Paper
Commercial paper issued by corporations and other institutions,
including variable rate notes and other short term corporate obligations, must
be rated in one of the two highest categories by at least two Rating Agencies,
or if not rated, must have been independently determined by the Adviser to be
of comparable quality.
Government Obligations
The Money Market, Government and Treasury Portfolios may invest in
direct obligations of the U.S. Treasury consisting of bills, notes and bonds.
The Money Market and Government Portfolios may also invest in other
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities, such
as the Government National Mortgage Association, are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
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<PAGE>
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. Some of these
investments may be variable or floating rate instruments.
Variable and Floating Rate Obligations
Each Portfolio may purchase rated and unrated variable and floating
rate obligations which may have stated maturities in excess of 13 months but
will, in any event, permit a Portfolio to demand payment of the principal of
the instrument at least once every 13 months on not more than thirty days'
notice (unless the instrument is a U.S. Government Obligation), provided that
the demand feature may be sold, transferred, or assigned only with the
underlying instrument involved. Such instruments may include variable rate
demand notes which are unsecured instruments that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. The absence of an active secondary market with respect to
particular variable and floating rate instruments could make it difficult for
a Portfolio to dispose of instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
its demand rights, and the Portfolio could, for these or other reasons, suffer
a loss with respect to such instruments. Variable and floating rate
instruments held by a Portfolio will be subject to the Portfolio's 10%
limitation on illiquid investments when the Portfolio may not demand payment
of the principal amount within seven days and a reliable trading market is
absent.
Repurchase and Reverse Repurchase Agreements
Each Portfolio may agree to purchase portfolio securities which it may
otherwise purchase from financial institutions subject to the seller's
agreement to repurchase them at a mutually agreed-upon date and price
("repurchase agreements"). No Portfolio will enter into repurchase agreements
with the Adviser, Co-Distributors, or any of their affiliates. Although the
securities subject to repurchase agreements may bear maturities exceeding 13
months provided the repurchase agreement itself matures in one year or less,
the Portfolios generally intend to enter into repurchase agreements which
terminate within seven days after notice by the Portfolios. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Portfolio may also borrow funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase. Whenever a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets equal to the repurchase price marked to market daily (including
accrued interest) and will subsequently monitor the account to ensure such
equivalent value is maintained.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans may include cash or
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<PAGE>
securities of the U.S. Government, its agencies or instrumentalities, some of
which may bear maturities exceeding 13 months. Such loans will not be made if,
as a result, the aggregate of all outstanding loans of a particular Portfolio
exceeds one-third of the value of its total assets. Loans of securities
involve risks of delay in receiving additional collateral or in recovering the
securities loaned or possibly loss of rights in the collateral should the
borrower of the securities become insolvent. In the event a Portfolio is
unable to recover the securities loaned in a particular transaction, it will
promptly sell any collateral which bears a maturity exceeding 13 months. Loans
will be made only to borrowers that provide the requisite collateral comprised
of liquid assets and when, in the Adviser's judgment, the income to be earned
from the loan justifies the attendant risks.
When-Issued Securities
Each Portfolio may purchase portfolio securities on a "when-issued"
basis and may purchase or sell such securities on a "forward commitment"
basis. These transactions involve commitment by a Portfolio to purchase or
sell particular securities with payment and delivery taking place in the
future, beyond the normal settlement date, at a stated price and yield.
Securities purchased on a when-issued basis or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, or if the value of the security to be sold
increases prior to the settlement date. When a Portfolio enters into such
transactions, the Custodian will maintain in a segregated account cash or
liquid portfolio securities equal to the amount of the commitment. The
Portfolios do not earn income with respect to these transactions until the
subject securities are delivered to the Portfolios. The Portfolios do not
intend to purchase when-issued securities for speculative purposes but only
for the purposes of acquiring portfolio securities. Each Portfolio's when-
issued purchases and forward commitments are not expected to exceed 25% of the
value of its total assets absent unusual market conditions.
Municipal and Related Securities
Municipal Securities may include general obligations, revenue
obligations, notes, and moral obligation bonds. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue obligations are payable only
from the revenues derived from a particular facility, class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source such as the user of the facility being financed. Private activity bonds
(i.e. bonds issued by industrial development authorities) are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of a private activity bond is usually
directly related to the credit standing of the private user of the facility
involved. Notes are short-term instruments which are obligations of the
issuing municipalities or agencies and are sold in anticipation of a bond
sale, collection of taxes or receipt of other revenues. Moral obligation bonds
are normally issued by special purpose public authorities. If the issuer of a
moral obligation bond is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer. Municipal Securities also include municipal lease/purchase
agreements which are similar to installment purchase contracts for property or
equipment issued by municipalities. Municipal lease/purchase agreements may be
considered illiquid investments.
See "Restricted Securities."
The Michigan Portfolio may purchase from financial institutions
participation interests in Municipal Securities. A participation interest
gives the Portfolio an undivided interest in the Municipal Security in the
proportion that the Portfolio's participation interest bears to the total
principal amount of the Municipal Security. These instruments may have fixed,
floating or variable rates of interest, with remaining maturities of 13 months
or less as determined in accordance with SEC regulations (although the
securities held by the financial institution may have longer maturities). If
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<PAGE>
the participation interest is unrated, or has been given a rating below that
which otherwise is permissible for purchase by the Portfolio, the
participation interest will be backed by an irrevocable letter of credit or
guarantee of a bank that the Trust's Board of Trustees has determined meets
the prescribed quality standards for banks set forth below, or the payment
obligation otherwise will be collateralized by U.S. Government securities. For
certain participation interests, the Portfolio will have the right to demand
payment, on not more than seven days' notice, for all or any part of the
Portfolio's participation interest in the Municipal Security, plus accrued
interest. As to these instruments, the Portfolio intends to exercise its right
to demand payment only upon a default under the terms of the Municipal
Security, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of its investment portfolio. Participation interests
that do not have this demand feature will be considered illiquid investments.
The Tax-Exempt and Michigan Portfolios may acquire "stand-by
commitments" with respect to Municipal Securities they hold. Under a stand-by
commitment, a dealer agrees to purchase at the Portfolio's option specified
Municipal Securities at a specified price. The acquisition of a stand-by
commitment may increase the cost, and thereby reduce the yield of the
Municipal Securities to which the commitment relates. The Portfolios will
acquire stand-by commitments solely to facilitate portfolio liquidity and do
not intend to exercise their rights thereunder for trading purposes.
The Tax-Exempt Portfolio has no policy of seeking particularly to
invest in Municipal Securities issued by or within any single state or select
group of states. However, certain states traditionally are sources of large
amounts of Municipal Securities, e.g., California, Colorado, Florida,
Michigan, New York and Texas. The Portfolio may from time to time have more
than 25% of its assets invested in securities issued by or from any of the
above states. To the extent that the Portfolio's assets are invested in
Municipal Securities issued by or from a single state or a few states, the
Portfolio will be subject to the peculiar risks presented by the laws and
economic conditions relating to such state or states to a greater extent than
would be the case if its assets were not so concentrated. If any state or
political subdivision thereof were to suffer serious financial difficulties
jeopardizing its ability to pay its obligations, the marketability of such
obligations held by the Portfolio, and consequently its net asset value, could
be adversely affected.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to
Michigan Municipal Securities, Michigan income taxes) are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Trust
nor its Adviser will review the proceedings relating to the issuance of
Municipal Securities or the bases for such opinions.
Special Risk Considerations Applicable to the Michigan Portfolio
The Michigan Portfolio will under normal market conditions consist of
Michigan Municipal Securities to the extent of 65% or more of its total
assets. This concentration in securities issued by governmental units of only
one state exposes the Portfolio to risk of loss greater than that of a more
diversified portfolio holding securities issued by governmental units of
different states and different regions of the country.
Moreover, the economy of the State of Michigan is heavily dependent
upon the automobile manufacturing industry. This industry is highly cyclical.
This factor affects the revenue streams of the State of Michigan and its
political subdivisions because it impacts tax sources, particularly sales
taxes, income taxes, and Michigan single business taxes.
A state economy during a recessionary cycle would also, as a separate
matter, adversely affect the capacity of users of facilities constructed or
acquired through the proceeds of private activity bonds or other "revenue"
securities to make periodic payments for the use of those facilities.
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The heavy concentration of the Michigan Portfolio in Michigan
Municipal Securities and the cyclical nature of the economy of the State of
Michigan may adversely affect the liquidity of the Portfolio.
In 1993 and 1994, Michigan adopted complex statutory and
constitutional changes which, among several other changes in tax methods and
rates, have the effect of imposing limits on annual assessment increases and
of transferring a significant part of the operating cost of public education
from locally based property tax sources to state based sources, including
increased sales tax. These changes will affect state and local revenues of
Michigan governmental units in future years in differing ways, not all of
which can be presently known with certainty.
Guaranteed Investment Contracts
The Money Market Portfolio may make limited investments in guaranteed
investment contracts ("GICs") issued by highly rated U.S. insurance companies.
Pursuant to such contracts, the Portfolio makes cash contributions to a
deposit fund of the insurance company's general account. The insurance company
then credits to the Portfolio on a monthly basis guaranteed interest which is
based on an index (in most cases this index will be the Salomon Brothers CD
Index). The GICs provide that this guaranteed interest will not be less than a
certain minimum rate. Generally, a GIC allows a purchaser to buy an annuity
with the monies accumulated under contract; however, the Portfolio will not
purchase any such annuity. A GIC is a general obligation of the issuing
insurance company and not a separate account. The purchase price paid for a
GIC becomes a part of the general assets of the issuer, and the contract is
paid from the general assets of the issuer. The Portfolio will only purchase
GICs from issuers which meet quality and credit standards established by the
Adviser. Generally, GICs are not assignable or transferable without the
permission of the issuing insurance companies, and an active secondary market
in GICs does not currently exist. Therefore, GICs are considered by the
Portfolio to be illiquid investments and subject to the limitation on illiquid
investments set forth below.
Restricted Securities
In accordance with its fundamental investment limitation described
below, each Portfolio will not invest more than 10% of the value of its total
assets in securities that are illiquid. Illiquid investments may include
securities having legal or contractual restrictions on resale or no readily
available market, GICs (in the case of the Money Market Portfolio), municipal
lease/purchase agreements (in the case of the Tax-Exempt and Michigan
Portfolios) and instruments (including repurchase agreements, variable and
floating rate instruments and time deposits) that do not provide for payment
to a Portfolio within seven days after notice. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed to be illiquid for purposes of this limitation.
Each Portfolio may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop. The Board of Trustees will carefully monitor any
investments by the Portfolios in these securities.
Securities of Other Investment Companies
Within the limits prescribed by the 1940 Act, each Portfolio may
invest in securities issued by other investment companies which invest in high
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quality, short term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that a Portfolio bears directly in connection with
its own operations.
Miscellaneous
The Trust will give 30 days notice to investors of any material change
in any Portfolio's investment policies.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase the securities of issuers conducting their principal
business activity in the same industry if immediately after such purchase the
value of its investments in such industry would exceed 25% of the value of its
total assets, provided that (a) utilities will be divided according to their
services, wholly-owned finance companies will be considered to be in the
industries of their parents if their activities are primarily related to
financing the activities of their parents, the personal credit and business
credit businesses will be considered separate industries and (b) there is no
limitation with respect to or arising out of investments in Municipal
Securities in the case of the Tax-Exempt Portfolio and Michigan Portfolio,
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, domestic bank obligations, or repurchase agreements by any
of the foregoing.
2. Borrow money, except from banks or through reverse repurchase
agreements, and except for temporary or emergency purposes and then only in
amounts not exceeding at any one time 20% of the value of its net assets at
the time of the borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
net assets are outstanding. Borrowings will only be effected in conformity
with the requirements of the 1940 Act.
3. Make loans, except (i) through the purchase of debt obligations in
accordance with its investment objective and policies, (ii) through repurchase
agreements and (iii) through the lending of investment securities.
Each of the Money Market, Government and Tax-Exempt Portfolios may not
invest more than 10% of its total assets in illiquid investments, including
restricted securities, securities having no readily available market
quotations, non-negotiable time deposits maturing in more than seven days, and
repurchase agreements with maturities of more than seven days.
Each of the Treasury and Michigan Portfolios may not invest more than
10% of its total assets in illiquid investments. See "Restricted Securities"
above.
With respect to 75% of its assets, the Tax-Exempt Portfolio may not
invest more than 5% of its assets in the securities of any one issuer, except
U.S. Government Obligations.
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In addition, the Tax-Exempt Portfolio may not invest less than 80% of
its net assets in securities the interest on which is exempt from federal
income tax, except during temporary defensive periods.
The Michigan Portfolio may not:
1. Invest less than 80% of its net assets in securities the interest
on which is exempt from federal income tax, except during temporary defensive
periods or periods of unusual market conditions. For purposes of this
investment limitation, securities the interest on which is treated as a
specific tax preference item under the federal alternative minimum tax are
considered taxable.
2. With respect to 50% of its total assets, invest more than 5% of its
assets in the securities of any one issuer, except U.S. Government Obligations
or securities of other regulated investment companies.
For purposes of the Investment Limitation above applicable to the
Money Market, Government, Treasury and Tax-Exempt Portfolios and No. 2 above
applicable to the Michigan Portfolio: (i) a security is considered to be
issued by the government entity (or entities) whose assets and revenues back
the security, or, with respect to a private activity bond that is backed only
by the assets and revenues of a nongovernmental user, a security is considered
to be issued by such nongovernmental user; (ii) in certain circumstances, the
guarantor of a guaranteed security may also be considered to be an issuer in
connection with such guarantee; and (iii) U.S. Government Obligations
(including securities backed by the full faith and credit of the United
States) are deemed to be U.S. Government obligations for purposes of the 1940
Act.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in value of a Portfolio's securities will not constitute a violation of
the limitation for purposes of the 1940 Act.
PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class I shares are sold primarily to NBD and its affiliated and
correspondent banks (the "Banks") acting on behalf of their respective
customers. The Banks may impose different minimum investment and other
requirements, as well as account charges, on their customers and may establish
separate operational arrangements by which shares may be purchased and
redeemed. Customers should contact their Banks for further information.
It is the responsibility of the Banks to transmit their customers'
purchase orders to NBD acting as transfer agent (the "Transfer Agent") and to
deliver required funds on a timely basis. Class I shares will normally be held
of record by the Banks. Confirmations of share purchases and redemptions will
be sent to the Banks. Beneficial ownership of Class I shares will be recorded
by the Banks and reflected in the account statements provided by them to their
customers.
In order to afford the Trust a reasonable opportunity to invest funds
that are received on the same day, purchase orders received by a Co-
Distributor or the Transfer Agent with respect to the Tax-Exempt and Michigan
Portfolios by noon, Eastern time, and with respect to the Money Market,
Government and Treasury Portfolios by 3:00 p.m., Eastern time, will be
executed the same day if NBD acting as the Portfolios' custodian (the
"Custodian") has received confirmation of receipt of a wire transfer of
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federal funds prior to noon and 3:00 p.m., Eastern time, respectively, and the
shares purchased will thus be eligible for that day's dividend, and otherwise
such purchase will be effected, and dividends will begin to accrue, on the
following business day.
Net Asset Value and Pricing of Shares
The net asset value per share of each Portfolio for purposes of
pricing purchase and redemption orders is determined by the Adviser as of noon
and as of 5:00 p.m., Eastern time, each day on which the New York Stock
Exchange ("Exchange") and NBD Bank or its bank affiliates are open for
business ("Business Day"). Currently, one or both of these institutions are
closed on the customary national business holidays of New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Columbus Day (observed), Veterans'
Day, Thanksgiving Day and Christmas Day. During those business days on which
the Exchange closes prior to the close of its regular trading hours (currently
4:00 p.m. Eastern time) ("Early Closing Time"), the net asset value of each
Portfolio will be determined and its shares will be priced as of such Early
Closing Time. Net asset value per Class I share of a Portfolio is calculated
by dividing the value of all securities and other assets belonging to the
Portfolio allocable to that Class I, less the liabilities charged to that
Class I, by the number of the outstanding shares of such Class I.
The assets in each Portfolio are valued based upon the amortized cost
method. Although the Trust seeks to maintain the net asset value per share of
the Portfolios at $1.00, there can be no assurance that the net asset value
will not vary.
REDEMPTION OF SHARES
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption. It is
the responsibility of the Banks to transmit redemption orders to the Transfer
Agent and credit their customers' accounts with the redemption proceeds on a
timely basis.
Written and telephone redemption requests will be effected on the same
Business Day if the request is received by the Transfer Agent with respect to
the Tax-Exempt and Michigan Portfolios before noon, Eastern time, and with
respect to the Money Market, Government and Treasury Portfolios, before 3:00
p.m., Eastern time. Redemption requests received after noon and 3:00 p.m.,
Eastern time, respectively, will normally be effected on the next Business Day
(and in any event within seven calendar days).
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities Exchange Act of
1934 after receipt by the Transfer Agent of a request in proper form. If
shares to be redeemed were purchased by check, the Trust will transmit the
redemption proceeds promptly upon clearance of such check, which could take up
to fifteen days from the purchase date. A shareholder of record having
purchased shares by wire must have filed an account application before any
redemption requests can be honored.
Written requests to redeem shares having a net asset value of more
than $50,000 must have all signatures of the registered owner(s) or their
authorized legal representative guaranteed by a commercial bank or trust
company which is a member of the Federal Reserve System or FDIC, a member firm
of a national securities exchange or a savings and loan association. A
signature guaranteed by a savings bank or notarized by a notary public is not
acceptable. A signature guarantee will also be required for a redemption
request (in any amount) if the address of record for the account has been
changed within the previous 15 days or which requests that the proceeds be
paid to an account other than the one preauthorized on the application, a
payee or payees other than the registered owners of the account, or an address
other than the address of record. The Trust may require additional supporting
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documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
Currently, the Trust imposes no charge when shares are redeemed.
However, Banks may charge a fee for providing services in connection with
investments in shares. The Trust reserves the right to redeem accounts
involuntarily, after sixty days' notice, if redemptions cause the account's
value to remain at $400 or less. Under certain circumstances, the
Trust may make payment for redemptions in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800) 688-3350.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance and yields of each class of shares of the Portfolios may be quoted
and compared to the performance and yields of other mutual funds with similar
investment objectives and to stock or other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, yields of the Money
Market, Government and Treasury Portfolios may be compared to the Donoghue's
Money Fund Average, Donoghue's Government Money Fund Average and Donoghue's
Treasury Money Fund Average, respectively, which are averages compiled by
IBC/Donoghue's Money Fund Report, a widely recognized independent publication
that monitors the performance of money market funds, or to the average yields
reported by the Bank Rate Monitor for money market deposit accounts offered by
the 50 leading banks and thrift institutions in the top five standard
metropolitan statistical areas. The yields of the Tax-Exempt Portfolio and
Michigan Portfolio may be compared to the Donoghue's Tax-Free Money Fund
Average. Performance and yield data as reported in national financial
publications including, but not limited to, Money Magazine, Forbes, Barron's,
The Wall Street Journal and The New York Times, or in publications of a local
or regional nature, may also be used in comparing the performance and yields
of the Portfolios.
"Yield" refers to the income generated in a class of shares of a
Portfolio over a seven-day period identified in the advertisement. This income
is annualized, i.e., the income during a particular week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. Each Portfolio may also advertise its "effective yield" which is
calculated similarly but, when annualized, income is assumed to be reinvested,
thereby making the "effective yield" slightly higher because of the
compounding effect of the assumed reinvestment. The Tax-Exempt Portfolio and
Michigan Portfolio may from time to time advertise a "tax-equivalent yield" to
demonstrate the level of taxable yield necessary to produce an after-tax yield
equivalent to that achieved by the Portfolios. The "tax- equivalent yield"
will be computed by dividing the tax-exempt portion of a Portfolio's yield by
a denominator consisting of one minus a stated federal (and/or Michigan)
income tax rate and adding the product to that portion, if any, of the
Portfolio's yield which is not tax-exempt.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. Since
yields fluctuate, yield data cannot necessarily be used to compare an
investment in a class' shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed
yield for a stated period of time. Performance and yield are generally
functions of kind and quality of the instruments held in a portfolio,
portfolio maturity, operating expenses and market conditions. Any fees charged
by financial institutions directly to their customer accounts in connection
with investments in shares will not be reflected in performance calculations.
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DIVIDENDS AND DISTRIBUTIONS
Each Portfolio's net investment income will be declared daily as a
dividend to shareholders of record at the close of business on the day of
declaration. Shareholders will receive dividends in additional Class I shares
of the applicable Portfolio unless they elect to receive cash. Shareholders
must make such election, or any revocation thereof, in writing to their Banks.
The election will become effective with respect to dividends paid after its
receipt. If an account is established with telephone privileges, the
registered owner or his preauthorized legal representative may change the
election to receive dividends in cash to an election to receive dividends in
shares by telephoning the Transfer Agent at 800-688-3350. Reinvestment or
payment of dividends will be effected monthly at the net asset value per Class
I share of the applicable Portfolio on the date effected, and will include
fractional shares if necessary. If cash payment is requested, checks will be
mailed within five Business Days after the last day of each month.
TAXES
Federal Taxes
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification relieves a Portfolio of liability for federal income taxes to
the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company for a taxable year
requires, among other things, that each Portfolio distribute to its
shareholders an amount equal to at least the sum of 90% of 23 its tax-exempt
interest income net of certain deductions and 90% of its investment company
taxable income for each taxable year. In general, a Portfolio's investment
company taxable income will be its taxable income, including interest, subject
to certain adjustments and excluding the excess of any net long term capital
gain for the taxable year over the net short term capital loss, if any, for
such year. Each Portfolio's policy is to distribute as dividends substantially
all of its investment company taxable income each year. Such dividends will be
taxable as ordinary income to the Portfolio's shareholders who are not
currently exempt from federal income taxes, whether such income or gain is
received in cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) In the case of the
Tax-Exempt Portfolio and Michigan Portfolio, dividends derived from tax-exempt
interest income ("exempt-interest dividends") may be treated by shareholders
as items of interest excludable from their gross income under Section 103(a)
of the Code unless under the circumstances applicable to the particular
shareholder the exclusion would be disallowed. (See Statement of Additional
Information under "Additional Information Concerning Taxes.") An
exempt-interest dividend is any dividend or part thereof (other than a capital
gain dividend) paid by the Tax-Exempt Portfolio or Michigan Portfolio and
designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than sixty days after the close of the Portfolio's
taxable year which does not exceed in its aggregate the net Municipal
Securities interest received by the Portfolio for the taxable year. It is
anticipated that no part of any distribution by the Portfolios will be
eligible for the dividends received deduction for corporations. In addition,
none of the Portfolios expects to pay capital gain dividends within the
meaning of the Code.
If the Tax-Exempt Portfolio or Michigan Portfolio should hold certain
private activity bonds issued after August 7, 1986, shareholders must include,
as an item of tax preference, the portion of dividends paid by the Portfolio
that is attributable to interest on such bonds in their federal alternative
minimum taxable income for purposes of determining liability (if any) for the
alternative minimum tax applicable to individuals and corporations and the
environmental tax applicable to corporations. Corporate shareholders must also
take all exempt-interest dividends into account in determining certain
adjustments for alternative minimum and environmental tax purposes.
Shareholders receiving Social Security benefits should note that all exempt-
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interest dividends will be taken into account in determining the taxability of
such benefits.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed to have been received by shareholders and paid by a Portfolio on
December 31 of such year if such dividends are actually paid during January of
the following year.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made each year.
State and Local Taxes
Dividends paid by the Tax-Exempt Portfolio and Michigan Portfolio that
are derived from interest attributable to tax-exempt Michigan Municipal
Securities will be exempt from Michigan income tax, Michigan intangibles tax
and Michigan single business tax. Conversely, to the extent that the
Portfolios' dividends are derived from interest on obligations other than
Michigan Municipal Securities or certain U.S. Government Obligations (or are
derived from short term or long term gains), such dividends will be subject to
Michigan income tax, Michigan intangibles tax and Michigan single business
tax, even though the dividends may be exempt for federal income tax purposes.
The Portfolios are unable to predict in advance the portion of their dividends
that will be derived from interest on Michigan Municipal Securities, but will
mail to their respective shareholders not later than sixty days after the
close of the Portfolios' taxable year a written notice containing information
as to the interest derived from Michigan obligations and exempt from Michigan
income tax, Michigan intangibles tax and Michigan single business tax.
Except as noted above with respect to Michigan income taxation,
distributions of net income may be taxable to investors as dividend income
under other state or local laws even though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust
and its shareholders under such laws may differ from treatment under federal
income tax laws. In certain states, review with a shareholder's tax adviser of
the effect of portfolio investments in repurchase agreements and U.S.
Government Obligations upon state income taxation may be appropriate.
Shareholders are advised to consult their tax advisers concerning the
application of state and local taxes, which may have different consequences
from those of the federal income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
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* Trustees who are "interested persons" of the Trust, as defined in the
1940 Act.
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*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
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* Trustees who are "interested persons" of the Trust, as defined in the
1940 Act.
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*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Senior Professor of Finance, Indiana University (1970-
1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser of the Trust is NBD, a wholly owned subsidiary
of First Chicago NBD Corporation, a bank holding company. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion of which in excess of $3.7
billion were money market instruments. NBD has been in the business of
providing such services since 1933. Included among NBD's accounts are pension
and profit sharing funds for major corporations and state and local
governments, as well as commingled trust funds and a variety of institutional
and personal advisory accounts, estates and trusts, all of which are potential
customers for shares of the Trust. NBD also acts as investment adviser for
other registered investment company portfolios.
Under the Advisory Agreement, NBD is subject to the general
supervision of the Trust's Board of Trustees and manages each Portfolio in
conformance with the stated policies of the Trust. In this regard, it is the
responsibility of NBD to make investment decisions for the Trust and to place
all purchase and sale orders for its portfolio transactions. Under the
Advisory Agreement, NBD also provides the Trust with certain administrative
services, such as maintaining the Trust's general ledger and assisting in the
preparation of various regulatory reports.
NBD is entitled to receive fees for advisory and administrative
services provided to the Portfolios, computed daily and payable monthly, at
annual rates of: (i) .45% of the first $1.0 billion of each of the Money
Market, Government, Treasury and Tax-Exempt Portfolio's average daily net
assets, .425% of the next $1.0 billion, and .40% of each such Portfolio's
average daily net assets in excess of $2.0 billion; and (ii) .50% of the
average daily net assets of the Michigan Portfolio. In addition, NBD is
entitled to 4/10ths of the gross income earned by a Portfolio on each loan of
securities (excluding capital gains and losses, if any). NBD may, however,
waive its fees in whole or in part. (The Trust will give 30 days notice to
investors of the discontinuance of advisory fee waivers.)
- -----------------------------
* Trustees who are "interested persons" of the Trust, as defined in the
1940 Act.
-25-
<PAGE>
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
NBD is reimbursed for postage and other out-of-pocket expenses in
connection with the above duties and also receives compensation from the Trust
for costs associated with clearing redemption drafts through NBD, and for its
standard bank charges for processing lock box deposits, processing redemption
drafts, and performing other services.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered, open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from underwriting securities, but
do not prohibit such a bank holding company or affiliate from acting as
adviser, transfer agent, or custodian to such an investment company or from
purchasing shares of such a company as agent for and upon the order of a
customer. NBD and the Trust believe that NBD may perform the advisory,
custodial and transfer agency services for the Trust described in this
Prospectus, and that NBD, subject to such banking laws and regulations, may
perform the shareholder services contemplated by this Prospectus, without
violation of such banking laws or regulations. However, future changes in
legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent NBD from continuing to perform investment advisory, custodial or
transfer agency services for the Trust or require NBD to alter or discontinue
the services it provides to shareholders.
If NBD were prohibited from performing investment advisory, custodial
or transfer agency services for the Trust, it is expected that the Board of
Trustees would recommend that shareholders approve new agreements with another
entity or entities qualified to perform such services and selected by the
Board. If NBD or its affiliates were required to discontinue all or part of
its shareholder servicing activities, their customers would be permitted to
remain the beneficial owners of Trust shares and alternative means for
continuing the servicing of such customers would be sought. The Trust does not
anticipate that investors would suffer any adverse financial consequences as a
result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
-26-
<PAGE>
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of the Portfolios: (i) fees payable
to the Co-Distributors pursuant to the Distribution Agreement; (ii) the actual
costs and expenses in connection with advertising and marketing the
Portfolios' shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions, and other professionals ("Service Agents")
for administration or servicing of Portfolio shareholders ("Servicing").
Servicing may include, among other things: answering client inquiries
regarding the Trust and the Portfolios; assisting clients in changing dividend
options, account designations and addresses; performing sub-accounting;
establishing and maintaining shareholder accounts and records; processing
purchase and redemption transactions; investing client cash account balances
automatically in Portfolio shares; providing periodic statements showing a
client's account balance and integrating such statements with those of other
transactions and balances in the client's other accounts serviced by the
Service Agent; arranging for bank wires; and such other services as the Trust
may request, to the extent the Service Agent is permitted by applicable
statute, rule or regulation. Under the Plan, the Trust also bears the cost of
preparing and printing Prospectuses for use in selling shares of the Trust and
costs associated with implementing and operating the Plan. These costs are
included in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .025% of the aggregate average net assets invested
in the Portfolios up to $400,000,000 and .005% of such assets in excess of
$400,000,000, and Essex is entitled to receive a fee at the annual rate of
.10% of the aggregate average net assets of the Trust's investment portfolios
attributable to investments by clients of Essex. The payments to be made to
the Co-Distributors which are based on a percentage of the net assets of the
Portfolios are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolios' shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets, the fees and expenses of NBD as the Trust's Custodian and
as its Transfer Agent, the fees payable to the Co-Distributors under the
Distribution Agreement, the fees and expenses of Trustees, expenses associated
with the Trust's Distribution Plan and Shareholder Servicing Plan, outside
auditing and legal expenses, all taxes and corporate fees payable by the
-27-
<PAGE>
Trust, SEC fees, state securities qualification fees, costs of preparing and
printing prospectuses for regulatory purposes and for distribution to
shareholders, costs to shareholder reports and shareholder meetings, and any
extraordinary expenses. Each Portfolio also pays for brokerage commissions and
transfer taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular portfolio of the Trust will
be charged to that portfolio and expenses not readily identifiable as
belonging to a particular portfolio will be allocated by the Board of Trustees
among one or more portfolios in such a manner as it deems fair and equitable.
For the fiscal year ended December 31, 1995, the Money Market, Government,
Treasury, Tax-Exempt and Michigan Portfolios' total expenses were .51%, .51%,
.53%, .53% and .69% (after fee waivers, if any) of their average net assets,
respectively. The Statement of Additional Information describes in more detail
the fees and expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust, which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Intermediate Bond Fund, Bond Fund, Short
Bond Fund, Municipal Bond Fund, Michigan Municipal Bond Fund, Growth/Value
Fund, Opportunity Fund, Intrinsic Value Fund, Capital Growth Fund, Balanced
Fund, International Equity Fund and Equity Index Fund. The Trust has
established the following two distinct classes of shares within each Portfolio:
Class I shares (Special Class 1) and Class A shares (Original Class). A sales
person and any other person or institution entitled to receive compensation
for selling or servicing shares may receive different compensation with
respect to different classes of shares in the Series.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
As of February 29, 1996, NBD held beneficially or of record
approximately 30.87%, 26.47%, 7.38%, 44.92% and 14.86% of the outstanding
shares of the Money Market, Government, Treasury, Tax-Exempt and Michigan
Portfolios, respectively, and therefore may be considered to be a controlling
person of the Portfolios for purposes of the 1940 Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
-28-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Portfolios'
Statement of Additional Information incorporated herein by reference, in
connection with the offering made by this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust, Adviser or Sponsors and Co-Distributors. This
Prospectus does not constitute an offering by the Portfolios or by their
Co-Distributors in any jurisdiction in which such offering may not lawfully be
made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY.............................. 2
FINANCIAL HIGHLIGHTS......................... 5
INTRODUCTION................................. 9
PROPOSED REORGANIZATION...................... 9
INVESTMENT OBJECTIVES,
POLICIES AND RISK
FACTORS.............................. 9
OTHER INVESTMENT POLICIES.................... 12
PURCHASE OF SHARES........................... 18
REDEMPTION OF SHARES......................... 19
PERFORMANCE AND YIELD
INFORMATION.......................... 20
DIVIDENDS AND DISTRIBUTIONS.................. 21
TAXES ..................................... 21
MANAGEMENT................................... 22
OTHER INFORMATION............................ 27
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities,
Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, PA 19107
<PAGE>
[ BACK COVER, COLUMN 2 ]
CLASS I SHARES OF THE:
WOODWARD MONEY MARKET FUND
WOODWARD GOVERNMENT FUND
WOODWARD TREASURY MONEY MARKET FUND
WOODWARD TAX-EXEMPT MONEY MARKET
FUND
WOODWARD MICHIGAN TAX-EXEMPT MONEY
MARKET FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-29-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series H - Special Class 1, I - Special Class 1, J -
Special Class 1, R - Special Class 1, S - Special Class 1
and T - Special Class 1 Representing Interests in the
Class A Shares of the Woodward Growth/Value, Opportunity,
Intrinsic Value, Balanced, Capital Growth
and International Equity Funds,
Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page....................................... Cover page
2. Synopsis......................................... Expense Summary;
Background
3. Financial Highlights............................. Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant....................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ........................ Management
6. Capital Stock and Other
Securities....................................... Purchase of
Shares; Redemption
of Shares;
Shareholder
Services;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered.................................... Purchase of
Shares;
Shareholder
Services;
Management
8. Redemption or Repurchase......................... Redemption of
Shares;
Shareholder
Services
9. Pending Legal Proceedings........................ Inapplicable
-5-
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- -------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following six investment portfolios (the "Portfolios"), each having its
own investment objective and policies as described in this Prospectus:
Class A shares of the:
Woodward Growth/Value Fund
Woodward Opportunity Fund
Woodward Intrinsic Value Fund
Woodward Capital Growth Fund
Woodward Balanced Fund
Woodward International Equity Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Growth/Value Fund ("Growth/Value Portfolio"), Woodward
Opportunity Fund ("Opportunity Portfolio"), Woodward Intrinsic Value Fund
("Intrinsic Value Portfolio"), Woodward Capital Growth Fund ("Capital Growth
Portfolio"), Woodward Balanced Fund ("Balanced Portfolio") and Woodward
International Equity Fund ("International Equity Portfolio"). Class I shares
are sold primarily to NBD and its affiliated and correspondent banks acting on
behalf of their respective customers. Class A shares are sold to the general
public primarily through financial institutions such as banks, brokers and
dealers. Class I shares are offered in a separate Prospectus. Investors should
call (800) 688-3350, a Co-Distributor or their financial institutions if they
would like to obtain more information concerning Class I shares and/or Class A
shares of the Portfolios. The following table is provided to assist investors
in understanding the various costs and expenses that an investor will
indirectly incur as a beneficial owner of Class A shares in each of the
Portfolios.
<TABLE>
<CAPTION>
Inter-
Growth/ Oppor- Intrinsic Capital national
Value tunity Value Growth Balanced Equity
Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases............... 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
(as a percentage of
offering price)
Sales Load
Imposed on Reinvested
Dividends................. None None None None None None
Deferred Sales Load........... None None None None None None
Redemption Fee................ None None None None None None
Exchange Fee.................. None None None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets)
Management Fees............... .75% .75% .75% .75% .75% .75%
12b-1 Fees(2)................. .011% .015% .011% .005% .013% .004%
Shareholder Servicing Fees(3). .25% .25% .25% .25% .25% .25%
Other Expenses(4)
(before fee waivers and/or
expense reimbursements).... .039% .035% .089% 0.145% 0.327% 0.596%
(after fee waivers and/or
expense reimbursements).... N/A N/A N/A 0.125% .187% 0.406%
Total Operating Expenses
(before fee waivers and/or
expense reimbursements).... 1.05% 1.05% 1.10% 1.15% 1.34% 1.60%
(after fee waivers and/or
expense reimbursements).... N/A N/A N/A 1.13% 1.20% 1.41%
<FN>
- ---------------------
1. The expenses for each of the Portfolios have been restated to
reflect current expenses.
2. As a result of the payment of sales loads and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (the "NASD"). Rules adopted by the NASD generally limit the
aggregate sales charges and payments under the Trust's Service and
Distribution Plan ("Distribution Plan") to a certain percentage of total new
gross share sales,
-2-
<PAGE>
plus interest. The Trust would stop accruing 12b-1 fees if, to the extent, and
for as long as, such limit would otherwise be exceeded.
3. The Trust has adopted a Shareholder Servicing Plan pursuant to
which the Trust may enter into agreements with institutions under which they
will render shareholder administrative support services for their customers
who beneficially own shares in return for a fee of up to .25% per annum of the
value of such shares ("Servicing Fees"). For further information,
see "Shareholder Servicing Plan" and "Investment Adviser, Custodian
and Transfer Agent" under the heading "Management" in this Prospectus.
4. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
- -------------------
</TABLE>
<TABLE>
<CAPTION>
Inter-
Growth/ Oppor- Intrinsic Capital national
Value tunity Value Growth Balanced Equity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Example
You would pay the following
expenses on a $1,000
investment, assuming:
(1) a 5% annual return
and (2) redemption at the
end of each time period:
One Year.................. $ 10.76 $ 10.76 $ 11.27 $ 11.58 $ 12.30 $ 14.45
Three Years............... 33.57 33.57 35.15 36.09 38.30 44.91
Five Years................ 58.20 58.20 60.91 62.53 66.31 77.58
Ten Years................. 128.75 128.75 134.57 138.04 146.10 169.97
Example
You would pay the following
expenses on a $1,000
investment, assuming (1) a
5% annual return, (2)
redemption at the end
of each time period
and (3) the imposition
of a maximum sales load at
the beginning of the period:
One Year:................ $ 60.22 $ 60.22 $ 60.71 $ 61.00 $ 61.68 $ 63.72
Three Years:............. 81.89 81.89 83.39 84.29 86.39 92.67
Five Years:.............. 105.29 105.29 107.86 109.40 112.99 123.70
Ten Years:............... 172.32 172.32 177.84 181.14 188.80 211.47
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
The examples demonstrate the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class A shares in each of the Portfolios,
based upon payment by the Portfolios of operating expenses at the respective
levels set forth in the expense table. For more complete descriptions of
Portfolio expenses, see "Investment Adviser, Custodian and Transfer Agent",
"Sponsors and Co- Distributors", "Shareholder Servicing Plan", "Service and
Distribution Plan" and "Trust Expenses" under the heading "Management" in this
Prospectus and the financial statements and related notes contained in the
Statement of Additional Information.
-3-
<PAGE>
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class A
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate Servicing Fees
attributable to such shares exclusively to them. See "Shareholder Servicing
Plan" and "Investment Adviser, Custodian and Transfer Agent" under
"Management," and see "Dividends and Distributions" and "Other Information"
for a description of the impact that this may have on holders of Class A
shares.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of how each Portfolio's
net asset value has changed during the periods presented. The tables have been
derived from the Portfolios' financial statements which have been audited by
Arthur Andersen LLP, the Trust's independent public accountants, whose report
thereon is contained in the Statement of Additional Information along with the
financial statements. The financial data included in these tables should be
read in conjunction with the financial statements and related notes included
in the Statement of Additional Information. Further information about the
performance of the Portfolios is available in annual reports to shareholders.
The Statement of Additional Information and annual reports to shareholders may
be obtained from the Trust free of charge by calling 800-688-3350.
<TABLE>
<CAPTION>
Growth/Value Portfolio
June 1, 1991
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
December December December December December 31,
31, 1995 31, 1994 31, 1993 31, 1992 1991
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $10.67 $11.16 $10.51 $ 9.86 $10.00
Income from investment
operations:
Net investment income.......... 0.21 0.23 0.20 0.22 0.14
Net realized and unrealized
gains (losses) on
investments.................. 2.76 (0.17) 1.24 0.75 (0.14)
------ ------- ------ ------ -------
Total from investment
operations................... $ 2.97 $ 0.06 $ 1.44 $ 0.97 $ 0.00
------ ------ ------ ------ ------
Less distributions:
From net investment
income...................... $ (0.22) $ (0.21) $(0.20) $(0.22) $(0.14)
From realized
gains....................... (0.26) (0.30) (0.59) (0.10) (0.00)
In excess of realized
gains....................... -- (0.01) 0.00 0.00 0.00
Tax return of capital.......... -- (0.03) 0.00 0.00 0.00
------- ------- ------- ------- -------
Total distributions......... $ (0.48) $ (0.55) $ (0.79) $ (0.32) $ (0.14)
------- ------- ------- ------- -------
Net asset value, end of
period...................... $13.16 $10.67 $11.16 $10.51 $ 9.86
====== ====== ====== ====== ======
Total return(b).................. 28.04% 0.55% 13.79% 9.87% 0.17%(a)
Ratios/Supplemental Data
Net assets, end of period........ $737,167,067 $571,370,711 $429,635,045 $287,344,809 $238,085,630
Ratio of expenses to average
net assets..................... 0.84% 0.84% 0.83% 0.83% 0.85%(a)
Ratio of net investment income
to average net assets.......... 1.73% 2.07% 1.84% 2.20% 2.56%(a)
Portfolio turnover rate.......... 26.80% 28.04% 42.31% 16.28% 0.94%
Average Commission Rate.......... $0.04
<FN>
- ------------------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Opportunity Portfolio
June 1, 1991
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
December December December December December 31,
31, 1995 31, 1994 31, 1993 31, 1992 1991
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $13.34 $14.49 $12.37 $10.40 $10.00
Income from investment
operations:
Net investment income.......... 0.06 0.07 0.10 0.11 0.09
Net realized and unrealized
gains (losses) on
investments.................. 2.57 (0.54) 2.87 2.43 0.43
------ ------- ------ ------ ------
Total from investment
operations................... $ 2.63 $ (0.47) $ 2.97 $ 2.54 $ 0.52
------ ------- ------ ------ ------
Less distributions:
From net investment
income....................... $(0.06) $(0.07) $(0.10) $(0.11) $(0.09)
From realized
gains........................ (0.76) (0.49) (0.75) (0.46) (0.03)
In excess of realized
gains......................... -- (0.02) 0.00 0.00 0.00
Tax return of capital.......... -- (0.10) 0.00 0.00 0.00
------- ------- ------ ------ ------
Total distributions........... $ (0.82) $ (0.68) $ (0.85) $ (0.57) $ (0.12)
------- ------- ------- ------- -------
Net asset value, end of
period......................... $15.15 $13.34 $14.49 $12.37 $10.40
====== ====== ====== ====== ======
Total return(b).................. 19.88% (3.27%) 24.01% 24.56% 8.92%(a)
Ratios/Supplemental Data
Net assets, end of period........ $650,952,268 $524,999,120 $365,664,513 $166,423,073 $108,046,450
Ratio of expenses to average
net assets..................... 0.89% 0.90% 0.86% 0.84% O.84%(a)
Ratio of net investment income
to average net assets.......... 0.37% 0.53% 0.71% 1.09% 1.56%(a)
Portfolio turnover rate 53.55% 37.51% 33.99% 34.44% 2.92%
Average Commission Rate.......... $0.04
<FN>
- ------------------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Intrinsic Value Portfolio
June 1, 1991
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
December December December December December 31,
31, 1995 31, 1994 31, 1993 31, 1992 1991
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $10.48 $11.05 $10.40 $ 9.89 $10.00
Income from investment
operations:
Net investment income.......... 0.29 0.31 0.29 0.29 0.17
Net realized and unrealized
gains (losses) on
investments.................. 2.24 (0.38) 1.23 1.14 ( 0.02)
------ ------- ------ ------ -------
Total from investment
operations................... $ 2.53 $(0.07) $ 1.52 $ 1.43 $ 0.15
------- ------- ------ ------ ------
Less distributions:
From net investment
income....................... $(0.30) $(0.30) $(0.28) $(0.28) $(0.17)
From realized
gains........................ (0.82) (0.20) ( 0.59) ( 0.64) ( 0.09)
------ ------- ------- ------- -------
Total distributions............ $ (1.12) $ (0.50) $ (0.87) $ (0.92) $ (0.26)
------- ------- ------- ------- -------
Net asset value, end of
period......................... $11.89 $10.48 $11.05 $10.40 $9.89
====== ====== ====== ====== =====
Total return(b).................. 24.38% (0.60%) 14.71% 14.56% 2.70%(a)
Ratios/Supplemental Data
Net assets, end of period........ $255,884,859 $220,028,096 $192,555,183 $107,260,873 $77,450,163
Ratio of expenses to average
net assets..................... 0.91% 0.91% 0.86% 0.84% O.84%(a)
Ratio of net investment income
to average net assets.......... 2.49% 2.92% 2.67% 2.78% 3.03%(a)
Portfolio turnover rate.......... 45.55% 58.62% 63.90% 48.52% 1.80%
Average Commission Rate.......... $0.03
<FN>
- ------------------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Capital Growth Portfolio
July 2, 1994
(Commencement
Year Ended of Operations) to
December 31, December 31,
1995 1994
------------ -----------------
<S> <C> <C>
Net asset value, beginning of period .......... $ 10.44 $ 10.00
Income from investment operations:
Net investment income ....................... 0.08 0.05
Net realized and unrealized gains (losses) on
investments ............................... 2.93 0.43
--------------- ---------------
Total from investment operations ............ $ 3.01 $ 0.48
--------------- ---------------
Less distributions:
From net investment income .................. $ (0.08) $ (0.04)
From net realized gains ..................... (0.11) 0.00
--------------- ---------------
Total distributions ......................... $ (0.19) $ (0.04)
--------------- ---------------
Net asset value, end of period ................ $ 13.26 $ 10.44
=============== ===============
Total return (b) .............................. 28.90% 9.62%(a)
Ratios/Supplemental Data
Net assets, end of period ..................... $ 195,861,178 $ 81,269,604
Ratio of expenses to average net assets ....... 0.86% 0.85%(a)
Ratio of net investment income to average net
assets ...................................... 0.65% 1.25%(a)
Ratio of expenses to average net assets without
fee waivers/reimbursed expenses ............. 0.90% 0.95%(a)
Ratio of net investment income to average net
assets without fee waivers/reimbursed
expenses .................................... 0.61% 1.15%(a)
Portfolio turnover rate ....................... 6.97% 3.29%
Average Commission Rate ....................... $ 0.04
<FN>
- ---------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Balanced Portfolio
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Net asset value, beginning
of period .............................. $ 9.53 $ 10.00
Income from investment
operations:
Net investment income .................. 0.35 0.28
Net realized and unrealized
gains (losses) on
investments .......................... 1.83 (0.48)
-------------- --------------
Total from investment
operations ........................... $ 2.18 $ (0.20)
-------------- --------------
Less distributions:
From net investment
income ............................... $ (0.35) $ (0.27)
From realized
gains ................................ (0.12) 0.00
-------------- --------------
Total distributions .................... $ (0.47) $ (0.27)
-------------- --------------
Net asset value, end of
period ................................. $ 11.24 $ 9.53
============== ==============
Total return(a) .......................... 23.18% (1.95%)
Ratios/Supplemental Data
Net assets, end of period ................ $ 93,623,801 $ 54,167,192
Ratio of expenses to average
net assets ............................. 0.91% 0.85%
Ratio of net investment income
to average net assets .................. 3.40% 3.41%
Ratio of expenses to average net assets
without fee waivers/reimbursed expenses 1.09% 1.56%
Ratio of net investment income to average
net assets without fee waivers/reimbursed
expenses ................................ 3.22% 2.70%
Portfolio turnover rate .................. 31.76% 37.49%
Average Commission Rate .................. $ 0.05
<FN>
- ------------------------
(a) Total returns as presented do not include any applicable sales load.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
International Equity Portfolio
December 3, 1994
Year Ended (Commencement
December 31, of Operations) to
1995 December 31, 1994
------------ -----------------
<S> <C> <C>
Net asset value, beginning
of period ............................. $ 10.01 $ 10.00
Income from investment
operations:
Net investment income ................. 0.10 0.01
Net realized and unrealized
gains (losses) on
investments ......................... 1.05 0.00
Total from investment
operations .......................... $ 1.15 $ 0.01
--------------- ---------------
Less distributions:
From net investment
income .............................. $ (0.11) $ 0.00
From realized
gains ............................... (0.00) 0.00
--------------- ---------------
Total distributions ................... $ (0.11) $ 0.00
--------------- ---------------
Net asset value, end of
period ................................ $ 11.05 $ 10.01
=============== ===============
Total return(b) ......................... 11.47% 1.26%(a)
Ratios/Supplemental Data
Net assets, end of period ............... $ 107,288,301 $ 36,545,470
Ratio of expenses to average
net assets ............................ 1.16% 1.15%(a)
Ratio of net investment income
to average net assets ................. 1.43% 1.18%(a)
Ratio of expenses to average net
assets without reimbursed
expenses .............................. 1.24% 1.92%(a)
Ratio of net investment income to average
net assets without reimbursed
expenses .............................. 1.35% 0.41%(a)
Portfolio turnover rate ................. 2.09% 0.30%
Average Commission Rate ................. $ 0.05
<FN>
- ------------------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total return as presented does not include any applicable sales
load.
</TABLE>
-10-
<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objective and
policies. However, only the Class A shares of the Growth/Value, Opportunity,
Intrinsic Value, Capital Growth, Balanced and International Equity Portfolios
are offered pursuant to this Prospectus. Each such Portfolio is classified as
a diversified investment portfolio under the 1940 Act.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
such Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Growth/Value Portfolio
The investment objective of the Growth/Value Portfolio is to achieve
long-term capital appreciation and, secondarily, to produce current income
approximating that prevailing within the general equity market. The Portfolio
seeks to achieve this objective by investing primarily in equity securities of
relatively large companies. The Adviser believes that well managed, larger
companies historically have provided investors with attractive returns, high
liquidity and lower than average volatility. The Portfolio invests in
companies which the Adviser believes have earnings growth expectations that
exceed those implied by the market's current valuation. In addition, the
Portfolio seeks to maintain a portfolio of companies whose earnings will
increase at a faster rate than within the general equity market. The equity
portion of the portfolio generally will be constructed in a "bottom-up"
manner. "Bottom-up" refers to an analytical approach to securities selection
which first focuses on the company
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<PAGE>
and company-related matters as contrasted to a "top-down" analysis which first
focuses on the industry or the economy. In the Adviser's opinion this
procedure may generally be expected to result in a portfolio characterized by
lower price/earnings ratios, above average growth prospects, and average
market risk.
Opportunity Portfolio
The investment objective of the Opportunity Portfolio is to achieve
long-term capital appreciation and, secondarily, to maintain a moderate level
of dividend income. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies with small to intermediate market
capitalization. The Adviser believes that there are many companies in this
size range that enjoy enhanced growth prospects, operate in more stable market
niches, and have greater ability to respond to new business opportunities, all
of which increase their likelihood of attaining superior levels of
profitability and investment returns. However, they may escape many investors'
attention because they are less well known than some larger companies. Shares
of these companies may also be more volatile than those of larger companies,
so the Opportunity Portfolio can be expected to exhibit somewhat greater
volatility than market indices dominated by very large companies. The Adviser
intends to reduce the volatility and enhance the potential return of the
Portfolio's holdings by concentrating on companies which have demonstrated
records of superior profitability, maintain conservative balance sheets, and
are, in general, of above-average quality, although stocks of lesser quality
may be purchased by the Portfolio if the Adviser believes they offer
sufficient opportunity for capital appreciation.
Intrinsic Value Portfolio
The investment objective of the Intrinsic Value Portfolio is to
provide long-term capital growth, with income a secondary consideration. The
Portfolio seeks to achieve this objective by investing primarily in equity
securities of companies believed by the Adviser to represent a value or
potential worth which is not fully recognized by prevailing market prices. In
selecting investments for the Portfolio, screening techniques are employed to
isolate issues believed to be attractively priced. The Adviser then evaluates
the underlying earning power and dividend paying ability of these potential
investments. The Portfolio's holdings are usually characterized by lower
price/earnings, price/cash flow and price/book value ratios and by above
average current dividend yields relative to the equity market. Companies
purchased by the Portfolio are often deemed by the Adviser to be overlooked
and out of favor by the marketplace at the time of purchase. In general the
Portfolio's investments are diversified among industry groups that meet the
Portfolio's valuation criteria to attempt to reduce certain of the risks
inherent in common stock investments.
Capital Growth Portfolio
The investment objective of the Capital Growth Portfolio is to
maximize long-term capital appreciation with current income not a significant
consideration. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies with a market capitalization of at
least $1 billion. In selecting investments for the Portfolio, the Adviser will
employ screening techniques and a research intensive approach emphasizing
superior, sustainable annual earnings growth which is supported by strong
revenue growth, margin expansion and conservative financial leverage. Because
of this growth orientation, certain market sectors may be over represented in
the Portfolio's investments; however, investments will be diversified among
industry groups and individual issuers. The value of the Portfolio's
investments will fluctuate based on market and specific industry conditions,
and other factors such as investment-style preferences. It is anticipated
that, generally, the dividend yield of the Portfolio will be less than or
equal to that of the broad
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<PAGE>
equity market and will likely fluctuate. Therefore, the Portfolio is intended
for investors seeking long-term capital appreciation.
Investment Policies Applicable to the Growth/Value, Opportunity, Intrinsic Value
and Capital Growth Portfolios
The Growth/Value, Opportunity, Intrinsic Value and Capital Growth
Portfolios invest primarily in publicly traded common stocks of companies
incorporated in the United States, although each such Portfolio may also
invest up to 25% of its total assets in the securities of foreign issuers,
either directly or through American Depository Receipts. In addition, they may
invest in securities convertible into common stock, such as certain bonds and
preferred stocks, and may invest up to 5% of their respective net assets in
other types of securities having common stock characteristics (such as rights
and warrants to purchase equity securities). The Portfolios may also enter
into futures contracts and related options and may utilize options. Under
normal market conditions, each Portfolio expects to invest at least 65% of the
value of its total assets in equity securities. Each Portfolio may also hold
up to 35% of its total assets in short-term obligations issued or guaranteed
by the U.S. Government, or its agencies or instrumentalities, money market
instruments, repurchase agreements and cash.
Balanced Portfolio
The investment objective of the Balanced Portfolio is to achieve
long-term total return through a combination of capital appreciation and
current income. The Portfolio seeks to achieve its investment objective by
investing its assets primarily in three major asset groups: equity securities;
fixed income securities; and cash equivalent securities. In pursuing the
Portfolio's investment objective, the Adviser allocates the Portfolio's
investments primarily based on its evaluation of the long-term relative
attractiveness of the major asset groups. The Adviser bases its evaluations of
relative attractiveness on its outlook for the capital market. This outlook
includes, but is not limited to, judgments about where the economy appears to
be in the business cycle together with expectations for inflation, interest
rates, and long-term corporate earnings growth.
Under normal market conditions, the Portfolio's policy is to invest at
least 25% of the value of its total assets in fixed income senior securities
and no more than 75% in equity securities. Compliance with these percentage
requirements may limit the ability of the Portfolio to maximize total return.
The actual percentage of assets invested in equity securities, fixed income
securities and cash equivalent securities will vary from time to time,
depending on the judgment of the Adviser as to general market and economic
conditions, trends in yields, interest rates and changes in fiscal and
monetary developments.
Equity Securities. The equity securities in which the Balanced
Portfolio normally invests are common stocks, preferred stocks, rights,
warrants and securities convertible into common or preferred stocks. The
equity portion of the Balanced Portfolio's investments will be invested
primarily in publicly traded stocks of companies incorporated in the United
States, although up to 20% of its total assets may be invested in the equity
securities of foreign issuers, either directly or through American Depository
Receipts.
The Adviser selects equity securities for the Portfolio based on such
factors as general financial condition, price/earnings, price/cash flow and
price/book value ratios, above average current dividend yields relative to the
equity market, market share, product leadership and other investment criteria.
The Portfolio invests in the equity securities of companies which the Adviser
believes have earnings growth expectations that exceed those implied by the
market's current valuation and that will increase at a faster rate than within
the general equity market. The Adviser may also select equity securities of
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<PAGE>
companies with small to intermediate market capitalization which enjoy
enhanced growth prospects, operate in market niches, and have greater ability
to respond to new business opportunities, all of which increase their
likelihood of attaining superior levels of profitability and investment
returns. The Adviser may also select equity securities of companies it
believes represent a value or potential worth which is not fully recognized by
prevailing market prices.
Debt Securities. The Balanced Portfolio invests the fixed income
portion of its portfolio of investments in a broad range of debt securities
rated "investment grade" or higher at the time of purchase, or unrated
investments deemed by the Adviser to be of comparable quality. Debt securities
in which the Portfolio normally invests are: (i) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; (ii)
corporate, bank and commercial obligations; (iii) securities issued or
guaranteed by foreign governments, their agencies or instrumentalities; (iv)
securities issued by supranational banks; (v) mortgage backed securities; and
(vi) securities representing interests in pools of assets. Investments include
fixed and variable-rate bonds, zero coupon bonds, debentures, and various
types of demand instruments. Obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities may include mortgage backed
securities, as well as "stripped securities" (both interest-only and
principal-only) and custodial receipts for Treasury securities. Most fixed
income obligations acquired by the Portfolio will be issued by companies or
governmental entities located within the United States. Up to 15% of the total
assets of the Portfolio may, however, be invested in dollar-denominated debt
obligations (including cash equivalent securities) of foreign issuers.
The Adviser manages the fixed income portion of the Portfolio based on
anticipated interest rate changes and the use of active management strategies
such as sector rotation, intra-sector adjustments and yield curve and
convexity considerations. In use of such active management strategies, the
Adviser seeks value in investment grade fixed income securities. Sector
rotation involves the Adviser selecting among different economic or industry
sectors based upon apparent or relative attractiveness. Thus at times a sector
offers yield advantages relative to other sectors. An intra-sector adjustment
occurs when the Adviser determines to select a particular issue within a
sector. Yield curve considerations involve the Adviser attempting to compare
the relationship between time to maturity and yield to maturity in order to
identify the relative value in the relationship. Convexity considerations
consist of the Adviser seeking securities that rise in price more quickly, or
decline in price less quickly, than the typical security of that price risk
level and therefore enable the Adviser to obtain an additional return when
interest rates change dramatically.
In acquiring particular fixed income securities for the Portfolio, the
Adviser will consider, among other things, historical yield relationships
between private and governmental debt securities, intermarket yield
relationships among various industry sectors, current economic cycles and the
attractiveness and creditworthiness of particular issuers. Depending upon the
Adviser's analysis of these and other factors, the Portfolio's holdings of
issues in particular industry sectors may be overweighted when compared to the
relative industry weightings in the Lehman Brothers Aggregate Bond Index, or
other recognized indices. The value of the fixed income portion of the
Portfolio can be expected to vary inversely with changes in prevailing
interest rates.
Cash Equivalent Securities and Other Investments. The cash equivalent
securities in which the Balanced Portfolio normally invests are short-term
obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, "high quality" money market instruments such as
certificates of deposit, bankers' acceptances, time deposits, repurchase
agreements, reverse repurchase agreements, short-term obligations issued by
state and local governmental issuers which carry yields that are competitive
with those of other types of high quality money market instruments, commercial
paper, notes, other
-14-
<PAGE>
short-term obligations and variable rate master demand notes. "High quality"
money market instruments are money market instruments which are rated at the
time of purchase within the two highest rating categories or which are unrated
at such time but are deemed by the Adviser to be of comparable quality. Such
investments may include obligations of foreign banks and foreign branches of
U.S. banks. The Portfolio may also invest its cash balances in securities
issued by other investment companies which invest in high-quality, short-term
debt securities. As a shareholder of another investment company, the Portfolio
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would
be in addition to the advisory and other expenses that the Portfolio bears
directly in connection with its own operations.
The Balanced Portfolio may also enter into futures contracts
and related options and utilize options as more fully described below.
International Equity Portfolio
The investment objective of the International Equity Portfolio is to
achieve long-term capital appreciation and, secondarily, to produce current
income. The Portfolio seeks to achieve its objective by investing primarily in
equity securities of foreign issuers. The Portfolio may exhibit more
volatility than the U.S. equity market in general.
The Adviser's investment approach to managing the Portfolio's assets
emphasizes active country selection involving global economic and political
assessments together with valuation analysis of selected countries' securities
markets. This country allocation approach is based on absolute/relative
valuations, expected total returns including currency and changing
fundamentals. In situations where an investment's attractiveness outweighs
prospects for currency weakness, the Adviser will take suitable hedging
measures. An index approach is typically used at the stock selection level.
The Adviser employs quantitative techniques in conjunction with its
judgment and experience to determine the foreign equity markets that the
Portfolio will be invested in and the percentage of total assets the Portfolio
will hold by country. This investment approach focuses on economic
developments in foreign countries, fundamental analysis at the country level
and the political environment. After the country weightings have been
determined, investments are typically made in country "baskets" of equity
securities. A country "basket" is comprised of equity securities of a
particular country and is constructed using a quantitatively-oriented sampling
technique to replicate the performance of an individual country's stock market
index. The Morgan Stanley Capital International Country Indexes have, for some
time, been the accepted benchmarks in the U.S. for international equity fund
country comparisons. The Portfolio may also invest in individual equity
securities the Adviser believes offer opportunity for capital appreciation.
The Portfolio's investments will generally be diversified among
geographic regions and countries. The Portfolio's assets may be invested in
equity securities located in but not limited to the United Kingdom and
European continent, Japan, other Far East areas and Latin America. The
Portfolio may also invest in other regions seeking to capitalize on investment
opportunities in other parts of the world. The Portfolio's assets will be
invested at all times in the securities of issuers located in at least three
different foreign countries. Investments in a particular country may exceed
25% of the Portfolio's total assets, thus making its performance more
dependent upon the political and economic circumstances of a particular
country than a more widely diversified portfolio.
The Portfolio will be primarily invested in equity securities of
foreign companies consisting of common stocks, preferred stocks, rights,
warrants, and
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<PAGE>
securities convertible into common or preferred stock. Equity investments also
include American Depository Receipts, European Depository Receipts and similar
securities that are either sponsored or unsponsored. Under normal market
conditions, the Portfolio expects to invest at least 65% of the value of its
total assets in equity securities of foreign issuers. The Portfolio may hold
up to 35% of its total assets in debt securities, and cash equivalent holdings
consisting of short-term debt obligations and cash. However, the Portfolio
does not expect to have a substantial portion of its assets invested in debt
securities and cash equivalent holdings under normal market conditions. Debt
securities in which the Portfolio may invest consist of: (i) debt securities
of foreign issuers, foreign governments and agencies that the Adviser
believes, based on market conditions, the financial condition of the issuer,
general economic conditions and other relevant factors, offer opportunities
for capital appreciation; (ii) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; (iii) corporate, bank and
commercial obligations; (iv) mortgage backed securities; and (v) securities
representing interests in pools of assets. In the event the Adviser determines
that unusual and adverse market conditions exist, the Portfolio may adopt a
temporary defensive posture and invest without limitation in debt securities
and cash equivalent holdings. To the extent the Portfolio is so invested, its
investment objective may not be achieved.
The Portfolio may also enter into futures contracts, related options,
foreign currency transactions and forward contracts, and utilize options.
OTHER INVESTMENT POLICIES
Ratings
If not rated as commercial paper, debt obligations acquired by any of
the Portfolios will be investment grade at the time of purchase, i.e.,
obligations rated AAA, AA, A or BBB by Standard & Poor's Rating Group,
Division of McGraw Hill ("S&P"), Fitch Investors Service, Inc. ("Fitch"), Duff
& Phelps Credit Co. ("Duff") or IBCA, Inc. ("IBCA") or Aaa, Aa, A or Baa by
Moody's Investors Service, Inc. ("Moody's") (each a "Rating Agency") or be
unrated but deemed by the Adviser to be comparable in quality at the time of
purchase to instruments that are so rated. Obligations rated in the lowest of
the top four rating categories (Baa by Moody's or BBB by S&P, Fitch, Duff or
IBCA) are considered to have less capacity to pay interest and repay principal
and have certain speculative characteristics. The debt ratings are described
in the Statement of Additional Information.
Short-Term Investments
Each Portfolio may hold the types of short-term investments described
under "Balanced Portfolio - Cash Equivalent Securities and Other Investments"
above.
U.S. Government Obligations
The Portfolios may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. The Portfolios may also invest in interests in the
foregoing securities, including collateralized mortgage obligations guaranteed
by a U.S. Government agency or instrumentality, and in Government-backed
trusts which hold obligations of
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foreign governments that are guaranteed or backed by the full faith and credit
of the United States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Stripped Government Obligations
To the extent consistent with their respective investment objectives,
the Balanced and International Equity Portfolios may purchase Treasury
receipts and other "stripped" securities that evidence ownership in either the
future interest payments or the future principal payments on U.S. Government
obligations. These participations, which may be issued by the U.S. Government
(or a U.S. Government agency or instrumentality) or by private issuers such as
banks and other institutions, are issued at a discount to their "face value,"
and may include stripped mortgage backed securities ("SMBS"), which are
derivative multi-class mortgage securities. Stripped securities, particularly
SMBS, may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, a Portfolio may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting entirely of principal payments generally is
extremely volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest are generally higher
than prevailing market yields on other mortgage backed obligations because
their cash flow patterns are more volatile and there is a greater risk that
the initial investment will not be fully recouped.
Custodial Receipts for Treasury Securities
The Balanced and International Equity Portfolios may purchase
participations in trusts that hold U.S. Treasury securities (such as TIGRs and
CATs) where the trust participations evidence ownership in either the future
interest payments or the future principal payments on the U.S. Treasury
obligations. These participations are normally issued at a discount to their
"face value," and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
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Repurchase and Reverse Repurchase Agreements
To increase its income, each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). No Portfolio will enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Portfolio may also obtain funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of a particular Portfolio exceeds one-third of the value of its total assets.
Loans of securities involve risks of delay in receiving additional collateral
or in recovering the securities loaned or possible loss of rights in the
collateral should the borrower of the securities become insolvent. Loans will
be made only to borrowers that provide the requisite collateral comprised of
liquid assets and when, in the Adviser's judgment, the income to be earned
from the loan justifies the attendant risks.
Illiquid Securities
In accordance with their fundamental investment limitation described
below, the Growth/Value, Opportunity and Intrinsic Value Portfolios will not
knowingly invest more than 10% and the Capital Growth, Balanced and
International Equity Portfolios will not knowingly invest more than 15% of the
value of their respective total assets in securities that are illiquid.
Securities having legal or contractual restrictions on resale or no readily
available market, and instruments (including repurchase agreements, variable
and floating rate instruments and time deposits) that do not provide for
payment to the Portfolios within seven days after notice are subject to this
limitation. Securities that have legal or contractual restrictions on resale
but have a readily available market are not deemed to be illiquid for purposes
of this limitation.
The Portfolios may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under
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Rule 144A is a recent development, and it is not possible to predict how this
market will develop. The Board of Trustees will carefully monitor any
investments by a Portfolio in these securities.
Borrowings
The Portfolios may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolios would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities
it is obligated to repurchase.
Foreign Securities
As stated above, the Growth/Value, Opportunity, Intrinsic Value,
Capital Growth, Balanced and International Equity Portfolios may invest up to
25%, 25%, 25%, 25%, 20% and 100% of their respective total assets (exclusive
of short-term cash investments) in foreign securities. Investments in foreign
securities, whether made directly or indirectly, involve certain inherent
risks, such as political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns, changes
in exchange rates of foreign currencies and the possibility of adverse changes
in investment or exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company.
Listed foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. Further, foreign stock markets are generally not as
developed or efficient as those in the U.S. and in most foreign markets volume
and liquidity are less than in the U.S. Fixed commissions on foreign stock
exchanges are generally higher than the negotiated commissions on U.S.
exchanges, and there is generally less government supervision and regulation
of foreign stock exchanges, brokers and listed companies than in the U.S. With
respect to certain foreign countries, there is a possibility of expropriation
or confiscatory taxation, limitations on the removal of funds or other assets
or diplomatic developments that could affect investment within those
countries. Because of these and other factors, securities of foreign companies
acquired by a Portfolio may be subject to greater fluctuation in price than
securities of domestic companies.
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations. Some currency exchange costs may be incurred
when a Portfolio changes investments from one country to another.
Furthermore, some securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the costs of such
investments and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by the Portfolios from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries. Tax conventions between certain countries and the
United States, however, may reduce or eliminate such taxes. All such taxes
paid by a Portfolio will reduce its net income available for distribution to
investors.
American Depository Receipts ("ADRs")
The Portfolios may invest in securities of foreign issuers in the form
of ADRs or similar securities representing securities of foreign issuers.
These securities may not be denominated in the same currency as the securities
they represent. ADRs are receipts typically issued by a United States bank or
trust
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company evidencing ownership of the underlying foreign securities and are
denominated in U.S. dollars. Certain such institutions issuing ADRs may not be
sponsored by the issuer. A non-sponsored depository may not provide the same
shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer.
European Depository Receipts ("EDRs")
The Capital Growth and International Equity Portfolios may invest in
securities of foreign issuers in the form of EDRs or similar securities
representing securities of foreign issuers. These securities may not be
denominated in the same currency as the securities they represent. EDRs are
receipts issued by a European financial institution evidencing ownership of
the underlying foreign securities and are generally denominated in foreign
currencies. Generally, EDRs, in bearer form, are designed for use in the
European securities markets.
Supranational Bank Obligations
The Balanced Portfolio may invest in obligations of supranational
banks. Supranational banks are international banking institutions designed or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will
be undertaken or met in the future.
Convertible Securities
A convertible security is a security that may be converted either at a
stated price or rate within a specified period of time into a specified number
of shares of common stock. By investing in convertible securities, a Portfolio
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock. Convertible securities acquired by a Portfolio will be rated
investment grade by a Rating Agency, or if unrated, will be of comparable
quality as determined by the Adviser. Subsequent to its purchase by a
Portfolio, a rated security may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Portfolio. The Adviser
will consider such an event in determining whether the Portfolio involved
should continue to hold the security. The Adviser expects, however, to
promptly sell any securities that are non-investment grade as a result of
these events that exceed 5% of a Portfolio's net assets where it has
determined that such sale is in the best interest of the Portfolio.
Warrants
Each Portfolio may invest up to 5% of its assets at the time of
purchase in warrants and similar rights (other than those that have been
acquired in units or attached to other securities). Warrants represent rights
to purchase securities at a specified price valid for a specified period of
time. The prices of warrants do not necessarily correlate with the prices of
the underlying securities.
When-Issued Purchases and Forward Commitments
The Portfolios may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a
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security it owns or intends to purchase, regardless of future changes in
interest rates. When-issued and forward commitment transactions involve the
risk, however, that the yield obtained in a transaction may be less favorable
than the yield available in the market when the securities delivery takes
place. Each Portfolio's forward commitments and when-issued purchases are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. The Portfolios do not earn income with respect to these
transactions until the subject securities are delivered to the Portfolios. The
Portfolios do not intend to engage in when-issued purchases and forward
commitments for speculative purposes but only in furtherance of their
investment objectives.
Asset Backed Securities
Asset Backed Securities held by the Balanced and International Equity
Portfolios arise through the grouping by governmental, government-related and
private organizations of loans, receivables and other assets originated by
various lenders, as described below.
The yield characteristics of Asset Backed Securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. As a result, if an Asset
Backed Security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an Asset Backed Security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Portfolios, the maturity of Asset Backed Securities
will be based on estimates of average life.
Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Like other fixed income securities, when interest rates rise the value of an
Asset Backed Security generally will decline; however, when interest rates
decline, the value of an Asset Backed Security with prepayment features may
not increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard
prepayments and thus affect maturities.
These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the
trading market for short-term mortgages and Asset Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Mortgage Backed Securities. Asset Backed Securities acquired by the
Balanced and International Equity Portfolios consist of both mortgage and
non-mortgage backed securities. Mortgage backed securities represent an
ownership interest in a pool of mortgages, the interest on which is in most
cases issued and guaranteed by an agency or instrumentality of the U.S.
Government, although not necessarily by the U.S. Government itself. Mortgage
backed securities include collateralized mortgage obligations and mortgage
pass-through certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
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("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. In
most cases, however, payments of principal are applied to the CMO classes in
the order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. These multiple class securities may be issued
or guaranteed by U.S. Government agencies or instrumentalities, including the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"), or
issued by trusts formed by private originators of, or investors in, mortgage
loans. Classes in CMOs which the Portfolios may hold are known as "regular"
interests. CMOs also issue "residual" interests, which in general are junior
to and more volatile than regular interests. The Portfolios do not intend to
purchase residual interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which
the Portfolios may invest is a GNMA Certificate which is backed as to the
timely payment of principal and interest by the full faith and credit of the
U.S. Government. Another type is a FNMA Certificate, the principal and
interest of which are guaranteed only by FNMA itself, not by the full faith
and credit of the U.S. Government. Another type is a FHLMC Participation
Certificate which is guaranteed by FHLMC as to timely payment of principal and
interest. However, like a FNMA security it is not guaranteed by the full faith
and credit of the U.S. Government. Privately issued mortgage backed securities
will carry a rating at the time of purchase of at least A by S&P or by Moody's
or, if unrated, will be in the Adviser's opinion equivalent in credit quality
to such rating. Mortgage backed securities issued by private issuers, whether
or not such obligations are subject to guarantees by the private issuer, may
entail greater risk than obligations directly or indirectly guaranteed by the
U.S. Government.
Non-Mortgage Backed Securities. The Balanced and International Equity
Portfolios may also invest in non-mortgage backed securities including
interests in pools of receivables, such as motor vehicle installment purchase
obligations and credit card receivables. Such securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities may also be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Non-mortgage backed
securities are not issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
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Variable and Floating Rate Instruments
The Balanced Portfolio may invest in leveraged inverse floating rate
debt instruments ("inverse floaters"). The interest rate of an inverse floater
resets in the opposite direction from the market rate of interest to which it
is indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent
in inverse floaters is associated with greater volatility in their market
values.
Zero Coupon Obligations
Each Portfolio may invest in zero coupon obligations which are
discount debt obligations that do not make periodic interest payments although
income is generally imputed to the holder on a current basis. Such obligations
may have higher price volatility than those which require the payment of
interest periodically. The Adviser will consider the liquidity needs of a
Portfolio when any investment in zero coupon obligations is made.
Foreign Currency Transactions
The International Equity and Balanced Portfolios may engage in
currency exchange transactions to the extent consistent with their respective
investment objectives or to hedge their portfolios. The Portfolios will
conduct their currency exchange transactions either on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, or through
entering into forward contracts to purchase or sell currencies. A forward
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which must be more than two days from the
date of the contract, at a price set at the time of the contract. Forward
currency exchange contracts are entered into in the interbank market conducted
directly between currency traders (typically commercial banks or other
financial institutions) and their customers. They may be used to reduce the
level of volatility caused by changes in foreign currency exchange rates or
when such transactions are economically appropriate for the reduction of risks
in the ongoing management of the Portfolios. Although forward currency
exchange contracts may be used to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of such currency
increase. The Portfolios also may combine forward currency exchange contracts
with investments in securities denominated in other currencies.
The International Equity Portfolio also may maintain short positions
in forward currency exchange transactions, which would involve the Portfolio
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency the Portfolio contracted to receive
in the exchange.
Each of the International Equity and Balanced Portfolios will maintain
in a segregated custodial account cash or U.S. Government securities or other
high quality liquid debt securities at least equal to the aggregate amount of
its short positions (in the case of the International Equity Portfolio) and of
its total assets committed to consummation of its forward currency exchange
contracts, plus accrued interest, in accordance with applicable requirements
of the SEC.
Options on Foreign Currency
The International Equity and Balanced Portfolios may purchase and sell
call and put options on foreign currency for the purpose of hedging against
changes in future currency exchange rates. Call options convey the right to
buy the underlying currency at a price which is expected to be lower than the
spot price
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of the currency at the time the option expires. Put options convey the right
to sell the underlying currency at a price which is anticipated to be higher
than the spot price of the currency at the time the option expires. The
Portfolios may use foreign currency options for the same purposes as forward
currency exchange and futures transactions, as described herein. See also
"Options" and "Currency Futures and Options on Currency Futures" below.
Futures Contracts and Related Options
Each Portfolio may trade futures contracts and options on futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. To the
extent permitted under applicable law, the International Equity Portfolio may
also trade futures contracts and related options on exchanges located outside
the United States, such as the London International Financial Futures Exchange
and the Sydney Futures Exchange Limited. Foreign markets may offer advantages
such as trading in commodities that are not currently traded in the United
States or arbitrage possibilities not available in the United States. Foreign
markets, however, may have greater risk potential than domestic markets.
Each Portfolio may purchase and sell futures contracts which obligate
it to take or make delivery of certain securities at maturity, as well as
stock index futures contracts which are bilateral agreements pursuant to which
two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. The Capital Growth, Balanced and International
Equity Portfolios may enter into contracts for the future delivery of
fixed-income securities commonly known as interest rate futures contracts.
A Portfolio may sell a futures contract in order to offset an expected
decrease in the value of its portfolio that might otherwise result from a
market decline or currency exchange fluctuation. A Portfolio may do so either
to hedge the value of its securities portfolio as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, a Portfolio may utilize futures contracts
in anticipation of changes in the composition of its holdings or in currency
exchange rates.
The Capital Growth, Balanced and International Equity Portfolios may
also purchase options on futures contracts and may purchase and write put and
call options on stock indices listed on U.S. and, in the case of the
International Equity Portfolio foreign exchanges, or traded in the
over-the-counter market. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period
of the option.
When a Portfolio sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, a Portfolio may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the
Portfolio intends to purchase. Similarly, if the value of a Portfolio's
portfolio securities is expected to decline, the Portfolio might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
The Portfolios' commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated
by the Commodities and Futures Trading Commission ("CFTC"). In addition, a
Portfolio may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona
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fide hedging transactions, would exceed 5% of the liquidation value of its
assets, after taking into account unrealized profits and unrealized losses on
such contracts it has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the percentage limitation. Pursuant to SEC
requirements, the Portfolios will be required to segregate cash or high
quality money market instruments in connection with their commodities
transactions in an amount generally equal to the value of the underlying
commodity. The Trust intends to comply with the regulations of the CFTC
exempting the Portfolios from registration as a "commodity pool operator".
For a more detailed description of futures contracts and related
options, see Appendix B to the Statement of Additional Information.
Currency Futures and Options on Currency Futures
The International Equity and Balanced Portfolios may purchase and sell
currency futures contracts and options thereon. By selling foreign currency
futures, a Portfolio can establish the number of U.S. dollars that it will
receive in the delivery month for a certain amount of a foreign currency. In
this way, if a Portfolio anticipates a decline of a foreign currency against
the U.S. dollar, the Portfolio can attempt to fix the U.S. dollar value of
some or all of its securities that are denominated in that currency. By
purchasing foreign currency futures, a Portfolio can establish the number of
U.S. dollars that it will be required to pay for a specified amount of a
foreign currency in the delivery month. Thus, if a Portfolio intends to buy
securities in the future and expects the U.S. dollar to decline against the
relevant foreign currency during the period before the purchase is effected,
the Portfolio, for the price of the currency future, can attempt to fix the
price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow a Portfolio,
for the price of the premium it must pay for the option, to decide whether or
not to buy (in the case of a call option) or to sell (in the case of a put
option) a futures contract at a specified price at any time during the period
before the option expires. If the Portfolios, in purchasing an option, have
been correct in their judgment concerning the direction in which the price of
a foreign currency would move as against the U.S. dollar, they may exercise
the option and thereby take a futures position to hedge against the risk they
had correctly anticipated or close out the option position at a gain that will
offset, to some extent, currency exchange losses otherwise suffered by the
Portfolios. If exchange rates move in a way a Portfolio did not anticipate,
the Portfolio will have incurred the expense of the option without obtaining
the expected benefit. As a result, a Portfolio's profits on the underlying
securities transactions may be reduced or overall losses may be incurred.
Options
The Capital Growth, Balanced and International Equity Portfolios may
purchase and sell put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation for hedging purposes.
Such transactions may be effected on a principal basis with primary reporting
dealers in U.S. Government securities in an amount not exceeding 5% of a
Portfolio's net assets, as described further in the Statement of Additional
Information. Such options may relate to particular securities or to various
stock indices or bond indices. Purchasing options is a specialized investment
technique which entails a substantial risk of a complete loss of the amounts
paid as premiums to the writer of the option. Each such Portfolio may also
purchase and write put and call options on stock indices listed on foreign
exchanges or traded in the over-the-counter market.
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The Capital Growth, Balanced and International Equity Portfolios may
purchase and sell put options on portfolio securities at or about the same
time that they purchase the underlying security or at a later time. By buying
a put, a Portfolio limits its risk of loss from a decline in the market value
of the security until the put expires. Any appreciation in the value of and
yield otherwise available from the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by a Portfolio in
order to acquire the underlying security at a later date at a price that
avoids any additional cost that would result from an increase in the market
value of the security. A Portfolio may also purchase call options to increase
its return to investors at a time when the call is expected to increase in
value due to anticipated appreciation of the underlying security. Prior to its
expiration, a purchased put or call option may be sold in a closing sale
transaction (a sale by a Portfolio, prior to the exercise of an option that it
has purchased, of an option of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
In addition, the Capital Growth, Balanced and International Equity
Portfolios may write covered call and secured put options. A covered call
option means that a Portfolio owns or has the right to acquire the underlying
security subject to call at all times during the option period. A secured put
option means that a Portfolio 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. Such
options will be listed on a national securities exchange and issued by the
Options Clearing Corporation and may be effected on a principal basis with
primary reporting dealers in U.S. Government securities. The aggregate value
of the securities subject to options written by a Portfolio will not exceed
25% of the value of its net assets. In order to close out an option position
prior to maturity, a Portfolio may enter into a "closing purchase transaction"
by purchasing a call or put option (depending upon the position being closed
out) on the same security with the same exercise price and expiration date as
the option which it previously wrote.
By writing a covered call option, a Portfolio forgoes the opportunity
to profit from an increase in the market price of the underlying security
above the exercise price except insofar as the premium represents such a
profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Portfolio effects a closing purchase
transaction by purchasing an option of the same series. If a Portfolio writes
a secured put option, it assumes the risk of loss should the market value of
the underlying security decline below the exercise price of the option. The
use of covered call and secured put options will not be a primary investment
technique of the Portfolios.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
Risk Factors Associated with Futures, Options and Currency Futures and Options
To the extent a Portfolio is engaging in a futures transaction as a
hedging device, due to the risk of an imperfect correlation between securities
in its portfolio that are the subject of a hedging transaction and the futures
contract used as a hedging device, it is possible that the hedge will not be
fully effective in that, for example, losses on the portfolio securities may
be in excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the portfolio securities that were the
subject of the hedge. In futures contracts based on indices, the risk of
imperfect correlation increases as the composition of the Portfolio varies
from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures
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contracts, the Portfolio may buy or sell futures contracts in a greater or
lesser dollar amount than the dollar amount of the securities being hedged if
the historical volatility of the futures contract has been less or greater
than that of the securities. Such "over hedging" or "under hedging" may
adversely affect the Portfolio's net investment results if market movements
are not as anticipated when the hedge is established.
Successful use of futures by a Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of
securities prices, interest rates, currency exchange rates and other economic
factors. For example, if the Portfolio has hedged against the possibility of a
decline in the market adversely affecting the value of securities held in its
portfolio and prices increase instead, the Portfolio will lose part or all of
the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.
Although a Portfolio intends to enter into futures contracts and
options transactions 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. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contracts prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the
Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures position in anticipation of adverse price
movements, it will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on
the futures contract.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. The foreign
currency market offers less protection against defaults in the forward trading
of currencies than is available when trading in currencies occurs on an
exchange. Since a forward currency contract is not guaranteed by an exchange
or clearinghouse, a default on the contract would deprive the Portfolio of
unrealized profits or force the Portfolio to cover its commitments for
purchase or resale, if any, at the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
are principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition,
unless the Portfolio hedges against fluctuations in the exchange rate between
the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Portfolio might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Portfolio could
incur losses as a
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result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Risk Factors Associated with Derivative Instruments
Each Portfolio may purchase "derivative" instruments. "Derivative"
instruments are instruments that derive value from the performance of
underlying assets, interest or currency exchange rates, or indices, and
include (but are not limited to) futures contracts, options, forward currency
contracts and structured debt obligations (including collateralized mortgage
obligations and other types of asset-backed securities, "stripped" securities
and various floating rate instruments, including "inverse" floaters).
Derivative instruments present, to varying degrees, market risk that
the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the "derivative"
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Portfolio will be unable to sell a "derivative"
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a "derivative" instrument (such as an option)
will not correlate exactly to the value of the underlying assets, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
"derivative" instruments are more complex than others, and for those
instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the "derivative"
instruments purchased by the Portfolios, and will determine, in connection
with its day-to-day management of the Portfolios, how they will be used in
furtherance of the Portfolios' investment objectives. It is possible, however,
that the Adviser's evaluations will prove to be inaccurate or incomplete and,
even when accurate and complete, it is possible that the Portfolios will,
because of the risks discussed above, incur loss as a result of their
investments in "derivative" instruments.
Portfolio Turnover
Generally the Portfolios will purchase securities for capital
appreciation or investment income, or both, and not for short-term trading
profits. However, a Portfolio may sell a portfolio investment soon after its
acquisition if the Adviser believes that such a disposition is consistent with
or in furtherance of the Portfolio's investment objective. Portfolio
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, such Portfolios
are likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Portfolio
turnover may also result in the realization of substantial net capital gains.
(See "Taxes-Federal" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.) While it is not possible
to accurately predict portfolio turnover rates, the annual turnover rates for
the Growth/Value, Opportunity, Intrinsic Value, Capital Growth and
International Equity Portfolios are not expected to exceed 100% and the annual
turnover rate for the Balanced Portfolio is not expected to exceed 75%.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
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investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of a Portfolio's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by a
Portfolio, except that up to 25% of the value of the Portfolio's total assets
may be invested without regard to these limitations.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured by such
instruments; (b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
3. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
4. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. No Portfolio will
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with a Portfolio's
investment practices described in the Statement of Additional Information or
in this Prospectus are not deemed to be pledged for purposes of this
limitation.
In addition, the Growth/Value, Opportunity and Intrinsic Value
Portfolios may not invest more than 10% of their respective total assets in
illiquid investments. The Capital Growth, Balanced and International Equity
Portfolios may invest up to 15% of their respective total assets in illiquid
securities. See "Illiquid Securities" above.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Portfolio's portfolio securities will not constitute
a violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of a Portfolio's shares in certain states,
the Portfolios may make commitments more restrictive than the investment
policies and limitations described above. Should a Portfolio determine that
any such commitment is no longer in the best interests of the Portfolio, it
will revoke the commitment by terminating sales of its shares in the state
involved.
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PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class A shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers. Investors may purchase Class
A shares directly in accordance with the procedures set forth below or through
procedures established by their financial institutions in connection with the
requirements of their accounts.
Financial institutions may impose different minimum investment and
other requirements on their customers and may charge additional fees in
connection with the establishment of accounts with the institutions and
purchase and redemption of Class A shares. Persons wishing to purchase Class A
shares through their accounts at an institution or a Co-Distributor should
contact the institution or Co-distributor directly for appropriate
instructions and fee information. In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby they
would perform various administrative support services for their customers who
are the beneficial owners of Class A shares in return for fees from the
Portfolios. See "Shareholder Servicing Plan" under the heading "Management" in
this Prospectus.
All shareholders of record will receive confirmations of share
purchases and redemptions. Class A shares purchased by institutions on behalf
of their customers will normally be held of record by them. Institutions will
record their customers' beneficial ownership of such shares and provide
regular account statements reflecting such beneficial ownership.
Institutions will be responsible for transmitting purchase and
redemption orders to FoM, Essex or NBD acting as transfer agent (the "Transfer
Agent") on a timely basis, in accordance with the procedures stated below.
Purchase Procedures
The minimum initial investment is $1,000, except for purchases through
an institution whose customers have invested an aggregate minimum of $1,000 or
for investments made through a Co-Distributor's or an institution's sweep
privilege, the Trust's Automatic Investment Plan described below, or the
Trust's IRA program described below. The minimum subsequent investment is
$100, except for reinvested dividends or as otherwise described below. The
Trust reserves the right to reject any purchase order.
Orders for Class A shares may be placed by telephone by calling (800)
688-3350 (provided an investor has made the appropriate election in his
account application) or by mail (by completing the account application which
accompanies this Prospectus and mailing the completed form and the payment for
shares to FoM, Essex or the Transfer Agent). All checks must be drawn on a
bank located within the United States and must be payable in U.S. dollars.
Subsequent investments in an existing account in a Portfolio may be made at
any time by sending a check or money order along with either (a) the
detachable form that regularly accompanies the Trust's confirmation of a prior
transaction, (b) a subsequent order form which may be obtained from the Trust,
or (c) a letter stating the amount of the investment, the name of the
Portfolio and the account number in which the investment is to be made. If any
check used for investment in an account does not clear, the order will be
cancelled and notice thereof will be given; in such event the account will be
responsible for any loss to the Trust as well as a $15 fee imposed by the
Transfer Agent.
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<PAGE>
With the exception of customers of FoM, Class A shares may also be
paid for by wiring federal funds to the Transfer Agent, NBD Bank, ABA
072000326, for the account of The Woodward Funds, Account Number GL 325612,
and identifying the customer name and account number. Before wiring payment,
customers should notify the Transfer Agent by calling (800) 688-3350.
If customers of FoM wire payment in federal funds, they should direct
payment to NBD Bank, ABA 072000326, for the account of First of Michigan
Corporation re: The Woodward Funds, Account Number 059-41, and should identify
the customer name and account number. Before wiring payment, customers of FoM
should call FoM at (800) 544-8275 (outside Michigan) or (800) 852-7730 (within
Michigan).
Purchase orders which are accompanied by payment (by check or wire
transfer) and received by the Transfer Agent in proper form on a Business Day
(as defined below) prior to the close of the New York Stock Exchange are
priced at the public offering price (i.e. net asset value plus the applicable
sales load set forth below) of the particular Portfolio determined on that
Business Day. Purchase orders which are received by the Transfer Agent after
the close of trading on the Exchange on a Business Day or on non-Business Days
will be executed as of the determination of net asset value on the next
Business Day.
The Trust will not accept payment in cash or third party checks for
the purchase of shares. Federal regulations require that each investor provide
a certified taxpayer identification number upon opening or reopening an
account. Applications without a taxpayer identification number will not be
accepted. See the account application for further information about this
requirement.
Net Asset Value and Pricing of Shares
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 5:00 p.m. Eastern
time on each day on which the New York Stock Exchange ("Exchange") and NBD
Bank or its bank affiliates are open for business ("Business Day"). Currently,
one or both of these institutions are closed on the customary national
business holidays of New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day,
Labor Day, Columbus Day (observed), Veterans' Day, Thanksgiving Day and
Christmas Day. During those business days on which the Exchange closes prior
to the close of its regular trading hours (currently 4:00 p.m. Eastern time)
("Early Closing Time"), the net asset value of each Portfolio will be
determined and its shares will be priced as of such Early Closing Time.
Net asset value per Class A share of a Portfolio is calculated by dividing
the value of all securities and other assets belonging to the Portfolio
allocable to that Class A, less the liabilities charged to that Class A,
by the number of the outstanding shares of such Class A.
Securities held by the Portfolios which are traded on a recognized
U.S. stock exchange are valued at the last sale price on the securities
exchange on which such securities are primarily traded or at the last sale
price on the national securities market. Securities which are primarily traded
on foreign securities exchanges are generally valued at the latest closing
price on their respective exchanges, except when an occurrence subsequent to
the time a value was established is likely to have changed such value, in
which case the fair value of those securities will be determined through
consideration of other factors by the Adviser under the supervision of the
Board of Trustees. Securities, whether U.S. or foreign, traded on only
over-the-counter markets and securities for which there were no transactions
are valued at the average of the current bid and asked prices. Fixed income
securities held by the Portfolios are valued according to the broadest and
most representative market, which ordinarily will be the over-the-counter
markets, whether in the United States or in foreign countries. Such securities
are valued at the average of the current bid and asked prices. Securities for
which accurate market quotations are not readily
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available, and other assets are valued at fair value by the Adviser under the
supervision of the Board of Trustees. Securities may be valued on the basis of
prices provided by independent pricing services when the Adviser believes such
prices reflect the fair market value of such securities. The prices provided
by pricing services take into account institutional size trading in similar
groups of securities and any developments related to specific securities. For
valuation purposes, the value of assets and liabilities expressed in foreign
currencies will be converted to U.S. dollars equivalent at the prevailing
market rate on the day of valuation. A Portfolio's open futures contracts will
be "marked-to- market."
PUBLIC OFFERING PRICE
The public offering price for Class A shares of the Portfolios is the
sum of the net asset value per share of the Class A shares being purchased
plus a sales load as follows:
<TABLE>
<CAPTION>
Reallowance to
Total Sales Load Institutions
------------------------------- --------------
As a % of As a % of As a % of
offering price net asset value offering price
Amount of Transaction per share per share per share
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $49,999................... 5.00 5.26 4.50
$50,000 to $99,999.................. 4.50 4.71 4.00
$100,000 to $249,999................ 3.50 3.63 3.00
$250,000 to $499,999................ 2.50 2.56 2.00
$500,000 to $999,999................ 2.00 2.04 1.75
$1,000,000 and over................. .00 .00 .00
</TABLE>
The sales load described above will not be applicable to purchases of
Class A shares by: (1) any bank, trust company or other institution acting on
behalf of its fiduciary customer accounts or any other account maintained by
its trust department (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended); (2) any individual, trust,
corporation or other person where the shares are acquired in connection with
the distribution of assets held in any account referred to in (l) above with
NBD or its affiliates; (3) individual retirement accounts maintained by the
trust division of NBD or of its affiliates; (4) current and retired directors,
officers and employees of NBD or any of its affiliates; (5) the trustees,
former trustees and officers of the Trust; (6) broker/dealers which have
entered into an agreement with a Co- Distributor or the Trust pursuant to the
Trust's Service and Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (7) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in paragraphs (4), (5) and (6) above. An application to qualify
for such purchases of Class A shares (an "NAV Account Application") may be
obtained from the Transfer Agent by calling (800) 688-3350. In addition, no
sales load is charged on the reinvestment of dividends or distributions, or in
connection with certain share exchanges described below under "Shareholder
Services -- Exchange Privilege." The Trust may terminate any exemption from
the sales load by providing notice in the Prospectus, but any such termination
would only affect future purchases of Class A shares. The reallowance to
institutions may be changed from time to time.
From time to time, the Co-Distributors, at their expense, may offer
additional promotional incentives to dealers.
Quantity Discounts
An investor may be entitled to reduced sales charges through Rights of
Accumulation, a Letter of Intent or a combination of investments, even if the
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investor does not wish to make an investment of a size that would normally
qualify for a quantity discount.
An investor must notify his institution or the Transfer Agent at the
time of purchase whenever a quantity discount applies. Upon such notification,
the investor will receive the lowest applicable sales charge. Quantity
discounts may be modified or terminated at any time and are subject to
confirmation of an investor's holdings. For more information about quantity
discounts, an investor should contact his institution or call (800) 688-3350.
Right of Accumulation. A reduced sales load applies to any purchase of
Class A shares of the Portfolios and any other portfolio which is currently
offered or may be offered in the future by the Trust that is sold with a sales
load ("Eligible Portfolios") where an investor's then current aggregate
investment is $50,000 or more. "Aggregate investment" means the total of: (a)
the dollar amount of the then current purchase; and (b) the value (based on
current net asset value) of Class A shares of Eligible Portfolios on which a
sales load has been paid (including shares acquired through reinvestment of
dividends or distributions on shares that were subject to a sales load). If,
for example, an investor beneficially owns Class A shares of the Growth/Value
Portfolio with an aggregate current value of $49,500 and subsequently
purchases additional Class A shares having a current value of $1,000, the load
applicable to the subsequent purchase would be reduced to 4.50% of the
offering price. Similarly, with respect to each subsequent investment, the
current value of all Class A shares of Eligible Portfolios that are
beneficially owned by the investor at the time of investment may be combined
to determine the applicable sales load.
Letter of Intent. By signing a Letter of Intent form (available from
his institution or the Transfer Agent) an investor becomes eligible for the
reduced sales load applicable to the total number of Eligible Portfolio Class
A shares purchased in a thirteen-month period (net of redemptions) pursuant to
the terms and under the conditions set forth in the Letter of Intent. To
compute the applicable sales load, the offering price of Class A shares an
investor beneficially owns (on the date of submission of the Letter of Intent)
in any Eligible Portfolio that may be used toward "Right of Accumulation"
benefits described above may be used as a credit toward completion of the
Letter of Intent. However, the reduced sales load will be applied only to new
purchases.
The Transfer Agent will hold in escrow Class A shares equal to the
amount indicated in the Letter of Intent for payment of a higher sales load if
an investor does not purchase the full amount specified in the Letter of
Intent. The escrow will be released when an investor fulfills the terms of the
Letter of Intent by purchasing the specified amount. If total purchases within
the thirteen-month period of the Letter of Intent exceed the amount specified,
an adjustment will be made in the form of additional Class A shares credited
to the shareholder's account to reflect further reduced sales charges
applicable to such purchases. If total purchases are less than the amount
specified, an investor will be requested to remit an amount equal to the
difference between the sales load actually paid and the sales load applicable
to the total purchases. If such remittance is not received within thirty days,
the Transfer Agent, as attorney-in-fact pursuant to the terms of the Letter of
Intent, will redeem an appropriate number of Class A shares held in escrow to
realize the difference. Signing a Letter of Intent does not bind an investor
to purchase the full amount indicated at the sales load in effect at the time
of signing, but an investor must complete the intended purchase to obtain the
reduced sales load.
Qualification for Discounts. For the purpose of applying the Right of
Accumulation and Letter of Intent privileges described above, the scale of
sales loads applies to the combined purchases made by any individual and/or
spouse purchasing securities for his, her or their own account or for the
account of any minor children under the Uniform Gifts to Minors Act or the
Uniform Transfers to Minors Act, or the aggregate investments of a trustee or
custodian of any
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qualified pension or profit sharing plan or IRA established, or the aggregate
investment of a trustee or other fiduciary, for the benefit of the persons
listed above.
REDEMPTION OF SHARES
In General
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption in
accordance with the procedures set forth below.
Redemption orders must be placed with or through the same financial
institution that placed the original purchase order. It is the responsibility
of the financial institutions to transmit redemption orders to the Transfer
Agent. Redemption proceeds are paid by check or credited to the investor's
account with his financial institution. Investors who purchased shares
directly from the Trust should follow the redemption procedures set forth
below.
Redemption Procedures
A shareholder of record may redeem shares in any amount by calling
(800)688-3350 (provided he has made the appropriate election in his account
application) or by sending a written request to The Woodward Funds, c/o NBD
Bank, P.O. Box 7058, Troy, Michigan 48007-7058. Written requests to redeem
shares having a net asset value of more than $50,000 must have all signatures
of the registered owner(s) or their authorized legal representative guaranteed
by a commercial bank or trust company which is a member of the Federal Reserve
System or FDIC, a member firm of a national securities exchange or a savings
and loan association. A signature guaranteed by a savings bank or notarized by
a notary public is not acceptable. A signature guarantee will also be required
for redemption requests (in any amount) if the address of record for the
account has been changed within the previous 15 days or which requests that
the proceeds be paid to an account other than the one preauthorized on the
application, a payee or payees other than the registered owners of the
account, or an address other than the address of record. The Trust may require
additional supporting documents for redemptions made by corporations,
fiduciaries, executors, administrators, trustees, guardians and institutional
investors.
Redemption orders for Class A shares may be placed through an
institution or directly by telephone by calling (800)688-3350. During periods
of unusual economic or market changes, telephone redemptions may be difficult
to implement. In such event, shareholders should mail their redemption
requests to their financial institutions or The Woodward Funds, c/o NBD Bank
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (including,
but not limited to, the name in which an account is registered, the account
number, or recent transactions in the account). To the extent that the Trust
and its Transfer Agent fail to use reasonable procedures to verify the
genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
Other Redemption Information
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities Exchange Act of
1934 after receipt by the Transfer Agent of a request in proper form. If
shares to
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be redeemed were purchased by check, the Trust will transmit the redemption
proceeds promptly upon clearance of such check, which could take up to fifteen
days from the purchase date. A shareholder having purchased shares by wire
must have filed an account application before any redemption requests can be
honored.
Currently, the Trust imposes no charge when shares are redeemed.
However, institutions may charge a fee for providing services in connection
with investments in Portfolio shares; NBD currently charges $16 for wire
transactions. The Trust reserves the right to redeem accounts involuntarily,
after sixty days' notice, if redemptions cause the account's net asset value
to remain at $1,000 or less. Under certain circumstances, the Trust may make
payment for redemption in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800)688-3350 or an investor's financial
institution.
SHAREHOLDER SERVICES
The shareholder services and privileges under this heading may not be
available to certain clients of particular financial institutions, and some
may impose conditions on their clients that are different from those described
below. investors should consult their own financial institutions in this
regard. Other investors should direct any questions to the Transfer Agent. The
Trust may modify or terminate any of the following services and privileges at
any time.
Exchange Privilege
Investors may exchange Class A shares which have been owned for at
least thirty days of the Growth/Value, Opportunity, Intrinsic Value, Capital
Growth, Balanced and International Equity Portfolios, of the Woodward
Intermediate Bond, Bond, Short Bond, Municipal Bond and Michigan Municipal
Bond Funds and of other investment portfolios of the Trust which may be
offered in the future and sold with a sales charge (each a "load portfolio")
and Class A shares which have been owned for at least thirty days of the
Woodward Equity Index, Money Market, Government, Treasury Money Market,
Tax-Exempt Money Market and Michigan Tax-Exempt Money Market Funds and of
other investment portfolios of the Trust which may be offered in the future
and sold without a sales charge (each a "no load portfolio"). The cost of the
acquired Class A shares will be their net asset value plus the applicable
sales load, if any.
With respect to exchanges between load portfolios other than exchanges
involving the Woodward Short Bond Fund, no additional sales load will be
payable, provided that the investor previously paid a sales load upon the
acquisition of Class A shares of a load Portfolio. Investors exchanging Class
A shares of the Woodward Short Bond Fund will be required to pay the
difference between the sales load previously paid and the sales load
applicable on the Class A shares being acquired in the exchange, unless the
investor's holding of Class A shares of the Woodward Short Bond Fund resulted
from a previous exchange of Class A shares with respect to which the investor
had paid a higher sales load.
Exchanges of Class A shares of a load portfolio for Class A shares of
a no load portfolio and exchanges of Class A shares of a no load portfolio for
Class A shares of another no load portfolio will not be subject to the payment
of a sales load.
Any exchange of Class A shares of a no load portfolio for Class A
shares of a load portfolio will be subject to the payment of the applicable
sales load, unless the investor is exchanging shares of a no load portfolio
which were received in a previous exchange transaction involving Class A
shares of a load portfolio. In such case, the investor will receive a credit
for any sales load
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previously paid and no additional sales load will be payable, except as noted
above with respect to the Woodward Short Bond Fund.
Shareholders contemplating an exchange should carefully review the
prospectus of the portfolio into which the exchange is being considered. The
Prospectus for any portfolio of the Trust may be obtained from an investor's
financial institution or from the Transfer Agent by calling (800)688-3350.
Exchanges will be effected by a redemption of Class A shares of the
portfolio held and the purchase of Class A shares of the portfolio acquired.
Investors should make their exchange requests in writing or by telephone to
the financial institutions through which they purchased their original Class A
shares. It is the responsibility of financial institutions to transmit
exchange requests to the Transfer Agent. Other investors should transmit
exchange requests directly to the Transfer Agent. The total value of shares
being exchanged must at least equal the minimum investment requirement of the
portfolio whose shares are being acquired in the exchange. Only one exchange
in any thirty-day period is permitted and only Class A shares that may be
legally sold in the state of the investor's residence may be acquired in an
exchange. The Trust reserves the right to reject any exchange request.
Investors wishing to make an exchange should contact their
institutions or the Transfer Agent (as appropriate). Exchange requests in the
required form which are received by the Transfer Agent prior to 4:00 p.m.,
Eastern time, will be effected on the same Business Day after such request is
received. Requests received after 4:00 p.m., Eastern time, will be effected on
the next Business Day after such request is received. During periods of
significant economic or market change, telephone exchanges may be difficult to
complete. In such event, an investor should mail the exchange request to his
financial institution or the Transfer Agent. Neither the Trust nor the
Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Trust and
its Transfer Agent will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to
account registration (including, but not limited to, the name in which an
account is registered, the account number, or recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions,
they may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to modify or
terminate its exchange procedures upon sixty days' notice to shareholders.
Reinvestment Privilege
Class A shares of a Portfolio may be purchased at net asset value by
persons who have redeemed within the previous 120 days their Class A shares of
that Portfolio or another investment portfolio of the Trust which were
purchased with a sales load. The amount which may be so reinvested is limited
to an amount up to the redemption proceeds. In order to exercise this
privilege, a written order for the purchase of Class A shares of the Portfolio
must be received by the Transfer Agent within 120 days after the redemption.
Reinvestment will be at the next calculated net asset value after receipt.
Option to Make Systematic Withdrawals
The Trust has available to shareholders a Systematic Withdrawal Plan
pursuant to which a shareholder who owns Class A shares of any investment
portfolio having a minimum value of $15,000 at the time he elects under the
Plan may have a fixed sum distributed in redemption at regular intervals. An
application form and additional information regarding this service may be
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obtained from an investor's financial institution or the Transfer Agent by
calling (800)688-3350.
Automatic Investment
The Trust offers an Automatic Investment Plan (the "Plan") whereby a
shareholder may automatically purchase Class A shares on a regular basis in
accordance with an election in his account application. An application may be
obtained from the Transfer Agent by calling (800)688-3350. Under the Plan a
shareholder's financial institution debits a pre-authorized amount from his
account and applies the amount to the purchase of Class A shares. The minimum
per transaction is $25. The minimum initial investment in a Portfolio is also
$25 for the following shareholders who elect the Plan: (1) current and retired
directors, officers and employees of NBD or any of its affiliates; (2) the
trustees, former trustees and officers of the Trust; (3) broker/dealers which
have entered into an agreement with a Co-Distributor or the Trust pursuant to
the Trust's Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (4) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in (l), (2) and (3) above. An NAV Account Application may be
obtained from the Transfer Agent by calling (800)688-3350. The Plan can be
implemented with any financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by the Trust for
participating in the Plan. Death or legal incapacity will terminate a
shareholder's participation in the Plan. Deposits, withdrawals and adjustments
will be made electronically under the rules of the Automated Clearing House
Association.
Cross Reinvestment of Dividend Plan
The Trust makes available to shareholders a Cross Reinvestment of
Dividend Plan (the "Plan") pursuant to which a shareholder who owns Class A
shares of any portfolio with a minimum value of $10,000 at the time he elects
under the Plan may have dividends paid by such portfolio automatically
reinvested into Class A shares of another portfolio in which he has invested a
minimum of $1,000. Shareholders may obtain an application and additional
information from their institutions or the Transfer Agent by calling
(800)688-3350.
The Woodward Funds Individual Retirement Custodial Account
Class A shares may be purchased in conjunction with the Trust's
Individual Retirement Custodial Account program ("IRA") where NBD acts as
custodian. investors should consult their institutions or a Co-Distributor for
information as to applications and annual fees. The minimum investment for an
IRA is $250 for investors who are not employees of NBD and $25 for investors
who are employees of NBD. Investors should also consult their tax advisers to
determine whether the benefits of an IRA are available or appropriate.
Other Retirement Plans
NBD and its affiliates offer a variety of pension and profit sharing
plans including IRAs, defined contribution plans, 401(k) Plans, 403(b)(7)
Plans and 457 Plans through which investors may purchase Class A shares. The
minimum investment for these Plans may differ from the minimum discussed above
in "Purchase of Shares." For details concerning any of the retirement plans,
please call the Transfer Agent or a Co-Distributor.
Direct Deposit Program
If an investor receives federal salary, social security, or certain
veteran's, military or other payments from the federal government or elects to
use his employer's payroll deposit program, he is eligible for the Direct
Deposit Program. With this Program, an investor may purchase Class A shares
(minimum of
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$25) by having these deposits automatically deposited into his Portfolio
account. For instructions on how to enroll in the Direct Deposit Program, an
investor should call his institution or the Transfer Agent. Death or legal
incapacity will terminate an investor's participation in the Program. An
investor may elect at any time to terminate his participation by notifying in
writing the appropriate federal agency. Further, the Trust may terminate an
investor's participation upon thirty days' notice to him.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance of each class of shares of the Portfolios may be compared to the
performance of other mutual funds with similar investment objectives and to
stock and other relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, performance may be compared to data
prepared by Lipper Analytical Services, Inc. In addition, the performance of
the Portfolios may be compared to the Standard & Poor's 500 Index, an index of
unmanaged groups of common stocks, the Consumer Price Index, or the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of thirty
industrial companies listed on the New York Stock Exchange. Performance data
as reported in national financial publications such as Money Magazine Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications
of a local or regional nature, may also be used in comparing the performance
of a Portfolio.
The Portfolios calculate their total returns on an "average annual
total return" basis for various periods from the date they commenced
investment operations and for other periods as permitted under the rules of
the SEC. Average annual total return of a class reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns may also be calculated on an "aggregate total return
basis" for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return also reflect changes in the price of the shares and
assume that any dividends and capital gain distributions made by the class
during the period are reinvested in shares of the class. When considering
average total return figures for periods longer than one year, it is important
to note that a class' annual total return for any one year in the period might
have been greater or less than the average for the entire period.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. The
investment return and principal value of an investment in a class will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Performance data should also be considered
in light of the risks associated with a Portfolio's portfolio composition,
quality, maturity, operating expenses and market conditions. Any fees charged
by financial institutions directly to their customer accounts in connection
with investments in shares will not be reflected in performance calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly
by each Portfolio, except the International Equity Portfolio which declares
and pays dividends annually. Each Portfolio's net realized capital gains are
distributed at least annually.
Dividends and distributions will reduce a class' net asset value by
the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested (without any sales charge) in additional Class A
shares
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of the same Portfolio at their net asset value per share determined on the
payment date, unless the holder has notified the Transfer Agent in writing
that he elects to have dividends or capital gain distributions (or both) paid
in cash. Shareholders must make such election, or any revocation thereof, in
writing to their financial institutions or Transfer Agent. The election will
become effective with respect to dividends paid after its receipt by the
Transfer Agent. If an account is established with telephone privileges, the
registered owner or his preauthorized legal representative may change the
election to receive dividends in cash to an election to receive dividends in
shares by telephoning the Transfer Agent at 800-688-3350.
TAXES
Federal
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolios of liability for federal income
taxes to the extent their earnings are distributed in accordance with the
Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, a Portfolio's investment company taxable income will be its
taxable income, subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Each Portfolio intends to distribute as
dividends substantially all of its investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to the Portfolio's shareholders who are not currently exempt
from federal income taxes regardless of whether a distribution is received in
cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) Such ordinary income
distributions will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
distributing Portfolio from domestic corporations for the taxable year.
Substantially all of each Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolios will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the shares and whether such
gains are received in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of a Portfolio, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after the purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such amounts, although in
effect a return of capital, is subject to tax.
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A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of a Portfolio depending upon the
tax basis and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Portfolio within 90 days of the purchase and is able to reduce the
sales charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included under certain
circumstances in the tax basis of the new shares.
It is expected that dividends and certain interest income earned by
the International Equity Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the
value of the Portfolio's total assets at the close of any taxable year
consists of equity or debt securities of foreign corporations, the Portfolio
may elect, for U.S. federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid its shareholders. The Portfolio may make this election.
As a consequence, the amount of such foreign taxes paid by the Portfolio will
be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and the shareholders will be
entitled (a) to credit their proportionate amounts of such taxes against their
U.S. federal income tax liabilities, or (b) if they itemize their deductions,
to deduct such proportionate amounts from their U.S. income.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolios and their shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
potential investors in the Portfolios should consult their tax advisers with
specific reference to their own tax situation.
State and Local
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust
and its shareholders under such laws may differ from treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
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*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Senior Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for each Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion. NBD has been in the business
of providing such services since 1933. Included among NBD's accounts are
pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services
to each Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for each
of the Portfolios.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Jeffrey C. Beard, First Vice President and Gary L. Konsler, Vice
President, are primarily responsible for the day-to-day management of the
Growth/Value and Capital Growth Portfolios. Mr. Beard joined NBD in 1982 after
receiving an MBA in Finance from Michigan State University in 1981. Mr.
Konsler joined NBD in 1973 after receiving a JD from Indiana University.
Ronald L. Doyle, First Vice President, and Joseph R. Gatz, Second Vice
President, are primarily responsible for the day-to-day management of the
Opportunity Portfolio. Mr. Doyle joined NBD in 1982 after receiving his MBA in
Finance from Michigan State University. Mr. Gatz joined NBD in 1986 after
receiving his MBA from Indiana University.
Chris M. Gassen, Vice President, and F. Richard Neumann, Vice
President, are primarily responsible for the day-to-day management of the
Intrinsic Value Portfolio. Mr. Gassen joined NBD in 1985 after receiving an
MBA in Finance from Indiana University. Mr. Neumann joined NBD in 1981 after
receiving an MBA in Finance/Accounting from the University of Chicago.
Claude B. Erb, First Vice President, is primarily responsible
for the day-to-day portfolio management of the Balanced Portfolio. Mr. Erb
joined First Chicago NBD Corporation in 1993, after receiving his MBA in
Finance from the University of California.
Richard P. Kost, First Vice President and Clyde L. Carter, Jr.,
Assistant Vice President, are primarily responsible for the day-to-day
portfolio management of the International Equity Portfolio. Mr. Kost joined
NBD in 1964 after he received his MBA from the University of Michigan. Mr.
Carter joined NBD in 1987 after he received his MBA from Western Michigan
University.
For its services under the Advisory Agreement, NBD is entitled to
receive advisory fees, computed daily and payable monthly, at an annual rate
of .75% of the average daily net assets of each of the Portfolios. In
addition, NBD is entitled to 4/10ths of the gross income earned by a Portfolio
on each loan of securities (excluding capital gains and losses, if any). NBD
may voluntarily waive its fees in whole or in part with respect to any
particular Portfolio.
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Adviser from continuing to perform investment
advisory, custodial or transfer agency services for the Trust or require the
Adviser to alter or discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees of the Trust would recommend that shareholders approve new
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agreements with another entity or entities qualified to perform such services
and selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of each Portfolio: (i) fees payable
to the Co- Distributors pursuant to the Distribution Agreement; (ii) the
actual costs and expenses in connection with advertising and marketing the
Portfolio's shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions and other professionals ("Service Agents") for
administration or servicing of Portfolio shareholders ("Servicing"). Servicing
may include, among other things: answering client inquiries regarding the
Trust and the Portfolios; assisting clients in changing dividend options,
account designations and addresses; performing sub-accounting; establishing
and maintaining shareholder accounts and records; processing purchase and
redemption transactions; investing client cash account balances automatically
in Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
printing Prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of a Portfolio's average net assets, and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net
-44-
<PAGE>
assets of the Trust's investment portfolios attributable to investments by
clients of Essex. The payments to be made to the Co-Distributors which are
based on a percentage of the net assets of the Portfolios are designed to
compensate the Co-Distributors for their participation in the distribution of
the Portfolios' shares and to reimburse the Co-Distributors for certain
distribution costs. Nonreimbursable expenses of the Co-Distributors include
salaries of executives, sales and clerical personnel performing services for
the Trust, and overhead expenses. Such costs are by their nature not subject
to precise quantification and the Trustees have determined that the fees to be
paid to the Co-Distributors are reasonable under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Shareholder Servicing Plan
Pursuant to a Shareholder Servicing Plan ("Servicing Plan") adopted by
its Board of Trustees, the Trust may enter into agreements ("Servicing
Agreements") with banks and financial institutions, which may include the
Adviser and its affiliates ("Shareholder Servicing Agents"), under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares of the Portfolios. Such services, which
are described more fully in the Statement of Additional Information, may
include processing purchase and redemption requests from customers, placing
net purchase and redemption orders with a Co-Distributor, processing, among
other things, distribution payments from the Trust, providing necessary
personnel and facilities to establish and maintain customer accounts and
records, and providing information periodically to customers showing their
positions in Class A shares.
For these services, the Trust will pay fees to Shareholder Servicing
Agents at an annual rate of up to .25% of the average daily net asset value of
Class A shares held by such Shareholder Servicing Agents for the benefit of
their customers and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Shareholder Servicing Agents are
required to provide their customers with a schedule of any credits, fees or
other conditions that may be applicable to the investment of customer assets
in Class A shares. The fees payable under such servicing agreements will be
allocated exclusively to the Class A shares in each Portfolio.
Conflict of interest restrictions may apply to the receipt of
compensation paid by the Trust to a Shareholder Servicing Agent in connection
with the investment of fiduciary funds in Portfolio shares. Banks and other
institutions regulated by the Comptroller of the Currency or other federal or
state bank regulatory agencies, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal counsel before
entering into Servicing Agreements.
-45-
<PAGE>
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan and Shareholder Servicing Plan, outside auditing and
legal expenses, all taxes and corporate fees payable by the Trust, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders,
costs of shareholder reports and shareholder meetings, and any extraordinary
expenses. Each Portfolio also pays for brokerage commissions and transfer
taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular Portfolio of the Trust will
be charged to that Portfolio, and expenses not readily identifiable as
belonging to a particular Portfolio will be allocated by the Board of Trustees
among one or more Portfolios in such a manner as it shall deem fair and
equitable. For the fiscal year ended December 31, 1995, the Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International
Equity Portfolios' total expenses were .84%, .89%, .91%, .86%, .91% and 1.16%
(after fee waivers, if any) of their average net assets, respectively. The
Statement of Additional Information describes in more detail the fees and
expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Money Market Fund, Government Fund,
Treasury Money Market Fund, Tax- Exempt Money Market Fund, Michigan Tax-Exempt
Money Market Fund, Intermediate Bond Fund, Bond Fund, Short Bond Fund,
Municipal Bond Fund, Michigan Municipal Bond Fund and Equity Index Fund. The
Trust has established the following two distinct classes of shares within each
Portfolio described herein: Class I shares (Original Class) and Class A shares
(Special Class 1). A sales person and any other person or institution entitled
to receive compensation for selling or servicing shares may receive different
compensation with respect to different classes of shares in the Series. Each
share has $.10 par value, represents an equal proportionate interest in the
related Portfolio with other shares of the same class outstanding, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to such Portfolio as are declared in the discretion of the
Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly, the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
-46-
<PAGE>
As of February 29, 1996, NBD held beneficially or of record
approximately 84.61%, 80.52%, 80.07%, 88.23%, 87.89% and 89.58% of the
outstanding shares of the Growth/Value, Opportunity, Intrinsic Value, Capital
Growth, Balanced and International Equity Portfolios, respectively, and
therefore may be considered to be a controlling person of the Trust for
purposes of the 1940 Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
-47-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give
any information or to make any
representations not contained in this
Prospectus, or in the Portfolios'
Statement of Additional Information
incorporated herein by reference, in
connection with the offering made by
this Prospectus and, if given or
made, such information or
representations must not be relied
upon as having been authorized by the
Trust, Adviser or Sponsors and Co-
Distributors. This Prospectus does
not constitute an offering by the
Portfolios or by their Co-
Distributors, in any jurisdiction in
which such offering may not lawfully
be made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY............................. 2
FINANCIAL HIGHLIGHTS........................ 5
INTRODUCTION................................ 11
PROPOSED REORGANIZATION..................... 11
INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS.......................... 11
OTHER INVESTMENT POLICIES................... 16
PURCHASE OF SHARES.......................... 30
PUBLIC OFFERING PRICE....................... 32
REDEMPTION OF SHARES........................ 34
SHAREHOLDER SERVICES........................ 35
PERFORMANCE AND YIELD
INFORMATION........................... 38
DIVIDENDS AND DISTRIBUTIONS................. 38
TAXES .................................... 39
MANAGEMENT.................................. 40
OTHER INFORMATION........................... 46
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania
19107-3496
<PAGE>
[ BACK COVER, COLUMN 2 ]
CLASS A SHARES OF THE:
WOODWARD GROWTH/VALUE FUND
WOODWARD OPPORTUNITY FUND
WOODWARD INTRINSIC VALUE FUND
WOODWARD CAPITAL GROWTH FUND
WOODWARD BALANCED FUND
WOODWARD INTERNATIONAL EQUITY FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-48-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series N - Special Class 1 Representing Interests in the
Class A Shares of the Woodward Equity Index Fund
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page...................................... Cover page
2. Synopsis........................................ Expense Summary;
Background
3. Financial Highlights............................ Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant...................................... Cover Page;
Introduction;
Investment
Objective,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ....................... Management
6. Capital Stock and Other
Securities...................................... Purchase of
Shares; Redemption
of Shares;
Shareholder
Services;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered................................... Purchase of
Shares;
Shareholder
Services;
Management
8. Redemption or Repurchase........................ Redemption of
Shares;
Shareholder
Services
9. Pending Legal Proceedings....................... Inapplicable
-6-
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following investment portfolio which has its own investment objective
and policies as described in this Prospectus:
Class A shares of the:
Woodward Equity Index Fund
The Woodward Equity Index Fund ("Equity Index Portfolio" or the
"Portfolio") is advised by NBD Bank ("NBD" or the "Adviser") and is sponsored
and distributed by First of Michigan Corporation ("FoM" or "Co-Distributor")
and Essex National Securities, Inc. ("Essex" or "Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in the Portfolio. Class I shares are sold primarily to NBD and its affiliated
and correspondent banks acting on behalf of their respective customers. Class
A shares are sold to the general public primarily through financial
institutions such as banks, brokers and dealers. Class I shares are offered in
a separate Prospectus. Investors should call (800) 688-3350, a Co-Distributor
or their financial institutions if they would like to obtain more information
concerning Class I shares and/or Class A shares of the Portfolios. The
following table is provided to assist investors in understanding the various
costs and expenses that an investor will indirectly incur as a beneficial
owner of Class A shares in the Portfolio.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................ None
(as a percentage of offering price)
Sales Load
Imposed on Reinvested
Dividends........................................... None
Deferred Sales Load.................................... None
Redemption Fee......................................... None
Exchange Fee........................................... None
ANNUAL FUND OPERATING EXPENSES1
(as a percentage of average net assets)
Management Fees........................................ .10%
12b-1 Fees............................................. .03%
Shareholder Servicing Fees(2).......................... .25%
Other Expenses
(assuming no fee waivers and/or expense reimbursements) .03%
Total Operating Expenses
(assuming no fee waivers and/or expense reimbursements) .41%
<FN>
- ---------------------
1. The expenses for the Portfolio have been restated to reflect
current expenses.
2. The Trust has adopted a Shareholder Servicing Plan pursuant to
which the Trust may enter into agreements with institutions under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares in return for a fee of up to .25% per
annum of the value of such shares ("Servicing Fees"). For further information,
see "Shareholder Servicing Plan" and "Investment Adviser, Custodian and
Transfer Agent" under the heading "Management" in this Prospectus.
3. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolio.
- -------------------
Example
You would pay the following
expenses on a $1,000
investment, assuming:
(1) a 5% annual return
and (2) redemption at the
end of each time period:
One Year................... $ 4.20
Three Years................ 13.19
Five Years................. 23.02
Ten Years.................. 51.83
</TABLE>
-2-
<PAGE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE GREATER
OR LESSER THAN THOSE SHOWN.
The example demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a
hypothetical investment in Class A shares in the Portfolio, based upon payment
by the Portfolio of operating expenses at the respective levels set forth in
the expense table. For more complete descriptions of Portfolio expenses, see
"Investment Adviser, Custodian and Transfer Agent", "Sponsors and Co-
Distributors", "Shareholder Servicing Plan", "Service and Distribution Plan"
and "Trust Expenses" under the heading "Management" in this Prospectus and the
financial statements and related notes contained in the Statement of
Additional Information.
-3-
<PAGE>
BACKGROUND
Shares of the Portfolio have been classified into two separate classes of
shares -- Class I shares and Class A shares. Only the Class A shares are
offered pursuant to this Prospectus. Until April 15, 1996, Class I shares and
Class A shares represented equal pro rata interests in the Portfolio. As of
such date, the Trust implemented its Shareholder Servicing Plan with respect
to Class A shares only and began to allocate Servicing Fees attributable to
such shares exclusively to them. See "Shareholder Servicing Plan" and
"Investment Adviser, Custodian and Transfer Agent" under "Management," and see
"Dividends and Distributions" and "Other Information" for a description of the
impact that this may have on holders of Class A shares.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides supplementary information to the Portfolio's
financial statements contained in the Statement of Additional Information and
sets forth certain information concerning the historic investment results of
Portfolio shares. It presents a per share analysis of how the Portfolio's net
asset value has changed during the periods presented. The table has been
derived from the Portfolio's financial statements which have been audited by
Arthur Andersen LLP, the Trust's independent public accountants, whose report
thereon is contained in the Statement of Additional Information along with the
financial statements. The financial data included in the table should be read
in conjunction with the financial statements and related notes included in the
Statement of Additional Information. Further information about the performance
of the Portfolio is available in annual reports to shareholders. The Statement
of Additional Information and annual reports to shareholders may be obtained
from the Trust free of charge by calling 800-688-3350.
<TABLE>
<CAPTION>
June 1, 1992
(Commencement
Year Ended Year Ended Year Ended of Operations) to
December December December December 31,
31, 1995 31, 1994 31, 1993 1992
---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period .................. $ 10.65 $ 11.15 $ 10.52 $ 10.00
Income from investment
operations:
Net investment income ...... 0.30 0.31 0.28 0.12
Net realized and unrealized
gains (losses) on
investments .............. 3.65 (0.20) 0.75 0.52
--------------- --------------- --------------- ---------------
Total from investment
operations ............... $ 3.95 $ 0.11 $ 1.03 $ 0.64
--------------- --------------- --------------- ---------------
Less distributions:
From net investment
income ................... $ (0.31) $ (0.30) $ (0.27) $ (0.12)
From realized
gains .................... (0.14) (0.23) (0.13) 0.00
In excess
of realized gains ......... (0.00) (0.08) 0.00 0.00
--------------- --------------- --------------- ---------------
Total distributions ......... $ (0.45) $ (0.61) $ (0.40) $ (0.12)
--------------- --------------- --------------- ---------------
Net asset value, end of
period ..................... $ 14.15 $ 10.65 $ 11.15 $ 10.52
=============== =============== =============== ===============
Total return ................. 37.35% 1.02% 9.77% 13.61%(a)
Ratios/Supplemental Data
Net assets, end of period .... $ 528,202,913 $ 340,808,050 $ 325,328,903 $ 242,057,866
Ratio of expenses to average
net assets ................. 0.15% 0.17% 0.20% 0.22%(a)
Ratio of net investment income
to average net assets ...... 2.39% 2.71% 2.59% 2.71%(a)
Portfolio turnover rate ...... 10.66% 24.15% 16.01% 0.50%
Average Commission Rate ...... $ 0.03%
<FN>
- ---------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-5-
<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objective and
policies. However, only the Class A shares of the Equity Index Portfolio is
offered pursuant to this Prospectus. The Portfolio is classified as a
diversified investment portfolio under the 1940 Act.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The investment objective of the Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
the Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," the Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that the Portfolio
will achieve its objective.
The investment objective of the Portfolio is to provide an investment
return which substantially duplicates the price and yield performance of
domestically traded common stocks in the aggregate, as represented by the
Standard & Poor's Composite Stock Price Index (the "S&P 500 Index" or
"Index"). The Portfolio uses the S&P 500 Index as a benchmark for comparison
because it represents roughly two-thirds of the market value of all publicly
traded common stocks in the United States, is well known to investors and is a
widely accepted measure of common stock investment returns. The Index contains
a representative sample of common stocks that trade on the New York and
American Stock Exchanges and also contains over-the-counter stocks that are a
part of the National Market System. The S&P 500 Index is constructed using a
"bottom-up" approach through identification of important industry categories
and allocation of a representative sample of stocks to these categories.
The Portfolio seeks to achieve a 95% correlation coefficient between
its performance and that of the Index. Therefore, the Portfolio's price
changes are expected to closely match movements in the underlying Index. In
addition, the total return of the Portfolio is expected to substantially match
that of the
-6-
<PAGE>
Index. However, there is no assurance that the Portfolio's objective will be
attained. Deviations from the performance of the Index ("tracking error") may
result from shareholder purchases and redemptions of shares of the Portfolio
that occur daily, as well as from the expenses borne by the Portfolio. To the
extent that a cash reserve is held to meet expected redemptions or pending
investment in securities, to the extent that securities must be sold to meet
redemption requests, and to the extent that purchases and sales are made to
conform the Portfolio's holdings more closely with that of the Index in
response to cash inflows or outflows and associated brokerage costs are
incurred, these daily inflows or outflows of cash may increase the Portfolio's
tracking error. In addition, tracking error may occur due to changes made in
the S&P 500 Index and the manner in which the Index is calculated by S&P among
other factors. In the event the performance of the Portfolio is not comparable
to the performance of the Index, the Board of Trustees will examine the
reasons for the deviation and the availability of corrective measures. These
measures may include adjustments to the Adviser's portfolio management
practices. If substantial deviation in the Portfolio's performance were to
continue for extended periods, it is expected that the Board of Trustees would
consider possible changes to the Portfolio's investment objective.
The Portfolio will not be managed by using traditional economic,
financial or market analysis. Instead, the Portfolio utilizes a sampling
methodology to determine which stocks to purchase or sell in order to closely
replicate the performance of the S&P 500 Index. Stocks are selected for the
Portfolio based on both capitalization weighing in the Index and industry
representation. Larger market capitalization securities in the Index are added
to the Portfolio according to their relative weight. Smaller capitalization
securities are then added to the Portfolio in equal weights according to an
analysis of the industry diversification of the Index. Therefore, while all
industry weights in the Portfolio are essentially matched to those of the S&P
500 Index, not necessarily all 500 stocks are held in the Portfolio. The
Adviser believes that a sampling methodology allows the Portfolio to maintain
a close correlation to the performance of the S&P 500 Index while at the same
time controlling the portfolio turnover and transaction costs of the
Portfolio.
Under normal market conditions, the Portfolio invests substantially
all of its total assets in the common stocks that comprise the Index in
accordance with their relative capitalization and sector weightings as
described above. It is possible, that if an issuer drops in ranking, or is
eliminated entirely from the Index, the Adviser may be required to sell some
or all of the common stock of such issuer then held by the Portfolio. Sales of
portfolio securities may be made at times when, if the Adviser were not
required to effect purchases and sales of portfolio securities in accordance
with the Index, such securities might not be sold. Such sales may result in
lower prices for such securities than may have been realized or in losses that
may not have been incurred if the Adviser were not required to effect the
purchases and sales. The failure of an issuer to declare or pay dividends, the
institution against an issuer of materially adverse legal proceedings, the
existence or threat of defaults materially and adversely affecting an issuer's
future declaration and payment of dividends, or the existence of other
materially adverse credit factors will not necessarily be the basis for the
disposition of portfolio securities, unless such event causes the issuer to be
eliminated entirely from the Index. The Portfolio may receive from time to
time as part of a "spin-off" or corporate restructuring of an issuer included
in the Index, securities that are themselves outside of the Index. Such
securities will be disposed of by the Portfolio in due course consistent with
the Portfolio's investment objective. In addition, the Portfolio may invest up
to 25% of its total assets in the securities of foreign issuers through
American Depository Receipts. An investment in the Portfolio involves risks
similar to those of investing in common stocks.
Pending investment and to meet anticipated redemption requests, the
Portfolio may hold up to 5% of its total assets in various short-term
-7-
<PAGE>
investments. In addition, up to 5% of the Portfolio's total assets may be
invested in futures contracts and related options in an effort to maintain
exposure to price movements in the Index pending investment of funds or while
maintaining liquidity to meet potential shareholder redemptions.
-8-
<PAGE>
OTHER INVESTMENT POLICIES
Ratings
If not rated as commercial paper, debt obligations acquired by the
Portfolio will be investment grade at the time of purchase, i.e., obligations
rated AAA, AA, A or BBB by Standard & Poor's Rating Group, Division of McGraw-
Hill ("S&P"), Fitch Investors Service ("Fitch") or IBCA, Inc. ("IBCA") or Aaa,
Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's") or be unrated but
deemed by the Adviser to be comparable in quality at the time of purchase to
instruments that are so rated. Obligations rated in the lowest of the top four
rating categories (Baa by Moody's or BBB by S&P or Fitch or IBCA) are
considered to have less capacity to pay interest and repay principal and have
certain speculative characteristics. The debt ratings are described in the
Statement of Additional Information.
Short-Term Investments
The Portfolio may hold short-term U.S. Government obligations, "high
quality" money market instruments such as certificates of deposit, bankers'
acceptances and time deposits (i.e. those rated at the time of purchase within
the two highest rating categories or which are unrated at such time but are
deemed by the Adviser to be of comparable quality), repurchase agreements,
reverse repurchase agreements, short-term obligations issued by state and
local governmental issuers which carry yields that are competitive with those
of other types of high quality money market instruments, commercial paper,
notes, other short-term obligations, variable rate master demand notes, and
cash, pending investment or to meet anticipated redemption requests. Such
investments may be in such proportions as, in the opinion of the Adviser,
existing circumstances may warrant, and may include obligations of foreign
banks and foreign branches of U.S banks. The Portfolio may also invest its
cash balances in securities issued by other investment companies which invest
in high-quality, short-term debt securities. As a shareholder of another
investment company, the Portfolio would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Portfolio bears directly in connection with its own
operations. These short-term investments are described in greater detail in
the Statement of Additional Information.
U.S. Government Obligations
The Portfolio may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. The Portfolio may also invest in interests in the
foregoing securities, including collateralized mortgage obligations guaranteed
by a U.S. Government agency or instrumentality, and in Government-backed
trusts which hold obligations of foreign governments that are guaranteed or
backed by the full faith and credit of the United States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government
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to purchase the agency's obligations; still others, such as those of the
Student Loan Marketing Association, are supported only by the credit of the
instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Repurchase and Reverse Repurchase Agreements
To increase its income, the Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolio will not enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
The Portfolio may also obtain funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements the Portfolio
will sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, the Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of the Portfolio exceeds one-third of the value of its total assets. Loans of
securities involve risks of delay in receiving additional collateral or in
recovering the securities loaned or possible loss of rights in the collateral
should the borrower of the securities become insolvent. Loans will be made
only to borrowers that provide the requisite collateral comprised of liquid
assets and when, in the Adviser's judgment, the income to be earned from the
loan justifies the attendant risks.
Illiquid Securities
In accordance with its fundamental investment limitation described
below, the Portfolio will not knowingly invest more than 10% of the value of
its total assets in securities that are illiquid. Securities having legal or
contractual restrictions on resale or no readily available market, and
instruments (including repurchase agreements, variable and floating rate
instruments and time deposits) that do not provide for payment to the
Portfolio within seven days after notice are subject to this 10% limit.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not deemed to be illiquid for purposes of this
limitation.
The Portfolio may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to
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"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. Any such security will not be considered to be illiquid so long as it is
determined by the Board of Trustees or the Adviser, acting under guidelines
approved and monitored by the Board, that an adequate trading market exists
for that security. This investment practice could have the effect of
increasing the level of illiquidity in the Portfolio during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop. The Board of Trustees will carefully monitor any
investments by the Portfolio in these securities.
Borrowings
The Portfolio may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolio would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
it is obligated to repurchase.
Foreign Securities
As stated above, the Portfolio may invest up to 25% of its total
assets (exclusive of short-term cash investments) in the securities of foreign
issuers through American Depository Receipts. Investments in foreign
securities, whether made directly or indirectly, involve certain inherent
risks, such as political or economic instability of the issuer or the country
of issue, the difficulty of predicting international trade patterns, changes
in exchange rates of foreign currencies and the possibility of adverse changes
in investment or exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company.
Listed foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. Further, foreign stock markets are generally not as
developed or efficient as those in the U.S. and in most foreign markets volume
and liquidity are less than in the U.S. Fixed commissions on foreign stock
exchanges are generally higher than the negotiated commissions on U.S.
exchanges, and there is generally less government supervision and regulation
of foreign stock exchanges, brokers and listed companies than in the U.S. With
respect to certain foreign countries, there is a possibility of expropriation
or confiscatory taxation, limitations on the removal of funds or other assets
or diplomatic developments that could affect investment within those
countries. Because of these and other factors, securities of foreign companies
acquired by the Portfolio may be subject to greater fluctuation in price than
securities of domestic companies.
American Depository Receipts ("ADRs")
The Portfolio may invest in securities of foreign issuers in the form
of ADRs or similar securities representing securities of foreign issuers.
These securities may not be denominated in the same currency as the securities
they represent. ADRs are receipts typically issued by a United States bank or
trust company evidencing ownership of the underlying foreign securities and
are denominated in U.S. dollars. Certain such institutions issuing ADRs may
not be sponsored by the issuer. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to
provide under its contractual arrangements with the issuer.
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<PAGE>
When-Issued Purchases and Forward Commitments
The Portfolio may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by the Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. The Portfolio's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolio does not earn income with
respect to these transactions until the subject securities are delivered to
the Portfolio. The Portfolio does not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of its investment objective.
Zero Coupon Obligations
The Portfolio may invest in zero coupon obligations which are discount
debt obligations that do not make periodic interest payments although income
is generally imputed to the holder on a current basis. Such obligations may
have higher price volatility than those which require the payment of interest
periodically. The Adviser will consider the liquidity needs of the Portfolio
when any investment in zero coupon obligations is made.
Futures Contracts and Related Options
The Portfolio may trade futures contracts and options on futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. The
Portfolio may purchase and sell futures contracts which obligate it to take or
make delivery of certain securities at maturity, as well as stock index
futures contracts which are bilateral agreements pursuant to which two parties
agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value (which
assigns relative values to the common stocks included in the index) at the
close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made.
The Portfolio may sell a futures contract in order to offset an
expected decrease in the value of its portfolio that might otherwise result
from a market decline. The Portfolio may do so either to hedge the value of
its securities portfolio as a whole, or to protect against declines occurring
prior to sales of securities in the value of the securities to be sold. In
addition, the Portfolio may utilize futures contracts in anticipation of
changes in the composition of its holdings.
The Portfolio may also purchase options on futures contracts including
stock index futures contracts. A futures option gives the holder, in return
for the premium paid, the right to buy (call) from or sell (put) to the writer
of the option a futures contract at a specified price at any time during the
period of the option.
When the Portfolio sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, the Portfolio may purchase call options
on futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the
Portfolio intends to purchase. Similarly, if the value of the Portfolio's
portfolio
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<PAGE>
securities is expected to decline, the Portfolio might purchase put options or
sell call options on futures contracts rather than sell futures contracts.
The Portfolio's commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated
by the Commodities and Futures Trading Commission ("CFTC"). In addition, the
Portfolio may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the
percentage limitation. Pursuant to SEC requirements, the Portfolio may be
required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to
the value of the underlying commodity. The Trust intends to comply with the
regulations of the CFTC exempting the Portfolio from registration as a
"commodity pool operator".
For a more detailed description of futures contracts and related
options, see Appendix B to the Statement of Additional Information.
Risk Factors Associated with Futures and Related Options
To the extent the Portfolio is engaging in a futures transaction as a
hedging device, due to the risk of an imperfect correlation between securities
in its portfolio that are the subject of a hedging transaction and the futures
contract used as a hedging device, it is possible that the hedge will not be
fully effective in that, for example, losses on the portfolio securities may
be in excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the portfolio securities that were the
subject of the hedge. In futures contracts based on indices, the risk of
imperfect correlation increases as the composition of the Portfolio varies
from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures
contract has been less or greater than that of the securities. Such "over
hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge
is established.
Successful use of futures by the Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of
securities prices, interest rates and other economic factors. For example, if
the Portfolio has hedged against the possibility of a decline in the market
adversely affecting the value of securities held in its portfolio and prices
increase instead, the Portfolio will lose part or all of the benefit of the
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Although the Portfolio intends to enter into futures contracts and
options transactions 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. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit
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<PAGE>
or trading may be suspended for specified periods during the trading day.
Futures contracts prices could move to the limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation
of futures positions and potentially subjecting the Portfolio to substantial
losses. If it is not possible, or the Portfolio determines not, to close a
futures position in anticipation of adverse price movements, it will be
required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may offset partially or completely losses on the futures
contract.
Risk Factors Associated with Derivative Instruments
The Portfolio may purchase certain "derivative" instruments.
"Derivative" instruments are instruments that derive value from the
performance of underlying assets, interest or currency exchange rates, or
indices, and include (but are not limited to) futures contracts, options and
structured debt obligations (including collateralized mortgage obligations and
various floating rate instruments).
Derivative instruments present, to varying degrees, market risk that
the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the "derivative"
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that the Portfolio will be unable to sell a "derivative"
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a "derivative" instrument (such as an option)
will not correlate exactly to the value of the underlying assets, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
"derivative" instruments are more complex than others, and for those
instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the "derivative"
instruments purchased by the Portfolio, and will determine, in connection with
its day-to-day management of the Portfolio, how they will be used in
furtherance of the Portfolio's investment objective. It is possible, however,
that the Adviser's evaluations will prove to be inaccurate or incomplete and,
even when accurate and complete, it is possible that the Portfolio will,
because of the risks discussed above, incur loss as a result of its
investments in "derivative" instruments.
Portfolio Turnover
The Portfolio's annual portfolio turnover rate will be somewhat
dependent on factors beyond the Adviser's control, such as changes made to the
S&P 500 Index, the dividend policy of issuers within the Index and the amount
of purchases and redemptions. A high rate of turnover may result in
correspondingly greater brokerage commissions and other transaction costs
which are borne indirectly by shareholders. Portfolio turnover may also result
in the realization of substantial net capital gains. (See "Taxes-Federal" in
the Prospectus and "Additional Information Concerning Taxes" in the Statement
of Additional Information.) Equity index funds typically have lower levels of
turnover than actively managed funds.
Investment Limitations
The Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed without the affirmative vote of the holders of a majority of the
Portfolio's outstanding shares. Other investment limitations that cannot be
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changed without a vote of shareholders are contained in the Statement of
Additional Information under "Investment objective, Policies and Risk
Factors."
The Portfolio may not:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of its total assets
would be invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Portfolio, except
that up to 25% of the value of the Portfolio's total assets may be invested
without regard to these limitations.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured by such
instruments; (b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
3. Invest more than 10% of its total assets in illiquid investments.
See "Illiquid Securities" above.
4. Make loans, except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
5. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. The Portfolio will not
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with the Portfolio's
investment practices described in the Statement of Additional Information or
in this Prospectus are not deemed to be pledged for purposes of this
limitation.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of the Portfolio's portfolio securities will not
constitute a violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of the Portfolio's shares in certain
states, the Portfolio may make commitments more restrictive than the
investment policies and limitations described above. Should the Portfolio
determine that any such commitment is no longer in the best interests of the
Portfolio, it will revoke the commitment by terminating sales of its shares in
the state involved.
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<PAGE>
PURCHASE OF SHARES
In General
The Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class A shares of the Portfolio are sold to the public primarily
through financial institutions such as banks, brokers and dealers. Investors
may purchase such shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may impose different minimum investment and
other requirements on their customers and may charge additional fees in
connection with the establishment of accounts with the institutions and
purchase and redemption of Class A shares. Persons wishing to purchase Class A
shares through their accounts at an institution or a Co-Distributor should
contact the institution or Co-Distributor directly for appropriate
instructions and fee information. In addition, certain financial institutions
may impose different minimum investment and other requirements on their
customers. In addition, certain financial institutions may enter into
shareholder servicing agreements with the Trust whereby they would perform
various administrative support services for their customers who are the
beneficial owners of Class A shares in return for fees from the Portfolio.
See "Shareholder Servicing Plan" under the heading "Management" in this
Prospectus.
All shareholders of record will receive confirmations of share
purchases and redemptions. Class A shares purchased by institutions on behalf
of their customers will normally be held of record by them. Institutions will
record their customers' beneficial ownership of such shares and provide
regular account statements reflecting such beneficial ownership.
Institutions will be responsible for transmitting purchase and
redemption orders to FoM, Essex or NBD acting as transfer agent ("the Transfer
Agent") on a timely basis, in accordance with the procedures stated below.
Purchase Procedures
The minimum initial investment is $1,000, except for purchases through
an institution whose customers have invested an aggregate minimum of $1,000 or
for investments made through a Co-Distributor's or an institution's sweep
privilege, the Trust's Automatic Investment Plan described below, or the
Trust's IRA program described below. The minimum subsequent investment is
$100, except for reinvested dividends or as otherwise described below. The
Trust reserves the right to reject any purchase order.
Orders for Class A shares may be placed by telephone by calling (800)
688-3350 (provided an investor has made the appropriate election in his
account application) or by mail (by completing the account application which
accompanies this Prospectus and mailing the completed form and the payment for
shares to FoM, Essex or the Transfer Agent). All checks must be drawn on a
bank located within the United States and must be payable in U.S. dollars.
Subsequent investments in an existing account in the Portfolio may be made at
any time by sending a check or money order along with either (a) the
detachable form that regularly accompanies the Trust's confirmation of a prior
transaction, (b) a subsequent order form which may be obtained from the Trust,
or (c) a letter stating the amount of the investment, the name of the
Portfolio and the account number in which the investment is to be made. If any
check used for investment in an account does not clear, the order will be
cancelled and notice thereof will be
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given; in such event the account will be responsible for any loss to the Trust
as well as a $15 fee imposed by the Transfer Agent.
With the exception of customers of FoM, Class A shares may also be
paid for by wiring federal funds to the Transfer Agent, NBD Bank, ABA
072000326, for the account of The Woodward Funds, Account Number GL 325612,
and identifying the customer name and account number. Before wiring payment,
customers should notify the Transfer Agent by calling (800) 688-3350.
If customers of FoM wire payment in federal funds, they should direct
payment to NBD Bank, ABA 072000326, for the account of First of Michigan
Corporation re: The Woodward Funds, Account Number 059-41, and should identify
the customer name and account number. Before wiring payment, customers of FoM
should call FoM at (800) 544-8275 (outside Michigan) or (800) 852-7730 (within
Michigan).
Purchase orders which are accompanied by payment (by check or wire
transfer) and received by the Transfer Agent in proper form on a Business Day
(as defined below) prior to the close of the New York Stock Exchange are
priced at the net asset value determined on that Business Day. Purchase orders
which are received by the Transfer Agent after the close of trading on the
Exchange on a Business Day or on non-Business Days will be executed as of the
determination of net asset value on the next Business Day.
The Trust will not accept payment in cash or third party checks for
the purchase of shares. Federal regulations require that each investor provide
a certified taxpayer identification number upon opening or reopening an
account. Applications without a taxpayer identification number will not be
accepted. See the account application for further information about this
requirement.
Net Asset Value and Pricing of Shares
The net asset value of the Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 5:00 p.m. Eastern
time each day on which the New York Stock Exchange ("Exchange") and NBD Bank
or its bank affiliates are open for business ("Business Day"). Currently, one
or both of these institutions are closed on the customary national business
holidays of New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus
Day (observed), Veterans' Day, Thanksgiving Day and Christmas Day. During
those business days on which the Exchange closes prior to the close of its
regular trading hours (currently 4:00 p.m. Eastern time) ("Early Closing
Time"), the net asset value of the Portfolio will be determined and its shares
will be priced as of such Early Closing Time. Net asset value per Class A
share is calculated by dividing the value of all securities and other assets
belonging to the Portfolio allocable to that Class A, less the liabilities
charged to that Class A, by the number of the outstanding shares of such
Class A.
Securities held by the Portfolio which are traded on a recognized U.S.
stock exchange are valued at the last sale price on the securities exchange on
which such securities are primarily traded or at the last sale price on the
national securities market. Securities traded on only over-the-counter markets
and securities for which there were no transactions are valued at the average
of the current bid and asked prices. Fixed income securities held by the
Portfolio are valued according to the broadest and most representative market,
which ordinarily will be the over-the-counter markets. Such securities are
valued at the average of the current bid and asked prices. Securities for
which accurate market quotations are not readily available, and other assets
are valued at fair value by the Adviser under the supervision of the Board of
Trustees. Securities may be valued on the basis of prices provided by
independent pricing services when the Adviser believes such prices reflect the
fair market value of such securities. The prices provided by pricing services
take into account
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institutional size trading in similar groups of securities and any developments
related to specific securities. The Portfolio's open futures contracts will be
"marked-to-market."
REDEMPTION OF SHARES
In General
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption in
accordance with the procedures set forth below.
Redemption orders must be placed with or through the same financial
institution that placed the original purchase order. It is the responsibility
of the financial institutions to transmit redemption orders to the Transfer
Agent. Redemption proceeds are paid by check or credited to the investor's
account with his financial institution. Investors who purchased shares
directly from the Trust should follow the redemption procedures set forth
below.
Redemption Procedures
A shareholder of record may redeem shares in any amount by calling
(800)688-3350 (provided he has made the appropriate election in his account
application) or by sending a written request to The Woodward Funds, c/o NBD
Bank, P.O. Box 7058, Troy, Michigan 48007-7058. Written requests to redeem
shares having a net asset value of more than $50,000 must have all signatures
of the registered owner(s) or their authorized legal representative guaranteed
by a commercial bank or trust company which is a member of the Federal Reserve
System or FDIC, a member firm of a national securities exchange or a savings
and loan association. A signature guaranteed by a savings bank or notarized by
a notary public is not acceptable. A signature guarantee will also be required
for redemption requests (in any amount) if the address of record for the
account has been changed within the previous 15 days or which requests that
the proceeds be paid to an account other than the one preauthorized on the
application, a payee or payees other than the registered owners of the
account, or an address other than the address of record. The Trust may require
additional supporting documents for redemptions made by corporations,
fiduciaries, executors, administrators, trustees, guardians and institutional
investors.
Redemption orders for Class A shares may be placed through an
institution or directly by telephone by calling (800)688-3350. During periods
of unusual economic or market changes, telephone redemptions may be difficult
to implement. In such event, shareholders should mail their redemption
requests to their financial institutions or The Woodward Funds, c/o NBD Bank
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (including,
but not limited to, the name in which an account is registered, the account
number, or recent transactions in the account). To the extent that the Trust
and its Transfer Agent fail to use reasonable procedures to verify the
genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
Other Redemption Information
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities and Exchange Act
of 1934 after receipt by the Transfer Agent of a request in proper form,
except as
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provided by the rules of the SEC. If shares to be redeemed were purchased by
check, the Trust will transmit the redemption proceeds promptly upon clearance
of such check, which could take up to fifteen days from the purchase date. A
shareholder having purchased shares by wire must have filed an account
application before any redemption requests can be honored.
Currently, the Trust imposes no charge when shares are redeemed.
However, institutions may charge a fee for providing services in connection
with investments in Portfolio shares; NBD currently charges $16 for wire
transactions. The Trust reserves the right to redeem accounts involuntarily,
after sixty days' notice, if redemptions cause the account's net asset value
to remain at $1,000 or less. Under certain circumstances, the Trust may make
payment for redemption in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800)688-3350 or an Investor's institution.
SHAREHOLDER SERVICES
The shareholder services and privileges under this heading may not be
available to certain clients of particular financial institutions, and some
may impose conditions on their clients that are different from those described
below. Investors should consult their own financial institutions in this
regard. Other investors should direct any questions to the Transfer Agent. In
addition, the Trust may modify or terminate any of the following services and
privileges at any time.
Exchange Privilege
Investors may exchange Class A shares which have been owned for at
least thirty days of the Equity Index Portfolio, of the Woodward Money Market,
Government, Treasury Money Market, Tax-Exempt Money Market and Michigan Money
Market Funds and of other investment portfolios of the Trust which may be
offered in the future and sold without a sales charge (each a "no load
portfolio") and Class A shares which have been owned for at least thirty days
of the Woodward Growth Value, Opportunity, Intrinsic Value, Capital Growth,
Balanced, International Equity, Intermediate Bond, Bond, Short Bond, Municipal
Bond and Michigan Municipal Bond Funds, and of other investment portfolios of
the Trust which may be offered in the future and sold with a sales charge
(each a "load portfolio"). The cost of the acquired Class A shares will be
their net asset value plus the applicable sales load, if any. Class A shares
of a no load portfolio may be exchanged for Class A shares of another no load
portfolio without payment of any sales load. Any exchange of Class A shares of
a no load portfolio for Class A shares of a load portfolio will be subject to
the payment of the applicable sales load, unless the investor is exchanging
shares of a no load portfolio which were received in a previous exchange
transaction involving Class A shares of a load portfolio. In such case, the
investor will receive the appropriate credit for the sales load previously
paid. Shareholders contemplating an exchange should carefully review the
prospectus of the portfolio into which the exchange is being considered. The
Prospectus for any portfolio of the Trust may be obtained from an Investor's
financial institution or from the Transfer Agent by calling (800) 688-3350.
Exchanges will be effected by a redemption of Class A shares of the
portfolio held and the purchase of Class A shares of the portfolio acquired.
Investors should make their exchange requests in writing or by telephone to
the financial institutions through which they purchased their original Class A
shares. It is the responsibility of financial institutions to transmit
exchange requests to the Transfer Agent. Other investors should transmit
exchange requests directly to the Transfer Agent. The total value of shares
being exchanged must at least equal the minimum investment requirement of the
portfolio whose shares are being acquired in the exchange. Only one exchange
in any
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thirty-day period is permitted and only Class A Shares that may be legally
sold in the state of the investor's residence may be acquired in an exchange.
The Trust reserves the right to reject any exchange request.
Investors wishing to make an exchange should contact their financial
institutions or the Transfer Agent (as appropriate). Exchange requests in the
required form which are received by the Transfer Agent prior to 4:00 p.m.,
Eastern time, will be effected on the same Business Day after such request is
received. Requests received after 4:00 p.m., Eastern time, will be effected on
the next Business Day after such request is received. During periods of
significant economic or market change, telephone exchanges may be difficult to
complete. In such event, an investor should mail the exchange request to his
financial institution or the Transfer Agent. Neither the Trust nor the
Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Trust and
its Transfer Agent will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to
account registration (including, but not limited to, the name in which an
account is registered, the account number, or recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions,
they may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to modify or
terminate its exchange procedures upon sixty days' notice to shareholders.
Option to Make Systematic Withdrawals
The Trust has available to shareholders a Systematic Withdrawal Plan
pursuant to which a shareholder who owns Class A shares of the Portfolio
having a minimum value of $15,000 at the time he elects under the Plan may
have a fixed sum distributed in redemption at regular intervals. An
application form and additional information regarding this service may be
obtained from an investor's financial institution or the Transfer Agent by
calling (800)688-3350.
Automatic Investment
The Trust offers an Automatic Investment Plan (the "Plan") whereby a
shareholder may automatically purchase Class A shares on a regular basis in
accordance with an election in his account application. An application may be
obtained from the Transfer Agent by calling (800)688-3350. Under the Plan a
shareholder's financial institution debits a pre-authorized amount from his
account and applies the amount to the purchase of Class A shares. The minimum
per transaction is $25. The minimum initial investment in the Portfolio is
also $25 for the following shareholders who elect the Plan: (l) current and
retired directors, officers and employees of NBD or any of its affiliates; (2)
the trustees, former trustees and officers of the Trust; (3) broker/dealers
which have entered into an agreement with a Co-Distributor or the Trust
pursuant to the Trust's Distribution Plan or Shareholder Servicing Plan and
their representatives purchasing for their own accounts; and (4) spouses,
children, grandchildren, siblings, parents, grandparents and in-laws of
individuals referred to in (l), (2) and (3) above. An NAV Account Application
may be obtained from the Transfer Agent by calling (800)688-3350. The Plan can
be implemented with any financial institution that is a member of the
Automated Clearing House. No service fee is currently charged by the Trust for
participating in the Plan. Death or legal incapacity will terminate a
shareholder's participation in the Plan. Deposits, withdrawals and adjustments
will be made electronically under the rules of the Automated Clearing House
Association.
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Cross Reinvestment of Dividend Plan
The Trust makes available to shareholders a Cross Reinvestment of
Dividend Plan (the "Plan") pursuant to which a shareholder who owns Class A
shares of any portfolio with a minimum value of $10,000 at the time he elects
under the Plan may have dividends paid by such portfolio automatically
reinvested into Class A shares of another portfolio in which he has invested a
minimum of $1,000. Shareholders may obtain an application and additional
information from their financial institutions or the Transfer Agent by calling
(800)688-3350.
The Woodward Funds Individual Retirement Custodial Account
Class A Shares may be purchased in conjunction with the Trust's
Individual Retirement Custodial Account program ("IRA") where NBD acts as
custodian. Investors should consult their institutions or a Co-Distributor for
information as to applications and annual fees. The minimum investment for an
IRA is $250 for investors who are not employees of NBD and $25 for investors
who are employees of NBD. Investors should also consult their tax advisers to
determine whether the benefits of an IRA are available or appropriate.
Other Retirement Plans
NBD and its affiliates offer a variety of pension and profit sharing
plans including IRAs, defined contribution plans, 401(k) Plans, 403(b)(7)
Plans and 457 Plans through which investors may purchase Class A shares. The
minimum investment for these Plans may differ from the minimum discussed above
in "Purchase of Shares." For details concerning any of the retirement plans,
please call the Transfer Agent or a Co-Distributor.
Direct Deposit Program
If an investor receives federal salary, social security, or certain
veteran's, military or other payments from the federal government or elects to
use his employer's payroll deposit program, he is eligible for the Direct
Deposit Program. With this Program, an investor may purchase Class A shares
(minimum of $25) by having these deposits automatically deposited into his
Portfolio account. For instructions on how to enroll in the Direct Deposit
Program, an investor should call his institution or the Transfer Agent. Death
or legal incapacity will terminate an investor's participation in the Program.
An investor may elect at any time to terminate his participation by notifying
in writing the appropriate federal agency. Further, the Trust may terminate an
investor's participation upon thirty days' notice to him.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance of each class of shares of the Portfolio may be compared to the
performance of other mutual funds with similar investment objectives and to
stock or other relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, performance may be compared to data
prepared by Lipper Analytical Services, Inc. In addition, the performance of
the Portfolio may be compared to the Standard & Poor's 500 Index, an index of
unmanaged groups of common stocks, the Consumer Price Index, or the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of thirty
industrial companies listed on the New York Stock Exchange. Performance data
as reported in national financial publications such as Money Magazine Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications
of a local or regional nature, may also be used in comparing the performance
of the Portfolio.
The Portfolio calculates its total returns on an "average annual total
return" basis for various periods from the date it commenced investment
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operations and for other periods as permitted under the rules of the SEC.
Average annual total return of a class reflects the average annual
percentage change in value of an investment in the class over the
measuring period. Total returns may also be calculated on an "aggregate
total return basis" for various periods. Aggregate total return reflects
the total percentage change in value over the measuring period. Both
methods of calculating total return also reflect changes in the price of
the shares and assume that any dividends and capital gain distributions
made by the class during the period are reinvested in shares of the class.
When considering average total return figures for periods longer than one
year, it is important to note that the class' annual total return for
any one year in the period might have been greater or less than the
average for the entire period.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. The
investment return and principal value of an investment in a class will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Performance data should also be considered
in light of the risks associated with the Portfolio's portfolio composition,
quality, maturity, operating expenses and market conditions. Any fees charged
by financial institutions directly to their customer accounts in connection
with investments in shares will not be reflected in performance calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly
by the Portfolio. The Portfolio's net realized capital gains are distributed
at least annually.
Dividends and distributions will reduce the class' net asset value by
the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested in additional Class A shares of the same
Portfolio at their net asset value per share determined on the payment date,
unless the holder has notified the Transfer Agent in writing that he elects to
have dividends or capital gain distributions (or both) paid in cash.
Shareholders must make such election, or any revocation thereof, in writing to
their financial institutions or Transfer Agent. The election will become
effective with respect to dividends paid after its receipt by the Transfer
Agent. If an account is established with telephone privileges, the registered
owner or his preauthorized legal representative may change the election to
receive dividends in cash to an election to receive dividends in shares by
telephoning the Transfer Agent at 800-688-3350.
TAXES
Federal
The Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolio of liability for federal income taxes
to the extent their earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, the Portfolio's investment company taxable income will be
its taxable income, subject to certain adjustments and excluding the excess of
any net long-term capital gain for the taxable year over the net short-term
capital loss, if
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any, for such year. The Portfolio intends to distribute as dividends
substantially all of its investment company taxable income and any net
tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to the Portfolio's shareholders who are not currently exempt
from federal income taxes regardless of whether a distribution is received in
cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) Such ordinary income
distributions will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
Portfolio from domestic corporations for the taxable year.
Substantially all of the Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolio will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the shares and whether such
gains are received in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of the Portfolio, the impact of dividends
or distributions which are expected to be declared or have been declared, but
not paid, should be carefully considered. Any dividend or distribution
declared shortly after the purchase of shares prior to the record date will
have the effect of reducing the per share net asset value by the per share
amount of the dividend or distribution. All or a portion of such amounts,
although in effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of the Portfolio depending upon the
tax basis and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another investment portfolio within 90 days of the purchase and is able to
reduce the sales charges applicable to the new shares (by virtue of the
Trust's exchange privilege), the amount equal to such reduction may not be
included in the tax basis of the shareholder's exchanged shares but may be
included under certain circumstances in the tax basis of the new shares.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolio and its shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation.
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State and Local
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust
and its shareholders under such laws may differ from treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since January 1995); Senior Vice President, Association for Investment
Management and Research (1992-1995); Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for the Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion. NBD has been in the business
of providing such services since 1933. Included among NBD's accounts are
pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services
to the Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for the
Portfolio.
F. Richard Neumann, Vice President and Henry Kaczmarek, Investment
Officer, are primarily responsible for the day-to-day management of the Equity
Index Portfolio. Mr. Neumann joined NBD in 1985 after receiving an MBA in
Finance from Indiana University. Mr. Kaczmarek joined NBD in 1993 after
receiving his MBA in Finance from Indiana University.
For its services under the Advisory Agreement, NBD is entitled to
receive advisory fees, computed daily and payable monthly, at an annual rate
of .10% of the average daily net assets of the Equity Index Portfolio. In
addition, NBD is entitled to 4/10ths of the gross income earned by the
Portfolio on each loan of securities (excluding capital gains and losses, if
any). NBD may voluntarily waive its fees in whole or in part with respect to
the Portfolio.
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolio for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could
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prevent the Adviser from continuing to perform investment advisory, custodial
or transfer agency services for the Trust or require the Adviser to alter or
discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees of the Trust would recommend that shareholders approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of the Portfolio: (i) fees payable to
the Co-Distributors pursuant to the Distribution Agreement; (ii) the actual
costs and expenses in connection with advertising and marketing the
Portfolio's shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions and other professionals ("Service Agents") for
administration or servicing of Portfolio shareholders ("Servicing"). Servicing
may include, among other things: answering client inquiries regarding the
Trust and the Portfolio; assisting clients in changing dividend options,
account designations and addresses; performing sub-accounting; establishing
and maintaining shareholder accounts and records; processing purchase and
redemption transactions; investing client cash account balances automatically
in Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
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printing Prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of the Portfolio's average net assets, and
Essex is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of the Trust's investment portfolios attributable to
investments by clients of Essex. The payments to be made to the
Co-Distributors which are based on a percentage of the net assets of the
Portfolio are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolio's shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust, and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Shareholder Servicing Plan
Pursuant to a Shareholder Servicing Plan ("Servicing Plan") adopted by
its Board of Trustees, the Trust may enter into agreements ("Servicing
Agreements") with banks and financial institutions, which may include the
Adviser and its affiliates ("Shareholder Servicing Agents"), under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares of the Portfolio. Such services, which are
described more fully in the Statement of Additional Information, may include
processing purchase and redemption requests from customers, placing net
purchase and redemption orders with a Co-Distributor, processing, among other
things, distribution payments from the Trust, providing necessary personnel
and facilities to establish and maintain customer accounts and records, and
providing information periodically to customers showing their positions in
Class A shares.
For these services, the Trust will pay fees to Shareholder Servicing
Agents at an annual rate of up to .25% of the average daily net asset value of
Class A shares held by such Shareholder Servicing Agents for the benefit of
their customers and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Shareholder Servicing Agents are
required to provide their customers with a schedule of any credits, fees or
other conditions that may be applicable to the investment of customer assets
in Class A shares. The fees payable under such servicing agreements will be
allocated exculsively to the Class A shares in each Portfolio.
Conflict of interest restrictions may apply to the receipt of
compensation paid by the Trust to a Shareholder Servicing Agent in connection
with the investment of fiduciary funds in Portfolio shares. Banks and other
institutions regulated by the Comptroller of the Currency or other federal or
state bank regulatory agencies, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities
-28-
<PAGE>
commissions, are urged to consult legal counsel before entering into Servicing
Agreements.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan and Shareholder Servicing Plan, outside auditing and
legal expenses, all taxes and corporate fees payable by the Trust, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders,
costs of shareholder reports and shareholder meetings, and any extraordinary
expenses. The Portfolio also pays for brokerage commissions and transfer taxes
(if any) in connection with the purchase and sale of portfolio securities.
Expenses attributable to a particular investment portfolio of the Trust will
be charged to that Portfolio, and expenses not readily identifiable as
belonging to a particular investment portfolio will be allocated by the Board
of Trustees among one or more investment portfolios in such a manner as it
shall deem fair and equitable. For the fiscal year ended December 31, 1995,
the Equity Index Portfolio's total expenses were .15% of its average net
assets, respectively. The Statement of Additional Information describes in
more detail the fees and expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolio described herein, the Trust offers the following
investment portfolios: the Woodward Growth/Value Fund, Intrinsic Value Fund,
Capital Growth Fund, Balanced Fund, International Equity Fund, Intermediate
Bond Fund, Bond Fund, Short Bond Fund, Municipal Bond Fund, Michigan Municipal
Bond Fund, Money Market Fund, Government Fund, Treasury Money Market Fund,
Tax-Exempt Money Market Fund and Michigan Tax-Exempt Money Market Fund. The
Trust has established the following two distinct classes of shares within each
Portfolio described herein: Class I shares (Original Class) and Class A shares
(Special Class 1). A salesperson and any other person or institution entitled
to receive compensation for selling or servicing shares may receive different
compensation with respect to different classes of shares in the Series. Each
share has $.10 par value, represents an equal proportionate interest in the
related portfolio with other shares of the same class outstanding, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to such portfolio as are declared in the discretion of the
Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate number of and
not by Series, except as otherwise expressly required by law or when the Board
of Trustees determines that the matter to be voted on affects only the
interests of shareholders of a particular Series. In addition, shareholders of
each of the Series have equal voting rights except that only shares of a
particular class within a Series are entitled to vote on matters affecting
only that class. Voting rights are not cumulative, and accordingly, the
holders of more than 50%
-29-
<PAGE>
of the aggregate number of shares of all Trust portfolios may elect all of the
Trustees.
As of February 29, 1996, NBD held beneficially or of record
approximately 91.62% of the outstanding shares of the Equity Index Portfolio
and therefore may be considered to be a controlling person of the Trust for
purposes of the 1940 Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
-30-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give
any information or to make any
representations not contained in this
Prospectus, or in the Portfolio's
Statement of Additional Information
incorporated herein by reference, in
connection with the offering made by
this Prospectus and, if given or
made, such information or
representations must not be relied
upon as having been authorized by the
Trust, Adviser or Sponsors and Co-
Distributors. This Prospectus does
not constitute an offering by the
Portfolio or by their Co-
Distributors, in any jurisdiction in
which such offering may not lawfully
be made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY............................. 2
FINANCIAL HIGHLIGHTS........................ 5
INTRODUCTION................................ 6
PROPOSED REORGANIZATION..................... 6
INVESTMENT OBJECTIVE, POLICIES AND
RISK FACTORS............................ 6
OTHER INVESTMENT POLICIES................... 9
PURCHASE OF SHARES.......................... 16
REDEMPTION OF SHARES........................ 18
SHAREHOLDER SERVICES........................ 19
PERFORMANCE INFORMATION..................... 21
DIVIDENDS AND DISTRIBUTIONS................. 22
TAXES .................................... 22
MANAGEMENT.................................. 24
OTHER INFORMATION........................... 29
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania
19107-3496
<PAGE>
[ BACK COVER, COLUMN 2 ]
CLASS A SHARES OF THE:
WOODWARD EQUITY INDEX FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-31-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series H - Original Class, I - Original Class,
J - Original Class, R - Original Class, S - Original Class,
N - Original Class and T - Original Class Representing
Interests in the Class I Shares of the Woodward
Growth/Value, Opportunity,
Intrinsic Value, Balanced, Capital Growth, Equity Index and
International Equity Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page...................................... Cover page
2. Synopsis........................................ Expense Summary;
Background
3. Financial Highlights............................ Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant...................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ....................... Management
6. Capital Stock and Other
Securities...................................... Purchase of
Shares; Redemption
of Shares;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered................................... Purchase of
Shares;
Management
8. Redemption or Repurchase........................ Redemption of
Shares
9. Pending Legal Proceedings....................... Inapplicable
-7-
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following seven investment portfolios (the "Portfolios"), each having
its own investment objective and policies as described in this Prospectus:
Class I shares of the:
Woodward Growth/Value Fund
Woodward Opportunity Fund
Woodward Intrinsic Value Fund
Woodward Capital Growth Fund
Woodward Balanced Fund
Woodward Equity Index Fund
Woodward International Equity Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Growth/Value Fund ("Growth/Value Portfolio"), Woodward
Opportunity Fund ("Opportunity Portfolio"), Woodward Intrinsic Value Fund
("Intrinsic Value Portfolio"), Woodward Capital Growth Fund ("Capital Growth
Portfolio"), Woodward Balanced Fund ("Balanced Portfolio"), Woodward Equity
Index Fund ("Equity Index Portfolio") and Woodward International Equity Fund
("International Equity Portfolio"). Class I shares are sold primarily to NBD
and its affiliated and correspondent banks acting on behalf of their
respective customers. Class A shares are sold to the general public primarily
through financial institutions such as banks, brokers and dealers. Class A
shares are offered in a separate Prospectus. Investors should call (800)
688-3350, a Co-Distributor or their financial institutions if they would like
to obtain more information concerning Class I shares and/or Class A shares of
the Portfolios. The following table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Class I shares in each of the Portfolios.
<TABLE>
<CAPTION>
Inter-
Growth/ Oppor- Intrinsic Capital Equity national
Value tunity Value Growth Balanced Index Equity
Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1)
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price....... None None None None None None None
Sales Load Imposed on
Reinvested Dividends. None None None None None None None
Deferred Sales Load..... None None None None None None None
Redemption Fee.......... None None None None None None None
Exchange Fee............ None None None None None None None
Annual Operating Expenses
(as a percentage of
average net assets)
Management Fees......... .75% .75% .75% .75% .75% .10% .75%
12b-1 Fees.............. .011% .015% .011% .005% .013% .03% .004%
Other Expenses(2)
(before no fee waivers
and/or expense
reimbursements)...... .039% .035% .089% .145% .327% .03% 0.596%
(after fee waivers
and/or expense
reimbursements)...... N/A N/A N/A .125% .187% .406%
Total Operating Expenses
(before fee waivers
and/or expense
reimbursements)...... .80% .80% .85% .90% 1.09% .16% 1.35%
(after fee waivers
and/or expense
reimbursements....... N/A N/A N/A .88% .95% 1.16%
<FN>
- ---------------------
1. The expenses for each Portfolio have been restated to reflect
current expenses.
-2-
<PAGE>
2. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
- -------------------
</TABLE>
<TABLE>
<CAPTION>
Inter-
Growth/ Oppor- Intrinsic Capital Equity national
Value tunity Value Growth Balanced Index Equity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- ------------------- --------- --------- ---------
Example
You would pay the following
expenses on a $1,000
investment, assuming:
(1) a 5% annual return
and (2) redemption at the
end of each time period:
<S> <C> <C> <C> <C> <C> <C> <C>
One Year:..... $ 8.20 $ 8.20 $ 8.71 $ 9.02 $ 9.73 $ 1.64 $ 11.89
Three Years:.. 25.64 25.64 27.23 28.18 30.40 5.16 37.04
Five Years:... 44.57 44.57 47.31 48.95 52.76 9.03 64.15
Ten Years:.... 99.27 99.27 105.22 108.78 117.05 20.47 141.50
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
The example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class I shares in each of the Portfolios,
based upon payment by the Portfolios of operating expenses at the respective
levels set forth in the expense table. For more complete descriptions of
Portfolio expenses, see "Investment Adviser, Custodian and Transfer Agent,"
"Sponsors and Co- Distributors," "Service and Distribution Plan" and "Trust
Expenses" under the heading "Management" in this Prospectus and the financial
statements and related notes contained in the Statement of Additional
Information.
-3-
<PAGE>
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class I
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate Servicing Fees
attributable to such shares exclusively to them.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of how each Portfolio's
net asset value has changed during the periods presented. The tables have been
derived from the Portfolios' financial statements which have been audited by
Arthur Andersen LLP, the Trust's independent public accountants, whose report
thereon is contained in the Statement of Additional Information along with the
financial statements. The financial data included in these tables should be
read in conjunction with the financial statements and related notes included
in the Statement of Additional Information. Further information about the
performance of the Portfolios is available in annual reports to shareholders.
The Statement of Additional Information and annual reports to shareholders may
be obtained from the Trust free of charge by calling (800) 688-3350.
<TABLE>
<CAPTION>
Growth/Value Portfolio
June 1, 1991
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
December December December December December 31,
31, 1995 31, 1994 31, 1993 31, 1992 1991
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period .................. $ 10.67 $ 11.16 $ 10.51 $ 9.86 $ 10.00
Income from investment
operations:
Net investment income ...... 0.21 0.23 0.20 0.22 0.14
Net realized and unrealized
gains (losses) on
investments .............. 2.76 (0.17) 1.24 0.75 (0.14)
--------------- --------------- --------------- --------------- ---------------
Total from investment
operations ............... $ 2.97 $ 0.06 $ 1.44 $ 0.97 $ 0.00
--------------- --------------- --------------- --------------- ---------------
Less distributions:
From net investment
income ................... $ (0.22) $ (0.21) $ (0.20) $ (0.22) $ (0.14)
From realized
gains .................... (0.26) (0.30) (0.59) (0.10) 0.00
In excess
of realized gains ......... -- (0.01) 0.00 0.00 0.00
Tax return of capital ....... -- (0.03) 0.00 0.00 0.00
--------------- --------------- --------------- --------------- ---------------
Total distributions ........ $ (0.48) $ (0.55) $ (0.79) $ (0.32) $ (0.14)
--------------- --------------- --------------- --------------- ---------------
Net asset value, end of
period ..................... $ 13.16 $ 10.67 $ 11.16 $ 10.51 $ 9.86
=============== =============== =============== =============== ===============
Total return ................. 28.04% 0.55% 13.79% 9.87% 0.17%(a)
Ratios/Supplemental Data
Net assets, end of period .... $ 737,167,067 $ 571,370,711 $ 429,635,045 $ 287,344,809 $ 238,085,630
Ratio of expenses to average
net assets ................. 0.84% 0.84% 0.83% 0.83% 0.85%(a)
Ratio of net investment income
to average net assets ...... 1.73% 2.07% 1.84% 2.20% 2.56%(a)
Portfolio turnover rate ...... 26.80% 28.04% 42.31% 16.28% 0.94%
Average Commission Rate ...... $ 0.04
<FN>
- ---------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Opportunity Portfolio
June 1, 1991
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
December December December December December 31,
31, 1995 31, 1994 31, 1993 31, 1992 1991
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period .................. $ 13.34 $ 14.49 $ 12.37 $ 10.40 $ 10.00
Income from investment
operations:
Net investment income ...... 0.06 0.07 0.10 0.11 0.09
Net realized and unrealized
gains (losses) on
investments .............. 2.57 (0.54) 2.87 2.43 0.43
------------ ------------ ------------ ------------ ------------
Total from investment
operations ............... $ 2.63 $ (0.47) $ 2.97 $ 2.54 $ 0.52
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment
income ................... $ (0.06) $ (0.07) $ (0.10) $ (0.11) $ (0.09)
From realized
gains .................... (0.76) (0.49) (0.75) (0.46) (0.03)
In excess
of realized gains ......... 0.00 (0.02) 0.00 0.00 0.00
Tax return of capital ...... 0.00 (0.10) 0.00 0.00 0.00
------------ ------------ ------------ ------------ ------------
Total distributions ........ $ (0.82) $ (0.68) $ (0.85) $ (0.57) $ (0.12)
------------ ------------ ------------ ------------ ------------
Net asset value, end of
period ..................... $ 15.15 $ 13.34 $ 14.49 $ 12.37 $ 10.40
============ ============ ============ ============ ============
Total return ................. $ 19.88% (3.27%) 24.01% 24.56% 8.92%(a)
Ratios/Supplemental Data
Net assets, end of period .... $650,952,268 $524,999,120 $365,664,513 $166,423,073 $108,046,450
Ratio of expenses to average
net assets ................. 0.89% 0.90% 0.86% 0.84% O.84%(a)
Ratio of net investment income
to average net assets ...... 0.37% 0.53% 0.71% 1.09% 1.56%(a)
Portfolio turnover rate ...... 53.55% 37.51% 33.99% 34.44% 2.92%
Average Commission Rate ...... $ 0.04
<FN>
- ------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Intrinsic Value Portfolio
June 1, 1991
(Commencement
Year Ended Year Ended Year Ended Year Ended of Operations) to
December December December December December 31,
31, 1995 31, 1994 31, 1993 31, 1992 1991
---------- ---------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period .................. $ 10.48 $ 11.05 $ 10.40 $ 9.89 $ 10.00
Income from investment
operations:
Net investment income ...... 0.29 0.31 0.29 0.29 0.17
Net realized and unrealized
gains (losses) on
investments .............. 2.24 (0.38) 1.23 1.14 (0.02)
------------ ------------ ------------ ------------ ------------
Total from investment
operations ............... $ 2.53 $ (0.07) $ 1.52 $ 1.43 $ 0.15
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment
income ................... $ (0.30) $ (0.30) $ (0.28) $ (0.28) $ (0.17)
From realized
gains .................... $ (0.82) $ (0.20) (0.59) (0.64) (0.09)
------------ ------------ ------------ ------------ ------------
Total distributions ........ $ (1.12) $ (0.50) $ (0.87) $ (0.92) $ (0.26)
------------ ------------ ------------ ------------ ------------
Net asset value, end of
period ..................... $ 11.89 $ 10.48 $ 11.05 $ 10.40 $ 9.89
============ ============ ============ ============ ============
Total return ................. 24.38% (0.60%) 14.71% 14.56% 2.70%(a)
Ratios/Supplemental Data
Net assets, end of period .... $255,884,859 $220,028,096 $192,555,183 $107,260,873 $ 77,450,163
Ratio of expenses to average
net assets ................. 0.91% 0.91% 0.86% 0.84% 0.84%(a)
Ratio of net investment income
to average net assets ...... 2.49% 2.92% 2.67% 2.78% 3.03%(a)
Portfolio turnover rate ...... 45.55% 58.62% 63.90% 48.52% 1.80%
Average Commission Rate ...... $ 0.03
<FN>
- ------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Capital Growth Portfolio
July 2, 1994
(Commencement
Year Ended of Operations) to
December 31, December 31,
1995 1994
------------ ----------------
<S> <C> <C>
Net asset value, beginning of period ....... $ 10.44 $ 10.00
Income from investment operations:
Net investment income .................... 0.08 0.05
Net realized and unrealized gains (losses)
on investments ......................... 2.93 0.43
------------ ------------
Total from investment operations ......... $ 3.01 $ 0.48
------------ ------------
Less distributions:
From net investment income ............... $ (0.08) $ (0.04)
From net realized gains .................. (0.11) 0.00
------------ ------------
Total distributions ...................... $ (0.19) $ (0.04)
------------ ------------
Net asset value, end of period ............. $ 13.26 $ 10.44
============ ============
Total return ............................... 28.90% 9.62%(a)
Ratios/Supplemental Data
Net assets, end of period .................. $195,861,178 $ 81,269,604
Ratio of expenses to average net assets .... 0.86% 0.85%(a)
Ratio of net investment income to average
net assets ................................ 0.65% 1.25%(a)
Ratio of expenses to average net assets
without fee waivers/reimbursed
expenses .................................. 0.90% 0.95%(a)
Ratio of net investment income to average
net assets without fee waivers/reimbursed
expenses ................................. 0.61% 1.15%(a)
Portfolio turnover rate .................... 6.97% 3.29%
Average Commission Rate .................... $ 0.04
<FN>
- ------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Balanced Portfolio
Year Ended Year Ended
December 31, December 31,
1995 1994
------------ -----------
<S> <C> <C>
Net asset value, beginning
of period .............................. $ 9.53 $ 10.00
Income from investment
operations:
Net investment income .................. 0.35 0.28
Net realized and unrealized
gains (losses) on
investments .......................... 1.83 (0.48)
------------ ------------
Total from investment
operations ........................... $ 2.18 $ (0.20)
------------ ------------
Less distributions:
From net investment
income ............................... $ (0.35) $ (0.27)
From realized
gains ................................ (0.12) 0.00
------------ ------------
Total distributions .................... $ (0.47) $ (0.27)
------------ ------------
Net asset value, end of
period ................................. $ 11.24 $ 9.53
============ ============
Total return ............................. 23.18% (1.95%)
Ratios/Supplemental Data
Net assets, end of period ................ $ 93,623,801 $ 54,167,192
Ratio of expenses to average
net assets ............................. 0.91% 0.85%
Ratio of net investment income
to average net assets .................. 3.40% 3.41%
Ratio of expenses to average net assets
without fee waivers/reimbursed expenses 1.09% 1.56%
Ratio of net investment income to average
net assets without fee waivers/reimbursed
expenses ................................ 3.22% 2.70%
Portfolio turnover rate .................. 31.76% 37.49%
Average Commission Rate .................. $ 0.05
- ------------
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Equity Index Fund
July 10, 1992
(Commencement of
Year Ended Year Ended Year Ended Operations) to
December 31, December 31, December 31, December 31,
1995 1994 1993 1992
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning
of period ................... $ 10.65 $ 11.15 $ 10.52 $ 10.00
Income from investment
operations:
Net investment income ....... 0.30 0.31 0.28 0.12
Net realized and unrealized
gains (losses) on
investments ............... 3.65 (0.20) 0.75 0.52
------------ ------------ ------------ ------------
Total from investment
operations ................ $ 3.95 $ 0.11 $ 1.03 $ 0.64
------------ ------------ ------------ ------------
Less distributions:
Dividends from net investment
income .................... $ (0.31) $ (0.30) $ (0.27) $ (0.12)
Distributions from realized
gains ..................... $ (0.14) $ (0.23) (0.13) 0.00
Distributions in excess of
realized gains ............ (0.00) (0.08) 0.00 0.00
------------ ------------ ------------ ------------
Total distributions ......... $ (0.45) $ (0.61) $ (0.40) $ (0.12)
------------ ------------ ------------ ------------
Net asset value, end of
period ...................... $ 14.15 $ 10.65 $ 11.15 $ 10.52
============ ============ ============ ============
Total return .................. 37.35% 1.02% 9.77% 13.61%(a)
Ratios/Supplemental Data
Net assets, end of period ..... $528,202,913 $340,808,050 $325,328,903 $242,057,866
Ratio of expenses to average
net assets .................. 0.15% 0.17% 0.20% O.22%(a)
Ratio of net investment income
to average net assets ....... 2.39% 2.71% 2.59% 2.71%(a)
Portfolio turnover rate ....... 10.66% 24.15% 16.01% 0.50%
Average Commission Rate ....... $ 0.03
<FN>
- ------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
International Equity Portfolio
December 3, 1994
(Commencement
Year Ended of Operations) to
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
Net asset value, beginning
of period ........................................ $ 10.01 $ 10.00
Income from investment
operations:
Net investment income ............................ 0.10 0.01
Net realized and unrealized
gains (losses) on
investments .................................... 1.05 0.00
------------ ------------
Total from investment
operations ..................................... $ 1.15 $ 0.01
------------ ------------
Less distributions:
From net investment
income ......................................... $ (0.11) $ 0.00
From realized
gains .......................................... (0.00) 0.00
------------ ------------
Total distributions .............................. $ (0.11) $ 0.00
------------ ------------
Net asset value, end of
period ........................................... $ 11.05 $ 10.01
============ ============
Total return ....................................... 11.47% 1.26%(a)
Ratios/Supplemental Data
Net assets, end of period .......................... $107,288,301 $ 36,545,470
Ratio of expenses to average
net assets ....................................... 1.16% 1.15%(a)
Ratio of net investment income
to average net assets ............................ 1.43% 1.18%(a)
Ratio of expenses to average net assets without fee
waivers/reimbursed expenses ...................... 1.24% 1.92%(a)
Ratio of net investment income to average net assets
without fee waivers/reimbursed expenses .......... 1.35% 0.41%(a)
Portfolio turnover rate ............................ 2.09% 0.30%
Average Commission Rate ............................ $ 0.05
<FN>
- ------------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
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<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objectives and
policies. However, only the Class I shares of the Growth/Value, Opportunity,
Intrinsic Value, Capital Growth, Balanced, Equity Index and International
Equity Portfolios are offered pursuant to this Prospectus. Each such Portfolio
is classified as a diversified investment portfolio under the 1940 Act.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is to expected be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
such Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Growth/Value Portfolio
The investment objective of the Growth/Value Portfolio is to achieve
long-term capital appreciation and, secondarily, to produce current income
approximating that prevailing within the general equity market. The Portfolio
seeks to achieve this objective by investing primarily in equity securities of
relatively large companies. The Adviser believes that well managed, larger
companies historically have provided investors with attractive returns, high
liquidity and lower than average volatility. The Portfolio invests in
companies which the Adviser believes have earnings growth expectations that
exceed those implied by the market's current valuation. In addition, the
Portfolio seeks to maintain a portfolio of companies whose earnings will
increase at a faster rate than within the general equity market. The equity
portion of the portfolio generally will be constructed in a "bottom-up"
manner. "Bottom-up" refers to an analytical approach to securities selection
which first focuses on the company and company-related matters as contrasted
to a "top-down" analysis which first
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<PAGE>
focuses on the industry or the economy. In the Adviser's opinion this
procedure may generally be expected to result in a portfolio characterized by
lower price/earnings ratios, above average growth prospects, and average
market risk.
Opportunity Portfolio
The investment objective of the Opportunity Portfolio is to achieve
long-term capital appreciation and, secondarily, to maintain a moderate level
of dividend income. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies with small to intermediate market
capitalization. The Adviser believes that there are many companies in this
size range that enjoy enhanced growth prospects, operate in more stable market
niches, and have greater ability to respond to new business opportunities, all
of which increase their likelihood of attaining superior levels of
profitability and investment returns. However, they may escape many investors'
attention because they are less well known than some larger companies. Shares
of these companies may also be more volatile than those of larger companies,
so the Opportunity Portfolio can be expected to exhibit somewhat greater
volatility than market indices dominated by very large companies. The Adviser
intends to reduce the volatility and enhance the potential return of the
Portfolio's holdings by concentrating on companies which have demonstrated
records of superior profitability, maintain conservative balance sheets, and
are, in general, of above-average quality, although stocks of lesser quality
may be purchased by the Portfolio if the Adviser believes they offer
sufficient opportunity for capital appreciation.
Intrinsic Value Portfolio
The investment objective of the Intrinsic Value Portfolio is to
provide long-term capital growth, with income a secondary consideration. The
Portfolio seeks to achieve this objective by investing primarily in equity
securities of companies believed by the Adviser to represent a value or
potential worth which is not fully recognized by prevailing market prices. In
selecting investments for the Portfolio, screening techniques are employed to
isolate issues believed to be attractively priced. The Adviser then evaluates
the underlying earning power and dividend paying ability of these potential
investments. The Portfolio's holdings are usually characterized by lower
price/earnings, price/cash flow and price/book value ratios and by above
average current dividend yields relative to the equity market. Companies
purchased by the Portfolio are often deemed by the Adviser to be overlooked
and out of favor by the marketplace at the time of purchase. In general the
Portfolio's investments are diversified among industry groups that meet the
Portfolio's valuation criteria to attempt to reduce certain of the risks
inherent in common stock investments.
Capital Growth Portfolio
The investment objective of the Capital Growth Portfolio is to
maximize long-term capital appreciation with current income not a significant
consideration. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies with a market capitalization of at
least $1 billion. In selecting investments for the Portfolio, the Adviser will
employ screening techniques and a research intensive approach emphasizing
superior, sustainable annual earnings growth which is supported by strong
revenue growth, margin expansion and conservative financial leverage. Because
of this growth orientation, certain market sectors may be over represented in
the Portfolio's investments; however, investments will be diversified among
industry groups and individual issuers. The value of the Portfolio's
investments will fluctuate based on market and specific industry conditions,
and other factors such as investment-style preferences. It is anticipated
that, generally, the dividend yield of the Portfolio will be less than or
equal to that of the broad equity market and will likely fluctuate. Therefore,
the Portfolio is intended for investors seeking long-term capital
appreciation.
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<PAGE>
Investment Policies Applicable to the Growth/Value, Opportunity, Intrinsic
Value and Capital Growth Portfolios
The Growth/Value, Opportunity, Intrinsic Value and Capital Growth
Portfolios invest primarily in publicly traded common stocks of companies
incorporated in the United States, although each such Portfolio may also
invest up to 25% of its total assets in the securities of foreign issuers,
either directly or through American Depository Receipts. In addition, they may
invest in securities convertible into common stock, such as certain bonds and
preferred stocks, and may invest up to 5% of their respective net assets in
other types of securities having common stock characteristics (such as rights
and warrants to purchase equity securities). The Portfolios may also enter
into futures contracts and related options and may utilize options. Under
normal market conditions, each Portfolio expects to invest at least 65% of the
value of its total assets in equity securities. Each Portfolio may also hold
up to 35% of its total assets in investment grade short-term obligations
issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, money market instruments, repurchase agreements and cash.
Balanced Portfolio
The investment objective of the Balanced Portfolio is to achieve
long-term total return through a combination of capital appreciation and
current income. The Portfolio seeks to achieve its investment objective by
investing its assets primarily in three major asset groups: equity securities;
fixed income securities; and cash equivalent securities. In pursuing the
Portfolio's investment objective, the Adviser allocates the Portfolio's
investments primarily based on its evaluation of the long-term relative
attractiveness of the major asset groups. The Adviser bases its evaluations of
relative attractiveness on its outlook for the capital market. This outlook
includes, but is not limited to, judgments about where the economy appears to
be in the business cycle together with expectations for inflation, interest
rates, and long-term corporate earnings growth.
Under normal market conditions, the Portfolio's policy is to invest at
least 25% of the value of its total assets in fixed income senior securities
and no more than 75% in equity securities. Compliance with these percentage
requirements may limit the ability of the Portfolio to maximize total return.
The actual percentage of assets invested in equity securities, fixed income
securities and cash equivalent securities will vary from time to time,
depending on the judgment of the Adviser as to general market and economic
conditions, trends in yields, interest rates and changes in fiscal and
monetary developments.
Equity Securities. The equity securities in which the Balanced
Portfolio normally invests are common stocks, preferred stocks, rights,
warrants and securities convertible into common or preferred stocks. The
equity portion of the Balanced Portfolio's investments will be invested
primarily in publicly traded stocks of companies incorporated in the United
States, although up to 20% of its total assets may be invested in the equity
securities of foreign issuers, either directly or through American Depository
Receipts.
The Adviser selects equity securities for the Portfolio based on such
factors as general financial condition, price/earnings, price/cash flow and
price/book value ratios, above average current dividend yields relative to the
equity market, market share, product leadership and other investment criteria.
The Portfolio invests in the equity securities of companies which the Adviser
believes have earnings growth expectations that exceed those implied by the
market's current valuation and that will increase at a faster rate than within
the general equity market. The Adviser may also select equity securities,
generally listed on a national exchange, of companies with small to
intermediate market capitalizations generally above $100 million which enjoy
enhanced growth prospects, operate in market niches, and have greater ability
to respond to new
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<PAGE>
business opportunities, all of which increase their likelihood of attaining
superior levels of profitability and investment returns. The Adviser may also
select equity securities of companies it believes represent a value or
potential worth which is not fully recognized by prevailing market prices.
Debt Securities. The Balanced Portfolio invests the fixed income
portion of its portfolio of investments in a broad range of debt securities
rated "investment grade" or higher at the time of purchase, or unrated
investments deemed by the Adviser to be of comparable quality. Debt securities
in which the Portfolio normally invests are: (i) obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; (ii)
corporate, bank and commercial obligations; (iii) securities issued or
guaranteed by foreign governments, their agencies or instrumentalities; (iv)
securities issued by supranational banks; (v) mortgage backed securities; and
(vi) securities representing interests in pools of assets. Investments include
fixed and variable-rate bonds, zero coupon bonds, debentures, and various
types of demand instruments. Obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities may include mortgage backed
securities, as well as "stripped securities" (both interest-only and
principal-only) and custodial receipts for Treasury securities. Most fixed
income obligations acquired by the Portfolio will be issued by companies or
governmental entities located within the United States. Up to 15% of the total
assets of the Portfolio may, however, be invested in dollar-denominated debt
obligations (including cash equivalent securities) of foreign issuers.
The Adviser manages the fixed income portion of the Portfolio based on
anticipated interest rate changes and the use of active management strategies
such as sector rotation, intra-sector adjustments and yield curve and
convexity considerations. In use of such active management strategies, the
Adviser seeks value in investment grade fixed income securities. Sector
rotation involves the Adviser selecting among different economic or industry
sectors based upon apparent or relative attractiveness. Thus at times a sector
offers yield advantages relative to other sectors. An intra-sector adjustment
occurs when the Adviser determines to select a particular issue within a
sector. Yield curve considerations involve the Adviser attempting to compare
the relationship between time to maturity and yield to maturity in order to
identify the relative value in the relationship. Convexity considerations
consist of the Adviser seeking securities that rise in price more quickly, or
decline in price less quickly, than the typical security of that price risk
level and therefore enable the Adviser to obtain an additional return when
interest rates change dramatically.
In acquiring particular fixed income securities for the Portfolio, the
Adviser will consider, among other things, historical yield relationships
between private and governmental debt securities, intermarket yield
relationships among various industry sectors, current economic cycles and the
attractiveness and creditworthiness of particular issuers. Depending upon the
Adviser's analysis of these and other factors, the Portfolio's holdings of
issues in particular industry sectors may be overweighted when compared to the
relative industry weightings in the Lehman Brothers Aggregate Bond Index, or
other recognized indices. The value of the fixed income portion of the
Portfolio can be expected to vary inversely with changes in prevailing
interest rates.
Cash Equivalent Securities and Other Investments. The cash equivalent
securities in which the Balanced Portfolio normally invests are short-term
obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, "high quality" money market instruments such as
certificates of deposit, bankers' acceptances, time deposits, repurchase
agreements, reverse repurchase agreements, short-term obligations issued by
state and local governmental issuers which carry yields that are competitive
with those of other types of high quality money market instruments, commercial
paper, notes, other short-term obligations and variable rate master demand
notes. "High quality" money market instruments are money market instruments
which are rated at the time
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<PAGE>
of purchase within the two highest rating categories or which are unrated at
such time but are deemed by the Adviser to be of comparable quality. Such
investments may include obligations of foreign banks and foreign branches of
U.S. banks. The Portfolio may also invest its cash balances in securities
issued by other investment companies which invest in high-quality, short-term
debt securities. As a shareholder of another investment company, the Portfolio
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would
be in addition to the advisory and other expenses that the Portfolio bears
directly in connection with its own operations.
The Balanced Portfolio may also enter into futures contracts
and related options and utilize options as more fully described below.
Equity Index Portfolio
The investment objective of the Equity Index Portfolio is to provide
an investment return which substantially duplicates the price and yield
performance of domestically traded common stocks in the aggregate, as
represented by the Standard & Poor's Composite Stock Price Index (the "S&P 500
Index" or "Index"). The Portfolio uses the S&P 500 Index as a benchmark for
comparison because it represents roughly two-thirds of the market value of all
publicly traded common stocks in the United States, is well known to investors
and is a widely accepted measure of common stock investment returns. The Index
contains a representative sample of common stocks that trade on the New York
and American Stock Exchanges and also contains over-the-counter stocks that
are a part of the National Market System. The S&P 500 Index is constructed
using a "bottom-up" approach through identification of important industry
categories and allocation of a representative sample of stocks to these
categories.
The Portfolio seeks to achieve a 95% correlation coefficient between
its performance and that of the Index. Therefore, the Portfolio's price
changes are expected to closely match movements in the underlying Index. In
addition, the total return of the Portfolio is expected to substantially match
that of the Index. However, there is no assurance that the Portfolio's
objective will be attained. Deviations from the performance of the Index
("tracking error") may result from shareholder purchases and redemptions of
shares of the Portfolio that occur daily, as well as from the expenses borne
by the Portfolio. To the extent that a cash reserve is held to meet expected
redemptions or pending investment in securities, to the extent that securities
must be sold to meet redemption requests, and to the extent that purchases and
sales are made to conform the Portfolio's holdings more closely with that of
the Index in response to cash inflows or outflows and associated brokerage
costs are incurred, these daily inflows or outflows of cash may increase the
Portfolio's tracking error. In addition, tracking error may occur due to
changes made in the S&P 500 Index and the manner in which the Index is
calculated by S&P among other factors. In the event the performance of the
Portfolio is not comparable to the performance of the Index, the Board of
Trustees will examine the reasons for the deviation and the availability of
corrective measures. These measures may include adjustments to the Adviser's
portfolio management practices. If substantial deviation in the Portfolio's
performance were to continue for extended periods, it is expected that the
Board of Trustees would consider possible changes to the Portfolio's
investment objective.
The Portfolio will not be managed by using traditional economic,
financial or market analysis. Instead, the Portfolio utilizes a sampling
methodology to determine which stocks to purchase or sell in order to closely
replicate the performance of the S&P 500 Index. Stocks are selected for the
Portfolio based on both capitalization weighing in the Index and industry
representation. Larger market capitalization securities in the Index are added
to the Portfolio according to their relative weight. Smaller capitalization
securities are then added to the Portfolio in equal weights according to an
analysis of the industry
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<PAGE>
diversification of the Index. Therefore, while all industry weights in the
Portfolio are essentially matched to those of the S&P 500 Index, not
necessarily all 500 stocks are held in the Portfolio. The Adviser believes
that a sampling methodology allows the Portfolio to maintain a close
correlation to the performance of the S&P 500 Index while at the same time
controlling the portfolio turnover and transaction costs of the Portfolio.
Under normal market conditions, the Portfolio invests substantially
all of its total assets in the common stocks that comprise the Index in
accordance with their relative capitalization and sector weightings as
described above. It is possible, that if an issuer drops in ranking, or is
eliminated entirely from the Index, the Adviser may be required to sell some
or all of the common stock of such issuer then held by the Portfolio. Sales of
portfolio securities may be made at times when, if the Adviser were not
required to effect purchases and sales of portfolio securities in accordance
with the Index, such securities might not be sold. Such sales may result in
lower prices for such securities than may have been realized or in losses that
may not have been incurred if the Adviser were not required to effect the
purchases and sales. The failure of an issuer to declare or pay dividends, the
institution against an issuer of materially adverse legal proceedings, the
existence or threat of defaults materially and adversely affecting an issuer's
future declaration and payment of dividends, or the existence of other
materially adverse credit factors will not necessarily be the basis for the
disposition of portfolio securities, unless such event causes the issuer to be
eliminated entirely from the Index. The Portfolio may receive from time to
time as part of a "spin-off" or corporate restructuring of an issuer included
in the Index, securities that are themselves outside of the Index. Such
securities will be disposed of by the Portfolio in due course consistent with
the Portfolio's investment objective. In addition, the Portfolio may invest up
to 25% of its assets in the securities of foreign issuers through American
Depository Receipts. An investment in the Portfolio involves risks similar to
those of investing in common stocks.
Pending investment and to meet anticipated redemption requests, the
Portfolio may hold up to 5% of its total assets in short-term obligations
issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, money market instruments, repurchase agreements and cash.
In addition, up to 5% of the Portfolio's total assets may be invested in
futures contracts and related options in an effort to maintain exposure to
price movements in the Index pending investment of funds or while maintaining
liquidity to meet potential shareholder redemptions.
International Equity Portfolio
The investment objective of the International Equity Portfolio is to
achieve long-term capital appreciation and, secondarily, to produce current
income. The Portfolio seeks to achieve its objective by investing primarily in
equity securities of foreign issuers. The Portfolio may exhibit more
volatility than the U.S. equity market in general.
The Adviser's investment approach to managing the Portfolio's assets
emphasizes active country selection involving global economic and political
assessments together with valuation analysis of selected countries' securities
markets. This country allocation approach is based on absolute/relative
valuations, changing fundamentals and expected total returns including
currency. In situations where an investment's attractiveness outweighs
prospects for currency weakness, the Adviser will take suitable hedging
measures. An index approach is typically used at the stock selection level.
The Adviser employs quantitative techniques in conjunction with its
judgment and experience to determine the foreign equity markets that the
Portfolio will be invested in and the percentage of total assets the Portfolio
will hold by country. This investment approach focuses on economic
developments
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<PAGE>
in foreign countries, fundamental analysis at the country level and the
political environment. After the country weightings have been determined,
investments are typically made in country "baskets" of equity securities. A
country "basket" is comprised of equity securities of a particular country and
is constructed using a quantitatively-oriented sampling technique to replicate
the performance of an individual country's stock market index. The Morgan
Stanley Capital International Country Indexes have, for some time, been the
accepted benchmarks in the U.S. for international equity fund country
comparisons. The Portfolio may also invest in individual equity securities the
Adviser believes offer opportunity for capital appreciation.
The Portfolio's investments will generally be allocated among
geographic countries and regions. The Portfolio's assets may be invested in
equity securities located in but not limited to the United Kingdom and
European continent, Japan, other Far East areas and Latin America. The
Portfolio may also invest in other regions seeking to capitalize on investment
opportunities in other parts of the world. The Portfolio's assets will be
invested at all times in the securities of issuers located in at least three
different foreign countries. Investments in a particular country may exceed
25% of the Portfolio's total assets, thus making its performance more
dependent upon the political and economic circumstances of a particular
country than a more widely diversified portfolio.
The Portfolio will be primarily invested in equity securities of
foreign companies consisting of common stocks, preferred stocks, rights,
warrants, and securities convertible into common or preferred stock. Equity
investments also include American Depository Receipts, European Depository
Receipts and similar securities that are either sponsored or unsponsored.
Under normal market conditions, the Portfolio expects to invest at least 65%
of the value of its total assets in equity securities of foreign issuers. The
Portfolio may hold up to 35% of its total assets in debt securities, and cash
equivalent holdings consisting of short-term debt obligations and cash.
However, the Portfolio does not expect to have a substantial portion of its
assets invested in debt securities and cash equivalent holdings under normal
market conditions. Debt securities in which the Portfolio may invest consist
of: (i) debt securities of foreign issuers, foreign governments and agencies
that the Adviser believes, based on market conditions, the financial condition
of the issuer, general economic conditions and other relevant factors, offer
opportunities for capital appreciation; (ii) obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; (iii) corporate,
bank and commercial obligations; (iv) mortgage backed securities; and (v)
securities representing interests in pools of assets. In the event the Adviser
determines that unusual and adverse market conditions exist, the Portfolio may
adopt a temporary defensive posture and invest without limitation in debt
securities and cash equivalent holdings. To the extent the Portfolio is so
invested, its investment objective may not be achieved.
The Portfolio may also enter into futures contracts, related options,
foreign currency transactions and forward contracts, and utilize options.
OTHER INVESTMENT POLICIES
Ratings
If not rated as commercial paper, debt obligations acquired by
any of the Portfolios will be investment grade at the time of purchase, i.e.,
obligations rated AAA, AA, A or BBB by Standard & Poor's Rating Group,
Division of McGraw Hill ("S&P"), Fitch Investors Service, Inc. ("Fitch"),
Duff & Phelps Credit Co. ("Duff") or IBCA, Inc. ("IBCA") or Aaa, Aa, A or
Baa by Moody's Investors Service, Inc. ("Moody's") (each a "Rating Agency")
or be unrated but deemed by the Adviser to be comparable in quality at the
time of purchase to instruments that are so rated. Obligations rated in
the lowest of the top four rating
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<PAGE>
categories (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) are considered
to have less capacity to pay interest and repay principal and have certain
speculative characteristics. The debt ratings are described in the Statement
of Additional Information.
Short-Term Investments
Each Portfolio may hold the types of short-term investments described
under "Balanced Portfolio - Cash Equivalent Securities and Other Investments"
above.
U.S. Government Obligations
The Portfolios may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. The Portfolios may also invest in interests in the
foregoing securities, including collateralized mortgage obligations guaranteed
by a U.S. Government agency or instrumentality, and in Government-backed
trusts which hold obligations of foreign governments that are guaranteed or
backed by the full faith and credit of the United States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities have historically involved little risk of loss of
principal if held to maturity. The value of these securities may fluctuate
significantly, which may result in a significant decline in a Portfolio's net
asset value. In such event, an investor potentially may suffer a loss if the
investor liquidates his portfolio shares. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Stripped Government Obligations
To the extent consistent with their respective investment objectives,
the Balanced and International Equity Portfolios may purchase Treasury
receipts and other "stripped" securities that evidence ownership in either the
future interest payments or the future principal payments on U.S. Government
obligations. These participations, which may be issued by the U.S. Government
(or a U.S. Government agency or instrumentality) or by private issuers such as
banks and other institutions, are issued at a discount to their "face value,"
and may include stripped mortgage backed securities ("SMBS"), which are
derivative multi-class mortgage securities. Stripped securities, particularly
SMBS, may exhibit greater price volatility than ordinary debt securities
because of the manner in which their principal and interest are returned to
investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage
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backed obligations. A common type of SMBS will have one class receiving all of
the interest, while the other class will receive all of the principal.
However, in some instances, one class will receive some of the interest and
most of the principal while the other class will receive most of the interest
and the remainder of the principal. If the underlying obligations experience
greater than anticipated prepayments of principal, a Portfolio may fail to
fully recoup its initial investment in these securities. The market value of
the class consisting entirely of principal payments generally is extremely
volatile in response to changes in interest rates. The yields on a class of
SMBS that receives all or most of the interest are generally higher than
prevailing market yields on other mortgage backed obligations because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
Custodial Receipts for Treasury Securities
The Balanced and International Equity Portfolios may purchase
participations in trusts that hold U.S. Treasury securities (such as TIGRs and
CATs) where the trust participations evidence ownership in either the future
interest payments or the future principal payments on the U.S. Treasury
obligations. These participations are normally issued at a discount to their
"face value," and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
Repurchase and Reverse Repurchase Agreements
To increase its income, each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). No Portfolio will enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Portfolio may also obtain funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of a particular Portfolio exceeds one-third of the value of its total assets.
Loans of securities involve risks of delay in receiving additional collateral
or in recovering the securities loaned or possible loss of rights in the
collateral should the borrower of the securities become insolvent. Loans will
be made only to borrowers that provide the requisite collateral comprised of
liquid assets and when, in the Adviser's judgment, the income to be earned
from the loan justifies the attendant risks.
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Illiquid Securities
In accordance with their fundamental investment limitation described
below, the Growth/Value, Opportunity, Intrinsic Value and Equity Index
Portfolios will not knowingly invest more than 10% and the Capital Growth,
Balanced and International Equity Portfolios will not knowingly invest more
than 15% of the value of their respective total assets in securities that are
illiquid. Securities having legal or contractual restrictions on resale or no
readily available market, and instruments (including repurchase agreements,
variable and floating rate instruments and time deposits) that do not provide
for payment to the Portfolios within seven days after notice are subject to
this limitation. Securities that have legal or contractual restrictions on
resale but have a readily available market are not deemed to be illiquid for
purposes of this limitation.
The Portfolios may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop. The Board of Trustees will carefully monitor any
investments by a Portfolio in these securities.
Borrowings
The Portfolios may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolios would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities
it is obligated to repurchase.
Foreign Securities
As stated above, the Growth/Value, Opportunity, Intrinsic Value,
Capital Growth, Balanced and International Equity Portfolios may invest up to
25%, 25%, 25%, 25%, 20% and 100% of their respective total assets (exclusive
of short-term cash investments) in foreign securities. In addition the Equity
Index Portfolio may invest up to 25% of its total assets in American
Depository Receipts. Investments in foreign securities, whether made directly
or indirectly, involve certain inherent risks, such as political or economic
instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns, changes in exchange rates of foreign
currencies and the possibility of adverse changes in investment or exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company. Listed foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic companies. Further,
foreign stock markets are generally not as developed or efficient as those in
the U.S. and in most foreign markets volume and liquidity are less than in the
U.S. Fixed commissions on foreign stock exchanges are generally higher than
the negotiated commissions on U.S. exchanges, and there is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the U.S. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation, limitations
on the removal of funds or other assets or
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diplomatic developments that could affect investment within those countries.
Because of these and other factors, securities of foreign companies acquired
by a Portfolio may be subject to greater fluctuation in price than securities
of domestic companies.
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations. Some currency exchange costs may be incurred
when a Portfolio changes investments from one country to another.
Furthermore, some securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the costs of such
investments and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by the Portfolios from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries. Tax conventions between certain countries and the
United States, however, may reduce or eliminate such taxes. All such taxes
paid by a Portfolio will reduce its net income available for distribution to
investors.
American Depository Receipts ("ADRs")
Each Portfolio may invest in securities of foreign issuers in the form
of ADRs or similar securities representing securities of foreign issuers.
These securities may not be denominated in the same currency as the securities
they represent. ADRs are receipts typically issued by a United States bank or
trust company evidencing ownership of the underlying foreign securities and
are denominated in U.S. dollars. Certain such institutions issuing ADRs may
not be sponsored by the issuer. A non-sponsored depository may not provide the
same shareholder information that a sponsored depository is required to
provide under its contractual arrangements with the issuer.
European Depository Receipts ("EDRs")
The Capital Growth and International Equity Portfolios may invest in
securities of foreign issuers in the form of EDRs or similar securities
representing securities of foreign issuers. These securities may not be
denominated in the same currency as the securities they represent. EDRs are
receipts issued by a European financial institution evidencing ownership of
the underlying foreign securities and are generally denominated in foreign
currencies. Generally, EDRs, in bearer form, are designed for use in the
European securities markets.
Supranational Bank Obligations
The Balanced Portfolio may invest in obligations of supranational
banks. Supranational banks are international banking institutions designed or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will
be undertaken or met in the future.
Convertible Securities
A convertible security is a security that may be converted either at a
stated price or rate within a specified period of time into a specified number
of shares of common stock. By investing in convertible securities, a Portfolio
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
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common stock. Convertible securities acquired by a Portfolio will be rated
investment grade by a Rating Agency, or if unrated, will be of comparable
quality as determined by the Adviser. Subsequent to its purchase by a
Portfolio, a rated security may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Portfolio. The Adviser
will consider such an event in determining whether the Portfolio involved
should continue to hold the security. The Adviser expects, however, to
promptly sell any securities that are non-investment grade as a result of
these events that exceed 5% of a Portfolio's net assets where it has
determined that such sale is in the best interest of the Portfolio.
Warrants
Each Portfolio may invest up to 5% of its assets at the time of
purchase in warrants and similar rights (other than those that have been
acquired in units or attached to other securities). Warrants represent rights
to purchase securities at a specified price valid for a specified period of
time. The prices of warrants do not necessarily correlate with the prices of
the underlying securities.
When-Issued Purchases and Forward Commitments
The Portfolios may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. Each Portfolio's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolios do not earn income with
respect to these transactions until the subject securities are delivered to
the Portfolios. The Portfolios do not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of their investment objectives.
Asset Backed Securities
Asset backed securities held by the Balanced and International Equity
Portfolios arise through the grouping by governmental, government-related and
private organizations of loans, receivables and other assets originated by
various lenders ("Asset Backed Securities") as described below.
The yield characteristics of Asset Backed Securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. As a result, if an Asset
Backed Security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an Asset Backed Security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Portfolios, the maturity of Asset Backed Securities
will be based on estimates of average life.
Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than
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mortgage loans and is less likely to experience substantial prepayments. Like
other fixed income securities, when interest rates rise the value of an Asset
Backed Security generally will decline; however, when interest rates decline,
the value of an Asset Backed Security with prepayment features may not
increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard
prepayments and thus affect maturities.
These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the
trading market for short-term mortgages and Asset Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Mortgage Backed Securities. Asset Backed Securities acquired by the
Balanced and International Equity Portfolios consist of both mortgage and
non-mortgage backed securities. Mortgage backed securities represent an
ownership interest in a pool of mortgages, the interest on which is in most
cases issued and guaranteed by an agency or instrumentality of the U.S.
Government, although not necessarily by the U.S. Government itself. Mortgage
backed securities include collateralized mortgage obligations and mortgage
pass-through certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways.
These multiple class securities may be issued or guaranteed by U.S. Government
agencies or instrumentalities, including the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by trusts formed
by private originators of, or investors in, mortgage loans. Classes in CMOs
which the Portfolios may hold are known as "regular" interests. CMOs also
issue "residual" interests, which in general are junior to and more volatile
than regular interests. The Portfolios do not intend to purchase residual
interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which
the Portfolios may invest is GNMA Certificate which is backed as to the timely
payment of principal and interest by the full faith and credit of the U.S.
Government. Another type is a FNMA Certificate, the principal and interest of
which are guaranteed only by FNMA itself, not by the full faith and credit of
the U.S. Government. Another type is a FHLMC Participation Certificate which
is guaranteed by FHLMC as to timely payment of principal and interest.
However, like a FNMA security, it is not guaranteed by the full faith and
credit of the U.S. Government. Privately issued mortgage backed securities
will carry a rating at the time of purchase of at least A by S&P or by Moody's
or, if unrated, will be in the Adviser's opinion equivalent in credit quality
to such rating. Mortgage backed securities issued by private issuers, whether
or not such obligations are subject to guarantees by the private issuer, may
entail greater risk than obligations directly or indirectly guaranteed by the
U.S. Government.
Non-Mortgage Backed Securities. The Balanced and International Equity
Portfolios may also invest in non-mortgage backed securities including
interests in pools of receivables, such as motor vehicle installment purchase
obligations and credit card receivables. Such securities are generally issued
as pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities may also be debt
instruments, which are also known as collateralized obligations and are
generally issued as
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the debt of a special purpose entity organized solely for the purpose of
owning such assets and issuing such debt. Non-mortgage backed securities are
not issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
Variable and Floating Rate Instruments
The Balanced Portfolio may invest in inverse floating rate debt
instruments ("inverse floaters") which may or may not be leveraged. The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the
Balanced Portfolio to dispose of the instruments if the issuer defaulted on
its payment obligation or during periods that the Portfolio is not entitled to
exercise demand rights, and the Portfolio could, for these or other reasons,
suffer a loss with respect to such instruments. Variable and floating rate
instruments (including inverse floaters) will be subject to the Portfolio's
limitation on illiquid investments. See "Illiquid Securities."
Zero Coupon Obligations
Each Portfolio may invest in zero coupon obligations which are
discount debt obligations that do not make periodic interest payments although
income is generally imputed to the holder on a current basis. Such obligations
may have higher price volatility than those which require the payment of
interest periodically. The Adviser will consider the liquidity needs of a
Portfolio when any investment in zero coupon obligations is made.
Foreign Currency Transactions
The International Equity and Balanced Portfolios may engage in
currency exchange transactions to the extent consistent with their respective
investment objectives or to hedge their portfolios. The Portfolios will
conduct their currency exchange transactions either on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, or through
entering into forward contracts to purchase or sell currencies. A forward
currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which must be more than two days from the
date of the contract, at a price set at the time of the contract. Forward
currency exchange contracts are entered into in the interbank market conducted
directly between currency traders (typically commercial banks or other
financial institutions) and their customers.
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They may be used to reduce the level of volatility caused by changes in
foreign currency exchange rates or when such transactions are economically
appropriate for the reduction of risks in the ongoing management of the
Portfolios. Although forward currency exchange contracts may be used to
minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that might be
realized should the value of such currency increase. The Portfolios also may
combine forward currency exchange contracts with investments in securities
denominated in other currencies.
The International Equity Portfolio also may maintain short positions
in forward currency exchange transactions, which would involve the Portfolio
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency the Portfolio contracted to receive
in the exchange.
Each of the International Equity and Balanced Portfolios will maintain
in a segregated custodial account cash or U.S. Government securities or other
high quality liquid debt securities at least equal to the aggregate amount of
its short positions (in the case of the International Equity Portfolio) and of
its total assets committed to consummation of its forward currency exchange
contracts, plus accrued interest, in accordance with applicable requirements
of the SEC.
Options on Foreign Currency
The International Equity and Balanced Portfolios may purchase and sell
call and put options on foreign currency for the purpose of hedging against
changes in future currency exchange rates. Call options convey the right to
buy the underlying currency at a price which is expected to be lower than the
spot price of the currency at the time the option expires. Put options convey
the right to sell the underlying currency at a price which is anticipated to
be higher than the spot price of the currency at the time the option expires.
The Portfolios may use foreign currency options for the same purposes as
forward currency exchange and futures transactions, as described herein. See
also "Options" and "Currency Futures and Options on Currency Futures" below.
Futures Contracts and Related Options
Each Portfolio may trade futures contracts and options on futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. To the
extent permitted under applicable law, the International Equity Portfolio may
also trade futures contracts and related options on exchanges located outside
the United States, such as the London International Financial Futures Exchange
and the Sydney Futures Exchange Limited. Foreign markets may offer advantages
such as trading in commodities that are not currently traded in the United
States or arbitrage possibilities not available in the United States. Foreign
markets, however, may have greater risk potential than domestic markets.
Each Portfolio may purchase and sell futures contracts which obligate
it to take or make delivery of certain securities at maturity, as well as
stock index futures contracts which are bilateral agreements pursuant to which
two parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value
(which assigns relative values to the common stocks included in the index) at
the close of the last trading day of the contract and the price at which the
futures contract is originally struck. No physical delivery of the underlying
stocks in the index is made. The Capital Growth, Balanced and International
Equity Portfolios may enter into contracts for the future delivery of fixed
income securities commonly known as interest rate futures contracts.
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A Portfolio may sell a futures contract in order to offset an expected
decrease in the value of its portfolio that might otherwise result from a
market decline or currency exchange fluctuation. A Portfolio may do so either
to hedge the value of its securities portfolio as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, a Portfolio may utilize futures contracts
in anticipation of changes in the composition of its holdings or in currency
exchange rates.
The Capital Growth, Balanced, Equity Index and International Equity
Portfolios may also purchase options on futures contracts and may purchase and
write put and call options on stock indices listed on U.S. and, in the case of
the International Equity Portfolio foreign exchanges, or traded in the
over-the-counter market. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period
of the option.
When a Portfolio sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, a Portfolio may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the
Portfolio intends to purchase. Similarly, if the value of a Portfolio's
portfolio securities is expected to decline, the Portfolio might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
The Portfolios' commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated
by the Commodities and Futures Trading Commission ("CFTC"). In addition, a
Portfolio may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the
percentage limitation. Pursuant to SEC requirements, the Portfolios will be
required to segregate cash or high quality money market instruments in
connection with their commodities transactions in an amount generally equal to
the value of the underlying commodity. The Trust intends to comply with the
regulations of the CFTC exempting the Portfolios from registration as a
"commodity pool operator."
For a more detailed description of futures contracts and related
options, see Appendix B to the Statement of Additional Information.
Currency Futures and Options on Currency Futures
The International Equity and Balanced Portfolios may purchase and sell
currency futures contracts and options thereon. By selling foreign currency
futures, a Portfolio can establish the number of U.S. dollars that it will
receive in the delivery month for a certain amount of a foreign currency. In
this way, if a Portfolio anticipates a decline of a foreign currency against
the U.S. dollar, the Portfolio can attempt to fix the U.S. dollar value of
some or all of its securities that are denominated in that currency. By
purchasing foreign currency futures, a Portfolio can establish the number of
U.S. dollars that it will be required to pay for a specified amount of a
foreign currency in the delivery month. Thus, if a Portfolio intends to buy
securities in the future and expects the U.S. dollar to decline against the
relevant foreign currency during the period before the purchase is effected,
the Portfolio, for the price of the currency future, can attempt to fix the
price in U.S. dollars of the securities it intends to acquire.
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The purchase of options on currency futures will allow a Portfolio,
for the price of the premium it must pay for the option, to decide whether or
not to buy (in the case of a call option) or to sell (in the case of a put
option) a futures contract at a specified price at any time during the period
before the option expires. If the Portfolios, in purchasing an option, have
been correct in their judgment concerning the direction in which the price of
a foreign currency would move as against the U.S. dollar, they may exercise
the option and thereby take a futures position to hedge against the risk they
had correctly anticipated or close out the option position at a gain that will
offset, to some extent, currency exchange losses otherwise suffered by the
Portfolios. If exchange rates move in a way a Portfolio did not anticipate,
the Portfolio will have incurred the expense of the option without obtaining
the expected benefit. As a result, a Portfolio's profits on the underlying
securities transactions may be reduced or overall losses may be incurred.
Options
The Capital Growth, Balanced and International Equity Portfolios may
purchase and sell put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation for hedging purposes.
Such transactions may be effected on a principal basis with primary reporting
dealers in U.S. Government securities in an amount not exceeding 5% of a
Portfolio's net assets, as described further in the Statement of Additional
Information. Such options may relate to particular securities or to various
stock indices or bond indices. Purchasing options is a specialized investment
technique which entails a substantial risk of a complete loss of the amounts
paid as premiums to the writer of the option. Each such Portfolio may also
purchase and write put and call options on stock indices listed on foreign
exchanges or traded in the over-the-counter market.
The Capital Growth, Balanced and International Equity Portfolios may
purchase and sell put options on portfolio securities at or about the same
time that they purchase the underlying security or at a later time. By buying
a put, a Portfolio limits its risk of loss from a decline in the market value
of the security until the put expires. Any appreciation in the value of and
yield otherwise available from the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by a Portfolio in
order to acquire the underlying security at a later date at a price that
avoids any additional cost that would result from an increase in the market
value of the security. A Portfolio may also purchase call options to increase
its return to investors at a time when the call is expected to increase in
value due to anticipated appreciation of the underlying security. Prior to its
expiration, a purchased put or call option may be sold in a closing sale
transaction (a sale by a Portfolio, prior to the exercise of an option that it
has purchased, of an option of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
In addition, the Capital Growth, Balanced and International Equity
Portfolios may write covered call and secured put options. A covered call
option means that a Portfolio owns or has the right to acquire the underlying
security subject to call at all times during the option period. A secured put
option means that a Portfolio 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. Such
options will be listed on a national securities exchange and issued by the
Options Clearing Corporation and may be effected on a principal basis with
primary reporting dealers in U.S. Government securities. The aggregate value
of the securities subject to options written by a Portfolio will not exceed
25% of the value of its net assets. In order to close out an option position
prior to maturity, a Portfolio may enter into a "closing purchase transaction"
by purchasing a call or put option
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(depending upon the position being closed out) on the same security with the
same exercise price and expiration date as the option which it previously
wrote.
By writing a covered call option, a Portfolio forgoes the opportunity
to profit from an increase in the market price of the underlying security
above the exercise price except insofar as the premium represents such a
profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Portfolio effects a closing purchase
transaction by purchasing an option of the same series. If a Portfolio writes
a secured put option, it assumes the risk of loss should the market value of
the underlying security decline below the exercise price of the option. The
use of covered call and secured put options will not be a primary investment
technique of the Portfolios.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
Risk Factors Associated with Futures, Options and Currency Futures and Options
To the extent a Portfolio is engaging in a futures transaction as a
hedging device, due to the risk of an imperfect correlation between securities
in its 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 gains on the portfolio securities that were the subject of the
hedge. In futures contracts based on indices, the risk of imperfect
correlation increases as the composition of the Portfolio varies from the
composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures
contract has been less or greater than that of the securities. Such "over
hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge
is established.
Successful use of futures by a Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of
securities prices, interest rates, currency exchange rates and other economic
factors. For example, if the Portfolio has hedged against the possibility of a
decline in the market adversely affecting the value of securities held in its
portfolio and prices increase instead, the Portfolio will lose part or all of
the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.
Although a Portfolio intends to enter into futures contracts and
options transactions 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. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contracts prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the
Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures position in
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anticipation of adverse price movements, it will be required to make daily
cash payments of variation margin. In such circumstances, an increase in the
value of the portion of the portfolio being hedged, if any, may offset
partially or completely losses on the futures contract.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. The foreign
currency market offers less protection against defaults in the forward trading
of currencies than is available when trading in currencies occurs on an
exchange. Since a forward currency contract is not guaranteed by an exchange
or clearinghouse, a default on the contract would deprive the Portfolio of
unrealized profits or force the Portfolio to cover its commitments for
purchase or resale, if any, at the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
are principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition,
unless the Portfolio hedges against fluctuations in the exchange rate between
the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Portfolio might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Portfolio could
incur losses as a result of those changes. Transactions on foreign exchanges
may include both commodities which are traded on domestic exchanges and those
which are not.
Risk Factors Associated with Derivative Instruments
Each Portfolio may purchase certain "derivative instruments."
Derivative instruments are instruments that derive value from the performance
of underlying assets, interest or currency exchange rates, or indices, and
include, but are not limited to, futures contracts, options, forward currency
contracts and structured debt obligations (including collateralized mortgage
obligations and other types of asset backed securities, "stripped" securities
and various floating rate instruments, including inverse floaters).
Derivative instruments present, to varying degrees, market risk that
the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Portfolio will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option)
will not correlate exactly to the value of the underlying assets, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The Adviser will evaluate the risks presented by the derivative
instruments purchased by the Portfolios, and will determine, in connection
with its day-to-day management of the Portfolios, how they will be used in
furtherance of the Portfolios' investment objectives. It is possible, however,
that the Adviser's evaluations will prove to be inaccurate or incomplete and,
even when accurate and
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complete, it is possible that the Portfolios will, because of the risks
discussed above, incur loss as a result of their investments in derivative
instruments.
Portfolio Turnover
Generally, the Portfolios will purchase securities for capital
appreciation or investment income, or both, and not for short-term trading
profits. However, a Portfolio may sell a portfolio investment soon after its
acquisition if the Adviser believes that such a disposition is consistent with
or in furtherance of the Portfolio's investment objective. Portfolio
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, such Portfolios
are likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Portfolio
turnover may also result in the realization of substantial net capital gains.
(See "Taxes-Federal" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.) While it is not possible
to accurately predict portfolio turnover rates, the annual turnover rates for
the Growth/Value, Opportunity, Intrinsic Value, Capital Growth and
International Equity Portfolios are not expected to exceed 100% and the annual
turnover rate for the Balanced Portfolio is not expected to exceed 75%. Equity
index funds typically have lower levels of turnover than actively managed
funds.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of a Portfolio's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by a
Portfolio, except that up to 25% of the value of the Portfolio's total assets
may be invested without regard to these limitations.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured by such
instruments; (b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
3. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
4. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary
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purposes in amounts not in excess of 10% of the value of its total assets at
the time of such borrowing; or mortgage, pledge or hypothecate any assets,
except in connection with any such borrowing and in amounts not in excess of
the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. No Portfolio will
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with a Portfolio's
investment practices described in the Statement of Additional Information or
in this Prospectus are not deemed to be pledged for purposes of this
limitation.
In addition, the Growth/Value, Opportunity, Intrinsic Value and Equity
Index Portfolios may not invest more than 10% of their respective total assets
in illiquid investments. The Capital Growth, Balanced and International Equity
Portfolios may invest up to 15% of their respective total assets in illiquid
securities. See "Illiquid Securities" above.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Portfolio's portfolio securities will not constitute
a violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of a Portfolio's shares in certain states,
the Portfolios may make commitments more restrictive than the investment
policies and limitations described above. Should a Portfolio determine that
any such commitment is no longer in the best interests of the Portfolio, it
will revoke the commitment by terminating sales of its shares in the state
involved.
PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class I shares are sold primarily to NBD and its affiliated and
correspondent banks (the "Banks") acting on behalf of their respective
customers. The Banks may impose different minimum investment and other
requirements, as well as account charges, on their customers and may establish
separate operational arrangements by which shares may be purchased and
redeemed. Customers should contact their Banks for further information.
It is the responsibility of the Banks to transmit their customers'
purchase orders to NBD acting as transfer agent (the "Transfer Agent") and to
deliver required funds on a timely basis. Class I shares will normally be held
of record by the Banks. Confirmations of share purchases and redemptions will
be sent to the Banks. Beneficial ownership of Class I shares will be recorded
by the Banks and reflected in the account statements provided by them to their
customers.
Purchase orders which are accompanied by payment (by check or wire
transfer) and received by the Transfer Agent in proper form on a Business Day
(as defined below) prior to the close of the New York Stock Exchange
("Exchange") are priced at the net asset value of the particular Portfolio
determined on that Business Day. Purchase orders which are received by the
Transfer Agent after the close of trading on the Exchange on a Business Day or
on non-Business Days will be executed as of the determination of net asset
value on the next Business Day.
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Net Asset Value and Pricing of Shares
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 5:00 p.m. Eastern
time on each day on which the New York Stock Exchange ("Exchange") and NBD
Bank or its bank affiliates are open for business ("Business Day"). Currently,
one or both of these institutions are closed on the customary business
holidays of New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Columbus
Day (observed), Veterans' Day, Thanksgiving Day and Christmas Day. During
those business days on which the Exchange closes prior to the close of its
regular trading hours (currently 4:00 p.m. Eastern time) ("Early Closing
Time"), the net asset value of each Portfolio will be determined and its
shares will be priced as of such Early Closing Time. Net asset value per
Class I share of a Portfolio is calculated by dividing the value of all
securities and other assets belonging to the Portfolio allocable to that
Class I, less the liabilities charged to that Class I, by the number of
the outstanding shares of such Class I.
Securities held by the Portfolios which are traded on a recognized
U.S. stock exchange are valued at the last sale price on the securities
exchange on which such securities are primarily traded or at the last sale
price on the national securities market. Securities which are primarily traded
on foreign securities exchanges are generally valued at the latest closing
price on their respective exchanges, except when an occurrence subsequent to
the time a value was established is likely to have changed such value, in
which case the fair value of those securities will be determined through
consideration of other factors by the Adviser under the supervision of the
Board of Trustees. Securities, whether U.S. or foreign, traded on only
over-the-counter markets and securities for which there were no transactions
are valued at the average of the current bid and asked prices. Fixed income
securities held by the Portfolios are valued according to the broadest and
most representative market, which ordinarily will be the over-the-counter
markets, whether in the United States or in foreign countries. Such securities
are valued at the average of the current bid and asked prices. Securities for
which accurate market quotations are not readily available, and other assets
are valued at fair value by the Adviser under the supervision of the Board of
Trustees. Securities may be valued on the basis of prices provided by
independent pricing services when the Adviser believes such prices reflect the
fair market value of such securities. The prices provided by pricing services
take into account institutional size trading in similar groups of securities
and any developments related to specific securities. For valuation purposes,
the value of assets and liabilities expressed in foreign currencies will be
converted to U.S. dollars equivalent at the prevailing market rate on the day
of valuation. A Portfolio's open futures contracts will be "marked-to-
market."
REDEMPTION OF SHARES
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption. It is
the responsibility of the Banks to transmit redemption orders to the Transfer
Agent and credit their customers' accounts with the redemption proceeds on a
timely basis.
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities Exchange Act of
1934 after receipt by the Transfer Agent of a request in proper form. If
shares to be redeemed were purchased by check, the Trust will transmit the
redemption proceeds promptly upon clearance of such check, which could take up
to fifteen days from the purchase date. A shareholder of record having
purchased shares by wire must have filed an account application before any
redemption requests can be honored.
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Written requests to redeem shares having a net asset value of more
than $50,000 must have all signatures of the registered owner(s) or their
authorized legal representative guaranteed by a commercial bank or trust
company which is a member of the Federal Reserve System or FDIC, a member firm
of a national securities exchange or a savings and loan association. A
signature guaranteed by a savings bank or notarized by a notary public is not
acceptable. A signature guarantee will also be required for a redemption
request (in any amount) if the address of record for the account has been
changed within the previous 15 days or which requests that the proceeds be
paid to an account other than the one preauthorized on the application, a
payee or payees other than the registered owners of the account, or an address
other than the address of record. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
Currently, the Trust imposes no charge when shares are redeemed.
However, Banks may charge a fee for providing services in connection with
investments in Portfolio shares. The Trust reserves the right to redeem
Portfolio shares involuntarily, after sixty days notice, if redemptions cause
an account's value to remain at $1,000 or less. Under certain circumstances,
the Trust may make payment for redemptions in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800) 688-3350.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance of each class of shares of the Portfolios may be compared to the
performance of other mutual funds with similar investment objectives and to
stock or other relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, performance may be compared to data
prepared by Lipper Analytical Services, Inc. In addition, the performance of
the Portfolios may be compared to the Standard & Poor's 500 Index, an index of
unmanaged groups of common stocks, the Consumer Price Index, or the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of thirty
industrial companies listed on the New York Stock Exchange. Performance data
as reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications
of a local or regional nature, may also be used in comparing the performance
of a Portfolio.
The Portfolios calculate their total returns on an "average annual
total return" basis for various periods from the date they commenced
investment operations and for other periods as permitted under the rules of
the SEC. Average annual total return of a class reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns may also be calculated on an "aggregate total return
basis" for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return also reflect changes in the price of the shares and
assume that any dividends and capital gain distributions made by the class
during the period are reinvested in shares of the class. When considering
average total return figures for periods longer than one year, it is important
to note that a class' annual total return for any one year in the period might
have been greater or less than the average for the entire period.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. The
investment return and principal value of an investment in a class will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank
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deposits and other investments which provide a fixed yield for a stated period
of time. Performance data should also be considered in light of the risks
associated with a Portfolio's portfolio composition, quality, maturity,
operating expenses and market conditions. Any fees charged by financial
institutions directly to their customer accounts in connection with
investments in shares will not be reflected in performance calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly
by each Portfolio, except the International Equity Portfolio which declares
and pays dividends annually. Each Portfolio's net realized capital gains are
distributed at least annually.
Dividends and distributions will reduce a class' net asset value by
the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested in additional Class I shares of the same
Portfolio at their net asset value per share determined on the payment date,
unless the holder has notified the Bank in writing that he elects to have
dividends or capital gain distributions (or both) paid in cash. Shareholders
must make such election, or any revocation thereof, in writing to their
financial institutions. The election will become effective with respect to
dividends paid after its receipt by the Transfer Agent. If an account is
established with telephone privileges, the registered owner or his
preauthorized legal representative may change the election to receive
dividends in cash to an election to receive dividends in shares by telephoning
the Transfer Agent at 800-688-3350.
TAXES
Federal
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolios of liability for federal income
taxes to the extent their earnings are distributed in accordance with the
Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, a Portfolio's investment company taxable income will be its
taxable income, subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Each Portfolio intends to distribute as
dividends substantially all of its investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to the Portfolio's shareholders who are not currently exempt
from federal income taxes regardless of whether a distribution is received in
cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) Such ordinary income
distributions will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
distributing Portfolio from domestic corporations for the taxable year.
Substantially all of each Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolios will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how
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long the shareholders have held the shares and whether such gains are received
in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of a Portfolio, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after the purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such amounts, although in
effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of a Portfolio depending upon the
tax basis and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Portfolio within 90 days of the purchase and is able to reduce the
sales charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included under certain
circumstances in the tax basis of the new shares.
It is expected that dividends and certain interest income earned by
the International Equity Portfolio from foreign securities will be subject to
foreign withholding taxes or other taxes. So long as more than 50% of the
value of the Portfolio's total assets at the close of any taxable year
consists of equity or debt securities of foreign corporations, the Portfolio
may elect, for U.S. federal income tax purposes, to treat certain foreign
taxes paid by it, including generally any withholding taxes and other foreign
income taxes, as paid its shareholders. The Portfolio may make this election.
As a consequence, the amount of such foreign taxes paid by the Portfolio will
be included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and the shareholders will be
entitled (a) to credit their proportionate amounts of such taxes against their
U.S. federal income tax liabilities, or (b) if they itemize their deductions,
to deduct such proportionate amounts from their U.S. income.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolios and their shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
potential investors in the Portfolios should consult their tax advisers with
specific reference to their own tax situation.
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State and Local
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust
and its shareholders under such laws may differ from treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Authority (since 1991). He is 53 years old and his address is 3650 Shorewood
Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Senior Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
- --------------------------------
* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
-38-
<PAGE>
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for each Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion. NBD has been in the business
of providing such services since 1933. Included among NBD's accounts are
pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services
to each Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for each
of the Portfolios.
Jeffrey C. Beard, First Vice President, and Gary L. Konsler, Vice
President are primarily responsible for the day-to-day management of the
Growth/Value and Capital Growth Portfolios. Mr. Beard joined NBD in 1982
after receiving an MBA in Finance from Michigan State University. Mr. Konsler
joined NBD in 1973 after receiving a JD from Indiana University.
Ronald L. Doyle, First Vice President, and Joseph R. Gatz, Second Vice
President, are primarily responsible for the day-to-day management of the
Opportunity Portfolio. Mr. Doyle joined NBD in 1982 after receiving his MBA in
Finance from Michigan State University. Mr. Gatz joined NBD in 1986 after
receiving an MBA from Indiana University.
Chris M. Gassen, Vice President, and F. Richard Neumann, Vice
President, are primarily responsible for the day-to-day management of the
Intrinsic Value Portfolio. Mr. Gassen joined NBD in 1985 after receiving
an MBA in Finance from Indiana University. Mr. Neumann joined NBD in
1981 after receiving an MBA in Finance/Accounting from the University of
Chicago.
Claude B. Erb, First Vice President, is primarily responsible for the
day-to-day portfolio management of the Balanced Portfolio. Mr. Erb joined
First Chicago NBD Corporaiton in 1993, after receiving his MBA in Finance
from the University of California.
Richard P. Kost, First Vice President, and Clyde L. Carter, Jr.,
Assistant Vice President are primarily responsible for the day-to-day
portfolio management of the International Equity Portfolio. Mr. Kost joined
NBD in 1964, after receiving his MBA from the University of Michigan.
Mr. Carter joined NBD in 1987 after he received his MBA from Western
Michigan University.
For its services under the Advisory Agreement, NBD is entitled to
receive advisory fees, computed daily and payable monthly, at an annual rate
of .75% of the average daily net assets of each of the Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International
Equity Portfolios and .10% of the average daily net assets of the Equity Index
Portfolio. In addition, NBD is entitled to 4/10ths of the gross income earned
by each Portfolio on each loan of securities (excluding capital gains and
losses, if any). NBD may voluntarily waive its fees in whole or in part with
respect to any particular Portfolio.
-39-
<PAGE>
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Adviser from continuing to perform investment
advisory, custodial or transfer agency services for the Trust or require the
Adviser to alter or discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees would recommend that shareholders approve new agreements
with another entity or entities qualified to perform such services and
selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
-40-
<PAGE>
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of each Portfolio: (i) fees payable
to the Co-Distributors pursuant to the Distribution Agreement; (ii) the
actual costs and expenses in connection with advertising and marketing the
Portfolio's shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions and other professionals ("Service Agents") for
administration or servicing of Portfolio shareholders ("Servicing"). Servicing
may include, among other things: answering client inquiries regarding the
Trust and the Portfolios; assisting clients in changing dividend options,
account designations and addresses; performing sub-accounting; establishing
and maintaining shareholder accounts and records; processing purchase and
redemption transactions; investing client cash account balances automatically
in Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
printing Prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of a Portfolio's average net assets, and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of the Trust's investment portfolios attributable to
investments by clients of Essex. The payments to be made to the
Co-Distributors which are based on a percentage of the net assets of the
Portfolios are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolios' shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust, and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan
-41-
<PAGE>
and Shareholder Servicing Plan, outside auditing and legal expenses, all taxes
and corporate fees payable by the Trust, SEC fees, state securities
qualification fees, costs of preparing and printing prospectuses for
regulatory purposes and for distribution to shareholders, costs of shareholder
reports and shareholder meetings, and any extraordinary expenses. Each
Portfolio also pays for brokerage commissions and transfer taxes (if any) in
connection with the purchase and sale of portfolio securities. Expenses
attributable to a particular Portfolio of the Trust will be charged to that
Portfolio and expenses not readily identifiable as belonging to a particular
Portfolio will be allocated by the Board of Trustees among one or more
Portfolios in such a manner as it shall deem fair and equitable. For the
fiscal year ended December 31, 1995, the Growth/Value, Opportunity, Intrinsic
Value, Capital Growth, Balanced, Equity Index and International Equity
Portfolios' total expenses were .84%, .89%, .91%, .86%, .91%, .15% and 1.16%
(after fee waivers, if any) of their average net assets, respectively. The
Statement of Additional Information describes in more detail the fees and
expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Money Market Fund, Government Fund,
Treasury Money Market Fund, Tax-Exempt Money Market Fund, Michigan Tax-Exempt
Money Market Fund, Intermediate Bond Fund, Bond Fund, Short Bond Fund,
Municipal Bond Fund and Michigan Municipal Bond Fund. The Trust has
established the following two distinct classes of shares within each
Portfolio described herein: Class I shares (Original Class) and Class A
shares (Special Class 1). A sales person and any other person or institution
entitled to receive compensation for selling or servicing shares may receive
different compensation with respect to different classes of shares in the
Series. Each share has $.10 par value, represents an equal proportionate
interest in the related Portfolio with other shares of the same class
outstanding, and is entitled to such dividends and distributions out of
the income earned on the assets belonging to such Portfolio as are declared
in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
As of February 29, 1996, NBD held beneficially or of record
approximately 84.61%, 80.52%, 80.07%, 88.23%, 87.89%, 91.62% and 89.58% of the
outstanding shares of the Growth/Value, Opportunity, Intrinsic Value, Capital
Growth, Balanced, Equity Index and International Equity Portfolios,
respectively, and therefore may be considered to be a controlling person of
the Trust for purposes of the 1940 Act.
-42-
<PAGE>
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
-43-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give
any information or to make any
representations not contained in this
Prospectus, or in the Portfolios'
Statement of Additional Information
incorporated herein by reference, in
connection with the offering made by
this Prospectus and, if given or
made, such information or
representations must not be relied
upon as having been authorized by the
Trust, Adviser or Sponsors and Co-
Distributors. This Prospectus does
not constitute an offering by the
Portfolios or by their Co-
Distributors, in any jurisdiction in
which such offering may not lawfully
be made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY............................. 2
FINANCIAL HIGHLIGHTS........................ 5
INTRODUCTION................................ 12
PROPOSED REORGANIZATION..................... 12
INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS............................ 12
OTHER INVESTMENT POLICIES................... 18
PURCHASE OF SHARES.......................... 32
REDEMPTION OF SHARES........................ 33
PERFORMANCE INFORMATION..................... 34
DIVIDENDS AND DISTRIBUTIONS................. 35
TAXES .................................... 35
MANAGEMENT.................................. 37
OTHER INFORMATION........................... 42
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania
19107-3496
<PAGE>
[ BACK COVER, COLUMN 1 ]
CLASS I SHARES OF THE:
WOODWARD GROWTH/VALUE FUND
WOODWARD OPPORTUNITY FUND
WOODWARD INTRINSIC VALUE FUND
WOODWARD CAPITAL GROWTH FUND
WOODWARD BALANCED FUND
WOODWARD EQUITY INDEX FUND
WOODWARD INTERNATIONAL EQUITY FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-44-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series K - Special Class 1, L - Special Class 1 and U -
Special Class 1 Representing Interests in the Class A
Shares of the Woodward Intermediate Bond,
Bond and Short Bond Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page...................................... Cover page
2. Synopsis........................................ Expense Summary;
Background
3. Financial Highlights............................ Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant...................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ....................... Management
6. Capital Stock and Other
Securities...................................... Purchase of
Shares; Redemption
of Shares;
Shareholder
Services;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered................................... Purchase of
Shares;
Shareholder
Services;
Management
8. Redemption or Repurchase........................ Redemption of
Shares;
Shareholder
Services
9. Pending Legal Proceedings....................... Inapplicable
-8-
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following three investment portfolios (the "Portfolios"), each having
its own investment objective and policies as described in this Prospectus:
Class A shares of the:
Woodward Intermediate Bond Fund
Woodward Bond Fund
Woodward Short Bond Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
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.
______________________________________________________________________________
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Intermediate Bond Fund ("Intermediate Bond
Portfolio"), Woodward Bond Fund ("Bond Portfolio") and Woodward Short Bond
Fund ("Short Bond Portfolio"). Class I shares are sold primarily to NBD and
its affiliated and correspondent banks acting on behalf of their respective
customers. Class A shares are sold to the general public primarily through
financial institutions such as banks, brokers and dealers. Class I shares are
offered in a separate Prospectus. Investors should call (800) 688-3350, a
Co-Distributor or their financial institutions if they would like to obtain
more information concerning Class I shares and/or Class A shares of the
Portfolios. The following table is provided to assist investors in
understanding the various costs and expenses that an investor will indirectly
incur as a beneficial owner of Class A shares in each of the Portfolios.
<TABLE>
<CAPTION>
Intermediate Bond Short Bond
Bond Portfolio(1) Portfolio(1) Portfolio(1)
--------------- ---------- ----------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load
Imposed on Purchases....... 4.75% 4.75% 3.00%
(as a percentage of
offering price)
Sales Load
Imposed on Reinvested
Dividends................. None None None
Deferred Sales Load........... None None None
Redemption Fee................ None None None
Exchange Fee.................. None None None
Annual Operating Expenses
(as a percentage of
average net assets)
Management Fees............... .65% .65% .65%
12b-1 Fees(2)................. .008% .01% .004%
Shareholder Servicing
Fees(3).................... .25% .25% .25%
Other Expenses(4)
(before fee waivers
and/or expense
reimbursements)............ .062% .06% .156%
after fee waivers
and/or expense
reimbursements)............ N/A N/A (.044)%
Total Operating Expenses
(before fee waivers
and/or expense
reimbursements)............ .97% .97% 1.06%
(after fee waivers
and/or expense
reimbursements............. N/A N/A .86%
- ---------
<FN>
1. The expenses for each Portfolio have been restated to reflect
current expenses.
2. As a result of the payment of sales loads and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (the "NASD"). Rules adopted by the NASD generally limit the
aggregate sales charges and payments under the Trust's Service and
Distribution Plan ("Distribution Plan") to a certain percentage of total new
gross share sales,
-2-
<PAGE>
plus interest. The Trust would stop accruing 12b-1 fees if, to the extent,
and for as long as, such limit would otherwise be exceeded.
3. The Trust has adopted a Shareholder Servicing Plan pursuant to
which the Trust may enter into agreements with institutions under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares in return for a fee of up to .25% per
annum of the value of such shares ("Servicing Fees"). For further information,
see "Shareholder Servicing Plan" and "Investment Adviser, Custodian and
Transfer Agent" under the heading "Management" in this Prospectus.
4. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
</TABLE>
<TABLE>
<CAPTION>
Intermediate Bond Short Bond
Bond Portfolio Portfolio Portfolio
-------------- --------- ---------
<S> <C> <C> <C>
Example
You would pay the following
expenses on a $1,000
investment, assuming:
(1) a 5% annual return
and (2) redemption at the
end of each time period:
One Year................... $ 9.94 $ 9.94 $ 8.81
Three Years................ 31.03 31.03 27.54
Five Years................. 53.85 53.85 47.85
Ten Years.................. 119.40 119.40 106.41
Example
You would pay the following
expenses on a $1.00
investment, assuming
(1) a 5% annual return,
(2) redemption at the end
of each time period and
(3) the imposition of a
maximum sales load at the
beginning of the period:
One Year:.................. $ 56.97 $ 56.97 $ 38.55
Three Years:............... 77.06 77.06 56.72
Five Years:................ 98.79 98.79 76.42
Ten Years:................. 161.23 161.23 133.22
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
The examples demonstrate the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class A shares in each of the Portfolios,
based upon payment by the Portfolios of operating expenses at the respective
levels set forth in the expense table. For more complete descriptions of
Portfolio expenses, see "Investment Adviser, Custodian and Transfer Agent",
"Sponsors and Co-Distributors", "Shareholder Servicing Plan", "Service and
Distribution Plan" and "Trust Expenses" under the heading "Management" in this
Prospectus and the financial statements and related notes contained in the
Statement of Additional Information.
-3-
<PAGE>
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class A
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate Servicing Fees
attributable to such shares exclusively to them. See "Shareholder Servicing
Plan" and "Investment Adviser, Custodian and Transfer Agent" under
"Management," and see "Dividends and Distributions" and "Other Information"
for a description of the impact that this may have on holders of Class A
shares.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of how each Portfolio's
net asset value has changed during the periods presented. The tables have been
derived from the Portfolios' financial statements which have been audited by
Arthur Andersen LLP, the Trust's independent public accountants, whose report
thereon is contained in the Statement of Additional Information along with the
financial statements. The financial data included in these tables should be
read in conjunction with the financial statements and related notes included
in the Statement of Additional Information. Further information about the
performance of the Portfolios is available in annual reports to shareholders.
The Statement of Additional Information and annual reports to shareholders may
be obtained from the Trust free of charge by calling 800-688-3350.
<TABLE>
<CAPTION>
Intermediate Bond Portfolio
June 1, 1991
(Commencement
of operations)
Year Ended Year Ended Year Ended Year Ended to
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $ 9.21 $10.41 $10.28 $10.55 $10.00
Income from investment
operations:
Net investment income.......... 0.59 0.56 0.59 0.71 0.40
Net realized and unrealized
gains (losses) on
investments.................. 1.16 (1.20) 0.26 (0.10) 0.57
------------ ------------ ----------- ------------ ------------
Total from investment
operations................... $ 1.75 $(0.64) $ 0.85 $ 0.61 $ 0.97
------------ ------------ ----------- ------------ ------------
Less distributions:
From net investment
income....................... $(0.59) $(0.55) $(0.59) $(0.71) $(0.40)
From realized
gains........................ (0.00) (0.01) ( 0.13) ( 0.17) ( 0.02)
------------ ------------ ----------- ------------ ------------
Total distributions............ $(0.59) $(0.56) ($0.72) ($0.88) ($0.42)
------------ ------------ ----------- ------------ ------------
Net asset value, end of
period......................... $10.37 $ 9.21 $10.41 $10.28 $10.55
============ ============ =========== ============ ============
Total return(b).................. 19.48% (6.31%) 8.41% 6.00% 16.62%(a)
Ratios/Supplemental Data
Net assets, end of period....... $405,309,939 $393,019,168 $429,789,85 $220,432,255 $130,367,032
Ratio of expenses to average
net assets..................... 0.73% 0.74% 0.74% 0.74% 0.75%(a)
Ratio of net investment income
to average net assets.......... 5.98% 5.73% 5.44% 6.91% 6.59%(a)
Portfolio turnover rate 36.47% 54.60% 92.80% 56.30% 7.38%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Bond Portfolio
June 1, 1991
(Commencement
of operations)
Year Ended Year Ended Year Ended Year Ended to
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $ 9.01 $10.32 $10.25 $10.55 $10.00
Income from investment
operations:
Net investment income.......... 0.63 0.61 0.76 0.83 0.51
Net realized and unrealized
gains (losses) on
investments.................. 1.45 (1.31) 0.38 ( 0.17) 0.57
------------ ------------ ------------ ------------ ------------
Total from investment
operations................... $ 2.08 $(0.70) $ 1.14 $ 0.66 $ 1.08
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment
income....................... $(0.64) $(0.59) $(0.76) $(0.83) $(0.51)
From realized
gains........................ (0.00) (0.02) (0.31) (0.13) (0.02)
------------ ------------ ------------ ------------ ------------
Total distributions............ $(0.64) $(0.61) $(1.07) $(0.96) $(0.53)
------------ ------------ ------------ ------------ ------------
Net asset value, end of
period......................... $10.45 $ 9.01 $10.32 $10.25 $10.55
============ ============ ============ ============ ============
Total return(b).................. 23.75% (6.99%) 11.39% 6.56% 18.45%(a)
Ratios/Supplemental Data
Net assets, end of period....... $517,565,579 $427,168,395 $501,196,278 $321,758,333 $237,673,316
Ratio of expenses to average
net assets..................... 0.74% 0.74% 0.73% 0.73% 0.75%(a)
Ratio of net investment income
to average net assets.......... 6.39% 6.36% 7.20% 8.08% 8.44%(a)
Portfolio turnover rate 41.91% 75.67% 111.52% 90.45% 8.19%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Short Bond Portfolio
September 17, 1994
(Commencement
Year Ended of Operations) to
December 31, December 31,
------------ ------------------
1995 1994
<S> <C> <C>
Net asset value, beginning
of period...................... $ 9.84 $10.00
Income from investment
operations:
Net investment income.......... 0.58 0.17
Net realized and unrealized
gains (losses) on
investments.................. 0.39 (0.16)
------------ -----------
Total from investment
operations................... $ 0.97 $ 0.01
------------ -----------
Less distributions:
From net investment
income....................... $(0.58) $(0.17)
From realized
gains........................ (0.00) 0.00
------------ -----------
Total distributions............ $(0.58) $(0.17)
------------ -----------
Net asset value, end of
period......................... $10.23 $ 9.84
============ ===========
Total return(b).................. 10.07% 0.21%(a)
Ratios/Supplemental Data
Net assets, end of period....... $163,336,885 $64,239,163
Ratio of expenses to average
net assets..................... 0.75% 0.75%(a)
Ratio of net investment income
to average net assets.......... 5.74% 5.92%(a)
Ratio of expenses to average
net assets without fee
waivers/reimbursed expenses..... 0.81% 0.93%(a)
Ratio of net investment income
to average net assets without
fee waivers/reimbursed expenses. 5.68% 5.74%(a)
Portfolio turnover rate.......... 30.94% 10.20%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total return as presented does not include any applicable sales
load.
</TABLE>
-7-
<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objective and
policies. However, only the Class A shares of the Intermediate Bond, Bond and
Short Bond Portfolios are offered pursuant to this Prospectus. Each such
Portfolio is classified as a diversified investment portfolio under the 1940
Act.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
such Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Intermediate Bond Portfolio
The investment objective of the Intermediate Bond Portfolio is to
maximize total rate of return while providing relative stability of principal
by investing predominantly in intermediate-term debt securities. While the
Portfolio may purchase securities with maturities or average lives of up to 15
years, during normal market conditions, its average weighted portfolio
maturity is expected to be between 3 and 6 years.
Bond Portfolio
The investment objective of the Bond Portfolio is to maximize total
rate of return by investing predominantly in intermediate and long-term debt
securities. During normal market conditions, the Portfolio's average weighted
portfolio maturity is expected to be between 6 and 12 years.
Short Bond Portfolio
-8-
<PAGE>
The investment objective of the Short Bond Portfolio is to maximize
total rate of return while providing relative stability of principal. While
the Portfolio may purchase securities with maturities or average lives of up
to 10 years, during normal market conditions, its average weighted portfolio
maturity will be limited to a maximum of 3 years.
Investment Policies Applicable to the Portfolios
The two components of total rate of return consist of current income
and capital appreciation. The Portfolios are more likely to exceed the
performance level of equity funds in the market with respect to current
income; however, it is more probable that the capital appreciation performance
of equity funds will surpass that of the Portfolios.
In pursuing their respective investment objectives, the Portfolios may
invest in the following debt securities: (i) obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; (ii) corporate,
bank and commercial obligations; (iii) securities issued or guaranteed by
foreign governments, their agencies or instrumentalities; (iv) securities
issued by supranational banks; (v) mortgage backed securities; and (vi)
securities representing interests in pools of assets. Obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities may
include mortgage backed securities, as well as "stripped securities" (both
interest-only and principal-only) and custodial receipts for Treasury
securities. The Portfolios may also invest in options and futures contracts
and related options. In addition, each Portfolio may invest in high quality
short-term obligations. For further information concerning these securities,
see "Other Investment Policies" below.
Each of the Portfolios invests at least 65% of the total value of its
assets in obligations, including mortgage backed securities, which are
investment grade or are issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Most obligations acquired by the Portfolios
will be issued by companies or governmental entities located within the United
States. Up to 15% of the total assets of each Portfolio may, however, be
invested in dollar denominated debt obligations of foreign issuers.
The debt securities in which the Portfolios may invest will be rated
investment grade, or if unrated, will be deemed by the Adviser to be
comparable in quality at the time of purchase to instruments that are so
rated. By so restricting their investments, the Portfolios' ability to
maximize total rate of return will be limited.
Although fixed income securities acquired by the Intermediate Bond and
Bond Portfolios will normally have intermediate or long-term maturities,
during temporary defensive periods the Portfolios may invest without
limitation in high quality short-term investments.
The Adviser manages the Portfolios based on anticipated interest rate
changes and the use of active management strategies such as sector rotation,
intra-sector adjustments and yield curve and convexity considerations. In use
of such active management strategies, the Adviser seeks value in investment
grade fixed income securities. Sector rotation involves the Adviser selecting
among different economic or industry sectors based upon apparent or relative
attractiveness. Thus at times a sector offers yield advantages relative to
other sectors. An intra-sector adjustment occurs when the Adviser determines
to select a particular issue within a sector. Yield curve considerations
involve the Adviser attempting to compare the relationship between time to
maturity and yield to maturity in order to identify the relative value in the
relationship. Convexity considerations consist of the Adviser seeking
securities that rise in price more quickly, or decline in price less quickly,
than the typical security
-9-
<PAGE>
of that price risk level and therefore enable the Adviser to obtain an
additional return when interest rates change dramatically.
In acquiring particular portfolio securities for a Portfolio, the
Adviser will consider, among other things, historical yield relationships
between private and governmental debt securities, intermarket yield
relationships among various industry sectors, current economic cycles and the
attractiveness and creditworthiness of particular issuers. Depending upon the
Adviser's analysis of these and other factors, a Portfolio's holdings of
issues in particular industry sectors may be overweighted when compared to the
relative industry weightings in related recognized indices. The value of the
Portfolios can be expected to vary inversely with changes in prevailing
interest rates.
OTHER INVESTMENT POLICIES
Ratings
If not rated as commercial paper, debt obligations acquired by the
Portfolios will be rated investment grade at the time of purchase, i.e.,
obligations rated AAA, AA, A or BBB by Standard & Poor's Rating Group,
Division of McGraw Hill ("S&P"), Fitch Investors Service ("Fitch"), Duff &
Phelps Credit Co. ("Duff") or IBCA, Inc. ("IBCA") or Aaa, Aa, A or Baa by
Moody's Investors Service, Inc. ("Moody's") (each a "Rating Agency") or be
unrated but deemed by the Adviser to be comparable in quality at the time of
purchase to instruments that are so rated. Obligations rated in the lowest of
the top four rating categories (Baa by Moody's, BBB by S&P or Fitch or IBCA)
are considered to have less capacity to pay interest and repay principal and
have certain speculative characteristics. The debt ratings are described in
the Statement of Additional Information.
Short-Term Investments
Each Portfolio may hold short-term U.S. Government obligations, "high
quality" money market instruments such as certificates of deposit, bankers'
acceptances and time deposits (i.e. those rated at the time of purchase within
the two highest rating categories or which are unrated at such time but are
deemed by the Adviser to be of comparable quality), repurchase agreements,
reverse repurchase agreements, short-term obligations issued by state and
local governmental issuers which carry yields that are competitive with those
of other types of high quality money market instruments, commercial paper,
notes, other short-term obligations, variable rate master demand notes, and
cash, pending investment, to meet anticipated redemption requests or if, in
the opinion of the Adviser, suitable bonds or other fixed income securities in
which the Portfolios invest are unavailable. Such investments may be in such
proportions as, in the opinion of the Adviser, existing circumstances may
warrant, and may include obligations of foreign banks and foreign branches of
U.S banks. The Portfolios may also invest their cash balances in securities
issued by other investment companies which invest in high-quality, short-term
debt securities. These short- term investments are described in greater detail
in the Statement of Additional Information.
U.S. Government Obligations
The Portfolios may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. Each
-10-
<PAGE>
Portfolio may also invest in interests in the foregoing securities, including
collateralized mortgage obligations guaranteed by a U.S. Government agency or
instrumentality, and in Government-backed trusts which hold obligations of
foreign governments that are guaranteed or backed by the full faith and credit
of the United States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Stripped Government Obligations
The Intermediate Bond, Bond and Short Bond Portfolios may purchase
Treasury receipts and other "stripped" securities that evidence ownership in
either the future interest payments or the future principal payments on U.S.
Government obligations. These participations, which may be issued by the U.S.
Government (or a U.S. Government agency or instrumentality) or by private
issuers such as banks and other institutions, are issued at a discount to
their "face value," and may include stripped mortgage backed securities
("SMBS"), which are derivative multi-class mortgage securities. Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, a Portfolio may
fail to fully recoup its initial investment in these securities. The market
value of the class consisting entirely of principal payments generally is
extremely volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest are generally higher
than prevailing market yields on other mortgage backed obligations because
their cash flow patterns are more volatile and there is a greater risk that
the initial investment will not be fully recouped.
Custodial Receipts for Treasury Securities
The Portfolios may purchase participations in trusts that hold U.S.
Treasury securities (such as TIGRs and CATs) where the trust participations
evidence ownership in either the future interest payments or the future
principal payments on the U.S. Treasury obligations. These participations are
normally issued at a discount to their "face value," and may exhibit greater
price volatility than ordinary debt securities because of the manner in which
their principal and interest are returned to investors.
-11-
<PAGE>
Repurchase and Reverse Repurchase Agreements
To increase its income, each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). No Portfolio will enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Portfolio may also obtain funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of a particular Portfolio exceeds one-third of the value of its total assets.
Loans of securities involve risks of delay in receiving additional collateral
or in recovering the securities loaned or possible loss of rights in the
collateral should the borrower of the securities become insolvent. Loans will
be made only to borrowers that provide the requisite collateral comprised of
liquid assets and when, in the Adviser's judgment, the income to be earned
from the loan justifies the attendant risks.
Illiquid Securities
In accordance with their fundamental investment limitation described
below, the Intermediate Bond and Bond Portfolios will not knowingly invest
more than 10% and the Short Bond Portfolio will not knowingly invest more than
15% of the value of their respective total assets in securities that are
illiquid. Securities having legal or contractual restrictions on resale or no
readily available market, and instruments (including repurchase agreements,
variable and floating rate instruments and time deposits) that do not provide
for payment to the Portfolios within seven days after notice are subject to
this limitation. Securities that have legal or contractual restrictions on
resale but have a readily available market are not deemed to be illiquid for
purposes of this limitation.
The Portfolios may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under
-12-
<PAGE>
Rule 144A is a recent development, and it is not possible to predict how this
market will develop. The Board of Trustees will carefully monitor any
investments by a Portfolio in these securities.
Borrowings
The Portfolios may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolios would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities
it is obligated to repurchase.
Asset Backed Securities
Asset Backed Securities held by the Portfolios arise through the
grouping by governmental, government-related and private organizations of
loans, receivables and other assets originated by various lenders, as
described below.
The yield characteristics of Asset Backed Securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. As a result, if an Asset
Backed Security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an Asset Backed Security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Portfolios, the maturity of Asset Backed Securities
will be based on estimates of average life.
Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Like other fixed income securities, when interest rates rise the value of an
Asset Backed Security generally will decline; however, when interest rates
decline, the value of an Asset Backed Security with prepayment features may
not increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard
prepayments and thus affect maturities.
These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the
trading market for short-term mortgages and Asset Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Mortgage Backed Securities. Asset Backed Securities acquired by the
Portfolios consist of both mortgage and non-mortgage backed securities.
Mortgage backed securities represent an ownership interest in a pool of
mortgages, the interest on which is in most cases issued and guaranteed by an
agency or instrumentality of the U.S. Government, although not necessarily by
the U.S. Government itself. Mortgage backed securities include collateralized
mortgage obligations and mortgage pass-through certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
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<PAGE>
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. In
most cases, however, payments of principal are applied to the CMO classes in
the order of their respective stated maturities, so that no principal payments
will be made on a CMO class until all other classes having an earlier stated
maturity date are paid in full. These multiple class securities may be issued
or guaranteed by U.S. Government agencies or instrumentalities, including the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"), or
issued by trusts formed by private originators of, or investors in, mortgage
loans. Classes in CMOs which the Portfolio may hold are known as "regular"
interests. CMOs also issue "residual" interests, which in general are junior
to and more volatile than regular interests. The Portfolios do not intend to
purchase residual interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which
the Portfolios may invest is a GNMA Certificate which is backed as to the
timely payment of principal and interest by the full faith and credit of the
U.S. Government. Another type is a FNMA Certificate, the principal and
interest of which are guaranteed only by FNMA itself, not by the full faith
and credit of the U.S. Government. Another type is a FHLMC Participation
Certificate which is guaranteed by FHLMC as to timely payment of principal and
interest. However, like a FNMA security it is not guaranteed by the full faith
and credit of the U.S. Government. Privately issued mortgage backed securities
will carry a rating at the time of purchase of at least A by S&P or by Moody's
or, if unrated, will be in the Adviser's opinion equivalent in credit quality
to such rating. Mortgage backed securities issued by private issuers, whether
or not such obligations are subject to guarantees by the private issuer, may
entail greater risk than obligations directly or indirectly guaranteed by the
U.S. Government.
Non-Mortgage Backed Securities. The Portfolios may also invest in non-
mortgage backed securities including interests in pools of receivables, such
as motor vehicle installment purchase obligations and credit card receivables.
Such securities are generally issued as pass-through certificates, which
represent undivided fractional ownership interests in the underlying pools of
assets. Such securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage backed securities are not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
-14-
<PAGE>
Variable and Floating Rate Instruments
The Portfolios may invest in leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate of an inverse floater
resets in the opposite direction from the market rate of interest to which it
is indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent
in inverse floaters is associated with greater volatility in their market
values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of the instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
demand rights, and the Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments. Variable and floating rate instruments
(including inverse floaters) will be subject to the Portfolio's limitation on
illiquid investments when a Portfolio may not demand payment of the principal
amount within seven days and a reliable trading market is absent. See
"Illiquid Securities."
Zero Coupon Obligations
Each Portfolio may invest in zero coupon obligations which are
discount debt obligations that do not make periodic interest payments although
income is generally imputed to the holder on a current basis. Such obligations
may have higher price volatility than those which require the payment of
interest periodically. The Adviser will consider the liquidity needs of the
Portfolios when any investment in zero coupon obligations is made.
Futures Contracts and Related Options
The Portfolios may trade futures contracts and options on futures
contracts in U.S. domestic markets, such as the Chicago Board of Trade and the
International Monetary Market of the Chicago Mercantile Exchange. They may
purchase and sell futures contracts which obligate a Portfolio to take or make
delivery of fixed income securities at maturity, commonly known as interest
rate futures contracts.
A Portfolio may sell a futures contract in order to offset an expected
decrease in the value of its portfolio that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its
securities portfolio as a whole, or to protect against declines occurring
prior to sales of securities in the value of the securities to be sold. In
addition, a Portfolio may utilize futures contracts in anticipation of changes
in the composition of its holdings.
The Portfolios may also purchase options on futures contracts and may
purchase and write put and call options on bond indices listed on U.S.
exchanges or traded in the over-the-counter market. A futures option gives the
holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at
any time during the period of the option.
When a Portfolio sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, a Portfolio may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the
Portfolio intends to purchase. Similarly, if the value of a Portfolio's
portfolio securities is expected to decline, the Portfolio might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
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<PAGE>
The Portfolios' commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated
by the Commodities and Futures Trading Commission ("CFTC"). In addition, a
Portfolio may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the
percentage limitation. Pursuant to SEC requirements, the Portfolios may be
required to segregate cash or high quality money market instruments in
connection with their commodities transactions in an amount generally equal to
the value of the underlying commodity. The Trust intends to comply with the
regulations of the CFTC exempting the Portfolios from registration as a
"commodity pool operator."
For a more detailed description of futures contracts and related
options, see Appendix B to the Statement of Additional Information.
Options
Each Portfolio may purchase and sell put and call options listed on a
national securities exchange and issued by the Options Clearing Corporation
for hedging purposes. Such transactions may be effected on a principal basis
with primary reporting dealers in U.S. Government securities in an amount not
exceeding 5% of a Portfolio's net assets, as described further in the
Statement of Additional Information. Such options may relate to particular
securities or to various bond indices. Purchasing options is a specialized
investment technique which entails a substantial risk of a complete loss of
the amounts paid as premiums to the writer of the option.
A Portfolio may purchase and sell put options on portfolio securities
at or about the same time that they purchase the underlying security or at a
later time. By buying a put, a Portfolio limits its risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by a Portfolio in order to acquire the underlying security at a
later date at a price that avoids any additional cost that would result from
an increase in the market value of the security. A Portfolio may also purchase
call options to increase its return to investors at a time when the call is
expected to increase in value due to anticipated appreciation of the
underlying security. Prior to its expiration, a purchased put or call option
may be sold in a closing sale transaction (a sale by a Portfolio, prior to the
exercise of an option that it has purchased, of an option of the same series),
and profit or loss from the sale will depend on whether the amount received is
more or less than the premium paid for the option plus the related transaction
costs.
In addition, each Portfolio may write covered call and secured put
options. A covered call option means that a Portfolio owns or has the right to
acquire the underlying security subject to call at all times during the option
period. A secured put option means that a Portfolio 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. Such options will be listed on a national securities exchange and
issued by the Options Clearing Corporation and may be effected on a principal
basis with primary reporting dealers in U.S. Government securities. The
aggregate value of the securities subject to options written by the
Intermediate Bond or Bond Portfolio will not exceed 25% of the value of its
net assets. In order to close out an option position prior to maturity, a
Portfolio may enter into a "closing purchase transaction" by purchasing a call
or put option (depending upon the position
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<PAGE>
being closed out) on the same security with the same exercise price and
expiration date as the option which it previously wrote.
By writing a covered call option, a Portfolio forgoes the opportunity
to profit from an increase in the market price of the underlying security
above the exercise price except insofar as the premium represents such a
profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Portfolio effects a closing purchase
transaction by purchasing an option of the same series. If a Portfolio writes
a secured put option, it assumes the risk of loss should the market value of
the underlying security decline below the exercise price of the option. The
use of covered call and secured put options will not be a primary investment
technique of the Portfolios.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
Risk Factors Associated with Futures and Related Options
To the extent a Portfolio is engaging in a futures transaction as a
hedging device, due to the risk of an imperfect correlation between securities
in its portfolio that are the subject of a hedging transaction and the futures
contract used as a hedging device, it is possible that the hedge will not be
fully effective in that, for example, losses on the portfolio securities may
be in excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the portfolio securities that were the
subject of the hedge. In futures contracts based on indices, the risk of
imperfect correlation increases as the composition of the Portfolio varies
from the composition of the index. In an effort to compensate for the
imperfect correlation of movements in the price of the securities being hedged
and movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures
contract has been less or greater than that of the securities. Such "over
hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge
is established.
Successful use of futures by a Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of
securities prices, interest rates and other economic factors. For example, if
the Portfolio has hedged against the possibility of a decline in the market
adversely affecting the value of securities held in its portfolio and prices
increase instead, the Portfolio will lose part or all of the benefit of the
increased value of securities which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations,
if the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
Although a Portfolio intends to enter into futures contracts and
options transactions 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. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contracts prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the
Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures position in anticipation of adverse price
movements, it will be required to make daily cash
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payments of variation margin. In such circumstances, an increase in the value
of the portion of the portfolio being hedged, if any, may offset partially or
completely losses on the futures contract.
Risk Factors Associated with Derivative Instruments
The Portfolios may purchase certain "derivative" instruments.
"Derivative" instruments are instruments that derive value from the
performance of underlying assets, interest or currency exchange rates, or
indices, and include (but are not limited to) futures contracts, options,
forward currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of asset backed
securities, "stripped" securities and various floating rate instruments,
including "inverse" floaters).
Derivative instruments present, to varying degrees, market risk that
the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the "derivative"
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Portfolio will be unable to sell a "derivative"
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a "derivative" instrument (such as an option)
will not correlate exactly to the value of the underlying assets, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
"derivative" instruments are more complex than others, and for those
instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the "derivative"
instruments purchased by the Portfolios, and will determine, in connection
with its day-to-day management of the Portfolios, how they will be used in
furtherance of the Portfolios' investment objectives. It is possible, however,
that the Adviser's evaluations will prove to be inaccurate or incomplete and,
even when accurate and complete, it is possible that the Portfolios will,
because of the risks discussed above, incur loss as a result of their
investments in "derivative" instruments.
Foreign Securities
The Portfolios may invest in dollar-denominated obligations of foreign
issuers. Such investments may include both obligations of foreign corporations
and banks, as well as obligations of foreign governments and their political
subdivisions. Investments in foreign securities, whether made directly or
indirectly, involve certain inherent risks, such as political or economic
instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns, changes in exchange rates of foreign
currencies and the possibility of adverse changes in investment or exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company. Listed foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards comparable to those applicable to domestic companies. Further,
foreign stock markets are generally not as developed or efficient as those in
the U.S. and in most foreign markets volume and liquidity are less than in the
U.S. Fixed commissions on foreign stock exchanges are generally higher than
the negotiated commissions on U.S. exchanges, and there is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the U.S. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation limitations
on the removal of funds or other assets or diplomatic developments that could
affect investment within those countries. Because of these and other factors,
securities of foreign companies acquired by
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a Portfolio may be subject to greater fluctuation in price than securities of
domestic companies.
Furthermore, some securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the costs of such
investments and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by the Portfolios from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries. Tax conventions between certain countries and the
United States, however, may reduce or eliminate such taxes. All such taxes
paid by a Portfolio will reduce its net income available for distribution to
investors.
Supranational Bank Obligations
The Portfolios may invest in obligations of supranational banks.
Supranational banks are international banking institutions designed or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will
be undertaken or met in the future.
When-Issued Purchases and Forward Commitments
The Portfolios may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. Each Portfolio's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolios do not earn income with
respect to these transactions until the subject securities are delivered to
the Portfolios. The Portfolios do not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of their investment objectives.
Portfolio Turnover
Generally, the Portfolios will purchase securities for capital
appreciation or investment income, or both, and not for short-term trading
profits. However, a Portfolio may sell a portfolio investment soon after its
acquisition if the Adviser believes that such a disposition is consistent with
or in furtherance of the Portfolio's investment objective. Portfolio
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, the Portfolios
are likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Portfolio
turnover may also result in the realization of substantial net capital gains.
(See "Taxes-Federal" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.) While it is not possible
to accurately predict portfolio turnover rates, the annual turnover rates for
the Intermediate Bond, Bond, and Short Bond Portfolios are not expected to
exceed 300%, 400% and 300%, respectively.
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Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of a Portfolio's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by a
Portfolio, except that up to 25% of the value of the Portfolio's total assets
may be invested without regard to these limitations.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured by such
instruments, (b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of the parents, and (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry.
3. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
4. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. No Portfolio will
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with a Portfolio's
investment practices described in the Statement of Additional Information or
in this Prospectus are not deemed to be pledged for purposes of this
limitation.
In addition, the Intermediate Bond and Bond Portfolios may not invest
more than 10% of their respective total assets in illiquid investments. The
Short Bond Portfolio may not invest more than 15% of its total assets in
illiquid investments. See "Illiquid Securities" above.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Portfolio's portfolio securities will not constitute
a violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of a Portfolio's shares in certain states,
the Portfolios may make commitments more restrictive than the investment
policies and
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limitations described above. Should a Portfolio determine that any such
commitment is no longer in the best interests of the Portfolio, it will revoke
the commitment by terminating sales of its shares in the state involved.
PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class A shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers. Investors may purchase Class
A shares directly in accordance with the procedures set forth below or through
procedures established by their financial institutions in connection with the
requirements of their accounts.
Financial institutions may impose different minimum investment and
other requirements on their customers and may charge additional fees in
connection with the establishment of accounts with the institutions and
purchase and redemption of Class A shares. Persons wishing to purchase Class A
shares through their accounts at an institution or a Co-Distributor should
contact the institution or Co-Distributor directly for appropriate
instructions and fee information. In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby they
would perform various administrative support services for their customers who
are the beneficial owners of Class A shares in return for fees from the
Portfolios. See "Shareholder Servicing Plan" under the heading "Management" in
this Prospectus.
All shareholders of record will receive confirmations of share
purchases and redemptions. Class A shares purchased by institutions on behalf
of their customers will normally be held of record by them. Institutions will
record their customers' beneficial ownership of such shares and provide
regular account statements reflecting such beneficial ownership.
Institutions will be responsible for transmitting purchase and
redemption orders to FoM, Essex or NBD acting as transfer agent ("the Transfer
Agent") on a timely basis, in accordance with the procedures stated below.
Purchase Procedures
The minimum initial investment is $1,000, except for purchases through
an institution whose customers have invested an aggregate minimum of $1,000 or
for investments made through a Co-Distributor's or an institution's sweep
privilege, the Trust's Automatic Investment Plan described below, or the
Trust's IRA program described below. The minimum subsequent investment is
$100, except for reinvested dividends or as otherwise described below. The
Trust reserves the right to reject any purchase order.
Orders for Class A shares may be placed by telephone by calling (800)
688-3350 (provided an investor has made the appropriate election in his
account application) or by mail (by completing the account application which
accompanies this Prospectus and mailing the completed form and the payment for
shares to FoM, Essex or the Transfer Agent). All checks must be drawn on a
bank located within the United States and must be payable in U.S. dollars.
Subsequent investments in an existing account in a Portfolio may be made at
any time by sending a check or money order along with either (a) the
detachable form that regularly accompanies the Trust's confirmation of a prior
transaction, (b) a subsequent order form which may be obtained from the Trust,
or (c) a letter stating the
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amount of the investment, the name of the Portfolio and the account number in
which the investment is to be made. If any check used for investment in an
account does not clear, the order will be cancelled and notice thereof will be
given; in such event the account will be responsible for any loss to the Trust
as well as a $15 fee imposed by the Transfer Agent.
With the exception of customers of FoM, Class A shares may also be
paid for by wiring federal funds to the Transfer Agent, NBD Bank, ABA
072000326, for the account of The Woodward Funds, Account Number GL 325612,
and identifying the customer name and account number. Before wiring payment,
customers should notify the Transfer Agent by calling (800) 688-3350.
If customers of FoM wire payment in federal funds, they should direct
payment to NBD Bank, ABA 072000326, for the account of First of Michigan
Corporation re: The Woodward Funds, Account Number 059-41, and should identify
the customer name and account number. Before wiring payment, customers of FoM
should call FoM at (800) 544-8275 (outside Michigan) or (800) 852-7730 (within
Michigan).
Purchase orders which are accompanied by payment (by check or wire
transfer) and received by the Transfer Agent in proper form on a Business Day
(as defined below) prior to the close of the New York Stock Exchange are
priced at the public offering price (i.e. net asset value plus the applicable
sales load set forth below) of the particular portfolio determined on that
Business Day. Purchase orders which are received by the Transfer Agent after
the close of trading on the Exchange on a Business Day or on non-Business Days
will be executed as of the determination of net asset value on the next
Business Day.
The Trust will not accept payment in cash or third party checks for
the purchase of shares. Federal regulations require that each investor provide
a certified taxpayer identification number upon opening or reopening an
account. Applications without a taxpayer identification number will not be
accepted. See the account application for further information about this
requirement.
Net Asset Value and Pricing of Shares
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 5:00 p.m. Eastern
time on each day on which both the New York Stock Exchange ("Exchange") and
NBD Bank or its bank affiliates are open for business ("Business Day").
Currently, one or both of these institutions are closed on the customary
national business holidays of New Year's Day, Dr. Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day (observed), Independence
Day, Labor Day, Columbus Day (observed), Veterans' Day, Thanksgiving Day
and Christmas Day. During those business days on which the Exchange closes
prior to the close of its regular trading hours (currently 4:00 p.m.
Eastern time) ("Early Closing Time"), the net asset value of each
Portfolio will be determined and its shares will be priced as of such
Early Closing Time. Net asset value per Class A share of a Portfolio
is calculated by dividing the value of all securities and other
assets belonging to the Portfolio allocable to that Class A, less the
liabilities charged to that Class A, by the number of the outstanding shares
of such Class A.
Securities held by the Portfolios which are traded on only
over-the-counter markets and securities for which there were no transactions
are valued at the average of the current bid and asked prices. Fixed income
securities held by the Portfolios are valued according to the broadest and
most representative market, which ordinarily will be the over-the-counter
markets, whether in the United States or in foreign countries. Such securities
are valued at the average of the current bid and asked prices. Securities for
which accurate market quotations are not readily available, and other assets
are valued at fair value by the Adviser under the supervision of the Board of
Trustees. Securities may be valued on the basis of prices provided by
independent pricing services when the Adviser
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believes such prices reflect the fair market value of such securities. The
prices provided by pricing services take into account institutional size
trading in similar groups of securities and any developments related to
specific securities. For valuation purposes, the value of assets and
liabilities expressed in foreign currencies will be converted to U.S. dollars
equivalent at the prevailing market rate on the day of valuation. A
Portfolio's open futures contracts will be "marked-to-market."
PUBLIC OFFERING PRICE
The public offering price for Class A shares of the Intermediate Bond
and Bond Portfolios is the sum of the net asset value per share of the Class A
shares being purchased plus a sales load as follows:
<TABLE>
<CAPTION>
Total Sales Load Reallowance to Institutions
------------------------------- ---------------------------
As a % of As a % of As a % of
offering price net asset value offering price
Amount of Transaction per share per share per share
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $49,999.................... 4.75 4.99 4.25
$50,000 to $99,999................... 4.25 4.44 3.75
$100,000 to $249,999................. 3.50 3.63 3.00
$250,000 to $499,999................. 2.50 2.56 2.00
$500,000 to $999,999................. 2.00 2.04 1.75
$1,000,000 and over.................. .00 .00 .00
</TABLE>
The public offering price for Class A shares of the Short Bond
Portfolio is the sum of the net asset value per share of the Class A
shares being purchased plus a sales load as follows:
<TABLE>
<CAPTION>
Total Sales Load Reallowance to Institutions
-------------------------------- ---------------------------
As a % of As a % of As a % of
offering price net asset value offering price
Amount of Transaction per share per share per share
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $99,999.................... 3.00 3.09 2.50
$100,000 to $249,999................. 2.25 2.30 2.00
$250,000 to $499,999................. 1.75 1.78 1.50
$500,000 to $999,999................. 1.25 1.27 1.00
$1,000,000 and over.................. .00 .00 .00
</TABLE>
The sales load described above will not be applicable to purchases of
Class A shares by: (1) any bank, trust company or other institution acting on
behalf of its fiduciary customer accounts or any other account maintained by
its trust department (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended); (2) any individual, trust,
corporation or other person where the shares are acquired in connection with
the distribution of assets held in any account referred to in (l) above with
NBD or its affiliates; (3) individual retirement accounts maintained by the
trust division of NBD or of its affiliates; (4) current and retired directors,
officers and employees of NBD or any of its affiliates; (5) the trustees,
former trustees and officers of the Trust; (6) broker/dealers which have
entered into an agreement with a Co-Distributor or the Trust pursuant to the
Trust's Service and Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (7) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in paragraphs (4), (5) and (6) above. An application to qualify
for such purchases of Class A shares (an "NAV Account Application") may be
obtained from the Transfer Agent by calling (800) 688-3350. In addition, no
sales load is charged on the reinvestment of dividends or distributions, or in
connection with certain share exchanges
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described below under "Shareholder Services -- Exchange Privilege." The Trust
may terminate any exemption from the sales load by providing notice in the
Prospectus, but any such termination would only affect future purchases of
Class A shares. The reallowance to Institutions may be changed from time to
time.
From time to time, the Co-Distributors, at their expense, may offer
additional promotional incentives to dealers.
Quantity Discounts
An investor may be entitled to reduced sales charges through Rights of
Accumulation, a Letter of Intent or a combination of investments, even if the
investor does not wish to make an investment of a size that would normally
qualify for a quantity discount.
An investor must notify his institution or the Transfer Agent at the time
of purchase whenever a quantity discount applies. Upon such notification, the
investor will receive the lowest applicable sales charge. Quantity discounts
may be modified or terminated at any time and are subject to confirmation of
an investor's holdings. For more information about quantity discounts, an
investor should contact his institution or call (800) 688-3350.
Right of Accumulation. A reduced sales load applies to any purchase of
Class A shares of the Portfolios and any other portfolio which is currently
offered or may be offered in the future by the Trust that is sold with a sales
load ("Eligible Portfolios") where an investor's then current aggregate
investment is $50,000 or more in the case of the Intermediate Bond and Bond
Portfolios and $100,000 or more in the case of the Short Bond Portfolio.
"Aggregate investment" means the total of: (a) the dollar amount of the then
current purchase; and (b) the value (based on current net asset value) of
Class A shares of Eligible Portfolios on which a sales load has been paid
(including shares acquired through reinvestment of dividends or distributions
on shares that were subject to a sales load). If, for example, an investor
beneficially owns Class A shares of the Intermediate Bond Portfolio with an
aggregate current value of $49,500 and subsequently purchases additional Class
A shares having a current value of $1,000, the load applicable to the
subsequent purchase would be reduced to 4.25% of the offering price.
Similarly, with respect to each subsequent investment, the current value of
all Class A shares of Eligible Portfolios that are beneficially owned by the
investor at the time of investment may be combined to determine the applicable
sales load.
Letter of Intent. By signing a Letter of Intent form (available from his
institution or the Transfer Agent) an investor becomes eligible for the
reduced sales load applicable to the total number of Eligible Portfolio Class
A shares purchased in a thirteen-month period (net of redemptions) pursuant to
the terms and under the conditions set forth in the Letter of Intent. To
compute the applicable sales load, the offering price of Class A shares an
investor beneficially owns (on the date of submission of the Letter of Intent)
in any Eligible Portfolio that may be used toward "Right of Accumulation"
benefits described above may be used as a credit toward completion of the
Letter of Intent. However, the reduced sales load will be applied only to new
purchases.
The Transfer Agent will hold in escrow Class A shares equal to the amount
indicated in the Letter of Intent for payment of a higher sales load if an
investor does not purchase the full amount specified in the Letter of Intent.
The escrow will be released when an investor fulfills the terms of the Letter
of Intent by purchasing the specified amount. If total purchases within the
thirteen-month period of the Letter of Intent exceed the amount specified, an
adjustment will be made in the form of additional Class A shares credited to
the shareholder's account to reflect further reduced sales charges applicable
to such purchases. If total purchases are less than the amount specified, an
investor will be requested to remit an amount equal to the difference between
the sales
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load actually paid and the sales load applicable to the total purchases. If
such remittance is not received within thirty days, the Transfer Agent, as
attorney-in-fact pursuant to the terms of the Letter of Intent, will redeem
an appropriate number of Class A shares held in escrow to realize the
difference. Signing a Letter of Intent does not bind an investor to purchase
the full amount indicated at the sales load in effect at the time of signing,
but an investor must complete the intended purchase to obtain the reduced
sales load.
Qualification for Discounts. For the purpose of applying the Right of
Accumulation and Letter of Intent privileges described above, the scale of
sales loads applies to the combined purchases made by any individual and/or
spouse purchasing securities for his, her or their own account or for the
account of any minor children under the Uniform Gifts to Minors Act or the
Uniform Transfers to Minors Act, or the aggregate investments of a trustee or
custodian of any qualified pension or profit sharing plan or IRA established,
or the aggregate investment of a trustee or other fiduciary, for the benefit
of the persons listed above.
REDEMPTION OF SHARES
In General
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption in
accordance with the procedures set forth below.
Redemption orders must be placed with or through the same financial
institution that placed the original purchase order. It is the responsibility
of the financial institutions to transmit redemption orders to the Transfer
Agent. Redemption proceeds are paid by check or credited to the investor's
account with his financial institution. Investors who purchased shares
directly from the Trust should follow the redemption procedures set forth
below.
Redemption Procedures
A shareholder of record may redeem shares in any amount by calling
(800)688-3350 (provided he has made the appropriate election in his account
application) or by sending a written request to The Woodward Funds, c/o NBD
Bank, P.O. Box 7058, Troy, Michigan 48007-7058. Written requests to redeem
shares having a net asset value of more than $50,000 must have all signatures
of the registered owner(s) or their authorized legal representative guaranteed
by a commercial bank or trust company which is a member of the Federal Reserve
System or FDIC, a member firm of a national securities exchange or a savings
and loan association. A signature guaranteed by a savings bank or notarized by
a notary public is not acceptable. A signature guarantee will also be required
for a redemption request (in any amount) if the address of record for the
account has been changed within the previous 15 days or which requests that
the proceeds be paid to an account other than the one preauthorized on the
application, a payee or payees other than the registered owners of the
account, or an address other than the address of record. The Trust may require
additional supporting documents for redemptions made by corporations,
fiduciaries, executors, administrators, trustees, guardians and institutional
investors.
Redemption orders for Class A shares may be placed through an
institution or directly by telephone by calling (800)688-3350. During periods
of unusual economic or market changes, telephone redemptions may be difficult
to implement. In such event, shareholders should mail their redemption
requests to their financial institutions or The Woodward Funds, c/o NBD Bank,
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered
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reasonable, including recording those instructions and requesting information
as to account registration (including, but not limited to, the name in which
an account is registered, the account number, or recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions,
they may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions.
Other Redemption Information
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities and Exchange Act
of 1934 after receipt by the Transfer Agent of a request in proper form. If
shares to be redeemed were purchased by check, the Trust will transmit the
redemption proceeds promptly upon clearance of such check, which could take up
to fifteen days from the purchase date. A shareholder having purchased shares
by wire must have filed an account application before any redemption requests
can be honored.
Currently, the Trust imposes no charge when shares are redeemed.
However, institutions may charge a fee for providing services in connection
with investments in Portfolio shares; NBD currently charges $16 for wire
transactions. The Trust reserves the right to redeem accounts involuntarily,
after sixty days' notice, if redemptions cause the account's net asset value
to remain at $1,000 or less. Under certain circumstances, the Trust may make
payment for redemption in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800)688-3350 or an investor's institution.
SHAREHOLDER SERVICES
The shareholder services and privileges under this heading may not be
available to certain clients of particular financial institutions, and some
may impose conditions on their clients that are different from those described
below. Investors should consult their own financial institutions in this
regard. Other investors should direct any questions to the Transfer Agent. The
Trust may modify or terminate any of the following services and privileges at
any time.
Exchange Privilege
Investors may exchange Class A shares which have been owned for at
least thirty days of the Intermediate Bond, Bond and Short Bond Portfolios, of
the Woodward Municipal Bond, Michigan Municipal Bond, Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International
Equity Funds and of other investment portfolios of the Trust which may be
offered in the future and sold without a sales charge (each a "load
Portfolio") and Class A shares which have been owned for at least thirty days
of the Woodward Equity Index, Money Market, Government, Treasury Money Market,
Tax-Exempt Money Market and Michigan Tax-Exempt Money Market Funds and of
other investment portfolios of the Trust which may be offered in the future
and sold without a sales charge (each a "no load portfolio"). The cost of the
acquired Class A shares will be their net asset value plus the applicable
sales load, if any.
With respect to exchanges between load portfolios other than exchanges
involving the Short Bond Portfolio, no additional sales load will be payable,
provided that the investor previously paid a sales load upon the acquisition
of Class A shares of a load Portfolio. Investors exchanging Class A shares of
the Short Bond Portfolio will be required to pay the difference between the
sales load previously paid and the sales load applicable on the Class A shares
being acquired in the exchange, unless the investor's holding of Class A
shares of the
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Short Bond Portfolio resulted from a previous exchange of Class A shares with
respect to which the investor had paid a higher sales load.
Exchanges of Class A shares of a load portfolio for Class A shares of
a no load portfolio and exchanges of Class A shares of a no load portfolio for
Class A shares of another no load portfolio will not be subject to the payment
of a sales load.
Any exchange of Class A shares of a no load portfolio for Class A
shares of a load portfolio will be subject to the payment of the applicable
sales load, unless the investor is exchanging shares of a no load portfolio
which were received in a previous exchange transaction involving Class A
shares of a load portfolio. In such case, the investor will receive a credit
for any sales load previously paid and no additional sales load will be
payable, except as noted above with respect to the Short Bond Portfolio.
Shareholders contemplating an exchange should carefully review the
prospectus of the portfolio into which the exchange is being considered. The
Prospectus for any portfolio of the Trust may be obtained from an investor's
financial institution or from the Transfer Agent by calling (800)688-3350.
Exchanges will be effected by a redemption of Class A shares of the
portfolio held and the purchase of Class A shares of the portfolio acquired.
Investors should make their exchange requests in writing or by telephone to
the financial institutions through which they purchased their original Class A
shares. It is the responsibility of financial institutions to transmit
exchange requests to the Transfer Agent. Other investors should transmit
exchange requests directly to the Transfer Agent. The total value of shares
being exchanged must at least equal the minimum investment requirement of the
portfolio whose shares are being acquired in the exchange. Only one exchange
in any thirty-day period is permitted and only Class A shares that may be
legally sold in the state of the investor's residence may be acquired in an
exchange. The Trust reserves the right to reject any exchange request.
Investors wishing to make an exchange should contact their
institutions or the Transfer Agent (as appropriate). Exchange requests in the
required form which are received by the Transfer Agent prior to 4:00 p.m.,
Eastern time, will be effected on the same Business Day after such request is
received. Requests received after 4:00 p.m., Eastern time, will be effected on
the next Business Day after such request is received. During periods of
significant economic or market change, telephone exchanges may be difficult to
complete. In such event, an investor should mail the exchange request to his
financial institution or the Transfer Agent. Neither the Trust nor the
Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Trust and
its Transfer Agent will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to
account registration (including, but not limited to, the name in which an
account is registered, the account number, or recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions,
they may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to modify or
terminate its exchange procedures upon sixty days' notice to shareholders.
Reinvestment Privilege
Class A shares of a Portfolio may be purchased at net asset value by
persons who have redeemed within the previous 120 days their Class A shares of
that Portfolio or another investment portfolio of the Trust which were
purchased with a sales load. The amount which may be so reinvested is limited
to an amount
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up to the redemption proceeds. In order to exercise this privilege, a written
order for the purchase of Class A shares of the Portfolio must be received by
the Transfer Agent within 120 days after the redemption. Reinvestment will be
at the next calculated net asset value after receipt.
Option to Make Systematic Withdrawals
The Trust has available to shareholders a Systematic Withdrawal Plan
pursuant to which a shareholder who owns Class A shares of any investment
portfolio having a minimum value of $15,000 at the time he elects under the
Plan may have a fixed sum distributed in redemption at regular intervals. An
application form and additional information regarding this service may be
obtained from an investor's institution or the Transfer Agent by calling
(800)688-3350.
Automatic Investment
The Trust offers an Automatic Investment Plan (the "Plan") whereby a
shareholder may automatically purchase Class A shares on a regular basis in
accordance with an election in his account application. An application may be
obtained from the Transfer Agent by calling (800)688-3350. Under the Plan a
shareholder's financial institution debits a pre-authorized amount from his
account and applies the amount to the purchase of Class A shares. The minimum
per transaction is $25. The minimum initial investment in a Portfolio is also
$25 for the following shareholders who elect the Plan: (l) current and retired
directors, officers and employees of NBD or any of its affiliates; (2) the
trustees, former trustees and officers of the Trust; (3) broker/dealers which
have entered into an agreement with a Co-Distributor or the Trust pursuant to
the Trust's Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (4) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in (l), (2) and (3) above. An NAV Account Application may be
obtained from the Transfer Agent by calling (800)688-3350. The Plan can be
implemented with any financial institution that is a member of the Automated
Clearing House. No service fee is currently charged by the Trust for
participating in the Plan. Death or legal incapacity will terminate a
shareholder's participation in the Plan. Deposits, withdrawals and adjustments
will be made electronically under the rules of the Automated Clearing House
Association.
Cross Reinvestment of Dividend Plan
The Trust makes available to shareholders a Cross Reinvestment of
Dividend Plan (the "Plan") pursuant to which a shareholder who owns Class A
shares of any portfolio with a minimum value of $10,000 at the time he elects
under the Plan may have dividends paid by such portfolio automatically
reinvested into Class A shares of another portfolio in which he has invested a
minimum of $1,000. Shareholders may obtain an application and additional
information from their institutions or the Transfer Agent by calling
(800)688-3350.
The Woodward Funds Individual Retirement Custodial Account
Class A shares may be purchased in conjunction with the Trust's
Individual Retirement Custodial Account program ("IRA") where NBD acts as
custodian. Investors should consult their institutions or a Co-Distributor for
information as to applications and annual fees. The minimum investment for an
IRA is $250 for investors who are not employees of NBD and $25 for investors
who are employees of NBD. Investors should also consult their tax advisers to
determine whether the benefits of an IRA are available or appropriate.
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Other Retirement Plans
NBD and its affiliates offer a variety of pension and profit sharing
plans including IRAs, defined contribution plans, 401(k) Plans, 403(b)(7)
Plans and 457 Plans through which investors may purchase Class A shares. The
minimum investment for these Plans may differ from the minimum discussed above
in "Purchase of Shares." For details concerning any of the retirement plans,
please call the Transfer Agent or a Co-Distributor.
Direct Deposit Program
If an investor receives federal salary, social security, or certain
veteran's, military or other payments from the federal government or elects to
use his employer's payroll deposit program, he is eligible for the Direct
Deposit Program. With this Program, an Investor may purchase Class A shares
(minimum of $25) by having these deposits automatically deposited into his
Portfolio account. For instructions on how to enroll in the Direct Deposit
Program, an investor should call his institution or the Transfer Agent. Death
or legal incapacity will terminate an investor's participation in the Program.
An investor may elect at any time to terminate his participation by notifying
in writing the appropriate federal agency. Further, the Trust may terminate an
investor's participation upon thirty days' notice to him.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance and yield of each class of shares of the Portfolios may be
compared to the performance of other mutual funds with similar investment
objectives and to bond or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, performance and yield may be
compared to data prepared by Lipper Analytical Services, Inc. In addition,
performance and yield data as reported in national financial publications such
as Money Magazine Forbes, Barron's, The Wall Street Journal and The New York
Times, or in publications of a local or regional nature, may also be used in
comparing the performance of a Portfolio.
"Yield" refers to the income generated by an investment in a class of
shares of a Portfolio over a thirty-day period identified in the
advertisement. This income is then "annualized," i.e., the income generated by
the investment during the thirty-day period is assumed to be earned and
reinvested at a constant rate and compounded semi-annually. The annualized
income is then shown as a percentage of the investment.
The Portfolios calculate their total returns on an "average annual
total return" basis for various periods from the date they commenced
investment operations and for other periods as permitted under the rules of
the SEC. Average annual total return of a class reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns may also be calculated on an "aggregate total return
basis" for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return also reflect changes in the price of the shares and
assume that any dividends and capital gain distributions made by the class
during the period are reinvested in shares of the class. When considering
average total return figures for periods longer than one year, it is important
to note that a class' annual total return for any one year in the period might
have been greater or less than the average for the entire period.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. The
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investment return and principal value of an investment in a class will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Yield and total return data should also be
considered in light of the risks associated with a Portfolio's portfolio
composition, quality, maturity, operating expenses and market conditions. Any
fees charged by financial institutions directly to their customer accounts in
connection with investments in shares will not be reflected in performance
calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly by
the Portfolios. Each Portfolio's net realized capital gains are distributed at
least annually.
Dividends and distributions will reduce a class' net asset value
by the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested (without any sales charge) in additional shares
of the same class at their net asset value per share determined on the payment
date, unless the holder has notified the Transfer Agent in writing that he
elects to have dividends or capital gain distributions (or both) paid in cash.
Shareholders must make such election, or any revocation thereof, in writing to
their financial institutions or Transfer Agent. The election will become
effective with respect to dividends paid after its receipt by the Transfer
Agent. If an account is established with telephone privileges, the registered
owner or his preauthorized legal representative may change the election to
receive dividends in cash to an election to receive dividends in shares by
telephoning the Transfer Agent at 800-688-3350.
TAXES
Federal
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolios of liability for federal income
taxes to the extent their earnings are distributed in accordance with the
Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, a Portfolio's investment company taxable income will be its
taxable income, subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Each Portfolio intends to distribute as
dividends substantially all of its investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to the Portfolio's shareholders who are not currently exempt
from federal income taxes regardless of whether a distribution is received in
cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code.) Such ordinary income
distributions will qualify for the dividends received deduction for
corporations to the extent of the total qualifying dividends received by the
distributing Portfolio from domestic corporations for the taxable year.
Substantially all of each Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolios will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently
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exempt from federal income taxes as long-term capital gains, regardless of how
long the shareholders have held the shares and whether such gains are received
in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of a Portfolio, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after the purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such amounts, although in
effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of a Portfolio depending upon the
tax basis and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Portfolio within 90 days of the purchase and is able to reduce the
sales charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included under certain
circumstances in the tax basis of the new shares.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolios and their shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
potential investors in the Portfolios should consult their tax advisers with
specific reference to their own tax situation.
State and Local
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust
and its shareholders under such laws may differ from treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth
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below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank, 611
Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989- 1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Senior Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for each Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion. NBD has been in the business
of providing such services since 1933. Included among NBD's accounts are
pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services
to each Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for each
of the Portfolios.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Douglas S. Swanson, First Vice President, and Ricardo F. Cipicchio,
Vice President, are primarily responsible for the day-to-day management of the
Intermediate Bond and Bond Portfolios. Mr. Swanson joined NBD in 1983 after
receiving an M.S. in Management from the Massachusetts Institute of Technology
(Sloan School). Prior to joining NBD in 1989, Mr. Cipicchio was employed by
CITGO as a petroleum engineer. Mr. Cipicchio received an MBA in Finance from
the University of Michigan.
Mr. Cipicchio and Christopher J. Nauseda, Second Vice President, are
primarily responsible for the day-to-day portfolio management of the Short
Bond Portfolio. Mr. Nauseda, who received an MBA from Wayne State University
in 1992, joined NBD in 1982.
For its services under the Advisory Agreement, NBD is entitled to
receive an advisory fee, computed daily and payable monthly, at an annual rate
of .65% of the average daily net assets of each of the Portfolios. In
addition, NBD is entitled to 4/10ths of the gross income earned by the
Intermediate Bond, Bond and Short Bond Portfolios on each loan of securities
(excluding capital gains and losses, if any). NBD may voluntarily waive its
fee in whole or in part with respect to any particular Portfolio.
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Adviser from continuing to perform investment
advisory, custodial or transfer agency services for the Trust or require the
Adviser to alter or discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees of the Trust would recommend that shareholders approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
-34-
<PAGE>
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of each Portfolio: (i) fees payable
to the Co-Distributors pursuant to the Distribution Agreement; (ii) the actual
costs and expenses in connection with advertising and marketing the
Portfolio's shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions and other professionals ("Service Agents") for
administration or servicing of Portfolio shareholders ("Servicing"). Servicing
may include, among other things: answering client inquiries regarding the
Trust and the Portfolios; assisting clients in changing dividend options,
account designations and addresses; performing sub-accounting; establishing
and maintaining shareholder accounts and records; processing purchase and
redemption transactions; investing client cash account balances automatically
in Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
printing Prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of a Portfolio's average net assets, and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of the Trust's investment portfolios attributable to
investments by clients of Essex. The payments to be made to the
Co-Distributors which are based on a percentage of the net assets of the
Portfolios are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolios' shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust, and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which,
-35-
<PAGE>
if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Shareholder Servicing Plan
Pursuant to a Shareholder Servicing Plan ("Servicing Plan") adopted by
its Board of Trustees, the Trust may enter into agreements ("Servicing
Agreements") with banks and financial institutions, which may include the
Adviser and its affiliates ("Shareholder Servicing Agents"), under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares of the Portfolios. Such services, which
are described more fully in the Statement of Additional Information, may
include processing purchase and redemption requests from customers, placing
net purchase and redemption orders with a Co-Distributor, processing, among
other things, distribution payments from the Trust, providing necessary
personnel and facilities to establish and maintain customer accounts and
records, and providing information periodically to customers showing their
positions in Class A shares of the Portfolio.
For these services, the Trust will pay fees to Shareholder Servicing
Agents at an annual rate of up to .25% of the average daily net asset value of
Class A shares held by such Shareholder Servicing Agents for the benefit of
their customers and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Shareholder Servicing Agents are
required to provide their customers with a schedule of any credits, fees or
other conditions that may be applicable to the investment of customer assets
in Class A shares. The fees payable under such servicing agreements will be
allocated exclusively to the Class A shares.
Conflict of interest restrictions may apply to the receipt of
compensation paid by the Trust to a Shareholder Servicing Agent in connection
with the investment of fiduciary funds in Portfolio shares. Banks and other
institutions regulated by the Comptroller of the Currency or other federal or
state bank regulatory agencies, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal counsel before
entering into Servicing Agreements.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan and Shareholder Servicing Plan, outside auditing and
legal expenses, all taxes and corporate fees payable by the Trust, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders,
costs of shareholder reports and shareholder meetings, and any extraordinary
expenses. Each Portfolio also pays for brokerage commissions and transfer
taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular Portfolio of the Trust will
be charged to that Portfolio, and expenses not readily identifiable as
belonging to a particular Portfolio will be allocated by the Board of Trustees
-36-
<PAGE>
among one or more Portfolios in such a manner as it shall deem fair and
equitable. For the fiscal year ended December 31, 1995, the Intermediate Bond,
Bond and Short Bond Portfolios' total expenses were .73%, .74%, and .75%
(after fee waivers, if any) of their average net assets, respectively. The
Statement of Additional Information describes in more detail the fees and
expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Municipal Bond Fund, Michigan Municipal
Bond Fund, Growth/Value Fund, Opportunity Fund, Intrinsic Value Fund, Capital
Growth Fund, Balanced Fund, Intermediate Equity Fund, Equity Index Fund, Money
Market Fund, Government Fund, Treasury Money Market Fund, Tax-Exempt Money
Market Fund and Michigan Tax-Exempt Money Market Fund. The Trust has
established the following two distinct classes of shares within each
Portfolio described herein: Class I shares (Original Class) and Class A
shares (Special Class 1). A sales person and any other person or
institution entitled to receive compensation for selling or servicing
shares may receive different compensation with respect to different
classes of shares in the Series. Each share has $.10 par value,
represents an equal proportionate interest in the related Portfolio
with other shares of the same class outstanding, and is entitled to such
dividends and distributions out of the income earned on the assets belonging
to such Portfolio as are declared in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly, the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
As of February 29, 1996, NBD held beneficially or of record
approximately 87.62%, 88.13% and 91.65% of the outstanding shares of the
Intermediate Bond, Bond and Short Bond Portfolios, respectively, and therefore
may be considered to be a controlling person of the Trust for purposes of the
1940 Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
-37-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Portfolios'
Statement of Additional Information incorporated herein by reference, in
connection with the offering made by this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust, Adviser or Sponsors and Co-Distributors. This
Prospectus does not constitute an offering by the Portfolios or by their Co-
Distributors, in any jurisdiction in which such offering may not lawfully be
made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY............................. 2
FINANCIAL HIGHLIGHTS........................ 5
INTRODUCTION................................ 8
PROPOSED REORGANIZATION..................... 8
INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS............................ 8
OTHER INVESTMENT POLICIES................... 11
PURCHASE OF SHARES.......................... 21
PUBLIC OFFERING PRICE....................... 23
REDEMPTION OF SHARES........................ 26
SHAREHOLDER SERVICES........................ 27
PERFORMANCE AND YIELD
INFORMATION......................... 30
DIVIDENDS AND DISTRIBUTIONS................. 30
TAXES .................................... 31
MANAGEMENT.................................. 32
OTHER INFORMATION........................... 37
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania
19107-3496
<PAGE>
[BACK COVER, COLUM 2]
CLASS A SHARES OF THE:
WOODWARD INTERMEDIATE BOND FUND
WOODWARD BOND FUND
WOODWARD SHORT BOND FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-38-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series P - Special Class 1 and Q - Special Class 1
Representing Interests in the Class A Shares of the Woodward
Municipal Bond and Michigan Municipal Bond
Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page....................................... Cover page
2. Synopsis......................................... Expense Summary;
Background
3. Financial Highlights............................. Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant....................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ........................ Management
6. Capital Stock and Other
Securities....................................... Purchase of
Shares; Redemption
of Shares;
Shareholder
Services;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered.................................... Purchase of
Shares;
Shareholder
Services;
Management
8. Redemption or Repurchase......................... Redemption of
Shares;
Shareholder
Services
9. Pending Legal Proceedings........................ Inapplicable
-9-
<PAGE>
- ------------------------------------------------------------------------------
PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following two investment portfolios (the "Portfolios"), each having its
own investment objective and policies as described in this Prospectus:
Class A shares of the:
Woodward Municipal Bond Fund
Woodward Michigan Municipal Bond Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Municipal Bond Fund ("Municipal Bond Portfolio") and
Woodward Michigan Municipal Bond Fund ("Michigan Municipal Bond Portfolio").
Class I shares are sold primarily to NBD and its affiliated and correspondent
banks acting on behalf of their respective customers. Class A shares are sold
to the general public primarily through financial institutions such as banks,
brokers and dealers. Class I shares are offered in a separate Prospectus.
Investors should call (800) 688-3350, a Co-Distributor or their financial
institutions if they would like to obtain more information concerning Class I
shares and/or Class A shares of the Portfolios. The following table is
provided to assist investors in understanding the various costs and expenses
that an investor will indirectly incur as a beneficial owner of Class A shares
in each of the Portfolios.
<TABLE>
<CAPTION>
Michigan
Municipal Municipal
Bond Bond
Portfolio(1) Portfolio(1)
------------ ------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed
on Purchases............................ 4.75% 4.75%
(as a percentage of offering price)
Sales Load
Imposed on Reinvested
Dividends.............................. None None
Deferred Sales Load..................... None None
Redemption Fee.............................. None None
Exchange Fee................................ None None
ANNUAL OPERATING EXPENSES
(as a percentage of average
net assets)............................
Management Fees............................. .65% .65%
12b-1 Fees(2)............................... .017% .038%
Shareholder Servicing Fees(3)............... .25% .25%
Other Expenses(4)
(before fee waivers and/or
expense reimbursements)................ .26% .352%
(after fee waivers and/or
expense reimbursements)................ .053% .002%
Total Operating Expenses
(before fee waivers and/or
expense reimbursements)................ 1.18% 1.29%
(after fee waivers and/or
expense reimbursements)................ .97% .94%
- ---------
<FN>
1. The expenses for each Portfolio have been restated to reflect
current expenses.
2. As a result of the payment of sales loads and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (the "NASD"). Rules adopted by the NASD generally limit the
aggregate sales charges and payments under the Trust's Service and
Distribution Plan
-2-
<PAGE>
("Distribution Plan") to a certain percentage of total new gross share sales,
plus interest. The Trust would stop accruing 12b-1 fees if, to the extent,
and for as long as, such limit would otherwise be exceeded.
3. The Trust has adopted a Shareholder Servicing Plan pursuant to
which the Trust may enter into agreements with institutions under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares in return for a fee of up to .25% per
annum of the value of such shares ("Servicing Fees"). For further information,
see "Shareholder Servicing Plan", "Sponsors and Co-Distributors", "Service
and Distribution Plan" and "Investment Adviser, Custodian and Transfer Agent"
under the heading "Management" in this Prospectus.
4. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
</TABLE>
<TABLE>
<CAPTION>
Michigan
Municipal Municipal
Bond Bond
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Example
You would pay the following
expenses on a $1,000
investment, assuming:
(1) a 5% annual return
and (2) redemption at the
end of each time period:
One Year........................... $ 9.94 $ 9.63
Three Years........................ 31.03 30.08
Five Years......................... 53.85 52.22
Ten Years.......................... 119.40 115.87
Example
You would pay the following
expenses on a $1.00
investment, assuming
(1) a 5% annual return,
(2) redemption at the end
of each time period and
(3) the imposition of a
maximum sales load at the
beginning of the period:
One Year:.......................... $56.97 $56.67
Three Years:....................... 77.06 76.15
Five Years:........................ 98.79 97.24
Ten Years:......................... 161.23 157.87
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
The examples demonstrate the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class A shares in each of the Portfolios,
based upon payment by the Portfolios of operating expenses at the respective
levels set forth in the expense table. For more complete descriptions of
Portfolio expenses, see "Investment Adviser, Custodian and Transfer Agent",
"Sponsors and Co-Distributors", "Shareholder Servicing Plan", "Service and
Distribution Plan" and "Trust Expenses" under the heading "Management" in this
Prospectus and the
-3-
<PAGE>
financial statements and related notes contained in the Statement of Additional
Information.
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class A
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate Servicing Fees
attributable to such shares exclusively to them. See "Shareholder Servicing
Plan" and "Investment Adviser, Custodian and Transfer Agent" under
"Management," and see "Dividends and Distributions" and "Other Information"
for a description of the impact that this may have on holders of Class A
shares.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of how each Portfolio's
net asset value has changed during the periods presented. The tables have been
derived from the Portfolios' financial statements which have been audited by
Arthur Andersen, LLP, the Trust's independent public accountants, whose report
thereon is contained in the Statement of Additional Information along with the
financial statements. The financial data included in these tables should be
read in conjunction with the financial statements and related notes included
in the Statement of Additional Information. Further information about the
performance of the Portfolios is available in annual reports to shareholders.
The Statement of Additional Information and annual reports to shareholders may
be obtained from the Trust free of charge by calling 800-688-3350.
<TABLE>
<CAPTION>
Municipal Bond Portfolio
February 1, 1993
(Commencement
Year Ended Year Ended of Operations) to
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning
of period...................... $9.59 $10.69 $10.00
Income from investment
operations:
Net investment income.......... 0.48 0.50 0.45
Net realized and unrealized
gains (losses) on
investments.................. 1.08 (1.11) 0.69
Total from investment
operations................... $1.56 $(0.61) $ 1.14
Less distributions:
From net investment
income....................... $(0.47) $(0.49) $(0.44)
From realized
gains........................ 0.00 0.00 ( 0.01)
Total distributions............ $(0.47) $(0.49) $(0.45)
Net asset value, end of
period......................... $10.68 $ 9.59 $10.69
Total return(b).................. 16.54% (5.72%) 12.69%(a)
Ratios/Supplemental Data
Net assets, end of period........ $76,963,564 $61,255,773 $54,703,974
Ratio of expenses to average
net assets..................... 0.79% 0.53% 0.19%(a)
Ratio of net investment income
to average net assets.......... 4.63% 4.94% 5.27%(a)
Ratio of expenses to average
net assets without fee
waivers/reimbursed
expenses....................... 0.93% 0.88% 1.12%(a)
Ratio of net investment income
to average net assets
without fee waivers/reimbursed
expenses....................... 4.49% 4.59% 4.34%(a)
Portfolio turnover rate.......... 20.46% 19.11% 11.12%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Michigan Municipal Bond Portfolio
February 1, 1993
(Commencement
Year Ended Year Ended of Operations) to
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning
of period...................... $9.54 $10.60 $10.00
Income from investment
operations:
Net investment income.......... 0.48 0.50 0.44
Net realized and unrealized
gains (losses) on
investments.................. 1.06 (1.06) 0.59
----------- ----------- -----------
Total from investment
operations................... $1.54 $(0.56) $ 1.03
----------- ----------- -----------
Less distributions:
From net investment
income....................... $(0.48) $(0.50) $(0.43)
From realized
gains........................ 0.00 0.00 ( 0.00)
----------- ----------- -----------
Total distributions............ $(0.48) $(0.50) $(0.43)
----------- ----------- -----------
Net asset value, end of
period......................... $10.60 $ 9.54 $10.60
=========== =========== ===========
Total return(b).................. 16.49% (5.42%) 11.50%(a)
Ratios/Supplemental Data
Net assets, end of period........ $53,453,160 $45,263,059 $42,113,795
Ratio of expenses to average
net assets..................... 0.79% 0.53% 0.19%(a)
Ratio of net investment income
to average net assets.......... 4.71% 5.01% 5.12%(a)
Ratio of expenses to average
net assets without fee
waivers/reimbursed
expenses....................... 1.04% 1.05% 1.21%(a)
Ratio of net investment income
to average net assets
without fee waivers/reimbursed
expenses....................... 4.46% 4.49% 4.10%(a)
Portfolio turnover rate.......... 26.97% 25.93% 41.70%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales
load.
</TABLE>
-6-
<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objective and
policies. However, only the Class A shares of the Municipal Bond and Michigan
Municipal Bond Portfolios are offered pursuant to this Prospectus. The
Municipal Bond Portfolio is classified as a diversified investment portfolio
and the Michigan Municipal Bond Portfolio is classified as a non-diversified
investment portfolio under the 1940 Act.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
that Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Municipal Bond Portfolio
The investment objective of the Municipal Bond Portfolio is to seek as
high a level of current income exempt from federal income tax as is consistent
with relative stability of principal. Under normal market and economic
conditions, the Portfolio seeks to achieve this objective by investing
primarily in investment grade debt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective political subdivisions, agencies,
instrumentalities and authorities, the interest on which is, in the opinion of
bond counsel for the issuers, exempt from regular federal income tax
("Municipal Securities").
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Michigan Municipal Bond Portfolio
The investment objective of the Michigan Municipal Bond Portfolio is
to seek as high a level of current income exempt from federal, and to the
extent possible, from State of Michigan income taxes as is consistent with
relative stability of principal. Under normal market and economic conditions,
the Portfolio seeks to achieve this objective by investing primarily in
investment grade debt obligations issued by the State of Michigan, its
political subdivisions, municipalities, corporations and authorities, the
interest on which is, in the opinion of bond counsel to the issuers, exempt
from federal and State of Michigan income taxes ("Michigan Municipal
Securities"). To the extent that acceptable Michigan Municipal Securities are
at any time unavailable for investment by the Portfolio, the Portfolio will
invest primarily in other Municipal Securities the interest on which is, in
the opinion of bond counsel, exempt from federal, but not State of Michigan
income taxes.
Investment Policies Applicable to the Portfolios
At least 80% of each of the Portfolios' total assets will be invested
in Municipal Securities except in extraordinary circumstances, such as when
the Adviser believes that market conditions indicate that a Portfolio should
adopt a temporary defensive position by holding uninvested cash or investing
in taxable short-term securities ("Short-Term Investments"). This policy is
fundamental with respect to each Portfolio and may not be changed without the
approval of the holders of a majority of the Portfolio's outstanding shares.
In addition, with respect to the Michigan Municipal Bond Portfolio, at least
65% of its total assets will be invested under normal market conditions in
Michigan Municipal Securities and the remainder may be invested in securities
that are not Michigan Municipal Securities and therefore may be subject to
Michigan income taxes. (See "Taxes.")
During normal market conditions each Portfolio's average weighted
portfolio maturity is expected to be between 7 and 20 years.
The Adviser manages the Portfolios based on anticipated interest rate
changes and the use of active management strategies such as sector rotation,
intra-sector adjustments and yield curve and convexity considerations. In use
of such active management strategies, the Adviser seeks value in investment
grade fixed income securities. Sector rotation involves the Adviser selecting
among different economic or industry sectors based upon apparent or relative
attractiveness. Thus at times a sector offers yield advantages relative to
other sectors. An intra-sector adjustment occurs when the Adviser determines
to select a particular issue within a sector. Yield curve considerations
involve the Adviser attempting to compare the relationship between time to
maturity and yield to maturity in order to identify the relative value in the
relationship. Convexity considerations consist of the Adviser seeking
securities that rise in price more quickly, or decline in price less quickly,
than the typical security of that price risk level and therefore enable the
Adviser to obtain an additional return when interest rates change
dramatically.
In acquiring particular portfolio securities for a Portfolio, the
Adviser will consider, among other things, historical yield relationships
between private and governmental debt securities, intermarket yield
relationships among various industry sectors, current economic cycles and the
attractiveness and creditworthiness of particular issuers. Depending upon the
Adviser's analysis of these and other factors, a Portfolio's holdings of
issues in particular industry sectors may be overweighted when compared to the
relative industry weightings in related recognized indices. The value of the
Portfolios can be expected to vary inversely with changes in prevailing
interest rates.
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OTHER INVESTMENT POLICIES
Ratings
Municipal Securities acquired by the Municipal Bond and Michigan
Municipal Bond Portfolios will be investment grade at the time of purchase,
i.e., obligations rated AAA, AA, A or BBB by Standard & Poor's Rating Group,
Division McGraw Hill ("S&P"), Fitch Investors Service ("Fitch"), Duff & Phelps
Credit Co. ("Duff") or IBCA, Inc. ("IBCA") or Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's") (each a "Rating Agency") in the case of
bonds, rated SP-2 or higher by S&P, MIG-2 or higher by Moody's or F-2 or
higher by Fitch, in the case of notes, rated A-2 or higher by S&P, Prime-2 or
higher by Moody's, F-2 or higher by Fitch or A2 or higher by IBCA, in the case
of tax-exempt commercial paper or VMIG or higher by Moody's in the case of
variable demand notes, or be unrated but deemed by the Adviser to be
comparable in quality at the time of purchase to instruments that are so
rated. Obligations rated in the lowest of the top four rating categories (Baa
by Moody's, BBB by S&P or Fitch or IBCA) are considered to have less capacity
to pay interest and repay principal and have certain speculative
characteristics. In the event that the rating of a security held by the
Municipal Bond or Michigan Municipal Bond Portfolios is reduced below Baa or
Moody's, BBB by S&P, BBB by Fitch or BBB by IBCA, the security will be
disposed of in an orderly fashion as soon as possible. The debt ratings are
described in the Statement of Additional Information.
Short-Term Investments
Each Portfolio may hold short-term U.S. Government obligations, "high
quality" money market instruments such as certificates of deposit, bankers'
acceptances and time deposits (i.e. those rated at the time of purchase within
the two highest rating categories or which are unrated at such time but are
deemed by the Adviser to be of comparable quality), repurchase agreements,
reverse repurchase agreements, commercial paper, notes, other short-term
obligations, variable rate master demand notes, and cash, pending investment,
to meet anticipated redemption requests or if, in the opinion of the Adviser,
suitable bonds or other fixed-income securities in which the Portfolios invest
are unavailable. Such investments may be in such proportions as, in the
opinion of the Adviser, existing circumstances may warrant, and may include
obligations of foreign banks and foreign branches of U.S banks. The Portfolios
may also invest their cash balances in securities issued by other investment
companies which invest in high-quality, short-term debt securities. These
short-term investments are described in greater detail in the Statement of
Additional Information.
U.S. Government Obligations
Each Portfolio may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. The Portfolios may also invest in interests in the
foregoing securities, including collateralized mortgage obligations guaranteed
by a U.S. Government agency or instrumentality, and in Government-backed
trusts which hold obligations of foreign governments that are guaranteed or
backed by the full faith and credit of the United States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the
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full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Municipal and Related Securities
Municipal Securities may include general obligations, revenue
obligations, notes, and moral obligation bonds. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue obligations are payable only
from the revenues derived from a particular facility, class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source such as the user of the facility being financed. Private activity bonds
(i.e. bonds issued by industrial development authorities) are in most cases
revenue securities and are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of a private activity bond is usually
directly related to the credit standing of the private user of the facility
involved. Although interest paid on private activity bonds is exempt from
regular federal income tax, it may be treated as a specific tax preference
item under the federal alternative minimum tax. (See "Taxes") Notes are
short-term instruments which are obligations of the issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Moral obligation bonds are normally issued by a
special purpose public authorities. If the issuer of a moral obligation bond
is unable to met its debt service obligations from current revenues, it may
draw on a reserve fund, the restoration of which is a moral commitment but not
a legal obligation of the state or municipality which created the issuer.
Municipal Securities also include municipal lease/purchase agreements which
are similar to installment purchase contracts for property or equipment issued
by municipalities. The Adviser will only invest in rated municipal
lease/purchase agreements.
There are, of course, variations in the quality of Municipal
Securities both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue.
Among other securities, the Portfolios may purchase short-term Tax
Anticipation Notes. Bond Anticipation Notes, Revenue Anticipation Notes, and
other forms of short-term loans. Such notes are issued with a short-term
maturity in anticipation of the receipt of tax or other funds, the proceeds of
bonds or other revenues. The Portfolios may also acquire zero coupon
obligations, which have greater price volatility than coupon obligations and
which will not result in the payment of interest until maturity.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to
Michigan Municipal Securities, Michigan income taxes) are rendered by bond
counsel to the respective issues at the time of issuance. Neither the
Portfolios nor the Adviser will review the proceedings relating to the
issuance of Municipal Securities or the bases for such opinions.
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Variable and Floating Rate Municipal Securities
Municipal Securities purchased by the Portfolios may include rated and
unrated variable and floating rate tax-exempt instruments. There may be no
active secondary market with respect to a particular variable or floating rate
instrument. Nevertheless, the periodic readjustments of their interest rates
tend to assure that their value to a Portfolio will approximate their par
value. Illiquid variable and floating rate instruments (instruments which are
not payable upon seven days' notice and do not have an active trading market)
that are acquired by the Portfolios are subject to the 10% limit described
under "Investment Limitations" in this Prospectus.
Repurchase and Reverse Repurchase Agreements
To increase its income, each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). No Portfolio will enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Portfolio may also obtain funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of a particular Portfolio exceeds one-third of the value of its total assets.
Loans of securities involve risks of delay in receiving additional collateral
or in recovering the securities loaned or possible loss of rights in the
collateral should the borrower of the securities become insolvent. Loans will
be made only to borrowers that provide the requisite collateral comprised of
liquid assets and when, in the Adviser's judgment, the income to be earned
from the loan justifies the attendant risks.
Securities of Other Investment Companies
Within the limits prescribed by the 1940 Act, each Portfolio may
invest in securities issued by other investment companies which invest in high
quality, short-term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method. As a
shareholder of another investment company, a Portfolio would bear, along with
other shareholders, its pro rata portion of the other investment company's
expenses, including advisory fees. These expenses would be in addition to the
advisory and other expenses that each Portfolio bears directly in connection
with its own operations.
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Custodial Receipts and Certificates of Participation
Securities acquired by the Portfolios may be in the form of custodial
receipts evidencing rights to receive a specific future interest payment,
principal payment or both on certain Municipal Securities. Such securities are
held in custody by a bank on behalf of holders of the receipts. These
custodial receipts are known by various names, including "Municipal Receipts,"
"Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-CATs") and
"Municipal Zero-Coupon Receipts." The Portfolios may also purchase from time
to time certificates of participation that, in the opinion of counsel to the
issuer, are exempt from federal income tax. A certificate of participation
gives a Portfolio an undivided interest in a pool of Municipal Securities.
Certificates of participation may have fixed, floating or variable rates of
interest. If a certificate of participation is unrated, the Adviser will have
determined that the instrument is of comparable quality to those instruments
in which a Portfolio may invest pursuant to guidelines approved by the Board
of Trustees. For certain certificates of participation, a Portfolio will have
the right to demand payment, on not more than 30 days' notice, for all or any
part of such Portfolio's participation interest, plus accrued interest. As to
these instruments, each Portfolio intends to exercise its right to demand
payment as needed to provide liquidity, to maintain or improve the quality of
its investment portfolio or upon a default (if permitted under the terms of
the instrument).
Illiquid Securities
In accordance with their fundamental investment limitation described
below, the Portfolios will not knowingly invest more than 10% of the value of
their respective total assets in securities that are illiquid. Securities
having legal or contractual restrictions on resale or no readily available
market, and instruments (including repurchase agreements, variable and
floating rate instruments and time deposits) that do not provide for payment
to the Portfolios within seven days after notice are subject to this 10%
limit. Securities that have legal or contractual restrictions on resale but
have a readily available market are not deemed to be illiquid for purposes of
this limitation.
The Portfolios may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop. The Board of Trustees will carefully monitor any
investments by a Portfolio in these securities.
Borrowings
The Portfolios may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolios would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities
it is obligated to repurchase.
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Options
Each Portfolio may purchase and sell put and call options listed on a
national securities exchange and issued by the Options Clearing Corporation
for hedging purposes. Such transactions may be effected on a principal basis
with primary reporting dealers in U.S. Government securities in an amount not
exceeding 5% of a Portfolio's net assets, as described further in the
Statement of Additional Information. Such options may relate to particular
securities or to various bond indices. Purchasing options is a specialized
investment technique which entails a substantial risk of a complete loss of
the amounts paid as premiums to the writer of the option.
A Portfolio may purchase and sell put options on portfolio securities
at or about the same time that they purchase the underlying security or at a
later time. By buying a put, a Portfolio limits its risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by a Portfolio in order to acquire the underlying security at a
later date at a price that avoids any additional cost that would result from
an increase in the market value of the security. A Portfolio may also purchase
call options to increase its return to investors at a time when the call is
expected to increase in value due to anticipated appreciation of the
underlying security. Prior to its expiration, a purchased put or call option
may be sold in a closing sale transaction (a sale by a Portfolio, prior to the
exercise of an option that it has purchased, of an option of the same series),
and profit or loss from the sale will depend on whether the amount received is
more or less than the premium paid for the option plus the related transaction
costs.
In addition, each Portfolio may write covered call and secured put
options. A covered call option means that a Portfolio owns or has the right to
acquire the underlying security subject to call at all times during the option
period. A secured put option means that a Portfolio 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. Such options will be listed on a national securities exchange and
issued by the Options Clearing Corporation and may be effected on a principal
basis with primary reporting dealers in U.S. Government securities. The
aggregate value of the securities subject to options written by a Portfolio
will not exceed 25% of the value of its net assets. In order to close out an
option position prior to maturity, a Portfolio may enter into a "closing
purchase transaction" by purchasing a call or put option (depending upon the
position being closed out) on the same security with the same exercise price
and expiration date as the option which it previously wrote.
By writing a covered call option, a Portfolio forgoes the opportunity
to profit from an increase in the market price of the underlying security
above the exercise price except insofar as the premium represents such a
profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Portfolio effects a closing purchase
transaction by purchasing an option of the same series. If a Portfolio writes
a secured put option, it assumes the risk of loss should the market value of
the underlying security decline below the exercise price of the option. The
use of covered call and secured put options will not be a primary investment
technique of the Portfolios.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
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When-Issued Purchases and Forward Commitments
The Portfolios may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. Each Portfolio's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolios do not earn income with
respect to these transactions until the subject securities are delivered to
the Portfolios. The Portfolios do not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of their investment objectives.
Risk Factors Associated with Derivative Instruments
The Portfolios may purchase certain "derivative" instruments such as
options, and various float rate investments. "Derivative" instruments are
instruments that derive value from the performance of underlying assets,
interest or currency exchange rates, or indices, and include (but are not
limited to) futures contracts, options and structured debt obligations
(including collateralized mortgage obligations and various floating rate
instruments.)
Derivative instruments present, to varying degrees, market risk that
the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterpart to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the "derivative"
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Portfolio will be unable to sell a "derivative"
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a "derivative" instrument (such as an option)
will not correlate exactly to the value of the underlying assets, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
"derivative" instruments are more complex than others, and for those
instruments that have been developed recently, data are lacking regarding
their actual performance over complete market cycles.
The Adviser will evaluate the risks presented by the "derivative"
instruments purchased by the Portfolios, and will determine, in connection
with its day-to-day management of the Portfolios, how they will be used in
furtherance of the Portfolios' investment objectives. It is possible, however,
that the Adviser's evaluations will prove to be inaccurate or incomplete and,
even when accurate and complete, it is possible that the Portfolios will,
because of the risks discussed above, incur loss as a result of their
investments in "derivative" instruments.
Special Risk Considerations Applicable to the Michigan Municipal
Bond Portfolio
The Michigan Municipal Bond Portfolio will under normal market
conditions consist of Michigan Municipal Securities to the extent of 65% or
more of its total assets. This concentration in securities issued by
governmental units of only one state exposes the Portfolio to risk of loss
greater than that of a more diversified portfolio holding securities issued by
governmental units of different states and different regions of the country.
Moreover, the economy of the State of Michigan is heavily dependent
upon the automobile manufacturing industry. This industry is highly cyclical.
This
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factor affects the revenue streams of the State of Michigan and its political
subdivisions because it impacts on tax sources, particularly sales taxes,
income taxes and Michigan single business taxes.
A state economy during a recessionary cycle would also, as a separate
matter, adversely affect the capacity of users of facilities constructed or
acquired through the proceeds of private activity bonds or other "revenue"
securities to make periodic payments for the use of those facilities.
The heavy concentration of the Michigan Municipal Bond Portfolio in
Michigan Municipal Securities and the cyclical nature of the economy of the
State of Michigan may adversely affect the liquidity of the Portfolio.
In 1993 and 1994, Michigan adopted complex statutory and
constitutional changes which, among several other changes in tax methods and
rates, have the effect of imposing limits on annual assessment increases and
of transferring a significant part of the operating cost of public education
from locally based property tax sources to state based sources, including
increased sales tax. These changes will affect state and local revenues of
Michigan governmental units in future years in differing ways, not all of
which can be presently known with certainty.
Portfolio Turnover
Although it may vary from year to year, it is currently estimated that
under normal market conditions the annual portfolio turnover rate for a
Portfolio will not exceed 100%. A Portfolio's annual portfolio turnover rate
will not, however, be a factor preventing a sale or purchase when the Adviser
believes investment considerations warrant such sale or purchase. Portfolio
turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover rates generally result in higher transaction
costs to a Portfolio.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
investment limitations that cannot be changed without a vote of shareholders
are contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
2. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. No Portfolio will
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with a Portfolio's
investment practices described in the Statement of
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Additional Information or in its Prospectus are not deemed to be pledged for
purposes of this limitation.
3. Invest more than 10% of its total assets in illiquid investments.
See "Illiquid Securities" above.
4. Purchase the securities of issuers conducting their principal
business activity in the same industry if immediately after such purchase the
value of a Portfolio's investments in such industry would exceed 25% of the
value of its total assets, provided that (a) utilities will be divided
according to their services, wholly-owned finance companies will be considered
to be in the industries of their parents if their activities are primarily
related to financing the activities of their parents, the personal credit and
business credit businesses will be considered separate industries and (b)
there is no limitation with respect to or arising out of investments in
Municipal Securities (other than private activity bonds), or obligations
issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities or repurchase agreements secured by any of the foregoing.
In addition, the Municipal Bond Portfolio may not purchase securities
of any one issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, immediately after such
purchase, more than 5% of the value of a Portfolio's total assets would be
invested in the securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by a Portfolio, except that up to
25% of the value of the Portfolio's total assets may be invested without
regard to theses limitations.
In addition, the Michigan Municipal Bond Portfolio may not with
respect to 50% of its total assets, invest more than 5% of its assets in
securities of any one issuer, except U.S. Government obligations or securities
of other regulated investment companies.
For purposes of the Investment Limitation above applicable to the
Municipal and Michigan Municipal Bond Portfolios, (i) a security is considered
to be issued by the governmental entity (or entities) whose assets and
revenues back the security, or with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental user, a security
is considered to be issued by such non-governmental user; (ii) in certain
circumstances, the guarantor of a guaranteed security may also be considered
to be an issuer in connection with such guarantee; and (iii) U.S. Governmental
obligations (including securities backed by the full faith and credit of the
United States) are deemed to be U.S. Government obligations for purposes of
the 1940 Act.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Portfolio's portfolio securities will not constitute
a violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of a Portfolio's shares in certain states,
the Portfolios may make commitments more restrictive than the investment
policies and limitations described above. Should a Portfolio determine that
any such commitment is no longer in the best interests of the Portfolio, it
will revoke the commitment by terminating sales of its shares in the state
involved.
PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243.
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Essex is a registered broker/dealer with offices at 215 Gateway Road West,
Napa, California 94558.
Class A shares are sold to the public primarily through financial
institutions such as banks, brokers and dealers. Investors may purchase Class
A shares directly in accordance with the procedures set forth below or through
procedures established by their financial institutions in connection with the
requirements of their accounts.
Financial institutions may impose different minimum investment and
other requirements on their customers and may charge additional fees in
connection with the establishment of accounts with the institutions and
purchase and redemption of Portfolio shares. Persons wishing to purchase
Portfolio shares through their accounts at an institution or a Co-Distributor
should contact the institution or Co-Distributor directly for appropriate
instructions and fee information. In addition, certain financial institutions
may enter into shareholder servicing agreements with the Trust whereby they
would perform various administrative support services for their customers who
are the beneficial owners of Portfolio shares in return for fees from the
Portfolios. See "Shareholder Servicing Plan" under the heading "Management" in
this Prospectus.
All shareholders of record will receive confirmations of share
purchases and redemptions. Class A shares purchased by institutions on behalf
of their customers will normally be held of record by them. Institutions will
record their customers' beneficial ownership of such shares and provide
regular account statements reflecting such beneficial ownership.
Institutions will be responsible for transmitting purchase and
redemption orders to FoM, Essex or NBD acting as transfer agent ("the Transfer
Agent") on a timely basis, in accordance with the procedures stated below.
Purchase Procedures
The minimum initial investment is $1,000, except for purchases through
an institution whose customers have invested an aggregate minimum of $1,000 or
for investments made through a Co-Distributor's or an institution's sweep
privilege and the Trust's Automatic Investment Plan described below. The
minimum subsequent investment is $100, except for reinvested dividends or as
otherwise described below. The Trust reserves the right to reject any purchase
order.
Orders for Class A shares may be placed by telephone by calling (800)
688-3350 (provided an investor has made the appropriate election in his
account application) or by mail (by completing the account application which
accompanies this Prospectus and mailing the completed form and the payment for
shares to FoM, Essex or the Transfer Agent). All checks must be drawn on a
bank located within the United States and must be payable in U.S. dollars.
Subsequent investments in an existing account in a Portfolio may be made at
any time by sending a check or money order along with either (a) the
detachable form that regularly accompanies the Trust's confirmation of a prior
transaction, (b) a subsequent order form which may be obtained from the Trust,
or (c) a letter stating the amount of the investment, the name of the
Portfolio and the account number in which the investment is to be made. If any
check used for investment in an account does not clear, the order will be
cancelled and notice thereof will be given; in such event the account will be
responsible for any loss to the Trust as well as a $15 fee imposed by the
Transfer Agent.
With the exception of customers of FoM, Class A shares may also be
paid for by wiring federal funds to the Transfer Agent, NBD Bank, ABA
072000326, for the account of The Woodward Funds, Account Number GL 325612,
and identifying the customer name and account number. Before wiring payment,
customers should notify the Transfer Agent by calling (800) 688-3350.
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If customers of FoM wire payment in federal funds, they should direct
payment to NBD Bank, ABA 072000326, for the account of First of Michigan
Corporation re: The Woodward Funds, Account Number 059-41, and should identify
the customer name and account number. Before wiring payment, customers of FoM
should call FoM at (800) 544-8275 (outside Michigan) or (800) 852-7730 (within
Michigan).
Purchase orders which are accompanied by payment (by check or wire
transfer) and received by the Transfer Agent in proper form on a Business Day
(as defined below) prior to the close of the New York Stock Exchange are
priced at the public offering price (i.e. net asset value plus the applicable
sales load set forth below) of the particular Portfolio determined on that
Business Day. Purchase orders which are received by the Transfer Agent after
the close of trading on the Exchange on a Business Day or on non-Business Days
will be executed as of the determination of net asset value on the next
Business Day.
The Trust will not accept payment in cash or third party checks for
the purchase of shares. Federal regulations require that each investor provide
a certified taxpayer identification number upon opening or reopening an
account. Applications without a taxpayer identification number will not be
accepted. See the account application for further information about this
requirement.
Net Asset Value and Pricing of Shares
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 5:00 p.m. Eastern
time on each day on which the New York Stock Exchange ("Exchange") and NBD
Bank or its bank affiliates are open for business. Currently, one or both of
these institutions are closed on the customary national business holidays of
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day (observed), Independence Day, Labor Day, Columbus Day (observed),
Veterans' Day, Thanksgiving Day and Christmas Day ("Business Day").
During those business days on which the Exchange closes prior to the
close of its regular trading hours (currently 4:00 p.m. Eastern time)
("Early Closing Time"), the net asset value of each Portfolio will be
determined and its shares will be priced as of such Early Closing Time. Net
asset value per Class A share of a Portfolio is calculated by dividing
the value of all securities and other assets belonging to the Portfolio
allocable to that Class A, less the liabilities charged to that Class A,
by the number of the outstanding shares of such Class A.
Securities held by the Portfolios traded only on over-the-counter
markets and securities for which there were no transactions are valued at the
average of the current bid and asked prices. Securities for which accurate
market quotations are not readily available, and other assets are valued at
fair value by the Adviser under the supervision of the Board of Trustees.
Securities may be valued on the basis of prices provided by independent
pricing services when the Adviser believes such prices reflect the fair market
value of such securities. The prices provided by pricing services take into
account institutional size trading in similar groups of securities and any
developments related to specific securities.
PUBLIC OFFERING PRICE
The public offering price for Class A shares of the Portfolios is the
sum of the net asset value per share of the Class A shares being purchased
plus a sales load as follows:
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<TABLE>
<CAPTION>
Total Sales Load Reallowance to Institutions
-------------------------------- ---------------------------
As a % of As a % of As a % of
offering price net asset value offering price
Amount of Transaction per share per share per share
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $49,999.......................... 4.75 4.99 4.25
$50,000 to $99,999......................... 4.25 4.44 3.75
$100,000 to $249,999....................... 3.50 3.63 3.00
$250,000 to $499,999....................... 2.50 2.56 2.00
$500,000 to $999,999....................... 2.00 2.04 1.75
$1,000,000 and over........................ .00 .00 .00
</TABLE>
The sales load described above will not be applicable to purchases of
Class A shares by: (1) any bank, trust company or other institution acting on
behalf of its fiduciary customer accounts or any other account maintained by
its trust department; (2) any individual, trust, corporation or other person
where the shares are acquired in connection with the distribution of assets
held in any account referred to in (l) above with NBD or its affiliates; (3)
individual retirement accounts maintained by the trust division of NBD or of
its affiliates; (4) current and retired directors, officers and employees of
NBD or any of its affiliates; (5) the trustees, former trustees and officers
of the Trust; (6) broker/dealers which have entered into an agreement with a
Co-Distributor or the Trust pursuant to the Trust's Service and Distribution
Plan or Shareholder Servicing Plan and their representatives purchasing for
their own accounts; and (7) spouses, children, grandchildren, siblings,
parents, grandparents and in-laws of individuals referred to in paragraphs
(4), (5) and (6) above. An application to qualify for such purchases of Class
A shares (an "NAV Account Application") may be obtained from the Transfer
Agent by calling (800) 688-3350. In addition, no sales load is charged on the
reinvestment of dividends or distributions, or in connection with certain
share exchanges described below under "Shareholder Services -- Exchange
Privilege." The Trust may terminate any exemption from the sales load by
providing notice in the Prospectus, but any such termination would only affect
future purchases of Class A shares. The reallowance to institutions may be
changed from time to time.
From time to time, the Co-Distributors, at their expense, may offer
additional promotional incentives to dealers.
Quantity Discounts
An investor may be entitled to reduced sales charges through Rights of
Accumulation, a Letter of Intent or a combination of investments, even if the
investor does not wish to make an investment of a size that would normally
qualify for a quantity discount.
An investor must notify his institution or the Transfer Agent at the
time of purchase whenever a quantity discount applies. Upon such notification,
the investor will receive the lowest applicable sales charge. Quantity
discounts may be modified or terminated at any time and are subject to
confirmation of an investor's holdings. For more information about quantity
discounts, an investor should contact his institution or call (800) 688-3350.
Right of Accumulation. A reduced sales load applies to any purchase of
Class A shares of the Portfolios and any other portfolio which is currently
offered or may be offered in the future by the Trust that is sold with a sales
load ("Eligible Portfolios") where an investor's then current aggregate
investment is $50,000 or more. "Aggregate investment" means the total of: (a)
the dollar amount of the then current purchase; and (b) the value (based on
current net asset value) of Class A shares of Eligible Portfolios on which a
sales load has been paid (including shares acquired through reinvestment of
dividends or distributions on shares that were subject to a sales load). If,
for example, an investor beneficially owns Class A shares of a Portfolio with
an
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aggregate current value of $49,500 and subsequently purchases additional Class
A shares having a current value of $1,000, the load applicable to the
subsequent purchase would be reduced to 4.25% of the offering price.
Similarly, with respect to each subsequent investment, the current value of
all Class A shares of Eligible Portfolios that are beneficially owned by the
investor at the time of investment may be combined to determine the applicable
sales load.
Letter of Intent. By signing a Letter of Intent form (available from
his institution or the Transfer Agent) an investor becomes eligible for the
reduced sales load applicable to the total number of Eligible Portfolio Class
A shares purchased in a thirteen-month period (net of redemptions) pursuant to
the terms and under the conditions set forth in the Letter of Intent. To
compute the applicable sales load, the offering price of Class A shares an
investor beneficially owns (on the date of submission of the Letter of Intent)
in any Eligible Portfolio that may be used toward "Right of Accumulation"
benefits described above may be used as a credit toward completion of the
Letter of Intent. However, the reduced sales load will be applied only to new
purchases.
The Transfer Agent will hold in escrow Class A shares equal to the
amount indicated in the Letter of Intent for payment of a higher sales load if
an investor does not purchase the full amount specified in the Letter of
Intent. The escrow will be released when an investor fulfills the terms of the
Letter of Intent by purchasing the specified amount. If total purchases within
the thirteen-month period of the Letter of Intent exceed the amount specified,
an adjustment will be made in the form of additional Class A shares credited
to the shareholder's account to reflect further reduced sales charges
applicable to such purchases. If total purchases are less than the amount
specified, an investor will be requested to remit an amount equal to the
difference between the sales load actually paid and the sales load applicable
to the total purchases. If such remittance is not received within thirty days,
the Transfer Agent, as attorney-in-fact pursuant to the terms of the Letter
of Intent, will redeem an appropriate number of Class A shares held in escrow
to realize the difference. Signing a Letter of Intent does not bind an
investor to purchase the full amount indicated at the sales load in effect at
the time of signing, but an investor must complete the intended purchase to
obtain the reduced sales load.
Qualification for Discounts. For the purpose of applying the Right of
Accumulation and Letter of Intent privileges described above, the scale of
sales loads applies to the combined purchases made by any individual and/or
spouse purchasing securities for his, her or their own account or for the
account of any minor children under the Uniform Gifts to Minors Act or the
Uniform Transfers to Minors Act, or the aggregate investments of a trustee or
custodian of any qualified pension or profit sharing plan or IRA established,
or the aggregate investment of a trustee or other fiduciary, for the benefit
of the persons listed above.
REDEMPTION OF SHARES
In General
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption in
accordance with the procedures set forth below.
Redemption orders must be placed with or through the same financial
institution that placed the original purchase order. It is the responsibility
of the financial institutions to transmit redemption orders to the Transfer
Agent. Redemption proceeds are paid by check or credited to the investor's
account with his financial institution. Investors who purchased shares
directly from the Trust should follow the redemption procedures set forth
below.
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Redemption Procedures
A shareholder of record may redeem shares in any amount by calling
(800)688-3350 (provided he has made the appropriate election in his account
application) or by sending a written request to The Woodward Funds, c/o NBD
Bank, P.O. Box 7058, Troy, Michigan 48007-7058. Written requests to redeem
shares having a net asset value of more than $50,000 must have all signatures
of the registered owner(s) or their authorized legal representative guaranteed
by a commercial bank or trust company which is a member of the Federal Reserve
System or FDIC, a member firm of a national securities exchange or a savings
and loan association. A signature guaranteed by a savings bank or notarized by
a notary public is not acceptable. A signature guarantee will also be required
for a redemption request (in any amount) if the address of record for the
account has been changed within the previous 15 days or which requests that
the proceeds be paid to an account other than the one preauthorized on the
application, a payee or payees other than the registered owners of the
account, or an address other than the address of record. The Trust may require
additional supporting documents for redemptions made by corporations,
fiduciaries, executors, administrators, trustees, guardians and institutional
investors.
Redemption orders for Class A shares may be placed through an
institution or directly by telephone by calling (800)688-3350. During periods
of unusual economic or market changes, telephone redemptions may be difficult
to implement. In such event, shareholders should mail their redemption
requests to their financial institutions or The Woodward Funds, c/o NBD Bank,
at the address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (including,
but not limited to, the name in which an account is registered, the account
number, or recent transactions in the account). To the extent that the Trust
and its Transfer Agent fail to use reasonable procedures to verify the
genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
Other Redemption Information
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities Exchange Act of
1934 after receipt by the Transfer Agent of a request in proper form. If
shares to be redeemed were purchased by check, the Trust will transmit the
redemption proceeds promptly upon clearance of such check, which could take up
to fifteen days from the purchase date. A shareholder having purchased shares
by wire must have filed an account application before any redemption requests
can be honored.
Currently, the Trust imposes no charge when shares are redeemed.
However, institutions may charge a fee for providing services in connection
with investments in Portfolio shares; NBD currently charges $16 for wire
transactions. The Trust reserves the right to redeem accounts involuntarily,
after sixty days' notice, if redemptions cause the account's net asset value
to remain at $1,000 or less. Under certain circumstances, the Trust may make
payment for redemption in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800)688-3350 or an investor's institution.
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SHAREHOLDER SERVICES
The shareholder services and privileges under this heading may not be
available to certain clients of particular financial institutions, and some
may impose conditions on their clients that are different from those described
below. investors should consult their own financial institutions in this
regard. Other investors should direct any questions to the Transfer Agent. The
Trust may modify or terminate any of the following services and privileges at
any time.
Exchange Privilege
Investors may exchange Class A shares which have been owned for at
least thirty days of the Municipal Bond and Michigan Municipal Bond
Portfolios, of the Woodward Intermediate Bond, Bond, Short Bond, Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International
Equity Funds and of other investment portfolios of the Trust which may be
offered in the future and sold with a sales charge (each a "load portfolio")
and Class A shares which have been owned for at least thirty days of the
Woodward Equity Index, Money Market, Government, Treasury Money Market,
Tax-Exempt Money Market and Michigan Tax-Exempt Money Market Funds and of
other investment portfolios of the Trust which may be offered in the future
and sold without a sales charge (each a "no load portfolio"). The cost of the
acquired Class A shares will be their net asset value plus the applicable
sales load, if any.
With respect to exchanges between load portfolios other than exchanges
involving the Woodward Short Bond Fund, no additional sales load will be
payable, provided that the investor previously paid a sales load upon the
acquisition of Class A shares of a load Portfolio. Investors exchanging Class
A shares of the Woodward Short Bond Fund will be required to pay the
difference between the sales load previously paid and the sales load
applicable on the Class A shares being acquired in the exchange, unless the
investor's holding of Class A shares of the Woodward Short Bond Fund resulted
from a previous exchange of Class A shares with respect to which the investor
had paid a higher sales load.
Exchanges of Class A shares of a load portfolio for Class A shares of
a no load portfolio and exchanges of Class A shares of a no load portfolio for
Class A shares of another no load portfolio will not be subject to the payment
of a sales load.
Any exchange of Class A shares of a no load portfolio for Class A
shares of a load portfolio will be subject to the payment of the applicable
sales load, unless the investor is exchanging shares of a no load portfolio
which were received in a previous exchange transaction involving Class A
shares of a load portfolio. In such case, the investor will receive a credit
for any sales load previously paid and no additional sales load will be
payable, except as noted above with respect to the Woodward Short Bond Fund.
Shareholders contemplating an exchange should carefully review the Prospectus
of the portfolio into which the exchange is being considered. The Prospectus
for any portfolio of the Trust may be obtained from an investor's financial
institution or from the Transfer Agent by calling (800) 688-3350.
Exchanges will be effected by a redemption of Class A shares of the
portfolio held and the purchase of Class A shares of the portfolio acquired.
investors should make their exchange requests in writing or by telephone to
the financial institutions through which they purchased their original Class A
shares. It is the responsibility of financial institutions to transmit
exchange requests to the Transfer Agent. Other investors should transmit
exchange requests directly to the Transfer Agent. The total value of shares
being exchanged must at least equal the minimum investment requirement of the
portfolio whose shares are being acquired in the exchange. Only one exchange
in any thirty-day period is permitted and only shares that may be legally sold
in the
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state of the investor's residence may be acquired in an exchange. The Trust
reserves the right to reject any exchange request.
Investors wishing to make an exchange should contact their
institutions or the Transfer Agent (as appropriate). Exchange requests in the
required form which are received by the Transfer Agent prior to 4:00 p.m.,
Eastern time, will be effected on the same Business Day after such request is
received. Requests received after 4:00 p.m., Eastern time, will be effected on
the next Business Day after such request is received. During periods of
significant economic or market change, telephone exchanges may be difficult to
complete. In such event, an investor should mail the exchange request to his
financial institution or the Transfer Agent. Neither the Trust nor the
Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Trust and
its Transfer Agent will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to
account registration (including, but not limited to, the name in which an
account is registered, the account number, or recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions,
they may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to modify or
terminate its exchange procedures upon sixty days' notice to shareholders.
Reinvestment Privilege
Class A shares of a Portfolio may be purchased at net asset value by
persons who have redeemed within the previous 120 days their Class A shares of
that Portfolio or another investment portfolio of the Trust which were
purchased with a sales load. The amount which may be so reinvested is limited
to an amount up to the redemption proceeds. In order to exercise this
privilege, a written order for the purchase of Class A shares of the Portfolio
must be received by the Transfer Agent within 120 days after the redemption.
Reinvestment will be at the next calculated net asset value after receipt.
Option to Make Systematic Withdrawals
The Trust has available to shareholders a Systematic Withdrawal Plan
pursuant to which a shareholder who owns Class A shares of any investment
portfolio having a minimum value of $15,000 at the time he elects under the
Plan may have a fixed sum distributed in redemption at regular intervals. An
application form and additional information regarding this service may be
obtained from an investor's financial institution or the Transfer Agent by
calling (800)688-3350.
Automatic Investment
The Trust offers an Automatic Investment Plan (the "Plan") whereby a
shareholder may automatically purchase Class A shares on a regular basis in
accordance with an election in his account application. An application may be
obtained from the Transfer Agent by calling (800)688-3350. Under the Plan a
shareholder's financial institution debits a pre-authorized amount from his
account and applies the amount to the purchase of Class A shares. The minimum
per transaction is $25. The minimum initial investment in a Portfolio is also
$25 for the following shareholders who elect the Plan: (1) current and retired
directors, officers and employees of NBD or any of its affiliates; (2) the
trustees, former trustees and officers of the Trust; (3) broker/dealers which
have entered into an agreement with a Co-Distributor or the Trust pursuant to
the Trust's Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (4) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in (1),
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(2) and (3) above. An NAV Account Application may be obtained from the
Transfer Agent by calling (800)688-3350. The Plan can be implemented with any
financial institution that is a member of the Automated Clearing House. No
service fee is currently charged by the Trust for participating in the Plan.
Death or legal incapacity will terminate a shareholder's participation in the
Plan. Deposits, withdrawals and adjustments will be made electronically under
the rules of the Automated Clearing House Association.
Cross Reinvestment of Dividend Plan
The Trust makes available to shareholders a Cross Reinvestment of
Dividend Plan (the "Plan") pursuant to which a shareholder who owns Class A
shares of any portfolio with a minimum value of $10,000 at the time he elects
under the Plan may have dividends paid by such portfolio automatically
reinvested into Class A shares of another portfolio in which he has invested a
minimum of $1,000. Shareholders may obtain an application and additional
information from their institutions or the Transfer Agent by calling
(800)688-3350.
Direct Deposit Program
If an investor receives federal salary, social security, or certain
veteran's, military or other payments from the federal government or elects to
use his employer's payroll deposit program, he is eligible for the Direct
Deposit Program. With this Program, an investor may purchase Class A shares
(minimum of $25) by having these deposits automatically deposited into his
Portfolio account. For instructions on how to enroll in the Direct Deposit
Program, an investor should call his institution or the Transfer Agent. Death
or legal incapacity will terminate an investor's participation in the Program.
An investor may elect at any time to terminate his participation by notifying
in writing the appropriate federal agency. Further, the Trust may terminate an
investor's participation upon thirty days' notice to him.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance and yield of each class of shares of the Portfolios may be
compared to the performance of other mutual funds with similar investment
objectives and to bond or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, performance and yield may be
compared to data prepared by Lipper Analytical Services, Inc. Performance and
yield data as reported in national financial publications such as Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times, or
in publications of a local or regional nature, may also be used in comparing
the performance of a Portfolio.
Yield refers to the income generated by an investment in a class of
shares of a Portfolio over a thirty-day period identified in the
advertisement. This income is then "annualized," i.e., the income generated by
the investment during the thirty-day period is assumed to be earned and
reinvested at a constant rate and compounded semi-annually. The annualized
income is then shown as a percentage of the investment.
The Portfolios calculate their total returns on an "average annual
total return" basis for various periods from the date they commenced
investment operations and for other periods as permitted under the rules of
the SEC. Average annual total return of a class reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns may also be calculated on an "aggregate total return
basis" for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return also reflect changes in the price of the shares and
assume that any dividends and capital gain
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distributions made by the class during the period are reinvested in shares of
the class. When considering average total return figures for periods longer
than one year, it is important to note that a Class' annual total return for
any one year in the period might have been greater or less than the average
for the entire period.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. The
investment return and principal value of an investment in a class will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Performance data should also be considered
in light of the risks associated with a Portfolio's portfolio composition,
quality, maturity, operating expenses and market conditions. Any fees charged
by financial institutions directly to their customer accounts in connection
with investments in shares will not be reflected in performance calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly by
each Portfolio. Each Portfolio's net realized capital gains are distributed at
least annually.
Dividends and distributions will reduce a class' net asset value by
the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested (without any sales charge) in additional Class A
shares of the same Portfolio at their net asset value per share determined on
the payment date, unless the holder has notified the Transfer Agent in writing
that he elects to have dividends or capital gain distributions (or both) paid
in cash. Shareholders must make such election, or any revocation thereof, in
writing to their financial institutions or Transfer Agent. The election will
become effective with respect to dividends paid after its receipt by the
Transfer Agent. If an account is established with telephone privileges, the
registered owner or his preauthorized legal representative may change the
election to receive dividends in cash to an election to receive dividends in
shares by telephoning the Transfer Agent at 800-688-3350.
TAXES
Federal
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolios of liability for federal income
taxes to the extent their earnings are distributed in accordance with the
Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. Dividends derived from tax-exempt interest income ("exempt-interest
dividends") may be treated by shareholders as items of interested excludable
from their gross income under Section 103(a) of the Code unless under the
circumstances applicable to the particular shareholder the exclusion would be
disallowed. (See Statement of Additional Information under "Additional
Information Concerning Taxes.") An exempt-interest dividend is any dividend or
part thereof (other than a capital gain dividend) paid by a Portfolio and
designated as an exempt-interest dividend in a written notice mailed to
shareholders not later than sixty days after the close of the Portfolio's
taxable year which does not exceed in its aggregate the net Municipal
Securities interest received by the Portfolio for the taxable year.
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<PAGE>
In general, a Portfolio's investment company taxable income, if any, will be
its taxable income, including taxable interest subject to certain adjustments
and short term capital gains. Dividends derived from such income will
generally be taxable to shareholders. It is anticipated that no part of any
distribution by the Portfolios will be eligible for the dividends received
deduction for corporations.
If a Portfolio should hold certain private activity bonds issued after
August 7, 1986, shareholders must include, as an item of tax preference, the
portion of dividends paid by the Portfolio that is attributable to interest on
such bonds in their federal alternative minimum taxable income for purposes of
determining liability (if any) for the alternative minimum tax applicable to
individuals and corporations and the environmental tax applicable to
corporations. Corporate shareholders must also take all exempt-interest
dividends into account in determining certain adjustments for alternative
minimum and environmental tax purposes. Shareholders receiving Social Security
benefits should note that all exempt-interest dividends will be taken into
account in determining the taxability of such benefits.
Substantially all of each Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolios will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the shares and whether such
gains are received in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of a Portfolio, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after the purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such amounts, although in
effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of a Portfolio depending upon the
tax basis and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Portfolio within 90 days of the purchase and is able to reduce the
sales charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included under certain
circumstances in the tax basis of the new shares.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
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<PAGE>
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolios and their shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
potential investors in the Portfolios should consult their tax advisers with
specific reference to their own tax situation.
State and Local
Dividends paid by the Michigan Municipal Bond Portfolio that are
derived from interest attributable to tax-exempt Michigan Municipal Securities
will be exempt from Michigan income tax, Michigan intangibles tax and Michigan
single business tax. Conversely, to the extent that the Portfolio's dividends
are derived from interest on obligations other than Michigan Municipal
Securities or certain U.S. Government Obligations (or are derived from short
term or long term gains), such dividends will be subject to Michigan income
tax. Michigan intangible tax and Michigan single business tax, even though the
dividends may be exempt for federal income tax purposes. The Portfolio is
unable to predict in advance the portion of its dividends that will be derived
from interest on Michigan Municipal Securities, but will mail to its
shareholders not later than sixty days after the close of the Portfolio's
taxable year a written notice containing information as to the interest
derived from Michigan Securities and exempt from Michigan income tax, Michigan
intangibles tax and Michigan single business tax.
Except as noted above with respect to Michigan income taxation,
distributions of net income may be taxable to investors as dividend income
under other state or local laws even though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
Miscellaneous
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws the treatment of the Trust and
its shareholders under such laws may differ from treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
- -------------
* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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<PAGE>
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982);
- -------------
* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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<PAGE>
Director, Detroit Symphony Orchestra (since 1985); Director, Oakland Commerce
Bank (since 1984) and Michigan Opera Theater (since 1981). He is 65 years-old,
and his address is 26957 Northwestern Highway, Suite 288, Southfield, Michigan
48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Senior Professor of Finance, Indiana University
(1970-1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62
years old, and his address is 5 Boar's Head Lane, Charlottesville, Virginia
22903.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and Officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for each Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion. NBD has been in the business
of providing such services since 1933. Included among NBD's accounts are
pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services
to each Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for each
of the Portfolios.
Robert T. Grabowski, First Vice President and manager of the municipal
desk at NBD, is the person primarily responsible for the day-to-day management
of the Municipal Bond Portfolio. Mr. Grabowski has been the portfolio manager
of the Portfolio since its inception and manager of the municipal desk since
1985. Mr. Grabowski and Rebecca L. Gersonde, Second Vice President, are
primarily responsible for the day-to-day management of the Michigan Municipal
Bond Portfolio. Ms. Gersonde joined NBD in 1982.
- ---------------
* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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<PAGE>
For its services under the Advisory Agreement, NBD is entitled to
receive advisory fees, computed daily and payable monthly, at an annual rate
of .65% of the average daily net assets of each of the Portfolios. In
addition, NBD is entitled to 4/10ths of the gross income earned by the
Portfolios on each loan of securities (excluding capital gains and losses, if
any). NBD may voluntarily waive its fees in whole or in part with respect to
any particular Portfolio.
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Adviser from continuing to perform investment
advisory, custodial or transfer agency services for the Trust or require the
Adviser to alter or discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees of the Trust would recommend that shareholders approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
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<PAGE>
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of each Portfolio: (i) fees payable
to the Co-Distributors pursuant to the Distribution Agreement; (ii) the actual
costs and expenses in connection with advertising and marketing the
Portfolio's shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions and other professionals ("Service Agents") for
administration or servicing of Portfolio shareholders ("Servicing"). Servicing
may include, among other things: answering client inquiries regarding the
Trust and the Portfolios; assisting clients in changing dividend options,
account designations and addresses; performing sub-accounting; establishing
and maintaining shareholder accounts and records; processing purchase and
redemption transactions; investing client cash account balances automatically
in Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
printing Prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of a Portfolio's average net assets, and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of the Trust's investment portfolios attributable to
investments by clients of Essex. The payments to be made to the
Co-Distributors which are based on a percentage of the net assets of the
Portfolios are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolios' shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust, and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
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<PAGE>
Shareholder Servicing Plan
Pursuant to a Shareholder Servicing Plan ("Servicing Plan") adopted by
its Board of Trustees, the Trust may enter into agreements ("Servicing
Agreements") with banks and financial institutions, which may include the
Adviser and its affiliates ("Shareholder Servicing Agents"), under which they
will render shareholder administrative support services for their customers
who beneficially own Class A shares of the Portfolio. Such services, which are
described more fully in the Statement of Additional Information, may include
processing purchase and redemption requests from customers, placing net
purchase and redemption orders with a Co-Distributor, processing, among other
things, distribution payments from the Trust, providing necessary personnel
and facilities to establish and maintain customer accounts and records, and
providing information periodically to customers showing their positions in
Class A shares.
For these services, the Trust will pay fees to Shareholder Servicing
Agents at an annual rate of up to .25% of the average daily net asset value of
Class A shares held by such Shareholder Servicing Agents for the benefit of
their customers and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Shareholder Servicing Agents are
required to provide their customers with a schedule of any credits, fees or
other conditions that may be applicable to the investment of customer assets
in Class A shares. The fees payable under such servicing agreements will be
allocated exclusively to the Class A shares in each Portfolio.
Conflict of interest restrictions may apply to the receipt of
compensation paid by the Trust to a Shareholder Servicing Agent in connection
with the investment of fiduciary funds in Portfolio shares. Banks and other
institutions regulated by the Comptroller of the Currency or other federal or
state bank regulatory agencies, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal counsel before
entering into Servicing Agreements.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan and Shareholder Servicing Plan, outside auditing and
legal expenses, all taxes and corporate fees payable by the Trust, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders,
costs of shareholder reports and shareholder meetings, and any extraordinary
expenses. Each Portfolio also pays for brokerage commissions and transfer
taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular Portfolio of the Trust will
be charged to that Portfolio, and expenses not readily identifiable as
belonging to a particular Portfolio will be allocated by the Board of Trustees
among one or more Portfolios in such a manner as it shall deem fair and
equitable. For the fiscal year ended December 31, 1995, the Municipal Bond
and Michigan Municipal Bond Portfolios' total expenses after fee waivers
and reimbursements were .79% (after fee waivers) and .79% of their average
net assets, respectively. The Statement of Additional Information describes
in more detail the fees and expenses borne by the Trust.
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<PAGE>
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Intermediate Bond Fund, Bond Fund, Short
Bond Fund, Growth/Value Fund, Opportunity Fund, Intrinsic Value Fund, Capital
Growth Fund, Balanced Fund, International Equity, Equity Index Fund, Money
Market Fund, Government Fund, Treasury Money Market Fund, Tax-Exempt Money
Market Fund and Michigan Tax-Exempt Money Market Fund. The Trust has
established the following two distinct classes of shares within each
Portfolio described herein: Class I shares (Original Class) and Class A
shares (Special Class 1). A sales person and any other person or
institution entitled to receive compensation for selling or servicing
shares may receive different compensation with respect to different
classes of shares in the Series. Each share has $.10 par value,
represents an equal proportionate interest in the related portfolio
with other shares of the same class outstanding, and is entitled to such
dividends and distributions out of the income earned on the assets belonging
to such portfolio as are declared in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly, the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
As of February 29, 1996, NBD held beneficially or of record
approximately 58.66% and 39.20% of the outstanding shares of Municipal Bond
and Michigan Municipal Bond Portfolios, respectively, and therefore may be
considered to be a controlling person of the Trust for purposes of the 1940
Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
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<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Portfolios'
Statement of Additional Information incorporated herein by reference, in
connection with the offering made by this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust, Adviser or Sponsors and Co- Distributors. This
Prospectus does not constitute an offering by the Portfolios or by their Co-
Distributors, in any jurisdiction in which such offering may not lawfully be
made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY............................. 2
FINANCIAL HIGHLIGHTS........................ 5
INTRODUCTION................................ 7
PROPOSED REORGANIZATION..................... 7
INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS............................ 7
OTHER INVESTMENT POLICIES................... 9
PURCHASE OF SHARES.......................... 16
PUBLIC OFFERING PRICE....................... 18
REDEMPTION OF SHARES........................ 20
SHAREHOLDER SERVICES........................ 22
PERFORMANCE AND YIELD
INFORMATION................. 24
DIVIDENDS AND DISTRIBUTIONS................. 25
TAXES .................................... 25
MANAGEMENT.................................. 27
OTHER INFORMATION........................... 33
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania
19107-3496
<PAGE>
[ BACK COVER, COLUMN 2 ]
CLASS A SHARES OF THE:
WOODWARD MUNICIPAL BOND FUND
WOODWARD MICHIGAN MUNICIPAL BOND FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
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<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series K - Original Class, L - Original Class, U - Original
Class, P - Original Class and Q - Original Class Representing
Interests in the
Class I Shares of the Woodward Intermediate Bond, Bond, Short Bond,
Municipal Bond and Michigan Municipal Bond Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page....................................... Cover page
2. Synopsis......................................... Expense Summary;
Background
3. Financial Highlights............................. Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant....................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ........................ Management
6. Capital Stock and Other
Securities....................................... Purchase of
Shares; Redemption
of Shares;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered.................................... Purchase of
Shares;
Management
8. Redemption or Repurchase......................... Redemption of
Shares
9. Pending Legal Proceedings........................ Inapplicable
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<PAGE>
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PROSPECTUS April 15, 1996
- ------------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
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The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following five investment portfolios (the "Portfolios"), each having
its own investment objective and policies as described in this Prospectus:
Class I shares of the:
Woodward Intermediate Bond Fund
Woodward Bond Fund
Woodward Short Bond Fund
Woodward Municipal Bond Fund
Woodward Michigan Municipal Bond Fund
Each of the Portfolios is advised by NBD Bank ("NBD" or the "Adviser")
and is sponsored and distributed by First of Michigan Corporation ("FoM" or
"Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD Bank
<PAGE>
EXPENSE SUMMARY
The Trust currently offers Class I shares (formerly known as
"Institutional Shares") and Class A shares (formerly known as "Retail Shares")
in each of the Woodward Intermediate Bond Fund ("Intermediate Bond
Portfolio"), Woodward Bond Fund ("Bond Portfolio"), Woodward Short Bond Fund
("Short Bond Portfolio") Woodward Municipal Bond Fund ("Municipal Bond
Portfolio") and Woodward Michigan Municipal Bond Fund ("Michigan Municipal
Bond Portfolio"). Class I shares are sold primarily to NBD and its affiliated
and correspondent banks acting on behalf of their respective customers. Class
A shares are sold to the general public primarily through financial
institutions such as banks, brokers and dealers. Class A shares are offered in
a separate Prospectus. Investors should call (800) 688-3350, a Co-Distributor
or their financial institutions if they would like to obtain more information
concerning Class I shares and/or Class A shares of the Portfolios. The
following table is provided to assist investors in understanding the various
costs and expenses that an investor will indirectly incur as a beneficial
owner of Class I shares in each of the Portfolios.
<TABLE>
<CAPTION>
Michigan
Intermediate Short Municipal Municipal
Bond Bond Bond Bond Bond
Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1) Portfolio(1)
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load
Imposed on Purchases....... None None None None None
(as a percentage of
offering price)
Sales Load
Imposed on Reinvested
Dividends................. None None None None None
Deferred Sales Load........... None None None None None
Redemption Fee................ None None None None None
Exchange Fee.................. None None None None None
Annual Operating Expenses
(as a percentage of
average net assets)
Management Fees............... .65% .65% .65% .65% .65%
12b-1 Fees.................... .008% .01% .004% . 017% .038%
Other Expenses(2)
(before no fee waivers
and/or expense
reimbursements)............ .062% .06% .156% .263% .352%
after fee waivers
and/or expense
reimbursements)............ N/A N/A .126% .153% .132%
Total Operating Expenses
(before fee waivers
and/or expense
reimbursements)............ .72% .72% .81% .93% 1.04%
(after fee waivers
and/or expense
reimbursements............. N/A N/A .78% .82% .82%
<FN>
- ---------
1. The expenses for each of the Portfolios have been restated to
reflect current expenses.
-2-
<PAGE>
2. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolios.
</TABLE>
<TABLE>
<CAPTION>
Michigan
Intermediate Short Municipal Municipal
Bond Bond Bond Bond Bond
Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Example
You would pay the following
expenses on a $1,000
investment, assuming:
(1) a 5% annual return
and (2) redemption at the
end of each time period:
One Year:.................. $ 7.38 $ 7.38 $ 7.99 $ 8.41 $ 8.41
Three Years:............... 23.10 23.10 25.00 26.28 26.28
Five Years:................ 40.18 40.18 43.47 45.67 45.67
Ten Years:................. 89.69 89.69 96.88 101.66 101.66
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
The example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in Class I shares in each of the Portfolios,
based upon payment by the Portfolios of operating expenses at the respective
levels set forth in the expense table. For more complete descriptions of
Portfolio expenses, see "Investment Adviser, Custodian and Transfer Agent,"
"Sponsors and Co-Distributors," "Service and Distribution Plan" and "Trust
Expenses" under the heading "Management" in this Prospectus and the
financial statements and related notes contained in the Statement of
Additional Information.
-3-
<PAGE>
BACKGROUND
Shares of each Portfolio have been classified into two separate
classes of shares -- Class I shares and Class A shares. Only the Class I
shares are offered pursuant to this Prospectus. Until April 15, 1996, Class I
shares and Class A shares represented equal pro rata interests in a Portfolio.
As of such date, the Trust implemented its Shareholder Servicing Plan with
respect to Class A shares only and began to allocate Servicing Fees
attributable to such shares exclusively to them.
-4-
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below provide supplementary information to the Portfolios'
financial statements contained in their Statement of Additional Information
and set forth certain information concerning the historic investment results
of Portfolio shares. They present a per share analysis of how each Portfolio's
net asset value has changed during the periods presented. The tables have been
derived from the Portfolios' financial statements which have been audited by
Arthur Andersen LLP, the Trust's independent public accountants, whose report
thereon is contained in the Statement of Additional Information along with the
financial statements. The financial data included in these tables should be
read in conjunction with the financial statements and related notes included
in the Statement of Additional Information. Further information about the
performance of the Portfolios is available in annual reports to shareholders.
The Statement of Additional Information and annual reports to shareholders may
be obtained from the Trust free of charge by calling (800) 688-3350.
<TABLE>
<CAPTION>
Intermediate Bond Portfolio
June 1, 1991
(Commencement)
of Operations)
Year Ended Year Ended Year Ended Year Ended to
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period..................... $ 9.21 $10.41 $10.28 $10.55 $10.00
Income from investment
operations:
Net investment income......... 0.59 0.56 0.59 0.71 0.40
Net realized and unrealized
gains (losses) on
investments................. 1.16 (1.20) 0.26 (0.10) 0.57
------------ ------------ ------------ ------------ ------------
Total from investment
operations.................. $ 1.75 $(0.64) $ 0.85 $ 0.61 $ 0.97
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment
income...................... $(0.59) $(0.55) $(0.59) $(0.71) $(0.40)
From realized
gains....................... -- (0.01) ( 0.13) ( 0.17) ( 0.02)
------------ ------------ ------------ ------------ ------------
Total distributions........... $(0.59) $(0.56) ($0.72) ($0.88) ($0.42)
------------ ------------ ------------ ------------ ------------
Net asset value, end of
period........................ $10.37 $ 9.21 $10.41 $10.28 $10.55
============ ============ ============ ============ ============
Total return.................... $19.48 (6.31%) 8.41% 6.00% 16.62%(a)
Ratios/Supplemental Data
Net assets, end of period....... $405,309,939 $393,019,168 $429,789,857 $220,432,255 $130,367,032
Ratio of expenses to average
net assets.................... 0.73% 0.74% 0.74% 0.74% 0.75%(a)
Ratio of net investment income
to average net assets......... 5.98% 5.73% 5.44% 6.91% 6.59%(a)
Portfolio turnover rate......... 36.47% 54.60% 92.80% 56.30% 7.38%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
Bond Portfolio
June 1, 1991
(Commencement)
of Operations)
Year Ended Year Ended Year Ended Year Ended to
December 31, December 31, December 31, December 31, December 31,
1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period...................... $ 9.01 $10.32 $10.25 $10.55 $10.00
Income from investment
operations:
Net investment income.......... 0.63 0.61 0.76 0.83 0.51
Net realized and unrealized
gains (losses) on
investments.................. 1.45 (1.31) 0.38 ( 0.17) 0.57
------------ ------------ ------------ ------------ ------------
Total from investment
operations................... $ 2.08 $(0.70) $ 1.14 $ 0.66 $ 1.08
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment
income....................... $(0.64) $(0.59) $(0.76) $(0.83) $(0.51)
From realized
gains........................ -- (0.02) (0.31) (0.13) (0.02)
------------ ------------ ------------ ------------ ------------
Total distributions............ $(0.64) $(0.61) $(1.07) $(0.96) $(0.53)
------------ ------------ ------------ ------------ ------------
Net asset value, end of
period......................... $10.45 $ 9.01 $10.32 $10.25 $10.55
============ ============ ============ ============ ============
Total return..................... 23.75% (6.99%) 11.39% 6.56% 18.45%(a)
Ratios/Supplemental Data
Net assets, end of period........ $517,565,579 $427,168,395 $501,196,278 $321,758,333 $237,673,316
Ratio of expenses to average
net assets..................... 0.74% 0.74% 0.73% 0.73% 0.75%(a)
Ratio of net investment income
to average net assets.......... 6.39% 6.36% 7.20% 8.08% 8.44%(a)
Portfolio turnover rate 41.91% 75.67% 111.52% 90.45% 8.19%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Short Bond Portfolio
September 17, 1994
(Commencement
Year-Ended of Operations) to
December 31, December 31,
1995 1994
------------ ------------------
<S> <C> <C>
Net asset value, beginning
of period...................... $ 9.84 $10.00
Income from investment
operations:
Net investment income.......... 0.58 0.17
Net realized and unrealized
gains (losses) on
investments.................. 0.39 (0.16)
------------ -----------
Total from investment
operations................... $ 0.97 $ 0.01
------------ -----------
Less distributions:
From net investment
income....................... $(0.58) $(0.17)
From realized
gains........................ 0.00 0.00
------------ -----------
Total distributions............ $(0.58) $(0.17)
------------ -----------
Net asset value, end of
period......................... $10.23 $ 9.84
============ ===========
Total return..................... 10.07% 0.21%(a)
Ratios/Supplemental Data
Net assets, end of period........ $163,336,855 $64,239,163
Ratio of expenses to average
net assets..................... 0.75% 0.75%(a)
Ratio of net investment income
to average net assets.......... 5.74% 5.92%(a)
Ratio of expenses to average net
assets without fee waivers/
reimbursed expenses............. 0.81% 0.93%(a)
Ratio of net investment income to
average net assets without fee
waivers/reimbursed expenses..... 5.68% 5.74%(a)
Portfolio turnover rate 30.94% 10.20%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Municipal Bond Portfolio
February 1, 1993
(Commencement
Year Ended Year Ended of Operations) to
December 31, December 31, December 31
1995 1994 1993
------------ ------------ -----------------
<S> <C> <C> <C>
Net asset value, beginning of period.. $ 9.59 $10.69 $10.00
Income from investment operations:
Net investment income............... 0.48 0.50 0.45
Net realized and unrealized
gains (losses)
on investments.................... 1.08 (1.11) 0.69
----------- ----------- -----------
Total from investment operations.... $ 1.56 $(0.61) $ 1.14
----------- ----------- -----------
Less distributions:
From net investment income.......... (0.47) $(0.49) $(0.44)
----------- ----------- -----------
From realized gains................. 0.00 (0.01)
----------- ----------- -----------
Total distributions................. $(0.47) $(0.49) $(0.45)
----------- ----------- -----------
Net asset value, end of period........ $10.68 $ 9.59 $10.69
=========== =========== ===========
Total return.......................... 16.54% (5.72%) 12.69%(a)
Ratios/Supplemental Data
Net assets, end of period............. $76,963,564 $61,255,733 $54,703,974
Ratio of expenses to average net assets 0.79% 0.53% 0.19%(a)
Ratio of net investment income to
average net assets.................. 4.63% 4.94% 5.27%(a)
Ratio of expenses to average net assets
without fee waivers/reimbursed
expenses............................ 0.93% 0.88% 1.12%(a)
Ratio of net investment income to average
net assets without fee waivers/reimbursed
expenses............................ 4.49% 4.59% 4.34%(a)
Portfolio turnover rate............... 20.46% 19.11% 11.12%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Michigan Municipal Bond Portfolio
February 1, 1993
(Commencement
Year Ended Year Ended of Operations) to
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ -----------------
<S> <C> <C> <C>
Net asset value, beginning
of period...................... $9.54 $10.60 $10.00
Income from investment
operations:
Net investment income.......... 0.48 0.50 0.44
Net realized and unrealized
gains (losses) on
investments.................. 1.06 (1.06) 0.59
----------- ----------- -----------
Total from investment
operations................... $ 1.54 $(0.56) $ 1.03
----------- ----------- -----------
Less distributions:
From net investment
income....................... $(0.48) $(0.50) $(0.43)
From realized
gains........................ -- 0.00 0.00
----------- ----------- -----------
Total distributions............ $(0.48) $(0.50) $(0.43)
----------- ----------- -----------
Net asset value, end of
period......................... $10.60 $ 9.54 $10.60
=========== =========== ===========
Total return..................... 16.49% (5.42)% 11.50%(a)
Ratios/Supplemental Data
Net assets, end of period........ $53,453,160 $45,263,059 $42,113,795
Ratio of expenses to average
net assets..................... 0.79% 0.53% 0.19%(a)
Ratio of net investment income
to average net assets.......... 4.71% 5.01% 5.12%(a)
Ratio of expenses to average
net assets without fee
waivers/reimbursed
expenses....................... 1.04% 1.05% 1.21%(a)
Ratio of net investment income
to average net assets
without fee waivers/reimbursed
expenses....................... 4.46% 4.49% 4.10%(a)
Portfolio turnover rate.......... 26.97% 25.93% 41.70%
<FN>
- ---------
(a) Annualized for periods less than one year for comparability
purposes. Actual annual values may be less than or greater than those shown.
</TABLE>
-9-
<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the"1940 Act"). The
Trust currently consists of seventeen investment portfolios, each of which
consists of a separate pool of assets with separate investment objectives and
policies. However, only the Class I shares of the Intermediate Bond, Bond,
Short Bond, Municipal Bond and Michigan Municipal Bond Portfolios are offered
pursuant to this Prospectus. The Intermediate Bond, Bond, Short Bond and
Municipal Bond Portfolios are classified as diversified investment portfolios
and the Michigan Municipal Bond Portfolio is classified as a non-diversified
investment portfolio under the 1940 Act.
PROPOSED REORGANIZATION
On December 1, 1995, NBD's parent, NBD Bancorp, Inc., merged with
First Chicago Corporation and the combined company was renamed First Chicago
NBD Corporation ("FCNBD"). An affiliate of FCNBD serves as the investment
adviser to Prairie Funds, Prairie Institutional Funds, Prairie Intermediate
Bond Fund and Prairie Municipal Bond Fund, Inc. (collectively, "Prairie").
FCNBD has recommended to both the Board of Trustees of the Trust and the Board
of Trustees/Directors of Prairie that the portfolios of the Trust and Prairie
be reorganized as described below. In light of this recommendation and after
considering various matters, the Trust's Board and Prairie's Board have
authorized certain Agreements and Plans of Reorganization (the
"Reorganization").
A Special Meeting of the Shareholders of each Prairie portfolio is
expected to be held in June 1996 to consider the approval or disapproval of
the Reorganization. The Reorganization generally provides for the transfer of
substantially all of each Prairie portfolio's assets and liabilities to a
corresponding portfolio of the Trust in exchange for such portfolio's shares.
In connection with the proposed Reorganization, a Special Meeting of
the Shareholders of the Trust is expected to be held in June 1996 to consider
proposals relating to investment policies, service agreements, the election of
two new trustees, and other matters. Proxy materials describing these matters
will be mailed to the Trust's shareholders of record for the meeting.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The investment objective of a Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
that Portfolio. See "Other Information." Except as noted below under
"Investment Limitations," a Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that a Portfolio
will achieve its objective.
Intermediate Bond Portfolio
The investment objective of the Intermediate Bond Portfolio is to
maximize total rate of return while providing relative stability of principal
by investing predominantly in intermediate-term debt securities. While the
Portfolio may purchase securities with maturities or average lives of up to 15
years, during normal market conditions, its average weighted portfolio
maturity is expected to be between 3 and 6 years.
Bond Portfolio
The investment objective of the Bond Portfolio is to maximize total
rate of return by investing predominantly in intermediate and long-term debt
-10-
<PAGE>
securities. During normal market conditions, the Portfolio's average weighted
portfolio maturity is expected to be between 6 and 12 years.
Short Bond Portfolio
The investment objective of the Short Bond Portfolio is to maximize
total rate of return while providing relative stability of principal. While
the Portfolio may purchase securities with maturities or average lives of up
to 10 years, during normal market conditions, its average weighted portfolio
maturity will be limited to a maximum of 3 years.
Investment Policies Applicable to the Intermediate Bond, Bond and Short Bond
Portfolios
The two components of total rate of return consist of current income
and capital appreciation. The Portfolios are more likely to exceed the
performance level of equity funds in the market with respect to current
income; however, it is more probable that the capital appreciation performance
of equity funds will surpass that of the Portfolios.
In pursuing their respective investment objectives, the Portfolios may
invest in the following debt securities: (i) obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities; (ii) corporate,
bank and commercial obligations; (iii) securities issued or guaranteed by
foreign governments, their agencies or instrumentalities; (iv) securities
issued by supranational banks; (v) mortgage backed securities; and (vi)
securities representing interests in pools of assets. Obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities may
include mortgage backed securities, as well as "stripped securities" (both
interest-only and principal-only) and custodial receipts for Treasury
securities. The Portfolios may also invest in options and futures contracts
and related options. In addition, each Portfolio may invest in high quality
short-term obligations. For further information concerning these securities,
see "Other Investment Policies" below.
Each of the Portfolios invests at least 65% of the total value of its
assets in obligations, including mortgage backed securities, which are
investment grade or are issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. Most obligations acquired by the Portfolios
will be issued by companies or governmental entities located within the United
States. Up to 15% of the total assets of each Portfolio may, however, be
invested in dollar denominated debt obligations of foreign issuers.
The debt securities in which the Portfolios may invest will be rated
investment grade, or if unrated, will be deemed by the Adviser to be
comparable in quality at the time of purchase to instruments that are so
rated. By so restricting their investments, the Portfolios' ability to
maximize total rate of return will be limited.
Municipal Bond Portfolio
The investment objective of the Municipal Bond Portfolio is to seek as
high a level of current income exempt from federal income tax as is consistent
with relative stability of principal. Under normal market and economic
conditions, the Portfolio seeks to achieve this objective by investing
primarily in investment grade debt obligations issued by or on behalf of
states, territories and possessions of the United States, the District of
Columbia and their respective political subdivisions, agencies,
instrumentalities and authorities, the interest on which is, in the opinion of
bond counsel for the issuers, exempt from regular federal income tax
("Municipal Securities").
-11-
<PAGE>
Michigan Municipal Bond Portfolio
The investment objective of the Michigan Municipal Bond Portfolio is
to seek as high a level of current income exempt from federal, and to the
extent possible, from State of Michigan income taxes as is consistent with
relative stability of principal. Under normal market and economic conditions,
the Portfolio seeks to achieve this objective by investing primarily in
investment grade debt obligations issued by the State of Michigan, its
political subdivisions, municipalities, corporations and authorities, the
interest on which is, in the opinion of bond counsel to the issuers, exempt
from federal and State of Michigan income taxes ("Michigan Municipal
Securities"). To the extent that acceptable Michigan Municipal Securities are
at any time unavailable for investment by the Portfolio, the Portfolio will
invest primarily in other Municipal Securities the interest on which is, in
the opinion of bond counsel, exempt from federal, but not State of Michigan
income taxes.
Investment Policies Applicable to the Municipal Bond and Michigan Municipal
Bond Portfolios
At least 80% of each of the Portfolios' total assets will be invested
in Municipal Securities except in extraordinary circumstances, such as when
the Adviser believes that market conditions indicate that a Portfolio should
adopt a temporary defensive position by holding uninvested cash or investing
in taxable short-term securities ("Short-Term Investments"). This policy is
fundamental with respect to each Portfolio and may not be changed without the
approval of the holders of a majority of the Portfolio's outstanding shares.
In addition, with respect to the Michigan Municipal Bond Portfolio, at least
65% of its total assets will be invested under normal market conditions in
Michigan Municipal Securities and the remainder may be invested in securities
that are not Michigan Municipal Securities and therefore may be subject to
Michigan income taxes. (See "Taxes.")
During normal market conditions each Portfolio's average weighted
portfolio maturity is expected to be between 7 and 20 years.
Investment Policies Applicable to All Portfolios
Although fixed income securities acquired by the Intermediate Bond and
Bond Portfolios will normally have intermediate or long-term maturities,
during temporary defensive periods the Portfolios may invest without
limitation in high quality short-term investments.
The Adviser manages the Portfolios based on anticipated interest rate
changes and the use of active management strategies such as sector rotation,
intra-sector adjustments and yield curve and convexity considerations. In use
of such active management strategies, the Adviser seeks value in investment
grade fixed income securities. Sector rotation involves the Adviser selecting
among different economic or industry sectors based upon apparent or relative
attractiveness. Thus at times a sector offers yield advantages relative to
other sectors. An intra-sector adjustment occurs when the Adviser determines
to select a particular issue within a sector. Yield curve considerations
involve the Adviser attempting to compare the relationship between time to
maturity and yield to maturity in order to identify the relative value in the
relationship. Convexity considerations consist of the Adviser seeking
securities that rise in price more quickly, or decline in price less quickly,
than the typical security of that price risk level and therefore enable the
Adviser to obtain an additional return when interest rates change
dramatically.
In acquiring particular portfolio securities for a Portfolio, the
Adviser will consider, among other things, historical yield relationships
between private and governmental debt securities, intermarket yield
relationships among various
-12-
<PAGE>
industry sectors, current economic cycles and the attractiveness and
creditworthiness of particular issuers. Depending upon the Adviser's analysis
of these and other factors, a Portfolio's holdings of issues in particular
industry sectors may be overweighted when compared to the relative industry
weightings in related recognized indices. The value of the Portfolios can be
expected to vary inversely with changes in prevailing interest rates.
OTHER INVESTMENT POLICIES
Ratings
If not rated as commercial paper, debt obligations acquired by the
Portfolios and Municipal Securities acquired by the Municipal Bond and
Michigan Municipal Bond Portfolios will be investment grade at the time of
purchase, i.e., obligations rated AAA, AA, A or BBB by Standard & Poor's
Ratings Group, Division of McGraw Hill ("S&P"), Fitch Investors Service
("Fitch"), Duff & Phelps Credit Co. ("Duff") or IBCA, Inc. ("IBCA") or Aaa,
Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's") (each a "Rating
Agency") in the case of bonds, rated SP-2 or higher by S&P, MIG-2 or higher by
Moody's or F-2 or higher by Fitch, in the case of notes, rated A-2 or higher
by S&P, Prime-2 or higher by Moody's, F-2 or higher by Fitch or A2 or higher
by IBCA, in the case of tax-exempt commercial paper or VMIG or higher by
Moody's in the case of variable demand notes, or be unrated but deemed by the
Adviser to be comparable in quality at the time of purchase to instruments
that are so rated. Obligations rated in the lowest of the top four rating
categories (Baa by Moody's, BBB by S&P or Fitch or IBCA) are considered to
have less capacity to pay interest and repay principal and have certain
speculative characteristics. In the event that the rating of a security held
by the Municipal Bond or Michigan Municipal Bond Portfolios is reduced below
Baa by Moody's, BBB by S&P, BBB by Fitch or BBB by IBCA, the security will be
disposed of in an orderly fashion as soon as possible. The debt ratings are
described in the Statement of Additional Information.
Short-Term Investments
Each Portfolio may hold short-term U.S. Government obligations, "high
quality" money market instruments such as certificates of deposit, bankers'
acceptances and time deposits (i.e. those rated at the time of purchase within
the two highest rating categories or which are unrated at such time but are
deemed by the Adviser to be of comparable quality), repurchase agreements,
reverse repurchase agreements, short-term obligations issued by state and
local governmental issuers which carry yields that are competitive with those
of other types of high quality money market instruments, commercial paper,
notes, other short-term obligations, variable rate master demand notes, and
cash, pending investment, to meet anticipated redemption requests or if, in
the opinion of the Adviser, suitable bonds or other fixed income securities in
which the Portfolios invest are unavailable. Such investments may be in such
proportions as, in the opinion of the Adviser, existing circumstances may
warrant, and may include obligations of foreign banks and foreign branches of
U.S. banks. The Portfolios may also invest their cash balances in securities
issued by other investment companies which invest in high-quality, short-term
debt securities. These short-term investments are described in greater detail
in the Statement of Additional Information.
U.S. Government Obligations
The Portfolios may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association, Federal National Mortgage Association, General Services
Administration, Student
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Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan
Mortgage Corporation, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Resolution Funding Corporation and Maritime Administration. The
Portfolios may also invest in interests in the foregoing securities, including
collateralized mortgage obligations guaranteed by a U.S. Government agency or
instrumentality, and in Government-backed trusts which hold obligations of
foreign governments that are guaranteed or backed by the full faith and credit
of the United States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities have historically involved little risk of loss of
principal if held to maturity. However, no assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Stripped Government Obligations
The Intermediate Bond, Bond and Short Bond Portfolios may purchase
Treasury receipts and other "stripped" securities that evidence ownership in
either the future interest payments or the future principal payments on U.S.
Government obligations. These participations, which may be issued by the U.S.
Government (or a U.S. Government agency or instrumentality) or by private
issuers such as banks and other institutions, are issued at a discount to
their "face value," and may include stripped mortgage backed securities
("SMBS"), which are derivative multi-class mortgage securities. Stripped
securities, particularly SMBS, may exhibit greater price volatility than
ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. With respect to investments
in interest only securities, should the underlying obligations experience
greater than anticipated prepayments of principal, a Portfolio may fail to
fully recoup its initial investment in these securities. The market value of
the class consisting entirely of principal payments may be more volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest are generally higher than prevailing
market yields on other mortgage backed obligations because their cash flow
patterns are more volatile. For interest only securities, there is a greater
risk that the initial investment will not be fully recouped.
Custodial Receipts and Certificates of Participation
The Intermediate Bond, Bond and Short Bond Portfolios may purchase
participations in trusts that hold U.S. Treasury securities (such as TIGRs and
CATs) where the trust participations evidence ownership in either the future
interest payments or the future principal payments on the U.S. Treasury
obligations. These participations are normally issued at a discount to their
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"face value," and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
Securities acquired by the Municipal Bond and Michigan Municipal Bond
Portfolios may be in the form of custodial receipts evidencing rights to
receive a specific future interest payment, principal payment or both on
certain Municipal Securities. Such securities are held in custody by a bank on
behalf of holders of the receipts. These custodial receipts are known by
various names, including "Municipal Receipts," "Municipal Certificates of
Accrual on Tax-Exempt Securities" ("M-CATs") and "Municipal Zero-Coupon
Receipts." The Portfolios may also purchase from time to time certificates of
participation that, in the opinion of counsel to the issuer, are exempt from
federal income tax. A certificate of participation gives a Portfolio an
undivided interest in a pool of Municipal Securities. Certificates of
participation may have fixed, floating or variable rates of interest. If a
certificate of participation is unrated, the Adviser will have determined that
the instrument is of comparable quality to those instruments in which a
Portfolio may invest pursuant to guidelines approved by the Board of Trustees.
For certain certificates of participation, a Portfolio will have the right to
demand payment, on not more than 30 days' notice, for all or any part of such
Portfolio's participation interest, plus accrued interest. As to these
instruments, each Portfolio intends to exercise its right to demand payment as
needed to provide liquidity, to maintain or improve the quality of its
investment portfolio or upon a default (if permitted under the terms of the
instrument).
Repurchase and Reverse Repurchase Agreements
To increase its income, each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). No Portfolio will enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose a Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
Each Portfolio may also obtain funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements the
Portfolios will sell portfolio securities to financial institutions such as
banks and broker-dealers and agree to repurchase them at a particular date and
price. Reverse repurchase agreements involve the risk that the market value of
the securities sold by a Portfolio may decline below the price of the
securities it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, each Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of a particular Portfolio exceeds one-third of the value of its total assets.
Loans of securities involve risks of delay in receiving additional collateral
or in recovering the securities loaned or possible loss of rights in the
collateral should the borrower of the securities become insolvent. Loans will
be made only to borrowers that provide
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the requisite collateral comprised of liquid assets and when, in the Adviser's
judgment, the income to be earned from the loan justifies the attendant risks.
Illiquid Securities
In accordance with their fundamental investment limitation described
below, the Intermediate Bond, Bond, Municipal Bond and Michigan Municipal Bond
Portfolios will not knowingly invest more than 10% and the Short Bond
Portfolio will not knowingly invest more than 15% of the value of their
respective total assets in securities that are illiquid. Securities having
legal or contractual restrictions on resale or no readily available market,
and instruments (including repurchase agreements, variable and floating rate
instruments and time deposits) that do not provide for payment to the
Portfolios within seven days after notice are subject to this limitation.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not deemed to be illiquid for purposes of this
limitation.
The Portfolios may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Portfolio during any period
that qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to predict how
this market will develop. The Board of Trustees will carefully monitor any
investments by a Portfolio in these securities.
Borrowings
The Portfolios may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolios would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities
it is obligated to repurchase.
Asset Backed Securities
Asset backed securities held by the Intermediate Bond, Bond and Short
Bond Portfolios arise through the grouping by governmental, government-related
and private organizations of loans, receivables and other assets originated by
various lenders ("Asset Backed Securities"), as described below.
The yield characteristics of Asset Backed Securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. As a result, if an Asset
Backed Security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an Asset Backed Security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Portfolios, the maturity of Asset Backed Securities
will be based on estimates of average life.
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Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Like other fixed income securities, when interest rates rise the value of an
Asset Backed Security generally will decline; however, when interest rates
decline, the value of an Asset Backed Security with prepayment features may
not increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard
prepayments and thus affect maturities.
These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the
trading market for short-term mortgages and Asset Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Mortgage Backed Securities. Asset Backed Securities acquired by the
Intermediate Bond, Bond and Short Bond Portfolios consist of both mortgage and
non-mortgage backed securities. Mortgage backed securities represent an
ownership interest in a pool of mortgages, the interest on which is in most
cases issued and guaranteed by an agency or instrumentality of the U.S.
Government, although not necessarily by the U.S. Government itself. Mortgage
backed securities include collateralized mortgage obligations and mortgage
pass-through certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways.
These multiple class securities may be issued or guaranteed by U.S. Government
agencies or instrumentalities, including the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by trusts formed
by private originators of, or investors in, mortgage loans. Classes in CMOs
which the Portfolios may hold are known as "regular" interests. CMOs also
issue "residual" interests, which in general are junior to and more volatile
than regular interests. The Portfolios do not intend to purchase residual
interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which
the Portfolios may invest is a GNMA Certificate which is backed as to the
timely payment of principal and interest by the full faith and credit of the
U.S. Government. Another type is a FNMA Certificate, the principal and
interest of which are guaranteed only by FNMA itself, not by the full faith
and credit of the U.S. Government. Another type is a FHLMC Participation
Certificate which is guaranteed by FHLMC as to timely payment of principal and
interest. However, like a FNMA security, it is not guaranteed by the full
faith and credit of the U.S. Government. Privately issued mortgage backed
securities will carry a rating at the time of purchase of at least A by S&P or
by Moody's or, if unrated, will be in the Adviser's opinion equivalent in
credit quality to such rating. Mortgage backed securities issued by private
issuers, whether or not such obligations are subject to guarantees by the
private issuer, may entail greater risk than obligations directly or
indirectly guaranteed by the U.S. Government.
Non-Mortgage Backed Securities. The Intermediate Bond, Bond and Short
Bond Portfolios may also invest in non-mortgage backed securities including
interests in pools of receivables, such as motor vehicle installment purchase
obligations
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and credit card receivables. Such securities are generally issued as pass-
through certificates, which represent undivided fractional ownership interests
in the underlying pools of assets. Such securities may also be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special purpose entity organized solely for
the purpose of owning such assets and issuing such debt. Non-mortgage backed
securities are not issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
Variable and Floating Rate Instruments
The Intermediate Bond, Bond and Short Bond Portfolios may invest in
inverse floating rate debt instruments ("inverse floaters") some of which may
be leveraged. The interest rate of an inverse floater resets in the opposite
direction from the market rate of interest to which it is indexed. An inverse
floater may be considered to be leveraged to the extent that its interest rate
varies by a magnitude that exceeds the magnitude of the change in the index
rate of interest. The higher degree of leverage inherent in inverse floaters
is associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of the instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
demand rights, and the Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments. Variable and floating rate instruments
(including inverse floaters) will be subject to a Portfolio's limitation on
illiquid investments. See "Illiquid Securities."
Zero Coupon Obligations
Each Portfolio may invest in zero coupon obligations which are
discount debt obligations that do not make periodic interest payments although
income is generally imputed to the holder on a current basis. Such obligations
may have higher price volatility than those which require the payment of
interest periodically. The Adviser will consider the liquidity needs of the
Portfolios when any investment in zero coupon obligations is made.
Municipal and Related Securities
Municipal Securities acquired by the Municipal Bond and Michigan
Municipal Bond Portfolios may include general obligations, revenue
obligations, notes, and moral obligation bonds. General obligations are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue obligations are payable only
from the revenues derived from a particular facility, class of facilities or,
in some cases, from the proceeds of a special excise or other specific revenue
source such as the user of the
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facility being financed. Private activity bonds (i.e. bonds issued by
industrial development authorities) are in most cases revenue securities and
are not payable from the unrestricted revenues of the issuer. Consequently,
the credit quality of a private activity bond is usually directly related to
the credit standing of the private user of the facility involved. Although
interest paid on private activity bonds is exempt from regular federal income
tax, it may be treated as a specific tax preference item under the federal
alternative minimum tax. (See "Taxes") Notes are short-term instruments which
are obligations of the issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other revenues.
Moral obligation bonds are normally issued by a special purpose public
authorities. If the issuer of a moral obligation bond is unable to met its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of
the state or municipality which created the issuer. Municipal Securities also
include municipal lease/purchase agreements which are similar to installment
purchase contracts for property or equipment issued by municipalities. The
Adviser will only invest in rated municipal lease/purchase agreements.
There are, of course, variations in the quality of Municipal
Securities both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer, general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue.
Among other securities, the Municipal Bond and Michigan Municipal Bond
Portfolios may purchase short-term Tax Anticipation Notes. Bond Anticipation
Notes, Revenue Anticipation Notes and other forms of short-term loans. Such
notes are issued with a short-term maturity in anticipation of the receipt of
tax or other funds, the proceeds of bonds or other revenues. The Portfolios
may also acquire zero coupon obligations, which have greater price volatility
than coupon obligations and which will not result in the payment of interest
until maturity.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax (and, with respect to
Michigan Municipal Securities, Michigan income taxes) are rendered by bond
counsel to the respective issues at the time of issuance. Neither the
Portfolios nor the Adviser will review the proceedings relating to the
issuance of Municipal Securities or the bases for such opinions.
Variable and Floating Rate Municipal Securities
Municipal Securities purchased by the Municipal Bond and Michigan Bond
Portfolios may include rated and unrated variable and floating rate tax-exempt
instruments. There may be no active secondary market with respect to a
particular variable or floating rate instrument. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value to a
Portfolio will approximate their par value. Illiquid variable and floating
rate instruments (instruments which are not payable upon seven days' notice
and do not have an active trading market) that are acquired by the Portfolios
are subject to Portfolios' limitation on illiquid instruments. See "Illiquid
Securities."
Futures Contracts and Related Options
The Intermediate Bond, Bond and Short Bond Portfolios may trade
futures contracts and options on futures contracts in U.S. domestic markets,
such as the Chicago Board of Trade and the International Monetary Market of
the Chicago Mercantile Exchange. They may purchase and sell futures contracts
which obligate a Portfolio to take or make delivery of fixed income securities
at maturity commonly known as interest rate futures contracts.
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A Portfolio may sell a futures contract in order to offset an expected
decrease in the value of its portfolio that might otherwise result from a
market decline. A Portfolio may do so either to hedge the value of its
securities portfolio as a whole, or to protect against declines occurring
prior to sales of securities in the value of the securities to be sold. In
addition, a Portfolio may utilize futures contracts in anticipation of changes
in the composition of its holdings.
The Portfolios may also purchase options on futures contracts and may
purchase and write put and call options on bond indices listed on U.S.
exchanges or traded in the over-the-counter market. A futures option gives the
holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at
any time during the period of the option.
When a Portfolio sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, a Portfolio may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the
Portfolio intends to purchase. Similarly, if the value of a Portfolio's
portfolio securities is expected to decline, the Portfolio might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
The Portfolios' commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated
by the Commodities and Futures Trading Commission ("CFTC"). In addition, a
Portfolio may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the
percentage limitation. Pursuant to SEC requirements, the Portfolios may be
required to segregate cash or high quality money market instruments in
connection with their commodities transactions in an amount generally equal to
the value of the underlying commodity. The Trust intends to comply with the
regulations of the CFTC exempting the Portfolios from registration as a
"commodity pool operator".
For a more detailed description of futures contracts and related
options, see Appendix B to the Statement of Additional Information.
Options
Each Portfolio may purchase and sell put and call options listed on a
national securities exchange and issued by the Options Clearing Corporation
for hedging purposes. Such transactions may be effected on a principal basis
with primary reporting dealers in U.S. Government securities in an amount not
exceeding 5% of a Portfolio's net assets, as described further in the
Statement of Additional Information. Such options may relate to particular
securities or to various bond indices. Purchasing options is a specialized
investment technique which entails a substantial risk of a complete loss of
the amounts paid as premiums to the writer of the option.
A Portfolio may purchase and sell put options on portfolio securities
at or about the same time that they purchase the underlying security or at a
later time. By buying a put, a Portfolio limits its risk of loss from a
decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by a Portfolio in
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order to acquire the underlying security at a later date at a price that
avoids any additional cost that would result from an increase in the market
value of the security. A Portfolio may also purchase call options to increase
its return to investors at a time when the call is expected to increase in
value due to anticipated appreciation of the underlying security. Prior to its
expiration, a purchased put or call option may be sold in a closing sale
transaction (a sale by a Portfolio, prior to the exercise of an option that it
has purchased, of an option of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
In addition, each Portfolio may write covered call and secured put
options. A covered call option means that a Portfolio owns or has the right to
acquire the underlying security subject to call at all times during the option
period. A secured put option means that a Portfolio 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. Such options will be listed on a national securities exchange and
issued by the Options Clearing Corporation and may be effected on a principal
basis with primary reporting dealers in U.S. Government securities. The
aggregate value of the securities subject to options written by a Portfolio
will not exceed 25% of the value of its net assets. In order to close out an
option position prior to maturity, a Portfolio may enter into a "closing
purchase transaction" by purchasing a call or put option (depending upon the
position being closed out) on the same security with the same exercise price
and expiration date as the option which it previously wrote.
By writing a covered call option, a Portfolio forgoes the opportunity
to profit from an increase in the market price of the underlying security
above the exercise price except insofar as the premium represents such a
profit, and it is not able to sell the underlying security until the option
expires or is exercised or the Portfolio effects a closing purchase
transaction by purchasing an option of the same series. If a Portfolio writes
a secured put option, it assumes the risk of loss should the market value of
the underlying security decline below the exercise price of the option. The
use of covered call and secured put options will not be a primary investment
technique of the Portfolios.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
Risk Factors Associated with Futures and Related Options
To the extent a Portfolio is engaging in a futures transaction as a
hedging device, due to the risk of an imperfect correlation between securities
in its 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 gains on the portfolio securities that were the subject of the
hedge. In futures contracts based on indices, the risk of imperfect
correlation increases as the composition of the Portfolio varies from the
composition of the index. In an effort to compensate for the imperfect
correlation of movements in the price of the securities being hedged and
movements in the price of futures contracts, the Portfolio may buy or sell
futures contracts in a greater or lesser dollar amount than the dollar amount
of the securities being hedged if the historical volatility of the futures
contract has been less or greater than that of the securities. Such "over
hedging" or "under hedging" may adversely affect the Portfolio's net
investment results if market movements are not as anticipated when the hedge
is established.
Successful use of futures by a Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of
securities prices,
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interest rates and other economic factors. For example, if the Portfolio has
hedged against the possibility of a decline in the market adversely affecting
the value of securities held in its portfolio and prices increase instead, the
Portfolio will lose part or all of the benefit of the increased value of
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. The Portfolio may have
to sell securities at a time when it may be disadvantageous to do so.
Although a Portfolio intends to enter into futures contracts and
options transactions 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. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contracts prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the
Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures position in anticipation of adverse price
movements, it will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on
the futures contract.
Risk Factors Associated with Derivative Instruments
The Portfolios may purchase certain "derivative instruments."
Derivative instruments are instruments that derive value from the performance
of underlying assets, interest or currency exchange rates, or indices, and
include (but are not limited to) futures contracts, options and structured
debt obligations (including collateralized mortgage obligations and various
floating rate instruments, including inverse floaters).
Derivative instruments present, to varying degrees, market risk that
the performance of the underlying assets, exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
instrument will decline more than the assets, rates or indices on which it is
based; liquidity risk that a Portfolio will be unable to sell a derivative
instrument when it wants because of lack of market depth or market disruption;
pricing risk that the value of a derivative instrument (such as an option)
will not correlate exactly to the value of the underlying assets, rates or
indices on which it is based; and operations risk that loss will occur as a
result of inadequate systems and controls, human error or otherwise. Some
derivative instruments are more complex than others, and for those instruments
that have been developed recently, data are lacking regarding their actual
performance over complete market cycles.
The Adviser will evaluate the risks presented by the derivative
instruments purchased by the Portfolios, and will determine, in connection
with its day-to-day management of the Portfolios, how they will be used in
furtherance of the Portfolios' investment objectives. It is possible, however,
that the Adviser's evaluations will prove to be inaccurate or incomplete and,
even when accurate and complete, it is possible that the Portfolios will,
because of the risks discussed above, incur loss as a result of their
investments in derivative instruments.
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Foreign Securities
The Intermediate Bond, Bond and Short Bond Portfolios may invest in
dollar-denominated obligations of foreign issuers. Such investments may
include both obligations of foreign corporations and banks, as well as
obligations of foreign governments and their political subdivisions.
Investments in foreign securities, whether made directly or indirectly,
involve certain inherent risks, such as political or economic instability of
the issuer or the country of issue, the difficulty of predicting international
trade patterns, changes in exchange rates of foreign currencies and the
possibility of adverse changes in investment or exchange control regulations.
There may be less publicly available information about a foreign company than
about a U.S. company. Listed foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic companies. Further, foreign stock markets are
generally not as developed or efficient as those in the U.S. and in most
foreign markets volume and liquidity are less than in the U.S. Fixed
commissions on foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges, and there is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the U.S. With respect to certain foreign countries,
there is a possibility of expropriation or confiscatory taxation limitations
on the removal of funds or other assets or diplomatic developments that could
affect investment within those countries. Because of these and other factors,
securities of foreign companies acquired by a Portfolio may be subject to
greater fluctuation in price than securities of domestic companies.
Furthermore, some securities may be subject to brokerage taxes levied
by foreign governments, which have the effect of increasing the costs of such
investments and reducing the realized gain or increasing the realized loss on
such securities at the time of sale. Income received by the Portfolios from
sources within foreign countries may be reduced by withholding or other taxes
imposed by such countries. Tax conventions between certain countries and the
United States, however, may reduce or eliminate such taxes. All such taxes
paid by a Portfolio will reduce its net income available for distribution to
investors.
Supranational Bank Obligations
The Intermediate Bond, Bond and Short Bond Portfolios may invest in
obligations of supranational banks. Supranational banks are international
banking institutions designed or supported by national governments to promote
economic reconstruction, development or trade between nations (e.g., the World
Bank). Obligations of supranational banks may be supported by appropriated but
unpaid commitments of their member countries and there is no assurance that
these commitments will be undertaken or met in the future.
When-Issued Purchases and Forward Commitments
The Portfolios may purchase securities on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. Each Portfolio's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolios do not earn income with
respect to these transactions until the subject securities are delivered to
the Portfolios. The Portfolios do not intend
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to engage in when-issued purchases and forward commitments for speculative
purposes but only in furtherance of their investment objectives.
Special Risk Considerations Applicable to the Michigan Municipal Bond
Portfolio
The Michigan Municipal Bond Portfolio will under normal market
conditions consist of Michigan Municipal Securities to the extent of 65% or
more of its total assets. This concentration in securities issued by
governmental units of only one state exposes the Portfolio to risk of loss
greater than that of a more diversified portfolio holding securities issued by
governmental units of different states and different regions of the country.
Moreover, the economy of the State of Michigan is heavily dependent
upon the automobile manufacturing industry. This industry is highly cyclical.
This factor affects the revenue streams of the State of Michigan and its
political subdivisions because it impacts on tax sources, particularly sales
taxes, income taxes and Michigan single business taxes.
A state economy during a recessionary cycle would also, as a separate
matter, adversely affect the capacity of users of facilities constructed or
acquired through the proceeds of private activity bonds or other "revenue"
securities to make periodic payments for the use of those facilities.
The heavy concentration of the Michigan Municipal Bond Portfolio in
Michigan Municipal Securities and the cyclical nature of the economy of the
State of Michigan may adversely affect the liquidity of the Portfolio.
In 1993 and 1994, Michigan adopted complex statutory and
constitutional changes which, among several other changes in tax methods and
rates, have the effect of imposing limits on annual assessment increases and
of transferring a significant part of the operating cost of public education
from locally based property tax sources to state based sources, including
increased sales tax. These changes will affect state and local revenues of
Michigan governmental units in future years in differing ways, not all of
which can be presently known with certainty.
Portfolio Turnover
Generally, the Portfolios will purchase securities for capital
appreciation or investment income, or both, and not for short-term trading
profits. However, a Portfolio may sell a portfolio investment soon after its
acquisition if the Adviser believes that such a disposition is consistent with
or in furtherance of the Portfolio's investment objective. Portfolio
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, the Portfolios
are likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Portfolio
turnover may also result in the realization of substantial net capital gains.
(See "Taxes-Federal" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.) While it is not possible
to accurately predict portfolio turnover rates, the annual turnover rates for
the Intermediate Bond, Bond, Short Bond, Municipal Bond and Michigan Municipal
Bond Portfolios are not expected to exceed 300%, 400%, 300%, 100% and 100%,
respectively.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a particular Portfolio without the affirmative vote
of the holders of a majority of the Portfolio's outstanding shares. Other
investment limitations that cannot be changed without a vote of shareholders
are
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contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured by such
instruments, (b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of the parents, (c) utilities will be divided
according to their services, for example, gas, gas transmission, electric and
gas, electric and telephone will each be considered a separate industry, (d)
personal credit and business credit businesses will be considered separate
industries, and (e) there is no limitation with respect to or arising out of
investments in Municipal Securities (other than private activity bonds).
2. Make loans, except that each Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
3. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. No Portfolio will
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with a Portfolio's
investment practices described in the Statement of Additional Information or
in this Prospectus are not deemed to be pledged for purposes of this
limitation.
The Intermediate Bond, Bond, Municipal Bond and Michigan Municipal
Bond Portfolios may not invest more than 10% of their respective total assets
in illiquid investments. The Short Bond Portfolio may not invest more than 15%
of its total assets in illiquid investments. See "Illiquid Securities" above.
The Intermediate Bond, Bond, Short Bond and Municipal Bond Portfolios
may not purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of a Portfolio's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by a
Portfolio, except that up to 25% of the value of the Portfolio's total assets
may be invested without regard to these limitations.
The Michigan Municipal Bond Portfolio may not with respect to 50% of
its total assets, invest more than 5% of its assets in securities of any one
issuer, except U.S. Government obligations or securities of other regulated
investment companies.
For purposes of the Investment Limitations above, (i) a security is
considered to be issued by the governmental entity (or entities) whose assets
and revenues back the security, or with respect to a private activity bond
that is backed only by the assets and revenues of a non-governmental user, a
security is considered to be issued by such non-governmental user; (ii) in
certain
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circumstances, the guarantor of a guaranteed security may also be considered
to be an issuer in connection with such guarantee; and (iii) U.S. Government
obligations (including securities backed by the full faith and credit of the
United States) are deemed to be U.S. Government obligations for purposes of
the 1940 Act.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Portfolio's portfolio securities will not constitute
a violation of such limitation for purposes of the 1940 Act.
In order to permit the sale of a Portfolio's shares in certain states,
the Portfolios may make commitments more restrictive than the investment
policies and limitations described above. Should a Portfolio determine that
any such commitment is no longer in the best interests of the Portfolio, it
will revoke the commitment by terminating sales of its shares in the state
involved.
PURCHASE OF SHARES
In General
Each Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th Floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Class I shares are sold primarily to NBD and its affiliated and
correspondent banks (the "Banks") acting on behalf of their respective
customers. The Banks may impose different minimum investment and other
requirements, as well as account charges, on their customers and may establish
separate operational arrangements by which shares may be purchased and
redeemed. Customers should contact their Banks for further information.
It is the responsibility of the Banks to transmit their customers'
purchase orders to NBD acting as transfer agent (the "Transfer Agent") and to
deliver required funds on a timely basis. Class I shares will normally be held
of record by the Banks. Confirmations of share purchases and redemptions will
be sent to the Banks. Beneficial ownership of Class I shares will be recorded
by the Banks and reflected in the account statements provided by them to their
customers.
Purchase orders which are accompanied by payment (by check or wire
transfer) and received by the Transfer Agent in proper form on a Business Day
(as defined below) prior to the close of the New York Stock Exchange
("Exchange") are priced at net asset value of the particular Portfolio
determined on that Business Day. Purchase orders which are received by the
Transfer Agent after the close of trading on the Exchange on a Business Day or
on non-Business Days will be executed as of the determination of net asset
value on the next Business Day.
Net Asset Value and Pricing of Shares
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 5:00 p.m. Eastern
time on each day on which the New York Stock Exchange ("Exchange") and NBD
Bank or its bank affiliates are open for business ("Business Day"). Currently,
one or both of these institutions are closed on the customary national
business holidays of New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor
Day, Columbus Day (observed), Veterans' Day, Thanksgiving Day and Christmas
Day. During those business days on which the
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Exchange closes prior to the close of its regular trading hours (currently
4:00 p.m. Eastern time) ("Early Closing Time"), the net asset value of each
Portfolio will be determined and its shares will be priced as of such Early
Closing Time. Net asset value per Class I share of a Portfolio is calculated
by dividing the value of all securities and other assets belonging to the
Portfolio allocable to that Class I, less the liabilities charged to that
Class I, by the number of the outstanding shares of such Class I.
Securities held by the Portfolios which are traded on only
over-the-counter markets and securities for which there were no transactions
are valued at the average of the current bid and asked prices. Fixed income
securities held by the Portfolios are valued according to the broadest and
most representative market, which ordinarily will be the over-the-counter
markets, whether in the United States or in foreign countries. Such securities
are valued at the average of the current bid and asked prices. Securities for
which accurate market quotations are not readily available, and other assets
are valued at fair value by the Adviser under the supervision of the Board of
Trustees. Securities may be valued on the basis of prices provided by
independent pricing services when the Adviser believes such prices reflect the
fair market value of such securities. The prices provided by pricing services
take into account institutional size trading in similar groups of securities
and any developments related to specific securities. For valuation purposes,
the value of assets and liabilities expressed in foreign currencies will be
converted to U.S. dollars equivalent at the prevailing market rate on the day
of valuation. A Portfolio's open futures contracts will be "marked-to-market."
REDEMPTION OF SHARES
Redemption orders are effected at the net asset value next determined
after receipt by the Transfer Agent of a proper notice of redemption. It is
the responsibility of the Banks to transmit redemption orders to the Transfer
Agent and credit their customers' accounts with the redemption proceeds on a
timely basis.
The Trust will make payment for redeemed shares within the time period
prescribed by the settlement requirements of the Securities and Exchange Act
of 1934 after receipt by the Transfer Agent of a request in proper form. If
shares to be redeemed were purchased by check, the Trust will transmit the
redemption proceeds promptly upon clearance of such check, which could take up
to fifteen days from the purchase date. A shareholder of record having
purchased shares by wire must have filed an account application before any
redemption requests can be honored.
Written requests to redeem shares having a net asset value of more
than $50,000 must have all signatures of the registered owner(s) or their
authorized legal representative guaranteed by a commercial bank or trust
company which is a member of the Federal Reserve System or FDIC, a member firm
of a national securities exchange or a savings and loan association. A
signature guaranteed by a savings bank or notarized by a notary public is not
acceptable. A signature guarantee will also be required for a redemption
request (in any amount) if the address of record for the account has been
changed within the previous 15 days or which requests that the proceeds be
paid to an account other than the one preauthorized on the application, a
payee or payees other than the registered owners of the account, or an address
other than the address of record. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
Currently, the Trust imposes no charge when shares are redeemed.
However, Banks may charge a fee for providing services in connection with
investments in
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Portfolio shares. The Trust reserves the right to redeem shares involuntarily,
after sixty days notice, if redemptions cause an account's value to remain
at $1,000 or less. Under certain circumstances, the Trust may make payment
for redemptions in securities or other property.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800)688-3350.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance and yield of each class of shares of the Portfolios may be
compared to the performance of other mutual funds with similar investment
objectives and to bond or other relevant indices or to rankings prepared by
independent services or other financial or industry publications that monitor
the performance of mutual funds. For example, performance and yield may be
compared to data prepared by Lipper Analytical Services, Inc. In addition,
performance and yield data as reported in national financial publications such
as Money Magazine, Forbes, Barron's, The Wall Street Journal and The New York
Times, or in publications of a local or regional nature, may also be used in
comparing the performance of a Portfolio.
"Yield" refers to the income generated by an investment in a class of
shares of a Portfolio over a thirty-day period identified in the
advertisement. This income is then "annualized," i.e., the income generated by
the investment during the thirty-day period is assumed to be earned and
reinvested at a constant rate and compounded semi-annually. The annualized
income is then shown as a percentage of the investment. The Municipal Bond and
Michigan Municipal Bond Portfolios may from time to time advertise a
"tax-equivalent yield" to demonstrate the level of taxable yield necessary to
produce an after-tax yield equivalent to that achieved by the Portfolios. The
"tax-equivalent yield" will be computed by dividing the tax-exempt portion of
a Portfolio's yield by a denominator consisting of one minus a stated federal
(and/or Michigan) income tax rate and adding the product to that portion, if
any, of the Portfolio's yield which is not tax-exempt.
The Portfolios calculate their total returns on an "average annual
total return" basis for various periods from the date they commenced
investment operations and for other periods as permitted under the rules of
the SEC. Average annual total return of a class reflects the average annual
percentage change in value of an investment in the class over the measuring
period. Total returns may also be calculated on an "aggregate total return
basis" for various periods. Aggregate total return reflects the total
percentage change in value over the measuring period. Both methods of
calculating total return also reflect changes in the price of the shares and
assume that any dividends and capital gain distributions made by the class
during the period are reinvested in shares of the class. When considering
average total return figures for periods longer than one year, it is important
to note that a class' annual total return for any one year in the period might
have been greater or less than the average for the entire period.
Performance of each class of shares is based on historical earnings
and will fluctuate and is not intended to indicate future performance. The
investment return and principal value of an investment in a class will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than their original cost. Performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Yield and total return data should also be
considered in light of the risks associated with a Portfolio's portfolio
composition, quality, maturity, operating expenses and market conditions. Any
fees charged by
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financial institutions directly to their customer accounts in connection with
investments in shares will not be reflected in performance calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly by
the Portfolios. Each Portfolio's net realized capital gains are distributed at
least annually.
Dividends and distributions will reduce a class' net asset value by
the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested in additional Class I shares of the same
Portfolio at their net asset value per share determined on the payment date,
unless the holder has notified the Bank in writing that he elects to have
dividends or capital gain distributions (or both) paid in cash. Shareholders
must make such election, or any revocation thereof, in writing to their
financial institutions. The election will become effective with respect to
dividends paid after its receipt by the Transfer Agent. If an account
is established with telephone privileges, the registered owner or his
preauthorized legal representative may change the election to receive
dividends in cash to an election to receive dividends in shares by telephoning
the Transfer Agent at 800-688-3350.
TAXES
Federal
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolios of liability for federal income
taxes to the extent their earnings are distributed in accordance with the
Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that each Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, a Portfolio's investment company taxable income will be its
taxable income, subject to certain adjustments and excluding the excess of any
net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. Each Portfolio intends to distribute as
dividends substantially all of its investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to the Intermediate Bond, Bond and Short Bond Portfolios'
shareholders who are not currently exempt from federal income taxes regardless
of whether a distribution is received in cash or reinvested in additional
shares. (Federal income taxes for distributions to an IRA are deferred under
the Code.) Such ordinary income distributions will qualify for the dividends
received deduction for corporations to the extent of the total qualifying
dividends received by the distributing Portfolio from domestic corporations
for the taxable year. Dividends derived from tax-exempt interest income
("exempt-interest dividends") paid by the Municipal Bond and Michigan
Municipal Bond Portfolios may be treated by their shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code
unless under the circumstances applicable to the particular shareholder the
exclusion would be disallowed. (See Statement of Additional Information under
"Additional Information Concerning Taxes.") An exempt-interest dividend is any
dividend or part thereof (other than a capital gain dividend) paid by the
Municipal Bond and Michigan Bond Portfolios and designated as an
exempt-interest dividend in a written notice mailed to their shareholders not
later than sixty days after the close of such Portfolios' taxable year which
does not exceed in its aggregate the net Municipal Securities interest
received such the Portfolios for the taxable year.
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Substantially all of each Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolios will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the shares and whether such
gains are received in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of a Portfolio, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after the purchase of shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such amounts, although in
effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of shares of a Portfolio depending upon the
tax basis and their price at the time of redemption, transfer or exchange. If
a shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another Portfolio within 90 days of the purchase and is able to reduce the
sales charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included under certain
circumstances in the tax basis of the new shares.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolios and their shareholders and
is not intended as a substitute for careful tax planning. Accordingly,
potential investors in the Portfolios should consult their tax advisers with
specific reference to their own tax situation.
State and Local
Dividends paid by the Michigan Municipal Bond Portfolio that are
derived from interest attributable to tax-exempt Michigan Municipal Securities
will be exempt from Michigan income tax, Michigan intangibles tax and Michigan
single business tax. Conversely, to the extent that the Portfolio's dividends
are derived from interest on obligations other than Michigan Municipal
Securities or certain U.S. Government Obligations (or are derived from short
term or long term gains), such dividends will be subject to Michigan income
tax. Michigan intangibles tax and Michigan single business tax, even though
the dividends may be exempt for federal income tax purposes. The Portfolio is
unable to predict in advance the portion of its dividends that will be derived
from interest on Michigan Municipal Securities, but will mail to its
shareholders not later than sixty days after the close of the Portfolio's
taxable year a written notice
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containing information as to the interest derived from Michigan Securities and
exempt from Michigan income tax, Michigan intangibles tax and Michigan single
business tax.
Except as noted above with respect to Michigan income taxation,
distributions of net income may be taxable to investors as dividend income
under other state or local laws even though a substantial portion of such
distributions may be derived from interest on tax-exempt obligations which, if
realized directly, would be exempt from such income taxes.
Miscellaneous
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in those
states or localities which have income tax laws the treatment of the Trust and
its shareholders under such laws may differ from treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980). He is
77 years old and his address is 333 West Fort Street, Detroit, Michigan 48226.
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation. He is 76 years old and his
address is 4501 Linden Drive, Midland, Michigan 48640.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991). He is 70 years old and his
address is 2733 Glenbrook Court, Bloomfield Hills, Michigan 48302.
[FN]
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
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Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991). He is 53 years old and his
address is 3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business (since 1995); Dean of the University of
Chicago Graduate School of Business (1983-1993); Director of Harpor Capital
Advisors; Trustee, Prairie Family of Funds. He is 55 years old and his address
is 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Prairie Family of
Funds. She is 46 years old and her address is 1100 North Lake Shore Drive,
Chicago, Illinois 60611.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981). He
is 65 years old, and his address is 26957 Northwestern Highway, Suite 288,
Southfield, Michigan 48034.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana. He is 67 years old, and his address is One American Square, 34th
Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President, Association for Investment Management and Research
(since 1995); Senior Vice President, Association for Investment Management and
Research (1992-1995); Professor of Finance, Indiana University (1970-1991);
Vice President, Trust & Investment Advisers, Inc. (1990-1991); Director,
Federal Home Loan Bank of Indianapolis (1981 to 1985). He is 62 years old, and
his address is 5 Boar's Head Lane, Charlottesville, Virginia 22903.
[FN]
- ---------
* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
-32-
<PAGE>
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
The Trustees receive fees and are reimbursed for their expenses in
connection with each meeting of the Board of Trustees they attend. Additional
information on the compensation paid by the Trust to its Trustees and officers
is included in the Statement of Additional Information.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for each Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of December 31,
1995, NBD was providing investment management and advisory services for
accounts aggregating approximately $37.9 billion. NBD has been in the business
of providing such services since 1933. Included among NBD's accounts are
pension and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services
to each Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for each
of the Portfolios.
Douglas S. Swanson, First Vice President, and Ricardo F. Cipicchio,
Vice President, are primarily responsible for the day-to-day management of the
Intermediate Bond and Bond Portfolios. Mr. Swanson joined NBD in 1983 after
receiving an M.S. in Management from the Massachusetts Institute of Technology
(Sloan School). Prior to joining NBD in 1989, Mr. Cipicchio was employed by
CITGO as a petroleum engineer. Mr. Cipicchio received an MBA in Finance from
the University of Michigan.
Mr. Cipicchio and Christopher J. Nauseda, Second Vice President, are
primarily responsible for the day-to-day portfolio management of the Short
Bond Portfolio. Mr. Nauseda, who received an MBA from Wayne State University
in 1992, joined NBD in 1982.
Robert T. Grabowski, First Vice President and manager of the municipal
desk at NBD, is the person primarily responsible for the day-to-day management
of the Municipal Bond and Michigan Municipal Bond Portfolios. Mr. Grabowski
has been the portfolio manager of the Portfolio since its inception and
manager of the municipal desk since 1985. Rebecca L. Gersonde, Second Vice
President, is the associate manager for both portfolios. Ms. Gersonde joined
NBD in 1982.
For its services under the Advisory Agreement, NBD is entitled to
receive an advisory fee, computed daily and payable monthly, at an annual rate
of .65% of the average daily net assets of each of the Portfolios. In
addition, NBD is entitled to 4/10ths of the gross income earned by the
Intermediate Bond, Bond, Municipal Bond and Michigan Municipal Bond Portfolios
on each loan of securities (excluding capital gains and losses, if any). NBD
may voluntarily waive its fee in whole or in part with respect to any
particular Portfolio.
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolios for these
services are described in the Statement of Additional Information.
-33-
<PAGE>
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Adviser from continuing to perform investment
advisory, custodial or transfer agency services for the Trust or require the
Adviser to alter or discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees would recommend that shareholders approve new agreements
with another entity or entities qualified to perform such services and
selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On December 31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of each Portfolio: (i) fees payable
to the Co-Distributors
-34-
<PAGE>
pursuant to the Distribution Agreement; (ii) the actual costs and expenses in
connection with advertising and marketing the Portfolio's shares; and (iii)
fees pursuant to agreements with securities dealers, financial institutions
and other professionals ("Service Agents") for administration or servicing of
Portfolio shareholders ("Servicing"). Servicing may include, among other
things: answering client inquiries regarding the Trust and the Portfolios;
assisting clients in changing dividend options, account designations and
addresses; performing sub-accounting; establishing and maintaining
shareholder accounts and records; processing purchase and redemption
transactions; investing client cash account balances automatically in
Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
printing Prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of a Portfolio's average net assets, and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of the Trust's investment portfolios attributable to
investments by clients of Essex. The payments to be made to the
Co-Distributors which are based on a percentage of the net assets of the
Portfolios are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolios' shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust, and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Trust expects
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan and Shareholder Servicing Plan, outside auditing and
legal expenses, all taxes and corporate fees payable by the Trust, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders,
costs of shareholder reports and shareholder meetings, and any extraordinary
expenses. Each Portfolio also pays for brokerage commissions and transfer
taxes (if any) in connection with the purchase and sale of portfolio
securities. Expenses attributable to a particular Portfolio of the
-35-
<PAGE>
Trust will be charged to that Portfolio and expenses not readily identifiable
as belonging to a particular Portfolio will be allocated by the Board of
Trustees among one or more Portfolios in such a manner as it shall deem fair
and equitable. For the fiscal year ended December 31, 1995, the Intermediate
Bond, Bond, Short Bond, Municipal Bond and Michigan Municipal Bond Portfolios'
total expenses were .73%, .74%, .75%, .79% and .79% (after fee waivers, if
any) of their average net assets, respectively. The Statement of Additional
Information describes in more detail the fees and expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having seventeen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolios described herein, the Trust offers the following
investment portfolios: the Woodward Growth/Value Fund, Opportunity Fund,
Intrinsic Value Fund, Capital Growth Fund, Balanced Fund, Equity Index Fund,
International Equity Fund, Money Market Fund, Government Fund, Treasury Money
Market Fund, Tax-Exempt Money Market Fund and Michigan Tax-Exempt Money Market
Fund. The Trust has established the following two distinct classes of shares
within each Portfolio described herein: Class I shares (Original Class)
and Class A shares (Special Class 1). A sales person and any other
person or institution entitled to receive compensation for selling or
servicing shares may receive different compensation with respect to
different classes of shares in the Series. Each share has $.10 par
value, represents an equal proportionate interest in the related
portfolio with other shares of the same class outstanding, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to such portfolio as are declared in the discretion of the
Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Voting rights are not cumulative, and accordingly, the holders of more
than 50% of the aggregate number of shares of all Trust portfolios may elect
all of the Trustees.
As of February 29, 1996, NBD held beneficially or of record
approximately 87.62%, 88.13%, 91.65%, 58.66% and 39.20% of the outstanding
shares of the Intermediate Bond, Bond, Short Bond, Municipal Bond and Michigan
Municipal Bond Portfolios, respectively, and therefore may be considered to be
a controlling person of the Trust for purposes of the 1940 Act.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to
-36-
<PAGE>
assist shareholder communications in connection with any meeting of
shareholders as prescribed in Section 16(c) of the 1940 Act.
-37-
<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give
any information or to make any
representations not contained in this
Prospectus, or in the Portfolios'
Statement of Additional Information
incorporated herein by reference, in
connection with the offering made by
this Prospectus and, if given or
made, such information or
representations must not be relied
upon as having been authorized by the
Trust, Adviser or Sponsors and Co-
Distributors. This Prospectus does
not constitute an offering by the
Portfolios or by their Co-
Distributors, in any jurisdiction in
which such offering may not lawfully
be made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY............................. 2
FINANCIAL HIGHLIGHTS........................ 5
INTRODUCTION................................ 10
PROPOSED REORGANIZATION..................... 10
INVESTMENT OBJECTIVES, POLICIES AND
RISK FACTORS................................ 10
OTHER INVESTMENT POLICIES................... 13
PURCHASE OF SHARES.......................... 26
REDEMPTION OF SHARES........................ 27
PERFORMANCE AND YIELD
INFORMATION......................... 27
DIVIDENDS AND DISTRIBUTIONS................. 28
TAXES .................................... 29
MANAGEMENT.................................. 31
OTHER INFORMATION........................... 36
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania
19107-3496
<PAGE>
[ BACK COVER, COLUMN 2 ]
CLASS I SHARES OF THE:
WOODWARD INTERMEDIATE BOND FUND
WOODWARD BOND FUND
WOODWARD SHORT BOND FUND
WOODWARD MUNICIPAL BOND FUND
WOODWARD MICHIGAN MUNICIPAL BOND FUND
THE WOODWARD FUNDS(R)
Prospectus
April 15, 1996
-38-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series V - Original Class and Special Class 1 Representing Interests
in the Class I and Class A Shares of the
Woodward U.S. Government Income Fund
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page.................................. Cover page
2. Synopsis.................................... Expense Summary;
Background
3. Financial Highlights........................ Financial
Highlights;
Performance and
Yield Information
4. General Description of
Registrant.................................. Cover Page;
Introduction;
Investment
Objective,
Policies and Risk
Factors; Other
Investment
Policies; Other
Information
5. Management of Registrant ................... Management
6. Capital Stock and Other
Securities.................................. Purchase of
Shares; Redemption
of Shares;
Shareholder
Services;
Dividends and
Distributions;
Taxes; Management;
Other Information
7. Purchase of Securities
Being Offered............................... Purchase of
Shares;
Shareholder
Services;
Management
8. Redemption or Repurchase.................... Redemption of
Shares;
Shareholder
Services
9. Pending Legal Proceedings................... Inapplicable
-16-
<PAGE>
- -----------------------------------------------------------------------------
PROSPECTUS ________, 1996
- -----------------------------------------------------------------------------
THE WOODWARD FUNDS
c/o NBD Bank, N.A., Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
24 Hour yield and performance information
Purchase and Redemption orders:
(800) 688-3350
- ------------------------------------------------------------------------------
The Woodward Funds (the "Trust") is offering in this Prospectus shares
in the following investment portfolio which has its own investment objective
and policies as described in this Prospectus:
Class I and Class A Shares of the:
Woodward U.S. Government Income Fund
The Woodward U.S. Government Income Fund ("U.S. Government Income
Portfolio" or the "Portfolio") is advised by NBD Bank, N.A. ("NBD" or the
"Adviser") and is sponsored and distributed by First of Michigan Corporation
("FoM" or "Co-Distributor") and Essex National Securities, Inc. ("Essex" or
"Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Funds at the address above.
The Statement of Additional Information bears the same date as this Prospectus
and is incorporated by reference in its entirety into the Prospectus.
- ------------------------------------------------------------------------------
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, N.A., ITS PARENT
COMPANY OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE
U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL
AGENCY. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE LOSS OF
PRINCIPAL.
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.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER:
NBD BANK, N.A.
<PAGE>
EXPENSE SUMMARY
The following table is provided to assist investors in understanding
the various costs and expenses that an investor will indirectly incur as a
beneficial owner of shares in the U.S. Government Income Portfolio.
<TABLE>
<CAPTION>
U.S. Govern- U.S. Govern-
ment Income ment Income
Class A Shares(1) Class I Shares(1)
--------------- ---------------
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load 4.5% None
on Purchases (as
a percentage of
offering price) None None
Sales Load Imposed
on Reinvested
Dividends
Deferred Sales Load None None
Redemption Fee None None
Exchange Fee None None
Annual Operating Expenses
(as a percentage of average net
assets)
Management Fee .65% .65%
12b-1 Fees Payable
to FoM and Essex(2) .015%(3) .015%
Other 12b-1 and
Servicing Fees(2) .00%(3) .00%
Other Expenses .085%(3) .085%
------- ------
Total Operating Expenses(4) .75%(3) .75%
<FN>
- ----------------------
1. As of the date of this Prospectus, the Portfolio had not
commenced investment operations and therefore the expenses for the Portfolio
are estimates only.
2. As a result of the payment of sales loads and 12b-1 fees, long-term
shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. (the "NASD"). Rules adopted by the NASD generally limit the
aggregate sales charges and payments under the Trust's Service and
Distribution Plan ("Distribution Plan") to a certain percentage of total new
gross share sales, plus interest. The Trust would stop accruing 12b-1 fees if,
to the extent, and for as long as, such limit would otherwise be exceeded.
3. The Trust has adopted a Shareholder Servicing Plan pursuant to
which the Trust may enter into agreements with institutions under which they
will render shareholder administrative support services for their customers
who beneficially own shares in return for a fee of up to .25% per annum of
the value of such shares ("Servicing Fees"). Effective on or about April 1,
1996, the Trust will implement the Shareholder Servicing Plan with respect to
Class A shares only and Servicing Fees will be borne exclusively by such
Class A shares. For further information on these matters, see "Shareholder
Servicing Plan" and "Investment Adviser, Custodian, Transfer Agent" under
the heading "Management" in this Prospectus.
-2-
<PAGE>
4. Credits or charges not reflected in the expense table may be
incurred directly by customers of financial institutions in connection with an
investment in the Portfolio.
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
U.S.
U.S. Govern-
Govern- ment
ment Income
Income Institu-
Class A tional
Shares Shares
-------- --------
<S> <C> <C>
Example
You would pay the
following expenses
on a $1,000 investment,
assuming: (1) a 5%
annual return and
(2) redemption at
the end of each
time period:
One Year:......... $ 7.69 $ 7.69
Three Years:...... $ 24.05 $ 24.05
Example
You would pay the
following expenses
on a $1,000 investment,
assuming: (1) a 5% annual
return, (2) redemption at
the end of each time period
and (3) the imposition of a
maximum sales load at the
beginning of the period:
One Year:......... $ 52.34 N/A
Three Years....... $ 67.97 N/A
</TABLE>
THE FOREGOING SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR RATES OF RETURN. ACTUAL EXPENSES OR RATE OF RETURN MAY BE
GREATER OR LESSER THAN THOSE SHOWN.
The example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in the Portfolio, based upon payment by the
Portfolio of operating expenses at the level set forth in the expense table.
For more complete descriptions of Portfolio expenses, see "Investment Adviser,
Custodian and Transfer Agent," "Sponsors and Co-Distributors," "Shareholder
Servicing Plan," "Service and Distribution Plan" and "Trust Expenses" under
the heading "Management" in this Prospectus.
-4-
<PAGE>
BACKGROUND
Shares of the Portfolio have been classified into two separate classes
of shares -- Class I shares and Class A shares. Currently, Class I shares and
Class A shares represent equal pro rata interests in a Portfolio. Effective
April 1, 1996, the Trust will allocate Servicing Fees attributable to Class A
shares exclusively to such shares. See "Shareholder Servicing Plan" and
"Investment Adviser, Custodian and Transfer Agent" under "Management," and see
"Dividends and Distributions" and "Other Information" for a description of the
impact that this may have on holders of Class A and Class I shares.
-5-
<PAGE>
INTRODUCTION
The Trust is an open-end management investment company registered
under the Investment Company Act, as amended (the " 1940 Act"). The Trust
currently consists of eighteen investment portfolios, each of which consists
of a separate pool of assets with separate investment objective and policies.
However, only the U.S. Government Income Portfolio is offered pursuant to this
Prospectus. The U.S. Government Income Portfolio is classified as a
diversified investment portfolio under the 1940 Act.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The investment objective of the U.S. Government Income Portfolio may
not be changed without approval of the holders of at least a majority of its
outstanding shares. See "Other Information." Except as noted below under
"Investment Limitations," the Portfolio's investment policies may be changed
without a vote of shareholders. There can be no assurance that the Portfolio
will achieve its objective.
The investment objective of the U.S. Government Income Portfolio is to
seek a high rate of current income by investing primarily in obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
normally having remaining maturities of up to 30 years and repurchase
agreements relating to such obligations. By so restricting its investments,
the Portfolio's ability to achieve a high rate of current income will be
limited.
In furtherance of its investment objective, the Portfolio may invest
in all types of U.S. Government securities, including U.S. Treasury bonds,
notes and bills, and obligations of Federal Home Loan Banks, Federal Farm
Credit Banks, Federal Land Banks, the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Tennessee Valley Authority,
Resolution Funding Corporation and Maritime Administration. The Portfolio may
also invest in interests in the foregoing securities, including mortgage
backed securities guaranteed by a U.S. Government agency or instrumentality,
and in Government-backed trusts which hold obligations of foreign governments
that are guaranteed or backed by the full faith and credit of the United
States.
Obligations of certain U.S. Government agencies and instrumentalities
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the Export-
Import Bank of the United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality.
The securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities described above have historically involved
little risk of loss of principal if held to maturity. However, no assurance
can be given that the U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not legally obligated to do
so. In addition, due to fluctuations in interest rates, the market value of
these securities is expected to vary during the period a shareholder owns
shares of the Portfolio. Specifically, the value of the Portfolio's
investments can be
-6-
<PAGE>
expected to fall when prevailing interest rates rise and rise when interest
rates fall.
As stated, the Portfolio intends to invest primarily in obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
and related repurchase agreements and, in no event, will it invest less than
65% of its total assets in these instruments during normal market conditions.
Such instruments may also include mortgage backed securities, stripped
Government obligations, and similar instruments.
For further information regarding the instruments in which the
Portfolio may invest, see "Other Investment Policies" below.
OTHER INVESTMENT POLICIES
Zero Coupon Obligations
Zero coupon obligations are discount debt obligations that do not make
periodic interest payments although income is generally imputed to the holder
on a current basis. Such obligations may have higher price volatility than
those which require the payment of interest periodically. The Adviser will
consider the liquidity needs of the Portfolio when any investment in zero
coupon obligations is made.
Stripped Government Obligations
The Portfolio may purchase Treasury receipts and other "stripped"
securities that evidence ownership in either the future interest payments or
the future principal payments on obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. These participations are issued
at a discount to their "face value," and may include stripped mortgage backed
securities ("SMBS"), which are derivative multi-class mortgage securities.
Stripped securities, particularly SMBS, may exhibit greater price volatility
than ordinary debt securities because of the manner in which their principal
and interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, the Portfolio
may fail to fully recoup its initial investment in these securities. The
market value of the class consisting entirely of principal payments generally
is extremely volatile in response to changes in interest rates. The yields on
a class of SMBS that receives all or most of the interest are generally higher
than prevailing market yields on other mortgage backed obligations because
their cash flow patterns are more volatile and there is a greater risk that
the initial investment will not be fully recouped.
Custodial Receipts for Treasury Securities
The Portfolio may purchase participations in trusts that hold U.S.
Treasury securities (such as TIGRs and CATs) where the trust participations
evidence ownership in either the future interest payments or the future
principal payments on the U.S. Treasury securities. These participations are
normally issued at a discount to their "face value," and may exhibit greater
price volatility than ordinary debt securities because of the manner in which
their principal and interest are returned to investors.
-7-
<PAGE>
Mortgage Backed Securities
Mortgage backed securities represent an ownership interest in a pool
of mortgages, the interest on which is in most cases issued and guaranteed by
an agency or instrumentality of the U.S. Government, although not necessarily
by the U.S. Government itself. Mortgage backed securities include
collateralized mortgage obligations and mortgage pass-through certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. The
Portfolio, however, will not purchase "residual" CMO interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which
the Portfolio may invest is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to the timely payment of
principal and interest by the full faith and credit of the U.S. Government.
Another type is a Federal National Mortgage Association ("FNMA") Certificate,
the principal and interest of which are guaranteed only by FNMA itself, not by
the full faith and credit of the U.S. Government. Another type is a Federal
Home Loan Mortgage Corporation ("FHLMC") Participation Certificate which is
guaranteed by FHLMC as to timely payment of principal and interest. However,
like a FNMA security, it is not guaranteed by the full faith and credit of the
U.S. Government.
The estimated life of a mortgage backed security varies with the
prepayment experience with respect to the underlying debt instruments. The
rate of such prepayments, and hence the life of a mortgage backed security,
will be primarily a function of current market interest rates, although other
economic and demographic factors may be involved. For example, falling
interest rates generally result in an increase in the rate of prepayments of
mortgage loans while rising interest rates generally decrease the rate of
prepayments. An acceleration in prepayment in response to sharply falling
interest rates may shorten the security's average maturity and limit the
potential appreciation in the security's value relative to a conventional debt
security. In periods of sharply rising rates, prepayments are generally slow
which may increase the security's average life. In certain cases, mortgage
backed securities may not be effective vehicles for locking in high long-term
yields. The Adviser will limit the Portfolio's purchases of Asset Backed
Securities to securities that are readily marketable at the time of purchase.
Premium Securities
The Portfolio may at times invest in securities bearing coupon rates
higher than prevailing market rates. Such "premium" securities are typically
purchased at prices greater than the principal amounts payable on maturity.
The Portfolio may elect not to amortize the premium paid for certain of these
securities in calculating its net investment income. As a result, the purchase
of such securities may provide the Portfolio a higher level of investment
income distributable to shareholders on a current basis than if the Portfolio
purchased securities bearing current market rates of interest. Because the
value of premium securities tends to approach the principal amount as they
approach maturity (or call price in the case of securities approaching their
first call date), the purchase of such securities may increase the Portfolio's
risk of capital loss if such securities are held to maturity (or first call
date).
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<PAGE>
During a period of declining interest rates, many of the Portfolio's
investments will likely bear coupon rates which are higher than the current
market rates, regardless of whether such securities were originally purchased
at a premium. Such securities would generally carry premium market values
which would be reflected in the net asset value of the Portfolio's shares. As
a result, an investor who purchases shares of the Portfolio during such
periods may initially receive higher taxable monthly distributions (derived
from the higher coupon rates payable on the Portfolio's investments) than
might be available from alternative investments bearing current market
interest rates, but may face an increased risk of capital loss as these higher
coupon securities approach maturity (or first call date). In evaluating the
potential performance of an investment in the Portfolio, investors may find it
useful to compare the Portfolio's current dividend rate with the Portfolio's
"yield," which is computed on a yield-to-maturity basis in accordance with SEC
regulations and which reflects amortization of market premiums.
Futures Contracts and Related Options
The Portfolio may enter into contracts for the future delivery of
fixed income securities commonly known as interest rate futures contracts, as
well as related options. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period
of the option. The Portfolio's commodities transactions must constitute bona
fide hedging or other permissible transactions pursuant to regulations
promulgated by the Commodities and Futures Trading Commission ("CFTC"). In
addition, the Portfolio may not engage in such transactions if the sum of the
amount of initial margin deposits and premiums paid for unexpired commodity
options, other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the
percentage limitation. Pursuant to SEC requirements, the Portfolio may be
required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to
the value of the underlying commodity. For a more detailed description of
futures contracts and related options, see Appendix B to the Statement of
Additional Information.
Options
The Portfolio may purchase and sell put and call options listed on a
national securities exchange and issued by the Options Clearing Corporation
for hedging purposes. Such transactions may be effected on a principal basis
with primary reporting dealers in U.S. Government securities in an amount not
exceeding 5% of the Portfolio's net assets, as described further in the
Statement of Additional Information. Such options may relate to particular
securities or to various bond indexes. Purchasing options is a specialized
investment technique which entails a substantial risk of a complete loss of
the amounts paid as premiums to the writer of the option.
The Portfolio may purchase and sell put options on portfolio
securities at or about the same time that it purchases the underlying security
or at a later time. By buying a put, the Portfolio limits its risk of loss
from a decline in the market value of the security until the put expires. Any
appreciation in the value of and yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by the Portfolio in order to acquire the underlying security at a
later date at a price that avoids any additional cost that would result from
an increase in the market value of the security. The Portfolio may also
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<PAGE>
purchase call options to increase its return to investors at a time when the
call is expected to increase in value due to anticipated appreciation of the
underlying security. Prior to its expiration, a purchased put or call option
may be sold in a closing sale transaction (a sale by the Portfolio, prior to
the exercise of an option that it has purchased, of an option of the same
series), and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the option plus the related
transaction costs.
In addition, the Portfolio may write covered call and secured put
options. A covered call option means that the Portfolio owns or has the right
to acquire the underlying security subject to call at all times during the
option period. A secured put option means that the Portfolio 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. Such options will be listed on a national securities exchange
and issued by the Options Clearing Corporation and may be effected on a
principal basis with primary reporting dealers in U.S. Government securities.
The aggregate value of the securities subject to options written by the
Portfolio will not exceed 25% of the value of its net assets. In order to
close out an option position prior to maturity, the Portfolio may enter into a
"closing purchase transaction" by purchasing a call or put option (depending
upon the position being closed out) on the same security with the same
exercise price and expiration date as the option which it previously wrote.
By writing a covered call option, the Portfolio forgoes the
opportunity to profit from an increase in the market price of the underlying
security above the exercise price except insofar as the premium represents
such a profit, and it is not able to sell the underlying security until the
option expires or is exercised or the Portfolio effects a closing purchase
transaction by purchasing an option of the same series. If the Portfolio
writes a secured put option, it assumes the risk of loss should the market
value of the underlying security decline below the exercise price of the
option. The use of covered call and secured put options will not be a primary
investment technique of the Portfolio.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
Short-Term Investments
The Portfolio may hold short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, repurchase agreements
relating to such obligations and cash, pending investment, to meet anticipated
redemption requests or if, in the opinion of the Adviser, suitable securities
in which the Portfolio normally invests are unavailable. The Portfolio may
also invest its cash balances in securities issued by other investment
companies which invest primarily in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. As a shareholder of
another investment company, the Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that the Portfolio bears directly in connection with its
own operations. These short-term investments are described in greater detail
in the Statement of Additional Information.
Repurchase and Reverse Repurchase Agreements
To increase its income, the Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
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<PAGE>
agreements"). The Portfolio will not enter into repurchase agreements with the
Adviser, the Co-Distributors, or any of their affiliates. The seller under a
repurchase agreement will be required to maintain the value of the securities
subject to the agreement at not less than the repurchase price, marked to
market daily. Default by the seller would, however, expose the Portfolio to
possible loss because of adverse market action or delay in connection with the
disposition of the underlying obligations.
The Portfolio may also obtain funds for temporary purposes by entering
into reverse repurchase agreements. Pursuant to such agreements the Portfolio
will sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
it is obligated to repurchase.
Lending Portfolio Securities
To increase income or offset expenses, the Portfolio may lend its
portfolio securities to financial institutions such as banks and
broker-dealers in accordance with the investment limitations described below.
Agreements would require that the loans be continuously secured by collateral
equal at all times in value to at least the market value of the securities
loaned plus accrued interest. Collateral for such loans could include cash or
securities of the U.S. Government, its agencies or instrumentalities. Such
loans will not be made if, as a result, the aggregate of all outstanding loans
of the Portfolio exceeds one-third of the value of its total assets. Loans of
securities involve risks of delay in receiving additional collateral or in
recovering the securities loaned or possible loss of rights in the collateral
should the borrower of the securities become insolvent. Loans will be made
only to borrowers that provide the requisite collateral comprised of liquid
assets and when, in the Adviser's judgment, the income to be earned from the
loan justifies the attendant risks.
Illiquid Securities
In accordance with its fundamental investment limitation described
below, the Portfolio will not knowingly invest more than 15% of the value of
its total assets in securities that are illiquid. Securities having legal or
contractual restrictions on resale or no readily available market, and
instruments (including repurchase agreements and variable and floating rate
instruments) that do not provide for payment to the Portfolio within seven
days after notice are subject to this 15% limit. Securities that have legal or
contractual restrictions on resale but have a readily available market are not
deemed to be illiquid for purposes of this limitation.
The Portfolio may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in the Portfolio during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities. The ability to sell to qualified institutional
buyers under Rule 144A is a recent development, and it is not possible to
predict how this market will develop. The Board of Trustees will carefully
monitor any investments by the Portfolio in these securities.
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<PAGE>
Borrowings
The Portfolio may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which the Portfolio would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Portfolio may decline below the price of the securities
it is obligated to repurchase.
When-Issued Purchases and Forward Commitments
The Portfolio may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by the Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. The Portfolio's forward commitments and when-issued
purchases are not expected to exceed 25% of the value of its total assets
absent unusual market conditions. The Portfolio does not earn income with
respect to these transactions until the subject securities are delivered to
it. The Portfolio does not intend to engage in when-issued purchases and
forward commitments for speculative purposes but only in furtherance of its
investment objective.
Portfolio Turnover
Generally, the Portfolio will purchase securities for capital
appreciation or investment income, or both, and not for short-term trading
profits. However, the Portfolio may sell a portfolio investment soon after its
acquisition if the Adviser believes that such a disposition is consistent with
or in furtherance of the Portfolio's investment objective. Portfolio
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, the Portfolio is
likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Portfolio
turnover may also result in the realization of substantial net capital gains.
(See "Taxes-Federal" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.) While it is not possible
to accurately predict portfolio turnover rates, the annual turnover rate for
the U.S. Government Income Portfolio is not expected to exceed 300%.
Investment Limitations
The U.S. Government Income Portfolio is subject to a number of
investment limitations. The following investment limitations are matters of
fundamental policy and may not be changed with respect to the Portfolio
without the affirmative vote of the holders of a majority of the Portfolio's
outstanding shares. Other investment limitations that cannot be changed
without a vote of shareholders are contained in the Statement of Additional
Information under "Investment Objective, Policies and Risk Factors."
The U.S. Government Income Portfolio may not:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) if,
immediately after such purchase, more than 5% of the value of the Portfolio's
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<PAGE>
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by the
Portfolio, except that up to 25% of the value of the Portfolio's total assets
may be invested without regard to these limitations.
2. Purchase any securities which would cause 25% or more of the value
of the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and repurchase agreements secured by such
instruments.
3. Invest more than 15% of its total assets in illiquid investments.
See "Illiquid Securities" above.
4. Make loans, except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
5. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or mortgage, pledge or hypothecate any
assets, except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Portfolio's total assets at the time of such borrowing. The Portfolio will not
purchase securities while its borrowings (including reverse repurchase
agreements) in excess of 5% of its total assets are outstanding. Securities
held in escrow or separate accounts in connection with the Portfolio's
investment practices described in the Statement of Additional Information or
in this Prospectus are not deemed to be pledged for purposes of this
limitation.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of the Portfolio's investments will not constitute a violation of such
limitation for purposes of the 1940 Act.
In order to permit the sale of the Portfolio's shares in certain
states, the Trust may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the best interests of the Portfolio, it will
revoke the commitment by terminating sales of its shares in the state
involved.
PURCHASE OF SHARES
In General
The Portfolio's shares are offered and sold on a continuous basis by
FoM and Essex, as the Trust's Co-Distributors. FoM is a registered
broker/dealer with offices at 100 Renaissance Center, 26th floor, Detroit,
Michigan 48243. Essex is a registered broker/dealer with offices at 215
Gateway Road West, Napa, California 94558.
Purchase of Class I Shares
Class I shares are sold primarily to NBD and its affiliated and
correspondent banks (the "Banks") acting on behalf of their respective
customers. Customers may purchase Class I shares through procedures
established by the Banks in connection with the requirements of their customer
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<PAGE>
accounts. Depending on the terms governing the particular account, the Banks
may impose account charges such as account maintenance fees, compensating
balance requirements or other charges based upon account transactions, assets
or income which will have the effect of reducing the net return on a
shareholder's investment in the Portfolio.
It is the responsibility of the Banks to transmit their customers'
purchase orders to NBD acting as transfer agent (the "Transfer Agent") and to
deliver required funds on a timely basis, in accordance with the procedures
stated below. Class I shares will normally be held of record by the Banks.
Confirmations of share purchases and redemptions will be sent to the Banks.
Beneficial ownership of Class I shares will be recorded by the Banks and
reflected in the account statements provided by them to their customers.
Purchase of Class A Shares
Class A shares are sold to the public ("Investors") primarily through
financial institutions such as banks, brokers and dealers. Investors may
purchase Class A shares directly in accordance with the procedures set forth
below or through procedures established by their financial institutions in
connection with the requirements of their accounts.
Financial institutions may charge certain account fees depending on
the type of account the Investor has established with the institution. (For
information on such fees, the Investor should review his agreement with the
institution or contact it directly). In addition, subject to the receipt of an
exemptive order from the SEC, certain financial institutions may enter into
shareholder servicing agreements with the Trust whereby a financial
institution would perform various administrative support services for its
customers who are the beneficial owners of Class A shares and would receive
fees from the Portfolio for such services; such fees which are attributable
to Class A Shares will be borne exclusively by those shares. See "Shareholder
Servicing Plan" and "Service and Distribution Plan" under the heading
"Management" in this Prospectus.
All shareholders of record will receive confirmations of share
purchases and redemptions. Shares of the Portfolio purchased by institutions
on behalf of their customers will normally be held of record by them.
Institutions will record their customers' beneficial ownership of Portfolio
shares and provide regular account statements reflecting such beneficial
ownership.
Financial institutions will be responsible for transmitting purchase
and redemption orders to FoM, Essex or the Transfer Agent on a timely basis,
in accordance with the procedures stated below.
Purchase Procedures
The minimum initial investment is $1,000, except for purchases through
an institution whose customers have invested an aggregate minimum of $1,000 or
for investments made through an institution's sweep privilege, the Trust's
Automatic Investment Plan as described below, or the Trust's IRA program as
described below. The minimum subsequent investment is $100, except for
reinvested dividends or as otherwise described below. Institutions may impose
different minimum investment and other requirements on their customers. The
Trust reserves the right to reject any purchase order.
Orders for Class I shares may be placed by Banks and orders for Class
A shares may be placed by telephone by calling (800) 688-3350 (provided an
Investor has made the appropriate election in his account application) or by
mail (by completing the account application which accompanies this Prospectus
and mailing the completed form and the payment for shares to FoM, Essex or the
Transfer Agent). All checks must be drawn on a bank located within the United
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<PAGE>
States and must be payable in U.S. dollars. Subsequent investments in an
existing account in the Portfolio may be made at any time by sending a check
or money order along with either (a) the detachable form that regularly
accompanies the Trust's confirmation of a prior transaction, (b) a subsequent
order form which may be obtained from the Trust, or (c) a letter stating the
amount of the investment, the name of the Portfolio and the account number in
which the investment is to be made. If any check used for investment in an
account does not clear, the order will be cancelled and notice thereof will be
given; in such event the account will be responsible for any loss to the Trust
as well as a $15 fee imposed by the Transfer Agent.
With the exception of customers of FoM, shares may also be paid for by
wiring federal funds to the Transfer Agent, NBD Bank, N.A., ABA 072000326 NATL
DET, for the account of The Woodward Funds, Account Number GL 325612, and
identifying the customer name and account number. Before wiring payment,
customers should notify the Transfer Agent by calling (800) 688-3350.
If customers of FoM wire payment in federal funds, they should direct
payment to NBD Bank, N.A., ABA 072000326 NATL DET, for the account of First of
Michigan Corporation re: The Woodward Funds, Account Number 059-41, and should
identify the customer name and account number. Before wiring payment,
customers of FoM should call FoM at (800) 544-8275 (outside Michigan) or (800)
852-7730 (within Michigan).
Purchase orders for Portfolio shares which are accompanied by payment
(by check or wire transfer) and received by the Transfer Agent in proper form
on a Business Day (as defined below) prior to the close of the New York Stock
Exchange (the "Exchange") are priced at the public offering price (i.e. net
asset value plus the applicable sales load set forth below) determined on that
Business Day. Purchase orders which are received by the Transfer Agent after
the close of trading on the Exchange on a Business Day or on non-Business Days
will be executed as of the determination of net asset value on the next
Business Day. Purchase orders which are received by the Transfer Agent after
the close of trading on the Exchange on a Business Day or on non-Business
Days, and orders for which payment is not received within five Business Days
will be executed as of the determination of net asset value on the next
Business Day.
The Trust will not accept payment in cash or third party checks for
the purchase of shares. Federal regulations require that each investor provide
a certified taxpayer identification number upon opening or reopening an
account. Applications without a taxpayer identification number will not be
accepted. See the account application for further information about this
requirement.
Net Asset Value and Pricing of Shares
The net asset value per share of the Portfolio for purposes of pricing
purchase and redemption orders is determined by the Adviser as of 5:00 p.m.
Eastern time on each business day ("Business Day") except those holidays the
Exchange or NBD or its bank affiliates observe (currently, New Year's Day, Dr.
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day (observed), Labor Day, Columbus Day, Veterans Day
(observed), Thanksgiving Day and Christmas Day (observed)). Net asset value
per share is calculated by dividing the value of all securities and other
assets belonging to the Portfolio, less its liabilities, by the number of the
Portfolio's outstanding shares.
Fixed income securities held by the Portfolio are valued according to
the broadest and most representative market, which ordinarily will be the
over-the-counter markets. Securities are valued at the average of the current
bid and asked prices. Securities for which accurate market quotations are not
readily available and other assets are valued at fair value by the Adviser
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under the supervision of the Board of Trustees. Securities may be valued on
the basis of prices provided by independent pricing services when the Adviser
believes such prices reflect the fair market value of such securities. The
prices provided by pricing services take into account institutional size
trading in similar groups of securities and any developments related to
specific securities. The Portfolio's open futures contracts will be "marked-
to-market."
PUBLIC OFFERING PRICE
The public offering price for Class A shares of the U.S. Government
Income Portfolio is the sum of the net asset value per share of the shares
being purchased plus a sales load as follows:
<TABLE>
<CAPTION>
Total Sales Load Reallowance to Institutions
---------------- ---------------------------
As a % of As a % of net As a % of
offering price asset value offering price
Amount of Transaction per share per share per share
------------- ------------ --------------
<S> <C> <C> <C>
Less than $25,000........ 4.50 4.71 4.00
$25,000 to $49,999....... 4.00 4.17 3.55
$50,000 to $99,999....... 3.50 3.63 3.10
$100,000 to $249,999..... 3.00 3.09 2.63
$250,000 to $499,999..... 2.00 2.04 1.65
$500,000 to $999,999..... 1.00 1.01 .65
$1,000,000 and over...... .50 .50 .41
</TABLE>
The sales load described above will not be applicable to purchases of
Class A shares by: (1) any bank, trust company or other institution acting on
behalf of its fiduciary customer accounts or any other account maintained by
its trust department (including a pension, profit-sharing or other employee
benefit trust created pursuant to a plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended); (2) any individual, trust,
corporation or other person where the shares are acquired in connection with
the distribution of assets held in any account referred to in (1) above with
NBD or its affiliates; (3) individual retirement accounts maintained by the
trust division of NBD or of its affiliates; (4) current and retired directors,
officers and employees of NBD or any of its affiliates; (5) the trustees,
former trustees and officers of the Trust; (6) broker/dealers which have
entered into an agreement with a Co-Distributor or the Trust pursuant to the
Trust's Distribution Plan or Shareholder Servicing Plan and their
representatives purchasing for their own accounts; and (7) spouses, children,
grandchildren, siblings, parents, grandparents and in-laws of individuals
referred to in paragraphs (4), (5) and (6) above. An application to qualify
for such purchases of Class A shares (an "NAV Account Application") may be
obtained from the Transfer Agent by calling (800) 688-3350. In addition, no
sales load is charged on the reinvestment of dividends or distributions, or in
connection with certain share exchanges described below under "Exchange
Privilege." The Trust may terminate any exemption from the sales load by
providing notice in the Prospectus, but any such termination would only affect
future purchases of Class A shares. The reallowance to Institutions may be
changed from time to time.
From time to time, the Co-Distributors, at their expense, may offer
additional promotional incentives to dealers.
Quantity Discounts
An Investor may be entitled to reduced sales charges through Rights of
Accumulation, a Letter of Intent or a combination of investments, even if the
Investor does not wish to make an investment of a size that would normally
qualify for a quantity discount.
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<PAGE>
An Investor must notify his institution or the Transfer Agent at the
time of purchase whenever a quantity discount applies. Upon such notification,
the Investor will receive the lowest applicable sales charge. Quantity
discounts may be modified or terminated at any time and are subject to
confirmation of an Investor's holdings. For more information about quantity
discounts, an Investor should contact his institution or call (800) 688-3350.
Right of Accumulation. A reduced sales load applies to any purchase of
Class A shares of the U.S. Government Income Portfolio and any other portfolio
which is currently offered or may be offered in the future by the Trust that
is sold with a sales load ("Eligible Portfolios") where an Investor's then
current aggregate investment is $25,000 or more. "Aggregate investment" means
the total of: (a) the dollar amount of the then current purchase; and (b) the
value (based on current net asset value) of Class A shares of Eligible
Portfolios on which a sales load has been paid (including shares acquired
through reinvestment of dividends or distributions on shares that were subject
to a sales load). If, for example, an Investor beneficially owns Class A
shares of Eligible Portfolios with an aggregate current value of $24,000 and
subsequently purchases Class A shares of another Eligible Portfolio having a
current value of $1,000, the load applicable to the subsequent purchase would
be reduced to 4% of the offering price. Similarly, with respect to each
subsequent investment, the current value of all Class A shares of Eligible
Portfolios that are beneficially owned by the Investor at the time of
investment may be combined to determine the applicable sales load.
Letter of Intent. By signing a Letter of Intent form (available from
his institution or the Transfer Agent) an Investor becomes eligible for the
reduced sales load applicable to the total number of Eligible Portfolio Class
A shares purchased in a thirteen-month period (net of redemptions) pursuant to
the terms and under the conditions set forth in the Letter of Intent. To
compute the applicable sales load, the offering price of Class A shares an
Investor beneficially owns (on the date of submission of the Letter of Intent)
in any Eligible Portfolio that may be used toward "Right of Accumulation"
benefits described above may be used as a credit toward completion of the
Letter of Intent. However, the reduced sales load will be applied only to new
purchases.
The Transfer Agent will hold in escrow Class A shares equal to the
amount indicated in the Letter of Intent for payment of a higher sales load if
an Investor does not purchase the full amount specified in the Letter of
Intent. The escrow will be released when an Investor fulfills the terms of the
Letter of Intent by purchasing the specified amount. If total purchases within
the thirteen-month period of the Letter of Intent exceed the amount specified,
an adjustment will be made in the form of additional Class A shares credited
to the shareholder's account to reflect further reduced sales charges
applicable to such purchases. If total purchases are less than the amount
specified, an Investor will be requested to remit an amount equal to the
difference between the sales load actually paid and the sales load applicable
to the total purchases. If such remittance is not received within thirty days,
the Transfer Agent, as attorney-in-fact pursuant to the terms of the Letter of
Intent, will redeem an appropriate number of Class A shares held in escrow to
realize the difference. Signing a Letter of Intent does not bind an Investor
to purchase the full amount indicated at the sales load in effect at the time
of signing, but an Investor must complete the intended purchase to obtain the
reduced sales load.
Qualification for Discounts. For the purpose of applying the Right of
Accumulation and Letter of Intent privileges described above, the scale of
sales loads applies to the combined purchases made by any individual and/or
spouse purchasing securities for his, her or their own account or for the
account of any minor children under the Uniform Gifts to Minors Act or the
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Uniform Transfers to Minors Act, or the aggregate investments of a trustee or
custodian of any qualified pension or profit sharing plan or IRA established,
or the aggregate investment of a trustee or other fiduciary, for the benefit
of the persons listed above.
REDEMPTION OF SHARES
In General
Redemption orders are effected at the net asset value per share next
determined after receipt by the Transfer Agent of a proper notice of
redemption in accordance with the procedures set forth below.
Redemption of Class I Shares
Customers may redeem all or part of their Class I shares in accordance
with instructions and limitations pertaining to their accounts at the Banks.
It is the responsibility of the Banks to transmit redemption orders to the
Transfer Agent and credit their customers' accounts with the redemption
proceeds on a timely basis.
If a customer has agreed with a particular Bank to maintain a minimum
balance in its account at the Bank and the balance in such account falls below
that minimum, the customer may be obliged to redeem all or part of its Class I
shares to the extent necessary to maintain the required minimum balance.
Redemption of Class A Shares
Redemption orders must be placed with or through the same financial
institution that placed the original purchase order. It is the responsibility
of the financial institutions to transmit redemption orders to the Transfer
Agent. Redemption proceeds are paid by check or credited to the Investor's
account with his financial institution. Investors who purchased shares
directly from the Trust should follow the redemption procedures set forth
below.
Redemption Procedures
A shareholder of record may redeem shares in any amount by calling
(800) 688-3350 (provided he has made the appropriate election in his account
application) or by sending a written request to The Woodward Funds, c/o NBD
Bank, N.A., P.O. Box 7058, Troy, Michigan 48007-7058. Redemption requests must
be signed by each shareholder, including each joint owner on redemption
requests for joint accounts, in the exact manner as the Portfolio account is
registered, and must state the number of shares or the amount to be redeemed
and identify the shareholder account number and tax identification number.
Each signature on the written request must be guaranteed by a commercial bank
or trust company which is a member of the Federal Reserve System or FDIC, a
member firm of a national securities exchange or a savings and loan
association. A signature guaranteed by a savings bank or notarized by a notary
public is not acceptable. The Trust may require additional supporting
documents for redemptions made by corporations, fiduciaries, executors,
administrators, trustees, guardians and institutional investors.
Redemption orders for Class I shares may be placed by Banks and
redemption orders for Class A shares may be placed through an institution or
directly by telephone by calling (800) 688-3350. During periods of unusual
economic or market changes, telephone redemptions may be difficult to
implement. In such event, shareholders should mail their redemption requests
to their Banks, institutions or The Woodward Funds, c/o NBD Bank, N.A. at the
address shown above. Neither the Trust nor its Transfer Agent will be
responsible for the authenticity of instructions received by telephone that
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are reasonably believed to be genuine. In attempting to confirm that telephone
instructions are genuine, the Trust and its Transfer Agent will use such
procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration (including,
but not limited to, the name in which an account is registered, the account
number, or recent transactions in the account). To the extent that the Trust
and its Transfer Agent fail to use reasonable procedures to verify the
genuineness of telephone instructions, they may be liable for such
instructions that prove to be fraudulent and unauthorized. In all other cases,
shareholders will bear the risk of loss for fraudulent telephone transactions.
Other Redemption Information
The Trust ordinarily will make payment for redeemed shares within
seven days after receipt by the Transfer Agent of a request in proper form,
except as provided by the rules of the SEC. If shares to be redeemed were
purchased by check, the Trust will transmit the redemption proceeds promptly
upon clearance of such check, which could take up to fifteen days from the
purchase date. A shareholder having purchased shares by wire must have filed
an account application before any redemption requests can be honored.
Currently, the Trust imposes no charge when shares are redeemed.
However, institutions may charge a fee for providing services in connection
with investments in Portfolio shares; NBD currently charges $16 for wire
transactions. The Trust reserves the right to redeem accounts involuntarily,
after sixty days' notice, if redemptions cause the account's net asset value
to remain at $1,000 or less. The Trust may also redeem shares of the Portfolio
involuntarily or make payment for redemption in securities or other property
if it is appropriate to do so in light of the Trust's responsibilities under
the 1940 Act.
Questions concerning the proper form for redemption requests should be
directed to the Transfer Agent at (800) 688-3350 or an Investor's institution.
SHAREHOLDER SERVICES
The shareholder services and privileges under this heading may not be
available to certain clients of particular Banks or institutions, and some may
impose conditions on their clients that are different from those described
below. Investors should consult their Banks or Institutions in this regard.
Other Investors should direct any questions on the following services to the
Transfer Agent. In addition, the Trust may modify or terminate any of the
following services and privileges at any time.
Exchange Privilege
Investors may exchange Class A shares of the U.S. Government Income
Portfolio and the Woodward Growth/Value, Opportunity, Intrinsic Value,
Intermediate Bond, Bond, Balanced, Municipal Bond, Michigan Municipal Bond,
Capital Growth, International Equity and Short Bond Funds, as well as other
investment portfolios of the Trust which may be offered in the future subject
to a sales load, (each a "load Portfolio") for which they have paid a sales
load and which have been owned for at least thirty days for Class A shares of
another load Portfolio or for Class A shares of the Woodward Money Market,
Government, Treasury Money Market, Tax-Exempt Money Market, Michigan Tax-
Exempt Money Market or Equity Index Funds, as well as other investment
portfolios of the Trust which may be offered in the future and sold without a
sales charge, (each a "no load Portfolio") at the net asset value per share on
the date of exchange. As a result, no additional load will be incurred with
respect to such an exchange. Shareholders may also exchange Class A shares of
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a no load Portfolio for Class A shares of another no load Portfolio at the net
asset value per share without payment of a sales load. When Class A shares of
a no load Portfolio are exchanged for Class A shares of a load Portfolio, the
applicable sales load will be assessed. However, shareholders exchanging
shares of a no load Portfolio which were received in a previous exchange
transaction involving Class A shares of a load Portfolio will not be required
to pay an additional sales load upon the reinvestment of the equivalent amount
into the Class A shares of a load Portfolio. Shareholders contemplating an
exchange should carefully review the Prospectus of the portfolio into which
the exchange is being considered. The Prospectus for any portfolio of the
Trust may be obtained from an Investor's financial institution or from the
Transfer Agent by calling (800) 688-3350.
Exchanges will be effected by a redemption of Class A shares of the
portfolio held and the purchase of Class A shares of the portfolio acquired.
Investors should make their exchange requests in writing or by telephone to
the financial institutions through which they purchased their original Class A
shares. It is the responsibility of financial institutions to transmit
exchange requests to the Transfer Agent. Other Investors should transmit
exchange requests directly to the Transfer Agent. The total value of shares
being exchanged must at least equal the minimum investment requirement of the
portfolio whose shares are being acquired in the exchange. Only one exchange
in any thirty-day period is permitted and only shares that may be legally sold
in the state of the Investor's residence may be acquired in an exchange. The
Trust reserves the right to reject any exchange request.
Investors wishing to make an exchange should contact their
institutions or the Transfer Agent (as appropriate). Exchange requests in the
required form which are received by the Transfer Agent prior to 4:00 p.m.,
Eastern time, will be effected on the next Business Day after such request is
received. Requests received after 4:00 p.m., Eastern time, will be effected on
the second Business Day after such request is received. During periods of
significant economic or market change, telephone exchanges may be difficult to
complete. In such event, an Investor should mail the exchange request to his
financial institution or the Transfer Agent. Neither the Trust nor the
Transfer Agent will be responsible for the authenticity of instructions
received by telephone that are reasonably believed to be genuine. In
attempting to confirm that telephone instructions are genuine, the Trust and
its Transfer Agent will use such procedures as are considered reasonable,
including recording those instructions and requesting information as to
account registration (including, but not limited to, the name in which an
account is registered, the account number, or recent transactions in the
account). To the extent that the Trust and its Transfer Agent fail to use
reasonable procedures to verify the genuineness of telephone instructions,
they may be liable for such instructions that prove to be fraudulent and
unauthorized. In all other cases, shareholders will bear the risk of loss for
fraudulent telephone transactions. The Trust reserves the right to modify or
terminate its exchange procedures upon sixty days' notice to shareholders.
Reinvestment Privilege
Class A shares of the Portfolio may be purchased at net asset value by
persons who have redeemed within the previous 120 days their Class A shares of
the Portfolio or another investment portfolio of the Trust which were
purchased with a sales load. The amount which may be so reinvested is limited
to an amount up to the redemption proceeds. In order to exercise this
privilege, a written order for the purchase of Class A shares of the Portfolio
must be received by the Transfer Agent within 120 days after the redemption.
Reinvestment will be at the next calculated net asset value after receipt.
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Option to Make Systematic Withdrawals
The Trust has available to shareholders a Systematic Withdrawal Plan
pursuant to which a shareholder who owns shares of any investment portfolio
having a minimum value of $15,000 at the time he elects under the Plan may
have a fixed sum distributed in redemption at regular intervals. An
application form and additional information regarding this service may be
obtained from an Investor's institution or the Transfer Agent by calling (800)
688-3350.
Automatic Investment
The Trust offers an Automatic Investment Plan (the "Plan") whereby a
shareholder may automatically purchase shares on a regular basis in accordance
with an election in his account application. An application may be obtained
from the Transfer Agent by calling (800) 688-3350. Under the Plan a
shareholder's financial institution debits a pre-authorized amount from his
account and applies the amount to the purchase of Portfolio shares. The
minimum per transaction is $25. The minimum initial investment in the
Portfolio is also $25 for the following shareholders who elect the Plan: (1)
current and retired directors, officers and employees of NBD or any of its
affiliates; (2) the trustees, former trustees and officers of the Trust; (3)
broker/dealers which have entered into an agreement with a Co-Distributor or
the Trust pursuant to the Trust's Distribution Plan or Shareholder Servicing
Plan and their representatives purchasing for their own accounts; and (4)
spouses, children, grandchildren, siblings, parents, grandparents and in-laws
of individuals referred to in (1), (2) and (3) above. An NAV Account
Application may be obtained from the Transfer Agent by calling (800) 688-3350.
The Plan can be implemented with any financial institution that is a member of
the Automated Clearing House. No service fee is currently charged by the Trust
for participating in the Plan. Death or legal incapacity will terminate a
shareholder's participation in the Plan. Deposits, withdrawals and adjustments
will be made electronically under the rules of the Automated Clearing House
Association.
Cross Reinvestment of Dividend Plan
The Trust makes available to shareholders a Cross Reinvestment of
Dividend Plan (the "Plan") pursuant to which a shareholder who owns shares of
any portfolio with a minimum value of $10,000 at the time he elects under the
Plan may have dividends paid by such portfolio automatically reinvested into
shares of another portfolio in which he has invested a minimum of $1,000.
Shareholders may obtain an application and additional information from an
Investor's Institution or the Transfer Agent by calling (800) 688-3350.
The Woodward Funds Individual Retirement Custodial Account
Shares may be purchased in conjunction with the Trust's Individual
Retirement Custodial Account program ("IRA") where NBD acts as custodian.
Investors should consult their institutions or a Co-Distributor for
information as to applications and annual fees. The minimum investment for an
IRA is $250 for Investors who are not employees of NBD and $25 for Investors
who are employees of NBD. Investors should also consult their tax advisers to
determine whether the benefits of an IRA are available or appropriate.
Retirement Plans
NBD and its affiliates offer a variety of pension and profit sharing
plans including IRAs, defined contribution plans, 401(k) Plans, 403(b)(7)
Plans and 457 Plans through which investors may purchase Portfolio shares. The
minimum investment for these Plans may differ from the minimum discussed
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above in "Purchase of Shares." For details concerning any of the retirement
plans, please call the Transfer Agent or a Co-Distributor.
Direct Deposit Program
If an Investor receives federal salary, social security, or certain
veteran's, military or other payments from the federal government or elects to
use his employer's payroll deposit program, he is eligible for the Direct
Deposit Program. With this Program, an Investor may purchase Portfolio shares
(minimum of $25) by having these deposits automatically deposited into his
Portfolio account. An Investor may deposit as much of such payments as he
elects. For instructions on how to enroll in the Direct Deposit Program, an
Investor should call his institution, or the Transfer Agent. Death or legal
incapacity will terminate an Investor's participation in the Program. An
Investor may elect at any time to terminate his participation by notifying in
writing the appropriate federal agency. Further, the Trust may terminate an
Investor's participation upon thirty days' notice to him.
PERFORMANCE AND YIELD INFORMATION
The performance and yield of each class of shares of the Portfolio may
be compared to those of other mutual funds with similar investment objectives
and to bond or other relevant indices, and rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, performance and yield may be
compared to data prepared by Lipper Analytical Services, Inc., or the Consumer
Price Index. Performance and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times or in publications of a local or regional nature, may
also be used in comparing the performance of the Portfolio.
"Yield" refers to the income generated by an investment in a class of
shares of a Portfolio over a thirty-day period identified in the
advertisement. This income is then "annualized," i.e., the income generated by
the investment during the thirty-day period is assumed to be earned and
reinvested at a constant rate and compounded semi-annually. The annualized
income is then shown as a percentage of the investment.
The Portfolio calculates its total returns on an "average annual total
return" basis for various periods from the date it commenced investment
operations and for other periods as permitted under the rules of the SEC.
Average annual total return of a class reflects the average annual percentage
change in value of an investment in the class over the measuring period. Total
returns may also be calculated on an "aggregate total return basis" for
various periods. Aggregate total return reflects the total percentage change
in value over the measuring period. Both methods of calculating total return
also reflect changes in the price of the shares and assume that any dividends
and capital gain distributions made by the class during the period are
reinvested in shares of the class. When considering average total return figures
for periods longer than one year, it is important to note that a class' annual
total return for any one year in the period might have been greater or less
than the average for the entire period.
Effective on or about April 1, 1996, Servicing Fees attributable to
Class A shares will be allocated exclusively to such shares. The yield on
Class A shares in the Portfolio will be effectively reduced by the amount of
such fees. See "Shareholder Servicing Plan" and "Investment Adviser, Custodian
and Transfer Agent" under the heading "Management" in this Prospectus.
Performance and yields of each class of shares are based on historical
earnings and will fluctuate and are not intended to indicate future
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performance. The investment return and principal value of an investment in a
class will fluctuate so that a shareholder's shares, when redeemed, may be
worth more or less than their original cost. Performance data may not provide
a basis for comparison with bank deposits and other investments which provide
a fixed yield for a stated period of time. Total return data should also be
considered in light of the risks associated with the Portfolio's portfolio
composition, quality, maturity, operating expenses and market conditions. Any
fees charged by Banks or other institutions directly to their customer
accounts in connection with investments in shares will not be included in
performance calculations.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid monthly by
the U.S. Government Income Portfolio. The Portfolio's net realized capital
gains are distributed at least annually.
Dividends and distributions will reduce the Class's net asset
value by the amount of the dividend or distribution. All dividends and
distributions are automatically reinvested (without any sales charge) in
additional shares of the same Portfolio at their net asset value per share
determined on the payment date unless the holder has notified the Transfer
Agent in writing that he elects to have dividends or capital gain
distributions (or both) paid in cash. Shareholders must make such election, or
any revocation thereof, in writing to their Banks, financial institutions or
Transfer Agent. The election will become effective with respect to dividends
paid after its receipt by the Transfer Agent.
Effective on or about April 1, 1996, the amount of the Portfolio's
net investment income available for distribution to the holders of Class A
shares will be effectively reduced by the amount of the Servicing Fees
allocated exclusively to such shares. See "Shareholder Servicing Plan" and
"Investment Adviser, Custodian and Transfer Agent" under the heading
"Management" in this Prospectus.
TAXES
Federal
The Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification will relieve the Portfolio of liability for federal income taxes
to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for a
taxable year requires, among other things, that the Portfolio distribute to
its shareholders an amount equal to at least the sum of 90% of its investment
company taxable income and 90% of its net tax-exempt interest income for such
year. In general, the Portfolio's investment company taxable income will be
its taxable income, subject to certain adjustments and excluding the excess of
any net long-term capital gain for the taxable year over the net short-term
capital loss, if any, for such year. The Portfolio intends to distribute as
dividends substantially all of its investment company taxable income and any
net tax-exempt interest income each year. Such dividends will be taxable as
ordinary income to the Portfolio's shareholders who are not currently exempt
from federal income taxes regardless of whether a distribution is received in
cash or reinvested in additional shares. (Federal income taxes for
distributions to an IRA are deferred under the Code). Such ordinary income
distributions will not qualify for the dividends received deduction for
corporations.
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Substantially all of the Portfolio's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Portfolio will generally have no tax liability with respect to such gains and
the distributions will be taxable to Portfolio shareholders who are not
currently exempt from federal income taxes as long-term capital gains,
regardless of how long the shareholders have held the shares and whether such
gains are received in cash or reinvested in additional shares.
Dividends declared in October, November or December of any year
payable to shareholders of record on a specified date in such months will be
deemed for federal tax purposes to have been paid by the Portfolio and
received by the shareholders on December 31 of such year if such dividends are
paid during January of the following year.
Prior to purchasing shares of the Portfolio, the impact of dividends
or distributions which are expected to be declared or have been declared, but
not paid, should be carefully considered. Any dividend or distribution
declared shortly after the purchase of shares prior to the record date will
have the effect of reducing the per share net asset value by the per share
amount of the dividend or distribution. All or a portion of such amounts,
although in effect a return of capital, is subject to tax.
A taxable gain or loss may be realized by a shareholder upon his
redemption, transfer or exchange of Portfolio shares depending upon the tax
basis and their price at the time of redemption, transfer or exchange. If a
shareholder has held shares for six months or less and during that time
received a distribution taxable as a long-term capital gain, then any loss the
shareholder might realize on the sale of those shares will be treated as a
long-term loss to the extent of the earlier capital gain distribution.
Generally, a shareholder may include sales charges incurred upon the purchase
of Portfolio shares in his tax basis for such shares for the purpose of
determining gain or loss on a redemption, transfer or exchange of such shares.
However, if the shareholder effects an exchange of such shares for shares of
another portfolio within 90 days of the purchase and is able to reduce the
sales charges applicable to the new shares (by virtue of the Trust's exchange
privilege), the amount equal to such reduction may not be included in the tax
basis of the shareholder's exchanged shares but may be included under certain
circumstances in the tax basis of the new shares.
Shareholders will be advised at least annually as to the federal
income tax consequences of distributions made to them each year.
The foregoing discussion summarizes some of the important tax
considerations generally affecting the Portfolio and its shareholders and is
not intended as a substitute for careful tax planning. Accordingly, potential
investors in the Portfolio should consult their tax advisers with specific
reference to their own tax situation.
State and Local
The Trust may be subject to state or local taxes in jurisdictions in
which the Trust may be deemed to be doing business. In addition, in these
states, which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from treatment under federal income
tax laws. Shareholders are advised to consult their tax advisers concerning
the application of state and local taxes, which may have different
consequences from those of the federal income tax law described above.
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MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management
of the business and affairs of the Trust. The Trustees and executive officers
of the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
N.A., 611 Woodward Avenue, Detroit, Michigan 48226.
*Earl I. Heenan, Jr., Chairman and President
Vice Chairman (since 1988) and President (1955-1988), Detroit Mortgage
& Realty Company; President (1989-1992) and Trustee (since 1966), Cottage
Hospital of Grosse Pointe (affiliate of Henry Ford Health System); Trustee,
Henry Ford Health Sciences Center (since 1987); Trustee, Henry Ford Continuing
Care Corporation (since 1980); Trustee, Earhart Foundation (since 1980).
*Eugene C. Yehle, Trustee and Treasurer
Retired; Director of Investor Relations and Pension Investments, Dow
Chemical Company (1972-1985); Trustee, Alma College (since 1978); Trustee
(since 1977) and Chairman (since 1983), Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation.
Will M. Caldwell, Trustee
Retired; Executive Vice President, Chief Financial Officer and
Director, Ford Motor Company (1979-1985); Director, First Nationwide Bank
(1986-1991); Director, Air Products & Chemicals, Inc. (since 1985); Director,
Zurich Holding Company of America (since 1990); Director, The Batts Group,
Ltd. (since 1986); Trustee and Vice Chairman, Detroit Medical Center
(1986-1991); Trustee Emeritus and Chairman of the Pension Investment
Sub-Committee, Detroit Medical Center (since 1991).
Nicholas J. De Grazia, Trustee
President, Chief Operating Officer and Director, Lionel Trains, Inc.
(since 1990); Vice President-Finance and Treasurer, University of Detroit
(1981-1990); President (1986-1990) and Director (since 1986), Polymer
Technologies, Inc.; President, Florence Development Company (1987-1990);
Chairman (since 1994) and Director (since 1992), Central Macomb County Chamber
of Commerce; Vice-Chairman, Michigan Higher Education Facilities Authority
(since 1991).
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981).
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*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana.
Donald L. Tuttle, Trustee
Senior Vice President, Association for Investment Management and
Research (since January 1992); Professor of Finance, Indiana University (1970-
1991); Vice President, Trust & Investment Advisers, Inc. (1990-1991);
Director, Federal Home Loan Bank of Indianapolis (1981-1985).
John P. Gould, Trustee
Distinguished Service Professor of Economics of the University of
Chicago Graduate School of Business. From 1983 to 1993, Dean of the University
of Chicago Graduate School Business. Dean Gould also serves as Director of
Harpor Capital Advisors. Mr. Gould is also a Board member of Prairie
Institutional Funds and the three other funds in the Prarie Family of Funds.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University. From 1981 to 1985, she was the Director of Planning and Policy
Development for the University of Colorado. She also serves on the Board of
Directors of Evanston Hospital, the Chicago Metropolitan YMCA, the Chicago
Network and United Charities. Mrs. McCoy is also a Board member of Prairie
Institutional Funds and the three other funds in the Prairie Family of Funds.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania.
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* Trustees who are "interested persons" of the Trust, as defined in the
1940 Act.
Investment Adviser, Custodian and Transfer Agent
The investment adviser for the Portfolio is NBD, a wholly owned
subsidiary of First Chicago NBD Corporation, a bank holding company. NBD has
offices at 611 Woodward Avenue, Detroit, Michigan 48226. As of __________, NBD
was providing investment management and advisory services for accounts
aggregating approximately $__ billion. NBD has been in the business of
providing such services since 1933. Included among NBD's accounts are pension
and profit sharing funds for major corporations and state and local
governments, commingled trust funds and a variety of institutional and
personal advisory accounts, estates and trusts. NBD also acts as investment
adviser for other registered investment company portfolios.
NBD provides investment advisory and certain administrative services to
the Portfolio pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for the
Portfolio. The persons primarily responsible for the day-to-day portfolio
management of the U.S. Government Income Portfolio are Ricardo F. Cipicchio,
Vice President, and Christopher J. Nauseda, Assistant Vice President. Mr.
Cipicchio joined NBD in 1989 after receiving his MBA from the University of
Michigan and Mr. Nauseda, who received an MBA from Wayne State University in
1992, joined NBD in 1982.
For its services under the Advisory Agreement, NBD is entitled to
receive an advisory fee, computed daily and payable monthly, at an annual rate
of .65% of the average daily net assets of the U.S. Government Income
- --------
*
Trustees who are "interested persons" of the Trust, as defined in the
1940 Act.
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Portfolio. NBD may voluntarily waive its fees in whole or in part with
respect to any particular Portfolio.
NBD also receives compensation as the Trust's Custodian and Transfer
Agent under separate agreements. The fees payable by the Portfolio for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered, open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from underwriting securities, but
do not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus, and that the Adviser, subject to such banking laws and
regulations, may perform the shareholder services contemplated by this
Prospectus, without violation of such banking laws or regulations. However,
future changes in legal requirements relating to the permissible activities of
banks and their affiliates, as well as future interpretations of present
requirements, could prevent the Adviser from continuing to perform investment
advisory, custodial or transfer agency services for the Trust or require the
Adviser to alter or discontinue the services provided by it to shareholders.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees of the Trust would recommend that shareholders approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board. If the Adviser or its affiliates were required to
discontinue all or part of its shareholder servicing activities, their
customers would be permitted to remain the beneficial owners of Portfolio
shares and alternative means for continuing the servicing of such customers
would be sought. The Trust does not anticipate that investors would suffer any
adverse financial consequences as a result of these occurrences.
Sponsors and Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a sponsor and Co-Distributor of the Trust's
shares. It is engaged in the securities underwriting and securities and
commodities brokerage business and is a member of the New York Stock Exchange,
Inc., other major securities and commodities exchanges, and the National
Association of Securities Dealers, Inc. FoM participates as a member of
various selling groups or as agent of other investment companies, executes
orders on behalf of investment companies for the purchase and sale of their
securities and sells securities to such companies as a broker or dealer in
securities. On _________, FoM had a net worth of $__________.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of
____________, Essex had a net worth of $________.
FoM and Essex act as sponsors and Co-Distributors of the Trust's
shares pursuant to the Distribution Agreement with the Trust which has been
entered into pursuant to the Distribution Plan described below.
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<PAGE>
Service and Distribution Plan
The Trust has adopted its Distribution Plan pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). Under the Plan, the Trust incurs expenses
primarily intended to result in the sale of the Trust's shares in an amount
not to exceed .35 of 1% of the value of each portfolio's average daily net
assets calculated as follows in the case of the Portfolio: (i) fees payable to
the Co-Distributors pursuant to the Distribution Agreement; (ii) the actual
costs and expenses in connection with advertising and marketing the
Portfolio's shares; and (iii) fees pursuant to agreements with securities
dealers, financial institutions and other professionals ("Service Agents") for
administration or servicing of Portfolio shareholders ("Servicing"). Servicing
may include, among other things: answering client inquiries regarding the
Trust and the Portfolio; assisting clients in changing dividend options,
account designations and addresses; performing sub-accounting; establishing
and maintaining shareholder accounts and records; processing purchase and
redemption transactions; investing client cash account balances automatically
in Portfolio shares; providing periodic statements showing a client's account
balance and integrating such statements with those of other transactions and
balances in the client's other accounts serviced by the Service Agent;
arranging for bank wires; and such other services as the Trust may request, to
the extent the Service Agent is permitted by applicable statute, rule or
regulation. Under the Plan, the Trust also bears the cost of preparing and
printing prospectuses for use in selling shares of the Trust and costs
associated with implementing and operating the Plan. These costs are included
in computing the .35 of 1% limitation set forth above.
Pursuant to the Distribution Agreement, FoM is entitled to receive a
fee at the annual rate of .005% of the Portfolio's average net assets, and
Essex is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of the Trust's investment portfolios attributable to
investments by clients of Essex. The payments to be made to the Co-
Distributors which are based on a percentage of the net assets of the
Portfolio are designed to compensate the Co-Distributors for their
participation in the distribution of the Portfolio's shares and to reimburse
the Co-Distributors for certain distribution costs. Nonreimbursable expenses
of the Co-Distributors include salaries of executives, sales and clerical
personnel performing services for the Trust, and overhead expenses. Such costs
are by their nature not subject to precise quantification and the Trustees
have determined that the fees to be paid to the Co-Distributors are reasonable
under the circumstances.
Pursuant to an exemptive order issued by the SEC, the Trust's Board of
Trustees is permitted to allocate certain expenses described above which are
attributable to Class A shares in the Portfolio exclusively to such shares. As
of the date hereof, the Board of Trustees has not exercised its discretion to
make any such allocations for the current fiscal year.
If current restrictions under the Glass-Steagall Act were relaxed, the
Trust expects that NBD would consider the possibility of offering to perform
some or all of the services now provided by the Co-Distributors. Legislation
modifying such restrictions has been proposed in past Sessions of Congress
which, if enacted, would permit a bank holding company to establish a non-bank
subsidiary having the authority to organize, sponsor and distribute shares of
an investment company. If such legislation were enacted, the Portfolios expect
that NBD's parent bank holding company would consider the possibility of one
of its non-bank subsidiaries offering to perform some or all of the services
now provided by the Co-Distributors. It is not possible, of course, to predict
whether or in what form legislation might be enacted or the terms upon which
NBD or such a non-bank affiliate might offer to provide such services.
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<PAGE>
Shareholder Servicing Plan
Pursuant to a Shareholder Servicing Plan ("Servicing Plan") adopted by
its Board of Trustees, the Trust may enter into agreements ("Servicing
Agreements") with banks and financial institutions, which may include the
Adviser and its affiliates ("Shareholder Servicing Agents"), under which they
will render shareholder administrative support services for their customers
who beneficially own shares. Such services, which are described more fully in
the Statement of Additional Information, may include processing purchase and
redemption requests from customers, placing net purchase and redemption orders
with a Co-Distributor, processing, among other things, distribution payments
from the Trust, providing necessary personnel and facilities to establish and
maintain customer accounts and records, and providing information periodically
to customers showing their positions in Portfolio shares.
For these services, the Trust will pay fees to Shareholder Servicing
Agents at an annual rate of up to .25% of the average daily net asset value of
Portfolio shares held by such Shareholder Servicing Agents for the benefit of
their customers and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Shareholder Servicing Agents are
required to provide their customers with a schedule of any credits, fees or
other conditions that may be applicable to the investment of customer assets
in Portfolio shares.
Effective on or about April 1, 1996, the Trust will implement the
Servicing Plan described above with respect to Class A shares only. In such
event, the Trust will enter into shareholder servicing agreements with
Shareholder Servicing Agents pursuant to which they would agree to provide
shareholder administrative support services to their customers who beneficially
own Class A shares in consideration for the payment of up to .25% (on an
annualized basis) of the average daily net asset value of such Class A shares.
The fees payable under such servicing agreements will be allocated exclusively
to the Class A shares in the Portfolio.
Conflict of interest restrictions may apply to the receipt of
compensation paid by the Trust to a Shareholder Servicing Agent in connection
with the investment of fiduciary funds in Portfolio shares. Banks and other
institutions regulated by the Comptroller of the Currency or other federal or
state bank regulatory agencies, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal counsel before
entering into Servicing Agreements.
Trust Expenses
The Trust is responsible for the payment of its expenses. These
include, for example, fees payable to NBD as Adviser, or expenses otherwise
incurred by the Trust in connection with the management of the investment of
the Trust's assets such as brokerage fees, commissions and other transaction
charges, the fees and expenses of NBD as the Trust's Custodian and as its
Transfer Agent, the fees payable to the Co-Distributors under the Distribution
Agreement, the fees and expenses of Trustees, expenses associated with the
Trust's Distribution Plan and Shareholder Servicing Plan, outside auditing and
legal expenses, all taxes and corporate fees payable by the Trust, SEC fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to shareholders,
costs of shareholder reports and shareholder meetings, and any extraordinary
expenses. The Portfolio also pays for brokerage commissions and transfer taxes
(if any) in connection with the purchase and sale of portfolio securities.
Expenses attributable to a particular portfolio of the Trust will be charged
to that portfolio, and expenses not readily identifiable as belonging to a
particular portfolio will be allocated by the Board of Trustees
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<PAGE>
among one or more portfolios in such a manner as it shall deem fair and
equitable. The Statement of Additional Information describes in more detail
the fees and expenses borne by the Trust.
OTHER INFORMATION
The Trust was organized as a Massachusetts business trust on April 21,
1987 under a Declaration of Trust which was amended and restated as of May 1,
1992. The Trust is a series fund having eighteen series of shares of
beneficial interest, each of which evidences an interest in a separate
investment portfolio. The Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares and to create an
unlimited number of series of shares ("Series") representing interests in a
portfolio and an unlimited number of classes of shares within a Series. In
addition to the Portfolio described herein, the Trust offers the following
investment portfolios: the Woodward Growth/Value Fund, Intrinsic Value Fund,
Capital Growth Fund, Balanced Fund, International Equity Fund, Equity Index,
Intermediate Bond Fund, Bond Fund, Short Bond Fund, Municipal Bond Fund,
Michigan Municipal Bond Fund, Money Market Fund, Government Fund, Treasury
Money Market Fund, Tax-Exempt Money Market Fund and Michigan Tax-Exempt Money
Market Fund. The Trust has established the following two distinct classes of
shares within each Series: Class I (Original Class) and Class A (Special Class
1). A salesperson and any other person or institution entitled to receive
compensation for selling or servicing shares may receive different
compensation with respect to different classes of shares in the Series. Each
share has $.10 par value, represents an equal proportionate interest in the
Portfolio with other shares of the same class outstanding, and is entitled to
such dividends and distributions out of the income earned on the assets
belonging to the Portfolio as are declared in the discretion of the Board of
Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. In addition, shareholders of each of
the Series have equal voting rights except that only shares of a particular
class within a Series are entitled to vote on matters affecting only that
class. Effective on or about April 1, 1996, the Trustees will allocate
servicing expenses attributable to Class A shares exclusively to the
shares in a Series as described above under "Shareholder Servicing Plan"
and "Service and Distribution Plan" under "Management" above, only the
holders of Class A shares in a Series will be entitled to vote on such
matters submitted to a vote of shareholders (if any). Voting rights are
not cumulative, and accordingly the holders of more than 50% of the
aggregate shares of the Trust may elect all of the Trustees
irrespective of the vote of the other shareholders.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
As of the date of this Prospectus, the Co-Distributors owned all the
outstanding shares of the U.S. Government Income Portfolio. It is contemplated
that the public offering of the shares of the Portfolio will reduce the
Co-Distributors' holdings to less than 5% of the total shares outstanding of
the Portfolio.
The Trust does not presently intend to hold annual meetings of
shareholders except as required by the 1940 Act or other applicable law. The
Trust's By-Laws provide that special meetings of shareholders of any Series
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<PAGE>
shall be called at the written request of shareholders entitled to cast at
least 10% of the votes of a Series entitled to be cast at such meeting. The
Trust also stands ready to assist shareholder communications in connection
with any meeting of shareholders as prescribed in Section 16(c) of the 1940
Act.
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<PAGE>
[ BACK COVER, COLUMN 1 ]
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Portfolio's
Statement of Additional Information incorporated herein by reference, in
connection with the offering made by this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Trust, Adviser or Sponsors and Co-Distributors. This
Prospectus does not constitute an offering by the Portfolio or by its
Co-Distributors in any jurisdiction in which such offering may not lawfully be
made.
TABLE OF CONTENTS Page
EXPENSE SUMMARY..............................
BACKGROUND...................................
INTRODUCTION.................................
INVESTMENT OBJECTIVE, POLICIES
AND RISK FACTORS.....................
OTHER INVESTMENT POLICIES....................
PURCHASE OF SHARES...........................
PUBLIC OFFERING PRICE........................
REDEMPTION OF SHARES.........................
SHAREHOLDER SERVICES.........................
PERFORMANCE AND YIELD
INFORMATION..........................
DIVIDENDS AND DISTRIBUTIONS..................
TAXES .....................................
MANAGEMENT...................................
OTHER INFORMATION............................
Investment Adviser:
NBD Bank, N.A.
Detroit, Michigan 48226
Sponsors and Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc.
Napa, California 94558
Custodian and Transfer Agent:
NBD Bank, N.A.
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania 19107-
3496
[ BACK COVER, COLUMN 2 ]
CLASS A AND CLASS I SHARES OF THE:
WOODWARD
U.S. GOVERNMENT INCOME FUND
THE WOODWARD FUNDS(R)
Prospectus
_________, 1995
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<PAGE>
CROSS REFERENCE SHEET
Series B, A, O, C, and M Representing Interests in the
Class A and Class I Shares of the Woodward Money Market,
Government, Treasury Money Market, Tax-Exempt Money Market
and Michigan Tax-Exempt Money Market Funds, Respectively
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page................................... Cover Page
11. Table of Contents............................ Table of Contents
12. General Information and History.............. Description of Shares
13. Investment Objectives and Policies........... Investment Objective,
Policies and Risk
Factors
14. Management of Registrant..................... Management
15. Control Persons and Principal................ Description of Shares
Holders of Securities
16. Investment Advisory and Other Services....... Management
17. Brokerage Allocation and other Practices..... Investment Objective,
Policies and Risk
Factors
18. Capital Stock and Other Securities........... Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing............. Net Asset Value
of Securities Being Offered
Additional Purchase and
Redemption Information
20. Tax Status................................... Additional Information
Concerning Taxes
21. Underwriters................................. Not Applicable
22. Calculation of Performance Data.............. Additional Information
on Performance
23. Financial Statements......................... Audited Financial
Statements
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 15, 1996
for
CLASS I AND CLASS A SHARES OF THE:
WOODWARD MONEY MARKET FUND
WOODWARD GOVERNMENT FUND
WOODWARD TREASURY MONEY MARKET FUND
WOODWARD TAX-EXEMPT MONEY MARKET FUND
WOODWARD MICHIGAN TAX-EXEMPT MONEY MARKET FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Funds'
Prospectuses dated April 15, 1996 pertaining to all classes of shares of the
Woodward Money Market Fund (the "Money Market Portfolio"), Woodward Government
Fund (the "Government Portfolio"), Woodward Treasury Money Market Fund (the
"Treasury Portfolio"), Woodward Tax-Exempt Money Market Fund (the "Tax-Exempt
Portfolio") and Woodward Michigan Tax-Exempt Money Market Fund (the "Michigan
Portfolio") (each, a "Portfolio" and collectively, the "Portfolios"), and is
incorporated by reference in its entirety into the Prospectuses. Because this
Additional Statement is not itself a prospectus, no investment in shares of
the Portfolios should be made solely upon the information contained herein.
Copies of the Portfolios' Prospectuses may be obtained from any office of the
Co-Distributors by writing or calling the Co-Distributors or the Trust.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives, Policies and Risk Factors............... 1
Net Asset Value................................................ 9
Additional Purchase and Redemption Information................. 11
Description of Shares.......................................... 11
Additional Information Concerning Taxes........................ 14
Management..................................................... 18
Independent Public Accountants................................. 24
Counsel........................................................ 24
Additional Information on Performance.......................... 24
Appendix A..................................................... A-1
Report of Independent Public Accountants
and Financial Statements..................................... FS-1
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Portfolios' respective
investment objectives and policies as set forth in their Prospectuses.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolios may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for each
Portfolio.
The annualized portfolio turnover rate for each Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less.
Purchases of money market instruments by the Portfolios are
made from dealers, underwriters and issuers. The Portfolios currently do not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
For the fiscal years ended December 31, 1995, 1994, and 1993,
the Portfolios incurred no brokerage commissions.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. A Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
<PAGE>
The Advisory Agreement for the Portfolios provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for each Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause a Portfolio
to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer
for effecting the same transaction, provided that the Adviser determines in
good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in
terms of either the particular transaction or the overall responsibilities of
the Adviser to the Portfolios. Such brokerage and research services might
consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their
comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolios. The Trustees will
periodically review any commissions paid by the Portfolios to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolios. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised by the Adviser.
Conversely, a Portfolio may be the primary beneficiary of the research or
services received as a result of portfolio transactions effected for such
other account or investment company.
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Adviser, the
Co-Distributors or an affiliated person of any of them (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted
by the SEC or its staff. In addition, a Portfolio will not purchase securities
during the existence of any underwriting or selling group relating thereto of
which a Co-Distributor or the Adviser, or an affiliated person of either of
them, is a member, except to the extent permitted by the SEC or its staff.
Under certain circumstances, the Portfolios may be at a disadvantage because
of
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<PAGE>
these limitations in comparison with other investment companies which have
similar investment objectives but are not subject to such limitations.
Investment decisions for each Portfolio are made independently
from those for the other Portfolios and for any other investment companies and
accounts advised or managed by the Adviser. Such other investment companies
and accounts may also invest in the same securities as the Portfolios. To the
extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
one or more of the Portfolios and another investment company or account, the
transaction will be averaged as to price and available investments allocated
as to amount, in a manner which the Adviser believes to be equitable to each
Portfolio and such other investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold by the Portfolio.
Eligible Securities
Each Portfolio may purchase "eligible securities" that present
minimal credit risks as determined by the Adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities generally
include: (1) securities that are rated by two or more Rating Agencies (or the
only Rating Agency which has issued a rating) in one of the two highest rating
categories for short term debt securities; (2) securities that have no short
term rating, if the issuer has other outstanding short term obligations that
are comparable in priority and security as determined by the Adviser
("Comparable Obligations") and that have been rated in accordance with (1)
above; (3) securities that have no short term rating, but are determined to be
of comparable quality to a security satisfying (1) or (2) above, and the
issuer does not have Comparable Obligations rated by a Rating Agency; and (4)
obligations that carry a demand feature that complies with (1), (2) or (3)
above, and are unconditional (i.e., readily exercisable in the event of
default) or, if conditional, either they or the long term obligations of the
issuer of the demand obligation are (a) rated by two or more Rating Agencies
(or the only Rating Agency which has issued a rating) in one of the two
highest categories for long term debt obligations, or (b) determined by the
Adviser to be of comparable quality to securities which are so rated. The
Board of Trustees will approve or ratify any purchases by each Portfolio of
securities that are rated by only one Rating Agency or that qualify under (3)
above.
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<PAGE>
Government Obligations
As stated in the Prospectuses, pursuant to their
respective investment objectives, the Portfolios may invest in
U.S. Government Obligations.
Bank Obligations
In accordance with their respective investment objectives, the
Portfolios may purchase bank obligations, which include bankers' acceptances,
negotiable certificates of deposit and non-negotiable time deposits, including
U.S. dollar-denominated instruments issued or supported by the credit of U.S.
or foreign banks or savings institutions. Although the Portfolios invest in
obligations of foreign banks or foreign branches of U.S. banks only where the
Adviser deems the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
Commercial paper, including variable and floating rate notes
and other short term corporate obligations, must be rated in one of the two
highest categories by at least two Rating Agencies, or if not rated, must have
been independently determined by the Adviser to be of comparable quality.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolios, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of instruments if the issuer defaulted on its payment obligation or
during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each Portfolio may invest from time to time in securities issued
by other investment companies which
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<PAGE>
invest in high quality, short term debt securities. Each Portfolio intends to
limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 5% of the value of the Portfolio's total
assets will be invested in the securities of any one investment company; (b)
not more than 10% of the value of the Portfolio's total assets will be
invested in the aggregate in securities of investment companies as a group;
and (c) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or the Trust as a whole.
Lending Securities
When a Portfolio lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectuses generally equals the price paid by a Portfolio plus
interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the
Trust's Custodian, in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Portfolios under the 1940 Act. At the time a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high-grade
debt securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Portfolio may
decline below the price of the securities it is obligated to repurchase.
When-Issued Purchases and Forward Commitments
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
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<PAGE>
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities
are delivered to the Portfolio on the settlement date. In these cases the
Portfolio may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
Municipal Securities
As stated in their Prospectuses, the Michigan and Tax- Exempt
Portfolios may invest in Municipal Securities including general obligation
securities, revenue securities, notes, and moral obligation bonds, which are
normally issued by special purpose authorities. There are, of course,
variations in the quality of Municipal Securities, both within a particular
classification and between classifications, and the yields on Municipal
Securities depend in part on a variety of factors, including general market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Municipal Securities by
Rating Agencies represent their opinions as to the quality of Municipal
Securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and Municipal Securities with the same
maturity, interest rate and rating may have different yields while Municipal
Securities with the same maturity and interest rate with different ratings may
have the same yield. Subsequent to its purchase by a Portfolio, a Municipal
Security may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Portfolio. The Adviser will consider such
an event in determining whether the Portfolio should continue to hold the
obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Portfolios will depend upon the ability of the
issuers to meet their obligations. The District of Columbia, each state, each
possession and territory of the United States, each of their political
subdivisions, agencies, instrumentalities and authorities and each state
agency of which a state is a member is a separate "issuer" as that term is
used in this Additional Statement and in the Prospectuses. The
non-governmental user of facilities financed by a private activity bond is
also considered to be an "issuer". An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights or remedies of creditors, such as the Federal
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Bankruptcy Code, and laws, if any, which may be enacted by Federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest or principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Certain of the Municipal Securities held by the Portfolios may
be insured at the time of issuance as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
Municipal Securities at the time of original issuance. In the event that the
issuer defaults with respect to interest or principal payments, the insurer
will be notified and will be required to make payment to the bondholders.
There is, however, no guarantee that the insurer will meet its obligations. In
addition, such insurance will not protect against market fluctuations caused
by changes in interest rates and other factors.
From time to time proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to
federal tax legislation passed in 1986 interest on certain private activity
bonds must be included in an investor's federal alternative minimum taxable
income, and corporate investors must include all tax-exempt interest in their
federal alternative minimum taxable income. The Trust cannot predict what
legislation, if any, may be proposed in Congress in the future as regards the
federal income tax status of interest on Municipal Securities in general, or
which proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of Municipal Securities for
investments by the Tax-Exempt and Michigan Portfolios and their liquidity and
value. In such event the Board of Trustees would reevaluate the Portfolios'
investment objectives and policies and consider changes in their structure or
possible dissolution.
Stand-By Commitments
The Tax-Exempt and Michigan Portfolios may acquire "stand-by
commitments" with respect to Municipal Securities they hold. Under a stand-by
commitment, a dealer agrees to purchase at the Portfolio's option specified
Municipal Securities at a specified price. Stand-by commitments may be
exercisable by the Portfolios at any time before the maturity of the
underlying Municipal Securities and may be sold, transferred or assigned only
with the instruments involved.
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The Portfolios expect that stand-by commitments will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Portfolios may pay for a stand-by
commitment either separately in cash or by paying a higher price for Municipal
Securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). Neither the
Tax-Exempt Portfolio nor the Michigan Portfolio will acquire a stand-by
commitment unless immediately after the acquisition, with respect to 75% of
its assets not more than 5% of its total assets will be invested in
instruments subject to a demand feature, including stand-by commitments, with
the same institution.
The Portfolios intend to enter into stand-by commitments only
with dealers, banks and broker-dealers which, in the Adviser's opinion,
present minimal credit risks. The Portfolios' reliance upon the credit of
these dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Portfolios in connection with a "stand-by commitment" will
not be qualitatively different from the risk of loss faced by a person that is
holding securities pending settlement after having agreed to sell the
securities in the ordinary course of business.
The Portfolios will acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a stand-by commitment will
not affect the valuation or assumed maturity of the underlying Municipal
Securities which will continue to be valued in accordance with the amortized
cost method. The actual stand-by commitment will be valued at zero in
determining net asset value. Where a Portfolio pays directly or indirectly for
a stand-by commitment, its cost will be reflected as an unrealized loss for
the period during which the commitment is held by the Portfolio and will be
reflected in realized gain or loss when the commitment is exercised or
expires.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectuses, the Portfolios are subject to the following investment
limitations which may not be changed without approval of the holders of the
majority of the outstanding shares of the affected Portfolio (as defined under
"Description of Shares" below).
None of the Portfolios may:
1. Purchase or sell real estate, although they may
invest in securities which are secured by real estate and of
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issuers which invest or deal in real estate; purchase or sell securities
issued by real estate investment trusts; purchase or sell commodities,
commodity contracts or oil and gas interests; acquire securities of other
investment companies, except in connection with a merger, consolidation,
reorganization, or acquisition of assets, or where otherwise permitted by the
1940 Act; or invest in companies for the purpose of exercising control or
management.
2. Act as an underwriter of securities (except insofar as it
might be deemed to be an underwriter within the meaning of the Securities Act
of 1933 upon the acquisition or disposition of portfolio securities), purchase
securities on margin, make short sales with securities or maintain a short
position in any security.
3. Issue senior securities as defined in the 1940 Act except to
the extent that such issuance might be involved with respect to borrowings
pursuant to reverse repurchase transactions or as set forth in Investment
Limitation No. 2 in the Prospectuses.
In order to permit the sale of a Portfolio's shares in certain
states, the Trust may make commitments with respect to a Portfolio more
restrictive than the investment policies and limitations described above and
in its Prospectuses. As of the date of this Additional Statement, the Trust
has made commitments that the Money Market, Government and Tax-Exempt
Portfolios will not invest in oil, gas or other mineral leases, or in real
estate limited partnership interests that are not readily marketable. Should
the Trust determine that any such commitment is no longer in the best
interests of a particular Portfolio, it will revoke the commitment by
terminating sales of the Portfolio's shares in the state involved and, in the
case of investors in Texas, give notice of such action.
NET ASSET VALUE
Each of the Portfolios intends to value its portfolio
securities based upon their amortized cost in accordance with Rule 2a-7 under
the 1940 Act. Where it is not appropriate to value a security by the amortized
cost method, the security will be valued either by market quotations, or by
fair value as determined by the Board of Trustees. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the securities. The value of portfolio securities
held by the Portfolios 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
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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 is held to
maturity, no gain or loss will be realized.
Pursuant to Rule 2a-7, each Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, to purchase
securities having remaining maturities of 13 months or less only, and to
invest only in securities determined by the Board of Trustees to be of high
quality with minimal credit risks. The Board of Trustees has established
procedures designed to stabilize, to the extent reasonably possible, each
Portfolio's price per share as computed for the purpose of sales and
redemptions at $1.00. These procedures include review of the investment
holdings by the Board of Trustees, at such intervals as it may deem
appropriate, to determine whether a Portfolio's net asset value calculated by
using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Board of
Trustees. If the deviation exceeds 1/2 of 1%, the Board of Trustees will
promptly consider what action, if any, will be initiated. In the event the
Board of Trustees determines that a deviation exists which may result in
material dilution or other unfair results to investors or existing
shareholders, it has agreed to take such corrective actions as it deems
necessary and appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These actions may include
selling portfolio securities prior to maturity to realize capital gains or
losses or to shorten a Portfolio's average maturity, withholding or reducing
dividends, redeeming shares in kind, splitting, combining or otherwise
recapitalizing outstanding shares or establishing a net asset value per share
by using available market quotations.
The Portfolios calculate their dividends based on daily net
investment income. Daily net investment income consists of (1) accrued
interest and other income plus or minus amortized purchase discount or
premium, (2) plus or minus all realized gains and losses on portfolio
securities and (3) minus accrued expenses allocated to that Portfolio.
Expenses of each Portfolio are accrued daily. As each Portfolio's portfolio
securities are normally valued at amortized cost, unrealized gains or losses
on such securities based on their market values will not normally be
recognized. However, should the net asset value deviate significantly from
market value, the Trustees could decide to value the securities at market
value and then unrealized gains and losses would be included in net investment
income.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are offered and sold on a continuous
basis by the Trust's sponsors and Co-Distributors, FoM and Essex, acting as
agent. As described in their Prospectuses, Class I shares of the Portfolios
are sold primarily to NBD and its affiliated and correspondent banks acting on
behalf of their respective customers. Class A shares of the Portfolios are
sold to the public ("Investors") primarily through financial institutions such
as banks, brokers and dealers.
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when
(a) trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted
such suspension; or (d) an emergency exists as determined by the SEC. (The
Trust may also suspend or postpone the recordation of the transfer of shares
upon the occurrence of any of the foregoing conditions).
In addition to the situations described in the Prospectuses
under "Redemption of Shares," the Trust may redeem shares involuntarily to
reimburse the Portfolios for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio shares as provided in the
Prospectuses from time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust, which
was amended and restated as of May 1, 1992, authorizes the Board of Trustees
to divide shares into two or more series, each series relating to a separate
portfolio of investments, and divide the shares of any series into two or more
classes. The number of shares of each series and/or of a class
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within each series shall be unlimited. The Trust does not intend to issue
share certificates. Pursuant to such authority, the Board of Trustees has
authorized the issuance of an unlimited number of shares of beneficial
interest in the Trust representing interests in the Portfolios. The shares of
each Portfolio are offered in two separate classes: Class I and Class A.
In the event of a liquidation or dissolution of the Trust or an
individual Portfolio, shareholders of a particular Portfolio would be entitled
to receive the assets available for distribution belonging to such Portfolio.
If there are any assets, income, earnings, proceeds, funds or payments, which
are not readily identifiable as belonging to any particular Portfolio, the
Trustees shall allocate them among any one or more of the Portfolios as they,
in their sole discretion, deem fair and equitable.
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Portfolio affected by the matter. A Portfolio is
affected by a matter unless it is clear that the interests of each Portfolio
in the matter are substantially identical or that the matter does not affect
any interest of the Portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if approved by a
majority of the outstanding shares of such Portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to particular Portfolios.
When used in the Prospectuses or in this Additional Statement,
a "majority" of shareholders means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust or the applicable Portfolio present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy,
or (2) more than 50% of the outstanding shares of the Trust or the applicable
portfolio.
As of March 29, 1996, Trussal & Co., a nominee of NBD's Trust
Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of record
58.32%, 58.10%, 79.85%, 77.83% and 31.52%, respectively, of the outstanding
shares of the Money Market Government, Treasury, Tax-Exempt and Michigan
Portfolios. As of the same date, First of Michigan Corporation, 100
Renaissance
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Center, 26th Floor, Detroit, Michigan 48243, held of record, but not
beneficially, 35.95% of the outstanding shares of the Michigan Portfolio. As
of the same date, Automated Cash Management Systems ("ACMS"), 900 Tower Drive,
10th Floor, Troy, Michigan 48098, held of record, but not beneficially,
16.54%, 7.86%, 14.92%, 11.96% and 6.42%, respectively, of the outstanding
shares of the Money Market, Government, Treasury, Tax-Exempt and Michigan
Portfolios. The Trustees and officers of the Trust, as a group, owned less
than 1% of the outstanding shares of each of these Portfolios. Furthermore, as
of February 29, 1996, with respect to the Government, Treasury, Tax-Exempt and
Michigan Portfolios, the following persons may have beneficially owned 5% or
more of the outstanding shares of such Portfolios:
<TABLE>
<CAPTION>
Percent of
Outstanding
Number of Shares Shares
---------------- -----------
<S> <C> <C>
Treasury Portfolio
Confederation Life-General 459,780,801 38.41%
260 Interstate North
Atlanta, GA 30339
Tax-Exempt Portfolio
Mrs. John E. Giles 30,564,579 5.05%
28 Doublet Hill Road
Weston, Massachusetts 02193
Michigan Portfolio
MI School Asbestos Trust 8,517,848 6.09%
Humphrey, Farmington, McClain PC
c/o Scott Manuel
221 W. Lexington, Suite 400
P.O. Box 900
Independence, Missouri 64051
</TABLE>
To the Trust's knowledge, there were no persons who
beneficially owned 5% or more of the outstanding shares of the Money Market
and Government Portfolios as of March 29, 1996.
When issued for payment as described in the Portfolio's
Prospectuses and this Additional Statement, shares of the Portfolios will be
fully paid and non-assessable by the Trust.
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The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of duties. It also provides that all third parties shall
look solely to the Trust property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the
affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning and is based on tax laws and regulations which are in
effect on the date hereof; such laws and regulations may be changed by
legislative or administrative action. Investors are advised to consult their
tax advisers with specific reference to their own tax situations.
Each Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, each Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain requirements with respect
to the source of its income for a taxable year. At least 90% of the gross
income of each Portfolio must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to the Portfolio's business of investing in such stock, securities or
currencies. The Treasury Department may by regulation exclude from qualifying
income foreign currency gains which are not directly related to the
Portfolio's principal business of investing in stock or securities, or options
and futures with respect to stock or securities. Any income derived by a
Portfolio from a partnership or trust is treated as derived with respect to
the Portfolio's business of investing in stock, securities or currencies only
to the extent that such income is attributable to items of income which would
have been qualifying
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income if realized by the Portfolio in the same manner as by the
partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Portfolio's gross income for
a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by a Portfolio upon maturity or
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
Each Portfolio will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Portfolio's taxable year.
Shareholders should note that, upon the sale or exchange of Portfolio shares,
if the shareholder has not held such shares for at least six months, any loss
on the sale or exchange of those shares will be treated as long term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, however, because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35% (or at a maximum effective marginal
rate of 39% in the case of corporations having taxable income between $100,000
and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Portfolio intends
to make sufficient distributions or deemed distributions of its ordinary
taxable income and any
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capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions (whether or not derived from interest on
Municipal Securities) would be taxable as ordinary income to shareholders to
the extent of the Portfolio's current and accumulated earnings and profits and
would be eligible for the dividends received deduction for corporations.
Each Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding
by the Internal Revenue Service for failure properly to include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
Depending upon the extent of the Portfolios' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Portfolios may be subject to the tax
laws of such states or localities. In addition, in those states and localities
which have income tax laws, the treatment of the Portfolios and their
shareholders under such laws may differ from their treatment under federal
income tax laws.
Tax-Exempt and Michigan Portfolios
As described above and in the Prospectuses, the Tax- Exempt and
Michigan Portfolios are designed to provide investors with current tax-exempt
interest income. The Portfolios are not intended to constitute a balanced
investment program and are not designed for investors seeking capital
appreciation or maximum tax-exempt income irrespective of fluctuations in
principal. Shares of the Portfolios would not be suitable for tax-exempt
institutions and may not be suitable for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and IRAs since such plans and accounts
are generally tax-exempt and, therefore, would not only fail to gain any
additional benefit from the Portfolios' dividends being tax-exempt, but such
dividends would be ultimately taxable to the beneficiaries when distributed to
them. In addition, the Portfolios may not be appropriate investments for
entities which are "substantial
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users" of facilities financed by private activity bonds or "related persons"
thereof. "Substantial user" is defined under U.S. Treasury Regulations to
include a non-exempt person who regularly uses a part of such facilities in
his trade or business and whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, or who occupies more than 5%
of the usable area of such facilities or for whom such facilities or a part
thereof were specifically constructed, reconstructed or acquired. "Related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S Corporation and its shareholders.
Each Portfolio's policy is to pay each year as federal
exempt-interest dividends substantially all of its Municipal Securities
interest income net of certain deductions. In order for a Portfolio to pay
exempt-interest dividends with respect to any taxable year, at the close of
each quarter of its taxable year at least 50% of the aggregate value of the
Portfolio's assets must consist of exempt-interest obligations. After the
close of its taxable year, each Portfolio will notify its shareholders of the
portion of the dividends paid by it which constitutes an exempt-interest
dividend with respect to such taxable year. However, the aggregate amount of
dividends so designated by a Portfolio cannot exceed the excess of the amount
of interest exempt from tax under Section 103 of the Code received by the
Portfolio during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total
dividends paid by a Portfolio with respect to any taxable year which qualify
as federal exempt-interest dividends will be the same for all shareholders
receiving dividends for such year.
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry the Portfolios' shares, equal to the
percentage of the total non-capital gain dividends distributed during the
shareholder's taxable year that are exempt-interest dividends, is not
deductible for federal income tax purposes.
Michigan Taxes
As stated in the Tax-Exempt and Michigan Portfolios'
Prospectuses, dividends paid by a Portfolio that are derived from interest
attributable to tax-exempt Michigan Municipal Securities will be exempt from
Michigan income tax, Michigan intangibles tax and Michigan single business
tax. Conversely, to the extent that a Portfolio's dividends are derived from
interest on obligations other than Michigan Municipal Securities or certain
U.S. Government obligations (or are derived from short-term or long-term
gains), such dividends will be subject to Michigan income tax, Michigan
intangibles tax and Michigan single business tax,
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even though the dividends may be exempt for federal income tax
purposes.
In particular, gross interest income and dividends derived from
obligations or securities of the State of Michigan and its political
subdivisions, exempt from federal income tax, are exempt from Michigan income
tax under Act No. 281, Public Acts of Michigan, 1967, as amended ("Michigan
Income Tax Act"), from Michigan intangibles tax under Act No. 301, Public Acts
of Michigan, 1939, as amended ("Michigan Intangibles Tax Act") and from
Michigan single business tax under Act. No. 228, Public Acts of Michigan,
1975, as amended ("Michigan Single Business Tax Act"). The Michigan Income Tax
Act levies a flat rate income tax on individuals, estates and trusts. The
Michigan Intangibles Tax Act levies a tax on the ownership of intangible
personal property of individuals, estates, trusts and certain corporations.
The Single Business Tax Act levies a tax of 2.30% upon the "adjusted tax base"
of most individuals, financial institutions, partnerships, joint ventures,
corporations, estates and trusts engaged in "business activity" as defined in
the Act.
The transfer of Portfolio shares by a shareholder is subject to
Michigan taxes measured by gain on the sale, payment or other disposition
thereof. In addition, the transfer of Portfolio shares by a shareholder may be
subject to Michigan estate or inheritance tax under Act No. 188, Public Acts
of Michigan, 1899, as amended ("Michigan Estate Tax").
The foregoing is only a summary of some of the important
Michigan state tax considerations generally affecting the Tax-Exempt and
Michigan Portfolios and their shareholders. No attempt has been made to
present a detailed explanation of the Michigan state tax treatment of the
Portfolios or their shareholders, and this discussion is not intended as a
substitute for careful planning. Accordingly, potential investors in the
Portfolios should consult their tax advisers with respect to the application
of such taxes to the receipt of Portfolio dividends and as to their own
Michigan state tax situation, in general.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the
Prospectuses. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226. Each Trustee also serves as a
trustee of The Woodward Variable Annuity Fund, a registered investment Company
advised by NBD Bank.
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Effective May 1, 1995, each Trustee receives from the Trust and
The Woodward variable Annuity Fund a total annual fee of $17,000 and a fee of
$2,000 for each Board of Trustees meeting attended. The Chairman is entitled
to additional compensation of $4,250 per year for his services to the Trusts
in that capacity. These fees are allocated among the investment portfolios of
the Trust and The Woodward Variable Annuity Fund based on their relative net
assets. All Trustees are reimbursed for out of pocket expenses incorrect in
connection with attendance at meetings. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Trusts.
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<PAGE>
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
-------------------- ------------ --------------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee $21,250 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr., $24,437.50 $24,437.50(2)+
Chairman and President++
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee++ $21,250 $21,250(2)+
Donald G. Sutherland, Trustee++ $21,250 $21,250(2)+
Donald L. Tuttle, Trustee++ $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
<FN>
- ---------
* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Variable Annuity Fund,
Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24,437.50, $21,500, $21,500,
and $21,500 accrued during The Woodward Funds' fiscal year ended December 31,
1995 for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and
Donald L. Tuttle, respectively.
</TABLE>
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<PAGE>
Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectuses. For the fiscal years ended December
31, 1995, 1994, and 1993, the Trust paid NBD fees for advisory services as
follows: (i) $7,225,557, $5,926,507, and $6,731,880 with respect to the Money
Market Portfolio, (ii) $1,987,590, $1,882,124, and $1,697,363 with respect to
the Government Portfolio, (iii) $3,248,535, $2,576,661 and $2,995,099 with
respect to the Treasury Portfolio, (iv) $2,458,246, $2,391,633, and $2,373,107
with respect to the Tax-Exempt Portfolio and (v) $496,026, $344,733, and
$274,780, with respect to the Michigan Portfolio. For the fiscal year ended
December 31, 1995, NBD voluntarily waived its fees in the amount of $61,221
with respect to the Michigan Portfolio.
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by the Trust. Joint purchase of investments for the
Trust and for NBD's own investment portfolio will not be made. NBD's
Commercial Banking Department may have deposit, loan and other commercial
banking relationships with issuers of securities purchased by the Trust,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of securities purchased by the Trust.
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a
pro rata share of the transaction costs incurred in making the bulk purchase.
See "Investment Objectives, Policies and Risk Factors - Portfolio
Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the
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<PAGE>
Trust as a result of changes in current state laws and regulations in those
states where the Trust has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations. To the Trust's knowledge, of the expense limitations in effect on
the date of this Additional Statement none is more restrictive than two and
one-half percent (2-1/2%) of the first $30 million of a Portfolio's average
annual net assets, two percent (2%) of the next $70 million of the average
annual net assets and one and one-half percent (1-1/2%) of the remaining
average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of each Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers
of national banks. These regulations provide, in general, that assets managed
by a national bank as fiduciary may not be invested in stock or obligations
of, or property acquired from, the bank, its affiliates or their directors,
officers or employees, and further provide that fiduciary assets may not be
sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed
to be the making of a loan to the Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Shareholder Servicing Plan
As stated in the Prospectuses for the Class A shares of the
Portfolios, the Trust may enter into Servicing Agreements with Shareholder
Servicing Agents which may include NBD and its affiliates. The Servicing
Agreements provide that the Shareholder Servicing Agents will render
shareholder administrative support services to their customers who are the
beneficial owners of Class A shares in consideration for the
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<PAGE>
Portfolios' payment of up to .25% (on an annualized basis) of the average
daily net asset value of the Class A shares beneficially owned by such
customers and held by the Shareholder Servicing Agents and, at the Trust's
option, it may reimburse the Shareholder Servicing Agents' out-of-pocket
expenses. Such services may include: (i) processing dividend and distribution
payments from a Portfolio; (ii) providing information periodically to
customers showing their share positions; (iii) arranging for bank wires; (iv)
responding to customer inquiries; (v) providing subaccounting with respect to
shares beneficially owned by customers or the information necessary for such
subaccounting; (vi) forwarding shareholder communications; (vii) processing
share exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses;
and (ix) other similar services requested by the Trust. Banks acting as
Shareholder Servicing Agents are prohibited from engaging in any activity
primarily intended to result in the sale of Portfolio shares. However,
Shareholder Servicing Agents other than banks may be requested to provide
marketing assistance (e.g., forwarding sales literature and advertising to
their customers) in connection with the distribution of Class A shares.
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended in connection with the Trust's arrangements
with Shareholder Servicing Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Trustees").
Any material amendment to the Trust's arrangements with
Shareholder Servicing Agents under the Shareholder Servicing Agreements must
be approved by a majority of the Board of Trustees (including a majority of
the Disinterested Trustees).
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of each Portfolio, (ii)
collects and makes disbursements of money on behalf of each Portfolio, (iii)
issues and redeems shares of each Portfolio, (iv) collects and receives all
income and other payments and distributions on account of the portfolio
securities of each Portfolio, (v) addresses and mails all communications by
the Trust to its shareholders, including reports to shareholders, dividend and
distribution notices and proxy materials for any meeting of shareholders, (vi)
maintains shareholder accounts, (vii) makes periodic reports to the Trust's
Board of Trustees concerning the Trust's operations, and (viii) maintains
on-line
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<PAGE>
computer capability for determining the status of shareholder
accounts.
For its services as Custodian, NBD is entitled to receive from
the Portfolios $11.00 for each clearing and settlement transaction and $23.00
for each accounting and safekeeping service with respect to investments, in
addition to activity charges for master control and master settlement
accounts.
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from each Portfolio of $11,000, $15 annually per account
in the Portfolios for the preparation of statements of account, and $1.00 for
each confirmation of purchase and redemption transactions. Charges for
providing computer equipment and maintaining a computerized investment system
are expected to approximate $350 per month for each Portfolio.
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which act under the Distribution Agreement as sponsors and
Co-Distributors for the Trust. For the fiscal year ended December 31, 1995,
the Money Market, Government, Treasury, Tax-Exempt and Michigan Portfolios
paid FoM for its services a fee of $119,933, $32,310, $52,950, $40,084 and
$7,261, respectively. For the fiscal year ended December 31, 1994, the Money
Market, Government, Treasury, Tax-Exempt, and Michigan Portfolios paid FoM for
its services a fee of $90,197, $25,425, $39,127, $32,631 and $4,129,
respectively. For the fiscal year ended December 31, 1993, the Money Market,
Government, Treasury, Tax-Exempt and Michigan Portfolios paid FoM for its
services a fee of $230,601, $57,017, $100,651, $79,747 and $8,312,
respectively. For the fiscal years ended December 31, 1995, 1994, and 1993,
FoM incurred expenses of $0 with respect to each Portfolio for the printing
and mailing of prospectuses to other than current shareholders. For the fiscal
year ended December 31, 1995, the Money Market, Government, Treasury,
Tax-Exempt and Michigan Portfolios paid Essex for its services a fee of
$32,940, $2,609, $805, $4,142 and $3,205, respectively. For the fiscal period
from April 20, 1994 through December 31, 1994, the Money Market, Government,
Treasury, Tax-Exempt and Michigan Portfolios paid Essex for its services a fee
of $25,515, $7,167, $7,935, $7,950 and $1,656, respectively. For the fiscal
year ended December 31, 1995, Essex incurred expenses of $0 with respect to
each Portfolio for the printing and mailing of prospectuses to other than
current shareholders. Additional information concerning fees for services
performed by FoM and Essex, the review of such fees under the Trust's plan for
the payment of distribution expenses and the services provided by FoM and
Essex are described in the Prospectuses.
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<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serve as auditors for the
Trust. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectuses have
been audited by Arthur Andersen LLP, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of each class of
shares of each Portfolio for various periods may be quoted in advertisements,
shareholder reports or other communications to shareholders. Performance
information is generally available by calling (800)688-3350.
The "yield" and "effective yield" of each class, as described
in the Portfolios' Prospectuses, are calculated according to formulas
prescribed by the SEC. The standardized seven-day yield is computed separately
by determining the net change, exclusive of capital changes, in the value of a
hypothetical pre-existing account in a class having a balance of one share at
the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by (365/7). The net
change in the value of an account includes the value of additional shares
purchased with dividends from the original share, and dividends declared on
both the original share and any such additional shares and all fees, other
than nonrecurring account sales charges, that are charged to all shareholder
accounts in proportion to the length of the base period and the Portfolio's
average account size. The capital changes to be excluded from the calculation
of the net change in account value are realized gains and losses from the sale
of securities and unrealized appreciation and depreciation. The effective
annualized yield for a class is computed by compounding the unannualized base
period return (calculated as above) by adding 1 to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting one from
the result. The fees which may be imposed by financial intermediaries on their
customers for cash management and other services are not reflected in the
Portfolios' calculations of
-25-
<PAGE>
yields. In addition, the Tax-Exempt and Michigan Portfolios may advertise
their standardized "tax-equivalent yields," which are computed by: (a)
dividing the portion of the yield (as calculated above) that is exempt from
income tax by one minus a stated income tax rate; and (b) adding the figure
resulting from (a) above to that portion, if any, of the yield that is not
tax-exempt.
Because each Portfolio values its portfolio on an amortized
cost basis, it does not believe that there is likely to be any material
difference between net income for dividend and standardized yield quotation
purposes.
For the seven day period ended December 31, 1995, the
annualized yields and effective yields for the shares of the Money Market,
Government, Treasury, Tax-Exempt and Michigan Portfolios were 5.37% and 5.48%,
5.32% and 5.41%, 5.23% and 5.42%, 3.90% and 4.10%, and 3.81% and 3.97%,
respectively. The tax-equivalent yields of the shares of the Tax-Exempt and
Michigan Portfolios (assuming a 39.6% federal income tax rate for both
Portfolios and a 4.4% Michigan income tax rate for the Michigan Portfolio) for
the seven-day period ended December 31, 1995 were 6.46% (annualized yield) and
6.79% (effective yield), and 6.85% (annualized yield) and 7.14% (effective
yield), respectively.
The Portfolios may also from time to time include in
advertisements, sales literature, communications to shareholders and other
materials ("Literature") total return figures that are not calculated
according to the formulas set forth above in order to compare more accurately
a Portfolio's performance with other measures of investment return. For
example, in comparing the Portfolios' total returns with data published by
Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the performance of an index,
the Portfolios may calculate their returns for the period of time specified in
the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment date. Percentage increases are determined
by subtracting the initial value of the investment from the ending value and
by dividing the remainder by the beginning value. The Portfolios do not, for
these purposes, deduct from the initial value invested any amount representing
sales charges. If applicable, the Portfolios will, however, disclose the
maximum sales charge (currently there is no sales charge) and will also
disclose that the performance data does not reflect sales charges and that
inclusion of sales charges would reduce the performance quoted.
The Portfolios may also from time to time include
discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if
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<PAGE>
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
Portfolio investment, but also of the additional Portfolio shares received
through reinvestment. As a result, the value of the Portfolio investment would
increase more quickly than if dividends or other distributions had been paid
in cash.
The Portfolios may also include discussions or illustrations of
the potential investment goals of a prospective investor, investment
management strategies, techniques, policies or investment suitability of a
Portfolio (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer, automatic accounting rebalancing,
the advantages and disadvantages of investing in tax-deferred and taxable
instruments), economic conditions, the relationship between sectors of the
economy and the economy as a whole, various securities markets, the effects of
inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance
of information contained in shareholder reports (including the investment
composition of a Portfolio), as well as the view of the Trust as to current
market, economy, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to
be of relevance to a Portfolio. The Portfolios may also include in
advertisements charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Portfolio and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, treasury bills and shares of a Portfolio. In
addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in
a Portfolio and/or other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and investment alternatives to certificates of deposit and
other financial instruments. Such advertisements or communicators may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
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<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D- 1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used
by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and
other protection factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE>
year or less which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to
adverse developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
A-4
<PAGE>
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly 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 "C" 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.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
A-5
<PAGE>
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating 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. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest
return is indexed to equities, commodities, or currencies; certain swaps and
options; and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality.
They carry the smallest degree of investment risk and are
A-6
<PAGE>
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
"Aa" - Bonds 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 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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the
bonds. The rating may be revised prior to delivery if changes
A-7
<PAGE>
ooccur in the legal documents or the underlying credit quality of
the bonds.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during economic
cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by Fitch
for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future
A-8
<PAGE>
developments, short-term debt of these issuers is generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
A-9
<PAGE>
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's
lowest investment grade category and indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB"
A-10
<PAGE>
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
A-11
<PAGE>
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
[ INTENTIONALLY LEFT BLANK ]
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
MONEY MARKET
FUND
------------
<S> <C>
ASSETS:
Investment in securities:
At cost $1,619,765,599
==============
At amortized cost (Note 2) $1,624,604,821
Cash 109
Interest receivable 16,341,428
Deferred organization costs, net (Note 2) --
Prepaids and other 298,771
--------------
TOTAL ASSETS 1,641,245,129
--------------
LIABILITIES:
Payable for securities purchased --
Accrued investment advisory fee 743,967
Accrued distribution fees 16,841
Accrued custodial fee 2,795
Dividends payable 738,061
Accounts payable and accrued expenses 48,651
--------------
TOTAL LIABILITIES 1,550,315
--------------
NET ASSETS $1,639,694,814
==============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 163,969,481
Additional paid-in capital 1,475,725,333
--------------
TOTAL NET ASSETS $1,639,694,814
==============
Net asset value and redemption price per share $ 1.00
==============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
December 31, 1995
MICHIGAN
TREASURY TAX-EXEMPT TAX-EXEMPT
GOVERNMENT MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND FUND
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in securities:
At cost $469,488,613 $921,604,627 $566,354,408 $126,549,715
============ ============ ============ ============
At amortized cost (Note 2) $469,643,055 $921,643,450 $564,592,007 $126,237,472
Cash 320 104 52,509 1,897
Interest receivable 5,112,013 6,544,562 5,203,797 1,139,798
Deferred organization costs, net (Note 2) -- 6,063 -- --
Prepaids and other 41,286 295,486 13,394 61,485
------------ ------------ ------------ ------------
TOTAL ASSETS 474,796,674 928,489,665 569,861,707 127,440,652
------------ ------------ ------------ ------------
LIABILITIES:
Payable for securities purchased -- -- 5,000,000 5,273,510
Accrued investment advisory fee 195,644 340,328 225,584 51,173
Accrued distribution fees 3,417 5,377 3,880 1,222
Accrued custodial fee 685 869 3,312 690
Dividends payable 210,856 413,557 190,363 39,832
Accounts payable and accrued expenses 9,217 34,032 25,092 17,283
------------ ------------ ------------ ------------
TOTAL LIABILITIES 419,819 794,163 5,448,231 5,383,710
------------ ------------ ------------ ------------
NET ASSETS $474,376,855 $927,695,502 $564,413,476 $122,056,942
============ ============ ============ ============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 47,437,686 $ 92,769,550 $ 56,441,348 $ 12,205,694
426,939,169 834,925,952 507,972,128 109,851,248
Additional paid-in capital ------------ ------------ ------------ ------------
$474,376,855 $927,695,502 $564,413,476 $122,056,942
TOTAL NET ASSETS ============ ============ ============ ============
Net asset value and redemption price per share $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
MONEY MARKET
FUND
------------
<S> <C>
INVESTMENT INCOME (Note 2): $98,415,963
-----------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 7,225,557
Distribution fees 152,873
Professional fees 48,970
Custodial fee 60,686
Shareholder servicing agent fees 450,637
Marketing expenses 102,871
Amortization of deferred organization expenses --
Registration, filing fees and other expenses 398,210
Less:
Waived investment advisory fee --
-----------
NET EXPENSES 8,439,804
-----------
NET INVESTMENT INCOME $89,976,159
===========
RATIO OF TOTAL EXPENSES TO TOTAL INVESTMENT INCOME 8.6%
===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
STATEMENTS OF OPERATIONS (Continued)
For the Year Ended December 31, 1995
MICHIGAN
TREASURY TAX-EXEMPT TAX-EXEMPT
GOVERNMENT MONEY MARKET MONEY MARKET MONEY MARKET
FUND FUND FUND FUND
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (Note 2): $26,262,034 $42,755,302 $21,196,396 $3,921,289
----------- ----------- ----------- ----------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 1,987,590 3,248,535 2,458,246 496,026
Distribution fees 34,919 53,755 44,226 10,466
Professional fees 48,970 48,970 48,970 48,970
Custodial fee 8,370 12,919 41,886 11,132
Shareholder servicing agent fees 60,644 298,599 86,193 82,305
Marketing expenses 36,670 41,925 42,552 34,396
Amortization of deferred organization expenses -- 8,021 -- 8,277
Registration, filing fees and other expenses 82,327 128,542 173,183 54,166
Less:
Waived investment advisory fee -- -- -- (61,221)
----------- ----------- ----------- ----------
NET EXPENSES 2,259,490 3,841,266 2,895,256 684,517
----------- ----------- ----------- ----------
NET INVESTMENT INCOME $24,002,544 $38,914,036 $18,301,140 $3,236,772
=========== =========== =========== ==========
RATIO OF TOTAL EXPENSES TO TOTAL INVESTMENT INCOME 8.6% 9.0% 13.7% 17.5%
=========== =========== =========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
MONEY MARKET FUND GOVERNMENT FUND
----------------- ---------------
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 89,976,159 $ 54,437,913 $ 24,002,544 $ 15,570,185
Distributions to shareholders from net investment
income (89,976,159) (54,437,913) (24,002,544) (15,570,185)
---------------- ---------------- --------------- ---------------
Net increase in net assets from operations -- -- -- --
---------------- ---------------- --------------- ---------------
FROM CAPITAL SHARE TRANSACTIONS (at $1.00 per share):
Proceeds from shares sold 15,430,620,141 11,950,595,231 7,866,220,550 4,177,408,097
Net asset value of shares issued in reinvestment of
distributions to shareholders 20,938,255 15,065,218 5,511,007 3,599,166
---------------- ---------------- --------------- ---------------
15,451,558,396 11,965,660,449 7,871,731,557 4,181,007,263
Less: payments for shares redeemed (15,134,903,898) (11,969,313,007) (7,818,562,738) (4,106,464,145)
---------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets from capital
share transactions 316,654,498 (3,652,558) 53,168,819 74,543,118
---------------- ---------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS 316,654,498 (3,652,558) 53,168,819 74,543,118
NET ASSETS:
Beginning of year 1,323,040,316 1,326,692,874 421,208,036 346,664,918
---------------- ---------------- --------------- ---------------
End of year $ 1,639,694,814 $ 1,323,040,316 $ 474,376,855 $ 421,208,036
================ ================ =============== ===============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
TREASURY TAX-EXEMPT MICHIGAN TAX-EXEMPT
MONEY MARKET FUND MONEY MARKET FUND MONEY MARKET FUND
----------------- ----------------- -----------------
Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- ------------- ------------- -------------
FROM OPERATIONS:
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 38,914,036 $ 23,209,709 $ 18,301,140 $ 12,879,849 $ 3,236,772 $ 1,621,567
Distributions to
shareholders from net
investment income (38,914,036) (23,209,709) (18,301,140) (12,879,849) (3,236,772) (1,621,567)
--------------- --------------- --------------- --------------- ------------- -------------
Net increase in net
assets from operations -- -- -- -- -- --
--------------- --------------- --------------- --------------- ------------- -------------
FROM CAPITAL SHARE
TRANSACTIONS
(at $1.00 per share):
Proceeds from
shares sold 6,284,582,300 3,163,540,997 2,777,275,094 3,097,740,398 293,836,102 229,739,020
Net asset value of
shares issued in
reinvestment of
distributions to
shareholders 5,449,979 6,513,927 2,421,757 2,353,656 2,029,545 1,022,699
--------------- --------------- --------------- --------------- ------------- -------------
6,290,032,279 3,170,054,924 2,779,696,851 3,100,094,054 295,865,647 230,761,719
Less: payments for
shares redeemed (6,148,030,955) (3,239,233,694) (2,766,019,376) (3,048,064,052) (252,448,579) (204,679,038)
--------------- --------------- --------------- --------------- ------------- -------------
Net increase (decrease)
in net assets from
capital share
transactions 142,001,324 (69,178,770) 13,677,475 52,030,002 43,417,068 26,082,681
--------------- --------------- --------------- --------------- ------------- -------------
NET INCREASE (DECREASE)
IN NET ASSETS 142,001,324 (69,178,770) 13,677,475 52,030,002 43,417,068 26,082,681
NET ASSETS:
Beginning of year 785,694,178 854,872,948 550,736,001 498,705,999 78,639,874 52,557,193
--------------- --------------- --------------- --------------- ------------- -------------
End of year $ 927,695,502 $ 785,694,178 $ 564,413,476 $ 550,736,001 $ 122,056,942 $ 78,639,874
=============== =============== =============== =============== ============= =============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Amortized
Cost
Description Face Amount (Note 2)
----------- ----------- --------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 16.98%
Allstate Life Insurance Co. Master Note, 5.93%,
1/2/96 $ 5,000,000 $ 5,000,000
American General Finance, Inc. Master Note, 5.85%,
1/2/96 15,000,000 15,000,000
Commonwealth Life Insurance Co. Master Note, 6.03%,
1/2/96 5,000,000 5,000,000
Peoples Security Life Insurance Co. Master Note,
6.03%, 1/2/96 5,000,000 5,000,000
Sun Life Insurance Co. of America Master Note,
6.13%, 1/2/96 10,000,000 10,000,000
Transamerica Finance Group, Inc. Master Note,
5.85%, 1/2/96 25,000,000 25,000,000
NationsBank Capital Markets, Inc., Revolving
Repurchase Agreement, 6.00%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 2/15/96 through 11/15/05 at various
interest rates ranging from 0.00% to 12.375%, all
held at Chemical Bank) 56,503,093 56,503,093
Nomura Securities International, Inc., Revolving
Repurchase Agreement, 6.00%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 1/18/96 through 9/10/02 at various
interest rates ranging from 0.00% to 8.26%, all
held at the Bank of New York) 77,000,000 77,000,000
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) 73,407,000 73,407,000
Yamaichi, Revolving Repurchase Agreement, 6.00%,
1/2/96 (secured by various U.S. Treasury
obligations with maturities ranging from 12/31/95
through 8/15/05 at various interest rates ranging
from 0.00% to 11.625%, all held at Chemical Bank) 4,000,000 4,000,000
--------------
275,910,093
--------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 4.52%
Federal Farm Credit Bank, 5.60%, 7/1/96 13,950,000 13,930,941
Federal Home Loan Bank:
5.63%, 6/26/96 12,000,000 11,992,746
5.98%, 8/14/96 5,000,000 5,000,000
Federal National Mortgage Assn. Deb., 8.75%,
6/10/96 2,000,000 2,025,084
Federal National Mortgage Assn. Medium Term Note:
5.97%, 5/16/96 4,000,000 4,002,877
5.71%, 6/10/96 9,000,000 8,994,375
Student Loan Marketing Assn., 6.05%, 6/30/96 27,500,000 27,528,471
--------------
73,474,494
--------------
COMMERCIAL PAPER -- 44.37%
Abbey National North America, 5.64%, 3/6/96 29,980,000 29,677,951
Accor, 5.74%, 2/15/96 8,000,000 7,943,000
AESOP Funding Corp., 5.82%, 1/22/96 15,000,000 14,949,250
Allomon Funding Corp.:
5.78%, 1/12/96 10,000,000 9,982,369
5.77%, 1/25/96 10,135,000 10,096,149
Alpine Securitization Corp., 5.76%, 2/13/96 8,000,000 7,945,342
American Express Credit Corp., 5.69%, 2/27/96 20,000,000 19,821,400
Avnet, Inc., 5.72%, 2/16/96 7,500,000 7,445,567
B.A.T. Capital Corp., 5.77%, 1/23/96 10,000,000 9,964,861
Barton Capital Corp., 5.80%, 1/26/96 17,000,000 16,931,764
Bass Finance (C.I.) Ltd., 5.71%, 2/14/96 10,815,000 10,740,052
BCI Funding Corp., 5.74%, 2/9/96 19,980,000 19,856,623
BEAL Cayman Ltd., 5.73%, 2/23/96 19,980,000 19,812,923
Clipper Receivables Corp., 5.76%, 1/17/96 20,000,000 19,948,889
Corporate Receivables Corp., 5.81%, 1/5/96 17,000,000 16,989,026
Echlin, Inc., 5.76%, 1/18/96 15,000,000 14,959,342
Eksportfinans A/S, 5.54%, 1/8/96 6,060,000 6,053,484
Electronic Data Systems Corp., 5.56%, 3/21/96 5,000,000 4,939,000
Engelhard Corp., 5.75%, 1/19/96 10,970,000 10,938,571
English China Clays PLC:
5.78%, 1/22/96 10,000,000 9,966,400
5.73%, 2/20/96 10,000,000 9,921,111
5.70%, 3/1/96 10,254,000 10,157,442
Enterprise Funding Corp.:
5.76%, 1/12/96 6,451,000 6,439,666
5.76%, 1/16/96 13,072,000 13,040,652
5.76%, 2/9/96 9,000,000 8,944,230
Explorer Pipeline Co.:
5.76%, 1/24/96 7,775,000 7,746,487
5.78%, 1/30/96 10,500,000 10,451,365
5.72%, 2/16/96 10,000,000 9,927,422
Franklin Resources, Inc., 5.73%, 2/20/96 8,000,000 7,936,889
Greenwich Funding Corp.:
5.76%, 1/8/96 10,000,000 9,988,819
5.78%, 1/11/96 10,000,000 9,983,972
Halifax Building Society, 5.77%, 1/3/96 10,000,000 9,996,794
Hercules, Inc., 5.60%, 6/21/96 10,000,000 9,739,611
International Lease Finance Corp., 5.76%, 1/9/96 12,730,000 12,713,734
International Securitization Corp.:
5.78%, 2/2/96 17,000,000 16,913,111
5.52%, 6/10/96 9,530,000 9,300,277
New Center Asset Trust, 5.78%, 1/31/96 20,000,000 19,904,167
Pacific Dunlop Holdings, Inc., 5.75%, 2/21/96 10,000,000 9,919,250
Pacific Dunlop Ltd., 5.67%, 1/23/96 5,000,000 4,982,736
Pooled Accounts Receivable Capital Corp.:
5.83%, 1/9/96 11,000,000 10,985,773
6.02%, 1/25/96 10,160,000 10,119,360
Preferred Receivables Funding Corp.:
5.73%, 2/2/96 15,975,000 15,894,060
5.75%, 2/21/96 8,050,000 7,984,996
Premium Funding, Inc.:
5.78%, 2/7/96 10,113,000 10,053,235
5.79%, 2/14/96 11,162,000 11,083,556
Ranger Funding Corp., 5.75%, 1/12/96 13,000,000 12,977,199
San Paolo U.S. Financial Co., 5.68%, 3/15/96 10,970,000 10,843,498
Sheffield Receivables Corp., 5.73%, 2/1/96 12,980,000 12,916,290
St. Michael Finance Ltd.:
5.75%, 2/20/96 9,272,000 9,198,597
5.64%, 3/5/96 5,694,000 5,637,516
5.64%, 3/8/96 10,000,000 9,896,150
Sunbelt-Dix, Inc.:
5.76%, 1/30/96 4,000,000 3,981,537
5.79%, 2/13/96 11,980,000 11,897,721
5.71%, 3/5/96 12,000,000 11,879,467
5.67%, 3/25/96 5,250,000 5,181,400
Sweden (Kingdom of):
5.71%, 2/16/96 15,000,000 14,891,325
5.72%, 3/1/96 6,980,000 6,914,039
5.73%, 3/12/96 10,000,000 9,888,175
TI Group, Inc., 5.70%, 3/4/96 17,000,000 16,832,210
U.S. Borax & Chemical Corp., 5.73%, 2/1/96 5,000,000 4,975,458
Windmill Funding Corp.:
6.02%, 1/16/96 10,000,000 9,975,000
5.82%, 1/24/96 15,000,000 14,944,417
WMX Technologies, Inc., 5.50%, 9/9/96 15,480,000 14,905,692
--------------
720,826,369
--------------
NOTES -- 17.27%
American Express Centurion Bank, 5.82%, A/R,
1/17/96 15,000,000 15,000,652
Associates Corp. of North America Debenture, 7.50%,
10/15/96 28,850,000 29,222,978
Associates Corp. of North America Euro Dollar
Debenture, 10.50%, 3/12/96 7,378,000 7,424,686
Boatmens National Bank of St. Louis, 6.00%, A/R,
6/12/96 20,000,000 20,000,000
Comerica Bank, 5.70%, 9/3/96 13,000,000 12,991,077
First Bank, NA, 5.96%, 3/4/96 27,500,000 27,499,558
First Union National Bank N. C., 5.76%, 2/2/96 5,000,000 5,000,000
Ford Motor Credit Co. Medium Term Notes:
6.25%, A/R, 5/10/96 12,000,000 12,013,087
14.00%, 7/5/96 5,000,000 5,198,163
9.10%, 7/18/96 5,000,000 5,083,739
Huntington National Bank, 5.67%, A/R, 8/29/96 30,000,000 29,988,082
J.P. Morgan, 5.75%, 8/7/96 29,980,000 29,986,992
PNC Bank, 5.65%, 9/18/96 20,000,000 19,996,215
Seattle First National Bank, 5.51%, 6/14/96 10,000,000 10,000,000
Smithkline Beecham Corp., 5.25%, 1/16/96 2,425,000 2,423,784
Society National Bank Cleveland Ohio Medium Term
Note, 6.875%, 10/15/96 23,500,000 23,683,821
Trust Company Bank, 6.50%, 3/21/96 25,000,000 24,994,577
-----------
280,507,411
-----------
CERTIFICATES OF DEPOSIT -- 15.44%
Bayerische Landesbank Girozentrale, 6.00%, 9/12/96 10,000,000 10,000,000
Bayerische Vereinsbank AG, 5.95%, 7/22/96 29,980,000 29,980,000
Canadian Imperial Bank of Commerce, 5.95%, 10/23/96 24,980,000 24,980,000
Dresdner Bank AG, 7.00%, 2/5/96 15,000,000 15,000,000
Harris Trust & Savings Bank, 5.72%, 2/29/96 14,975,000 14,975,000
National Westminster Bank PLC, 5.83%, 1/12/96 15,000,000 15,000,045
PNC Bank Corp., 5.74%, 9/30/96 20,000,000 19,985,384
Royal Bank of Canada:
6.60%, 4/3/96 2,980,000 2,980,399
6.55%, 4/9/96 8,000,000 8,000,000
Societe Generale:
7.05%, 2/14/96 20,000,000 20,000,000
6.80%, 3/1/96 5,000,000 5,000,000
Toronto-Dominion Bank, Euro:
6.80%, 3/11/96 24,980,000 24,987,939
5.84%, 11/7/96 30,000,000 30,000,000
Wachovia Bank of Georgia, NA, 5.85%, 1/10/96 10,000,000 10,000,000
Wachovia Bank of North Carolina, 7.13%, 1/26/96 20,000,000 19,997,687
--------------
250,886,454
--------------
TIME DEPOSIT -- 1.42%
Mitsubishi Bank, 12.00%, 1/2/96 23,000,000 23,000,000
--------------
23,000,000
--------------
TOTAL INVESTMENTS $1,624,604,821
==============
<FN>
A/R -- Adjustable Rate
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Amortized Cost
Description Face Amount (Note 2)
----------- ----------- --------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 45.05%
NationsBank Capital Markets, Inc., Revolving
Repurchase Agreement, 6.00%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 2/15/96 through 11/15/05 at various
interest rates ranging from 0.00% to 12.375%, all
held at Chemical Bank) $73,569,000 $ 73,569,000
Nomura Securities International, Inc., Revolving
Repurchase Agreement, 6.00% 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 1/18/96 through 9/10/02 at various
interest rates ranging from 0.00% to 8.26%, all
held at the Bank of New York) 23,000,000 23,000,000
Yamaichi, Revolving Repurchase Agreement, 6.00%,
1/2/96 (secured by various U.S. Treasury
obligations with maturities ranging from 12/31/95
through 8/15/05 at various interest rates ranging
from 0.00% to 11.625%, all held at Chemical Bank) 115,000,000 115,000,000
------------
211,569,000
------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 54.95%
U.S. Treasury Securities -- 4.28%
U.S. Treasury Notes:
4.375%, 8/15/96 5,000,000 4,957,174
7.000%, 9/30/96 15,000,000 15,150,150
------------
20,107,324
------------
Agency Obligations -- 50.67%
Federal Farm Credit Bank:
5.78%, A/R, 2/9/96 25,000,000 24,998,664
6.61%, 4/12/96 4,000,000 4,006,934
6.39%, 4/17/96 10,000,000 10,022,719
5.59%, A/R, 6/7/96 10,000,000 9,998,338
5.60%, 11/1/96 10,000,000 10,002,747
Federal Home Loan Bank:
6.85%, 2/28/96 24,000,000 24,012,415
6.30%, 3/1/96 2,500,000 2,474,042
5.05%, 6/7/96 6,000,000 5,983,328
5.90%, 7/25/96 5,000,000 5,000,000
5.98%, 8/14/96 19,000,000 19,000,000
6.00%, 8/16/96 2,000,000 2,000,411
4.84%, 8/26/96 5,000,000 4,976,737
5.77%, 11/20/96 10,000,000 9,998,229
Federal Home Loan Mortgage Corp., 6.79%, 2/20/96 15,000,000 14,999,678
Federal National Mortgage Assn., 5.58% 2/21/96 8,400,000 8,334,074
Federal National Mortgage Assn. Medium Term Note:
5.50%, A/R, 1/26/96 25,000,000 24,998,973
5.71%, 6/10/96 5,000,000 4,998,939
5.50%, 6/12/96 18,000,000 17,969,843
Student Loan Marketing Assn.:
6.13%, A/R, 6/30/96 12,500,000 12,490,660
6.06%, A/R, 7/1/96 11,700,000 11,700,000
6.05%, A/R, 10/4/96 10,000,000 10,000,000
------------
237,966,731
------------
TOTAL INVESTMENTS $469,643,055
============
<FN>
A/R -- Adjustable Rate
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Amortized Cost
Description Face Amount (Note 2)
----------- ----------- -------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 82.74%
Aubrey Langston, Revolving Repurchase Agreement,
5.92%, 1/2/96 (secured by various U.S. Treasury
obligations with maturities ranging from 8/31/97
through 11/15/05 at various interest rates
ranging from 4.75% to 13.75%, all held at
Chemical Bank) $43,000,000 $ 43,000,000
Bear Stearns & Co., Inc., Revolving Repurchase
Agreement, 5.82%, 1/2/96 (secured by various U.S.
Treasury obligations with maturities ranging from
5/15/96 through 8/15/23 at various interest rates
ranging from 0.00% to 8.875%, all held at the
Custodial Trust Co.) 215,000,000 215,000,000
Daiwa Securities America, Inc., Revolving
Repurchase Agreement, 5.90%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 4/30/96 through 11/15/01 at various
interest rates ranging from 0.00% to 15.75%, all
held at the Bank of New York) 43,000,000 43,000,000
First Boston, Inc., Revolving Repurchase Agreement,
5.85%, 1/2/96 (secured by various U.S. Treasury
Notes with maturities ranging from 11/15/96
through 2/15/03 at various interest rates ranging
from 4.375% to 6.25%, all held at Chemical Bank) 36,000,000 36,000,000
Lehman Brothers, Inc., Revolving Repurchase
Agreement, 5.92%, 1/2/96 (secured by U.S.
Treasury Note, 5.875%, 7/31/97, held at Chemical
Bank) 43,000,000 43,000,000
Morgan Stanley & Co., Inc., Revolving Repurchase
Agreement, 5.87%, 1/2/96 (secured by U.S.
Treasury Note, 6.125%, 5/31/97, held at the Bank
of New York) 43,000,000 43,000,000
NationsBank Capital Markets, Inc., Revolving
Repurchase Agreement, 6.00%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 2/15/96 through 11/15/05 at various
interest rates ranging from 0.00% to 12.375%, all
held at Chemical Bank) 216,533,000 216,533,000
Nikko Securities Co. International, Inc., Revolving
Repurchase Agreement, 5.90%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 7/31/96 through 8/15/00 at various
interest rates ranging from 0.00% to 8.75%, all
held at the Bank of New York) 40,000,000 40,000,000
Nomura Securities International, Inc., Revolving
Repurchase Agreement, 5.96%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 8/31/97 through 5/15/01 at various
interest rates ranging from 0.00% to 6.00%, all
held at the Bank of New York) 40,000,000 40,000,000
Sanwa BGK Securities Co., L.P., Revolving
Repurchase Agreement, 5.90%, 1/2/96 (secured by
U.S. Treasury Note, 5.50%, 11/15/98, held at the
Bank of New York) 43,000,000 43,000,000
------------
762,533,000
------------
U.S. GOVERNMENT OBLIGATIONS -- 17.26%
U.S. Treasury Securities -- 17.26%
Principal Strip from U.S. Treasury Bond due
5/15/96 5,000,000 4,897,685
U.S. Treasury Bill, 6.26%, 3/7/96 3,000,000 2,965,955
U.S. Treasury Notes:
4.000%, 1/31/96 8,000,000 7,988,924
4.625%, 2/15/96 10,000,000 9,976,935
7.875%, 2/15/96 35,000,000 35,049,857
7.500%, 2/29/96 15,000,000 15,016,012
5.500%, 4/30/96 20,000,000 19,970,088
5.875%, 5/31/96 10,000,000 10,001,983
7.875%, 7/15/96 2,000,000 2,021,778
6.125%, 7/31/96 7,000,000 7,013,918
7.875%, 7/31/96 4,000,000 4,046,593
4.375%, 8/15/96 14,000,000 13,873,585
8.000%, 10/15/96 15,000,000 15,256,312
4.375%, 11/15/96 5,000,000 4,943,974
7.250%, 11/15/96 6,000,000 6,086,851
------------
159,110,450
------------
TOTAL INVESTMENTS $921,643,450
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD TAX-EXEMPT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Amortized
Interest Cost
Description Rating* Rate*** Face Amount (Note 2)
----------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Alabama -- 1.05%
Alabama HFA Mulit-Family CP:
12/1/13 VMIG 1 3.50% $ 3,200,000 $ 3,200,000
12/1/13 VMIG 1 3.60% 2,700,000 2,700,000
Alaska -- 7.97%
Anchorage Electric Utilities (MBIA Insured)
12/1/15 Aaa 7.63% 11,100,000 11,423,545
Valdez Marine Terminal--Arco Transportation:
CP, 5/1/31 VMIG 1 3.50% 8,000,000 8,000,000
CP, 5/1/31 VMIG 1 3.55% 3,900,000 3,900,000
CP, 5/1/31 VMIG 1 3.75% 1,700,000 1,700,000
VRDB, 5/1/31 VMIG 1 3.50% 8,000,000 8,000,000
Valdez Marine Terminal--Exxon Pipeline Co. VRDB,
10/1/25 P 1 5.95% 12,000,000 12,000,000
Arizona -- 1.00%
Chandler IDR VRDB--Parsons Municipal Services,
12/15/09 A 1+ 4.25% 3,600,000 3,600,000
Maricopa Co. School District GO Unlimited Tax Series
A, 7/1/96 Aa 3.75% 2,000,000 2,000,952
Colorado -- 2.87%
Adams Co. IDR VRDB--City View Park, 12/1/15 A 1+ 5.20% 3,000,000 3,000,000
Englewood HFA Multi-Family VRDN--Mark Project,
12/15/97 A 1+ 5.25% 2,000,000 2,000,000
Lakewood Multi-Family Housing (FGIC Insured)
VRDB--St. Moritz & Diamond Head, 10/1/07 VMIG 1 4.00% 8,250,000 8,250,000
Moffat Co. PCR VRDB, 7/1/10 VMIG 1 4.65% 3,000,000 3,000,000
Delaware -- 1.35%
Delaware EDC VRDB--Hospital Billing Series B, 12/1/15 VMIG 1 5.25% 7,600,000 7,600,000
Florida -- 1.58%
Florida GO Unlimited Tax, 7/1/08 Aaa 7.20% 3,270,000 3,355,215
Florida HFA Multi-Family (MBIA Insured) VRDB--Lake
Northdale, 6/1/07 Aaa 3.75% 5,595,000 5,595,000
Georgia -- 2.56%
Cobb Co. Housing Multi-Family VRDB--Pittco Frey
Associates Project, 6/1/23 VMIG 1 5.20% 5,900,000 5,900,000
College Park IDR VRDB-- Marriott Corp., 8/1/15 Aa 3 6.10% 1,200,000 1,200,000
Fulton Co. Development IDR VRDN--Palisades West Ltd.,
9/1/96 Aaa 5.15% 2,235,000 2,235,000
Georgia Municipal Gas Authority--Southern Portfolio I
Project, 4/1/96 VMIG 1 3.75% 5,100,000 5,100,000
Hawaii -- 2.41%
Hawaii Dept. of Budget & Finance Mortgage:
VRDN--Kuakini Medical Center, 7/1/04 VMIG 1 3.75% 4,000,000 4,000,000
VRDB--Wilcox Memorial Hospital, 7/1/18 VMIG 1 5.95% 2,100,000 2,100,000
Hawaii State Housing Finance & Development Corp.
VRDB--Rental Housing Systems, 7/1/24 VMIG 1 5.15% 7,500,000 7,500,000
Illinois -- 8.50%
Chicago GO Tender Notes, 10/31/96 VMIG 1 3.75% 6,100,000 6,100,000
Chicago O'Hare International Airport--American
Airlines VRDB:
Series C, 12/1/17 P 1 6.10% 15,000,000 15,000,000
Series D, 12/1/17 P 1 6.10% 15,000,000 15,000,000
Illinois GO, 4/1/06 AA- 7.13% 1,000,000 1,022,317
Illinois State Sales Tax, 6/15/15 Aaa 7.63% 6,950,000 7,132,216
Illinois State Toll Highway Authority, VRDB 1/1/10 VMIG 1 5.05% 300,000 300,000
Northwest Suburban Municipal Joint Account (MBIA
Insured)--Water Agency Supply System, 5/1/03 Aaa 7.20% 3,440,000 3,490,557
Indiana -- 3.40%
Jasper Co. PCR CP--Northern Indiana Public Services,
11/1/16 VMIG 1 3.70% 2,000,000 2,000,000
Mt. Vernon PCR CP--General Electric Project,
12/1/04 P 1 3.50% 6,900,000 6,900,000
12/1/04 P 1 3.70% 2,790,000 2,790,000
Rockport Pollution Control (AMBAC Insured)
VRDB--AEP Generating Co., 7/1/25 Aaa 5.95% 5,500,000 5,500,000
VRDB--Indiana Michigan Power Co., 6/1/25 Aaa 5.00% 2,000,000 2,000,000
Kansas -- 1.18%
Olathe GO Unlimited Tax, 5/1/96 MIG 1 4.50% 6,700,000 6,700,000
<PAGE>
Kentucky -- 0.53%
Mason Co. PCR E. Kentucky Power VRDB--CFC Power
National Rural Utilities B-1, 10/15/14 P 1 4.65% 3,000,000 3,000,000
Maryland -- 1.06%
Baltimore PCR VRDN-- SCM Plants, 2/1/00 A 1+ 5.10% 6,000,000 6,000,000
Michigan -- 12.87%
Clinton Township EDC (MBIA Insured) VRDB Sisters of
Charity St. Joseph, 5/1/13 VMIG 1 5.00% 300,000 300,000
Dearborn EDC VRDB--Oakbrook Common:
3/1/23 A 1 5.10% 2,300,000 2,300,000
3/1/25 A 1 5.10% 200,000 200,000
Delta Co. EDC--Mead Escanaba Paper:
Series D, 12/1/23 P 1 6.00% 4,200,000 4,200,000
Series F, 12/1/23 P 1 6.10% 4,300,000 4,300,000
Farmington Hills EDR VRDB--Brookfield Building
Associates, 11/1/10 A 1 5.20% 2,000,000 2,000,000
Grand Rapids EDC VRDB--Amway, 12/1/06 A 1 5.10% 3,600,000 3,600,000
Ingham Co. EDC VRDB--Martin Luther Memorial Home,
Inc., 4/1/22 A 1+ 5.20% 5,870,000 5,870,000
Kent Hospital VRDB--Butterworth Hospital, 1/15/20 VMIG 1 5.40% 2,600,000 2,600,000
Meridian Limited Obligation EDC VRDN--Service
Merchandise Co., 12/15/99 A 1+ 4.00% 500,000 500,000
Michigan State Building Authority, 10/1/96 AA- 3.75% 5,000,000 5,005,297
Michigan State Hospital VRDB--Hospital Equipment Loan
Program:
12/1/23 VMIG 1 5.20% 1,600,000 1,600,000
12/1/23 VMIG 1 5.20% 8,900,000 8,900,000
Michigan State Hospital VRDB--Mt. Clemens Hospital,
8/15/15 VMIG 1 5.00% 4,600,000 4,600,000
Michigan State HDA VRDB:
Laurel Valley, 12/1/07 VMIG 1 5.10% 400,000 400,000
Shoal Creek, 10/1/07 VMIG 1 5.10% 2,800,000 2,800,000
Michigan State Job Development Authority
VRDB--Gordon Food Service, 8/1/15 Aaa 5.00% 5,800,000 5,800,000
PCR VRDB--Mazda Motor Corp., 10/1/08 VMIG 1 5.25% 4,500,000 4,500,000
Michigan State Strategic Fund VRDB--Allen Group, Inc.
11/1/25 VMIG 1 5.00% 400,000 400,000
University of Michigan Hospital VRDB:
12/1/19 VMIG 1 5.90% 1,200,000 1,200,000
12/1/27 VMIG 1 5.90% 11,610,000 11,610,000
Minnesota -- 1.60%
Hennepin Co. GO, 12/1/06 VMIG 1 5.15% 5,000,000 5,000,000
Rochester GO Various Sales Tax, 11/1/99 **N/R 5.00% 100,000 100,000
St. Paul Housing & Redevelopment Authority VRDB,
12/1/12 A 1+ 3.80% 3,900,000 3,900,000
Mississippi -- 1.45%
Perry Co. PCR VRDB--Leaf River Forest, 10/1/12 P 1 5.30% 8,200,000 8,200,000
Missouri -- 1.44%
Independence Water Utility Improvements CP 11/1/16 VMIG 1 3.40% 2,400,000 2,400,000
Missouri State Environmental Improvement Energy
Research PCR--Union Electric Co.:
Series A, 6/1/14 P 1 4.00% 1,000,000 1,000,000
Series B, 6/1/14 P 1 4.00% 4,750,000 4,750,217
Nevada -- 2.64%
Clark Co. Airport Improvement (MBIA Insured) VRDB,
7/1/12 VMIG 1 5.15% 8,600,000 8,600,000
Clark Co. PCR VRDB--Nevada Power Co. 10/1/23 A 1+ 5.00% 6,300,000 6,300,000
New Hampshire -- 0.32%
New Hampshire IDR VRDB--Oerlikon-Burlhe USA, 7/1/13 A 1+ 3.75% 1,800,000 1,800,000
New Jersey -- 0.22%
Rutgers State University, 5/1/96 AA 4.25% 1,220,000 1,221,741
New York -- 1.95%
New York City GO (MBIA Insured) VRDB 8/15/22 VMIG 1 5.90% 11,000,000 11,000,000
North Carolina -- 2.67%
North Carolina Eastern Municipal Power Agency--Power
System, 1/1/15 Aaa 7.75% 15,000,000 15,000,000
Ohio -- 2.40%
Cincinnati/Hamilton Co. EDR, 8/1/15 **N/R 3.90% 3,150,000 3,150,000
Columbus Electric System VRDB, 9/1/09 A 1 3.90% 1,400,000 1,400,000
Franklin Co. IDR VRDN--Capital South Community
Redevelopment, 12/1/05 **N/R 4.10% 700,000 700,000
Ohio Environmental Improvements CP, U.S. Steel Corp.,
5/1/11 P 1 5.50% 8,300,000 8,300,000
Oregon -- 2.41%
Medford Hospital VRDB--Rogue Valley Manor, 12/1/15 VMIG 1 5.20% 4,000,000 4,000,000
Port Morrow VRDB--General Elecitric, 10/1/13 P 1 6.00% 5,700,000 5,700,000
Tualatin Hills Parks & Recreation TRAN, 6/28/96 SP 1+ 4.25% 3,875,000 3,882,320
Pennsylvania -- 5.01%
Allegheny Co. Industrial Development VRDB--United
Jewish Federation:
Series B, 10/1/25 VMIG 1 5.25% 10,000,000 10,000,000
Series C, 10/1/15 VMIG 1 5.25% 1,100,000 1,100,000
Delaware Co. IDR (FGIC Insured) CP--Philadelphia
Electric, 12/1/12 VMIG 1 3.40% 2,400,000 2,400,000
Montgomery Co. Higher Education Health Authority
VRDB--Philadelphia Presbytery 7/1/25 VMIG 1 5.25% 5,000,000 5,000,000
Schuylkill Co. IDR VRDB--Westwood Energy 11/1/09 P 1 6.25% 6,800,000 6,800,000
Upper Allegheny Joint Sanitary Authority, 9/1/26 MIG 1 4.50% 3,000,000 3,001,004
South Carolina -- 2.57%
Richland Co. Schoold District TAN GO Unlimited Tax,
4/15/96 MIG 1 4.00% 8,300,000 8,305,660
South Carolina GO State Capital Improvement, 2/1/96 Aaa 7.30% 3,500,000 3,509,443
South Dakota -- 0.48%
South Dakota HDA, 5/1/96 Aa 1 3.90% 2,715,000 2,715,000
Tennessee -- 2.13%
Knox Co. Board IDR VRDB--Service Merchandise Co.,
Inc., 12/15/08 A 1+ 4.00% 800,000 800,000
Metropolitan Government Nashville & Davidson Co.,
6/15/06 AA 6.50% 6,000,000 6,142,843
Metropolitan Government Nashville & Davidson Co.,
VRDB--Nashville Apartments 9/1/15 Aa 3 5.15% 5,100,000 5,100,000
Texas -- 10.02%
Austin Utilities System CP, 4/9/96 P 1 3.65% 5,400,000 5,400,000
Houston Water & Sewer System (MBIA Insured) 12/1/16 Aaa 7.13% 3,000,000 3,150,445
North Central HCFA VRDB--YMCA Dallas 6/1/21 VMIG 1 5.65% 5,600,000 5,600,000
Texas Hospital Equipment Finance Council (MBIA
Insured) VRDN, 4/7/05 VMIG 1 5.45% 8,045,000 8,045,000
Texas Small Business IDR VRDB--Texas Public
Facilities Capital Access, 7/1/26 VMIG 1 5.20% 2,300,000 2,300,000
Texas State Higher Education Authority (FGIC Insured)
VRDB--Educational Equipment & Improvements, 12/1/25 VMIG 1 5.15% 2,510,000 2,510,000
Texas State Public Finance Authority:
10/1/96 Aa 6.40% 3,000,000 3,061,190
CP, 8/20/96 P 1 3.75% 5,000,000 5,000,000
Texas TRAN, 8/30/96 MIG 1 4.75% 12,750,000 12,812,314
Texas Transportation CP, 8/20/96 P 1 3.65% 5,000,000 5,000,000
Tyler Health Facilities Development Corp. CP--East
Texas Medical Center Regional Health, 11/1/25 VMIG 1 3.65% 3,700,000 3,700,000
Utah -- 3.01%
Intermountain Power Agency, 7/1/17 Aaa 7.75% 4,700,000 4,889,980
Salt Lake Co. PCR--VRDB--Pacific Corp. 2/1/08 P 1 5.95% 12,100,000 12,100,000
Vermont -- 1.87%
Vermont Educational Health Agency, 11/1/27 A 1+ 3.80% 5,975,000 5,975,000
Vermont Student Assistance Corp. VRDN, 1/1/04 VMIG 1 3.75% 4,600,000 4,600,000
Virginia -- 0.48%
Loudoun Co. IDR VRDB, 11/1/24 A 1 6.45% 2,700,000 2,700,000
Washington -- 1.88%
Port Townsend IDR VRDB--Townsend Paper Corp., 3/1/09 VMIG 1 5.15% 5,100,000 5,100,000
Seattle Municipal Light & Power Co., 11/1/15 VMIG 1 3.50% 5,500,000 5,500,000
West Virginia -- 0.48%
Raleigh Co. Health Care System VRDB, 9/1/06 VMIG 1 5.25% 2,700,000 2,700,000
Wisconsin -- 5.70%
Milwaukee School Order Notes Series B, 8/22/96 MIG 1 4.50% 15,000,000 15,046,050
Waukesha School District TRAN, 8/23/96 SP 1 4.25% 14,000,000 14,020,236
Wisconsin State Transportation Transit Improvements,
7/1/02 AAA 7.90% 3,000,000 3,123,465
Wyoming -- 1.42%
Lincoln Co. PCR VRDB--Pacificorp Project, 1/1/16 VMIG 1 3.40% 8,000,000 8,000,000
------------
TOTAL INVESTMENTS $564,592,007
============
<FN>
Investment Abbreviations
AMBAC -- AMBAC Indemnity Corp.
BIGI -- Bond Investors Guaranty Insurance Co.
CP -- Commercial Paper
EDC -- Economic Development Corporation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Securities Assurance Corp.
GO -- General Obligation
HCF -- Health Care Facilities
HR -- Housing Revenue
HDA -- Housing Development Authority
HFA -- Housing Finance Authority
Individual Development & Export
IDA -- Authority
IDR -- Industrial Development Revenue
MBIA -- Municipal Bond Insurance Association
PCR -- Pollution Control Revenue
PFA -- Public Facilities Authority
TAN -- Tax Anticipation Note
TRAN -- Tax Revenue Anticipation Note
Unit Priced Daily Adjustable Tax
UPDATE -- Exempt Securities
VRDB -- Variable Rate Demand Bond
VRDN -- Variable Rate Demand Note
* Moody's when rated, otherwise Standard & Poor's.
<PAGE>
** N/R investment is not rated, yet deemed by the Investment Advisor as an
acceptable credit and having characteristics equivalent to obligations
rated AA or MIG 1 by Moody's, AA or A-1+ by Standard & Poor's.
*** Interest rates on variable rate securities are adjusted periodically based
on appropriate indexes. The interest rates shown are the rates in effect at
December 31, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD MICHIGAN TAX-EXEMPT MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Amortized
Interest Cost
Description Rating* Rate*** Face Amount (Note 2)
----------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Michigan -- 99.24%
Ann Arbor EDC Ltd. Obligation VRDN--Webers
Industries, 5/1/00 **N/R 5.20% $ 930,000 $ 930,000
Bruce Township Hospital (MBIA Insured) VRDB--Sisters
of Charity St. Joseph:
Series A, 5/1/18 VMIG 1 3.70% 3,000,000 3,000,000
Series B, 5/1/18 VMIG 1 5.00% 800,000 800,000
Dearborn EDC Ltd. Obligation VRDB--Oakbrook Common,
3/1/25 A 1 5.10% 800,000 800,000
Delta Co. EDC--Mead Escanaba Paper Co.:
Series B, 12/1/23 P 1 3.60% 1,600,000 1,600,000
Series E, 12/1/23 P 1 6.10% 3,600,000 3,600,000
Detroit Downtown Development Authority
VRDB--Millender Center Project, 12/1/10 VMIG 1 5.30% 4,500,000 4,500,000
Detroit Sewage Disposal (MBIA Insured) Series B,
7/1/96 Aaa 5.00% 4,750,000 4,781,575
Detroit Tax Increment Revenue VRDB, 10/1/10 A 1 5.25% 4,200,000 4,200,000
Eaton Inter School District TAN, 4/4/96 **N/R 3.95% 1,245,000 1,245,299
Farmington Hills EDC Ltd. Obligation VRDB--Brookfield
Building Assn., L P, 11/1/10 A 1 5.20% 1,135,000 1,135,000
Ferndale Schools GO Unlimited Tax, 5/1/06 Aaa 7.00% 1,075,000 1,087,371
Flint Hospital Building Authority VRDB--Hurley
Medical Center, Series B, 7/1/15 VMIG 1 5.60% 5,000,000 5,000,000
Grand Traverse Hospital VRDB--Munson Medical Center
Series A, 12/1/15 Aaa 7.63% 1,000,000 1,050,748
Grosse Point Public Library TAN, 4/3/96 **N/R 3.60% 990,000 990,291
Holland EDC VRDB--Thrifty Holland, Inc., 3/1/13 A 1 3.90% 1,300,000 1,300,000
Ingham Co. EDC VRDB--Martin Luther Memorial Home,
Inc., 4/1/22 A 1+ 5.20% 500,000 500,000
Kalamazoo Co. EDC VRDB--Industrial & Economic
Development WBC Properties Ltd., 9/1/15 **N/R 5.60% 1,000,000 1,000,000
Kalamazoo Public Library TAN, 4/1/96 **N/R 3.60% 2,190,000 2,190,358
Kent Hospital VRDB--Butterworth Hospital Series A,
1/15/20 VMIG 1 5.40% 300,000 300,000
L'Anse Creuse Public Schools GO Unlimited Tax, 5/1/96 AA 5.75% 1,000,000 1,004,629
Leelanau Co. EDC Ltd. Obligation--American Community
Mutual Insurance Co., 6/15/06 **N/R 3.90% 1,060,000 1,060,000
Livonia EDC AMT VRDB--Foodland Distributors, 12/1/11 VMIG 1 5.20% 1,000,000 1,000,000
Macomb Township EDC Ltd. Obligation AMT VRDN--ACR
Industries, 1/1/03 VMIG 1 5.10% 1,050,000 1,050,000
Meridian EDC Ltd. Obligation VRDB--Hannah
Technologies, 11/15/14 A 1+ 4.25% 2,500,000 2,500,000
Michigan Municipal Bond Authority:
Series A, 5/3/96 SP 1+ 5.00% 2,000,000 2,004,832
Series B, 7/3/96 SP 1+ 4.50% 4,000,000 4,014,133
Michigan Public Power Agency (AMBAC Insured)--Belle
River Project, 1/1/96 Aaa 7.00% 3,000,000 3,000,000
Michigan State Building Authority:
Series I, 10/1/96 AA- 3.75% 2,000,000 2,000,000
University & College Improvements, 10/1/96 AA- 4.30% 5,235,000 5,253,942
University of Michigan Hospital, 12/1/96 Aaa 7.88% 665,000 702,565
Michigan State Comprehensive Transportation, 8/1/05 AA- 7.63% 1,940,000 1,951,707
Michigan State Hospital Henry Ford Health Series A,
11/15/96 Aa 4.00% 1,070,000 1,073,510
5/1/00 Aaa 7.35% 2,055,000 2,095,912
5/1/08 Aaa 8.00% 1,310,000 1,344,864
Michigan State Hospital VRDB--Hospital Equipment Loan
Program:
12/1/23 VMIG 1 5.20% 1,600,000 1,600,000
12/1/23 VMIG 1 5.20% 400,000 400,000
Michigan State HDA VRDB, 4/1/19 A+ 1 5.00% 1,000,000 1,000,000
Michigan State HDA Ltd. Obligation VRDB--
Laurel Valley, 12/1/07 VMIG 1 5.10% 800,000 800,000
Shoal Creek, 10/1/07 VMIG 1 5.10% 200,000 200,000
Michigan State Job Development Authority IDR:
VRDN--Sugar Sebewa, 9/1/00 Aa 3 5.15% 2,600,000 2,600,000
VRDN--Hitachi Metals, 1/1/04 Aa 3 4.00% 1,800,000 1,800,000
VRDB--Gordon Food Service, 8/1/15 Aaa 5.00% 2,200,000 2,200,000
Michigan State Job Development Authority PCR
VRDB--Mazda Motors Mfg. USA Corp., 10/1/08 VMIG 1 5.25% 1,500,000 1,500,000
Michigan State Strategic Fund IDR VRDB--Allen Group,
Inc., 11/1/25 VMIG 1 5.00% 600,000 600,000
Michigan State Strategic Fund PCR VRDN--Consumers
Power Co., 9/1/00 A 1+ 5.15% 3,000,000 3,000,000
Michigan State Strategic Fund Ltd. Obligation--
Environmental Research, Series B, 6/1/11 VMIG 1 4.35% 1,280,000 1,280,000
Michigan State Strategic Fund Ltd. Obligation AMT:
VRDN--Alpha Tech, Inc., 10/1/97 P 1 5.50% 6,000,000 6,000,000
VRDN--Michigan & Wayne Disposal Inc., 4/1/99 A 1 5.35% 1,500,000 1,500,000
VRDB--West Riverbank, 11/1/06 A 1 5.20% 1,100,000 1,100,000
VRDB--Dennenlease L C, 4/1/10 **N/R 5.15% 2,395,000 2,395,000
VRDB--Ironwood Plastics, Inc., 11/1/11 **N/R 5.15% 1,275,000 1,275,000
VRDB--Molmec Inc., 12/1/14 **N/R 5.35% 1,500,000 1,500,000
VRDB--CEC Products Co., 6/1/15 **N/R 5.35% 3,300,000 3,300,000
VRDB--Detroit Edison Co., 9/1/30 P 1 6.00% 5,000,000 5,000,000
Michigan State Strategic Fund Ltd. Obligation
VRDN--Freezer Services, 10/1/97 **N/R 5.30% 760,000 760,000
Michigan State Trunk Line Highway & Transit
Improvements:
7/1/96 AA- 7.00% 500,000 508,041
11/15/96 AA- 5.25% 500,000 506,136
Michigan State Underground Storage Tank VRDN, 12/1/04 VMIG 1 5.15% 2,900,000 2,900,000
Oakland Co. EDC--Corners Shopping Center, 8/1/15 A 1+ 4.10% 530,000 530,000
Oakland Co. EDC Ltd. Obligation AMT--Orchard Maple
Project, 11/15/16 **N/R 4.00% 615,000 615,000
Plymouth Township EDC VRDN--Key International
Manufacturing, Inc., 7/1/04 **N/R 4.00% 3,750,000 3,750,000
Van Buren Township EDC AMT VRDN--Daikin Clutch USA
Inc., 3/1/97 Aa 3 5.50% 3,000,000 3,000,000
University of Michigan Hospital VRDB:
12/1/19 VMIG 1 5.90% 2,800,000 2,800,000
12/1/27 VMIG 1 5.90% 790,000 790,000
------------
125,275,913
------------
PUERTO RICO -- 0.76%
Commonwealth of Puerto Rico (FGIC Insured) GO
Unlimited Tax, 7/1/96 Aaa 7.80% 500,000 521,705
Puerto Rico Public Buildings Authority--Public
Education & Health Facilities, 7/1/12 Aaa 8.00% 425,000 439,854
961,559
------------
TOTAL INVESTMENTS $126,237,472
============
<FN>
Investment Abbreviations
AMBAC -- AMBAC Indemnity Corp.
BIGI -- Bond Investors Guaranty Insurance Co.
CP -- Commercial Paper
EDC -- Economic Development Corporation
EDR -- Economic Development Revenue
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Securities Assurance Corp.
GO -- General Obligation
HCFA -- Health Care Facilities
HR -- Housing Revenue
HDA -- Housing Development Authority
HFA -- Housing Finance Authority
IDA -- Industrial Development & Export Authority
IDR -- Industrial Development Revenue
MBIA -- Municipal Bond Insurance Association
PCR -- Pollution Control Revenue
PFA -- Public Facilities Authority
TAN -- Tax Anticipation Note
TRAN -- Tax Revenue Anticipation Note
UPDATE -- Unit Priced Daily Adjustable Tax-Exempt Securities
VRDB -- Variable Rate Demand Bond
VRDN -- Variable Rate Demand Note
* Moody's when rated, otherwise Standard & Poor's.
** N/R investment is not rated, yet deemed by the Investment Advisor as an
acceptable credit and having characteristics equivalent to obligations
rated AA or MIG 1 by Moody's, AA or A-1+ by Standard & Poor's.
*** Interest rates on variable rate securities are adjusted periodically based
on appropriate indexes. The interest rates shown are the rates in effect at
December 31, 1995.
</TABLE>
<PAGE>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Funds (Woodward) was organized as a Massachusetts business
trust on April 21, 1987 and registered under the Investment Company Act of
1940, as amended, as an open-end investment company. As of December 31, 1995
Woodward consisted of seventeen separate series of which there were five money
market funds (Money Market Funds), as described below.
Woodward Money Market Fund
Woodward Government Fund
Woodward Treasury Money Market Fund
Woodward Tax-Exempt Money Market Fund
Woodward Michigan Tax-Exempt Money Market Fund
The Money Market Funds commenced operations on January 4, 1988, except
for the Michigan Tax-Exempt Money Market Fund and the Treasury Money Market
Fund, which commenced operations on January 23, 1991 and January 1, 1993,
respectively.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed
by the Money Market Funds in preparation of the financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. Following generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Investments
Pursuant to Rule 2a-7 of the Investment Company Act of 1940, the Money
Market Funds utilize the amortized cost method to determine the carrying value
of investment securities. Under this method, investment securities are valued
for both financial reporting and federal tax purposes at amortized cost and
any discount or premium is amortized from the date of acquisition to maturity.
The use of this method results in a carrying value which approximates market
value. Market value is determined based upon quoted market prices or dealer
quotes.
Investment security purchases and sales are accounted for on the trade
date.
Woodward invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD Bank (NBD), acting under the supervision of
the Board of Trustees, has established the following additional policies and
procedures relating to Woodward's investments in securities subject to
repurchase agreements: 1) the value of the underlying collateral is required
to equal or exceed 102% of the funds advanced under the repurchase agreement
including accrued interest; 2) collateral is marked to market daily by NBD to
assure its value remains at least equal to 102% of the repurchase agreement
amount; and 3) funds are not disbursed by Woodward or its agent unless
collateral is presented or acknowledged by the collateral custodian.
The Tax-Exempt and Michigan Tax-Exempt Funds invest in a majority of
instruments whose stated maturity is greater than one year, but whose rate of
interest is readjusted no less frequently than annually, or which possess
demand features and may therefore be deemed to have a maturity equal to the
period remaining until the next interest adjustment date or the demand date,
whichever is longer.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount. Premiums and discounts are
amortized/accreted as required by the Internal Revenue Code.
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying Financial Statements.
Shareholder Dividends
On each business day except those holidays the New York Stock Exchange
(Exchange), NBD or its bank affiliates observe, net investment income is
declared as a dividend, at the close of the Exchange, to shareholders of
record at such close. Such dividends are paid monthly.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of each series.
Expenses
Expenses are charged daily as a percentage of the respective Fund's net
assets. Woodward monitors the rate at which expenses are charged to ensure
that a proper amount of expense is charged to income each year. This
percentage is subject to revision if there is a change in the estimate of the
future net assets of the funds or a change in expectations as to the level of
actual expenses.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Pursuant to
their Distribution Agreement with Woodward, FoM is entitled to receive a fee
at the annual rate of .025% of the aggregate average net assets invested in
the Money Market Funds' first $400 million and .005% of such assets in excess
of $400 million. Fees of FoM under the Distribution Agreement are allocated
among the Funds based on the relative net asset values. Essex is entitled to
receive a fee at the annual rate of .10% of the aggregate average net assets
of Woodward's investment portfolios, attributable to investments by clients of
Essex.
NBD is the investment advisor pursuant to the Advisory Agreement. For
its advisory services to Woodward, NBD is entitled to a fee, computed daily
and payable monthly. Under the Advisory Agreement, NBD also provides Woodward
with certain administrative services, such as maintaining Woodward's general
ledger and assisting in the preparation of various regulatory reports. NBD
receives no additional compensation for such services.
A reorganization of Woodward and The Prairie Funds is being considered
by the Board of Trustees of both funds. In connection with the proposed
reorganization, the Board of Trustees of Woodward and the Board of Trustees of
Prairie must approve certain reorganization agreements. The transaction is
intended to be effected as a tax-free reorganization under the Internal
Revenue Code, so that none of the Funds' shareholders will recognize taxable
gains or losses as a result of the reorganization. A proxy
statement/prospectus describing the reorganization and the reasons therefore
will be sent to shareholders.
NBD, FoM, and Essex have agreed that they may waive their fees in whole
or in part; and, if in part, may specify the particular fund to which such
waiver relates as may be required to satisfy any expense limitation imposed by
state securities laws or other applicable laws. At present, no restrictive
expense limitation is imposed on Woodward. Restrictive limitations could be
imposed as a result of changes in current state laws and regulations in those
states where Woodward has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations. For the year ended December 31, 1995, NBD waived $61,221 of the
advisory fee for the Michigan Tax-Exempt Money Market Fund.
NBD is also compensated for its services as Woodward's Custodian,
Transfer Agent and Dividend Disbursing Agent, and is reimbursed for certain
out of pocket expenses incurred on behalf of Woodward.
On March 10, 1994, Woodward adopted The Woodward Funds Deferred
Compensation Plan (the "Plan"), an unfunded, nonqualified deferred
compensation plan. The Plan allows an individual Trustee to elect to defer
receipt of all or a percentage of fees which otherwise would be payable for
services performed.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions is as follows:
<TABLE>
<CAPTION>
Michigan
Treasury Tax-Exempt Tax-Exempt
Money Market Government Money Market Money Market Money Market
Fund Fund Fund Fund Fund
------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Purchases $58,940,462,599 $5,440,529,005 $7,317,697,881 $2,744,829,205 $388,242,330
Sales & Maturities $58,634,036,261 $5,389,053,887 $7,177,784,932 $2,723,533,379 $337,049,476
</TABLE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee rates
payable to NBD, and amounts paid to NBD, FoM, and Essex pursuant to the
agreements described in Note 3 for the year ended December 31, 1995. The rates
shown are stated as a percentage of each Fund's average net assets.
<TABLE>
<CAPTION>
Michigan
Treasury Tax-Exempt Tax-Exempt
Money Market Government Money Market Money Market Money Market
Effective Date Fund Fund Fund Fund Fund
-------------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Expense Rates:
January 1 0.50% 0.51% 0.53% 0.53% 0.69%
May 11 0.52% 0.51% 0.53% 0.53% 0.69%
November 9 0.52% 0.52% 0.53% 0.53% 0.69%
December 1 0.52% 0.52% 0.55% 0.53% 0.69%
NBD Advisory Fee:
Net Assets--
Up to $1.0 billion 0.45% 0.45% 0.45% 0.45% 0.50%
$1.0 to $2.0 billion 0.425% 0.425% 0.425% 0.425% 0.50%
Over $2.0 billion 0.40% 0.40% 0.40% 0.40% 0.50%
Amounts Paid:
Advisory Fee to NBD $7,225,557 $1,987,590 $3,248,535 $2,458,246 $496,026
Distribution Fee to FoM and Essex $ 152,873 $ 34,919 $ 53,755 $ 44,226 $ 10,466
Other Fees & Out of Pocket Expenses to NBD $ 341,111 $ 55,012 $ 150,481 $ 92,713 $ 30,134
Expenses Waived:
Advisory Fee to NBD -- -- -- -- $(61,221)
</TABLE>
(6) Portfolio Composition
Although the Tax-Exempt Money Market Fund has a diversified investment
portfolio, the Fund has investments in excess of 10% of its total investments
in the states of Michigan and Texas. The Michigan Tax-Exempt Money Market Fund
does not have a diversified portfolio since 99% of its investments are within
the state of Michigan. Such concentrations within particular states may subject
the funds more significantly to economic changes occurring within those states.
<PAGE>
THE WOODWARD FUNDS
MONEY MARKET FUNDS
FINANCIAL HIGHLIGHTS
The Financial Highlights present a per share analysis of net investment
income and distributions from net investment income for the Money Market Funds.
Additional quantitative measures expressed in ratio form analyze important
relationships between certain items presented in the financial statements.
These financial highlights have been derived from the financial statements of
the Money Market Funds and other information for the periods presented.
<TABLE>
<CAPTION>
Money Market Fund
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Investment Income $ 0.0549 $ 0.0378 $ 0.0281 $ 0.0347 $ 0.0579
Distributions From Net Investment Income $ (0.0549) $ (0.0378) $ (0.0281) $ (0.0347) $(0.0579)
Net Asset Value at Beginning and End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return 5.63% 3.86% 2.85% 3.58% 5.95%
Ratios to Average Net Assets:
Expenses 0.51% 0.47% 0.49% 0.52% 0.50%
Net Investment Income 5.49% 3.78% 2.81% 3.47% 5.79%
Net Assets, End of Year
(in 000's) $1,639,695 $1,323,040 $1,326,693 $1,095,354 $775,521
<CAPTION>
Government Fund
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Investment Income $ 0.0544 $ 0.0372 $ 0.0277 $ 0.0357 $ 0.0564
Distributions From Net Investment Income $(0.0544) $(0.0372) $(0.0277) $(0.0357) $(0.0564)
Net Asset Value at Beginning and End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return 5.57% 3.77% 2.81% 3.63% 5.79%
Ratios to Average Net Assets:
Expenses 0.51% 0.51% 0.51% 0.51% 0.50%
Net Investment Income 5.44% 3.72% 2.77% 3.57% 5.64%
Net Assets, End of Year
(in 000's) $474,377 $421,208 $346,665 $261,614 $288,369
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury
Money Market Fund
---------------------------------------------
Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net Investment Income $ 0.0539 $ 0.0370 $ 0.0273
Distributions From Net Investment Income $(0.0539) $(0.0370) $(0.0273)
Net Asset Value at Beginning and End of Year $ 1.00 $ 1.00 $ 1.00
Total Return 5.53% 3.77% 2.77%
Ratios to Average Net Assets:
Expenses 0.53% 0.50% 0.50%
Net Investment Income 5.39% 3.70% 2.73%
Net Assets, End of Year
(in 000's) $927,696 $785,694 $854,873
<CAPTION>
Tax-Exempt Money Market Fund
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Investment Income $ 0.0335 $ 0.0242 $ 0.0196 $ 0.0264 $ 0.0422
Distributions From Net Investment Income $(0.0335) $(0.0242) $(0.0196) $(0.0264) $(0.0422)
Net Asset Value at Beginning and End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return 3.41% 2.45% 1.98% 2.70% 4.30%
Ratios to Average Net Assets:
Expenses 0.53% 0.51% 0.51% 0.53% 0.52%
Net Investment Income 3.35% 2.42% 1.96% 2.64% 4.22%
Net Assets, End of Year
(in 000's) $564,413 $550,736 $498,706 $379,431 $227,808
<CAPTION>
Michigan Tax-Exempt
Money Market Fund
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Investment Income $ 0.0329 $ 0.0235 $ 0.0181 $ 0.0237 $ 0.0353
Distributions From Net Investment Income $(0.0329) $(0.0235) $(0.0181) $(0.0237) $(0.0353)
Net Asset Value at Beginning and End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total Return 3.32% 2.38% 1.83% 2.40% 3.83%(a)
Ratios to Average Net Assets:
Expenses 0.69% 0.67% 0.65% 0.64% 0.65%(a)
Net Investment Income 3.30% 2.35% 1.81% 2.37% 3.77%(a)
Expenses without fee waiver 0.76% 0.75% -- -- --
Net Investment Income without fee waiver 3.23% 2.28% -- -- --
Net Assets, End of Period
(in 000's) $122,057 $ 78,640 $ 52,557 $ 52,960 $ 38,885
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward Money Market Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the Money Market Funds of THE
WOODWARD FUNDS (comprising, as indicated in Note 1, the Money Market,
Government, Treasury Money Market, Tax-Exempt Money Market and Michigan
Tax-Exempt Money Market Funds) as of December 31, 1995, and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended or
from inception (as indicated in Note 1) through December 31, 1995. 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 and financial
highlights 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 physical counts and confirmation of
securities owned as of December 31, 1995, by inspection and correspondence with
custodians, banks 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective funds constituting the Money Market Funds of
The Woodward Funds as of December 31, 1995, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended and the financial highlights for each of the five
years in the period then ended or from inception (as indicated in Note 1)
through December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
<PAGE>
CROSS REFERENCE SHEET
Series H, I, J, R, S and T Representing Interests in the
Class A and Class I Shares of the Woodward Growth/Value,
Opportunity, Intrinsic Value, Balanced, Capital Growth, and
International Equity Funds, Respectively
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page.................................... Cover Page
11. Table of Contents............................. Table of Contents
12. General Information and History............... Description of Shares
13. Investment Objectives and Policies............ Investment Objectives,
Policies and Risk
Factors
14. Management of Registrant...................... Management
15. Control Persons and Principal................. Description of Shares
Holders of Securities
16. Investment Advisory and Other Services........ Management
17. Brokerage Allocation and other Practices...... Investment Objectives,
Policies and Risk
Factors
18. Capital Stock and Other Securities............ Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing.............. Net Asset Value
of Securities Being Offered
Additional Purchase and
Redemption Information
20. Tax Status.................................... Additional Information
Concerning Taxes
21. Underwriters.................................. Not Applicable
22. Calculation of Performance Data............... Additional Information
on Performance
23. Financial Statements.......................... Report of Independent
Public Accountant;
Financial Statements
-12-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 15, 1996
for
CLASS I AND CLASS A SHARES OF THE:
WOODWARD GROWTH/VALUE FUND
WOODWARD OPPORTUNITY FUND
WOODWARD INTRINSIC VALUE FUND
WOODWARD CAPITAL GROWTH FUND
WOODWARD BALANCED FUND
WOODWARD INTERNATIONAL EQUITY FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Funds'
Prospectuses dated April 15, 1996 pertaining to Class I and Class A classes of
shares of the Woodward Growth/Value Fund (the "Growth/Value Portfolio"),
Woodward Opportunity Fund (the "Opportunity Portfolio"), Woodward Intrinsic
Value Fund (the "Intrinsic Value Portfolio"), Woodward Capital Growth Fund
(the "Capital Growth Portfolio"), Woodward Balanced Fund (the "Balanced
Portfolio"), and Woodward International Equity Fund (the "International Equity
Portfolio") (each, a "Portfolio" and collectively, the "Portfolios"). Because
this Additional Statement is not itself a prospectus, no investment in shares
of the Portfolios should be made solely upon the information contained herein.
Copies of the Portfolios' Prospectuses may be obtained from any office of the
Co- Distributors by writing or calling the Co-Distributors or the Trust.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives, Policies and Risk Factors................. 1
Additional Purchase and Redemption Information................... 16
Description of Shares............................................ 18
Additional Information Concerning Taxes.......................... 21
Management....................................................... 23
Independent Public Accountants................................... 29
Counsel.......................................................... 29
Additional Information on Performance............................ 29
Appendix A....................................................... A-1
Appendix B....................................................... B-1
Financial Statements............................................. FS-1
-i-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Portfolios' respective
investment objectives and policies as set forth in their Prospectuses.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolios may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for each
Portfolio.
The annualized portfolio turnover rate for each Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover of
the Portfolios may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Portfolios to receive favorable
tax treatment. Portfolio turnover will not be a limiting factor in making
portfolio decisions, and the Portfolios may engage in short term trading to
achieve their respective investment objectives.
Purchases of money market instruments by the Portfolios are
made from dealers, underwriters and issuers. The Portfolios currently do not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-
<PAGE>
counter market are generally on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument.
For the fiscal year ended December 31, 1995, the Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International Equity
Portfolios paid brokerage commissions of $504,214, $866,286, $209,816,
$120,761, $81,178 and $72,856, respectively. For the fiscal years ended
December 31, 1994 and 1993, the Trust paid brokerage commissions of: (i)
$519,412 and $423,124 with respect to the Growth/Value Portfolio; (ii)
$683,613 and $330,962 with respect to the Opportunity Fund; and (iii) $325,912
and $320,121 with respect to the Intrinsic Value Portfolio. For the period
from the Capital Growth Portfolio's commencement of investment operations on
July 2, 1994 through December 31, 1994, the Capital Growth Portfolio paid
brokerage commissions of $27,188. For the period from the Balanced Portfolio's
commencement of investment operations on January 1, 1994 through December 31,
1994, the Balanced Portfolio paid brokerage commissions of $123,890. For the
period from the International Equity Portfolio's commencement of investment
operations on December 3, 1994 through December 31, 1994, the International
Equity Portfolio paid brokerage commissions of $4,492.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. A Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
The Advisory Agreement for the Portfolios provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for each Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause a Portfolio
to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer
for effecting the same transaction, provided that the Adviser determines in
good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in
terms of either the particular transaction or the overall responsibilities of
the Adviser to the Portfolios. Such brokerage and research
-2-
<PAGE>
services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond
and government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolios. The Trustees will
periodically review any commissions paid by the Portfolios to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolios. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised by the Adviser.
Conversely, a Portfolio may be the primary beneficiary of the research or
services received as a result of portfolio transactions effected for such
other account or investment company.
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Adviser, the
Co-Distributors or an affiliated person of any of them (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted
by the SEC or its staff. In addition, a Portfolio will not purchase securities
during the existence of any underwriting or selling group relating thereto of
which a Co-Distributor or the Adviser, or an affiliated person of either of
them, is a member, except to the extent permitted by the SEC or its staff.
Under certain circumstances, the Portfolios may be at a disadvantage because
of these limitations in comparison with other investment companies which have
similar investment objectives but are not subject to such limitations.
Investment decisions for each Portfolio are made independently
from those for the other Portfolios and for any other investment companies and
accounts advised or managed by the Adviser. Such other investment companies
and accounts may also invest in the same securities as the Portfolios. To the
extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
one or more of the Portfolios and another investment company or account, the
transaction will be averaged as to price and available investments allocated
as to amount, in a manner which the Adviser believes to be equitable to each
Portfolio and such other investment company or account. In some instances,
this
-3-
<PAGE>
investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold by the Portfolio.
Government Obligations
As stated in the Prospectuses, pursuant to their respective
investment objectives, the Portfolios may invest in U.S. Government
Obligations.
Stripped U.S. Government Obligations
Within the past several years, the Treasury Department has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve
book-entry record-keeping system. The Federal Reserve program as established
by the Treasury Department is known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities." To the extent consistent
with their respective investment objectives, the Balanced and International
Equity Portfolios may purchase securities registered in the STRIPS program.
Under the STRIPS program, the Balanced and International Equity Portfolios
will be able to have their beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
In addition, the Balanced and International Portfolios may
acquire U.S. Government obligations and their unmatured interest coupons that
have been separated ("stripped") by their holder, typically a custodian bank
or investment brokerage firm. Having separated the interest coupons from the
underlying principal of the U.S. Government obligations, the holder will
resell the stripped securities in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRs") and
"Certificate of Accrual on Treasury Securities" ("CATS"). The stripped coupons
are sold separately from the underlying principal, which is usually sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. The Trust is
-4-
<PAGE>
not aware of any binding legislative, judicial or administrative
authority on this issue.
As described in their Prospectuses, the Portfolios may also
purchase stripped mortgage-backed securities ("SMBS"). SMBS that are interest
only or principal only and not issued by the U.S. Government may be considered
illiquid securities if they can not be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of net asset value per share.
Bank Obligations
In accordance with their respective investment objectives, the
Portfolios may purchase bank obligations, which include bankers' acceptances,
negotiable certificates of deposit and non-negotiable time deposits, including
U.S. dollar-denominated instruments issued or supported by the credit of U.S.
or foreign banks or savings institutions. Although the Portfolios invest in
obligations of foreign banks or foreign branches of U.S. banks only where the
Adviser deems the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
Commercial paper, including variable and floating rate notes
and other short term corporate obligations, must be rated in one of the two
highest categories by at least two Rating Agencies, or if not rated, have been
issued by a corporation having an outstanding bond issue rated A or higher by
a Rating Agency. Bonds and other short term obligations (if not rated as
commercial paper) purchased by the Portfolios must be rated BBB or Baa, or
higher, by a Rating Agency, respectively, or if unrated, be of comparable
investment quality in the judgment of the Adviser.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolios, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of instruments if the issuer defaulted
-5-
<PAGE>
on its payment obligation or during periods that the Portfolio is not entitled
to exercise its demand rights, and the Portfolio could, for these or other
reasons, suffer a loss with respect to such instruments.
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Portfolios may invest from time to time in securities issued
by other investment companies which invest in high quality, short term debt
securities. Each of the Portfolios intends to limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more
than 5% of the value of the Portfolio's total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of the Portfolio's total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio or the Trust as a whole.
Lending Securities
When a Portfolio lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectuses generally equals the price paid by a Portfolio plus
interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the
Trust's Custodian, in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Portfolios under the 1940 Act. At the time a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high-grade
debt securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve
the risk that the market value of
-6-
<PAGE>
the securities sold by the Portfolio may decline below the price
of the securities it is obligated to repurchase.
American Depository Receipts ("ADRs")
The Portfolios may invest in ADRs, which are receipts issued by
an American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. ADRs may be listed on a national
securities exchange or may trade in the over-the-counter market. Although ADR
prices are denominated in U.S. dollars, the underlying security may be
denominated in a foreign currency. The underlying security may be subject to
foreign government taxes which would reduce the yield on such securities.
When-Issued Purchases and Forward Commitments
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities
are delivered to the Portfolio on the settlement date. In these cases the
Portfolio may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
Mortgage Backed Securities
Mortgage Backed Securities Generally. Mortgage backed
securities held by the Balanced and International Equity Portfolios represent
an ownership interest in a pool of residential mortgage loans. These
securities are designed to provide monthly payments of interest and principal
to the investor. The mortgagor's monthly payments to his lending institution
are "passed-through" to an investor such as the Portfolios. Most issuers or
poolers provide guarantees of payments, regardless of whether or not the
mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit, collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance
purchased by the issuers or poolers so that they can meet their obligations
under the policies. Mortgage backed securities issued by private issuers or
poolers, whether or not such securities are subject to guarantees, may entail
greater
-7-
<PAGE>
risk than securities directly or indirectly guaranteed by the
U.S. Government.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid. Additional payments
are caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be
incurred. Some mortgage backed securities are described as "modified
pass-through". These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("PC's"), which represent interests in mortgages
from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers which include state and federally-chartered savings and loan
credit unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA.
The principal guarantor of mortgage-backed securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S
Government, the timely payment of principal and interest on securities issued
by approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of
-8-
<PAGE>
conventional residential mortgage loans. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or
indirect government guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools is supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance purchased by the issuer. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies.
The Trust expects that governmental or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payment may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage backed securities
are developed and offered in the market, the Trust may consider making
investments in such new types of securities.
Underlying Mortgages. Pools consist of whole mortgage loans or
participations in loans. The majority of these loans are made to purchasers of
one to four family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Balanced and
International Equity Portfolios may purchase pools of variable rate mortgages
("VRM"), growing equity mortgages ("GEM"), graduated payment mortgages ("GPM")
and other types where the principal and interest payment procedures vary.
VRM's are mortgages which reset the mortgage's interest rate periodically with
changes in open market interest rates. To the extent that a Portfolio is
actually invested in VRM's, its interest income will vary with changes in the
applicable interest rate on pools of VRM's. GPM and GEM pools maintain
constant interest rates, with varying levels of principal repayment over the
life of the mortgage. These different interest and principal payment
procedures should not impact the Portfolios' net asset value since the prices
at which these securities are valued will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included
in the pools. In addition, some mortgages included in pools are insured
through private mortgage insurance companies.
-9-
<PAGE>
Average Life. The average life of pass-through pools varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments
is affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
Returns on Mortgage Backed Securities. Yields on mortgage
backed pass-through securities are typically quoted based on the maturity of
the underlying instruments and the associated average life assumption.
Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yields of the
Balanced and International Equity Portfolios. The compounding effect from
reinvestments of monthly payments received by the Portfolios will increase
their respective yields to shareholders, compared to bonds that pay interest
semi-annually.
Foreign Currency Transactions
At or before the maturity of a forward contract, the
International Equity Portfolio either may sell a security and make delivery of
the currency, or retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to which the
Portfolio will obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If the Portfolio retains the
security and engages in an offsetting transaction, at the time of execution of
the offsetting transaction, the Portfolio will incur a gain or loss to the
extent movement has occurred in forward contract prices. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a currency and the date it enters into an offsetting
contract for the purchase of the currency, it will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost of currency transactions varies with factors such as
the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange usually
are conducted on a principal basis, no fees or commissions are involved. The
use of forward currency exchange contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. If a devaluation
-10-
<PAGE>
generally is anticipated, the International Equity Portfolio may
not be able to contract to sell the currency at a price above the
devaluation level it anticipates. The requirements for
qualification as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"), may cause
the Portfolio to restrict the degree to which it engages in
currency transactions. See "Additional Information Concerning
Taxes."
Futures Contracts and Related Options
See Appendix B to this Additional Statement for a discussion of
futures contracts and related options.
Options Trading
As stated in the Prospectuses, the Capital Growth, Balanced and
International Equity Portfolios may purchase and sell put and call options
listed on a national securities exchange and issued by the Options Clearing
Corporation. Such transactions may be effected on a principal basis with
primary reporting dealers in U.S. Government securities in an amount not
exceeding 5% of a Portfolio's net assets. This is a highly specialized
activity which entails greater than ordinary investment risks. Regardless of
how much the market price of the underlying security increases or decreases,
the option buyer's risk is limited to the amount of the original investment
for the purchase of the option. However, options may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities. A listed call option gives the purchaser of the option
the right to buy from a clearing corporation, and a writer has the obligation
to sell to the clearing corporation, the underlying security at the stated
exercise price at any time prior to the expiration of the option, regardless
of the market price of the security. The premium paid to the writer is in
consideration for undertaking the obligations under the option contract. A
listed put option gives the purchaser the right to sell to a clearing
corporation the underlying security at the stated exercise price at any time
prior to the expiration date of the option, regardless of the market price of
the security. Put and call options purchased by a Portfolio will be valued at
the last sale price or, in the absence of such a price, at the mean between
bid and asked prices.
A Portfolio's obligation to sell a security subject to a
covered call option written by it, or to purchase a security subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e.,
-11-
<PAGE>
same underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize
a profit on an outstanding option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to permit the
writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, will not be
able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Portfolio will write an option on a
particular security only if the Adviser believes that a liquid secondary
market will exist on an exchange for options of the same series which will
permit the Portfolio to make a closing purchase transaction in order to close
out its position.
When a Portfolio writes a covered call option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of the Portfolio's statement of assets
and liabilities as a deferred credit. The amount of the deferred credit will
be subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date or if the Portfolio enters
into a closing purchase transaction, it will realize a gain (or loss if the
cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. Any gain on a covered call option may be offset by a decline in
the market price of the underlying security during the option period. If a
covered call option is exercised, the Portfolio may deliver the underlying
security held by it or purchase the underlying security in the open market. In
either event, the proceeds of the sale will be increased by the net premium
originally received and the Portfolio will realize a gain or loss. If a
secured put option is exercised, the amount paid by the Portfolio involved for
the underlying security will be partially offset by the amount of the premium
previously paid to the Portfolio. Premiums from expired options written by a
Portfolio and net gains from closing purchase transactions are treated as
short-term capital gains for
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<PAGE>
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses.
Stock Index Options
The Capital Growth, Balanced and International Equity
Portfolios may purchase and write put and call options on stock indexes listed
on U.S. securities exchanges or traded in the over-the-counter market. The
International Equity Portfolio may also purchase and write put and call
options on stock indexes list on foreign securities exchange. A stock index
fluctuates with changes in the market values of the stocks included in the
index.
Options on stock indexes are similar to options on stock except
that (a) the expiration cycles of stock index options are generally monthly,
while those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i)
the amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing
value of the underlying index on the date of exercise, multiplied by (ii) a
fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or it may
let the option expire unexercised.
Municipal Securities
To the extent consistent with its investment objective, the
Balanced Portfolio may invest in municipal securities including general
obligation securities, revenue securities, notes, and moral obligation bonds,
which are normally issued by special purpose authorities ("Municipal
Securities"). There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend in part on a
variety of factors, including general market conditions, the financial
condition of the issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating
of the
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<PAGE>
issue. The ratings of Municipal Securities by Rating Agencies represent their
opinions as to the quality of Municipal Securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality,
and Municipal Securities with the same maturity, interest rate and rating may
have different yields while Municipal Securities with the same maturity and
interest rate with different ratings may have the same yield. Subsequent to
its purchase by the Balanced Portfolio, a Municipal Security may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Portfolio. The Adviser will consider such an event in
determining whether the Balanced Portfolio should continue to hold the
obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Balanced Portfolio will depend upon the ability of
the issuers to meet their obligations. The District of Columbia, each state,
each possession and territory of the United States, each of their political
subdivisions, agencies, instrumentalities and authorities and each state
agency of which a state is a member is a separate "issuer" as that term is
used in this Additional Statement and in the Prospectuses. The
non-governmental user of facilities financed by a private activity bond is
also considered to be an "issuer". An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights or remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest or principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Certain of the Municipal Securities held by the Balanced
Portfolio may be insured at the time of issuance as to the timely payment of
principal and interest. The insurance policies will usually be obtained by the
issuer of the Municipal Securities at the time of original issuance. In the
event that the issuer defaults with respect to interest or principal payments,
the insurer will be notified and will be required to make payment to the
bondholders. There is, however, no guarantee that the insurer will meet its
obligations. In addition, such insurance will not protect against market
fluctuations caused by changes in interest rates and other factors.
-14-
<PAGE>
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectuses, the Portfolios are subject to the following investment
limitations which may not be changed without approval of the holders of the
majority of the outstanding shares of the affected Portfolio (as defined under
"Miscellaneous" below).
None of the Portfolios may:
1. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Portfolio might be deemed to be
an underwriter upon the disposition of portfolio securities acquired within
the limitation on purchases of restricted securities and except to the extent
that the purchase of obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for, with respect to all Portfolios,
transactions in options on securities, indices of securities, futures
contracts and options on futures contracts, and with respect to the Capital
Growth, Balanced and International Equity Portfolios, foreign currencies or
indices, forward foreign currency exchange contracts, other contracts for the
future delivery of foreign currency, and similar instruments.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to the Growth/Value, Opportunity and Intrinsic
Value Portfolios' transactions in futures contracts and related options, (b)
this investment limitation shall not apply to the Capital Growth, Balanced and
International Equity Portfolios' transactions in options on securities,
foreign currencies or indices, indices of securities, futures contracts,
options on futures contracts, forward foreign currency exchange contracts,
other contracts for the future delivery of foreign currency and similar
instruments, and (c) the Portfolios may obtain short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities.
-15-
<PAGE>
6. Purchase securities of companies for the purpose
of exercising control.
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that (a) the
Growth/Value, Opportunity and Intrinsic Value Portfolios may, to the extent
appropriate to their respective investment objectives, purchase publicly
traded securities of companies engaging in whole or in part in such activities
and may enter into futures contracts and related options, and (b) the Capital
Growth, Balanced and International Equity Portfolios may, to the extent
appropriate to their respective investment objectives, purchase publicly
traded securities of companies engaging in whole or in part in such activities
and may enter into transactions in options on securities, foreign currencies
or indices, indices of securities, futures contracts, options on futures
contracts, forward foreign currency exchange contracts, other contracts for
the future delivery of foreign currency and similar instruments.
In order to permit the sale of a Portfolio's shares in certain
states, the Trust may make commitments with respect to a Portfolio more
restrictive than the investment policies and limitations described above and
in its Prospectuses. Should the Trust determine that any such commitment is no
longer in the best interests of a particular Portfolio, it will revoke the
commitment by terminating sales of the Portfolio's shares in the state
involved and, in the case of investors in Texas, give notice of such action.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are offered and sold on a continuous
basis by the Trust's sponsors and Co-Distributors, FoM and Essex, acting as
agent. As described in their respective Prospectuses, Class I shares of the
Portfolios are sold primarily to NBD and its affiliated and correspondent
banks acting on behalf of their respective customers. Class A shares of the
Portfolios are sold to the public ("Investors") primarily through financial
institutions such as banks, brokers and dealers. The Co-Distributors may be
entitled to a sales charge on the sale of Class A shares of the Portfolios as
described in the Prospectuses.
An illustration of the computation of the public offering price
per Class A share of the Growth/Value, Opportunity, Intrinsic Value, Capital
Growth, Balanced and International Equity Portfolios, based on the value of
each Portfolio's total net assets and total number of shares outstanding on
March 15, 1996, is as follows:
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<PAGE>
<TABLE>
<CAPTION>
TABLE
Intrinsic Capital International
Growth/Value Opportunity Value Growth Balanced Equity
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
------------ ----------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Assets.................... $755,773,349 $673,796,161 $263,483,860 $218,424,035 $102,628,589 $131,098,847
------------ ------------ ------------ ------------ ------------ ------------
Number of Shares Outstanding.. 54,835,428 42,359,638 21,290,453 15,486,301 8,884,575 11,862,721
============ ============ ============ ============ ============ ============
Net Asset Value Per Share..... $ 13.78 $ 15.91 $ 12.38 $ 14.10 $ 11.55 $ 11.05
------------ ----------- ------------ ------------ ------------ ------------
Sales Charge, 5.00 percent
of offering price (5.26
percent of net asset value
per share)................... $ .73 $ .84 $ .65 $ .74 $ .60 $ .58
------------ ------------ ------------ ------------ ------------- -------------
Offering Price to Public...... $ 14.51 $ 16.75 $ 13.03 $ 14.84 $ 12.16 $ 11.63
============ ============ ============ ============ ============== ==============
</TABLE>
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when:
(a) trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted
such suspension; or (d) an emergency exists as determined by the SEC. (The
Trust may also suspend or postpone the recordation of the transfer of shares
upon the occurrence of any of the foregoing conditions).
In addition to the situations described in the Prospectuses
under "Redemption of Shares," the Trust may redeem shares involuntarily to
reimburse the Portfolios for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio shares as provided in the
Prospectuses from time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
Total sales charges paid by shareholders of the Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International
Equity Portfolios for the fiscal year ended December 31, 1995, were $92,788,
$122,061, $17,964,
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<PAGE>
$55,755, $37,984 and $13,659, respectively. Total sales charges paid by
shareholders of the International Equity Portfolio for the period from January
1, 1995 through June 30, 1995 were $0. Total sales charges paid by
shareholders of the Growth/Value, Opportunity, Intrinsic Value, Capital
Growth, Balanced and International Equity Portfolios for the fiscal year or
period ended December 31, 1994 were $431,841, $544,053, $87,757, $38,718,
$286,056, and $0, respectively. For the fiscal year ended December 31, 1993,
the sales charges for the Growth/Value, Opportunity and Intrinsic Value
Portfolios were $735,713, $1,266,118, and $249,653, respectively.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust, which
was amended and restated as of May 1, 1992, authorizes the Board of Trustees
to divide shares into two or more series, each series relating to a separate
portfolio of investments, and divide the shares of any series into two or more
classes. The number of shares of each series and/or of a class within each
series shall be unlimited. The Trust does not intend to issue share
certificates.
In the event of a liquidation or dissolution of the Trust or an
individual Portfolio, shareholders of a particular Portfolio would be entitled
to receive the assets available for distribution belonging to such Portfolio.
If there are any assets, income, earnings, proceeds, funds or payments, which
are not readily identifiable as belonging to any particular Portfolio, the
Trustees shall allocate them among any one or more of the Portfolios as they,
in their sole discretion, deem fair and equitable.
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Portfolio affected by the matter. A Portfolio is
affected by a matter unless it is clear that the interests of each Portfolio
in the matter are substantially identical or that the matter does not affect
any interest of the Portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if approved by a
majority of the outstanding shares of such Portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to particular Portfolios.
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<PAGE>
When used in the Prospectuses or in this Additional Statement,
a "majority" of shareholders means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust, or the applicable Portfolio, present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy,
or (2) more than 50% of the outstanding shares of the Trust or the applicable
portfolio.
As of March 29, 1996, Trussal & Co., a nominee of NBD's
Trust Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of
record 92.83%, 88.86%, 92.68%, 97.42%, 90.05% and 98.82%, of the outstanding
shares of the Growth/Value, Opportunity, Intrinsic Value, Capital Growth,
Balanced and International Equity Portfolios, respectively. The Trustees and
officers of the Trust, as a group, owned less than 1% of the outstanding
shares of each Portfolios. Furthermore, as of March 29, 1996, with respect
to the Growth/Value, Opportunity, Intrinsic Value, Balanced and International
Equity Portfolios, the following persons may have beneficially owned 5% or
more of the outstanding shares of such Portfolios:
Growth/Value Portfolio
<TABLE>
<CAPTION>
Percent of
Outstanding
Number of Shares Shares
---------------- -----------
<S> <C> <C>
NBD Bancorp, Inc. Employees' 4,256,469 7.80%
Savings and Investment Plan
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
Opportunity Portfolio
Employees Retirement Plan of 4,399,872 10.49%
NBD Bank
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
NBD Bancorp, Inc. Employees' 3,923,604 9.35%
Savings & Investment Plan
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Number of Shares Shares
---------------- -----------
<S> <C> <C>
Intrinsic Value Portfolio
Employees Retirement Plan of 3,334,458 15.60%
NBD Bank
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
Capital Growth Portfolio
Employees Retirement Plan of 2,957,605 18.97%
of NBD Bank
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
Balanced Portfolio
NBD Bancorp., Inc. Employees 1,938,845 21.30%
Savings and Investment Plan
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
Dickinson, Wright, Moon, Van Dusen 1,072,198 11.78%
& Freeman
1 Detroit Center
500 Woodward Avenue, Suite 4000
Detroit, MI 48226-3425
International Equity Portfolio
Employees Retirement Plan of 4,269,535 35.22%
NBD Bank
Trust Administration
611 Woodward Avenue
Detroit, MI 48232
</TABLE>
When issued for payment as described in the Portfolios'
Prospectuses and this Additional Statement, shares of the Portfolios will be
fully paid and non-assessable by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of duties. It also provides that all third parties shall
look solely to the Trust property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust provides that a Trustee,
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officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning and is based on tax laws and regulations which are in
effect on the date hereof; such laws and regulations may be changed by
legislative or administrative action. Investors are advised to consult their
tax advisers with specific reference to their own tax situations.
Each Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, each Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain requirements with respect
to the source of its income for a taxable year. At least 90% of the gross
income of each Portfolio must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to the Portfolio's business of investing in such stock, securities or
currencies. The Treasury Department may by regulation exclude from qualifying
income foreign currency gains which are not directly related to the
Portfolio's principal business of investing in stock or securities, or options
and futures with respect to stock or securities. Any income derived by a
Portfolio from a partnership or trust is treated as derived with respect to
the Portfolio's business of investing in stock, securities or currencies only
to the extent that such income is attributable to items of income which would
have been qualifying income if realized by the Portfolio in the same manner as
by the partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Portfolio's gross income for
a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not
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<PAGE>
directly related to a Portfolio's principal business of investing in stock and
securities (and options and futures with respect to stocks and securities).
Interest (including original issue discount and accrued market discount)
received by a Portfolio upon maturity or disposition of a security held for
less than three months will not be treated as gross income derived from the
sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized
market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose.
Each Portfolio will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Portfolio's taxable year.
Shareholders should note that, upon the sale or exchange of Portfolio shares,
if the shareholder has not held such shares for at least six months, any loss
on the sale or exchange of those shares will be treated as long term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%; however, because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35% (or at a maximum effective marginal
rate of 39% in the case of corporations having taxable income between $100,000
and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Portfolio intends
to make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each
calendar year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions (whether or not derived from interest on
Municipal Securities) would be taxable as ordinary income to shareholders to
the extent of the Portfolio's current and accumulated earnings and profits and
would be eligible for the dividends received deduction for corporations.
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Each Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding
by the Internal Revenue Service for failure properly to include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
Depending upon the extent of the Portfolios' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Portfolios may be subject to the tax
laws of such states or localities. In addition, in those states and localities
which have income tax laws, the treatment of the Portfolios and their
shareholders under such laws may differ from their treatment under federal
income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the
Prospectuses. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226. Each Trustee also serves as a
trustee of The Woodward Variable Annuity Fund, a registered investment Company
advised by NBD Bank.
Effective May 1, 1995, each Trustee receives from the Trust and
The Woodward variable Annuity Fund a total annual fee of $17,000 and a fee of
$2,000 for each Board of Trustees meeting attended. The Chairman is entitled
to additional compensation of $4,250 per year for his services to the Trusts
in that capacity. These fees are allocated among the investment portfolios of
the Trust and The Woodward Variable Annuity Fund based on their relative net
assets. All Trustees are reimbursed for out of pocket expenses incorrect in
connection with attendance at meetings. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Trusts.
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<PAGE>
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
-------------------- ------------- --------------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee $21,250 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr., $24,437.50 $24,437.50(2)+
Chairman and President++
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee++ $21,250 $21,250(2)+
Donald G. Sutherland, Trustee++ $21,250 $21,250(2)+
Donald L. Tuttle, Trustee++ $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
<FN>
- ---------
* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Variable Annuity Fund,
Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24,437.50, $21,500, $21,500, and
$21,500 accrued during The Woodward Funds' fiscal year ended December 31,
1995 for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and
Donald L. Tuttle, respectively.
</TABLE>
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<PAGE>
Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectuses. For the fiscal years ended December
31, 1995, 1994 and 1993, the Trust paid NBD fees for advisory services as
follows: (i) $4,951,664, $4,032,266 and $2,624,744 with respect to the
Growth/Value Portfolio; (ii) $4,490,930, $3,670,337 and $1,926,219 with
respect to the Opportunity Portfolio; and (iii) $1,817,833, $1,615,375 and
$1,119,400 with respect to the Intrinsic Value Portfolio. For the fiscal year
ended December 31, 1995 and the fiscal period from July 2, 1994 (commencement
of operations) through December 31, 1994, the Trust paid NBD fees for advisory
services aggregating $1,064,273 and $247,589, respectively on behalf of the
Capital Growth Portfolio. For the fiscal years ended December 31, 1995
and 1994, the Trust paid NBD $570,525 and $260,903, respectively on
behalf of the Balanced Portfolio. For the fiscal year ended December 31,
1995 and the fiscal period from December 3, 1994 (commencement of
operations) through December 31, 1994, the Trust paid NBD fees for
advisory services aggregating $529,312 and $20,568, respectively on
behalf of the International Equity Portfolio. For the fiscal year
ended December 31, 1995, NBD reimbursed the Capital Growth, Balanced and
International Equity Portfolios in the amounts of $58,424, $136,954 and
$51,707, respectively, for certain other expenses.
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, corporate debt obligations, equity securities
and other investments any of which may also be purchased by the Trust. Joint
purchase of investments for the Trust and for NBD's own investment portfolio
will not be made. NBD's Commercial Banking Department may have deposit, loan
and other commercial banking relationships with issuers of securities
purchased by the Trust, including outstanding loans to such issuers which may
be repaid in whole or in part with the proceeds of securities purchased by the
Trust.
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment
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<PAGE>
portfolio), in which case the Trust will be charged a pro rata share of the
transaction costs incurred in making the bulk purchase. See "Investment
Objectives, Policies and Risk Factors - Portfolio Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the Trust as a result of changes in current
state laws and regulations in those states where the Trust has qualified its
shares, or by a decision of the Trustees to qualify the shares in other states
having restrictive expense limitations. To the Trust's knowledge, of the
expense limitations in effect on the date of this Additional Statement none is
more restrictive than two and one-half percent (2-1/2%) of the first $30
million of a Portfolio's average annual net assets, two percent (2%) of the
next $70 million of the average annual net assets and one and one-half percent
(1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of each Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the various regulatory governmental bank agencies.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed
to be the making of a loan to the Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Shareholder Servicing Plan
As stated in the Prospectuses for Class A shares of the
Portfolio, the Trust may enter into Servicing Agreements with Shareholder
Servicing Agents which may include NBD and its affiliates. The Servicing
Agreements provide that the Shareholder Servicing Agents will render
shareholder
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<PAGE>
administrative support services to their customers who are the beneficial
owners of Class A shares in consideration for the Portfolios' payment of up to
.25% (on an annualized basis) of the average daily net asset value of Class A
shares beneficially owned by such customers and held by the Shareholder
Servicing Agents and, at the Trust's option, it may reimburse the Shareholder
Servicing Agents' out-of-pocket expenses. Such services may include: (i)
processing dividend and distribution payments from a Portfolio; (ii) providing
information periodically to customers showing their share positions; (iii)
arranging for bank wires; (iv) responding to customer inquiries; (v) providing
subaccounting with respect to shares beneficially owned by customers or the
information necessary for such subaccounting; (vi) forwarding shareholder
communications; (vii) processing share exchange and redemption requests from
customers; (viii) assisting customers in changing dividend options, account
designations and addresses; and (ix) other similar services requested by the
Trust. Banks acting as Shareholder Servicing Agents are prohibited from
engaging in any activity primarily intended to result in the sale of Portfolio
shares. However, Shareholder Servicing Agents other than banks may be
requested to provide marketing assistance (e.g., forwarding sales literature
and advertising to their customers) in connection with the distribution of
Portfolio shares.
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended in connection with the Trust's arrangements
with Shareholder Servicing Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Trustees").
Any material amendment to the Trust's arrangements with
Shareholder Servicing Agents under the Shareholder Servicing Agreements must
be approved by a majority of the Board of Trustees (including a majority of
the Disinterested Trustees).
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of each Portfolio, (ii)
collects and makes disbursements of money on behalf of each Portfolio, (iii)
issues and redeems shares of each Portfolio, (iv) collects and receives all
income and other payments and distributions on account of the portfolio
securities of each Portfolio, (v) addresses and mails all communications by
the Trust to its shareholders, including reports to shareholders, dividend and
distribution notices and proxy materials for any meeting of shareholders, (vi)
maintains
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<PAGE>
shareholder accounts, (vii) makes periodic reports to the Trust's Board of
Trustees concerning the Trust's operations, and (viii) maintains on-line
computer capability for determining the status of shareholder accounts.
For its services as Custodian, NBD is entitled to receive from
the Growth/Value, Opportunity, Intrinsic Value, Capital Growth, Balanced and
International Equity Portfolios at the following annual rates based on the
aggregate market value of such Portfolios' portfolio securities, held as
Custodian: .03% of the first $20 million; .025% of the next $20 million; .02%
of the next $20 million; .015% of the next $40 million; .0125% of the next
$200 million; and .01% of the balance over $300,000,000. NBD will receive an
annual account fee of $1,000 and $1.54 per month per asset held in each of
these Portfolios. In addition, NBD, as Custodian, is entitled to receive $50
for each cash statement and inventory statement and $13 for each pass-through
certificate payment, $30 for each option transaction requiring escrow receipts
and $20 for all other security transactions.
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from each Portfolio of $11,000, $12 annually per account
in each such Portfolio for the preparation of statements of account, and $1.00
for each confirmation of purchase and redemption transactions. Charges for
providing computer equipment and maintaining a computerized investment system
are expected to approximate $350 per month for each Portfolio.
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which act under the Distribution Agreement as sponsors and
Co-Distributors for the Trust. For the fiscal year ended December 31, 1995,
the Growth/Value, Opportunity Intrinsic Value, Capital Growth, Balanced and
International Equity Portfolios paid FoM for its services a fee of $33,011,
$29,940, $12,119, $7,095, $3,804 and $3,676, respectively. For the fiscal year
ended December 31, 1994, the Growth/Value, Opportunity, Intrinsic Value and
Balanced Portfolios paid FoM for its services a fee of $21,826, $19,861,
$8,798 and $1,284. For the fiscal year ended December 31, 1993, the
Growth/Value, Opportunity and Intrinsic Value Portfolios paid FoM for its
services a fee of $34,731, $25,518 and $14,822, respectively. For the fiscal
year ended December 31, 1995, such Portfolios paid Essex for its services a
fee of $34,229, $50,523, $12,521, $2,360, $7,344 and $387, respectively. For
the fiscal period from April 20, 1994 (date of original Distribution Agreement
with Essex) to December 31, 1994, the Growth/Value, Opportunity, Intrinsic
Value and Balanced Portfolios paid Essex for its services a fee of $27,976,
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<PAGE>
$40,223, $10,418 and $5,646, respectively. For the fiscal period from July 2,
1994 (commencement of operations through December 31, 1994, the Capital Growth
Portfolio paid FoM and Essex for their respective services a fee of $1,004 and
$953. For the fiscal period from December 3, 1994 (commencement of operations)
to December 31, 1994, the International Equity Portfolio paid FoM and Essex
for their respective services a fee of $147 and $0. For the fiscal years ended
December 31, 1995, 1994 and 1993, FoM incurred expenses of $0 with respect to
each of the Growth/Value, Opportunity, Intrinsic Value, Capital Growth,
Balanced and International Equity Portfolios for the printing and mailing of
prospectuses to other than current shareholders. For the fiscal year ended
December 31, 1995 and for the fiscal period from April 20, 1994 through
December 31, 1994, Essex incurred expenses of $0 with respect to each of the
Portfolios. Additional information concerning fees for services performed by
FoM and Essex, the review of such fees under the Trust's plan for the payment
of distribution expenses and the services provided by FoM and Essex are
described in the Prospectuses.
As stated in the Prospectus, the Trust's Board of Trustees is
permitted, among other things, to allocate distribution fees which are
attributable to the Class A Shares in a Portfolio exclusively to such shares.
As of the date hereof, the Board of Trustees has not exercised its discretion
to make any such allocations for the current fiscal year.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serves as auditors for the
Trust. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectuses have
been audited by Arthur Andersen LLP, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each class of shares of
each Portfolio and the yield of the Balanced Portfolio for various periods may
be quoted in advertisements, shareholder
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<PAGE>
reports or other communications to shareholders. Performance information is
generally available by calling (800)688-3350.
Total Return Calculations. Each Portfolio computes its "average
annual total return" for a class by determining the average annual compounded
rates of return during specified periods that equate the initial amount
invested to the ending redeemable value of such investment. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the
number of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of
the period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, ex-
pressed in terms of years.
The Portfolios compute their aggregate total returns for each
class by determining the aggregate rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable
value of such investment. The formula for calculating aggregate total return
is as follows:
ERV
T = (------) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period, and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to a Portfolio's mean (or median) account size for any fees that vary
with the size of the account. The ending redeemable value (variable "ERV" in
each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the
end of the period covered by the computation. Each Portfolio's average annual
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<PAGE>
total return may reflect the deduction of the maximum sales load
imposed on purchases.
The average annual total returns for the Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, Balanced and International
Equity Portfolios for the one year period ended December 31, 1995 (if
applicable) and the period since
commencement of operations are shown below:
<TABLE>
<CAPTION>
Average Annual Average Annual Average Annual Average Annual
Total Return Total Return Total Return Total Return
For One Year For One Year From Inception From Inception
Ended 12/31/95 Ended 12/31/95 Through 12/31/95 Through 12/31/95
(with Deduction (without Deduc- (with Deduction (without Deduc-
of Maximum tion for Any of Maximum tion for Any
Sales Charge) Sales Charge) Sales Charge) Sales Charge)
--------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
Growth/Value Portfolio 21.62% 28.02% 9.71% 10.94%
- ------------------------
Inception: June 1, 1991
Opportunity Portfolio 13.90% 19.90% 13.51% 14.79%
- ------------------------
Inception: June 1, 1991
Intrinsic Value Portfolio 18.16% 24.38% 10.28% 11.52%
- -------------------------
Inception: June 1, 1991
Capital Growth Portfolio 22.46% 28.90% 18.09% 22.19%
- -------------------------
Inception: July 2, 1994
Balanced Portfolio 17.01% 23.16% 7.08% 9.86%
- ---------------------------
Inception: January 1, 1994
International Equity Portfolio 5.90% 11.47% 5.50% 10.66%
- ------------------------------
Inception: December 3, 1994
</TABLE>
The aggregate annual total returns for the Portfolios for the one
year period ended December 31, 1995 (if applicable) and the period since
commencement of operations are shown below:
<TABLE>
<CAPTION>
Aggregate Total Aggregate Total
Return From Return From
Inception Inception
Through 12/31/95 Through 12/31/95
(with Deduction (without Deduc-
of Maximum tion for Any
Sales Charge) Sales Charge)
---------------- ----------------
<S> <C> <C>
Growth/Value Portfolio 53.01% 61.05%
- ------------------------
Inception: June 1, 1991
Opportunity Portfolio 78.89% 88.30%
- ------------------------
Inception: June 1, 1991
Intrinsic Value Portfolio 56.68% 64.92%
- -------------------------
Inception: June 1, 1991
Capital Growth Portfolio 28.36% 35.11%
- -------------------------
Inception: July 2, 1994
Balanced Portfolio 14.67% 20.70%
- ---------------------------
Inception: January 1, 1994
International Equity Portfolio 5.95% 11.53%
- ------------------------------
Inception: December 3, 1994
</TABLE>
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<PAGE>
The Portfolios may also from time to time include in
advertisements, sales literature, communications to shareholders and other
materials ("Literature") total return figures that are not calculated
according to the formulas set forth above in order to compare more accurately
a Portfolio's performance with other measures of investment return. For
example, in comparing the Portfolios' total returns with data published by
Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the performance of an index,
the Portfolios may calculate their returns for the period of time specified in
the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment date. Percentage increases are determined
by subtracting the initial value of the investment from the ending value and
by dividing the remainder by the beginning value. The Portfolios do not, for
these purposes, deduct from the initial value invested any amount representing
sales charges. The Portfolios will, however, disclose the maximum sales charge
and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance
quoted.
The Portfolios may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original Portfolio investment, but also of the additional
Portfolio shares received through reinvestment. As a result, the value of the
Portfolio investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The Portfolios may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
strategies, techniques, policies or investment suitability of a Portfolio
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
instruments), economic conditions, the relationship between sectors of the
economy and the economy as a whole, various securities markets, the effects of
inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance
of information contained in shareholder reports (including the investment
composition of a Portfolio), as well as the view of the Trust as to current
market, economy, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to
be of relevance to a Portfolio. The Portfolios may also include in
advertisements charts, graphs or drawings which compare the investment
objective, return potential, relative
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<PAGE>
stability and/or growth possibilities of the Portfolio and/or other mutual
funds, or illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury
bills and shares of a Portfolio. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to
be derived by an investment in a Portfolio and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information
on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
advertisements or communicators may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
-33-
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in the
relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by
A-1
<PAGE>
many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection
factors qualify issue as investment grade. Risk factors are larger and subject
to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
A-2
<PAGE>
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
A-3
<PAGE>
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for timely
repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
A-4
<PAGE>
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest
and repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly 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 "C" 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.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
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"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating 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. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 possess many favorable investment attributes and are to
be considered as upper medium-grade
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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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes ooccur in the legal documents or the underlying
credit quality of the bonds.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for
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prudent investment. Considerable variability in risk is present during
economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation
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for bond issues not in default. For defaulted bonds, the rating "DDD" to "D"
is an assessment of the ultimate recovery value through reorganization or
liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation
of investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to
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maturity of long term debt and preferred stock which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the rating categories used by
Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
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"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality
and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in their Prospectuses, each of the Portfolios may enter
into futures contracts for hedging purposes. The International Equity,
Balanced and Capital Growth Portfolios may enter into related options for
hedging purposes.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Balanced Portfolio may use
interest rate futures as a defense, or hedge, against anticipated interest
rate changes and not for speculation. As described below, this would include
the use of futures contract sales to protect against expected increases in
interest rates and futures contract purchases to offset the impact of interest
rate declines.
The Balanced Portfolio presently could accomplish a similar result
to that which they hope to achieve through the use of futures contracts by
selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase, or conversely,
selling short-term bonds and investing in long-term bonds when interest rates
are expected to decline. However, because of the liquidity that is often
available in the futures market the protection is more likely to be achieved,
perhaps at a lower cost and without changing the rate of interest being earned
by the Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Balanced Portfolio, as
seller, to deliver the specific type of financial instrument called for in the
contract at a specific future time for a specified price. A futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of the specific type of financial instrument at a specific future
time at a specific price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near
that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
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Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery
date. If the price in the sale exceeds the price in the offsetting purchase,
the Portfolio is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Portfolio's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
Portfolio realizes a gain, and if the purchase price exceeds the offsetting
sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange.
The Portfolio would deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the
exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Balanced Portfolio may trade in any futures contract for which
there exists a public market, including, without limitation, the foregoing
instruments.
Examples of Futures Contract Sale. The Balanced Portfolio would
engage in an interest rate futures contract sale to maintain the income
advantage from continued holding of a long-term bond while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany a
decline in long-term securities prices. Assume that the market value of a
certain security in the Portfolio tends to move in concert with the futures
market prices of long-term United States Treasury bonds ("Treasury bonds").
The Adviser wishes to fix the current market value of this portfolio security
until some point in the future. Assume the portfolio security has a market
value of 100, and the Adviser believes that, because of an anticipated rise in
interest rates, the value will decline to 95. The Portfolio might enter into
futures contract sales of Treasury bonds for an equivalent of 98. If the
market value of the portfolio security does indeed decline from 100 to 95, the
equivalent futures market price for the Treasury bonds might also decline from
98 to 93.
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In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and
the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Balanced Portfolio would
engage in an interest rate futures contract purchase when it is not fully
invested in long-term bonds but wishes to defer for a time the purchase of
long-term bonds in light of the availability of advantageous interim
investments, e.g., shorter-term securities whose yields are greater than those
available on long-term bonds. The Portfolio's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Portfolio would be endeavoring at the same time to eliminate
the effect of all or part of an expected increase in market price of the
long-term bonds that the Portfolio may purchase.
For example, assume that the market price of a long-term bond that
the Portfolio may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The Adviser wishes to fix the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the Adviser believes that,
because of an anticipated fall in interest rates, the price will have risen to
105 (and the yield will have dropped to about 9 1/2%) in four months. The
Portfolio might enter into futures contracts purchases of Treasury bonds for
an equivalent price of 98. At the same time, the Portfolio would assign a pool
of investments in short-term securities that are either maturing in four
months or earmarked for sale in four months, for purchase of the long-term
bond at an assumed market price of 100. Assume these short-term securities are
yielding 15%. If the market price of the long-term bond does indeed rise from
100 to 105, the equivalent futures market price for Treasury bonds might also
rise from 98 to 103. In that case, the 5-point increase in the price that the
Portfolio pays for the long-term
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bond would be offset by the 5-point gain realized by closing out the futures
contract purchase.
The Adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
A stock or bond index assigns relative values to the stocks or
bonds included in the index and the index fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as the Standard & Poor's 500
or the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by
the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of
the parties to each contract.
The Portfolios may sell index futures contracts in order to offset
a decrease in market value of its portfolio securities that might otherwise
result from a market decline. A Portfolio may do so either to hedge the value
of its portfolio as a whole, or to protect against declines, occurring prior
to sales of securities, in the value of the securities to be sold. Conversely,
the Portfolios may purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Portfolios may purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a
corresponding purchase of securities.
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In addition, the Portfolios may utilize index futures contracts in
anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio
will decline prior to the time of sale.
The following are examples of transactions in stock index futures
(net of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Equity Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
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If, however, the market moved in the opposite direction, that is,
market value decreased and the Portfolio had entered into an anticipatory
purchase hedge, or market value increased and the Portfolio had hedged its
stock portfolio, the results of the Portfolio's transactions in stock index
futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
Unlike when a Portfolio purchases or sells a security, no price is
paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's Custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures
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transactions is different from that of margin in security transactions in that
futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Portfolio upon termination of the futures contract assuming
all contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will
operate to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on
the future which will not be completely offset by movements in the price of
the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged and
movements in the price of futures contracts, a Portfolio may buy or sell
futures contracts in a greater dollar amount than the
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dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, of if otherwise deemed to be
appropriate by the Adviser. Conversely, a Portfolio may buy or sell fewer
futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Adviser. It is also possible that, where a Portfolio has
sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of securities held by the Portfolio may
decline. If this occurred, the Portfolio would lose money on the future and
also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value
of the futures contracts (or options), will be deposited in a segregated
account with the Portfolio's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the
B-8
<PAGE>
cash market and movements in the price of futures, a correct forecast of
general market trends or interest rate movements by the Adviser may still not
result in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures. Although a
Portfolio intends to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may
not be possible to close a futures investment position, and in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will
in fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
Successful use of futures by a Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the
market. For example, if a Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
B-9
<PAGE>
V. Options on Futures Contracts
The Balanced, Capital Growth and International Equity Portfolios
may purchase options on the futures contracts described above. A futures
option gives the holder, in return for the premium paid, the right to buy
(call) from or sell (put) to the writer of the option a futures contract at a
specified price at any time during the period of the option. Upon exercise,
the writer of the option is obligated to pay the difference between the cash
value of the futures contract and the exercise price. Like the buyer or seller
of a futures contract, the holder, or writer, of an option has the right to
terminate its position prior to the scheduled expiration of the option by
selling, or purchasing, an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of
the securities being hedged, an option may or may not be less risky than
ownership of the futures contract or such securities. In general, the market
prices of options can be expected to be more volatile than the market prices
on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Portfolio because
the maximum amount at risk is the premium paid for the options (plus
transaction costs). Although permitted by their fundamental investment
policies, the Balanced, Capital Growth and International Equity Portfolios do
not currently intend to write futures options, and will not do so in the
future absent any necessary regulatory approvals.
VI. Accounting and Tax Treatment
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Generally, futures contracts held by a Portfolio at the close of
the Portfolio's taxable year will be treated for federal income tax purposes
as sold for their fair market value on the last business day of such year, a
process known as "marking-to- market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Portfolio holds the
futures contract ("the 40%-60% rule"). The
B-10
<PAGE>
amount of any capital gain or loss actually realized by a Portfolio in a
subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by the
Portfolio in a prior year as a result of the constructive sale of the
contracts. With respect to futures contracts to sell, which will be regarded
as parts of a "mixed straddle" because their values fluctuate inversely to the
values of specific securities held by the Portfolio, losses as to such
contracts to sell will be subject to certain loss deferral rules which limit
the amount of loss currently deductible on either part of the straddle to the
amount thereof which exceeds the unrecognized gain (if any) with respect to
the other part of the straddle, and to certain wash sales regulations. Under
short sales rules, which will also be applicable, the holding period of the
securities forming part of the straddle will (if they have not been held for
the long-term holding period) be deemed not to begin prior to termination of
the straddle. With respect to certain futures contracts, deductions for
interest and carrying charges will not be allowed. Notwithstanding the rules
described above, with respect to futures contracts to sell which are properly
identified as such, a Portfolio may make an election which will exempt (in
whole or in part) those identified futures contracts from being treated for
federal income tax purposes as sold on the last business day of the
Portfolio's taxable year, but gains and losses will be subject to such short
sales, wash sales, loss deferral rules and the requirement to capitalize
interest and carrying charges. Under temporary regulations, a Portfolio would
be allowed (in lieu of the foregoing) to elect either (1) to offset gains or
losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under
either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures generally receive federal tax treatment similar to that
described above.
Certain foreign currency contracts entered into by a Portfolio may
be subject to the "marking-to-market" process and the 40%-60% rule in a manner
similar to that described in the preceding paragraph for futures contracts. To
receive such federal income tax treatment, a foreign currency contract must
meet the following conditions: (1) the contract must require delivery of a
foreign currency of a type in which regulated futures contracts are traded or
upon which the settlement value of the contract depends; (2) the contract must
be entered into at arm's length at a price determined by reference to the
price in the interbank market; and (3) the contract must be traded in the
interbank market. The Treasury Department has broad authority to
B-11
<PAGE>
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Additional Statement, the Treasury Department has not
issued any such regulations. Other foreign currency contracts entered into by
a Portfolio may result in the creation of one or more straddles for federal
income tax purposes, in which case certain loss deferral, short sales, and
wash sales rules and the requirement to capitalize interest and carrying
charges may apply.
Some of the Portfolios' investments may be subject to special rules
which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar.
The types of transactions covered by the special rules include the following:
(1) the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations,
preferred stock); (2) the accruing of certain trade receivables and payables;
and (3) the entering into or acquisition of any forward contract, futures
contract, option or similar financial instrument. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their fair market value at year-end under the
marking-to-market rules, unless an election is made to have such currency
rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss
on the underlying transaction and is normally taxable as ordinary gain or
loss. A taxpayer may elect to treat as capital gain or loss foreign currency
gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not a part of a straddle. In accordance with Treasury regulations,
certain transactions that are part of a "section 988 hedging transaction" (as
defined in the Code and the Treasury regulations) may be integrated and
treated as a single transaction or otherwise treated consistently for purposes
of the Code. "Section 988 hedging transactions" are not subject to the
mark-to-market or loss deferral rules under the Code. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Portfolio which are not subject to the special currency rules (such as foreign
equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
As described more fully in "Additional Information Concerning
Taxes", a regulated investment company must derive less than 30% of its gross
income from gains realized on the sale or other disposition of securities and
certain other investments
B-12
<PAGE>
held for less than three months. With respect to futures contracts and other
financial instruments subject to the marking-to-market rules, the Internal
Revenue Service has ruled in private letter rulings that a gain realized from
such a futures contract or financial instrument will be treated as being
derived from a security held for three months or more (regardless of the
actual period for which the contract or instrument is held) if the gain arises
as a result of a constructive sale under the marking-to-market rules, and will
be treated as being derived from a security held for less than three months
only if the contract or instrument is terminated (or transferred) during the
taxable year (other than by reason of marking-to-market) and less than three
months have elapsed between the date the contract or instrument is acquired
and the termination date. In determining whether the 30% test is met for a
taxable year, increases and decreases in the value of each Portfolio's futures
contracts and other investments that qualify as part of a "designated hedge,"
as defined in the Code, may be netted.
B-13
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
GROWTH/VALUE
FUND
------------
<S> <C>
ASSETS:
Investment in securities:
At cost $598,057,275
============
At value (Note 2) $738,017,171
Cash --
Receivable for shares purchased 10,466
Receivable for securities sold --
Income receivable 1,492,249
Deferred organization costs, net (Note 2) 7,429
Prepaids and other assets 5,141
------------
TOTAL ASSETS 739,532,456
------------
LIABILITIES:
Payable for securities purchased 1,109,508
Payable for shares redeemed 56,779
Accrued investment advisory fee 463,866
Accrued distribution fees 3,092
Accrued custodial fee 8,632
Dividends payable 612,601
Other payables and accrued expenses 110,911
------------
TOTAL LIABILITIES 2,365,389
------------
NET ASSETS $737,167,067
============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 5,599,664
Additional paid-in capital 585,240,911
Accumulated undistributed net investment income 40,678
Accumulated undistributed net realized gains 6,325,918
Net unrealized appreciation on investments 139,959,896
------------
TOTAL NET ASSETS $737,167,067
============
Shares of capital stock outstanding 55,996,649
============
Net asset value and redemption price per share $ 13.16
============
Maximum offering price per share $ 13.85
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPPORTUNITY INTRINSIC VALUE CAPITAL GROWTH BALANCED
FUND FUND FUND FUND
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in securities:
At cost $544,177,289 $231,447,596 $164,013,755 $ 83,617,256
============ ============ ============ ============
At value (Note 2) $643,022,640 $258,251,034 $196,462,000 $ 93,092,772
Cash 17,377 -- -- 79,791
Receivable for shares purchased 24,818 1,900 22,908 10,020
Receivable for securities sold 8,064,596 -- -- 126,207
Income receivable 630,474 841,061 179,422 487,653
Deferred organization costs, net (Note 2) 3,243 2,323 28,388 28,315
Prepaids and other assets 5,141 5,945 43,804 35,774
------------ ------------ ------------ ------------
TOTAL ASSETS 651,768,289 259,102,263 196,736,522 93,860,532
------------ ------------ ------------ ------------
LIABILITIES:
Payable for securities purchased -- 2,638,759 459,114 115,985
Payable for shared redeemed -- 10,509 218,571 9,057
Accrued investment advisory fee 404,734 159,538 123,751 59,011
Accrued distribution fees 2,698 1,064 825 393
Accrued custodial fee 8,431 3,766 2,805 6,415
Dividends payable 122,691 301,351 56,269 38,528
Other payables and accrued expenses 277,467 102,417 14,009 7,342
------------ ------------ ------------ ------------
TOTAL LIABILITIES 816,021 3,217,404 875,344 236,731
------------ ------------ ------------ ------------
NET ASSETS $650,952,268 $255,884,859 $195,861,178 $ 93,623,801
============ ============ ============ ============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 4,296,018 $ 2,152,537 $ 1,476,584 $ 832,868
Additional paid-in capital 546,076,193 224,411,095 161,372,369 83,021,763
Accumulated undistributed net investment income 977 110,249 11,301 28,937
Accumulated undistributed net realized gains 1,733,729 2,407,540 552,679 264,717
Net unrealized appreciation on investments 98,845,351 26,803,438 32,448,245 9,475,516
------------ ------------ ------------ ------------
TOTAL NET ASSETS $650,952,268 $255,884,859 $195,861,178 $ 93,623,801
============ ============ ============ ============
Shares of capital stock outstanding 42,960,183 21,525,367 14,765,837 8,328,682
============ ============ ============ ============
Net asset value and redemption price per share $ 15.15 $ 11.89 $ 13.26 $ 11.24
============ ============ ============ ============
Maximum offering price per share $ 15.95 $ 12.52 $ 13.96 $ 11.83
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
GROWTH/VALUE
FUND
------------
<S> <C>
INVESTMENT INCOME (Note 2)
Interest $ 2,809,867
Dividends 14,058,482
------------
TOTAL INVESTMENT INCOME 16,868,349
------------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 4,951,664
Distribution fees 67,240
Professional fees 53,872
Custodial fee 96,218
Transfer and dividend disbursing agent fees 78,475
Amortization of deferred organization costs 17,828
Marketing expenses 40,193
Registration, filing fees and other expenses 207,105
Less:
Expense reimbursement --
------------
NET EXPENSES 5,512,595
------------
NET INVESTMENT INCOME 11,355,754
------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains 21,032,338
Net change in unrealized appreciation on
investments 130,722,828
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 151,755,166
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $163,110,920
============
<FN>
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OPPORTUNITY INTRINSIC VALUE CAPITAL GROWTH BALANCED
FUND FUND FUND FUND
----------- --------------- -------------- -----------
<S> <C> <C> <C>
INVESTMENT INCOME (Note 2)
Interest $ 1,558,492 $ 2,056,046 $ 436,419 $ 2,380,276
Dividends 5,940,727 6,149,838 1,676,890 806,598
------------- ------------ ------------ ------------
TOTAL INVESTMENT INCOME 7,499,219 8,205,884 2,113,309 3,186,874
------------ ------------ ------------ ------------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 4,490,930 1,817,833 1,064,273 570,525
Distribution fees 80,463 24,640 9,455 11,148
Professional fees 53,872 53,872 56,031 59,307
Custodial fee 97,189 46,198 30,473 73,464
Transfer and dividend disbursing agent fees 134,736 35,266 12,933 18,045
Amortization of deferred organization costs 7,783 5,575 8,111 9,434
Marketing expenses 45,500 34,242 32,082 31,058
Registration, filing fees and other expenses 403,502 176,642 51,617 35,253
Less:
Expense reimbursement -- -- (58,424) (136,954)
------------ ------------ ------------ ------------
NET EXPENSES 5,313,975 2,194,268 1,206,551 671,280
------------ ------------ ------------ ------------
NET INVESTMENT INCOME 2,185,244 6,011,616 906,758 2,515,594
------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains 33,998,949 18,391,186 2,343,100 1,548,275
Net change in unrealized appreciation on
investments 70,828,164 28,180,120 30,092,839 11,071,176
------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 104,827,113 46,571,306 32,435,939 12,619,451
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $107,012,357 $ 52,582,922 $ 33,342,697 $ 15,135,045
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
GROWTH/VALUE OPPORTUNITY
FUND FUND
-------------------------------- -------------------------------
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 11,355,754 $ 10,988,308 $ 2,185,244 $ 2,549,199
Net realized gains (losses) 21,032,338 12,792,234 33,998,949 16,116,289
Net change in unrealized appreciation
(depreciation) on investments 130,722,828 (21,338,549) 70,828,164 (35,552,031)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets from
operations 163,110,920 2,441,993 107,012,357 (16,886,543)
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income (11,928,616) (10,560,126) (2,383,890) (2,336,343)
From realized gains (14,216,458) (15,490,059) (31,302,346) (18,160,909)
In excess of realized gains -- (489,962) -- (962,874)
Tax return of capital -- (1,387,986) -- (3,857,441)
------------- ------------- ------------- -------------
Total distributions (26,145,074) (27,928,133) (33,686,236) (25,317,567)
------------- ------------- ------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 129,170,938 236,571,313 138,422,625 239,540,057
Net asset value of shares issued in reinvestment of
distributions to shareholders 22,736,385 25,441,184 32,652,833 24,557,678
------------- ------------- ------------- -------------
151,907,323 262,012,497 171,075,458 264,097,735
Less: payments for shares redeemed (123,076,813) (94,790,691) (118,448,431) (62,559,018)
------------- ------------- ------------- -------------
Net increase in net assets from capital share
transactions 28,830,510 167,221,806 52,627,027 201,538,717
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS 165,796,356 141,735,666 125,953,148 159,334,607
NET ASSETS:
Beginning of period 571,370,711 429,635,045 524,999,120 365,664,513
------------- ------------- ------------- -------------
End of period $ 737,167,067 $ 571,370,711 $ 650,952,268 $ 524,999,120
============= ============= ============= =============
CAPITAL SHARE TRANSACTIONS:
Shares sold 10,922,667 21,126,574 9,374,983 16,685,198
Shares issued in reinvestment of distributions to
shareholders 1,788,703 2,363,365 2,199,921 1,834,826
------------- ------------- ------------- -------------
12,711,370 23,489,939 11,574,904 18,520,024
Less: shares redeemed (10,251,504) (8,442,703) (7,969,587) (4,398,758)
------------- ------------- ------------- -------------
NET INCREASE IN SHARES OUTSTANDING 2,459,866 15,047,236 3,605,317 14,121,266
CAPITAL SHARES:
Beginning of period 53,536,783 38,489,547 39,354,866 25,233,600
------------- ------------- ------------- -------------
End of period 55,996,649 53,536,783 42,960,183 39,354,866
============= ============= ============= =============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTRINSIC VALUE CAPITAL GROWTH BALANCED
FUND FUND FUND
----------------------------- ---------------------------- -----------------------------
Year Ended Year Ended Year Ended Period Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 6,011,616 $ 6,245,776 $ 906,758 $ 418,787 $ 2,515,594 $ 1,181,465
Net realized gains (losses) 18,391,186 4,420,719 2,343,100 (174,336) 1,548,275 (295,624)
Net change in unrealized
appreciation (depreciation)
on investments 28,180,120 (11,608,354) 30,092,839 2,355,406 11,071,176 (1,595,660)
------------- ------------ ------------ ----------- ------------ ------------
Net increase (decrease) in net
assets from operations 52,582,922 (941,859) 33,342,697 2,599,857 15,135,045 (709,819)
------------- ------------ ------------ ----------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
(Note 2):
From net investment income (6,247,197) (6,000,928) (933,730) (380,514) (2,524,322) (1,143,800)
From realized gains (16,471,970) (4,141,890) (1,616,085) -- (987,934) --
In excess of realized gains -- -- -- -- -- --
Tax return of capital -- -- -- -- -- --
------------- ------------ ------------ ----------- ------------ ------------
Total distributions (22,719,167) (10,142,818) (2,549,815) (380,514) (3,512,256) (1,143,800)
------------- ------------ ------------ ----------- ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 39,975,498 66,411,165 116,265,186 89,598,698 47,232,261 61,358,453
Net asset value of shares issued
in reinvestment of distributions
to shareholders 21,049,306 8,927,141 2,306,069 262,019 3,343,276 1,087,022
------------- ------------ ------------ ----------- ------------ ------------
61,024,804 75,338,306 118,571,255 89,860,717 50,575,537 62,445,475
Less: payments for shares redeemed (55,031,796) (36,780,716) (34,772,563) (10,810,456) (22,741,717) (6,424,664)
------------- ------------ ------------ ----------- ------------ ------------
Net increase in net assets from
capital share transactions 5,993,008 38,557,590 83,798,692 79,050,261 27,833,820 56,020,811
------------- ------------ ------------ ----------- ------------ ------------
NET INCREASE IN NET ASSETS 35,856,763 27,472,913 114,591,574 81,269,604 39,456,609 54,167,192
NET ASSETS:
Beginning of period 220,028,096 192,555,183 81,269,604 -- 54,167,192 --
------------- ------------ ------------ ----------- ------------ ------------
End of period $ 255,884,859 $220,028,096 $195,861,178 $81,269,604 $ 93,623,801 $ 54,167,192
============= ============ ============ =========== ============ ============
CAPITAL SHARE TRANSACTIONS:
Shares sold 3,432,079 6,127,697 9,733,178 8,792,790 4,495,916 6,238,090
Shares issued in reinvestment
of distributions to shareholders 1,777,948 845,552 177,953 25,058 306,837 113,081
------------- ------------ ------------ ----------- ------------ ------------
5,210,027 6,973,249 9,911,131 8,817,848 4,802,753 6,351,171
Less: shares redeemed (4,687,782) (3,402,089) (2,927,524) (1,035,618) (2,160,736) (664,506)
------------- ------------ ------------ ----------- ------------ ------------
NET INCREASE IN SHARES OUTSTANDING 522,245 3,571,160 6,983,607 7,782,230 2,642,017 5,686,665
CAPITAL SHARES:
Beginning of period 21,003,122 17,431,962 7,782,230 -- 5,686,665 --
------------- ------------ ------------ ----------- ------------ ------------
End of period 21,525,367 21,003,122 14,765,837 7,782,230 8,328,682 5,686,665
============= ============ ============ =========== ============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 3.30%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S.
Treasury Strips with maturities ranging from
2/15/96 through 11/15/05 and U.S. Treasury
Notes, 5.50%, 11/15/98, all held at Chemical
Bank) $ 24,354,633 $ 24,354,633
------------
(Cost $24,354,633)
Shares
------------
COMMON STOCKS -- 96.70%
Aerospace -- 3.13%
Boeing Co. 295,000 23,120,625
------------
Apparel -- 1.76%
Russell Corp. 467,000 12,959,250
------------
Banks -- 4.73%
Barnett Banks, Inc. 254,000 14,986,000
Fleet Financial Group, Inc. 489,000 19,926,750
------------
34,912,750
------------
Business Machines -- 0.71%
Autodesk, Inc. 153,900 5,271,075
------------
Business Services -- 7.14%
Deluxe Corp. 454,000 13,166,000
Dun & Bradstreet Corp. 240,000 15,540,000
Interpublic Group of Companies, Inc. 227,100 9,850,463
WMX Technologies, Inc. 473,000 14,130,875
------------
52,687,338
------------
Chemicals -- 6.31%
Dow Chemical Co. 199,000 14,004,625
Great Lakes Chemical Corp. 274,000 19,728,000
Sigma-Aldrich Corp. 259,000 12,820,500
------------
46,553,125
------------
Construction -- 7.30%
Masco Corp. 489,000 15,342,375
Stanley Works 315,000 16,222,500
York International Corp. 474,000 22,278,000
------------
53,842,875
------------
Consumer Durables -- 2.21%
Rubbermaid, Inc. 640,000 16,320,000
------------
Containers -- 1.07%
Crown Cork & Seal Co., Inc. * 189,000 7,890,750
------------
Drugs and Medicine -- 12.07%
Abbott Laboratories Corp. 337,000 14,069,750
Bristol-Myers Squibb Co. 218,000 18,720,750
Merck & Co., Inc. 227,000 14,925,250
Schering-Plough Corp. 405,000 22,173,750
U.S. HealthCare, Inc. 412,000 19,158,000
------------
89,047,500
------------
Electronics -- 2.95%
General Motors Corp. Class E 419,000 21,788,000
------------
Energy and Utilities -- 3.55%
Entergy Corp. 237,000 6,932,250
MCN Corp. 830,000 19,297,500
------------
26,229,750
------------
Energy Raw Materials -- 4.88%
Burlington Resources, Inc. 310,000 12,167,500
Schlumberger Ltd. 344,000 23,822,000
------------
35,989,500
------------
Food and Agriculture -- 4.00%
ConAgra, Inc. 265,000 10,931,250
Sysco Corp. 573,000 18,622,500
------------
29,553,750
------------
Insurance -- 7.85%
American International Group, Inc. 185,000 17,112,500
Chubb Corp. 237,000 22,929,750
First Colony Corp. 706,000 17,914,750
------------
57,957,000
------------
International Oil -- 1.53%
Royal Dutch Petroleum Co., N.Y. Registry 80,000 11,290,000
------------
Liquor -- 2.31%
Anheuser-Busch Companies, Inc. 255,000 17,053,125
------------
Media -- 4.99%
Gannett Co., Inc. 310,000 19,026,250
Washington Post Co. Class B 63,000 17,766,000
------------
36,792,250
------------
Motor Vehicles -- 1.96%
General Motors Corp. 273,000 14,434,875
------------
Non-Durables and Entertainment -- 1.38%
Cracker Barrel Old Country Store, Inc. 592,000 10,212,000
------------
Producer Goods -- 4.25%
General Electric Co. 221,000 15,912,000
Stewart & Stevenson Services, Inc. 612,000 15,453,000
------------
31,365,000
------------
Retail -- 1.52%
Toys R Us * 517,000 11,244,750
------------
Telephone -- 7.04%
AT&T Corp. 211,000 13,662,250
Century Telephone Enterprises, Inc. 486,000 15,430,500
MCI Communications Corp. 874,000 22,833,250
------------
51,926,000
------------
Trucking and Freight -- 2.06%
Ryder System, Inc. 615,000 15,221,250
------------
TOTAL COMMON STOCKS 713,662,538
------------
(Cost $573,702,642)
TOTAL INVESTMENTS $738,017,171
============
(Cost $598,057,275)
<FN>
* Non-income producing security.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 1.37%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2//96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05, and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $8,833,683 $ 8,833,683
-------------
(Cost $8,833,683)
Shares
------
COMMON STOCKS -- 98.63%
Air Transport -- 1.57%
Air Express International Corp. 438,500 10,085,500
-------------
Apparel -- 1.24%
Nine West Group, Inc. * 212,850 7,981,875
-------------
Banks -- 4.66%
Charter One Financial, Inc. 385,000 11,790,625
Commerce Bancshares, Inc. 139,255 5,326,511
TCF Financial Corp. 387,600 12,839,250
-------------
29,956,386
-------------
Business Machines -- 5.88%
Autodesk, Inc. 221,330 7,580,552
Diebold, Inc. 182,250 10,092,094
InterVoice, Inc. * 175,000 3,325,000
Komag, Inc. * 185,200 8,542,350
Xilinx, Inc. * 271,200 8,271,600
-------------
37,811,596
-------------
Business Services -- 8.37%
American Management Systems, Inc. * 316,700 9,501,000
CDI Corp. * 207,300 3,731,400
DST Systems, Inc. * 120,100 3,422,850
G & K Services, Inc. Class A 248,700 6,341,850
Omnicom Group, Inc. 239,220 8,910,945
SunGard Data Systems, Inc. * 335,300 9,556,050
Zilog, Inc. * 337,900 12,375,587
-------------
53,839,682
-------------
Chemicals -- 1.50%
RPM, Inc. 584,673 9,647,096
-------------
Construction -- 2.37%
Crane Co. 413,146 15,234,759
-------------
Consumer Durables -- 2.12%
Durakon Industries, Inc. * 314,892 3,936,150
Invacare Corp. 122,600 3,095,650
Leggett & Platt, Inc. 270,910 6,569,567
-------------
13,601,367
-------------
Containers -- 1.88%
AptarGroup, Inc. 323,200 12,079,600
-------------
Drugs and Medicine -- 5.90%
Community Health System, Inc. * 186,600 6,647,625
Health Care & Retirement Corp. * 189,556 6,634,460
Scherer (R.P.) Corp. * 149,464 7,342,419
Sybron International Corp. * 383,000 9,096,250
Vivra, Inc. * 326,400 8,200,800
-------------
37,921,554
-------------
Electronics -- 9.59%
Allen Group, Inc. 373,947 8,367,064
Belden, Inc. 530,000 13,647,500
Dynatech Corp. * 601,200 10,220,400
Holophane Corp. * 412,000 8,961,000
MEMC Electronic Materials * 182,600 5,957,325
Molex, Inc. Class A Non-Voting 246,607 7,552,339
3COM Corp. * 66,748 3,112,126
Vishay Intertechnology, Inc. * 121,900 3,839,850
-------------
61,657,604
-------------
Energy Raw Materials -- 2.93%
Apache Corp. 382,374 11,280,033
Southwestern Energy Co. 593,074 7,561,694
-------------
18,841,727
-------------
Food and Agriculture -- 1.19%
Universal Foods Corp. 191,001 7,663,915
-------------
Insurance -- 3.24%
Citizens Corp. 498,502 9,284,600
Transatlantic Holdings, Inc. 157,746 11,574,613
-------------
20,859,213
-------------
Media -- 1.59%
Banta Corp. 232,510 10,230,440
-------------
Miscellaneous and Conglomerates -- 11.78%
Arctco, Inc. 351,316 4,567,108
Culligan Water Technologies, Inc. * 280,000 6,790,000
DENTSPLY International, Inc. 274,200 10,968,000
Department 56, Inc. * 96,800 3,714,700
Greenfield Industries, Inc. 404,900 12,653,125
Health Management Associates, Inc. Class A * 343,075 8,962,834
Littlefuse, Inc. * 247,500 9,095,625
Minerals Technologies, Inc. 215,665 7,871,773
Wolverine Tube, Inc. * 297,000 11,137,500
-------------
75,760,665
-------------
Miscellaneous Finance -- 12.53%
A.G. Edwards, Inc. 401,580 9,587,723
CMAC Investment Corp. 186,000 8,184,000
Executive Risk, Inc. 368,300 10,680,700
FINOVA Group, Inc. 384,165 18,535,961
Idex Corp. 171,329 7,024,468
PMI Group, Inc. 235,300 10,647,325
Prudential Reinsurance Holdings 422,700 9,880,613
Scotsman Industries, Inc. 342,000 6,027,750
-------------
80,568,540
-------------
Motor Vehicles -- 5.11%
Excel Industries, Inc. 496,065 6,944,910
Harley-Davidson, Inc. 483,474 13,899,878
Myers Industries, Inc. 358,120 5,864,215
Superior Industries International 232,444 6,130,71
-------------
32,839,714
-------------
Non-Durables and Entertainment -- 1.53%
Lancaster Colony Corp. 263,796 9,826,401
-------------
Non-Ferrous Metals -- 0.86%
DT Industries, Inc. 408,500 5,514,750
-------------
Producer Goods -- 8.55%
Hubbell, Inc. Class B 234,413 15,412,655
Juno Lighting, Inc. 505,611 8,089,776
Stewart & Stevenson Services, Inc. 267,000 6,741,750
Teleflex, Inc. 108,760 4,459,160
Trimas Corp. 439,465 8,294,902
Watts Industries, Inc. Class A 515,002 11,973,796
-------------
54,972,039
-------------
Retail -- 2.80%
Cato Corp. Class A 1,019,082 7,897,885
Kohls Corp. * 122,118 6,411,195
Talbots, Inc. 128,701 3,700,154
-------------
18,009,234
-------------
Travel and Recreation -- 1.44%
Callaway Golf Co. 410,400 9,285,300
-------------
TOTAL COMMON STOCKS 634,188,957
-------------
(Cost $535,343,601)
TOTAL INVESTMENTS $643,022,640
============
(Cost $544,177,289)
<FN>
* Non-income producing security.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
INTRINSIC VALUE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 6.44%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $16,639,265 $ 16,639,265
------------
(Cost $16,639,265)
CONVERTIBLE BONDS -- 9.26%
Chubb Capital Corp., 6.00%, 5/15/98 5,650,000 6,384,500
Consolidated Natural Gas Co., 7.25%, 12/15/15 5,218,500 5,414,194
Price Co., 6.75%, 3/1/01 5,400,000 5,487,750
Unifi, Inc., 6.00%, 3/15/02 6,566,000 6,615,245
------------
(Cost $23,403,674) 23,901,689
------------
Shares
------
COMMON STOCKS -- 84.30%
Apparel -- 3.13%
Reebok International Ltd. 128,530 3,630,972
Unifi Inc. 82,900 1,834,163
V. F. Corp. 49,600 2,616,400
------------
8,081,535
------------
Banks -- 4.36%
Bancorp Hawaii, Inc. 156,400 5,610,850
First Union Corp. 101,500 5,645,938
------------
11,256,788
------------
Business Services -- 5.34%
Angelica Corp. 120,200 2,464,100
Harland (John H.) Co. 247,500 5,166,562
National Service Industries, Inc. 190,200 6,157,725
------------
13,788,387
------------
Chemicals -- 2.21%
NCH Corp. 98,800 5,705,700
------------
Consumer Durables -- 4.29%
Hillenbrand Industries, Inc. 90,800 3,075,850
National Presto Industries, Inc. 78,800 3,132,300
Thiokol Corp. 143,700 4,867,838
------------
11,075,988
------------
Domestic Oil -- 4.61%
Atlantic Richfield Co. 37,200 4,119,900
MAPCO, Inc. 142,700 7,794,988
------------
11,914,888
------------
Drugs and Medicine -- 2.84%
Block Drug, Inc. Class A 45,700 1,588,075
Bristol-Myers Squibb Co. 66,800 5,736,450
------------
7,324,525
------------
Energy and Utilities -- 5.34%
American Water Works Co., Inc. 76,435 2,971,411
Equitable Resources, Inc. 128,200 4,006,250
Sierra Pacific Resources 291,900 6,823,162
------------
13,800,823
------------
Energy Raw Materials -- 1.09%
Ashland Coal, Inc. 131,300 2,806,537
------------
Insurance -- 13.18%
Allmerica Property & Casualty Co. 129,500 3,496,500
AMBAC, Inc. 94,600 4,434,375
Financial Security Assurance Holdings 126,500 3,146,688
Home Beneficial Corp. Class B 246,900 5,925,600
Marsh & McLennan Companies, Inc. 34,200 3,035,250
Mid Ocean Ltd. 76,100 2,825,213
Old Republic International Corp. 223,900 7,948,450
SAFECO Corp. 93,600 3,229,200
------------
34,041,276
------------
International Oil -- 3.62%
Amoco Corp. 61,900 4,449,062
Texaco, Inc. 62,500 4,906,250
------------
9,355,312
------------
Liquor -- 1.44%
Anheuser-Busch Companies, Inc. 55,800 3,731,625
------------
Media -- 1.64%
Gannett Co., Inc. 69,000 4,234,875
------------
Miscellaneous Finance -- 7.91%
Federal National Mortgage Association 75,800 9,408,675
Fund American Enterprises Holdings, Inc. 112,365 8,371,192
Salomon, Inc. 74,300 2,637,650
------------
20,417,517
------------
Motor Vehicles -- 1.01%
Ford Motor Co. 89,798 2,604,142
------------
Non-Durables and Entertainment -- 3.53%
Hasbro, Inc. 181,000 5,611,000
Luby's Cafeterias, Inc. 37,800 841,050
Sbarro, Inc. 123,700 2,659,550
------------
9,111,600
------------
Railroads and Shipping -- 3.23%
Alexander & Baldwin, Inc. 252,600 5,809,800
Norfolk Southern Corp. 31,900 2,532,062
------------
8,341,862
------------
Retail -- 7.89%
May Department Stores Co. 155,900 6,586,775
Melville Corp. 201,500 6,196,125
Mercantile Stores, Inc. 62,000 2,867,500
Stanhome, Inc. Voting 162,200 4,724,075
------------
20,374,475
------------
Soaps and Cosmetics -- 2.33%
Unilever N. V. 42,800 6,024,100
------------
Tires and Rubber Goods -- 1.13%
Bandag, Inc. Class A 54,900 2,909,700
------------
Tobacco -- 4.18%
Loews Corp. 77,400 6,066,225
Philip Morris Companies, Inc. 52,400 4,742,200
------------
10,808,425
------------
TOTAL COMMON STOCKS 217,710,080
------------
(Cost $191,404,657)
TOTAL INVESTMENTS $258,251,034
============
(Cost $231,447,596)
<FN>
* Non-income producing security.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 2.52%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96, (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $4,958,619 $ 4,958,619
------------
(Cost $4,958,619)
Shares
COMMON STOCKS -- 97.48%
Banks -- 3.67%
Banc One Corp. 80,000 3,020,000
Norwest Corp. 127,000 4,191,000
------------
7,211,000
------------
Business Machines -- 4.03%
Autodesk, Inc. 90,400 3,096,200
Microsoft Corp. * 55,000 4,826,250
------------
7,922,450
------------
Business Services -- 6.26%
Automatic Data Processing, Inc. 58,000 4,306,500
Interpublic Group of Companies, Inc. 105,000 4,554,375
WMX Technologies, Inc. 115,000 3,435,625
------------
12,296,500
------------
Chemicals -- 3.56%
Great Lakes Chemical Corp. 58,000 4,176,000
Sigma-Aldrich Corp. 57,000 2,821,500
------------
6,997,500
------------
Construction -- 4.84%
Fluor Corp. 73,000 4,818,000
York International Corp. 100,000 4,700,000
------------
9,518,000
------------
Consumer Durables -- 2.88%
Newell Co. 140,000 3,622,500
Rubbermaid, Inc. 80,000 2,040,000
------------
5,662,500
------------
Containers -- 2.13%
Crown Cork & Seal Co., Inc. * 100,000 4,175,000
------------
Drugs and Medicine -- 12.79%
Johnson & Johnson 70,000 5,993,750
Medtronic, Inc. 67,000 3,743,625
Pall Corp. 225,000 6,046,875
Stryker Corp. 83,000 4,357,500
United Healthcare Corp. 76,000 4,978,000
------------
25,119,750
------------
Electronics -- 6.26%
General Motors Corp., Class E 95,000 4,940,000
Hewlett-Packard Co. 37,000 3,098,750
Intel Corp. 75,000 4,256,250
------------
12,295,000
------------
Energy and Utilities -- 1.94%
Enron Corp. 100,000 3,812,500
------------
Energy Raw Materials -- 4.15%
Schlumberger Ltd. 52,000 3,601,000
Western Atlas, Inc. * 90,000 4,545,000
------------
8,146,000
------------
Food and Agriculture -- 3.86%
CPC International, Inc. 57,000 3,911,625
Sysco Corp. 113,000 3,672,500
------------
7,584,125
------------
Insurance -- 4.84%
AFLAC, Inc. 100,000 4,337,500
American International Group, Inc. 56,000 5,180,000
------------
9,517,500
------------
Media -- 2.20%
Donnelley (R.R.) & Sons Co. 110,000 4,331,250
------------
Miscellaneous and Conglomerates -- 2.37%
Duracell International, Inc. 90,000 4,657,500
------------
Non-Durables and Entertainment -- 6.05%
Cracker Barrel Old Country Store, Inc. 250,000 4,312,500
CUC International, Inc *. 73,650 2,513,306
Service Corp. International 115,000 5,060,000
------------
11,885,806
------------
Producer Goods -- 3.57%
Illinois Tool Works, Inc. 76,000 4,484,000
Stewart & Stevenson Services, Inc. 100,000 2,525,000
------------
7,009,000
------------
Retail -- 8.95%
Albertsons, Inc. 132,000 4,339,500
Home Depot, Inc. 135,000 6,463,125
Toys R Us * 130,000 2,827,500
Walgreen Co. 132,000 3,943,500
------------
17,573,625
------------
Telephone -- 4.77%
AirTouch Communications, Inc. * 170,000 4,802,500
MCI Communications Corp. 175,000 4,571,875
------------
9,374,375
------------
Tobacco -- 1.87%
UST, Inc. 110,000 3,671,250
------------
Travel and Recreation -- 6.49%
Carnival Corp. Class A 180,000 4,387,500
Disney (Walt) Co. 80,000 4,720,000
Gaylord Entertainment Co. Class A 131,000 3,635,250
------------
12,742,750
------------
TOTAL COMMON STOCKS 191,503,381
------------
(Cost $159,055,136)
TOTAL INVESTMENTS $196,462,000
============
(Cost $164,013,755)
<FN>
* Non-income producing security
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BALANCED FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 11.13%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05, and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $10,363,688 $10,363,688
-----------
(Cost $10,363,688)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 33.62%
U.S. Treasury Securities -- 15.64%
Principal Strips from U.S. Treasury Securities
due:
8/15/98 500,000 436,475
5/15/18 600,000 149,664
11/15/18 600,000 145,734
8/15/20 4,765,000 1,037,245
Strips from U.S. Treasury Securities due:
5/15/98 200,000 176,984
2/15/99 100,000 84,995
2/15/11 600,000 242,940
5/15/11 1,083,000 431,077
2/15/12 280,000 105,795
8/15/12 750,000 273,848
5/15/13 760,000 264,290
2/15/14 200,000 66,210
U.S. Treasury Bonds:
12.750%, 11/15/10 395,000 601,632
10.375%, 11/15/12 495,000 684,338
U.S. Treasury Notes:
7.375%, 5/15/96 350,000 352,681
7.250%, 11/15/96 200,000 203,312
8.500%, 4/15/97 165,000 171,626
8.625%, 8/15/97 850,000 894,625
8.750%, 10/15/97 200,000 211,968
8.875%, 11/15/97 800,000 851,496
7.875%, 1/15/98 2,400,000 2,521,872
7.875%, 4/15/98 3,870,000 4,086,488
5.375%, 5/31/98 350,000 351,148
6.875%, 7/31/99 200,000 210,000
-----------
(Cost $13,572,976) 14,556,443
-----------
Agency Obligations -- 17.98%
Federal Home Loan Mortgage Corp. Participation
Ctf.
#555238, 12.000%, 7/1/19 177,465 198,989
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 22 Class C, 9.500%, 4/15/20 138,110 156,469
Series 11 Class D, 9.500%,7/15/19 200,000 222,572
Series 99 Class Z, 9.500%, 1/15/21 109,086 117,377
Series 1051 Class D, 7.000%, 11/15/19 194,946 197,330
Series 1065 Class J, 9.000%, 4/15/21 100,000 108,781
Series 1084 Class F, AR, 5/15/21 250,000 254,990
Series 1084 Class S, IF, 5/15/21 175,000 227,500
Series 1144 Class KB, 8.500%, 9/15/21 250,000 264,635
Series 1295 Class JB, 4.500%, 3/15/07 300,000 271,701
Series 1297 Class H, 7.500%, 1/15/20 130,723 133,925
Series 1360 Class PK, 10.000%, 12/15/20 150,000 172,192
Series 1370 Class F, 6.750%, 3/15/19 260,000 262,743
Series 1378 Class H, 10.000%, 1/15/21 100,000 115,208
Series 1378 Class JZ, 7.500%, 11/15/21 253,428 257,659
Series 1456 Class G, 6.500%,12/15/18 300,000 300,315
Series 1465 Class SA, IF, 2/15/08 1,584,527 78,228
Series 1483 Class E, 6.500%, 2/15/20 367,500 367,283
Series 1489 Class L, 5.500%, 4/15/08 208,713 203,631
Series 1491 Class F, 5.000%, 8/15/19 400,000 375,472
Series 1508 Class KB, IO, IF, 5/15/23 709,793 45,689
Series 1531 Class K, 6.000%, 4/15/08 346,816 336,404
Series 1554 Class KA, PO, 8/15/08 84,308 66,971
Series 1583 Class NS, IF, 9/15/23 115,888 85,757
Series 1585 Class NB, IF, 9/15/23 144,996 117,446
Series 1586 Class A, 6.000%, 9/15/08 167,962 161,611
Series 1595 Class S, IO, IF, 10/15/13 1,582,125 64,266
Series 1604 Class SE, IF, 11/15/08 187,033 149,626
Series 1606 Class LD, IF, 5/15/08 393,649 295,358
Series 1681 Class K, 7.000%, 8/15/23 446,020 436,243
Series 1686 Class A, 5.000%, 2/15/24 92,449 82,440
Series 1689 Class SD, IF, 10/15/23 100,000 89,000
Series 1706 Class LA, 7.000%, 3/15/24 425,008 416,402
Series 1757-A, Class A, 9.500%, 5/15/23 176,610 187,868
Series 1796-A, Class S, IF, 2/15/09 100,000 75,500
Federal Housing Administration Merrill Lynch
Project Pool 170 Pass thru Ctf., 7.430%, 8/1/20 228,368 235,931
Federal National Mortgage Assn. Pass Thru
Securities Pool #116612, AR, 3/1/19 120,860 125,058
Federal National Mortgage Assn. Pass Thru
Securities Guaranteed Remic Trust:
1989 Class 34-D, 9.850%, 7/25/13 100,480 101,805
1989 Class 69-G, 7.600%, 10/25/19 800,000 825,385
1989 Class 78-H, 9.400%, 11/25/19 250,000 278,605
1990 Class 1-D, 8.800%, 1/25/20 150,000 159,384
1990 Class 140-K, HB, 652.1454%, 12/25/20 1,859 34,111
1990 Class 143-J, 8.750%, 12/25/20 125,000 134,010
1991 Class 144-PZ, 8.500%, 6/25/21 213,482 225,832
1991 Class 161-H, 7.500%, 2/25/21 195,157 198,564
1992 Class 204-B, 6.000%, 10/25/20 250,000 241,885
1993 Class 13-G, 6.000%, 6/25/20 200,000 196,274
1993 Class 15-K, 7.000%, 02/25/08 198,103 197,104
1993 Class 19-G, 5.000%, 5/25/19 250,000 237,095
1993 Class 32-K, 6.000%, 3/25/23 398,757 383,429
1993 Class 38-S, IO, IF, 11/25/22 1,167,204 32,098
1993 Class 44-S, IO, IF, 4/25/23 440,206 19,395
1993 Class 58-J, 5.500%, 4/25/23 172,150 160,876
1993 Class 94-K, 6.750%, 5/25/23 129,919 127,147
1993 Class 139-SG, IF, 8/25/23 242,431 187,959
1993 Class 155-LA, 6.500%, 5/25/23 347,178 342,498
1993 Class 155-SB, IO, IF, 9/25/23 855,151 46,495
1993 Class 190-SE, IF, 10/25/08 49,847 38,740
1993 Class 207-SC, IF, 11/25/23 286,295 208,995
1993 Class 209-KB, 5.659%, 8/25/08 186,995 178,470
1993 Class 214-L, 6.000%, 12/25/08 167,752 165,801
1993 Class 220-SD, IF, 11/25/13 49,707 38,631
1993 Class 223-FB, AR, 12/25/23 371,360 365,790
1993 Class 223-SB, IF, 12/25/23 165,265 132,212
1994 Class 8-G, PO, 11/25/23 259,594 188,206
1994 Class 19-C, 5.000%, 1/25/24 341,483 315,697
1994 Class 30-LA, 6.500%, 2/25/09 84,934 83,897
1994 Class 36-SE, IF, 11/25/23 136,624 109,299
1994 Class 39-F, AR, 3/25/24 226,630 225,071
1994 Class 39-S, IF, 3/25/24 87,166 77,413
1994 Class 53-CA, PO, 11/25/23 460,000 318,550
1994 Class 59-PK, 6.000%, 3/25/24 176,633 171,714
1994 Class 82-SA, IO, 5/25/23 1,931,538 51,900
1995 Class 13-B, 6.500%, 3/25/09 576,322 563,533
1992-G Class 15-Z, 7.000%, 1/25/22 196,015 190,649
1992-G Class 42-Z, 7.000%, 7/25/22 633,918 624,341
1992-G Class 59-C, 6.000%, 12/25/21 200,000 194,128
1993-G Class 19-K, 6.500%, 6/25/19 254,799 250,365
1994-G Class 13-ZB, 7.000%, 11/17/24 107,229 102,640
Government National Mortgage Assn. Pass Thru
Securities
Guaranteed Remic Trust:
1994 Class 4-SA, IO, IF, 10/16/22 600,000 38,250
Government National Mortgage Assn. Pass Thru:
Pool #297628, 8.000%, 9/15/22 190,467 198,974
Pool #313110, 7.500%, 11/15/22 499,859 515,218
-----------
(Cost $15,517,459) 16,737,005
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 31,293,448
-----------
(Cost $29,090,435)
CORPORATE BONDS AND NOTES -- 1.95%
Finance -- 1.12%
Associates Corp. of North America:
9.125%, 4/1/00 85,000 95,937
8.150%, 8/1/09 200,000 227,996
Ford Credit Grantor Trust Asset Backed Ctf.
Series 1994-A, Class A, 6.350%, 5/15/99 272,012 274,846
Merrill Lynch Trust 43 E CMO, Series 43-E,
6.500%, 8/27/15 200,000 198,998
Nationsbank Auto Grantor Trust Asset Backed Ctf.
Series 1995-A, Class A, 5.850%, 6/15/02 96,427 96,983
Standard Credit Card Master Trust Asset Backed
Ctf. Series 1995-5, Class A, AR, 5/8/00 150,000 150,046
-----------
(Cost $1,000,850) 1,044,806
-----------
Industrial -- 0.42%
Boeing Co., 7.950%, 8/15/24 110,000 129,493
Proctor & Gamble Co., 8.000%, 10/26/96 220,000 262,544
-----------
(Cost $360,295) 392,037
-----------
Public Utility -- 0.41%
New England Telephone & Telegraph Co., 7.875%,
11/15/29 250,000 294,213
Nippon Telegraph & Telephone Corp., 9.500%,
7/27/98 80,000 87,370
-----------
(Cost $351,127) 381,583
-----------
TOTAL CORPORATE BONDS AND NOTES 1,818,426
-----------
(Cost $1,712,272)
CONVERTIBLE BONDS -- 0.52%
Chubb Capital Corp., 6.00%, 5/15/98 121,000 136,730
Consolidated Natural Gas Co., 7.25%, 12/15/15 98,100 101,779
Price Co., 6.75%, 3/1/01 112,000 113,820
Unifi, Inc., 6.00%, 3/15/02 130,000 130,975
-----------
(Cost $473,776) 483,304
-----------
Shares
------
COMMON STOCKS -- 52.78%
Aerospace -- 1.06%
Boeing Co. 12,600 987,525
-----------
Air Transport -- 0.15%
Air Express International Corp. 6,225 143,175
-----------
Apparel -- .90%
Nine West Group, Inc. * 2,950 110,625
Reebok International Ltd. 2,780 78,535
Russell Corp. 20,000 555,000
Unifi Inc. 1,640 36,285
V.F. Corp. 1,050 55,388
-----------
835,833
-----------
Banks -- 2.58%
Banc One Corp. 3,100 117,025
Bancorp Hawaii, Inc. 3,390 121,616
Barnett Banks, Inc. 10,800 637,200
Charter One Financial Inc. 5,200 159,250
Commerce Bancshares, Inc. 1,975 75,530
First Union Corp. 2,200 122,375
Fleet Financial Group, Inc. 20,900 851,675
Norwest Corp. 4,000 132,000
TCF Financial Corp. 5,600 185,500
-----------
2,402,171
-----------
Business Machines -- 1.01%
Autodesk, Inc. 12,370 423,673
Diebold, Inc. 2,613 144,695
InterVoice, Inc. * 2,500 47,500
Komag, Inc. * 2,700 124,538
Microsoft Corp. * 1,100 96,525
Xilinx, Inc. * 3,350 102,174
-----------
939,105
-----------
Business Services -- 3.94%
American Management System, Inc. * 4,500 135,000
Angelica Corp. 2,600 53,300
Automatic Data Processing, Inc. 1,800 133,650
CDI Corp. * 2,900 52,200
Deluxe Corp. 19,400 562,600
DST Systems, Inc. * 1,600 45,600
Dun & Bradstreet Corp. 10,300 666,925
G & K Services, Inc. Class A 3,400 86,700
Harland (John H.) Co. 5,360 111,890
Interpublic Group of Companies, Inc. 12,600 546,525
National Service Industries, Inc. 4,120 133,385
Omnicom Group, Inc. 3,380 125,905
SunGard Data Systems, Inc. * 4,500 128,250
WMX Technologies, Inc. 23,500 702,063
Zilog, Inc. * 5,000 183,125
-----------
3,667,118
-----------
Chemicals -- 2.64%
Dow Chemical Co. 8,500 598,188
Great Lakes Chemical Corp. 13,600 979,200
NCH Corp. 2,140 123,585
RPM, Inc. 8,265 136,372
Sigma-Aldrich Corp. 12,500 618,750
-----------
2,456,095
-----------
Construction -- 3.00%
Crane Co. 5,604 206,648
Fluor Corp. 2,100 138,600
Masco Corp. 20,900 655,737
Stanley Works 13,500 695,250
York International Corp. 23,300 1,095,100
-----------
2,791,335
-----------
Consumer Durables -- 1.43%
Durakon Industries, Inc. * 4,508 56,350
Hillenbrand Industries, Inc. 1,970 66,734
Invacare Corp. 1,700 42,925
Leggett & Platt, Inc. 3,840 93,120
National Presto Industries, Inc. 1,710 67,973
Newell Co. 4,300 111,263
Rubbermaid, Inc. 30,700 782,850
Thiokol Corp. 3,110 105,350
-----------
1,326,565
-----------
Containers -- 0.65%
AptarGroup, Inc. 4,600 171,925
Crown Cork & Seal Co., Inc. * 10,400 434,200
-----------
606,125
-----------
Domestic Oil -- 0.27%
Atlantic Richfield Co. 810 89,708
MAPCO, Inc. 2,940 160,597
-----------
250,305
-----------
Drugs and Medicine -- 5.52%
Abbott Laboratories 14,400 601,200
Block Drug, Inc. Class A 1,000 34,750
Bristol-Myers Squibb Co. 10,790 926,591
Community Health System 2,600 92,625
Health Care & Retirement Corp. * 2,594 90,790
Johnson & Johnson 1,700 145,563
Medtronic, Inc. 2,400 134,100
Merck & Co., Inc. 9,700 637,775
Pall Corp. 5,800 155,875
Scherer (R.P.) Corp. * 2,286 112,300
Schering-Plough Corp. 17,300 947,175
Stryker Corp. 900 47,250
Sybron International Corp. * 5,400 128,250
United Healthcare Corp. 2,400 157,200
U.S. HealthCare, Inc. 17,600 818,400
Vivra, Inc. * 4,500 113,062
-----------
5,142,906
-----------
Electronics -- 2.28%
Allen Group, Inc. 5,393 120,668
Belden, Inc. 7,500 193,125
Dynatech Corp. * 8,000 136,000
General Motors Corp. Class E 20,400 1,060,800
Hewlett Packard Co. 1,500 125,625
Holophane Corp. * 5,100 110,925
Intel Corp. 1,600 90,800
MEMC Electronic Materials * 2,500 81,563
Molex, Inc. Class A Non-Voting 3,550 108,719
3COM Corp. * 952 44,387
Vishay Intertechnology, Inc. * 1,700 53,550
-----------
2,126,162
-----------
Energy and Utilities -- 1.62%
American Water Works Co., Inc. 1,800 69,975
Enron Corp. 1,500 57,188
Entergy Corp. 10,200 298,350
Equitable Resources, Inc. 2,770 86,563
MCN Corp. 36,300 843,974
Sierra Pacific Resources 6,320 147,730
-----------
1,503,780
-----------
Energy Raw Materials -- 2.27%
Apache Corp. 5,076 149,742
Ashland Coal, Inc. 2,810 60,064
Burlington Resources, Inc. 13,300 522,025
Schlumberger Ltd. 16,500 1,142,625
Southwestern Energy Co. 8,476 108,069
Western Atlas, Inc. * 2,500 126,250
-----------
2,108,775
-----------
Food and Agriculture -- 1.71%
ConAgra, Inc. 11,300 466,125
CPC International, Inc. 1,500 102,938
Sysco Corp. 28,300 919,750
Universal Foods Corp. 2,549 102,278
-----------
1,591,091
-----------
Insurance -- 3.97%
AFLAC, Inc. 1,400 60,725
Allmerica Property & Casualty Co. 2,800 75,600
AMBAC, Inc. 2,050 96,094
American International Group, Inc. 9,400 869,500
Chubb Corp. 10,200 986,850
Citizens Corp. 6,548 121,957
Financial Security Assurance Holdings 2,440 60,695
First Colony Corp. 30,200 766,325
Home Beneficial Corp. Class B 5,350 128,400
Marsh & McLennan Companies, Inc. 740 65,675
Mid Ocean Ltd. 1,570 58,286
Old Republic International Corp. 4,880 173,240
SAFECO Corp. 2,020 69,690
Transatlantic Holdings, Inc. 2,254 165,387
-----------
3,698,424
-----------
International Oil -- 0.73%
Amoco Corp. 1,340 96,313
Royal Dutch Petroleum Co., N.Y. Registry 3,400 479,825
Texaco, Inc. 1,350 105,975
-----------
682,113
-----------
Liquor -- 0.87%
Anheuser Busch Companies, Inc. 12,120 810,525
-----------
Media -- 2.04%
Banta Corp. 3,290 144,760
Donnelley (R.R.) & Sons Co. 2,200 86,625
Gannett Co., Inc. 14,790 907,736
Washington Post Co. Class B 2,700 761,400
-----------
1,900,521
-----------
Miscellaneous and Conglomerates -- 1.24%
Arctco, Inc. 4,983 64,779
Culligan Water Technologies, Inc. * 3,700 89,725
DENTSPLY International, Inc. 3,700 148,000
Department 56, Inc. * 1,200 46,050
Duracell International, Inc. 2,200 113,850
Greenfield Industries, Inc. 5,700 178,125
Health Management Associates, Inc. Class A * 4,862 127,020
Littlefuse, Inc. * 3,500 128,625
Minerals Technologies, Inc. 3,085 112,602
Wolverine Tube, Inc. * 4,000 150,000
-----------
1,158,776
-----------
Miscellaneous Finance -- 1.68%
A.G. Edwards, Inc. 5,755 137,401
CMAC Investment Corp. 2,300 101,200
Executive Risk, Inc. 5,200 150,800
Federal National Mortgage Association 1,640 203,565
FINOVA Group, Inc. 5,535 267,064
Fund American Enterprises Holdings, Inc. 2,310 172,095
Idex Corp. 2,472 101,332
PMI Group, Inc. 3,200 144,800
Prudential Reinsurance Holding 6,000 140,250
Salomon, Inc. 1,610 57,154
Scotsman Industries, Inc. 4,900 86,362
-----------
1,562,023
-----------
Motor Vehicles -- 1.22%
Excel Industries, Inc. 7,035 98,490
Ford Motor Co. 1,861 53,969
General Motors Corp. 11,700 618,638
Harley-Davidson, Inc. 6,926 199,123
Myers Industries, Inc. 4,520 74,014
Superior Industries International 3,338 88,040
-----------
1,132,274
-----------
Non-Durables and Entertainment -- 1.12%
Cracker Barrel Old Country Store, Inc. 32,000 552,000
CUC International, Inc. 2,250 76,781
Hasbro, Inc. 3,920 121,520
Lancaster Colony Corp. 3,764 140,209
Luby's Cafeterias, Inc. 820 18,245
Sbarro, Inc. 2,280 49,020
Service Corp. International 2,000 88,000
-----------
1,045,775
-----------
Non-Ferrous Metals -- 0.08%
DT Industries, Inc. 5,200 70,200
-----------
Producer Goods -- 2.52%
General Electric Co. 9,500 684,000
Hubbell, Inc. Class B 3,351 220,328
Illinois Tool Works, Inc. 2,100 123,900
Juno Lighting, Inc. 7,239 115,824
Stewart & Stevenson Services, Inc. 33,400 843,350
Teleflex, Inc. 1,590 65,190
Trimas Corp. 6,235 117,686
Watts Industries, Inc. Class A 7,398 172,003
-----------
2,342,281
-----------
Railroads and Shipping -- 0.19%
Alexander & Baldwin, Inc. 5,470 125,810
Norfolk Southern Corp. 690 54,769
-----------
180,579
-----------
Retail -- 1.70%
Albertsons, Inc. 3,200 105,200
Cato Corp. Class A 14,518 112,515
Home Depot, Inc. 2,500 119,688
Kohls Corp. * 1,732 90,930
May Department Stores Co. 3,380 142,805
Melville Corp. 4,360 134,070
Mercantile Stores Inc. 1,200 55,500
Stanhome, Inc. Voting 3,510 102,229
Talbots, Inc. 1,949 56,034
Toys R Us * 24,900 541,575
Walgreen Co. 4,200 125,474
-----------
1,586,020
-----------
Soaps and Cosmetics -- 0.12%
Unilever N. V. 810 114,007
-----------
Telephone -- 2.64%
AT&T Corp. 9,000 582,750
AirTouch Communications, Inc. * 3,300 93,225
Century Telephone Enterprises, Inc. 21,500 682,625
MCI Communications Corp. 42,000 1,097,250
-----------
2,455,850
-----------
Tires and Rubber Goods -- 0.06%
Bandag, Inc. Class A 1,050 55,650
-----------
Tobacco -- 0.38%
Loews Corp. 1,700 133,238
Philip Morris Companies, Inc. 1,130 102,265
UST, Inc. 3,500 116,812
-----------
352,315
-----------
Travel and Recreation -- 0.49%
Callaway Golf Co. 5,600 126,700
Carnival Corp. Class A 5,000 121,875
Disney (Walt) Co. 1,600 94,400
Gaylord Entertainment Co. Class A 4,130 114,608
-----------
457,583
-----------
Trucking and Freight -- 0.70%
Ryder System, Inc. 26,300 650,924
-----------
TOTAL COMMON STOCKS 49,133,906
-----------
(Cost $41,977,085)
TOTAL INVESTMENTS $93,092,772
===========
(Cost $83,617,256)
<FN>
* Non-income producing security.
</TABLE>
<PAGE>
THE WOODWARD FUNDS
BALANCED FUND
PORTFOLIO OF INVESTMENTS (Continued)
Notes to Portfolio of Investments
The Fund invests in securities whose value is derived from an underlying pool
of mortgages or consumer loans. Some of these securities are collateralized
mortgage obligations (CMOs). CMOs are debt securities issued by U.S.
government agencies or by financial institutions and other mortgage lenders
which are collateralized by a pool of mortgages held under an indenture.
Descriptions of certain collateralized mortgage obligations are as follows:
Adjustable Rate (AR)
Inverse Floaters (IF) represent securities that pay interest at a rate that
increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these
securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. These securities are subject to accelerated principal paydowns as a
result of prepayments or refinancing of the underlying pool of mortgage
instruments. As a result, interest income may be reduced considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as
those associated with IO securities. Unlike IO's, the owner also has a right
to receive a very small portion of principal. The high interest rate results
from taking interest payments from other classes in the REMIC Trust and
allocating them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion only
on an underlying pool of mortgage loans. The market value of these securities
is extremely volatile in response to changes in market interest rates. As
prepayments on the underlying mortgages of these securities increase, the
yield on these securities increases.
<PAGE>
THE WOODWARD FUNDS
EQUITY FUNDS
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Funds (Woodward) was organized as a Massachusetts business
trust on April 21, 1987, and registered under the Investment Company Act of
1940, as amended, as an open-end investment company. As of December 31, 1995,
Woodward consisted of seventeen separate series. The five Equity Funds (Equity
Funds) included in these financial statements are described below.
Woodward Growth/Value Fund
Woodward Opportunity Fund
Woodward Intrinsic Value Fund
Woodward Capital Growth Fund
Woodward Balanced Fund
The Growth/Value, Opportunity and Intrinsic Value Funds commenced
operations on June 1, 1991, the Balanced Fund commenced operations on
January 1, 1994, and the Capital Growth Fund commenced operations on
July 2, 1994.
The remaining two Woodward Equity Funds, the Equity Index and
International Equity Funds, are each included on separate stand alone
financial statements.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Equity Funds in preparation of the financial statements. The policies are
in conformity with generally accepted accounting principles for investment
companies. Following generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments
The Equity Funds value investment securities at market value which is
determined by a pricing service based upon quoted market prices or dealer
quotes. Securities for which market prices or dealer quotes are not readily
available are valued by the investment advisor, NBD Bank (NBD) in accordance
with procedures approved by the Board of Trustees.
Investment security purchases and sales are accounted for on the day
after trade date.
Woodward invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD, acting under the supervision of the Board
of Trustees, has established the following additional policies and procedures
relating to Woodward's investments in securities subject to repurchase
agreements: 1) the value of the underlying collateral is required to equal or
exceed 102% of the funds advanced under the repurchase agreement including
accrued interest; 2) collateral is marked to market daily by NBD to assure its
value remains at least equal to 102% of the repurchase agreement amount; and
3) funds are not disbursed by Woodward or its agent unless collateral is
presented or acknowledged by the collateral custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments. Bond
premiums and discounts are amortized/accreted as required by the Internal
Revenue Code. Premiums and discounts on mortgage-backed securities are
amortized/accreted using the effective interest rate method. As prepayments on
the underlying mortgages increase or decrease the expected life, the yield is
adjusted to amortize/accrete the security to its new expected life. Dividends
are recorded on the ex-dividend date.
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to
its shareholders. Therefore, no federal income tax provision is required in
the accompanying financial statements.
Net realized gains differ for financial statement and tax purposes
primarily because of the recognition of wash sale transactions and
post-October 31 capital losses. Also, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed may differ
from the year that the income or realized gains were recorded by the Fund.
Certain book-to-tax timing differences for the funds are reflected as excess
distributions in the Statements of Changes in Net Assets. These distributions
do not constitute a tax return of capital.
Shareholder Dividends
Dividends from net investment income are declared and paid quarterly by
the Equity Funds. Net realized capital gains are distributed annually.
Distributions from net investment income and net realized gains are made
during each year to avoid the 4% excise tax imposed on regulated investment
companies by the Internal Revenue Code.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of each series.
Expenses
Expenses are charged daily as a percentage of the respective Fund's net
assets. Woodward monitors the rate at which expenses are charged to ensure
that a proper amount of expense is charged to income each year. This
percentage is subject to revision if there is a change in the estimate of the
future net assets of Woodward or a change in expectations as to the level of
actual expenses.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Pursuant to
their Distribution Agreement with Woodward, FoM is entitled to receive a fee
at the annual rate of .005% of the Equity Funds' average net assets and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of Woodward's investment portfolios attributable to
investments by clients of Essex.
NBD is the investment advisor pursuant to the Advisory Agreement. For
its advisory services to Woodward, NBD is entitled to a fee, computed daily
and payable monthly. Under the Advisory Agreement, NBD also provides Woodward
with certain administrative services, such as maintaining Woodward's general
ledger and assisting in the preparation of various regulatory reports. NBD
receives no additional compensation for such services.
A reorganization of Woodward and The Prairie Funds is being considered
by the Board of Trustees of both funds. In connection with the proposed
reorganization, the Board of Trustees of Woodward and the Board of Trustees of
Prairie must approve certain reorganization agreements. The transaction is
intended to be effected as a tax-free reorganization under the Internal
Revenue Code, so that none of the Funds' shareholders will recognize taxable
gains or losses as a result of the reorganization. A proxy
statement/prospectus describing the reorganization and the reasons therefore
will be sent to shareholders.
NBD, FoM, and Essex have agreed that they may waive their fees in whole
or in part; and, if in part, may specify the particular fund to which such
waiver relates as may be required to satisfy any expense limitation imposed by
state securities laws or other applicable laws. At present, no restrictive
expense limitation is imposed on Woodward. Restrictive limitations could be
imposed as a result of changes in current state laws and regulations in those
states where Woodward has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations. For the period ended December 31, 1995, NBD reimbursed the
Capital Growth Fund and Balanced Fund for certain expenses in the amounts of
$58,424 and $136,954, respectively.
NBD is also compensated for its services as Woodward's Custodian,
Transfer Agent and Dividend Disbursing Agent, and is reimbursed for certain
out of pocket expenses incurred on behalf of Woodward.
<PAGE>
On March 10, 1994, Woodward adopted The Woodward Funds Deferred
Compensation Plan (the "Plan"), an unfunded, nonqualified deferred
compensation plan. The Plan allows an individual Trustee to elect to defer
receipt of all or a percentage of fees which otherwise would be payable for
services performed.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions based on the aggregate cost of investments for federal income tax
purposes, excluding short-term securities, is as follows:
<TABLE>
<CAPTION>
Growth/Value Opportunity Intrinsic Value
Fund Fund Fund
------------ ------------ ---------------
<S> <C> <C> <C>
Gross Unrealized Gains $151,285,779 $121,714,875 $ 32,487,357
Gross Unrealized Losses (11,595,221) (23,828,874) (5,683,919)
------------ ------------ ------------
$139,690,558 $ 97,886,001 $ 26,803,438
============ ============ ============
Federal Income Tax Cost $598,326,613 $545,136,639 $231,447,596
Purchases $226,974,931 $334,152,727 $100,553,869
Sales, at value $164,369,937 $305,957,872 $104,699,734
</TABLE>
<TABLE>
<CAPTION>
Capital Growth Balanced
Fund Fund
------------- --------
<S> <C> <C>
Gross Unrealized Gains $ 36,159,065 $10,960,819
Gross Unrealized Losses (3,710,820) (1,616,652)
------------ -----------
$ 32,448,245 $ 9,344,167
============ ===========
Federal Income Tax Cost $164,013,755 $83,748,605
Purchases $ 94,109,852 $38,447,984
Sales, at value $ 9,347,828 $20,747,860
</TABLE>
<PAGE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee
rates payable to NBD, and amounts paid to NBD, FoM, and Essex pursuant to the
agreements described in Note 3 for the year ended December 31, 1995. The rates
shown are stated as a percentage of each fund's average net assets.
<TABLE>
<CAPTION>
Growth/Value Opportunity Intrinsic Value
Effective Date Fund Fund Fund
-------------- ------------ ----------- --------------
<S> <C> <C> <C>
Expense Rates:
January 1 0.84% 0.90% 0.91%
August 9 0.83% 0.88% 0.90%
November 9 0.83% 0.86% 0.90%
NBD Advisory Fee:
January 1 0.75% 0.75% 0.75%
Amounts Paid:
Advisory Fee to NBD $4,951,664 $4,490,930 $1,817,833
Distribution Fees to FoM & Essex $ 67,240 $ 80,463 $ 24,640
Other Fees & Out of Pocket Expenses to NBD $ 183,590 $ 247,535 $ 85,169
</TABLE>
<TABLE>
<CAPTION>
Capital Growth Balanced
Effective Date Fund Fund
-------------- -------------- --------
<S> <C> <C>
Expense Rates:
January 1 0.85% 0.87%
March 21 0.85% 0.90%
August 9 0.85% 0.90%
November 9 0.87% 0.92%
NBD Advisory Fee:
January 1 0.75% 0.75%
Amounts Paid:
Advisory Fee to NBD $1,064,273 $ 570,525
Distribution Fees to FoM & Essex $ 9,455 $ 11,148
Other Fees & Out of Pocket
Expenses to NBD $ 44,622 $ 93,196
Expense Reimbursements by NBD $ (58,424) $(136,954)
</TABLE>
<PAGE>
THE WOODWARD FUNDS
EQUITY FUNDS
FINANCIAL HIGHLIGHTS
The Financial Highlights present a per share analysis of how the Equity
Funds' net asset values have changed during the periods presented. Additional
quantitative measures expressed in ratio form analyze important relationships
between certain items presented in the financial statements. These financial
highlights have been derived from the financial statements of the Equity Funds
and other information for the periods presented.
<TABLE>
<CAPTION>
Growth/Value Fund
Year Ended Year Ended Year Ended Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.67 $ 11.16 $ 10.51 $ 9.86 $ 10.00
Income from investment operations:
Net investment income 0.21 0.23 0.20 0.22 0.14
Net realized and unrealized
gains (losses) on investments 2.76 (0.17) 1.24 0.75 (0.14)
------------ ------------ ------------ ------------ ------------
Total from investment operations 2.97 0.06 1.44 0.97 --
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment income (0.22) (0.21) (0.20) (0.22) (0.14)
From realized gains (0.26) (0.30) (0.59) (0.10) --
In excess of realized gains -- (0.01) -- -- --
Tax return of capital -- (0.03) -- -- --
------------ ------------ ------------ ------------ ------------
Total distributions (0.48) (0.55) (0.79) (0.32) (0.14)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 13.16 $ 10.67 $ 11.16 $ 10.51 $ 9.86
============ ============ ============ ============ ============
Total Return (b) 28.04% 0.55% 13.79% 9.87% 0.17%(a)
Ratios/Supplemental Data
Net assets, end of period $737,167,067 $571,370,711 $429,635,045 $287,344,809 $238,085,630
Ratio of expenses to average net assets 0.84% 0.84% 0.83% 0.83% 0.85%(a)
Ratio of net investment income to
average net assets 1.73% 2.07% 1.84% 2.20% 2.56%(a)
Portfolio turnover rate 26.80% 28.04% 42.31% 16.28% 0.94%
<FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
Opportunity Fund
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.34 $ 14.49 $ 12.37 $ 10.40 $ 10.00
Income from investment operations:
Net investment income 0.06 0.07 0.10 0.11 0.09
Net realized and unrealized gains
losses) on investments 2.57 (0.54) 2.87 2.43 0.43
------------ ------------ ------------ ------------ ------------
Total from investment operations 2.63 (0.47) 2.97 2.54 0.52
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment income (0.06) (0.07) (0.10) (0.11) (0.09)
From realized gains (0.76) (0.49) (0.75) (0.46) (0.03)
In excess of realized gains -- (0.02) -- -- --
Tax return of capital -- (0.10) -- -- --
------------ ------------ ------------ ------------ ------------
Total distributions (0.82) (0.68) (0.85) (0.57) (0.12)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 15.15 $ 13.34 $ 14.49 $ 12.37 $ 10.40
============ ============ ============ ============ ============
Total Return (b) 19.88% (3.27%) 24.01% 24.56% 8.92%(a)
Ratios/Supplemental Data
Net assets, end of period $650,952,268 $524,999,120 $365,664,513 $166,423,073 $108,046,450
Ratio of expenses to average net assets 0.89% 0.90% 0.86% 0.84% 0.84%(a)
Ratio of net investment income
to average net assets 0.37% 0.53% 0.71% 1.09% 1.56(a)
Portfolio turnover rate 53.55% 37.51% 33.99% 34.44% 2.92%
Average commission rate $ 0.04
</TABLE>
<TABLE>
<CAPTION>
Intrinsic Value Fund
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.48 $ 11.05 $ 10.40 $ 9.89 $ 10.00
Income from investment operations:
Net investment income 0.29 0.31 0.29 0.29 0.17
Net realized and unrealized gains
(losses) on investments 2.24 (0.38) 1.23 1.14 (0.02)
------------ ------------ ------------ ------------ ------------
Total from investment operations 2.53 (0.07) 1.52 1.43 0.15
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment income (0.30) (0.30) (0.28) (0.28) (0.17)
From realized gains (0.82) (0.20) (0.59) (0.64) (0.09)
------------ ------------ ------------ ------------ ------------
Total distributions (1.12) (0.50) (0.87) (0.92) (0.26)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 11.89 $ 10.48 $ 11.05 $ 10.40 $ 9.89
============ ============ ============ ============ ===========
Total Return (b) 24.38% (0.60%) 14.71% 2.70%(a)
Ratios/Supplemental Data
Net assets, end of period $255,884,859 $220,028,096 $192,555,183 $107,260,873 $77,450,163
Ratio of expenses to average net assets 0.91% 0.91% 0.86% 0.84 0.84%(a)
Ratio of net investment income
to average net assets 2.49% 2.92% 2.67% 2.78% 3.03%(a)
Portfolio turnover rate 45.55% 58.62% 63.90% 48.52% 1.80%
Average commission rate $ 0.03
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Capital Growth Fund Balanced Fund
----------------------------- -----------------------------
Year Ended Period Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.44 $ 10.00 $ 9.53 $ 10.00
Income from investment operations:
Net investment income 0.08 0.05 0.35 0.28
Net realized and unrealized gains
(losses) on investments 2.93 0.43 1.83 (0.48)
------------ ----------- ----------- -----------
Total from investment operations 3.01 0.48 2.18 (0.20)
------------ ----------- ----------- -----------
Less distributions:
From net investment income (0.08) (0.04) (0.35) (0.27)
From realized gains (0.11) -- (0.12) --
------------ ----------- ----------- -----------
Total distributions (0.19) (0.04) (0.47) (0.27)
------------ ----------- ----------- -----------
Net asset value, end of period $ 13.26 $ 10.44 $ 11.24 $ 9.53
============ =========== =========== ===========
Total Return (b) 28.90% 9.62%(a) 23.18% (1.95)%
Ratios/Supplemental Data
Net assets, end of period $195,861,178 $81,269,604 $93,623,801 $54,167,192
Ratio of expenses to average net assets 0.86% 0.85%(a) 0.91% 0.85%
Ratio of net investment income to
average net assets 0.65% 1.25%(a) 3.40% 3.41%
Ratio of expenses to average net assets
without fee waivers/ reimbursed expenses 0.90% 0.95%(a) 1.09% 1.56%
Ratio of net investment income to
average net assets without fee waivers/
reimbursed expenses 0.61% 1.15%(a) 3.22% 2.70%
Portfolio turnover rate 6.97% 3.29% 31.76% 37.49%
Average commission rate $ 0.04 $ 0.05
<FN>
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward Equity Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the Equity Funds of THE WOODWARD
FUNDS (comprising, as indicated in Note 1, the Growth/Value, Opportunity,
Intrinsic Value, Capital Growth and Balanced Funds) as of December 31, 1995,
and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods from
inception (as indicated in Note 1) through December 31, 1995. 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 audits to
obtain reasonable assurance about whether the financial statements and
financial highlights 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 physical counts and
confirmation of securities owned as of December 31, 1995, by inspection and
correspondence with custodians, banks 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective funds constituting the Equity Funds of The
Woodward Funds as of December 31, 1995, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended and the financial highlights for each of the periods
from inception (as indicated in Note 1) through December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
<PAGE>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investment in securities:
At cost $100,165,227
============
At value (Note 2) $107,690,899
Cash 364,232
Receivable for securities sold 8,253
Unrealized appreciation on foreign exchange contracts 52
Withholding tax receivable 140,894
Income receivable 178,985
Deferred organization costs, net (Note 2) 49,159
Prepaids and other assets 27,321
------------
TOTAL ASSETS 108,459,795
------------
LIABILITIES:
Payable for securities purchased 770,234
Unrealized depreciation on foreign exchange contracts 267
Accrued investment advisory fee 67,327
Accrued distribution fees 516
Accrued custodial fee 14,528
Dividends payable 306,527
Other payables and accrued expenses 12,095
------------
TOTAL LIABILITIES 1,171,494
------------
NET ASSETS $107,288,301
============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 971,289
Additional paid-in capital 98,938,436
Accumulated undistributed net investment income 803
Accumulated undistributed net realized losses from
investments and foreign currency transactions (154,256)
Net unrealized appreciation on investments and
foreign currency translation 7,532,029
------------
TOTAL NET ASSETS $107,288,301
============
Shares of capital stock outstanding 9,712,891
============
Net asset value and redemption price per share $ 11.05
============
Maximum offering price per share $ 11.63
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<S> <C> <C>
INVESTMENT INCOME (Note 2)
Interest $ 538,478
Dividends (net of foreign taxes withheld of $98,515) 1,279,198
----------
TOTAL INVESTMENT INCOME 1,817,676
----------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 529,312
Distribution fees 4,063
Professional fees 66,313
Custodial fee 133,650
Amortization of deferred organization costs 10,714
Marketing expenses 46,449
Registration, filing fees and other expenses 77,246
Less: Expense reimbursement (51,707)
----------
NET EXPENSES 816,040
----------
NET INVESTMENT INCOME 1,001,636
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
AND FOREIGN CURRENCY:
Net realized loss on:
Investment securities (147,589)
Foreign currency transactions (475) (148,064)
---------
Net change in unrealized appreciation on:
Investment securities 7,523,087
Assets and liabilities denominated in foreign
currencies 6,376 7,529,463
--------- ----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS
AND FOREIGN CURRENCY 7,381,399
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $8,383,035
==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,001,636 $ 32,338
Net realized losses on investments and foreign
currency transactions (148,064) (2,937)
Net change in unrealized appreciation on
investments and foreign currency translation 7,529,463 2,566
------------ -----------
Net increase in net assets from operations 8,383,035 31,967
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,033,171) --
In excess of realized gains (3,255) --
------------ -----------
Total distributions (1,036,426) --
------------ -----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 74,411,073 36,626,877
Net asset value of shares issued in reinvestment of
distributions to shareholders 720,012 --
------------ -----------
75,131,085 36,626,877
Less: payments for shares redeemed (11,734,863) (113,374)
------------ -----------
Net increase in net assets from capital share
transactions 63,396,222 36,513,503
------------ -----------
NET INCREASE IN NET ASSETS 70,742,831 36,545,470
NET ASSETS:
Beginning of period 36,545,470 --
------------ -----------
End of period $107,288,301 $36,545,470
============ ===========
CAPITAL SHARE TRANSACTIONS:
Shares sold 7,102,657 3,664,087
Shares issued in reinvestment of distributions to
shareholders 65,214 --
------------ -----------
7,167,871 3,664,087
Less: shares redeemed (1,107,679) (11,388)
------------ -----------
NET INCREASE IN SHARES OUTSTANDING 6,060,192 3,652,699
------------ -----------
CAPITAL SHARES:
Beginning of period 3,652,699 --
------------ -----------
End of period 9,712,891 3,652,699
============ ===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 4.48%
Salomon Brothers, Revolving Repurchase Agreement,
5.875%, 1/3/95 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/95
through 5/15/99, all held at Chemical Bank) $4,819,555 $4,819,555
---------- ----------
(Cost $4,819,555)
Shares
------
<S> <C> <C>
COMMON STOCKS -- 95.52%
AUSTRALIA -- 2.42%
BANKS
National Australia Bank 38,710 348,421
Westpac Bank Corp 55,410 245,657
CHEMICALS
Ici Australia 11,453 87,751
CONSTRUCTION
Boral Limited 17,000 42,996
Csr Limited 27,466 89,488
Pioneer International 13,882 35,832
ENERGY & RAW MATERIALS
Broken Hill Pty 28,140 397,716
Santos Limited 33,203 97,066
FOOD & AGRICULTURE
Amcor Limited 9,799 69,247
Goodman Fielder Limited 23,031 23,128
LIQUOR & TOBACCO
Coca-Cola Amatil 14,487 115,631
Fosters Brewing Gp 22,347 36,737
MEDIA
News Corporation (Aust Listing) 37,765 201,702
News Corporation Preferred Limited Voting
Shares 30,504 142,726
MISCELLANEOUS
Pacific Dunlop Limited 44,367 103,960
NON-FERROUS METALS
Cra Limited 10,619 155,938
Mim Holding Limited 23,841 32,986
Western Mining Corp 36,388 233,866
RAILROAD & SHIPPING
Brambles Inds Ltd. 8,027 89,565
RETAIL
Coles Myer Ltd. 18,791 58,568
----------
2,608,981
----------
BELGIUM -- 4.30%
BANKS
Generale De Banque 1,300 460,514
Kredietbank 1,550 423,985
CHEMICALS
Solvay 850 459,240
ENERGY & UTILITIES
Electrabel 4,250 1,010,905
Tractebel Inv Cap 1,300 536,714
INSURANCE
Fortis Ag 3,700 450,099
Fortis Ag(VVPR) 80 9,745
INTERNATIONAL OIL
Petrofina Sa 2,160 661,305
NON-FERROUS METALS
Union Miniere * 1,804 120,761
OTHER ENERGY SOURCES
Gpe Bruxelles Lam 2,300 319,259
PRODUCER GOODS
Bekaert Sa 220 181,282
----------
4,633,809
----------
DENMARK -- 2.11%
BANKS
Den Danske Bank 3,641 251,634
Unidanmark 'A' (Reg'd) 3,535 175,417
BUSINESS MACHINE
Iss International Series 'B' 2,800 63,156
Sophus Berendsen 'B' 1,175 132,516
DRUGS & MEDICINE
Novo-Nordisk As 'B' 2,449 335,855
FOOD & AGRICULTURE
Danisco 3,695 178,689
LIQUOR & TOBACCO
Carlsberg 'A' 275 15,383
Carlsberg 'B' 2,018 112,884
RAILROAD & SHIPPING
D/S 1912 'B' 15 286,910
D/S Svendborg 'B' 9 248,475
TELEPHONE
Tele Danmark 'B' 8,786 480,378
----------
2,281,297
----------
FINLAND -- 3.55%
BANKS
Unitas Ser 'A' * 119,766 303,414
CONSTRUCTION
Metro AB 'A' 2,000 82,450
ELECTRONICS
Nokia (AB) Oy Series 'K' 18,600 736,802
Nokia (AB) Oy Series 'A' 24,500 964,876
FOOD & AGRICULTURE
Cultor Oy Series '2' 500 20,728
Cultor Oy Series '1' 2,500 103,639
INSURANCE
Pohjola Series 'B' 3,800 49,010
Sampo 'A' 2,200 118,056
NON-FERROUS METALS
Outokumpo Oy 'A' 19,500 309,880
PAPER & FOREST PRODUCTS
Kymmene Corp 12,500 331,068
Repola 23,400 441,915
PRODUCER GOODS
Kone Corp 'B' 700 58,521
RETAIL
Kesko 12,000 149,516
Stockmann Oy 'A' 1,600 91,386
TRAVEL & RECREATION
Amer Group 'A' 3,800 59,424
----------
3,820,685
----------
FRANCE -- 4.91%
BANKS
Banque National Paris 3,615 163,291
Cie De Suez 1,251 51,673
Cie Fin Paribas 'A' 2,318 127,267
Society Generale 1,829 226,270
CHEMICALS
Air Liquide ('L') 996 165,173
Rhone Poulenc Sa 'A' 5,686 121,966
CONSTRUCTION
Cie De St Gobain 1,834 203,262
Lafarge Coppee Sa (Br) 1,800 116,126
CONSUMER DURABLES
Printemps (Av) 600 119,868
DRUGS & MEDICINE
L'Oreal 985 264,056
Sanofi 2,339 150,134
ELECTRONICS
Alcatel Alsthom (Cge) 2,544 219,631
Csf (Thomson) 3,520 78,528
Legrand 500 77,295
Schneider Sa (Ex-Sp) 3,630 124,257
ENERGY & UTILITIES
Eaux (Cie Generale) 2,307 230,635
Lyonnaise Des Eaux 1,753 169,013
FOOD & AGRICULTURE
Danone (Ex Bsn) 1,520 251,138
Eridania Beghin Sa 861 147,890
Saint Louis 350 93,040
INSURANCE
Axa 1,981 133,677
INTERNATIONAL OIL
Elf Auqitaine (Soc Nat) 5,566 410,646
Total B 4,716 318,715
LIQUOR & TOBACCO
Lvmh Moet-Hennessy 2,000 417,146
Pernod-Ricard 1,114 63,395
MOTOR VEHICLES
Peugeot Sa 793 104,752
PRODUCER GOODS
Carnaud Metal Box 766 35,086
Michelin (Cgde) Class 'B' (Brwn Bds)(Reg'd) 2,150 85,861
REAL PROPERTY
Sefimeg (Reg'd) 986 65,527
RETAIL
Carrefour 586 356,006
Promodes 433 101,912
TRAVEL & RECREATION
Accor 757 98,139
----------
5,291,375
----------
GERMANY -- 4.93%
AIR TRANSPORT
Lufthansa Ag 1,707 236,739
BANKS
Bayer Vereinsbank (Var) 5,140 154,422
Deutsche Bank (Var) 10,440 496,734
Dresdner Bank (Var) 7,140 191,810
CHEMICALS
Basf (Var) 1,026 231,540
Bayer (Var) 1,100 292,662
Schering 1,350 89,888
CONSTRUCTION
Hochtief 357 152,899
ELECTRONICS
Siemens (Var) 704 387,592
SAP N/V Pref 600 91,303
ENERGY & UTILITIES
Rwe (Var) 516 188,010
Veba (Var) 10,150 435,422
INSURANCE
Munchener Ruckvers Reg Vink * 145 313,042
Allianz (Regd) 250 491,869
MOTOR VEHICLES
Daimler-Benz (Var) 384 194,243
Volkswagen (Var) 506 170,048
PRODUCER GOODS
Linde 156 92,645
Mannesmann (Var) 1,146 365,512
RETAIL
Kaufhof Holding 402 122,739
STEEL
Preussag Br (Var) 1,074 303,153
Thyssen * 716 130,917
Viag (Var) 419 173,014
----------
5,306,203
----------
HONG KONG -- 2.40%
AIR TRANSPORT
Cathay Pacific Airways 37,000 56,467
BANKS
Hang Seng Bank 39,400 352,881
ENERGY & UTILITIES
China Light & Power 34,700 159,769
Hong Kong Electric 20,000 65,572
Hong Kong & China Gas 34,800 56,035
MISCELLANEOUS
Hutchinson Whampoa 56,000 341,131
MISCELLANEOUS FINANCE
Swire Pacific 'A' 23,500 182,361
Wharf (Holding) 30,000 99,910
Wing Lung Bank 16,848 94,351
REAL PROPERTY
Cheung Kong (Holdings) 40,000 243,665
Hopewell Holdings 50,000 28,777
Hysan Development 10,000 26,449
New World Infrastr * 52 100
New World Development Co 31,366 136,710
Sun Hung Kai Properties 45,700 373,842
TELEPHONE
Hong Kong Telecomm 203,600 363,386
----------
2,581,406
----------
IRELAND -- 1.95%
BANKS
Allied Irish Banks 82,680 447,907
Bank of Ireland (Dublin Listing) 26,825 193,904
CONSTRUCTION
Crh 48,929 367,014
FOOD & AGRICULTURE
Greencore 24,349 209,568
Kerry Group 'A' 28,760 218,954
INSURANCE
Irish Life 56,656 215,211
MEDIA
Independent News 18,405 117,406
PAPER & FOREST PRODUCTS
Smurfit(Jefferson) (Dublin Listing) 139,859 329,517
----------
2,099,481
----------
JAPAN -- 30.54%
AIR TRANSPORT
Japan Airlines Co * 46,000 305,472
BANK
Asahi Bank 34,000 428,495
Bank of Tokyo 28,000 491,315
Dai-Ichi Kangyo Bank 40,000 787,190
Fuji Bank 43,000 950,445
Industrial Bank of Japan 23,000 697,904
Joyo Bank 36,000 289,671
Sakura Bank 19,000 241,295
Sumitomo Bank 37,000 785,542
Tokai Bank 25,000 349,001
BUSINESS MACHINE
Canon Inc 21,000 380,702
Fujitsu 10,000 111,486
Ricoh Co. 55,000 602,511
CHEMICALS
Asahi Chemical Industries 63,000 482,493
Dainippon Ink & Chemical 19,000 88,598
Mitsubishi Gas Chemical 19,000 85,651
Sekisui Chemical 15,000 221,034
Shin-Etsu Chemical Co. 13,000 269,700
Showa Denko Kk * 102,000 320,383
Sumitomo Chemical 92,000 459,324
Toray Industries Inc 20,000 131,845
CONSTRUCTION
Chichibu Onoda Cement 6,000 32,050
Fujita Corp 6,000 27,106
Haseko Corp 57,000 230,428
Kajima Corp 11,000 108,772
Nihon Cement Co 30,000 200,675
Obayashi Corp 8,000 63,596
Sato Kogyo Co 12,000 73,872
Sekisui House 43,000 550,258
Shimizu Corp 25,000 254,480
Taisei Corp 47,000 313,936
Toto 15,000 209,400
CONSUMER DURABLES
Matsushita Electric Industries 56,000 912,055
Sanyo Electric Co 34,000 196,119
Sharp Corp 24,000 383,901
DRUGS & MEDICINE
Daiichi Pharmacy Co 33,000 470,278
Sankyo Co 15,000 337,367
Takeda Chemical Industries 24,000 395,534
ELECTRONICS
Hitachi * 78,000 786,415
Kyocera 11,000 817,922
Mitsubishi Electric Corp 48,000 345,743
Omron Corp 17,000 392,238
ENERGY & UTILITIES
Kansai Electric Power 13,900 336,883
Osaka Gas Co 124,000 429,154
Tokyo Electric Power 36,600 979,296
Tokyo Gas Co 15,000 52,932
FOOD & AGRICULTURE
Ajinomoto Co., Inc. 36,000 401,351
Yamazaki Baking Co 14,000 260,587
INTERNATIONAL OIL
Japan Energy Corp 19,000 63,731
Nippon Oil Co 86,000 540,253
MEDIA
Dai Nippon Printing 33,000 559,855
MULTI-INDUSTRY
Itochu Corp 38,000 256,031
Marubeni Corp 68,000 368,506
Mitsubishi 26,000 320,111
Sumitomo Corp 34,000 346,092
MISCELLANEOUS FINANCE
Daiwa Securities 34,000 520,786
Mitsubishi Trust & Banking 11,000 183,419
Nomura Securities 44,000 959,752
Yamaichi Securities Co. 34,000 264,678
MOTOR VEHICLES
Honda Motor Co 27,000 557,528
Nissan Motor Co 53,000 407,449
Toyota Motor Corp 56,000 1,188,929
NON-FERROUS METALS
Mitsubishi Steel * 17,000 88,995
Tostem Corp 5,000 166,260
PAPER & FOREST PRODUCTS
Daishowa Paper Manufacturing * 13,000 100,822
Honshu Paper Co 48,000 294,091
PRODUCER GOODS
Bridgestone Corp 31,000 492,866
Komatsu 33,000 271,930
Kubota Corp 60,000 386,809
Mitsubishi Heavy Industries 79,000 630,305
Nippondenso Co 25,000 467,758
Sumitomo Heavy Industries * 83,000 298,522
Toyo Seikan Kaisha 12,000 359,471
Toyoda Auto Loom 12,000 215,217
RAILROAD & SHIPPING
Hankyu Corp * 65,000 356,029
Mitsui Osk Lines * 63,000 202,159
Nagoya Railroad Co 61,000 307,508
Tokyu Corp 47,000 332,161
REAL PROPERTY
Mitsubishi Estate 49,000 612,787
RETAIL
Ito-Yokado Co 6,000 369,941
Nichii Co 47,000 624,226
Seven-Elevan Japan Npv 7,000 494,030
STEEL
Kawasaki Steel Corp 47,000 164,030
Kobe Steel * 34,000 105,146
Nippon Steel Corp 108,000 370,638
Nkk Corp * 48,000 129,362
Sumitomo Metal Industries * 156,000 473,360
----------
32,893,948
----------
MALAYSIA -- 2.03%
AIR TRANSPORT
Malaysian Airline Systems 8,000 25,995
BANKS
Ammb Holdings Berhad 6,000 68,534
Commerce Asset Holding 5,000 25,208
Dcb Holdings Berhad 17,000 49,549
Malayan Bkg Berhad 32,000 269,723
Public Bank Berhad 14,000 19,631
Public Bank Berhad (Alien Market) 51,000 97,625
CONSTRUCTION
Hume Inds (M) Berhad 16,000 76,884
United Engineers Berhad 8,000 51,046
CONSUMER DURABLES
Tech Res Inds Berhad * 21,000 62,035
ENERGY & UTILITIES
Tenaga Nasional 74,000 291,465
FOOD & AGRICULTURE
Golden Hope Plants 31,000 51,770
Nestle Malay Berhad 2,000 14,652
LIQUOR & TOBACCO
Rothmans Pall Mall 10,000 82,319
MISCELLANEOUS
Malayan Utd Inds 28,000 22,718
MOTOR VEHICLES
Edaran Otomobil 17,000 127,890
MULTI-INDUSTRY
Sime Darby Berhad 52,200 138,780
PRODUCER GOODS
Leader Univ Holdings 41,333 94,423
RAILROAD & SHIPPING
Malaysian Int Ship (Alien Market) 22,000 57,623
REAL PROPERTY
Hong Leong Properties 7,000 7,279
TELEPHONE
Telekom Malaysia 41,000 319,744
TRAVEL & RECREATION
Landmarks Berhad 6,000 7,988
Magnum Corp Berhad 61,500 116,271
Resorts World Berhad 19,000 101,775
----------
2,180,927
----------
MEXICO -- 1.03%
BANKS
Gpo Financiero Banamex-Ac Series 'B' 13,700 22,831
Gpo Financiero Banamex-Ac Series 'L' 685 1,006
CONSTRUCTION
Cemex Sa Ser 'A' 29,937 98,692
FOOD & AGRICULTURE
Grupo Ind Bimbo Series 'A' 12,000 49,061
MEDIA
Fomento Economico Mexico Series 'B' 17,000 39,274
Grupo Televisa Ptg Certs Repr 1 A,L,D Shs 11,500 130,452
MISCELLANEOUS FINANCE
Grupo Financiero Bancomer Series 'B' 55,000 15,490
Grupo Financiero Bancomer Series 'L' 2,037 523
Grupo Carso Series 'A1' * 16,000 85,350
MULTI-INDUSTRY
Alfa Sa Series 'A' (Cpo) 3,500 44,791
NON-FERROUS METALS
Industrias Penoles 10,000 41,273
PAPER & FOREST PRODUCTS
Kimberly Clark Mexico 'A' 11,000 166,326
RETAIL
Cifra Sa De Cv 'B' * 147,000 154,542
TELEPHONE
Telefonos De Mexico Series 'L' (Ltd Voting) 162,000 258,620
----------
1,108,231
----------
NETHERLANDS -- 6.11%
AIR TRANSPORT
KLM 2,341 82,366
BANK
ABN Amro Holding 11,227 511,977
CHEMICALS
Akzo Nobel Nv 2,562 296,638
ELECTRONICS
Philips Electronic 11,082 400,974
FOOD & AGRICULTURE
Ahold (kon) Nv 4,389 179,340
Unilever Nv Cva 5,151 724,616
INSURANCE
ING Groep Nv Cva 8,743 584,689
INTERNATIONAL OIL
Royal Dutch Petroleum (Br) 16,546 2,314,186
LIQUOR & TOBACCO
Heineken Nv 1,734 307,968
MEDIA
Elsevier Nv 23,480 313,460
Wolters Kluwer Cva 2,079 196,877
PAPER & FOREST PRODUCTS
KNP BT (Kon) Nv 2,446 62,867
STEEL
Kon Hoogovens Nv Cva 1,568 52,528
TELEPHONE
Kon Ptt Nederland 15,198 552,744
----------
6,581,230
----------
NORWAY -- 3.41%
CHEMICALS
Dyno Industrier 4,900 114,786
DRUGS & MEDICINE
Hafslund Nycomed Series 'A' 10,010 262,218
Hafslund Nycomed Series 'B' 6,018 152,882
FOOD & AGRICULTURE
Orkla As 'A' 6,150 306,631
Orkla As 'B' 1,200 57,361
INSURANCE
Uni Storebrand As 'A' * 51,053 282,826
INTERNATIONAL OIL
Norsk Hydro As 35,100 1,477,812
Transocean * 14,721 255,142
PAPER & FOREST PRODUCTS
Norske Skogsindust 'A' 4,100 120,706
PRODUCER GOODS
Kvaerner As Series 'A' 5,750 203,867
Kvaerner As Series 'B' 3,900 130,867
RAILROAD & SHIPPING
Bergesen Dy As 'A' 7,100 141,599
Bergesen Dy As 'B' Non-Voting 2,400 47,105
Leif Hoegh & Co 4,600 68,441
Unitor As 4,000 55,081
----------
3,677,324
----------
SINGAPORE -- 3.35%
AIR TRANSPORT
Singapore Airlines (Alien Market) 48,000 447,943
BANK
Dev Bank Singapore (Alien Market) 35,250 438,611
Overseas Chinese Bank (Alien Market) 33,833 423,371
United Overseas Bank (Alien Market) 40,804 392,328
CONSUMER DURABLES
Jardine Matheson (Sing Quote) 2,041 13,981
LIQUOR & TOBACCO
Fraser & Neave 18,000 229,062
Straits Trading Co 36,000 84,498
MEDIA
Singapore Press Holdings (Alien Market) 16,000 282,792
MOTOR VEHICLES
Cycle & Carriage 30,000 299,053
MULTI-INDUSTRY
Straits Steamship 44,000 148,692
PRODUCER GOODS
Jurong Shipyard (Nl) 13,000 100,179
Keppel Corp 45,000 400,858
REAL PROPERTY
City Developments 37,600 273,799
Hong Kong Land Holdings (Sing Quote) 25,975 48,054
RETAIL
Dairy Farms Intl (Sing Quote) 21,831 20,084
----------
3,603,305
----------
SPAIN -- 2.31%
BANKS
Argentaria Corp Banc 3,909 161,108
Banco Bilbao Vizcaya (Reg'd) 5,568 200,568
Banco Central Hispan (Reg'd) 3,721 75,453
Banco Santander (Reg'd) 4,588 230,315
CONSTRUCTION
Fomento Const Y Contra 588 45,076
ENERGY & UTILITIES
Empresa Nac Electricid 6,839 387,285
Gas Natural Sdg Sa 1,341 208,916
Iberdrola Sa 19,807 181,227
Union Electrical Fenosa 12,958 77,973
INSURANCE
Corporation Mapfre (Reg'd) 947 53,003
INTERNATIONAL OIL
Repsol Sa 8,351 273,626
LIQUOR & TOBACCO
Tabacalera Sa Series 'A' (Reg'd) 1,599 60,630
NON-FERROUS METALS
Acerinox Sa (Reg'd) 401 40,557
PRODUCER GOODS
Zardoya-Otis 310 33,858
RAILROAD & SHIPPING
Autopistas Cesa 6,059 68,923
REAL PROPERTY
Vallehermoso Sa 2,815 52,325
TELEPHONE
Telefonica De Espana 24,037 332,867
----------
2,483,710
----------
SWITZERLAND -- 5.46%
BANKS
Cs Holding (Reg'd) 6,034 620,102
Schweiz Bangesellsch (Br) 566 614,870
Schweiz Bangesellsch (Reg'd) 252 57,380
Schweiz Bankverein (Reg'd) 700 143,267
CHEMICALS
Ciba-Geigy (Br) 120 105,332
Ciba-Geigy (Reg'd) 380 335,202
CONSTRUCTION
Holderbank Fn Glarus (Br) 135 103,833
Holderbank Fn Glarus Wts (Pur Br) * 55 50
CONSUMER DURABLES
Smh Ag Neuenburg (Reg'd) 475 62,334
Smh Ag Neuenburg (Br) 25 14,992
DRUGS & MEDICINE
Roche Holdings Genusscheine Npv 113 896,124
Roche Holdings (Br) 44 617,564
Sandoz (Reg'd) 835 766,314
ELECTRONICS
Bbc Brown Boveri (Br) 240 279,494
Sgs Holding (Br) 24 47,764
FOOD & AGRICULTURE
Merkur Hldg Ag (Reg'd) 80 17,590
Nestle Sa (Reg'd) 673 746,315
INSURANCE
Zurich Versicherun (Reg'd) 1,200 359,796
NON-FERROUS METALS
Alusuisse-Lonza Holdings (Reg'd) 108 85,788
PRODUCER GOODS
Sulzer Ag Ptg 13 6,947
----------
5,881,058
----------
UNITED KINGDOM -- 14.71%
AIR TRANSPORT
British Airways 44,575 322,505
BANKS
Abbey National 38,813 383,260
Barclays 34,087 391,104
Hsbc Holdings (UK Reg'd) 42,779 652,231
Hsbc Holdings (UK Reg'd) 24,871 388,464
LLoyds Bank 74,113 381,450
CHEMICALS
Boc Group 13,799 193,033
Imperial Chemical Industries 17,053 202,016
CONSTRUCTION
English China Clay 33,609 165,415
Rmc Group 19,470 299,571
Taylor Woodrow 91,386 166,716
DRUGS & MEDICINE
Glaxo Holdings 63,234 898,321
Smithkline Beecham/ Bec Unts (1bch 'B'
12.5P&1sbc Pfd) 22,566 245,953
Smithkline Beecham 'A' 24,860 274,043
Zeneca Group 17,984 347,908
ELECTRONICS
General Electric Co 59,140 325,964
ENERGY & UTILITIES
British Gas 123,228 485,962
National Power 34,132 238,205
Thames Water 26,744 233,358
FOOD & AGRICULTURE
Associated British Foods 33,128 189,793
Cadbury Schweppes 27,535 227,434
Kingfisher 11,117 93,551
Sainsbury (J) 32,305 197,116
Tesco 47,446 218,784
Unilever 14,698 301,910
INSURANCE
Prudential Corp 68,435 440,947
INTERNATIONAL OIL
British Petroleum 125,393 1,049,353
LIQUOR & TOBACCO
BAT Industries 67,568 595,342
Bass 24,550 274,056
Grand Metropolitan 47,103 339,333
Guinness 59,179 435,517
MEDIA
Reuters Holdings 39,031 357,537
MULTI-INDUSTRY
Hanson 107,145 320,230
Inchcape 11,605 44,865
PRODUCER GOODS
Btr * 78,087 398,873
Rolls Royce 54,712 160,548
Rtz Corp (Reg'd) 27,830 404,435
Smiths Industries 22,799 225,130
REAL PROPERTY
Mepc 15,356 94,175
RETAIL
Argos 17,988 166,452
Boots Co 16,552 150,594
Great Univ Stores 19,328 205,559
Marks & Spencer 53,864 376,332
Sears 50,391 81,367
STEEL
British Steel 37,990 95,995
TELEPHONE
British Telecom 130,594 717,771
Cable & Wireless 52,660 376,096
Vodafone Group 74,958 268,255
TRAVEL & RECREATION
Ladbroke Group 64,565 146,857
Thorn Emi 12,257 288,688
------------
15,838,374
------------
TOTAL COMMON STOCKS 102,871,344
(COST $95,345,672) ------------
TOTAL INVESTMENTS $107,690,899
(COST $100,165,227) ============
<FN>
* Non Income producing security
</TABLE>
<PAGE>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1995
Notes to Portfolio of Investments
At December 31, 1995, industry diversification of the Woodward
International Equity Fund investments was as follows:
<TABLE>
<CAPTION>
% of
Sector Diversification Investments
---------------------- -----------
<S> <C>
Banks/Finance 22.51%
Materials and Services 14.89
Consumer Non-Durables 14.01
Utilities 8.39
International Oil 6.87
Drugs and Medicine 5.96
Capital Goods 5.74
Electronics 5.73
Consumer Durables 4.52
Temporary Cash Investment 4.48
Transportation 3.47
Miscellaneous 2.33
Technology 0.59
Energy 0.51
------
Total Investments 100.00%
======
</TABLE>
<PAGE>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Funds (Woodward) was organized as a Massachusetts business
trust on April 21, 1987, and registered under the Investment Company Act of
1940, as amended, as an open-end investment company. As of December 31, 1995,
Woodward consisted of seventeen separate series. The Woodward International
Equity Fund (International Fund) commenced operations on December 3, 1994.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed
in the preparation of the financial statements. The policies are in conformity
with generally accepted accounting principles for investment companies.
Following generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investments
The International Fund values investment securities at market value
which is determined by a pricing service based upon quoted market prices or
dealer quotes at the close of the respective foreign securities exchange.
Securities for which market prices or dealer quotes are not readily available
are valued by the investment advisor, NBD Bank, (NBD) in accordance with
procedures approved by the Board of Trustees.
Investment security purchases and sales are accounted for on the day
after trade date.
Woodward invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD, acting under the supervision of the Board
of Trustees, has established the following additional policies and procedures
relating to Woodward's investments in securities subject to repurchase
agreements: 1) the value of the underlying collateral is required to equal or
exceed 102% of the funds advanced under the repurchase agreement including
accrued interest; 2) collateral is marked to market daily by NBD to assure its
value remains at least equal to 102% of the repurchase agreement amount; and
3) funds are not disbursed by Woodward or its agent unless collateral is
presented or acknowledged by the collateral custodian.
Investment Income
Interest income is recorded daily on the accrual basis. Dividends are
recorded on the ex-dividend date or upon receipt of ex-dividend notification
in the case of certain foreign securities. Investment income is recorded net
of foreign taxes withheld where recovery of such taxes is uncertain.
Forward Foreign Currency Contracts
The International Fund may enter into a forward foreign currency
contract which is an agreement between two parties to buy and sell a currency
at a set price on a future date. The market value of the contract will
fluctuate with changes in currency exchange rates. The contract is
"marked-to-market" daily using the prevailing exchange rate and the change in
market value is recorded as an unrealized gain or loss. When the contract is
closed, a realized gain or loss is recorded equal to the difference between
the value of the contract at the time it was entered into and the value at the
time it was closed.
The International Fund may enter into forward foreign currency contracts
with the objective of minimizing its risk from adverse changes in the
relationship between currencies or to enhance income. The International Fund
may also enter into a forward contract in relation to a security denominated
in a foreign currency when it anticipates receipt in a foreign currency of
dividend payments in order to "lock in" the U.S. dollar price of a security or
the U.S. dollar equivalent of such dividend payments.
These contracts involve market risk in excess of the amounts reflected
in the International Fund's Statement of Assets and Liabilities. The face or
contract amount in U.S. dollars, as reflected in Footnote 6, reflects the
total exposure the fund has in that particular currency contract. Losses may
arise due to changes in the value of the foreign currency or if the
counterparty does not perform under the contract.
Foreign Currency Translations
The accounting records of the International Fund are maintained in U.S.
dollars. Foreign currency-denominated assets and liabilities are
"marked-to-market" daily using the prevailing exchange rate and the change in
value is recorded as an unrealized gain or loss. Upon receipt or payment, a
realized gain or loss is recorded equal to the difference between the original
value and the settlement value of the asset or liability. Purchases and sales
of securities, income, and expenses are translated into U.S. dollars at
prevailing exchange rate on the respective date of the transaction.
Net realized gains and losses on foreign currency transactions represent
gains and losses from sales and maturities of forward foreign currency
contracts, disposition of foreign currencies and currency gains and losses
realized between trade and settlement dates on securities transactions and
between the ex, pay and settlement dates on dividend income. Exchange rate
fluctuations on investments are not segregated in the statement of operations
from changes arising in market price movements. The effects of changes in
foreign currency exchange rates on investments in securities are included
within the net realized gain or loss on securities sold and net unrealized
appreciation or depreciation on investment securities held.
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
Net investment income and net realized gains (losses) may differ for
financial statement and tax purposes primarily due to differing treatments for
foreign currency transactions, wash sales and post October 31 capital losses.
Also, due to the timing of dividend distributions, the fiscal year in which
amounts are distributed may differ from the year that the net investment
income or realized gains (losses) were recorded by the Fund. Certain
book-to-tax timing differences for the Fund are reflected as excess
distributions in the Statement of Changes in Net Assets. These distributions
do not constitute a tax return of capital.
Shareholder Dividends
Dividends from net investment income are declared and paid annually. Net
realized capital gains are distributed annually. Distributions from net
investment income and net realized gains are made during each year to avoid
the 4% excise tax imposed on regulated investment companies by the Internal
Revenue Code.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of the Fund.
Expenses
Expenses are charged daily as a percentage of the Fund's assets.
Woodward monitors the rate at which expenses are charged to ensure that a
proper amount of expense is charged to income each year. This percentage is
subject to revision if there is a change in the estimate of the future net
assets of the International Fund or change in expectations as to the level of
actual expenses.
Concentration of Risk
Investing in securities of foreign issuers and currency transactions may
involve certain considerations and risks not typically associated with
investing in U.S. companies and U.S. government securities. These risks
include revaluation of currencies, adverse fluctuations in foreign currency
values and possible adverse political, social and economic developments,
including those particular to a specific industry, country or region, which
could cause the securities and their markets to be less liquid and price more
volatile than those of comparable U.S. companies and U.S. government
securities.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Pursuant to
their Distribution Agreement with Woodward, FoM is entitled to receive
a fee at the annual rate of .005% of the International Fund's average net
assets and Essex is entitled to receive a fee at the annual rate of .10% of
the aggregate average net assets of Woodward's investment portfolios,
attributable to investments by clients of Essex.
NBD is the investment advisor pursuant to the Advisory Agreement. For
its advisory services to Woodward, NBD is entitled to a fee, computed daily
and payable monthly. Under the Advisory Agreement, NBD also provides Woodward
with certain administrative services, such as maintaining Woodward's general
ledger and assisting in the preparation of various regulatory reports. NBD
receives no additional compensation for such services.
A reorganization of Woodward and The Prairie Funds is being considered
by the Board of Trustees of both funds. In connection with the proposed
reorganization, the Board of Trustees of Woodward and the Board of Trustees of
Prairie must approve certain reorganization agreements. The transaction is
intended to be effected as a tax-free reorganization under the Internal
Revenue Code, so that none of the Fund's shareholders will recognize taxable
gains or losses as a result of the reorganization. A proxy
statement/prospectus describing the reorganization and the reasons therefore
will be sent to shareholders.
NBD, FoM, and Essex have agreed that they may waive their fees in whole
or in part; and, if in part, may specify the particular fund to which such
waiver relates as may be required to satisfy any expense limitation imposed by
state securities laws or other applicable laws. At present, no restrictive
expense limitation is imposed on Woodward. Restrictive limitations could be
imposed as a result of changes in current state laws and regulations in those
states where Woodward has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations. For the year ended December 31, 1995, NBD reimbursed the
International Fund for certain expenses in the amount of $51,707.
NBD is also compensated for its services as Woodward's Custodian,
Transfer Agent and Dividend Disbursing Agent, and is reimbursed for certain
out of pocket expenses incurred on behalf of Woodward.
On March 10, 1994, Woodward adopted the Woodward Funds Deferred
Compensation Plan (the "Plan"), an unfunded, nonqualified deferred
compensation plan. The Plan allows an individual trustee to elect to defer
receipt of all or a percentage of fees which otherwise would be payable for
services performed.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
<PAGE>
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions based on the aggregate cost of investments for federal income tax
purposes, excluding short-term securities, is as follows:
<TABLE>
<S> <C>
Gross Unrealized Gains $ 10,121,293
Gross Unrealized Losses (2,595,621)
------------
$ 7,525,672
============
Federal Income Tax Cost $100,165,227
Purchases $ 65,664,939
Sales, at value $ 1,353,172
</TABLE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee
rates payable to NBD, and amounts paid to NBD, FoM, and Essex pursuant to the
agreements described in Note 3 for the year ended December 31, 1995. The rates
shown are stated as a percentage of the Fund's average net assets.
<TABLE>
<CAPTION>
Effective Date
- --------------
<S> <C>
Expense Rates:
January 1 1.15%
November 9 1.17%
NBD Advisory Fee:
January 1 0.75%
Amounts Paid:
Advisory Fee to NBD $529,312
Distribution Fees to FoM & Essex $ 4,063
Other
Fees & Out of Pocket Expenses to NBD $140,786
Expense reimbursements by NBD $(51,707)
</TABLE>
<PAGE>
(6) Forward Foreign Currency Contracts
As of December 31, 1995, the Fund had entered into two forward foreign
currency exchange contracts that obligate the Fund to deliver currencies at
specified future dates.
Outstanding contracts as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
U.S. Dollar U.S. Dollar
Currency To Value As Of Currency To Value as of Unrealized
Settlement Date Be Delivered Dec. 31, 1995 Be Received Dec. 31, 1995 Gain (Loss)
- --------------- ------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Jan. 2, 1996 770,501 $770,501 3,344,361 $770,234 $(267)
U.S. Dollars Finnish Marks
Jan. 3, 1996 5,349 (8,305) 8,253 (8,253) 52
G.B. Pounds U.S. Dollars
-------- -------- -----
$762,196 $761,981 $(215)
======== ======== =====
</TABLE>
<PAGE>
THE WOODWARD FUNDS
INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS
The Financial Highlights present a per share analysis of how the International
Equity Fund's net asset values have changed during the periods presented.
Additional quantitative measures expressed in ratio form analyze important
relationships between certain items presented in the financial statements.
These Financial Highlights have been derived from the financial statements of
the International Equity Fund and other information for the periods presented.
<TABLE>
<CAPTION>
Year Ended Period ended
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
Net asset value, beginning of period $ 10.01 $ 10.00
Income from investment operations:
Net investment income 0.10 0.01
Net realized and unrealized gains on investments 1.05 --
------------ -----------
Total from investment operations 1.15 0.01
------------ -----------
Less distributions:
From net investment income (0.11) --
In excess of realized gains (0.00) --
------------ -----------
Total distributions (0.11) --
------------ -----------
Net asset value, end of period $ 11.05 $ 10.01
============ ===========
Total Return (b) 11.47% 1.26%(a)
Ratios/Supplemental Data
Net assets, end of period $107,288,301 $36,545,470
Ratio of expenses to average net assets 1.16% 1.15%(a)
Ratio of net investment income to average net assets 1.43% 1.18%(a)
Ratio of expenses to average net assets without
reimbursed expenses 1.24% 1.92%(a)
Ratio of net investment income to average net assets
without reimbursed expenses 1.35% 0.41%(a)
Portfolio turnover rate 2.09% 0.30%
Average commission rate $ 0.05
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward International Equity Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of The Woodward International Equity
Fund as of December 31, 1995, and the related statement of operations for the
year then ended, the statements of changes in net assets and the financial
highlights for each of the periods from inception (as indicated in Note 1)
through December 31, 1995. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
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 and
financial highlights 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 physical counts and
confirmation of securities owned as of December 31, 1995, by inspection and
correspondence with custodians, banks 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of The Woodward International Equity Fund as of December 31, 1995,
the results of its operations for the year then ended, the changes in its net
assets and the financial highlights for each of the periods from inception (as
indicated in Note 1) through December 31, 1995 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
<PAGE>
CROSS REFERENCE SHEET
Series N Representing Interests in the
Class A and Class I Shares of the Woodward Equity Index Fund
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page................................... Cover Page
11. Table of Contents............................ Table of Contents
12. General Information and History.............. Description of Shares
13. Investment Objectives and Policies........... Investment Objective,
Policies and Risk
Factors
14. Management of Registrant..................... Management
15. Control Persons and Principal................ Description of Shares
Holders of Securities
16. Investment Advisory and Other Services....... Management
17. Brokerage Allocation and other Practices..... Investment Objective,
Policies and Risk
Factors
18. Capital Stock and Other Securities........... Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing............. Net Asset Value
of Securities Being Offered
Additional Purchase and
Redemption Information
20. Tax Status................................... Additional Information
Concerning Taxes
21. Underwriters................................. Not Applicable
22. Calculation of Performance Data.............. Additional Information
on Performance
23. Financial Statements......................... Audited Financial
Statements
-13-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 15, 1996
for
CLASS I AND CLASS A SHARES OF THE:
WOODWARD EQUITY INDEX FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Funds'
Prospectuses dated April 15, 1996 pertaining to all classes of shares of the
Equity Index Fund (the "Equity Index Portfolio" or the "Portfolio"), and is
incorporated by reference in its entirety into the Prospectuses. Because this
Additional Statement is not itself a prospectus, no investment in shares of
the Portfolio should be made solely upon the information contained herein.
Copies of the Portfolio's Prospectuses may be obtained from any office of the
Co- Distributors by writing or calling the Co-Distributors or the Trust.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objective, Policies and Risk Factors.............. 1
Additional Purchase and Redemption Information............... 7
Description of Shares........................................ 8
Additional Information Concerning Taxes...................... 10
Management................................................... 12
Independent Public Accountants............................... 17
Counsel...................................................... 17
Additional Information on Performance........................ 17
Appendix A................................................... A-1
Appendix B................................................... B-1
Report of Independent Public Accountants
and Financial Statements................................... FS-1
-i-
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The following policies supplement the Portfolio's investment
objective and policies as set forth in its Prospectuses.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolio may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for the
Portfolio.
The annualized portfolio turnover rate for the Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Portfolio to receive favorable tax treatment. Portfolio
turnover will not be a limiting factor in making portfolio decisions.
Purchases of money market instruments by the Portfolio are made
from dealers, underwriters and issuers. The Portfolio currently does not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for its own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-counter market are generally on a net basis
(i.e., without
<PAGE>
commission) through dealers, or otherwise involve transactions directly with
the issuer of an instrument.
For the fiscal years ended December 31, 1995, 1994 and 1993 and
the fiscal period ended December 31, 1992, the Equity Index Portfolio paid
brokerage commissions of $137,443, $169,830, $98,588 and $23,460,
respectively.
The Portfolio may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
The Advisory Agreement for the Portfolio provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for the Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause the
Portfolio to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either the particular transaction or the overall
responsibilities of the Adviser to the Portfolio. Such brokerage and research
services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond
and government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolio. The Trustees will
periodically review any commissions paid by the Portfolio to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolio. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised by the Adviser.
Conversely, the
-2-
<PAGE>
Portfolio may be the primary beneficiary of the research or services received
as a result of portfolio transactions effected for such other account or
investment company.
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Adviser, the
Co-Distributors or an affiliated person of any of them (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted
by the SEC or its staff. In addition, the Portfolio will not purchase
securities during the existence of any underwriting or selling group relating
thereto of which a Co-Distributor or the Adviser, or an affiliated person of
either of them, is a member, except to the extent permitted by the SEC or its
staff. Under certain circumstances, the Portfolio may be at a disadvantage
because of these limitations in comparison with other investment companies
which have similar investment objectives but are not subject to such
limitations.
Investment decisions for the Portfolio are made independently
from those of any other investment companies and accounts advised or managed
by the Adviser. Such other investment companies and accounts may also invest
in the same securities as the Portfolio. To the extent permitted by law, the
Adviser may aggregate the securities to be sold or purchased for the Portfolio
with those to be sold or purchased for other investment companies or accounts
in executing transactions. When a purchase or sale of the same security is
made at substantially the same time on behalf of one or more of the Portfolio
and another investment company or account, the transaction will be averaged as
to price and available investments allocated as to amount, in a manner which
the Adviser believes to be equitable to the Portfolio and such other
investment company or account. In some instances, this investment procedure
may adversely affect the price paid or received by the Portfolio or the size
of the position obtained or sold by the Portfolio.
Government Obligations
As stated in the Prospectuses, pursuant to its investment
objective the Portfolio may invest in U.S. Government Obligations.
Bank Obligations
In accordance with its investment objective, the Portfolio may
purchase bank obligations, which include bankers' acceptances, negotiable
certificates of deposit and non- negotiable time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions. Although the Portfolio invests in
-3-
<PAGE>
obligations of foreign banks or foreign branches of U.S. banks only where the
Adviser deems the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
Commercial paper, including variable and floating rate notes
and other short term corporate obligations, must be rated in one of the two
highest categories by at least two Rating Agencies, or if not rated, have been
issued by a corporation having an outstanding bond issue rated A or higher by
a Rating Agency. Bonds and other short term obligations (if not rated as
commercial paper) purchased by the Portfolio must be rated BBB or Baa, or
higher, by a Rating Agency, respectively, or if unrated, be of comparable
investment quality in the judgment of the Adviser.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolio, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the
Portfolio to dispose of instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
its demand rights, and the Portfolio could, for these or other reasons, suffer
a loss with respect to such instruments.
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Portfolio may invest from time to time in securities issued
by other investment companies which invest in high quality, short term debt
securities. The Portfolio intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than
5% of the value of the Portfolio's total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of the Portfolio's total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of the
outstanding
-4-
<PAGE>
voting stock of any one investment company will be owned by the Portfolio or
the Trust as a whole.
Lending Securities
When the Portfolio lends its securities, it continues to
receive interest or dividends on the securities loaned and may simultaneously
earn interest on the investment of the cash collateral. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans will be called so that the securities may be voted by the
Portfolio if a material event affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectuses generally equals the price paid by the Portfolio plus
interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the
Trust's Custodian, in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Portfolio under the 1940 Act. At the time the Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high-grade
debt securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Portfolio may
decline below the price of the securities it is obligated to repurchase.
When-Issued Purchases and Forward Commitments
The Portfolio will purchase securities on a when-issued basis
or purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however,
the Portfolio may dispose of or renegotiate a commitment after it is entered
into, and may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. In these
cases the Portfolio may realize a capital gain or loss.
-5-
<PAGE>
When the Portfolio engages in when-issued and forward
commitment transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Portfolio's incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectuses, the Portfolio is subject to the following investment limitations
which may not be changed without approval of the holders of the majority of
the outstanding shares of the Portfolio (as defined under "Miscellaneous"
below).
The Equity Index Portfolio may not:
1. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Portfolio might be deemed to
be an underwriter upon the disposition of portfolio securities acquired within
the limitation on purchases of restricted securities and except to the extent
that the purchase of obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for transactions in options on securities,
indices of securities, futures contracts and options on futures contracts.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to the Portfolio's transactions in futures
contracts and related options, and (b) the Portfolio may obtain short-term
credit as may be necessary for the clearance of purchases and sales of
portfolio securities.
6. Purchase securities of companies for the purpose of
exercising control.
-6-
<PAGE>
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that the Portfolio may,
to the extent appropriate to its investment objective, purchase publicly
traded securities of companies engaging in whole or in part in such activities
and may enter into futures contracts and related options.
In order to permit the sale of the Portfolio's shares in
certain states, the Trust may make commitments more restrictive than the
investment policies and limitations described above and in the Prospectuses.
Should the Trust determine that any such commitment is no longer in the best
interests of the Portfolio, it will revoke the commitment by terminating sales
of the Portfolio's shares in the state involved and, in the case of investors
in Texas, give notice of such action.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolio are offered and sold on a continuous
basis by the Trust's sponsors and Co-Distributors, FoM and Essex, acting as
agent. As described in the Prospectuses, Class I shares of the Portfolio are
sold primarily to NBD and its affiliated and correspondent banks acting on
behalf of their respective customers. Class A shares of the Portfolio are sold
to the public ("Investors") primarily through financial institutions such as
banks, brokers and dealers.
-7-
<PAGE>
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when:
(a) trading on the New York Stock Exchange (the "Exchange") is restricted by
applicable rules and regulations of the SEC; (b) the Exchange is closed for
other than customary weekend and holiday closings; (c) the SEC has by order
permitted such suspension; or (d) an emergency exists as determined by the
SEC. (The Trust may also suspend or postpone the recordation of the transfer
of shares upon the occurrence of any of the foregoing conditions).
In addition to the situations described in the Prospectuses
under "Redemption of Shares," the Trust may redeem shares involuntarily to
reimburse the Portfolio for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio shares as provided in the
Prospectuses from time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust, which
was amended and restated as of May 1, 1992, authorizes the Board of Trustees
to divide shares into two or more series, each series relating to a separate
portfolio of investments, and divide the shares of any series into two or more
classes. The number of shares of each series and/or of a class within each
series shall be unlimited. The Trust does not intend to issue share
certificates.
In the event of a liquidation or dissolution of the Trust or
the Portfolio, shareholders of the Portfolio would be entitled to receive the
assets available for distribution belonging to the Portfolio. If there are any
assets, income, earnings, proceeds, funds or payments, which are not readily
identifiable as belonging to any particular investment portfolio, the Trustees
shall allocate them among any one or more of the
-8-
<PAGE>
investment portfolios as they, in their sole discretion, deem fair and
equitable.
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each investment portfolio affected by the matter. A
investment portfolio is affected by a matter unless it is clear that the
interests of each investment portfolio in the matter are substantially
identical or that the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement or
any change in a fundamental investment policy would be effectively acted upon
with respect to an investment portfolio only if approved by a majority of the
outstanding shares of such portfolio. However, the Rule also provides that the
ratification of the appointment of independent accountants, the approval of
principal underwriting contracts and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting together in the
aggregate without regard to particular investment portfolio.
When used in the Prospectuses or in this Additional Statement,
a "majority" of shareholders means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust or the applicable portfolio present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy,
or (2) more than 50% of the outstanding shares of the Trust or the applicable
portfolio.
As of March 29, 1996, Trussal & Co., a nominee of NBD's Trust
Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of record
98.96% of the outstanding shares of the Portfolio. The Trustees and officers
of the Trust, as a group, owned less than 1% of the outstanding shares of the
Portfolio. Furthermore, as of March 29, 1996, the following persons may
have beneficially owned 5% or more of the outstanding shares of the Portfolio:
-9-
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Equity Index Portfolio Number of Shares Shares
- ---------------------- ---------------- -----------
<S> <C> <C>
Whirlpool 11,864,524 28.58%
2000 M-63 North
Benton Harbon, MI 49022
Oakland County Retirement 3,271,916 7.88%
System
1200 N. Telegraph
Pontiac, MI 48053
McGregor Fund 3,284,512 7.91%
333 West Fort Street
Detroit, MI 48226
Consumer Power Union Welfare
Benefit 4,235,027 10.20%
212 West Michigan Avenue
Jackson, MI 49201
</TABLE>
When issued for payment as described in the Portfolio's
Prospectuses and this Additional Statement, shares of the Portfolio will be
fully paid and non-assessable by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of duties. It also provides that all third parties shall
look solely to the Trust property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the
affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described
in the Prospectuses. No attempt is made to present a detailed explanation of
the tax treatment of the Portfolio or its shareholders, and the discussion
here and in the Prospectuses is not intended as a substitute for careful tax
planning and is based on tax laws and regulations which are in effect on the
date hereof;
-10-
<PAGE>
such laws and regulations may be changed by legislative or administrative
action. Investors are advised to consult their tax advisers with specific
reference to their own tax situations.
The Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, the Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain requirements with respect
to the source of its income for a taxable year. At least 90% of the gross
income of the Portfolio must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to the Portfolio's business of investing in such stock, securities or
currencies. The Treasury Department may by regulation exclude from qualifying
income foreign currency gains which are not directly related to the
Portfolio's principal business of investing in stock or securities, or options
and futures with respect to stock or securities. Any income derived by the
Portfolio from a partnership or trust is treated as derived with respect to
the Portfolio's business of investing in stock, securities or currencies only
to the extent that such income is attributable to items of income which would
have been qualifying income if realized by the Portfolio in the same manner as
by the partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of the Portfolio's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by the Portfolio upon maturity or
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
The Portfolio will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Portfolio's taxable year.
Shareholders should note that, upon the sale or exchange of Portfolio shares,
if the shareholder has not held such shares for at least six months, any loss
on the sale or exchange of those shares
-11-
<PAGE>
will be treated as long term capital loss to the extent of the capital gain
dividends received with respect to the shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, however, because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35% (or at a maximum effective marginal
rate of 39% in the case of corporations having taxable income between $100,000
and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Portfolio intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year
to avoid liability for this excise tax.
If for any taxable year the Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions would be taxable as ordinary income to
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits and would be eligible for the dividends received deduction for
corporations.
The Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding
by the Internal Revenue Service for failure properly to include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
Depending upon the extent of the Portfolio's activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located or in which its otherwise deemed to be
conducting business, the Portfolio may be subject to the tax laws of such
states or localities. In addition, in those states and localities which have
income tax laws, the treatment of the Portfolio and its shareholders under
such laws may differ from their treatment under federal income tax laws.
-12-
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the
Prospectuses. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
Effective May 1, 1995, each Trustee receives from the Trust and
The Woodward Variable Annuity Fund a total annual fee of $17,000 and a fee of
$2,000 for each Board of Trustees meeting attended. The Chairman is entitled
to additional compensation of $4,250 per year for his services to the Trusts
in that capacity. These fees are allocated among the investment portfolios of
the Trust and The Woodward Variable Annuity Fund based on their relative net
assets. All Trustees are reimbursed for out of pocket expenses incurred in
connection with attendance at meetings. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Trusts.
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<PAGE>
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1995:
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
- ------------------------------ --------------- --------------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee $21,250 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr., $24,437.50 $24,437.50(2)+
Chairman and President
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee $21,250 $21,250(2)+
Donald G. Sutherland, Trustee $21,250 $21,250(2)+
Donald L. Tuttle, Trustee $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
<FN>
- ---------
* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Variable Annuity Fund,
Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24,437.50, $21,500, $21,500 and
$21,500 accrued during The Woodward Funds' fiscal year ended December 31,
1995 for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and
Donald L. Tuttle, respectively.
Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectuses. For the fiscal years ended December
31, 1995, 1994 and 1993, the Trust paid NBD fees for advisory services
aggregating $411,792, $329,438 and $308,549 on behalf of the Equity Index
Portfolio.
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<PAGE>
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by the Trust. Joint purchase of investments for the
Trust and for NBD's own investment portfolio will not be made. NBD's
Commercial Banking Department may have deposit, loan and other commercial
banking relationships with issuers of securities purchased by the Trust,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of securities purchased by the Trust.
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a
pro rata share of the transaction costs incurred in making the bulk purchase.
See "Investment Objective and Policies - Portfolio Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the Trust as a result of changes in current
state laws and regulations in those states where the Trust has qualified its
shares, or by a decision of the Trustees to qualify the shares in other states
having restrictive expense limitations. To the Trust's knowledge, of the
expense limitations in effect on the date of this Additional Statement none is
more restrictive than two and one-half percent (2-1/2%) of the first $30
million of the Portfolio's average annual net assets, two percent (2%) of the
next $70 million of the average annual net assets and one and one-half percent
(1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of the Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers
of national banks. These regulations provide, in general, that
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<PAGE>
assets managed by a national bank as fiduciary may not be invested in stock or
obligations of, or property acquired from, the bank, its affiliates or their
directors, officers or employees, and further provide that fiduciary assets
may not be sold or transferred, by loan or otherwise, to the bank or persons
connected with the bank as described above.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed
to be the making of a loan to the Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Shareholder Servicing Plan
As stated in the Prospectuses for Class A Shares of the
Portfolios, the Trust may enter into Servicing Agreements with Shareholder
Servicing Agents which may include NBD and its affiliates. The Servicing
Agreements provide that the Shareholder Servicing Agents will render
shareholder administrative support services to their customers who are the
beneficial owners of Class A shares in consideration for the Portfolio's
payment of up to .25% (on an annualized basis) of the average daily net asset
value of Class A shares beneficially owned by such customers and held by the
Shareholder Servicing Agents and, at the Trust's option, it may reimburse the
Shareholder Servicing Agents' out-of-pocket expenses. Such services may
include: (i) processing dividend and distribution payments from the Portfolio;
(ii) providing information periodically to customers showing their share
positions; (iii) arranging for bank wires; (iv) responding to customer
inquiries; (v) providing subaccounting with respect to shares beneficially
owned by customers or the information necessary for such subaccounting; (vi)
forwarding shareholder communications; (vii) processing share exchange and
redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; and (ix) other similar
services requested by the Trust. Banks acting as Shareholder Servicing Agents
are prohibited from engaging in any activity primarily intended to result in
the sale of Portfolio
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<PAGE>
shares. However, Shareholder Servicing Agents other than banks may be
requested to provide marketing assistance (e.g., forwarding sales literature
and advertising to their customers) in connection with the distribution of
Portfolio shares.
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended in connection with the Trust's arrangements
with Shareholder Servicing Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Trustees").
Any material amendment to the Trust's arrangements with
Shareholder Servicing Agents under the Shareholder Servicing Agreements must
be approved by a majority of the Board of Trustees (including a majority of
the Disinterested Trustees).
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of the Portfolio, (ii)
collects and makes disbursements of money on behalf of the Portfolio, (iii)
issues and redeems shares of the Portfolio, (iv) collects and receives all
income and other payments and distributions on account of the portfolio
securities of the Portfolio, (v) addresses and mails all communications by the
Trust to its shareholders, including reports to shareholders, dividend and
distribution notices and proxy materials for any meeting of shareholders, (vi)
maintains shareholder accounts, (vii) makes periodic reports to the Trust's
Board of Trustees concerning the Trust's operations, and (viii) maintains
on-line computer capability for determining the status of shareholder
accounts.
For its services as Custodian, NBD is entitled to receive fees
from the Portfolio at the following annual rates based on the aggregate market
value of the Portfolio's portfolio securities, held as Custodian: .03% of the
first $20 million; .025% of the next $20 million; .02% of the next $20
million; .015% of the next $40 million; .0125% of the next $200 million; and
.01% of the balance over $300,000,000. NBD will receive an annual account fee
of $1,000 and $1.54 per month per asset held in the Portfolio. In addition,
NBD, as Custodian, is entitled to receive $50 for each cash statement and
inventory statement and $13 for each pass-through certificate payment, $35 for
each option transaction requiring escrow receipts and $20 for all other
security transactions.
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<PAGE>
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from the Portfolio of $11,000 and $12 annually per
account in the Portfolio for the preparation of statements of account, and
$1.00 for each confirmation of purchase and redemption transactions. Charges
for providing computer equipment and maintaining a computerized investment
system are expected to approximate $350 per month for the Portfolio.
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which act under the Distribution Agreement as sponsors and
Co-Distributors for the Trust. For the fiscal years ended December 31, 1995,
1994 and 1993, the Portfolio paid FoM for its services a fee of $20,590,
$13,455 and $30,631, respectively. For the same fiscal years, FoM incurred
expenses of $0 with respect to the Portfolio for the printing and mailing of
prospectuses to other than current shareholders. FoM was reimbursed for these
expenses. For the fiscal year ended December 31, 1995 and the fiscal period
from April 20, 1994 through December 31, 1994, Essex incurred expenses of $664
and $2,876 with respect to the Portfolio. Additional information concerning
fees for services performed by FoM and Essex, the review of such fees under
the Trust's plan for the payment of distribution expenses and the services
provided by FoM and Essex are described in the Prospectuses.
As stated in the Prospectuses, the Trust's Board of Trustees is
permitted, among other things, to allocate distribution fees which are
attributable to the Class A shares in a Portfolio exclusively to such shares.
As of the date hereof, the Board of Trustees has not exercised its discretion
to make any such allocations for the current fiscal year.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serve as auditors for the
Trust. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectuses have
been audited by Arthur Andersen LLP, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to the Trust.
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<PAGE>
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each class of shares of
the Portfolio for various periods may be quoted in advertisements, shareholder
reports or other communications to shareholders. Performance information is
generally available by calling (800)688-3350.
Total Return Calculations. The Portfolio computes its "average
annual total return" for a class by determining the average annual compounded
rates of return during specified periods that equate the initial amount
invested to the ending redeemable value of such investment. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the
number of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of
the period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, ex-
pressed in terms of years.
The Portfolio computes its aggregate total returns for each
class by determining the aggregate rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable
value of such investment. The formula for calculating aggregate total return
is as follows:
ERV
T = (------) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Portfolio's mean (or median) account size for any fees that vary
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<PAGE>
with the size of the account. The ending redeemable value (variable "ERV" in
each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the
end of the period covered by the computations. The Portfolio's average annual
total return may reflect the deduction of the maximum sales load imposed on
purchases.
For the one-year period ended December 31, 1995, the average
annual total return for the Equity Index Portfolio was 37.35%. For the same
period, the aggregate total return for the Equity Index Fund was 62.19%.
The Portfolio may also from time to time include in
advertisements, sales literature, communications to shareholders and other
materials ("Literature") total return figures that are not calculated
according to the formulas set forth above in order to compare more accurately
its performance with other measures of investment return. For example, in
comparing the Portfolio's total returns with data published by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or Weisenberger
Investment Company Service, or with the performance of an index, the Portfolio
may calculate its returns for the period of time specified in the
advertisement or communication by assuming the investment of $10,000 in shares
and assuming the reinvestment date. Percentage increases are determined by
subtracting the initial value of the investment from the ending value and by
dividing the remainder by the beginning value. The Portfolio does not, for
these purposes, deduct from the initial value invested any amount representing
sales charges. The Portfolio will, however, disclose, if applicable, the
maximum sales charge and will also disclose that the performance data does not
reflect sales charges and that inclusion of sales charges would reduce the
performance quoted.
The Portfolios may also from time to time include discussions
or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on
a Portfolio investment are reinvested by being paid in additional Portfolio
shares, any future income or capital appreciation of a Portfolio would
increase the value, not only of the original Portfolio investment, but also of
the additional Portfolio shares received through reinvestment. As a result,
the value of the Portfolio investment would increase more quickly than if
dividends or other distributions had been paid in cash.
The Portfolio may also include discussions or illustrations of
the potential investment goals of a prospective investor, investment
management strategies, techniques, policies or investment suitability of the
Portfolio (such as value investing, market timing, dollar cost averaging,
asset
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<PAGE>
allocation, constant ratio transfer, automatic accounting rebalancing, the
advantages and disadvantages of investing in tax-deferred and taxable
instruments), economic conditions, the relationship between sectors of the
economy and the economy as a whole, various securities markets, the effects of
inflation and historical performance of various asset classes, including but
not limited to, stocks, bonds and Treasury bills. From time to time
advertisements or communications to shareholders may summarize the substance
of information contained in shareholder reports (including the investment
composition of the Portfolio), as well as the view of the Trust as to current
market, economy, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to
be of relevance to the Portfolio. The Portfolio may also include in
advertisements charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Portfolio and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, treasury bills and shares of the Portfolio. In
addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in
the Portfolio and/or other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and investment alternatives to certificates of deposit and
other financial instruments. Such advertisements or communicators may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
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<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It
is, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime
rating categories.
The three rating categories of Duff & Phelps for investment
grade commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff &
Phelps employs three designations, "D- 1+," "D-1" and "D-1-," within the
highest rating category. The following summarizes the rating categories used
by Duff & Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade.
A-2
<PAGE>
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or
A-3
<PAGE>
interest of unsubordinated instruments having a maturity of one year or less
which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to
adverse developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity for
timely repayment.
"A1" - Obligations are supported by the highest capacity for
timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
A-4
<PAGE>
"B" - Obligations for which the capacity for timely repayment
is susceptible to adverse changes in business, economic or financial
conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which
are currently in default.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly 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 "C" 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.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to
A-5
<PAGE>
meet timely interest and principal payments. The "BB" rating category is also
used for debt subordinated to senior debt that is assigned an actual or
implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating 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. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest
return is indexed to
A-6
<PAGE>
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of
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projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
(P)... - When applied to forward delivery bonds, indicates that
the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes ooccur in the legal documents or the
underlying credit quality of the bonds.
The following summarizes the long-term debt ratings used by
Duff & Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but
such protection factors are still considered sufficient for prudent
investment. Considerable variability in risk is present during economic
cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
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The following summarizes the highest four ratings used by Fitch
for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the
Fitch ratings from and including "AA" to "C" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within these major
rating categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
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"AAA" - Obligations for which there is the lowest expectation
of investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one
of these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating
to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
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"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
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Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in its Prospectuses, the Equity Index Portfolio may
enter into futures contracts and related options for hedging purposes.
I. Index Futures Contracts
A stock index assigns relative values to the stocks included in
the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
The Portfolio may sell index futures contracts in order to
offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. The Portfolio may do so either to
hedge the value of its portfolio as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Portfolio may purchase index futures contracts in
anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolio may purchase such securities upon termination of
the long futures position, but a long futures position may be terminated
without a corresponding purchase of securities.
In addition, the Portfolio may utilize index futures contracts
in anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of
industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio
will decline prior to the time of sale.
Transactions in futures contracts and options may also be
desirable to hedge against a price movement in the Index at
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times when the Portfolio is not fully invested in stocks that are included in
the Index. For example, by purchasing a futures contract or option, the
Portfolio may be able to reduce the potential that cash inflows will disrupt
its ability to track the Index, since the futures contract or option may serve
as a temporary substitute for stocks which may then be purchased in an orderly
fashion. Similarly, because futures contracts and options only require a small
initial margin deposit, the Portfolio may be able, as an effective matter, to
be fully invested in the Index while keeping a cash reserve to meet potential
redemptions.
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Equity Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that
is, market value decreased and the Portfolio had entered into an anticipatory
purchase hedge, or market value increased and the Portfolio had hedged its
stock portfolio, the results of the Portfolio's transactions in stock index
futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
II. Margin Payments
Unlike when the Portfolio purchases or sells a security, no
price is paid or received by the Portfolio upon the purchase or sale of a
futures contract. Initially, the Portfolio will be required to deposit with
the broker or in a segregated account with the Portfolio's Custodian an amount
of cash or cash equivalents, the value of which may vary but is generally
equal to 10% or less of the value of the contract. This amount is known as
initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to
the Portfolio upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when the Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where the Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will
operate to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional
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cash is required to be paid by or released to the Portfolio, and the Portfolio
realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by the Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio will experience either a loss or gain on the future
which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, the Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities
being hedged if the volatility over a particular time period of the prices of
such securities has been greater than the volatility over such time period of
the future, of if otherwise deemed to be appropriate by the Adviser.
Conversely, the Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Adviser.
It is also possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the
value of securities held by the Portfolio may decline. If this occurred, the
Portfolio would lose money on the future and also experience a decline in
value in its portfolio securities.
Where futures are purchased to hedge against a possible
increase in the price of securities before the Portfolio is able to invest its
cash (or cash equivalents) in securities (or options) in an orderly fashion,
it is possible that the market may decline instead; if the Portfolio then
concludes not to invest in securities or options at that time because of
concern as to possible further market decline or for other reasons, the
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Portfolio will realize a loss on the futures contract that is not offset by a
reduction in the price of securities purchased.
In instances involving the purchase of futures contracts by the
Portfolio, an amount of cash and cash equivalents, equal to the market value
of the futures contracts (or options), will be deposited in a segregated
account with the Portfolio's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the
price of futures, a correct forecast of general market trends or interest rate
movements by the adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although
the Portfolio intends to purchase or sell futures only on exchanges or boards
of trade where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board of trade
will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures investment position, and in
the event of adverse price movements, the Portfolio would continue to be
required to make daily cash payments of variation margin. However, in the
event futures contracts have been used to hedge portfolio securities, such
securities will not be sold until the futures contract can be terminated. In
such circumstances, an increase in the price
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of the securities, if any, may partially or completely offset losses on the
futures contract. However, as described above, there is no guarantee that the
price of the securities will in fact correlate with the price movements in the
futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
Successful use of futures by the Portfolio is also subject to
the Adviser's ability to predict correctly movements in the direction of the
market. For example, if the Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
IV. Options on Futures Contracts
The Portfolio may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid
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secondary market). In addition, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased. Depending on the pricing
of the option compared to either the futures contract upon which it is based,
or upon the price of the securities being hedged, an option may or may not be
less risky than ownership of the futures contract or such securities. In
general, the market prices of options can be expected to be more volatile than
the market prices on the underlying futures contract. Compared to the purchase
or sale of futures contracts, however, the purchase of call or put options on
futures contracts may frequently involve less potential risk to the Portfolio
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). Although permitted by its fundamental investment policies,
the Portfolio does not currently intend to write futures options, and will not
do so in the future absent any necessary regulatory approvals.
V. Accounting and Tax Treatment
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by the Portfolio at the close
of the Portfolio's taxable year will be treated for federal income tax
purposes as sold for their fair market value on the last business day of such
year, a process known as "marking-to-market." Forty percent of any gain or
loss resulting from such constructive sale will be treated as short-term
capital gain or loss and 60% of such gain or loss will be treated as long-term
capital gain or loss without regard to the length of time the Portfolio holds
the futures contract ("the 40%-60% rule"). The amount of any capital gain or
loss actually realized by the Portfolio in a subsequent sale or other
disposition of those futures contracts will be adjusted to reflect any capital
gain or loss taken into account by the Portfolio in a prior year as a result
of the constructive sale of the contracts. With respect to futures contracts
to sell, which will be regarded as parts of a "mixed straddle" because their
values fluctuate inversely to the values of specific securities held by the
Portfolio, losses as to such contracts to sell will be subject to certain loss
deferral rules which limit the amount of loss currently deductible on either
part of the straddle to the amount thereof which exceeds the unrecognized gain
(if any) with respect to the other part of the straddle, and to certain wash
sales regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to
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begin prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts
to sell which are properly identified as such, the Portfolio may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the
last business day of the Portfolio's taxable year, but gains and losses will
be subject to such short sales, wash sales, loss deferral rules and the
requirement to capitalize interest and carrying charges. Under temporary
regulations, the Portfolio would be allowed (in lieu of the foregoing) to
elect either (1) to offset gains or losses from portions which are part of a
mixed straddle by separately identifying each mixed straddle to which such
treatment applies, or (2) to establish a mixed straddle account for which
gains and losses would be recognized and offset on a periodic basis during the
taxable year. Under either election, the 40%-60% rule will apply to the net
gain or loss attributable to the futures contracts, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures generally receive federal tax treatment similar to that
described above.
Certain foreign currency contracts entered into by the
Portfolio may be subject to the "marking-to-market" process and the 40%-60%
rule in a manner similar to that described in the preceding paragraph for
futures contracts. To receive such federal income tax treatment, a foreign
currency contract must meet the following conditions: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract
depends; (2) the contract must be entered into at arm's length at a price
determined by reference to the price in the interbank market; and (3) the
contract must be traded in the interbank market. The Treasury Department has
broad authority to issue regulations under the provisions respecting foreign
currency contracts. As of the date of this Additional Statement, the Treasury
Department has not issued any such regulations. Other foreign currency
contracts entered into by a Portfolio may result in the creation of one or
more straddles for federal income tax purposes, in which case certain loss
deferral, short sales, and wash sales rules and the requirement to capitalize
interest and carrying charges may apply.
As described more fully in "Additional Information Concerning
Taxes", a regulated investment company must derive less than 30% of its gross
income from gains realized on the sale or other disposition of securities and
certain other
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investments held for less than three months. With respect to futures contracts
and other financial instruments subject to the marking-to-market rules, the
Internal Revenue Service has ruled in private letter rulings that a gain
realized from such a futures contract or financial instrument will be treated
as being derived from a security held for three months or more (regardless of
the actual period for which the contract or instrument is held) if the gain
arises as a result of a constructive sale under the marking-to-market rules,
and will be treated as being derived from a security held for less than three
months only if the contract or instrument is terminated (or transferred)
during the taxable year (other than by reason of marking-to-market) and less
than three months have elapsed between the date the contract or instrument is
acquired and the termination date. In determining whether the 30% test is met
for a taxable year, increases and decreases in the value of the Portfolio's
futures contracts and other investments that qualify as part of a "designated
hedge," as defined in the Code, may be netted.
B-10
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY INDEX FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
<S> <C>
ASSETS:
Investment in securities:
At cost $404,271,461
============
At value (Note 2) $537,807,471
Receivable for shares purchased 5,500
Receivable for securities sold 276,211
Income receivable 960,384
Deferred organization costs, net (Note 2) 6,599
Prepaids and other assets 18,025
------------
TOTAL ASSETS 539,074,190
------------
LIABILITIES:
Payable for securities purchased 10,245,243
Payable for shares redeemed 174,627
Accrued investment advisory fee 43,456
Accrued distribution fees 2,173
Accrued custodial fee 8,503
Dividends payable 378,684
Other payables and accrued expenses 18,591
TOTAL LIABILITIES 10,871,277
------------
NET ASSETS $528,202,913
============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 3,733,385
Additional paid-in capital 393,359,193
Accumulated undistributed net investment income 142,278
Accumulated undistributed net realized (losses) (2,567,953)
Net unrealized appreciation on investments 133,536,010
------------
TOTAL NET ASSETS $528,202,913
============
Shares of capital stock outstanding 37,333,855
============
Net asset value and redemption price per share $ 14.15
============
Maximum offering price per share $ 14.15
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY INDEX FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
<S> <C>
INVESTMENT INCOME (Note 2):
Interest $ 104,661
Dividends 10,355,653
------------
TOTAL INVESTMENT INCOME 10,460,314
------------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 411,792
Distribution fees 21,253
Professional fees 53,872
Custodial fee 79,955
Transfer and dividend disbursing agent fees 7,135
Amortization of deferred organization costs 4,399
Marketing expenses 35,105
Registration, filing fees and other expenses 2,903
------------
TOTAL EXPENSES 616,414
------------
NET INVESTMENT INCOME 9,843,900
------------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains 4,873,484
Net change in unrealized appreciation on
investments 113,244,299
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 118,117,783
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $127,961,683
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY INDEX FUND
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 9,843,900 $ 8,937,984
Net realized gains 4,873,484 6,401,604
Net change in unrealized appreciation
(depreciation) on investments 113,244,299 (11,009,072)
------------- -------------
Net increase in net assets from operations 127,961,683 4,330,516
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income (10,140,926) (8,745,069)
From realized gains (4,873,484) (7,135,458)
In excess of realized gains (90,675) (2,477,278)
------------- -------------
Total distributions (15,105,085) (18,357,805)
------------- -------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 142,012,075 123,274,323
Net asset value of shares issued in reinvestment
of distributions to shareholders 13,655,168 17,030,652
------------- -------------
155,667,243 140,304,975
Less: payments for shares redeemed (81,128,978) (110,798,539)
------------- -------------
Net increase in net assets from capital share
transactions 74,538,265 29,506,436
------------- -------------
NET INCREASE IN NET ASSETS 187,394,863 15,479,147
NET ASSETS:
Beginning of year 340,808,050 325,328,903
------------- -------------
End of year $ 528,202,913 $ 340,808,050
============= =============
CAPITAL SHARE TRANSACTIONS:
Shares sold 10,856,382 11,159,448
Shares issued in reinvestment of distributions
to shareholders 1,022,145 1,593,566
------------- -------------
11,878,527 12,753,014
Less: shares redeemed (6,539,777) (9,938,857)
------------- -------------
NET INCREASE IN SHARES OUTSTANDING 5,338,750 2,814,157
CAPITAL SHARES:
Beginning of year 31,995,105 29,180,948
------------- -------------
End of year 37,333,855 31,995,105
============= =============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
EQUITY INDEX FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 1.92%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes,
5.50%, 11/15/98, all held at Chemical Bank) $10,340,932 $ 10,340,932
------------
(Cost $10,340,932)
Shares
------
COMMON STOCKS -- 98.08%
Aerospace -- 2.41%
Boeing Co. 39,459 3,092,599
General Dynamics Corp. 7,756 458,574
Goodrich (B.F.) Co. 2,800 190,750
Lockheed Martin Corp. 23,009 1,817,711
Loral Corp. 19,100 675,663
McDonnell Douglas Corp. 12,351 1,136,292
Northrop Grumman Corp. 4,572 292,608
Raytheon Co. 27,748 1,311,093
Rockwell International Corp. 25,129 1,328,696
Textron, Inc. 9,333 629,978
TRW, Inc. 8,170 633,174
United Technologies Corp. 14,966 1,419,898
------------
12,987,036
------------
Air Transport -- 0.38%
AMR Corp. * 10,104 750,222
Delta Air Lines, Inc. 4,609 340,490
Federal Express Corp. * 5,806 428,918
Southwest Airlines Co. 14,400 334,800
USAir Group, Inc. * 13,700 181,525
------------
2,035,955
------------
Apparel -- 0.47%
Fruit of the Loom, Inc. Class A * 7,600 185,250
Liz Claiborne, Inc. 7,712 214,008
Nike, Inc. Class B 16,012 1,114,836
Reebok International Ltd. 8,375 236,594
Russell Corp. 7,500 208,124
Spring Industries, Inc 4,400 182,050
Stride Rite Corp. 10,700 80,250
V.F. Corp. 6,348 334,856
------------
2,555,968
------------
Banks -- 6.64%
Banc One Corp. 44,743 1,689,048
Bank of Boston Corp. 13,126 607,078
Bank of New York Co., Inc. 23,190 1,130,513
BankAmerica Corp. 41,132 2,663,297
Bankers Trust New York Corp. 7,894 524,951
Barnett Banks, Inc. 12,604 743,636
Boatmens Bancshares, Inc. 15,366 628,085
Chase Manhattan Corp. 20,182 1,223,534
Chemical Banking Corp. 30,052 1,765,555
Citicorp 48,842 3,284,625
Comerica, Inc. 12,500 501,563
CoreStates Financial Corp. 13,765 521,349
Dean Witter, Discover & Co. 17,707 832,229
First Bank System, Inc. 14,360 712,615
First Chicago NBD Corp. 34,916 1,379,182
First Fidelity Bancorp 8,427 635,185
First Interstate Bancorp 8,270 1,128,855
First Union Corp. 20,814 1,157,779
Fleet Financial Group, Inc. 29,695 1,210,071
J.P. Morgan & Co., Inc. 23,022 1,847,516
KeyCorp 26,700 967,875
MBNA Corp. 19,255 710,028
Mellon Bank Corp. 18,154 975,777
National City Corp. 14,600 483,625
NationsBank Corp. 31,150 2,168,819
Norwest Corp. 42,526 1,403,358
PNC Bank Corp. 29,365 947,021
Republic NY Corp. 5,292 328,766
Suntrust Banks, Inc. 11,752 805,012
U.S. Bancorp 17,367 583,964
Wachovia Corp. 21,673 991,540
Wells Fargo & Co. 5,433 1,173,527
------------
35,725,978
------------
Business Machines -- 4.51%
Amdahl Corp. * 18,600 158,100
Apple Computer, Inc. 11,306 360,379
Autodesk, Inc. 4,800 164,400
Ceridian Corp. * 7,300 301,125
Cisco System, Inc. * 30,300 2,261,138
Compaq Computer Corp. * 30,539 1,465,872
Cray Research, Inc. * 6,500 160,875
Data General Corp. * 14,700 202,125
Digital Equipment Corp. * 15,647 1,003,364
DSC Communications Corp. * 11,450 422,219
Honeywell, Inc. 14,577 708,807
Intergraph Corp. * 14,000 220,500
International Business Machines Corp. 65,437 6,003,845
Microsoft Corp. * 68,100 5,975,775
Novell, Inc. * 37,179 529,801
Pitney Bowes, Inc. 16,721 785,887
Silicon Graphics * 21,335 586,712
Sun Microsystems, Inc. * 24,368 1,111,790
Tandem Computers, Inc. * 11,500 122,187
Xerox Corp. 12,388 1,697,155
------------
24,242,056
------------
Business Services -- 2.00%
Allergan, Inc. 6,247 203,027
Automatic Data Processing, Inc. 18,218 1,352,687
Block (H.&R.), Inc. 11,190 453,195
Browning-Ferris Industries, Inc. 21,348 629,766
Computer Associates International, Inc. 26,271 1,494,163
Computer Sciences Corp. * 5,160 362,490
Deluxe Corp. 7,609 220,661
Dial Corp. 8,718 258,271
Dun & Bradstreet Corp. 20,331 1,316,433
Ecolab, Inc. 5,746 172,380
Harland (John H.) Co. 6,200 129,425
Interpublic Group of Companies, Inc. 11,232 487,188
Laidlaw Inc., Class B 25,242 258,731
Moore Corp. Ltd. 7,228 134,622
National Service Industries, Inc. 5,000 161,875
Ogden Corp. 7,200 153,900
Shared Medical Systems, Inc. 4,900 266,438
U S West Media Group * 59,131 1,123,488
WMX Technologies, Inc. 53,154 1,587,975
------------
10,766,715
------------
Chemicals -- 2.73%
Air Products & Chemicals, Inc. 11,263 594,123
Dow Chemical Co. 30,045 2,114,417
duPont (E I) de Nemours & Co., Inc. 64,446 4,503,164
Grace (W.R.) & Co. 9,911 585,988
Great Lakes Chemical Corp. 7,468 537,696
Hercules, Inc. 11,874 669,397
Monsanto Co. 13,277 1,626,433
Morton International, Inc. 15,537 557,390
Nalco Chemical Co. 6,364 191,716
PPG Industries, Inc. 25,304 1,157,658
Praxair, Inc. 17,414 585,546
Rohm & Haas Co. 9,529 613,428
Safety Kleen Corp. 12,300 192,187
Sigma-Aldrich Corp. 4,800 237,600
Union Carbide Corp. 14,084 528,150
------------
14,694,893
------------
Construction -- 0.51%
Armstrong World Industries, Inc. 3,327 206,274
Centex Corp. (with warrants to purchase
interest in CDC L.P. Class B units and shares
Of 3333 Holdings Corp) 9,783 339,959
Crane Co. 5,200 191,750
Fluor Corp. 7,963 525,558
Masco Corp. 15,411 483,520
Owens-Corning Fiberglas Corp. * 4,189 187,982
Pulte Corp. 6,400 215,200
Sherwin Williams Co. 7,904 322,088
Stanley Works 4,942 254,513
------------
2,726,844
------------
Consumer Durables -- 0.40%
Black & Decker Corp. 8,478 298,850
Jostens, Inc. 8,100 196,425
Maytag Corp. 9,270 187,718
Newell Co. 17,640 456,435
Outboard Marine Corp. 9,000 183,375
Rubbermaid, Inc. 17,234 439,467
Whirlpool Corp. 7,503 399,534
------------
2,161,804
------------
Containers -- 0.13%
Ball Corp. 4,800 132,000
Crown Cork & Seal Co., Inc. * 10,435 435,661
Stone Container Corp. 8,382 120,491
------------
688,152
------------
Domestic Oil -- 1.13%
Amerada Hess Corp. 9,788 518,764
Ashland, Inc. 6,582 231,193
Atlantic Richfield Co. 18,776 2,079,442
Kerr-McGee Corp. 4,421 280,734
Oryx Energy Co. * 13,100 175,213
Pennzoil Co. 3,908 165,113
Phillips Petroleum Co. 30,153 1,028,970
Sun Co., Inc. 9,180 251,302
Unocal Corp. 25,256 735,581
USX-Marathon Group 31,263 609,629
------------
6,075,941
------------
Drugs and Medicine -- 10.35%
Abbott Laboratories 90,874 3,793,990
ALZA Corp. * 6,556 162,261
American Home Products Corp. 35,936 3,485,792
Amgen, Inc. * 29,188 1,733,038
Bard (C.R.), Inc. 6,300 203,175
Bausch & Lomb, Inc. 6,896 273,254
Baxter International, Inc. 31,689 1,326,977
Becton Dickinson & Co. 6,973 522,975
Beverly Enterprises, Inc. * 14,300 151,938
Biomet, Inc. * 11,900 212,712
Bristol-Myers Squibb Co. 59,742 5,130,344
Columbia/HCA Healthcare Corp. 51,766 2,627,125
Community Psychiatric Centers 16,800 205,800
Eli Lilly & Co. 65,314 3,673,913
Humana, Inc. * 16,000 438,000
Johnson & Johnson 74,480 6,377,350
Mallinckrodt Group, Inc. 10,469 380,810
Manor Care, Inc. 5,756 201,460
Medtronic, Inc. 27,732 1,549,526
Merck & Co., Inc. 141,076 9,275,747
Pall Corp. 16,845 452,709
Pfizer, Inc. 71,564 4,508,532
Pharmacia & Upjohn Co. 57,225 2,217,468
St. Jude Medical, Inc. 6,900 296,700
Schering-Plough Corp. 41,606 2,277,929
Tenet Healthcare Corp. 20,102 417,117
United Healthcare Corp. 20,100 1,316,550
United States Surgical Co. 7,300 156,036
U.S. HealthCare, Inc. 16,300 757,950
Warner Lambert Co. 15,568 1,512,041
------------
55,639,219
------------
Electronics -- 4.51%
Advanced Micro Devices, Inc. * 10,652 175,758
AMP, Inc. 22,676 870,192
Andrew Corp. * 4,050 154,913
Boston Scientific Corp. * 20,835 1,020,915
E G & G, Inc. 9,700 235,225
First Data Corp. 26,300 1,758,813
General Signal Corp. 6,453 208,916
Harris Corp. 3,007 164,258
Hewlett-Packard Co. 58,800 4,924,500
Intel Corp. 94,724 5,375,587
Johnson Controls, Inc. 3,508 241,175
LSI Logic Corp. * 14,300 468,325
Micron Technology, Inc. 22,500 891,563
Motorola, Inc. 67,810 3,865,170
National Semiconductor Corp. * 11,816 262,906
Northern Telecom Ltd. 31,505 1,354,715
Perkin Elmer Corp. 4,400 166,100
Raychem Corp. 3,881 220,732
Scientific-Atlanta, Inc. 15,100 226,500
Tektronix, Inc. 3,400 167,024
Teledyne, Inc. 6,300 161,437
Texas Instruments, Inc. 22,928 1,186,523
Thomas & Betts Corp. 2,400 177,000
------------
24,278,247
------------
Energy and Utilities -- 4.52%
American Electric Power Co., Inc. 19,165 776,183
Baltimore Gas & Electric Co. 14,831 422,684
Carolina Power & Light Co. 16,419 566,456
Central & SouthWest Corp. 19,584 545,904
CINergy Corp. 21,342 653,599
Coastal Corp. 14,683 546,942
Columbia Gas System, Inc. * 5,000 219,375
Consolidated Edison Co. of New York, Inc. 24,428 781,696
Consolidated Natural Gas Co. 13,336 605,121
Detroit Edison Co. 16,226 559,797
Dominion Resources, Inc. 21,159 872,809
Duke Power Co. 24,609 1,165,851
Enron Corp. 28,208 1,075,430
Enserch Corp. 10,100 164,125
Entergy Corp. 29,860 873,405
FPL Group, Inc. 22,855 1,059,901
General Public Utilities Corp. 11,743 399,262
Houston Industries, Inc. 33,196 805,003
Niagara Mohawk Power Corp. 17,000 163,625
Nicor, Inc. 6,100 167,750
Noram Energy Inc. 23,600 209,450
Northern States Power Co. 5,948 292,196
ONEOK Inc. 7,600 173,850
Ohio Edison Co. 13,703 322,021
PP&L Resources, Inc. 17,300 432,500
Pacific Enterprises 8,168 230,746
Pacific Gas & Electric Co. 47,730 1,354,339
PacifiCorp 37,377 794,261
Panhandle Eastern Corp. 15,080 420,355
PECO Energy Co. 22,567 679,831
Peoples Energy Corp. 6,000 190,500
Public Service Enterprise Group, Inc. 25,672 786,205
SCE Corp. 50,271 892,310
Sonat, Inc. 8,648 308,085
Southern Co. 75,746 1,865,245
Texas Utilities Co. 27,494 1,130,691
Unicom Corp. 22,576 739,363
Union Electric Co. 10,806 451,150
Williams Companies, Inc. 14,094 618,373
------------
24,316,389
------------
Energy Raw Materials -- 1.37%
Baker Hughes, Inc. 12,357 301,202
Barricks Gold Corp. 37,602 991,753
Burlington Resources, Inc. 12,952 508,366
Dresser Industries, Inc. 17,030 415,106
Eastern Enterprises 5,500 193,875
Halliburton Co. 11,218 567,911
Helmerich & Payne, Inc. 11,600 345,100
Louisiana Land & Exploration Co. 4,500 192,938
McDermott International, Inc. 9,700 213,400
Nacco Industries, Inc. Class A 2,400 133,200
Occidental Petroleum Corp. 33,871 723,993
Pittston Services Group 6,600 207,075
Rowan Companies, Inc. * 22,800 225,150
Santa Fe Energy Resources, Inc. * 19,500 187,688
Schlumberger Ltd. 27,075 1,874,944
Western Atlas, Inc. * 5,154 260,276
------------
7,341,977
------------
Food and Agriculture -- 5.84%
Archer Daniels Midland Co. 67,129 1,208,322
Campbell Soup Co. 28,867 1,732,020
Coca-Cola Co. 144,248 10,710,414
ConAgra, Inc. 28,219 1,164,034
CPC International, Inc. 16,087 1,103,970
Darden Restaurants, Inc. 15,167 180,108
Fleming Companies, Inc. 7,800 160,875
General Mills, Inc. 16,867 974,069
Heinz (H.J.) Co. 42,444 1,405,941
Hershey Foods Corp. 9,606 624,390
Kellogg Co. 25,837 1,995,908
Pepsico, Inc. 90,580 5,061,158
Pioneer Hi-Bred International, Inc. 8,826 490,946
Quaker Oats Co. 12,966 447,327
Ralston-Ralston Purina Group 11,200 698,600
Sara Lee Corp. 55,655 1,774,003
Sysco Corp. 23,827 774,378
Whitman Corp. 9,800 227,850
Wrigley (Wm.) Jr Co. 12,335 647,588
------------
31,381,901
----------
Gold -- 0.20%
Homestake Mining Co. 20,389 318,578
Placer Dome, Inc. 25,255 609,277
Santa Fe Pacific Gold Corp. 10,698 129,713
------------
1,057,568
------------
Insurance -- 3.35%
Aetna Life & Casualty Co. 12,182 843,604
Alexander & Alexander Services, Inc. 7,300 138,700
Allstate Corp. 53,240 2,189,495
American General Corp. 22,363 779,910
American International Group, Inc. 54,548 5,045,690
Chubb Corp. 10,537 1,019,455
CIGNA Corp. 8,555 883,304
General Re Corp. 9,103 1,410,965
ITT Hartford Group, Inc. * 12,269 593,513
Jefferson-Pilot Corp. 6,776 315,061
Lincoln National Corp. 10,969 589,584
Marsh & McLennan Companies, Inc. 9,432 837,090
Providian Corp. 9,897 403,303
SAFECO Corp. 17,292 596,574
St. Paul Companies 9,800 545,125
Torchmark Corp. 6,795 307,474
Transamerica Corp. 9,465 689,761
UNUM Corp. 8,400 462,000
USF&G Corp. 10,400 175,500
USLIFE Corp. 6,400 191,200
------------
18,017,308
------------
International Oil -- 6.64%
Amoco Corp. 57,118 4,105,356
Chevron Corp. 77,214 4,053,735
Exxon Corp. 142,741 11,437,123
Mobil Corp. 45,476 5,093,312
Royal Dutch Petroleum Co., N.Y. Registry 61,354 8,658,583
Texaco, Inc. 30,133 2,365,441
------------
35,713,550
------------
Liquor -- 0.71%
Anheuser-Busch Companies, Inc. 29,261 1,956,829
Brown Forman Corp. Class B 7,254 264,771
Coors (Adolph) Co. Class B 9,700 214,613
Seagram Co. Ltd. 40,159 1,390,505
------------
3,826,718
------------
Media -- 2.40%
Cabletron System, Inc. * 7,670 621,270
Capital Cities/ABC, Inc. 17,650 2,177,569
Comcast Corp., Class A Special 22,800 414,675
Donnelley (R.R.) & Sons Co. 16,445 647,522
Dow Jones & Co., Inc. 9,154 365,016
Gannett Co., Inc. 16,139 990,531
King World Productions, Inc. * 5,100 198,263
Knight-Ridder, Inc. 5,021 313,813
McGraw Hill Companies, Inc. 6,882 599,594
Meredith Corp. 5,300 221,938
New York Times Co. Class A 10,426 308,870
Tele-Communications, Inc. Class A * 75,829 1,507,102
Time Warner, Inc. 46,173 1,748,802
Times Mirror Co. Class A 11,909 403,417
Tribune Co. 8,657 529,159
Viacom, Inc. Class B Non-Voting * 39,334 1,863,447
------------
12,910,988
------------
Miscellaneous and Conglomerates -- 1.07%
Corning, Inc. 31,042 993,344
Eastman Chemical Co. 8,060 504,758
ITT Corp. 12,269 650,257
ITT Industries, Inc. 12,269 294,456
Minnesota Mining & Manufacturing Co. 50,228 3,327,605
------------
5,770,420
------------
Miscellaneous Finance -- 2.70%
Ahmanson (H.F.) & Co. 11,433 302,975
American Express Co. 54,068 2,237,064
Beneficial Corp. 5,140 239,653
Federal Home Loan Mortgage Corp. 22,200 1,853,700
Federal National Mortgage Association 31,747 3,940,596
Golden West Financial Corp. 5,715 315,754
Great Western Financial Corp. 12,328 314,364
Household International, Inc. 12,649 747,872
Merrill Lynch & Co., Inc. 20,657 1,053,507
Morgan Stanley Group, Inc. 9,300 749,813
Salomon, Inc. 10,526 373,672
Travelers Inc. 37,452 2,354,794
------------
14,483,764
------------
Motor Vehicles -- 2.32%
Chrysler Corp. 44,214 2,448,350
Cummins Engine Co., Inc. 4,300 159,100
Dana Corp. 9,124 266,877
Eaton Corp. 8,634 462,998
Echlin, Inc. 4,769 174,069
Fleetwood Enterprises, Inc. 9,100 234,325
Ford Motor Co. 120,028 3,480,812
General Motors Corp. 85,970 4,545,664
Genuine Parts Co. 16,819 689,579
------------
12,461,774
------------
Non-Durables and Entertainment -- 2.29%
American Greetings Corp. Class A 7,080 195,585
Bally Entertainment Corp. * 15,200 212,800
CUC International, Inc. * 23,850 813,881
Handleman Co. 12,600 72,450
Harcourt General, Inc. 6,876 287,933
Hasbro, Inc. 7,758 240,498
Kimberly-Clark Corp. 32,517 2,690,782
Luby's Cafeterias, Inc. 8,600 191,350
Mattel, Inc. 23,913 735,325
McDonalds Corp. 79,782 3,600,163
Oracle Systems Corp. * 49,993 2,118,453
Premark International, Inc. 5,124 259,403
Service Corp. International 13,086 575,783
Shoneys, Inc * 17,100 175,275
Wendy's International, Inc. 7,090 150,662
------------
12,320,343
------------
Non-Ferrous Metals -- 1.02%
Alcan Aluminum Ltd. 30,807 958,868
Aluminum Co. of America 19,344 1,022,814
Asarco, Inc. 5,900 188,800
Cyprus Amax Minerals Co. 8,663 226,321
Echo Bay Mines Ltd. 17,400 180,525
Engelhard Corp. 14,386 312,896
Freeport McMoran Copper Class B 21,000 590,625
Inco, Ltd. 14,174 471,285
Newmont Mining Corp. 12,482 564,811
Phelps Dodge Corp. 9,358 582,535
Reynolds Metals Co. 7,044 398,866
------------
5,498,346
------------
Optical Photographic Equipment -- 0.53%
Eastman Kodak Co. 39,041 2,615,747
Polaroid Corp. 4,396 208,261
------------
2,824,008
------------
Paper and Forest Products -- 1.16%
Bemis, Inc. 5,800 148,625
Boise Cascade Corp. 4,800 166,200
Champion International Corp. 11,355 476,910
Federal Paper Board Co., Inc. 4,900 254,188
Georgia-Pacific Corp. 11,026 756,659
International Paper Co. 32,570 1,233,589
James River Corp. of Virginia 13,338 321,779
Louisiana Pacific Corp. 10,925 264,931
Mead Corp. 5,388 281,523
Potlatch Corp. 4,400 176,000
Temple-Inland, Inc. 5,025 221,728
Union Camp Corp. 9,171 436,769
Westvaco Corp. 8,841 245,338
Weyerhaeuser Co. 21,766 941,379
Willamette Industries, Inc. 5,700 320,625
------------
6,246,243
------------
Producer Goods -- 5.35%
Alco Standard Corp. 13,466 614,386
Allied Signal, Inc. 31,748 1,508,030
Applied Materials Co. * 21,280 837,900
Avery Dennison Corp. 5,770 289,221
Briggs & Stratton Corp. 4,000 173,500
Caterpillar, Inc. 23,480 1,379,450
Cincinnati Milacron, Inc. 5,400 141,750
Cooper Industries, Inc. 10,859 399,068
Deere & Co. 32,823 1,157,011
Dover Corp. 10,862 400,536
Emerson Electric Co. 25,042 2,047,184
FMC Corp. * 5,203 351,853
Foster Wheeler Corp. 4,400 187,000
General Electric Co. 192,042 13,827,024
Giddings & Lewis, Inc. 9,200 151,800
Grainger (W.W.), Inc. 4,812 318,795
Harnischfeger Industries, Inc. 4,600 152,950
Illinois Tool Works, Inc. 13,358 788,122
Ingersoll-Rand Co. 11,162 392,065
Millipore Corp. 5,600 230,300
Navistar International * 18,600 195,300
Parker-Hannifin Corp. 5,815 199,164
Snap-On, Inc. 4,400 199,100
Tenneco, Inc. 20,242 1,004,509
Timken Co. 3,400 130,050
Trinova Corp. 4,600 131,675
Tyco International Ltd. 20,788 740,572
Varity Corp. * 3,550 131,794
Westinghouse Electric Corp. 41,470 684,255
------------
28,764,364
------------
Railroads and Shipping -- 1.05%
Burlington Northern Santa Fe 15,925 1,242,150
Conrail, Inc. 10,666 746,620
CSX Corp. 22,140 1,010,137
Norfolk Southern Corp. 13,876 1,101,408
Union Pacific Corp. 23,667 1,562,022
------------
5,662,337
------------
Retail -- 4.50%
Albertsons, Inc. 30,169 991,806
American Stores Co. 14,264 381,562
Charming Shoppes, Inc. 125,500 360,812
Circuit City Stores, Inc. 10,964 302,881
Dayton Hudson Corp. 7,044 528,300
Dillard Department Stores Class A 11,730 334,305
Federated Department Stores, Inc. * 20,400 561,000
Gap, Inc. 14,456 607,152
Giant Food, Inc. Class A 5,800 182,700
Great Atlantic & Pacific Tea Co., Inc. 9,000 207,000
Home Depot, Inc. 53,265 2,550,062
Kmart Corp. 43,988 318,913
Kroger Co. * 13,345 500,437
Limited, Inc. 35,443 615,822
Longs Drug Stores Corp. 4,500 215,437
Lowes Companies, Inc. 20,584 689,564
May Department Stores Co. 29,670 1,253,558
Melville Corp. 11,512 353,994
Mercantile Stores, Inc. 3,900 180,375
Nordstrom, Inc. 7,793 315,617
J.C. Penney & Co., Inc. 26,988 1,285,304
Pep Boys Manny Moe & Jack 7,700 197,313
Price/Costco, Inc. * 21,613 329,598
Rite-Aid Corp. 8,156 279,343
Sears, Roebuck & Co. 44,809 1,747,551
Supervalu, Inc. 6,231 196,276
Tandy Corp. 9,138 379,227
TJX Companies, Inc. 13,100 247,263
Toys R Us * 28,967 630,032
Wal Mart Stores, Inc. 263,995 5,906,888
Walgreen Co. 25,686 767,369
Winn-Dixie Stores, Inc. 17,274 636,979
Woolworth Corp. 11,464 149,032
------------
24,203,472
------------
Soaps and Cosmetics -- 2.72%
Alberto-Culver Co. Class B 6,000 206,250
Avon Products, Inc. 7,090 534,409
Clorox Co. 4,947 354,329
Colgate-Palmolive Co. 16,027 1,125,897
Gillette Co. 50,518 2,633,251
International Flavors & Fragrances, Inc. 14,843 712,464
Procter & Gamble Co. 78,887 6,547,621
Unilever N.V. 18,014 2,535,470
------------
14,649,691
------------
Steel -- 0.28%
Armco, Inc. * 36,400 213,850
Bethlehem Steel Corp. * 8,538 119,532
Inland Steel Industries, Inc. 10,972 275,672
Nucor Corp. 9,259 528,920
USX-U.S. Steel Group 7,828 240,711
Worthington Industries, Inc. 6,785 141,213
------------
1,519,898
------------
Telephone -- 8.41%
AT&T Corp. 183,000 11,849,250
AirTouch Communications, Inc. * 54,510 1,539,908
ALLTEL Corp. 24,305 716,998
Ameritech Corp. 62,912 3,711,808
Bell Atlantic Corp. 50,790 3,396,581
Bellsouth Corp. 114,250 4,969,875
GTE Corp. 111,373 4,900,412
MCI Communications Corp. 75,559 1,973,979
NYNEX Corp. 48,110 2,597,940
Pacific Telesis Group 47,110 1,584,074
SBC Communications Inc. 70,076 4,029,370
Sprint Corp. 39,565 1,577,655
Tellabs, Inc. * 8,848 327,376
US WEST Communications Group 57,731 2,063,882
------------
45,239,108
------------
Tires and Rubber Goods -- 0.20%
Cooper Tire & Rubber Co. 6,842 168,484
Goodyear Tire & Rubber Co. 19,742 895,794
------------
1,064,278
------------
Tobacco -- 2.15%
American Brands, Inc. 20,002 892,589
Loews Corp. 13,620 1,067,468
Philip Morris Companies, Inc. 96,623 8,744,382
Schweitzer Mauduit International, Inc. * 1 21
UST, Inc. 25,615 854,90
------------
11,559,360
------------
Travel and Recreation -- 0.96%
Brunswick Corp. 9,813 235,512
Disney (Walt) Co. 60,667 3,579,353
Harrahs Entertainment, Inc. 10,050 243,712
Hilton Hotels Corp. 7,883 484,804
Marriott International, Inc. 16,137 617,240
------------
5,160,621
------------
Trucking and Freight -- 0.17%
Consolidated Freightways, Inc. 6,200 164,300
PACCAR, Inc. 4,292 180,800
Roadway Services, Inc. 3,773 184,405
Ryder System, Inc. 6,199 153,425
Yellow Corp. 17,000 210,375
------------
893,305
------------
TOTAL COMMON STOCKS 527,466,539
------------
(Cost $393,930,529)
TOTAL INVESTMENTS $537,807,471
============
(Cost $404,271,461)
<FN>
* Non-income producing security
</TABLE>
<PAGE>
THE WOODWARD FUNDS
EQUITY INDEX FUND
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Funds (Woodward) was organized as a Massachusetts business
trust on April 21, 1987, and registered under the Investment Company Act of
1940, as amended, as an open-end investment company. As of December 31, 1995,
Woodward consisted of seventeen separate series. The Woodward Equity Index
Fund (Equity Index Fund) commenced operations on July 10, 1992.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Equity Index Fund in the preparation of the financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies. Following generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the 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.
Investments
The Equity Index Fund values investment securities at market value which
is determined by a pricing service based upon quoted market prices or dealer
quotes. Securities for which market prices or dealer quotes are not readily
available are valued by the investment advisor, NBD Bank (NBD) in accordance
with procedures approved by the Board of Trustees.
Investment security purchases and sales are accounted for on the day
after trade date.
Woodward invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD, acting under the supervision of the Board
of Trustees, has established the following additional policies and procedures
relating to Woodward's investments in securities subject to repurchase
agreements: 1) the value of the underlying collateral is required to equal or
exceed 102% of the funds advanced under the repurchase agreement including
accrued interest; 2) collateral is marked to market daily by NBD to assure its
value remains at least equal to 102% of the repurchase agreement amount; and
3) funds are not disbursed by Woodward or its agent unless collateral is
presented or acknowledged by the collateral custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments.
Dividends are recorded on the ex-dividend date.
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
Net realized gains differ for financial statement and tax purposes
primarily because of the recognition of wash sale transactions and
post-October 31 capital losses. Also, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed may differ
from the year that the income or realized gains were recorded by the Fund.
Certain book-to-tax timing differences for the funds are reflected as excess
distributions in the Statements of Changes in Net Assets. These distributions
do not constitute a tax return of capital.
Shareholder Dividends
Dividends from net investment income are declared and paid quarterly by
the Equity Index Fund. Net realized capital gains are distributed annually.
Distributions from net investment income and net realized gains are made
during each year to avoid the 4% excise tax imposed on regulated investment
companies
<PAGE>
by the Internal Revenue Code.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of the Equity
Index Fund.
Expenses
Expenses are charged daily as a percentage of the Fund's net assets.
Woodward monitors the rate at which expenses are charged to ensure that a
proper amount of expense is charged to income each year. This percentage is
subject to revision if there is a change in the estimate of the future net
assets of Woodward or a change in expectations as to the level of actual
expenses.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Pursuant to
their Distribution Agreement with Woodward, FoM is entitled to receive a fee
at the annual rate of .005% of the Equity Index Fund's average net assets and
Essex is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of Woodward's investment portfolios attributable to
investments by clients of Essex.
NBD is the investment advisor pursuant to the Advisory Agreement. For its
advisory services to Woodward, NBD is entitled to a fee, computed daily and
payable monthly. Under the Advisory Agreement, NBD also provides Woodward with
certain administrative services, such as maintaining Woodward's general ledger
and assisting in the preparation of various regulatory reports. NBD receives
no additional compensation for such services.
A reorganization of Woodward and The Prairie Funds is being considered by
the Board of Trustees of both funds. In connection with the proposed
reorganization, the Board of Trustees of Woodward and the Board of Trustees of
Prairie must approve certain reorganization agreements. The transaction is
intended to be effected as a tax-free reorganization under the Internal
Revenue Code, so that none of the Fund's shareholders will recognize taxable
gains or losses as a result of the reorganization. A proxy
statement/prospectus describing the reorganization and the reasons therefore
will be sent to shareholders.
NBD, FoM, and Essex have agreed that they may waive their fees in whole
or in part; and, if in part, may specify the particular fund to which such
waiver relates as may be required to satisfy any expense limitation imposed by
state securities laws or other applicable laws. At present, no restrictive
expense limitation is imposed on Woodward. Restrictive limitations could be
imposed as a result of changes in current state laws and regulations in those
states where Woodward has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations.
NBD is also compensated for its services as Woodward's Custodian,
Transfer Agent and Dividend Disbursing Agent, and is reimbursed for certain
out of pocket expenses incurred on behalf of Woodward.
On March 10, 1994, Woodward adopted The Woodward Funds Deferred
Compensation Plan (the "Plan"), an unfunded, nonqualified deferred
compensation plan. The Plan allows an individual Trustee to elect to defer
receipt of all or a percentage of fees which otherwise would be payable for
services performed.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
<PAGE>
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions, based on the aggregate cost of investments for federal income
tax purposes, excluding short-term securities, is as follows:
<TABLE>
<S> <C>
Gross Unrealized Gains $ 142,270,373
Gross Unrealized Losses (11,735,522)
-------------
$ 130,534,851
=============
Federal Income Tax Cost $ 407,272,620
Purchases $ 114,112,109
Sales $ 43,881,654
</TABLE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee rates
payable to NBD, and amounts paid to NBD, FoM, and Essex pursuant to the
agreements described in Note 3 for the year ended December 31, 1995. The rates
shown are stated as a percentage of each fund's average net assets.
<TABLE>
<CAPTION>
Effective Date
--------------
<S> <C>
Expense Rates:
January 1 0.15%
NBD Advisory Fee:
January 1 0.10%
Amounts Paid:
Advisory Fee to NBD $411,792
Distribution Fee to FoM & Essex $ 21,253
Other Fees & Out of Pocket Expenses
to NBD $ 89,143
</TABLE>
<PAGE>
THE WOODWARD FUNDS
EQUITY INDEX FUND
FINANCIAL HIGHLIGHTS
The Financial Highlights presents a per share analysis of how the Equity
Index Fund's net asset values have changed during the periods presented.
Additional quantitative measures expressed in ratio form analyze important
relationships between certain items presented in the financial statements.
These financial highlights have been derived from the financial statements of
the Equity Index Fund and other information for the periods presented.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.65 $ 11.15 $ 10.52 $ 10.00
Income from investment operations:
Net investment income 0.30 0.31 0.28 0.12
Net realized and unrealized gains (losses)
on investments 3.65 (0.20) 0.75 0.52
------------ ------------ ------------ ------------
Total from investment operations 3.95 0.11 1.03 0.64
------------ ------------ ------------ ------------
Less distributions:
From net investment income (0.31) (0.30) (0.27) (0.12)
From realized gains (0.14) (0.23) (0.13) --
In excess of realized gains (0.00) (0.08) -- --
------------ ------------ ------------ ------------
Total distributions (0.45) (0.61) (0.40) (0.12)
------------ ------------ ------------ ------------
Net asset value, end of period $ 14.15 $ 10.65 $ 11.15 $ 10.52
============ ============ ============ ============
Total Return 37.35% 1.02% 9.77% 13.61%(a)
Ratios/Supplemental Data
Net assets, end of period $528,202,913 $340,808,050 $325,328,903 $242,057,866
Ratio of expenses to average net assets 0.15% 0.17% 0.20% 0.22%(a)
Ratio of net investment income to average net
assets 2.39% 2.71% 2.59% 2.71%(a)
Portfolio turnover rate 10.66% 24.15% 16.01% 0.50%
Average commission rate $ 0.03
<FN>
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward Equity Index Fund:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of The Woodward Equity Index Fund as
of December 31, 1995, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
from inception (as indicated in Note 1) through December 31, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
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 and
financial highlights 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 physical counts and
confirmation of securities owned as of December 31, 1995, by inspection and
correspondence with custodians, banks 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of The Woodward Equity Index Fund as of December 31, 1995, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods from inception (as indicated in Note 1)
through December 31, 1995 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
<PAGE>
CROSS REFERENCE SHEET
Series K, L, and U Representing Interests in the Class A
and Class I Shares of the Woodward Intermediate Bond,
Bond and Short Bond Funds, Respectively
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page................................... Cover Page
11. Table of Contents............................ Table of Contents
12. General Information and History.............. Description of Shares
13. Investment Objectives and Policies........... Investment Objective,
Policies and Risk
Factors
14. Management of Registrant..................... Management
15. Control Persons and Principal................ Description of Shares
Holders of Securities
16. Investment Advisory and Other Services....... Management
17. Brokerage Allocation and other Practices..... Investment Objective,
Policies and Risk
Factors
18. Capital Stock and Other Securities........... Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing............. Net Asset Value
of Securities Being Offered
Additional Purchase and
Redemption Information
20. Tax Status................................... Additional Information
Concerning Taxes
21. Underwriters................................. Not Applicable
22. Calculation of Performance Data.............. Additional Information
on Performance
23. Financial Statements......................... Audited Financial
Statements
-14-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 15, 1996
for
CLASS I AND CLASS A SHARES OF THE:
WOODWARD INTERMEDIATE BOND FUND
WOODWARD BOND FUND
WOODWARD SHORT BOND FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Funds'
Prospectuses dated April 15, 1996 pertaining to all classes of shares of the
Woodward Intermediate Bond Fund (the "Intermediate Bond Portfolio"), Woodward
Bond Fund (the "Bond Portfolio") and Woodward Short Bond Fund (the "Short Bond
Portfolio") (each, a "Portfolio" and collectively, the "Portfolios"), and is
incorporated by reference in its entirety into the Prospectuses. Because this
Additional Statement is not itself a prospectus, no investment in shares of
the Portfolios should be made solely upon the information contained herein.
Copies of the Portfolios' Prospectuses may be obtained from any office of the
Co-Distributors by writing or calling the Co-Distributors or the Trust.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS....................... 1
NET ASSET VALUE........................................................ 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION......................... 15
DESCRIPTION OF SHARES.................................................. 17
MANAGEMENT............................................................. 21
INDEPENDENT PUBLIC ACCOUNTANTS......................................... 27
COUNSEL........................................................ 27
ADDITIONAL INFORMATION ON PERFORMANCE.................................. 27
APPENDIX A........................................................... A-1
APPENDIX B.............................................................B-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AND FINANCIAL
STATEMENTS............................................................FS-1
-i-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Portfolios' respective
investment objectives and policies as set forth in the Prospectuses.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolios may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for each
Portfolio.
The annualized portfolio turnover rate for each Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Portfolios to receive favorable tax treatment. Portfolio
turnover will not be a limiting factor in making portfolio decisions, and the
Portfolios may engage in short term trading to achieve their respective
investment objectives.
Purchases of money market instruments by the Portfolios are
made from dealers, underwriters and issuers. The Portfolios currently do not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-
<PAGE>
counter market are generally on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument.
For the fiscal years ended December 31, 1995, 1994, and 1993,
the Intermediate Bond and Bond Portfolios incurred no brokerage commissions,
and for the fiscal year ended December 31, 1995 and the period from September
17, 1994 (commencement of operations) through December 31, 1994, the Short
Bond Portfolio incurred no brokerage commissions.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. A Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
The Advisory Agreement for the Portfolios provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for each Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause a Portfolio
to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer
for effecting the same transaction, provided that the Adviser determines in
good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in
terms of either the particular transaction or the overall responsibilities of
the Adviser to the Portfolios. Such brokerage and research services might
consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their
comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolios. The Trustees will
periodically review any commissions paid by the Portfolios to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolios. It is
possible that certain of the supplementary research or
-2-
<PAGE>
other services received will primarily benefit one or more other investment
companies or other accounts for which investment discretion is exercised by
the Adviser. Conversely, a Portfolio may be the primary beneficiary of the
research or services received as a result of portfolio transactions effected
for such other account or investment company.
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Adviser, the
Co-Distributors or an affiliated person of any of them (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted
by the SEC or its staff. In addition, a Portfolio will not purchase securities
during the existence of any underwriting or selling group relating thereto of
which a Co-Distributor or the Adviser, or an affiliated person of either of
them, is a member, except to the extent permitted by the SEC or its staff.
Under certain circumstances, the Portfolios may be at a disadvantage because
of these limitations in comparison with other investment companies which have
similar investment objectives but are not subject to such limitations.
Investment decisions for each Portfolio are made independently
from those for the other Portfolios and for any other investment companies and
accounts advised or managed by the Adviser. Such other investment companies
and accounts may also invest in the same securities as the Portfolios. To the
extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
one or more of the Portfolios and another investment company or account, the
transaction will be averaged as to price and available investments allocated
as to amount, in a manner which the Adviser believes to be equitable to each
Portfolio and such other investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold by the Portfolio.
Government Obligations
As stated in the Prospectuses, pursuant to their investment
objectives, the Portfolios may invest in U.S.
Government Obligations.
-3-
<PAGE>
Stripped U.S. Government Obligations
Within the past several years, the Treasury Department has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve
book-entry record-keeping system. The Federal Reserve program as established
by the Treasury Department is known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities." The Portfolios may purchase
securities registered in the STRIPS program. Under the STRIPS program, the
Portfolios will be able to have their beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu
of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
In addition, the Portfolios may acquire U.S. Government
obligations and their unmatured interest coupons that have been separated
("stripped") by their holder, typically a custodian bank or investment
brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government obligations, the holder will resell the
stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate
of Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. The Trust is
not aware of any binding legislative, judicial or administrative authority on
this issue.
Bank Obligations
In accordance with their investment objectives, the Portfolios
may purchase bank obligations, which include bankers' acceptances, negotiable
certificates of deposit and non-negotiable time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions. Although the Portfolios invest in
obligations of foreign banks or foreign branches of U.S. banks
-4-
<PAGE>
only where the Adviser deems the instrument to present minimal credit risks,
such investments may nevertheless entail risks that are different from those
of investments in domestic obligations of U.S. banks due to differences in
political, regulatory and economic systems and conditions. All investments in
bank obligations are limited to the obligations of financial institutions
having more than $1.0 billion in total assets at the time of purchase.
Commercial Paper
Commercial paper, including variable and floating rate notes
and other short term corporate obligations, must be rated in one of the two
highest categories by at least two Rating Agencies, or if not rated, must have
been issued by a corporation having an outstanding bond issue rated A or
higher by a Rating Agency. Bonds and other short term obligations (if not
rated as commercial paper) purchased by the Portfolios must be rated BBB or
Baa, or higher, by a Rating Agency, respectively, or if unrated, be of
comparable investment quality in the judgment of the Adviser.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolios, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of instruments if the issuer defaulted on its payment obligation or
during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Portfolios may invest from time to time in securities issued
by other investment companies which invest in high quality, short term debt
securities. Each of the Portfolios intends to limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more
than 5% of the value of the Portfolio's total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of the Portfolio's total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio or the Trust as a whole.
-5-
<PAGE>
Lending Securities
When a Portfolio lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectuses generally equals the price paid by a Portfolio plus
interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the
Trust's Custodian, in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Portfolios under the 1940 Act. At the time a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high-grade
debt securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Portfolio may
decline below the price of the securities it is obligated to repurchase.
Futures Contracts and Related Options
See Appendix B to this Additional Statement for a discussion of
futures contracts and related options.
Options Trading
As stated in the Prospectuses, the Portfolios may purchase and
sell put and call options listed on a national securities exchange and issued
by the Options Clearing Corporation. Such transactions may be effected on a
principal basis with primary reporting dealers in U.S. Government securities
in an amount not exceeding 5% of a Portfolio's net assets. This is a highly
specialized activity which entails greater than ordinary investment risks.
Regardless of how much the market price of the underlying security increases
or decreases, the option buyer's risk is limited to the amount of the original
investment for the purchase of the option. However,
-6-
<PAGE>
options may be more volatile than the underlying securities, and therefore, on
a percentage basis, an investment in options may be subject to greater
fluctuation than an investment in the underlying securities. A listed call
option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking
the obligations under the option contract. A listed put option gives the
purchaser the right to sell to a clearing corporation the underlying security
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security. Put and call options
purchased by a Portfolio will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
A Portfolio's obligation to sell a security subject to a
covered call option written by it, or to purchase a security subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, will not be
able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Portfolio will write an option on a
particular security only if the Adviser believes that a liquid secondary
market will exist on an exchange for options of the same series which will
permit the Portfolio to make a closing purchase transaction in order to close
out its position.
When a Portfolio writes a covered call option, an amount equal
to the net premium (the premium less the commission)
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<PAGE>
received by the Portfolio is included in the liability section of the
Portfolio's statement of assets and liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked-to-market to reflect
the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a
covered call option may be offset by a decline in the market price of the
underlying security during the option period. If a covered call option is
exercised, the Portfolio may deliver the underlying security held by it or
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss. If a secured put option is
exercised, the amount paid by the Portfolio involved for the underlying
security will be partially offset by the amount of the premium previously paid
to the Portfolio. Premiums from expired options written by a Portfolio and net
gains from closing purchase transactions are treated as short-term capital
gains for federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses.
When-Issued Purchases and Forward Commitments
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities
are delivered to the Portfolio on the settlement date. In these cases the
Portfolio may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Mortgage Backed Securities
Mortgage Backed Securities Generally. Mortgage backed
securities held by the Portfolios represent an ownership interest
in a pool of residential mortgage loans. These securities are
designed to provide monthly payments of interest and principal to
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<PAGE>
the investor. The mortgagor's monthly payments to his lending institution are
"passed-through" to an investor such as the Portfolios. Most issuers or
poolers provide guarantees of payments, regardless of whether or not the
mortgagor actually makes the payment. The guarantees made by issuers or
poolers are supported by various forms of credit, collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance
purchased by the issuers or poolers so that they can meet their obligations
under the policies. Mortgage backed securities issued by private issuers or
poolers, whether or not such securities are subject to guarantees, may entail
greater risk than securities directly or indirectly guaranteed by the U.S.
Government.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid. Additional payments
are caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be
incurred. Some mortgage backed securities are described as "modified
pass-through". These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("PC's"), which represent interests in mortgages
from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers which include state and federally-chartered savings and loan
credit unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA.
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<PAGE>
The principal guarantor of mortgage-backed securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S
Government, the timely payment of principal and interest on securities issued
by approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of conventional residential mortgage
loans. Pools created by such non-governmental issuers generally offer a higher
rate of interest than government and government-related pools because there
are no direct or indirect government guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance purchased by the issuer. The insurance
and guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies.
The Trust expects that governmental or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payment may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage backed securities
are developed and offered in the market, the Trust may consider making
investments in such new types of securities.
Underlying Mortgages. Pools consist of whole mortgage loans or
participations in loans. The majority of these loans are made to purchasers of
one to four family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Intermediate
Bond and Bond Portfolios may purchase pools of variable rate mortgages
("VRM"), growing equity mortgages ("GEM"), graduated payment mortgages ("GPM")
and other types where the principal and interest payment procedures vary.
VRM's are mortgages which reset the mortgage's interest rate periodically with
changes in open market interest rates. To the extent that a Portfolio is
actually invested in VRM's, its interest income will vary with changes in the
applicable interest rate on pools of VRM's. GPM and GEM pools maintain
constant interest rates, with varying levels of principal repayment over the
life of the mortgage. These different interest and principal payment
procedures should
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<PAGE>
not impact the Portfolios' net asset value since the prices at which these
securities are valued will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included
in the pools. In addition, some mortgages included in pools are insured
through private mortgage insurance companies.
Average Life. The average life of pass-through pools varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments
is affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
Returns on Mortgage Backed Securities. Yields on mortgage
backed pass-through securities are typically quoted based on the maturity of
the underlying instruments and the associated average life assumption.
Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yields of the
Portfolios. The compounding effect from reinvestments of monthly payments
received by the Portfolios will increase their respective yields to
shareholders, compared to bonds that pay interest semi-annually.
Municipal Securities
As stated in the Prospectuses, the Portfolios may invest in
municipal securities including general obligation securities, revenue
securities, notes, and moral obligation bonds, which are normally issued by
special purpose authorities ("Municipal Securities"). There are, of course,
variations in the quality of Municipal Securities, both within a particular
classification and between classifications, and the yields on Municipal
Securities depend in part on a variety of factors, including general market
conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Municipal Securities by
Rating Agencies represent their opinions as to the quality of Municipal
Securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality, and Municipal Securities with the same
maturity, interest rate and rating may have different yields while Municipal
Securities with the same maturity and interest rate with different ratings
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<PAGE>
may have the same yield. Subsequent to its purchase by a Portfolio, a
Municipal Security may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Portfolio. The Adviser will
consider such an event in determining whether the Portfolio should continue to
hold the obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Portfolios will depend upon the ability of the
issuers to meet their obligations. The District of Columbia, each state, each
possession and territory of the United States, each of their political
subdivisions, agencies, instrumentalities and authorities and each state
agency of which a state is a member is a separate "issuer" as that term is
used in this Additional Statement and in the Prospectuses. The
non-governmental user of facilities financed by a private activity bond is
also considered to be an "issuer." An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights or remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest or principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Certain of the Municipal Securities held by the Portfolios may
be insured at the time of issuance as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
Municipal Securities at the time of original issuance. In the event that the
issuer defaults with respect to interest or principal payments, the insurer
will be notified and will be required to make payment to the bondholders.
There is, however, no guarantee that the insurer will meet its obligations. In
addition, such insurance will not protect against market fluctuations caused
by changes in interest rates and other factors.
Stand-By Commitments
Each Portfolio may acquire "stand-by commitments" with respect
to Municipal Securities it holds. Under a stand-by commitment, a dealer agrees
to purchase, at the Portfolio's option specified Municipal Securities at a
specified price. Stand-by commitments may be exercisable by the Portfolio at
any time before the maturity of the underlying Municipal Securities and may be
sold, transferred or assigned only with the instruments involved.
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<PAGE>
The Portfolios expect that stand-by commitments will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Portfolios may pay for a stand-by
commitment either separately in cash or by paying a higher price for Municipal
Securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). A Portfolio
will not acquire a stand-by commitment unless immediately after the
acquisition, with respect to 75% of its assets not more than 5% of its total
assets will be invested in instruments subject to a demand feature, including
stand-by commitments, with the same institution.
The Portfolios intend to enter into stand-by commitments only
with dealers, banks and broker-dealers which, in the Adviser's opinion,
present minimal credit risks. A Portfolio's reliance upon the credit of these
dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Portfolios in connection with a "stand-by commitment" will
not be qualitatively different from the risk of loss faced by a person that is
holding securities pending settlement after having agreed to sell the
securities in the ordinary course of business.
The Portfolios will acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a stand-by commitment will
not affect the valuation or assumed maturity of the underlying Municipal
Securities which will continue to be valued in accordance with the amortized
cost method. The actual stand-by commitment will be valued at zero in
determining net asset value. Where a Portfolio pays directly or indirectly for
a stand-by commitment, its cost will be reflected as an unrealized loss for
the period during which the commitment is held and will be reflected in
realized gain or loss when the commitment is exercised or expires.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectuses, the Portfolios are subject to the following investment
limitations which may not be changed without approval of the holders of the
majority of the outstanding shares of the affected Portfolio (as defined under
"Description of Shares" below).
None of the Portfolios may:
1. Purchase or sell real estate, except that each
Portfolio may purchase securities of issuers which deal in real
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estate and may purchase securities which are secured by interests
in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Portfolio might be deemed to be
an underwriter upon the disposition of portfolio securities acquired within
the limitation on purchases of restricted securities and except to the extent
that the purchase of obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for transactions in options on securities
or indices of securities, futures contracts and options on futures contracts,
and in the case of the Short Bond Portfolio, similar investments.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to a Portfolio's transactions in futures contracts
and related options, (b) with respect to the Short Bond Portfolio, this
investment limitation shall not apply to the Portfolio's transactions in
options on securities or indices of securities and similar instruments, and
(c) each Portfolio may obtain short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
6. Purchase securities of companies for the purpose
of exercising control.
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that (a) the
Intermediate Bond and Bond Portfolios may, to the extent appropriate to their
respective investment objectives, purchase publicly traded securities of
companies engaging in whole or in part in such activities and may enter into
futures contracts and related options, and (b) the Short Bond Portfolio may,
to the extent appropriate to its investment objective, purchase publicly
traded securities of companies engaging in whole or in part in such activities
and may enter into transactions in options on securities or indices of
securities, futures contracts, options on futures contracts and similar
instruments.
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In order to permit the sale of a Portfolio's shares in certain
states, the Trust may make commitments with respect to a Portfolio more
restrictive than the investment policies and limitations described above and
in its Prospectuses. Should the Trust determine that any such commitment is no
longer in the best interests of a particular Portfolio, it will revoke the
commitment by terminating sales of the Portfolio's shares in the state
involved and, in the case of investors in Texas, give notice of such action.
As of the date of this Additional Statement, the Trust has made no such
commitments.
NET ASSET VALUE
"Assets which belong to" a Portfolio consist of the
consideration received upon the issuance of shares of the Portfolio together
with all income, earnings, profits and proceeds derived from the investment
thereof, including any proceeds from the sale of such investments, any funds
or payments derived from any reinvestment of such proceeds, and a portion of
any general assets of the Trust not belonging to a particular investment
portfolio. Assets belonging to a Portfolio are charged with the direct
liabilities of the Trust which are normally allocated in proportion to the
relative net asset values of all of the Trust's investment portfolios at the
time of allocation. Subject to the provisions of the Declaration of Trust,
determinations by the Board of Trustees as to the direct and allocable
liabilities, and the allocable portion of any general assets, with respect to
a Portfolio are conclusive.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are offered and sold on a continuous
basis by the Trust's sponsors and Co-Distributors, FoM and Essex, acting as
agent. As described in their Prospectuses, Class I shares of the Portfolios
are sold primarily to NBD and its affiliated and correspondent banks acting on
behalf of their respective customers. Class A shares of the Portfolios are
sold to the public ("Investors") primarily through financial institutions such
as banks, brokers and dealers. The Co-Distributors may be entitled to the
payment of a sales charge on the sale of Class A shares of the Portfolios as
described in the Prospectuses.
An illustration of the computation of the public offering price
per Class A share of the Portfolios, based on the value of the Portfolios'
total net assets and total number of shares outstanding on March 15, 1996,
is as follows:
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TABLE
<TABLE>
<CAPTION>
Intermediate Short
Bond Bond Bond
Portfolio Portfolio Portfolio
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets .................... $ 395,996,370 $ 508,392,506 $ 161,880,880
--------------- --------------- ---------------
Number of Shares Outstanding .. 38,923,097 50,172,782 15,976,543
=============== =============== ===============
Net Asset Value Per Share ..... $ 10.17 $ 10.13 $ 10.13
--------------- --------------- ---------------
Sales Charge, 4.75% of
offering price (4.99%
of net asset value per
share) of Intermediate Bond
and Bond Portfolios and 3.00%
of offering price (3.099% of
net asset value per share of
Short Bond Portfolio .......... $ .51 $ .51 $ .31
--------------- --------------- ---------------
Offering Price to Public ...... $ 10.68 $ 10.64 $ 10.44
=============== =============== ===============
</TABLE>
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when:
(a) trading on the New York Stock Exchange (the "Exchange") is restricted by
applicable rules and regulations of the SEC; (b) the Exchange is closed for
other than customary weekend and holiday closings; (c) the SEC has by order
permitted such suspension; or (d) an emergency exists as determined by the
SEC. (The Trust may also suspend or postpone the recordation of the transfer
of shares upon the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectuses
under "Redemption of Shares," the Trust may redeem shares involuntarily to
reimburse the Portfolios for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio shares as provided in the
Prospectuses from time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
Total sales charges paid by shareholders of the Intermediate
Bond, Bond and Short Bond Portfolios for the fiscal
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year ended December 31, 1995 were $7,877, $30,433 and $2,848, respectively.
Total sales charges paid by shareholders of the Intermediate Bond, Bond and
Short Bond Portfolios for the fiscal year ended December 31, 1994 were
$41,775, $203,760 and $0, respectively. Total sales charges paid by
shareholders of the Intermediate Bond and Bond Portfolios for the fiscal year
ended December 31, 1993 were $391,744 and $1,215,391, respectively.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust, which
was amended and restated as of May 1, 1992, authorizes the Board of Trustees
to divide shares into two or more series, each series relating to a separate
portfolio of investments, and divide the shares of any series into two or more
classes. The number of shares of each series and/or of a class within each
series shall be unlimited. The Trust does not intend to issue share
certificates. Pursuant to such authority, the Board of Trustees has authorized
the issuance of an unlimited number of shares of beneficial interest in the
Trust representing interests in the Portfolios. The shares of each Portfolio
are offered in two separate classes: Class I and Class A.
In the event of a liquidation or dissolution of the Trust or an
individual Portfolio, shareholders of a particular Portfolio would be entitled
to receive the assets available for distribution belonging to such Portfolio.
If there are any assets, income, earnings, proceeds, funds or payments, which
are not readily identifiable as belonging to any particular Portfolio, the
Trustees shall allocate them among any one or more of the Portfolios as they,
in their sole discretion, deem fair and equitable.
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Portfolio affected by the matter. A Portfolio is
affected by a matter unless it is clear that the interests of each Portfolio
in the matter are substantially identical or that the matter does not affect
any interest of the Portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if approved by a
majority of the outstanding shares of such Portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to particular Portfolios.
-17-
<PAGE>
When used in the Prospectuses or in this Additional Statement,
a "majority" of shareholders means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust or the applicable Portfolio present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy,
or (2) more than 50% of the outstanding shares of the Trust or the applicable
portfolio.
As of March 29, 1996, Trussal & Co., a nominee of NBD's
Trust Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of
record 97.00%, 94.06% and 99.55% of the outstanding shares of the
Intermediate Bond, Bond and Short Bond Portfolios, respectively. The Trustees
and officers of the Trust, as a group, owned less than 1% of the outstanding
shares of the Portfolios. Furthermore, as of March 29, 1996, the following
persons may have beneficially owned 5% or more of the outstanding shares of
the Portfolios:
<TABLE>
<CAPTION>
Percent of
Outstanding
Number of Shares Shares
---------------- -----------
<S> <C> <C>
Bond Portfolio
Henry Ford Investment Management 9,504,320 17.88%
Account
600 Fisher Building
Detroit, MI 48202
Short Bond Portfolio
Comprehensive Health System, Inc. 4,058,447 25.25%
6500 John C. Lodge
Detroit, MI 48202
Kresge Foundation 3,551,158 22.10%
3215 W. Big Beaver
P.O. Box 3151
Troy, MI 48007-3151
</TABLE>
To the Trust's knowledge, there were no persons who
beneficially owned 5% or more of the outstanding shares of the Intermediate
Bond Portfolio as of March 29, 1996.
When issued for payment as described in the Portfolios'
Prospectuses and this Additional Statement, shares of the Portfolios will be
fully paid and non-assessable by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to
-18-
<PAGE>
the Trust or to a shareholder, nor will any such person be liable to any third
party in connection with the affairs of the Trust, except as such liability
may arise from his or its own bad faith, willful misfeasance, gross
negligence, or reckless disregard of duties. It also provides that all third
parties shall look solely to the Trust property for satisfaction of claims
arising in connection with the affairs of the Trust. With the exceptions
stated, the Declaration of Trust provides that a Trustee, officer, employee or
agent is entitled to be indemnified against all liability in connection with
the affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses are not intended as a substitute
for careful tax planning and is based on tax laws and regulations which are in
effect on the date hereof; such laws and regulations may be changed by
legislative or administrative action. Investors are advised to consult their
tax advisers with specific reference to their own tax situations.
Each Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, a Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain requirements with respect
to the source of its income for a taxable year. At least 90% of the gross
income of a Portfolio must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to the Portfolio's business of investing in such stock, securities or
currencies. The Treasury Department may by regulation exclude from qualifying
income foreign currency gains which are not directly related to the
Portfolio's principal business of investing in stock or securities, or options
and futures with respect to stock or securities. Any income derived by a
Portfolio from a partnership or trust is treated as derived with respect to
the Portfolio's business of investing in stock, securities or currencies only
to the extent that such income is attributable to items of income which would
have been qualifying income if realized by the Portfolio in the same manner as
by the partnership or trust.
-19-
<PAGE>
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Portfolio's gross income for
a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by a Portfolio upon maturity or
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
Each Portfolio will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Portfolio's taxable year.
Shareholders should note that, upon the sale or exchange of Portfolio shares,
if the shareholder has not held such shares for at least six months, any loss
on the sale or exchange of those shares will be treated as long term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, however, because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long term capital gains and ordinary income are both
taxable at a maximum nominal rate of 35% (or at a maximum effective marginal
rate of 39% in the case of corporations having taxable income between $100,000
and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Portfolio intends
to make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each
calendar year to avoid liability for this excise tax.
-20-
<PAGE>
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions (whether or not derived from interest on
Municipal Securities) would be taxable as ordinary income to shareholders to
the extent of the Portfolio's current and accumulated earnings and profits and
would be eligible for the dividends received deduction for corporations.
Each Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding
by the Internal Revenue Service for failure properly to include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
Depending upon the extent of the Portfolios' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Portfolios may be subject to the tax
laws of such states or localities. In addition, in those states and localities
which have income tax laws, the treatment of the Portfolios and their
shareholders under such laws may differ from their treatment under federal
income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the
Prospectuses. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
Effective May 1, 1995, each Trustee receives from the Trust and
The Woodward Variable Annuity Fund a total annual fee of $17,000 and a fee of
$2,000 for each Board of Trustees meeting attended. The Chairman is entitled
to additional compensation of $4,250 per year for his services to the Trusts
in that capacity. These fees are allocated among the investment portfolios of
the Trust and The Woodward Variable Annuity Fund based on their relative net
assets. All Trustees are reimbursed for out of pocket expenses incurred in
connection with attendance at
-21-
<PAGE>
meetings. Drinker Biddle & Reath, of which Mr. McConnel is a
partner, receives legal fees as counsel to the Trusts.
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1995:
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
- ------------------------------ ------------------- -------------------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee $21,250 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr., $24,437.50 $24,437.50(2)+
Chairman and President++
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee++ $21,250 $21,250(2)+
Donald G. Sutherland, Trustee++ $21,250 $21,250(2)+
Donald L. Tuttle, Trustee++ $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
<FN>
- ----------------------
* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Variable Annuity Fund,
Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24,437.50, $21,500, $21,500 and
$21,500 accrued during The Woodward Funds' fiscal year ended December 31,
1995 for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and
Donald L. Tuttle, respectively.
- --------------------------------
</TABLE>
Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectuses. For the fiscal years ended December
31, 1995, 1994 and 1993, the Trust paid NBD
-22-
<PAGE>
fees for advisory services as follows: (i) $2,650,418, $2,718,286 and
$2,127,982 with respect to the Intermediate Bond Portfolio; (ii) $3,121,267,
$3,200,907 and $2,588,697 with respect to the Bond Portfolio. For the fiscal
year ended December 31, 1995 and the fiscal period from September 17, 1994
(commencement of operations) through December 31, 1994, the Trust paid NBD
fees for advisory services aggregating $650,298 and $112,091, respectively, on
behalf of the Short Bond Portfolio. For the same periods, NBD reimbursed the
Short Bond Portfolio in the amount of $65,761 and $32,000, respectively, for
certain other expenses.
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by the Trust. Joint purchase of investments for the
Trust and for NBD's own investment portfolio will not be made. NBD's
Commercial Banking Department may have deposit, loan and other commercial
banking relationships with issuers of securities purchased by the Trust,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of securities purchased by the Trust.
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a
pro rata share of the transaction costs incurred in making the bulk purchase.
See "Investment Objectives, Policies and Risk Factors - Portfolio
Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the Trust as a result of changes in current
state laws and regulations in those states where the Trust has qualified its
shares, or by a decision of the Trustees to qualify the shares in other states
having restrictive expense limitations. To the Trust's knowledge, of the
expense limitations in effect on the date of this Additional Statement none is
more restrictive than
-23-
<PAGE>
two and one-half percent (2-1/2%) of the first $30 million of a Portfolio's
average annual net assets, two percent (2%) of the next $70 million of the
average annual net assets and one and one-half percent (1-1/2%) of the
remaining average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of each Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers
of national banks. These regulations provide, in general, that assets managed
by a national bank as fiduciary may not be invested in stock or obligations
of, or property acquired from, the bank, its affiliates or their directors,
officers or employees, and further provide that fiduciary assets may not be
sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed
to be the making of a loan to the Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Shareholder Servicing Plan
As stated in the Prospectus for Class A shares of the
Portfolios, the Trust may enter into Servicing Agreements with Shareholder
Servicing Agents which may include NBD and its affiliates. The Servicing
Agreements provide that the Shareholder Servicing Agents will render
shareholder administrative support services to their customers who are the
beneficial owners of Class A shares in consideration for the Portfolios'
payment of up to .25% (on an annualized basis) of the average daily net asset
value of Class A shares beneficially owned by such customers and held by the
Shareholder Servicing Agents and, at the Trust's option, it may reimburse the
Shareholder Servicing Agents' out-of-pocket expenses. Such services may
include: (i) processing dividend and distribution
-24-
<PAGE>
payments from a Portfolio; (ii) providing information periodically to
customers showing their share positions; (iii) arranging for bank wires; (iv)
responding to customer inquiries; (v) providing subaccounting with respect to
shares beneficially owned by customers or the information necessary for such
subaccounting; (vi) forwarding shareholder communications; (vii) processing
share exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses;
and (ix) other similar services requested by the Trust. Banks acting as
Shareholder Servicing Agents are prohibited from engaging in any activity
primarily intended to result in the sale of Class A shares. However,
Shareholder Servicing Agents other than banks may be requested to provide
marketing assistance (e.g., forwarding sales literature and advertising to
their customers) in connection with the distribution of Portfolio shares.
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended in connection with the Trust's arrangements
with Shareholder Servicing Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Trustees").
Any material amendment to the Trust's arrangements with
Shareholder Servicing Agents under the Shareholder Servicing Agreements must
be approved by a majority of the Board of Trustees (including a majority of
the Disinterested Trustees).
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of each Portfolio, (ii)
collects and makes disbursements of money on behalf of each Portfolio, (iii)
issues and redeems shares of each Portfolio, (iv) collects and receives all
income and other payments and distributions on account of the portfolio
securities of each Portfolio, (v) addresses and mails all communications by
the Trust to its shareholders, including reports to shareholders, dividend and
distribution notices and proxy materials for any meeting of shareholders, (vi)
maintains shareholder accounts, (vii) makes periodic reports to the Trust's
Board of Trustees concerning the Trust's operations, and (viii) maintains
on-line computer capability for determining the status of shareholder
accounts.
For its services as Custodian, NBD is entitled to receive from
the Portfolios at the following annual rates based on the aggregate market
value of such Portfolios' portfolio
-25-
<PAGE>
securities, held as Custodian: .03% of the first $20 million; .025% of the
next $20 million; .02% of the next $20 million; .015% of the next $40 million;
.0125% of the next $200 million; and .01% of the balance over $300,000,000.
NBD will receive an annual account fee of $1,000 and $1.54 per month per asset
held in each of these Portfolios. In addition, NBD, as Custodian, is entitled
to receive $50 for each cash statement and inventory statement and $13 for
each pass-through certificate payment, $35 for each option transaction
requiring escrow receipts and $20 for all other security transactions.
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from each Portfolio of $11,000, $15 annually per account
in the Intermediate Bond, Bond and Short Bond Portfolios for the preparation
of statements of account, and $1.00 for each confirmation of purchase and
redemption transactions. Charges for providing computer equipment and
maintaining a computerized investment system are expected to approximate $350
per month for each Portfolio.
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which act under the Distribution Agreement as sponsors and
Co-Distributors for the Trust. For the fiscal year ended December 31, 1995,
the Intermediate Bond, Bond and Short Bond Portfolios paid FoM for its
services a fee of $20,388, $26,762 and $5,002, respectively. For the fiscal
year ended December 31, 1994, the Intermediate Bond and Bond Portfolios paid
FoM for its services a fee of $17,302 and $20,668, respectively. For the
fiscal year ended December 31, 1993, the Intermediate Bond and Bond Portfolios
paid FoM for its services a fee of $32,525 and $39,354, respectively. For the
fiscal period from September 17, 1994 (commencement of operations) through
December 31, 1994, the Short Bond Portfolio paid FoM for its services a fee of
$377. For the fiscal years ended December 31, 1995, 1994 and 1993, FoM
incurred expenses of $0 with respect to each of the Portfolios for the
printing and mailing of prospectuses to other than current shareholders. For
the fiscal year ended December 31, 1995, the Intermediate Bond, Bond and Short
Bond Portfolio paid Essex a fee for its services of $8,391, $24,725 and $163,
respectively. For the fiscal period from April 20, 1994 (date of Distribution
Agreement with Essex) through December 31, 1994, the Portfolios paid Essex a
fee for its services of $10,763, $27,439 and $537, respectively. For the
fiscal year ended December 31, 1995 and the fiscal period ended December 31,
1994, Essex incurred expenses of $0 with respect to each of the Portfolios.
Additional information concerning fees for services performed by FoM and
Essex, the review of such fees under the Trust's plan for the payment of
distribution expenses and the services provided by FoM and Essex are described
in the Prospectuses.
-26-
<PAGE>
As stated in the Prospectuses, the Trust's Board of Trustees is
permitted, among other things, to allocate distribution fees which are
attributable to the Class A shares in a Portfolio exclusively to such shares.
As of the date hereof, the Board of Trustees has not exercised its discretion
to make any such allocations for the current fiscal year.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serve as auditors for the
Trust. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectuses have
been audited by Arthur Andersen LLP, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of each class of
shares of each Portfolio for various periods may be quoted in advertisements,
shareholder reports or other communications to shareholders. Performance
information is generally available by calling 1-(800)688-3350.
Yield Calculations. A Portfolio's yield is calculated by
dividing the Portfolio's net investment income per share (as described below)
earned during a 30-day period by the maximum offering price per share on the
last day of the period and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. A Portfolio's net
investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can
be expressed as follows:
-27-
<PAGE>
a-b 6
Yield = 2 [(----- + 1) - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities held by a Portfolio is recognized by accruing 1/360 of the stated
dividend rate of the security each day that the security is in the portfolio.
Each Portfolio calculates interest earned on any debt obligations held in its
portfolio by computing the yield to maturity of each obligation held by it
based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest), and dividing the result by 360 and multiplying
the quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is in the portfolio. For
purposes of this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect changes
in the market values of such debt obligations.
Undeclared earned income may be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the 30-day base
period, has not been declared as a dividend, but is reasonably expected to be
and is declared as a dividend shortly thereafter.
For the 30-day period ended December 31, 1995, the yields,
calculated as set forth above, of the Intermediate Bond,
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<PAGE>
Bond and Short Bond Portfolios were 5.51%, 5.86% and 5.24%, (taking into
account the deduction of the maximum sales charge) and 5.79%, 6.16% and 5.40%
(without taking into account the deduction of the maximum applicable sales
charge).
Total Return Calculations. Each Portfolio computes its "average
annual total return" for a class by determining the average annual compounded
rates of return during specified periods that equate the initial amount
invested to the ending redeemable value of such investment. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment
by $1,000 and raising the quotient to a power equal to one divided by the
number of years (or fractional portion thereof) covered by the computation and
subtracting one from the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, ex-
pressed in terms of years.
The Portfolios compute their aggregate total returns for each
class by determining the aggregate rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable
value of such investment. The formula for calculating aggregate total return
is as follows:
ERV
T = [(------ - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Portfolio's mean or (median) account size for any fees that vary
with the size of the account. The ending redeemable value (variable "ERV" in
each formula) is determined by assuming complete redemption of the
hypothetical investment and the
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<PAGE>
deduction of all nonrecurring charges at the end of the period covered by the
computations. Each Portfolio's average annual total return may reflect the
deduction of the maximum sales load imposed on purchases.
The average annual total returns for the Intermediate Bond, Bond
and Short Bond Portfolios for the one year period ended December 31, 1995 (if
applicable) and the period since commencement of operations are shown below:
<TABLE>
<CAPTION>
Average Annual Average Annual Average Annual Average Annual
Total Return Total Return Total Return Total Return
For One Year For One Year From Inception From Inception
Ended 12/31/95 Ended 12/31/95 Through 12/31/95 Through 12/31/95
(with Deduction (without Deduc- (with Deduction (without Deduc-
of Maximum tion for Any of Maximum tion for Any
Sales Charge) Sales Charge) Sales Charge) Sales Charge)
--------------- --------------- ---------------- -------------
<S> <C> <C> <C> <C>
Intermediate Bond Portfolio 13.80% 19.48% 6.65% 7.78%
- ---------------------------
Inception: June 1, 1991
Bond Portfolio 17.86% 23.75% 8.28% 9.43%
- --------------
Inception: June 1, 1991
Short Bond Portfolio 6.77% 10.07% 5.27% 7.78%
- --------------------
Inception: September 17, 1994
</TABLE>
The aggregate annual total returns for the Portfolios for the one
year period ended December 31, 1995 (if applicable) and the period since
commencement of operations are shown below:
<TABLE>
<CAPTION>
Aggregate Total Aggregate Total
Return From Return From
Inception Inception
Through 12/31/95 Through 12/31/95
(with Deduction (without Deduc-
of Maximum tion for Any
Sales Charge) Sales Charge)
---------------- ----------------
<S> <C> <C>
Intermediate Bond Portfolio 34.35% 41.05%
- ---------------------------
Inception: June 1, 1991
Bond Portfolio 44.03% 51.22%
- -----------------
Inception: June 1, 1991
Short Bond Portfolio 6.85% 10.16%
- --------------------
Inception: September 17, 1994
</TABLE>
The Portfolios may also from time to time include in
advertisements, sales literature, communications to shareholders and other
materials ("Literature") total return figures that are not calculated
according to the formulas set forth above in order to compare more accurately
a Portfolio's performance with other measures of investment return. For
example, in comparing the Portfolios' total returns with data published by
Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. or
-30-
<PAGE>
Weisenberger Investment Company Service, or with the performance of an index,
the Portfolios may calculate their returns for the period of time specified in
the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment date. Percentage increases are determined
by subtracting the initial value of the investment from the ending value and
by dividing the remainder by the beginning value. The Portfolios do not, for
these purposes, deduct from the initial value invested any amount representing
sales charges. The Portfolios will, however, disclose the maximum sales charge
and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance
quoted.
The Portfolios may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original Portfolio investment, but also of the additional
Portfolio shares received through reinvestment. As a result, the value of the
Portfolio investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The Portfolios may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
strategies, techniques, policies or investment suitability of a Portfolio
(such as value investing, market timing, dollar cost averaging, asset
allocation, constant ratio transfer, automatic accounting rebalancing, or the
advantages and disadvantages of investing in tax-deferred and taxable
investments), economic conditions, the relationship between sectors of the
economy as a whole, various securities markets, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Portfolio), as well as the view of the Trust as to current market, economy,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio. The Portfolios may also include in advertisements
charts, graphs or drawings which compare the investment objective, return
potential, relative stability and/or growth possibilities of the Portfolios
and/or other mutual funds, or illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to,
stocks, bonds, treasury bills and shares of a Portfolio. In addition,
advertisements or shareholder
-31-
<PAGE>
communications may include a discussion of certain attributes or benefits to
be derived by an investment in a Portfolio and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information
on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
advertisements or communicators may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
-32-
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in the
relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity, and
other protection factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term ratings to
indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks,
A-3
<PAGE>
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
A-4
<PAGE>
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by
Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest
and repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly 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 "C" 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.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and
A-5
<PAGE>
principal repayments. Adverse business, financial or economic conditions will
likely impair capacity or willingness to pay interest and repay principal. The
"B" rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating 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. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility
or high variability in expected returns due to non-credit risks. Examples of
such obligations are: securities whose principal or interest return is indexed
to equities, commodities, or currencies; certain swaps and options; and
interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality.
They carry the smallest degree of investment risk and are
A-6
<PAGE>
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
"Aa" - Bonds 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 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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the
bonds. The rating may be revised prior to delivery if changes
A-7
<PAGE>
ooccur in the legal documents or the underlying credit quality of
the bonds.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt
rated "B" possesses the risk that obligations will not be met when due. Debt
rated "CCC" is well below investment grade and has considerable uncertainty as
to timely payment of principal, interest or preferred dividends. Debt rated
"DD" is a defaulted debt obligation, and the rating "DP" represents preferred
stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future
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<PAGE>
developments, short-term debt of these issuers is generally rated
"F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
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<PAGE>
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low expectation
of investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment
of principal or interest over the term to maturity of long term debt and
preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's
lowest investment grade category and indicates an acceptable
capacity to repay principal and interest. Issues rated "BBB"
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<PAGE>
are, however, more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
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"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality
and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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<PAGE>
APPENDIX B
As stated in their Prospectuses, each of the Portfolios may enter
into futures contracts and related hedging purposes.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established
in both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the
future for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Portfolios may use interest rate
futures as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Portfolios presently could accomplish a similar result to that
which they hope to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term
bonds and investing in long-term bonds when interest rates are expected to
decline. However, because of the liquidity that is often available in the
futures market the protection is more likely to be achieved, perhaps at a
lower cost and without changing the rate of interest being earned by the
Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract
at a specific future time for a specified price. A futures contract purchase
would create an obligation by the Portfolio, as purchaser, to take delivery of
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date
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<PAGE>
without the making or taking of delivery of securities. Closing out a futures
contract sale is effected by the Portfolio's entering into a futures contract
purchase for the same aggregate amount of the specific type of financial
instrument and the same delivery date. If the price in the sale exceeds the
price in the offsetting purchase, the Portfolio is paid the difference and
thus realizes a gain. If the offsetting purchase price exceeds the sale price,
the Portfolio pays the difference and realizes a loss. Similarly, the closing
out of a futures contract purchase is effected by the Portfolio's entering
into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Portfolio realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges -- principally, the Chicago
Board of Trade, the Chicago Mercantile Exchange and the New York Futures
Exchange. The Portfolios would deal only in standardized contracts on
recognized exchanges. Each exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed
by the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Portfolios may trade in any futures contract for which there exists
a public market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. The Portfolios would engage in
an interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all
of the loss in market value that would otherwise accompany a decline in
long-term securities prices. Assume that the market value of a certain
security in a Portfolio tends to move in concert with the futures market
prices of long-term United States Treasury bonds ("Treasury bonds"). The
Adviser wishes to fix the current market value of this portfolio security
until some point in the future. Assume the portfolio security has a market
value of 100, and the Adviser believes that, because of an anticipated rise in
interest rates, the value will decline to 95. The Portfolio might enter into
futures contract sales of Treasury bonds for an equivalent of 98. If the
market value of the portfolio security does indeed decline from 100 to 95, the
equivalent futures market price for the Treasury bonds might also decline from
98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to
B-2
<PAGE>
more than 93 or to less than 93 because of the imperfect correlation between
cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and
the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the above
example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Portfolios would engage
in an interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Portfolio's basic motivation would be to maintain for a
time the income advantage from investing in the short-term securities; the
Portfolio would be endeavoring at the same time to eliminate the effect of all
or part of an expected increase in market price of the long-term bonds that
the Portfolio may purchase.
For example, assume that the market price of a long-term bond that
the Portfolio may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The Adviser wishes to fix the
current market price (and thus 10% yield) of the long-term bond until the time
(four months away in this example) when it may purchase the bond. Assume the
long-term bond has a market price of 100, and the Adviser believes that,
because of an anticipated fall in interest rates, the price will have risen to
105 (and the yield will have dropped to about 9 1/2%) in four months. The
Portfolio might enter into futures contracts purchases of Treasury bonds for
an equivalent price of 98. At the same time, the Portfolio would assign a pool
of investments in short-term securities that are either maturing in four
months or earmarked for sale in four months, for purchase of the long-term
bond at an assumed market price of 100. Assume these short-term securities are
yielding 15%. If the market price of the long-term bond does indeed rise from
100 to 105, the equivalent futures market price for Treasury bonds might also
rise from 98 to 103. In that case, the 5-point increase in the price that the
Portfolio pays for the long-term bond would be offset by the 5-point gain
realized by closing out the futures contract purchase.
B-3
<PAGE>
The Adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
A bond index assigns relative values to the bonds included in the
index and the index fluctuates with changes in the market values of the bonds
included. Futures contracts are traded on organized exchanges regulated by
the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of
the parties to each contract.
The Portfolios may sell index futures contracts in order to offset
a decrease in market value of its portfolio securities that might otherwise
result from a market decline. A Portfolio may do so either to hedge the value
of its portfolio as a whole, or to protect against declines, occurring prior
to sales of securities, in the value of the securities to be sold. Conversely,
the Portfolios may purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Portfolios may purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Portfolios may utilize index futures
contracts in anticipation of changes in the composition of their
B-4
<PAGE>
portfolio holdings. For example, in the event that a Portfolio expects to
narrow the range of industry groups represented in its holdings it may, prior
to making purchases of the actual securities, establish a long futures
position based on a more restricted index, such as an index comprised of
securities of a particular industry group. The Portfolio may also sell futures
contracts in connection with this strategy, in order to protect against the
possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
The following are examples of transactions in bond index futures
(net of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Bond Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Bond Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A BOND PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Bond Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Bond Portfolio-Own Buy 16 Index Futures at 120
Bond with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and the Portfolio had
B-5
<PAGE>
entered into an anticipatory purchase hedge, or market value increased and the
Portfolio had hedged its bond portfolio, the results of the Portfolio's
transactions in bond index futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Bond Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Bond Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A BOND PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 =$62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Bond Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Bond Portfolio-Own Buy 16 Index Futures at 130
Bond with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
Unlike when a Portfolio purchases or sells a security, no price is
paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's Custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security
B-6
<PAGE>
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Portfolio upon termination of the futures contract
assuming all contractual obligations have been satisfied. Subsequent payments,
called variation margin, to and from the broker, will be made on a daily basis
as the price of the underlying security or index fluctuates making the long
and short positions in the futures contract more or less valuable, a process
known as marking to the market. For example, when a Portfolio has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Portfolio will be entitled to receive from the broker a variation margin
payment equal to that increase in value. Conversely, where a Portfolio has
purchased a futures contract and the price of the future contract has declined
in response to a decrease in the underlying instruments, the position would be
less valuable and the Portfolio would be required to make a variation margin
payment to the broker. At any time prior to expiration of the futures
contract, the Adviser may elect to close the position by taking an opposite
position, subject to the availability of a secondary market, which will
operate to terminate the Portfolio's position in the futures contract. A final
determination of variation margin is then made, additional cash is required to
be paid by or released to the Portfolio, and the Portfolio realizes a loss or
gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on
the future which will not be completely offset by movements in the price of
the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged and
movements in the price of futures contracts, a Portfolio may buy or sell
futures contracts in a greater dollar amount than the
B-7
<PAGE>
dollar amount of securities being hedged if the volatility over a particular
time period of the prices of such securities has been greater than the
volatility over such time period of the future, of if otherwise deemed to be
appropriate by the Adviser. Conversely, a Portfolio may buy or sell fewer
futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Adviser. It is also possible that, where a Portfolio has
sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of securities held by the Portfolio may
decline. If this occurred, the Portfolio would lose money on the future and
also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in
the price of securities before a Portfolio is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the Portfolio then concludes not to
invest in securities or options at that time because of concern as to possible
further market decline or for other reasons, the Portfolio will realize a loss
on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value
of the futures contracts (or options), will be deposited in a segregated
account with the Portfolio's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and
B-8
<PAGE>
because of the imperfect correlation between the movements in the cash market
and movements in the price of futures, a correct forecast of general market
trends or interest rate movements by the Adviser may still not result in a
successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures. Although a
Portfolio intends to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may
not be possible to close a futures investment position, and in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will
in fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
Successful use of futures by a Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the
market. For example, if a Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
B-9
<PAGE>
V. Options on Futures Contracts
The Portfolios may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of
the securities being hedged, an option may or may not be less risky than
ownership of the futures contract or such securities. In general, the market
prices of options can be expected to be more volatile than the market prices
on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Portfolio because
the maximum amount at risk is the premium paid for the options (plus
transaction costs).
VI. Accounting and Tax Treatment
Accounting for futures contracts and options will be in accordance
with generally accepted accounting principles.
Generally, futures contracts held by a Portfolio at the close of
the Portfolio's taxable year will be treated for federal income tax purposes
as sold for their fair market value on the last business day of such year, a
process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Portfolio holds the
futures contract ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by a Portfolio in a subsequent sale or other disposition of
those futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Portfolio in a prior year as a
B-10
<PAGE>
result of the constructive sale of the contracts. With respect to futures
contracts to sell, which will be regarded as parts of a "mixed straddle"
because their values fluctuate inversely to the values of specific securities
held by the Portfolio, losses as to such contracts to sell will be subject to
certain loss deferral rules which limit the amount of loss currently
deductible on either part of the straddle to the amount thereof which exceeds
the unrecognized gain (if any) with respect to the other part of the straddle,
and to certain wash sales regulations. Under short sales rules, which will
also be applicable, the holding period of the securities forming part of the
straddle will (if they have not been held for the long-term holding period) be
deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts, deductions for interest and carrying charges will
not be allowed. Notwithstanding the rules described above, with respect to
futures contracts to sell which are properly identified as such, a Portfolio
may make an election which will exempt (in whole or in part) those identified
futures contracts from being treated for federal income tax purposes as sold
on the last business day of the Portfolio's taxable year, but gains and losses
will be subject to such short sales, wash sales, loss deferral rules and the
requirement to capitalize interest and carrying charges. Under temporary
regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and
losses would be recognized and offset on a periodic basis during the taxable
year. Under either election, the 40%-60% rule will apply to the net gain or
loss attributable to the futures contracts, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures generally receive federal tax treatment similar to that
described above.
Certain foreign currency contracts entered into by a Portfolio may
be subject to the "marking-to-market" process and the 40%-60% rule in a manner
similar to that described in the preceding paragraph for futures contracts. To
receive such federal income tax treatment, a foreign currency contract must
meet the following conditions: (1) the contract must require delivery of a
foreign currency of a type in which regulated futures contracts are traded or
upon which the settlement value of the contract depends; (2) the contract must
be entered into at arm's length at a price determined by reference to the
price in the interbank market; and (3) the contract must be traded in the
interbank market. The Treasury Department has broad authority to issue
regulations under the provisions respecting foreign currency contracts. As of
the date of this Additional Statement, the Treasury Department has not issued
any such regulations.
B-11
<PAGE>
Other foreign currency contracts entered into by a Portfolio may result in the
creation of one or more straddles for federal income tax purposes, in which
case certain loss deferral, short sales, and wash sales rules and the
requirement to capitalize interest and carrying charges may apply.
As described more fully in "Additional Information Concerning
Taxes", a regulated investment company must derive less than 30% of its gross
income from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months. With respect to
futures contracts and other financial instruments subject to the
marking-to-market rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale
under the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date
the contract or instrument is acquired and the termination date. In
determining whether the 30% test is met for a taxable year, increases and
decreases in the value of each Portfolio's futures contracts and other
investments that qualify as part of a "designated hedge," as defined in the
Code, may be netted.
B-12
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<S> <C>
ASSETS: BOND FUND
---------
Investment in securities:
At cost $481,852,916
============
At value (Note 2) $512,978,615
Cash --
Receivable for securities sold 225,826
Interest receivable 5,748,712
Deferred organization costs, net (Note 2) 6,439
Prepaids and other assets 4,113
------------
TOTAL ASSETS 518,963,705
------------
LIABILITIES:
Payable for securities purchased 456,491
Accrued investment advisory fee 283,332
Accrued distribution fees 5,095
Accrued custodial fee 7,282
Dividends payable 582,184
Other payables and accrued expenses 63,742
------------
TOTAL LIABILITIES 1,398,126
------------
NET ASSETS $517,565,579
============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 4,952,384
Additional paid-in capital 509,179,119
Accumulated undistributed net investment income 233,362
Accumulated undistributed net realized gains (losses) (27,924,985)
Net unrealized appreciation on investments 31,125,699
------------
TOTAL NET ASSETS $517,565,579
============
Shares of capital stock outstanding 49,523,843
============
Net asset value and redemption price per share $ 10.45
============
Maximum offering price per share $ 10.97
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
December 31, 1995
INTERMEDIATE SHORT
BOND FUND BOND FUND
------------ ------------
<S> <C> <C>
Investment in securities:
At cost $391,716,402 $159,199,919
============ ============
At value (Note 2) $401,008,361 $161,484,092
Cash 231,665 --
Receivable for securities sold -- --
Interest receivable 4,975,654 2,337,249
Deferred organization costs, net (Note 2) 3,565 25,504
Prepaids and other assets 21,456 78,198
----------- ------------
TOTAL ASSETS 406,240,701 163,925,043
----------- ------------
LIABILITIES:
Payable for securities purchased -- 31,588
Accrued investment advisory fee 222,293 89,955
Accrued distribution fees 2,543 714
Accrued custodial fee 6,109 3,255
Dividends payable 632,436 443,656
Other payables and accrued expenses 67,381 19,020
------------ ------------
TOTAL LIABILITIES 930,762 588,188
------------ ------------
NET ASSETS $405,309,939 $163,336,855
============ ============
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 3,909,253 $ 1,596,349
Additional paid-in capital 402,590,497 159,350,652
Accumulated undistributed net investment income 291,887 65,478
Accumulated undistributed net realized gains (losses (10,773,659) 40,203
Net unrealized appreciation on investments 9,291,959 2,284,173
------------ ------------
TOTAL NET ASSETS $405,309,939 $163,336,855
============ ============
Shares of capital stock outstanding 39,092,534 15,963,488
============ ============
Net asset value and redemption price per share $ 10.37 $ 10.23
============ ============
Maximum offering price per share $ 10.89 $ 10.55
============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
BOND FUND
---------
<S> <C>
INTEREST INCOME (Note 2) $ 34,039,591
------------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 3,121,267
Distribution fees 51,487
Professional fees 69,263
Custodial fee 80,898
Transfer and dividend disbursing agent fees 38,611
Amortization of deferred organization costs 15,455
Marketing expenses 43,247
Security pricing services 13,033
Registration, filing fees and other expenses 118,444
Less:
Expense reimbursement --
------------
NET EXPENSES 3,551,705
------------
NET INVESTMENT INCOME 30,487,886
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses) (1,566,826)
Net change in unrealized appreciation on
investments 72,514,668
------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 70,947,842
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $101,435,728
============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF OPERATIONS (Continued)
For the Year Ended December 31, 1995
INTERMEDIATE SHORT
BOND FUND BOND FUND
------------ ------------
<S> <C> <C>
INTEREST INCOME (Note 2) $27,227,503 $6,498,945
----------- ----------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 2,650,418 650,298
Distribution fees 28,779 5,165
Professional fees 67,806 67,810
Custodial fee 71,081 31,613
Transfer and dividend disbursing agent fees 18,952 4,585
Amortization of deferred organization costs 8,555 6,801
Marketing expenses 39,826 32,438
Security pricing services 13,033 13,033
Registration, filing fees and other expenses 79,582 2,375
Less:
Expense reimbursement -- (65,761)
----------- ----------
NET EXPENSES 2,978,032 748,357
----------- ----------
NET INVESTMENT INCOME 24,249,471 5,750,588
----------- ----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses) (4,126,208) 97,446
Net change in unrealized appreciation on
investments 52,637,906 3,290,608
----------- ----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 48,511,698 3,388,054
----------- ----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $72,761,169 $9,138,642
=========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
BOND FUND
------------------------------
Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 30,487,886 $ 30,959,603
Net realized gains (losses) (1,566,826) (17,468,162)
Net change in unrealized appreciation
(depreciation) on investments 72,514,668 (49,072,055)
------------ ------------
Net increase (decrease) in net assets from
operations 101,435,728 (35,580,614)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income (31,071,705) (30,287,702)
From realized gains -- (1,125,200)
------------ ------------
Total distributions (31,071,705) (31,412,902)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 81,776,844 136,836,769
Net asset value of shares issued in reinvestment
of distributions to shareholders 24,963,507 26,773,071
------------ ------------
106,740,351 163,609,840
Less: payments for shares redeemed (86,707,190) (170,644,207)
------------ ------------
Net increase (decrease) in net assets from
capital share transactions 20,033,161 (7,034,367)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS 90,397,184 (74,027,883)
NET ASSETS:
Beginning of period 427,168,395 501,196,278
------------ ------------
End of period $517,565,579 $427,168,395
============ ============
CAPITAL SHARE TRANSACTIONS:
Shares sold 8,355,987 13,838,356
Shares issued in reinvestment of distributions
to shareholders 2,525,870 2,798,104
------------ ------------
10,881,857 16,636,460
Less: shares redeemed (8,790,418) (17,749,867)
------------ ------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING 2,091,439 (1,113,407)
CAPITAL SHARES:
Beginning of period 47,432,404 48,545,811
------------ ------------
End of period 49,523,843 47,432,404
============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
INTERMEDIATE SHORT
BOND FUND BOND FUND
------------------------------- -------------------------------
Year Ended Year Ended Year Ended Period Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 24,249,471 $ 23,804,528 $ 5,750,588 $ 1,090,862
Net realized gains (losses) (4,126,208) (3,493,275) 97,446 (31,726)
Net change in unrealized appreciation
(depreciation) on investments 52,637,906 (47,966,003) 3,290,608 (1,006,435)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations 72,761,169 (27,654,750) 9,138,642 52,701
------------ ------------ ------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income (24,265,050) (23,538,862) (5,697,455) (1,078,517)
From realized gains -- (325,750) (25,517) --
------------ ------------ ------------ ------------
Total distributions (24,265,050) (23,864,612) (5,722,972) (1,078,517)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 47,268,989 108,142,125 114,313,557 74,761,056
Net asset value of shares issued in reinvestment
of distributions to shareholders 19,077,115 19,356,266 3,924,968 941,812
------------ ------------ ------------ ------------
66,346,104 127,498,391 118,238,525 75,702,868
Less: payments for shares redeemed (102,551,452) (112,749,718) (22,556,503) (10,437,889)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
capital share transactions (36,205,348) 14,748,673 95,682,022 65,264,979
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS 12,290,771 (36,770,689) 99,097,692 64,239,163
NET ASSETS:
Beginning of period 393,019,168 429,789,857 64,239,163 --
------------ ------------ ------------ ------------
End of period $405,309,939 $393,019,168 $163,336,855 $ 64,239,163
============ ============ ============ ============
CAPITAL SHARE TRANSACTIONS:
Shares sold 4,818,378 10,895,776 11,284,693 7,483,171
Shares issued in reinvestment of distributions
to shareholders 1,922,824 1,990,229 388,668 95,210
------------ ------------ ------------ ------------
6,741,202 12,886,005 11,673,361 7,578,381
Less: shares redeemed (10,335,186) (11,494,626) (2,236,808) (1,051,446)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING (3,593,984) 1,391,379 9,436,553 6,526,935
CAPITAL SHARES:
Beginning of period 42,686,518 41,295,139 6,526,935 --
------------ ------------ ------------ ------------
End of period 39,092,534 42,686,518 15,963,488 6,526,935
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 5.47%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $16,559,026 $ 16,559,026
Nikko Securities, Revolving Repurchase Agreement,
5.90%, 1/2/96 (secured by various U.S. Treasury
Bills with maturities ranging from 9/19/96
through 10/17/96, and U.S. Treasury Notes with
maturities ranging from 5/31/96 through 8/15/00,
all held at the Bank of New York) 11,500,000 11,500,000
-----------
(Cost $28,059,026) 28,059,026
-----------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 82.21%
U.S. Treasury Securities -- 36.90%
Principal Strip from U.S. Treasury Securities
due:
8/15/98 1,500,000 1,309,425
2/15/99 7,450,000 6,332,128
11/15/18 61,840,000 15,020,318
8/15/20 55,640,000 12,111,715
5/15/18 3,720,000 932,976
5/15/05 3,950,000 2,324,614
Strip from U.S. Treasury Securities due:
5/15/98 1,800,000 1,592,856
11/15/98 1,700,000 1,464,992
2/15/99 3,355,000 2,851,146
2/15/11 4,525,000 1,832,172
5/15/11 9,338,000 3,716,898
2/15/12 4,555,000 1,721,061
5/15/13 10,594,000 3,684,064
2/15/14 8,950,000 2,962,897
U.S. Treasury Bonds:
12.750%, 11/15/10 9,000,000 13,708,080
10.375%, 11/15/12 8,830,000 12,207,475
U.S. Treasury Notes:
7.375%, 5/15/96 5,001,000 5,039,308
6.125%, 7/31/96 1,000,000 1,004,840
8.000%, 10/15/96 4,400,000 4,490,728
7.250%, 11/15/96 3,890,000 3,954,418
6.750%, 2/28/97 2,100,000 2,135,763
8.500%, 4/15/97 3,505,000 3,645,761
8.500%, 5/15/97 3,130,000 3,263,995
6.750%, 5/31/97 1,000,000 1,020,620
8.625%, 8/15/97 18,900,000 19,892,250
8.750%, 10/15/97 6,150,000 6,518,016
8.875%, 11/15/97 8,780,000 9,345,169
7.875%, 1/15/98 12,592,000 13,231,422
8.125%, 2/15/98 3,000,000 3,172,500
7.875%, 4/15/98 16,125,000 17,027,032
5.375%, 5/31/98 4,000,000 4,013,120
6.875%, 7/31/99 7,410,000 7,780,500
-----------
(Cost $174,104,991) 189,308,259
-----------
Agency Obligations -- 45.31%
Federal Home Loan Mortgage Corp. Participation
Ctfs.:
#170269, 12.000%, 8/1/15 1,938,783 2,173,246
#200070, 7.500%, 4/1/02 314,427 321,520
#274081, 7.500%, 7/1/16 95,532 97,744
#289711, 7.500%, 4/1/17 171,732 175,599
#555238, 12.000%, 7/1/19 887,323 994,945
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 10 Class D, 10.000%, 7/15/18 1,255,907 1,288,962
Series 11 Class D, 9.500%, 7/15/19 1,500,000 1,669,289
Series 22 Class C, 9.500%, 4/15/20 1,104,876 1,251,748
Series 23 Class E, 9.400%, 8/15/19 823,046 849,687
Series 23 Class F, 9.600%, 4/15/20 1,150,000 1,283,652
Series 32 Class B, 9.500%, 8/15/19 1,000,494 1,020,613
Series 38 Class C, 9.500%, 1/15/19 596,952 612,735
Series 41 Class I, HB, 84.000%, 5/15/20 141,037 331,436
Series 47 Class F, 10.000%, 6/15/20 500,000 559,415
Series 51 Class D, 10.000%, 5/15/19 802,603 807,105
Series 56 Class E, 9.600%, 5/15/20 2,220,582 2,215,606
Series 82 Class D, 8.900%, 10/15/20 1,000,000 1,018,119
Series 99 Class Z, 9.500%, 1/15/21 2,181,715 2,347,545
Series 129 Class E, 8.850%, 6/15/09 3,500,000 3,565,136
Series 134 Class B, IO, 9.000%, 8/15/22 1,177,894 265,026
Series 204 Class E, HB, IF, 5/15/23 21,745 478,384
Series 1022 Class G, 8.000%, 2/15/19 696,411 699,815
Series 1045 Class G, HB, 1066.2085%, 2/15/21 5,071 135,144
Series 1051 Class D, 7.000%, 11/15/19 1,429,602 1,447,085
Series 1065 Class J, 9.000%, 4/15/21 2,000,000 2,175,618
Series 1072 Class A, HB, 1008.500%, 5/15/06 35,279 697,117
Series 1079 Class S, IF, 5/15/21 1,332,679 1,501,756
Series 1084 Class F, AR, 5/15/21 2,000,000 2,039,918
Series 1084 Class S, IF, 5/15/21 1,400,000 1,820,000
Series 1089 Class C, IO, IF, 6/15/21 91,366 1,000,233
Series 1098 Class M, HB, 10.080%, 6/15/06 15,632 326,711
Series 1144 Class KB, 8.500%, 9/15/21 2,000,000 2,117,078
Series 1172 Class L, HB, 1167.776%, 11/15/21 21,071 611,045
Series 1196 Class B, HB, IF, 1/15/22 93,403 934,965
Series 1295 Class JB, 4.500%, 3/15/07 2,400,000 2,173,605
Series 1297 Class H, 7.500%, 1/15/20 1,699,404 1,741,021
Series 1298 Class L, HB, 981.8667, 6/15/07 9,000 328,500
Series 1329 Class S, IO, IF, 8/15/99 5,014,742 269,542
Series 1360 Class PK, 10.000%, 12/15/20 2,500,000 2,869,872
Series 1370 Class F, 6.750%, 3/15/19 600,000 606,329
Series 1378 Class H, 10.000%, 1/15/21 1,500,000 1,728,119
Series 1378 Class JZ, 7.500%, 11/15/21 2,280,849 2,318,934
Series 1418 Class B, 6.500%, 11/15/19 2,250,000 2,253,062
Series 1456 Class G, 6.500%, 12/15/18 6,500,000 6,506,818
Series 1465 Class SA, IO, IF, 2/15/08 29,155,288 1,439,397
Series 1483 Class E, 6.500%, 2/15/20 3,150,000 3,148,138
Series 1489 Class L, 5.500%, 4/15/08 2,087,129 2,036,306
Series 1506 Class F, AR, 5/15/08 1,632,714 1,640,877
Series 1506 Class S, IF, 5/15/08 583,112 530,632
Series 1506 Class SD, IO, IF, 5/15/08 27,449,198 1,269,525
Series 1508 Class KB, IO, IF, 5/15/23 8,872,418 571,118
Series 1531 Class K, 6.000%, 4/15/08 1,127,152 1,093,314
Series 1554 Class KA, PO, 8/15/08 927,383 736,685
Series 1583 Class NS, IF, 9/15/23 1,270,128 939,895
Series 1585 Class NB, IF, 9/15/23 2,271,596 1,839,993
Series 1586 Class A, 6.000%, 9/15/08 1,478,062 1,422,175
Series 1595 Class S, IO, IF, 10/15/11 14,871,975 604,100
Series 1604 Class SE, IF, 11/15/08 701,374 561,099
Series 1628 Class S, IF, 12/15/23 2,550,000 1,606,500
Series 1640 Class A, 5.500%, 10/15/07 1,102,202 1,073,455
Series 1655 Class F, AR, 12/15/08 1,494,755 1,483,544
Series 1655 Class SA, IF, 12/15/08 344,875 257,146
Series 1681 Class K, 7.000%, 8/15/23 1,115,049 1,090,606
Series 1686 Class SH, IF, 2/15/24 1,535,892 1,132,720
Series 1689 Class SD, IF, 10/15/23 1,725,000 1,535,250
Series 1694 Class SE, IF, 5/15/23 1,418,419 1,290,761
Series 1706 Class LA, 7.000%, 3/15/24 5,227,604 5,121,740
Series 1757-A Class A, 9.500%, 5/15/23 3,532,192 3,757,369
Series 1796-A, Class S, IF, 2/15/09 1,000,000 755,000
Series 1798-B, Class C, 6.500%, 3/15/08 2,250,000 2,200,073
GNMA Series 29 Class SD, IO, IF, 4/25/24 24,545,249 613,631
Federal Housing Administration Merrill Lynch
Project Pool 170 Pass Thru Ctfs., 7.430%,
8/1/20 1,368,496 1,413,821
Federal National Mortgage Assn. Mortgage Backed
Securities,
Stripped Trust:
23, Class 2, IO, 10.000%, 9/1/17 1,348,966 346,521
50, Class 2, IO, 10.500%, 3/25/19 180,863 46,912
Federal National Mortgage Assn. Pass Thru
Securities:
Pool #44699, 7.000%, 4/1/17 350,441 355,329
Pool #50966, 7.000%, 1/1/24 2,047,461 2,068,364
Pool #70226, AR, 1/1/19 603,874 604,629
Pool #116612, AR, 3/1/19 2,562,238 2,651,219
Pool #160330, 6.345%, 3/1/99 2,391,211 2,433,057
Pool #303306, 12.500%, 1/1/16 2,182,598 2,515,988
Federal National Mortgage Assn. Pass Thru
Securities
Gtd. Remic Trust:
1988 Class 7-Z, 9.250%, 4/25/18 841,800 897,829
1988 Class 17-B, 9.400%, 10/25/17 736,900 760,273
1989 Class 27-D, 10.000%, 1/25/16 827,434 852,744
1989 Class 34-E, 9.850%, 8/25/14 1,000,000 1,066,785
1989 Class 69-G, 7.600%, 10/25/19 2,250,000 2,321,397
1989 Class 70-G, 8.000%, 10/25/19 2,000,000 2,122,378
1989 Class 73-C, PO, 10/25/19 1,299,464 1,015,206
1989 Class 78-H, 9.400%, 11/25/19 1,250,000 1,393,024
1990 Class 1-D, 8.800%, 1/25/20 3,200,000 3,400,189
1990 Class 60-K, 5.500%, 6/25/20 750,000 713,669
1990 Class 63-H, 9.500%, 6/25/20 900,000 1,003,301
1990 Class 93-G, 5.500%, 8/25/20 1,500,000 1,427,669
1990 Class 94-H, HB, 505.000%, 8/25/20 36,402 527,832
1990 Class 95-J, HB, 1118.040%, 8/25/20 20,445 654,236
1990 Class 102-J, 6.500%, 8/25/20 4,000,000 3,990,276
1990 Class 106-H, 8.500%, 1/25/19 1,135,711 1,137,731
1990 Class 134-SC, IF, 11/25/20 1,210,648 1,325,659
1990 Class 140-K, HB, 652.1454%, 12/25/20 23,237 426,391
1991 Class 4-N, HB, 758.750%, 1/25/06 11,237 162,935
1991 Class 7-K, HB, 908.500%, 2/25/21 8,010 172,206
1991 Class 33-J, HB, 1008.250%, 4/25/06 10,292 206,673
1991 Class 55-G, HB, 1148.550%, 2/25/05 3,554 14,215
1991 Class 144-PZ, 8.500%, 6/25/21 2,134,822 2,258,319
1992 Class 13-S, HB, IF, 1/25/99 35,593 263,385
1992 Class 135-LC, 7.500%, 9/25/07 1,000,000 1,035,809
1992 Class 137-BA, 3.500%, 1/25/17 2,297,663 2,212,970
1992 Class 199-S, IO, IF, 11/25/99 13,023,680 577,861
1992 Class 204-B, 6.000%, 10/25/20 4,300,000 4,160,418
1993 Class 8-SB, IO, IF, 8/25/06 16,001,583 729,992
1993 Class 12-S, IO, IF, 2/25/23 7,558,799 481,873
1993 Class 12-SB, HB, IF, 2/25/23 59,767 552,847
1993 Class 13-G, 6.000%, 6/25/20 2,000,000 1,962,738
1993 Class 15-K, 7.000%, 2/25/08 792,410 788,415
1993 Class 19-G, 5.000%, 5/25/19 3,265,000 3,096,457
1993 Class 32-K, 6.000%, 3/25/23 1,888,847 1,816,240
1993 Class 38-S, IO, IF, 11/25/22 33,215,974 913,439
1993 Class 44-S, IO, IF, 4/25/23 11,772,196 518,683
1993 Class 58-J, 5.500%, 4/25/23 2,065,801 1,930,512
1993 Class 94-K, 6.750%, 5/25/23 1,299,186 1,271,473
1993 Class 113-S, IO, IF, 7/25/23 8,861,933 509,561
1993 Class 139-SG, IF, 8/25/23 3,450,311 2,675,060
1993 Class 152-D, PO, 8/25/23 1,000,000 785,000
1993 Class 155-LA, 6.500%, 5/25/23 4,166,134 4,109,970
1993 Class 155-SB, IO, IF, 9/25/23 10,689,381 581,182
1993 Class 156-SD, IF, 10/25/19 1,250,000 900,000
1993 Class 167-S, IF, 9/25/23 1,776,420 1,314,551
1993 Class 190-SE, IF, 10/25/08 1,719,713 1,336,526
1993 Class 207-SC, IF, 11/25/23 3,435,541 2,507,945
1993 Class 209-KB, 5.659%, 8/25/08 3,632,376 3,466,773
1993 Class 214-L, 6.000%, 12/25/08 838,760 829,005
1993 Class 220-SD, IF, 11/25/13 2,087,684 1,622,506
1993 Class 223-FB, AR, 12/25/23 5,732,752 5,646,761
1993 Class 223-SB, IF, 12/25/23 2,901,860 2,321,488
1993 Class X-225C VO, IF, 12/25/22 1,600,000 1,456,000
1994 Class 8-G, PO, 11/25/23 2,249,815 1,631,116
1994 Class 19-C, 5.000%, 1/25/24 2,519,478 2,329,230
1994 Class 26-G, PO, 2/25/24 2,278,569 1,458,284
1994 Class 30-LA, 6.500%, 2/25/09 1,953,476 1,929,623
1994 Class 36-SG, IO, IF, 8/25/23 7,651,123 399,236
1994 Class 36-SE, IF, 11/25/23 2,061,342 1,649,073
1994 Class 39-F, AR, 3/25/24 1,133,152 1,125,356
1994 Class 39-S, IF, 3/25/24 435,828 387,067
1994 Class 53-CA, PO, 11/25/23 2,500,000 1,731,250
1994 Class 59-PK, 6.000%, 3/25/24 1,766,334 1,717,140
1994 Class 82-SA, IO, IF, 5/25/23 41,672,922 1,119,751
1995 Class 13-B, 6.500%, 3/25/09 3,457,934 3,381,203
1995 Class XG1C C, 8.800%, 1/25/25 1,000,000 1,096,116
1992-G Class 15-Z, 7.000%, 1/25/22 1,633,455 1,588,745
1992-G Class 27-SQ, HB, IF, 5/25/22 7,749 1,118,615
1992-G Class 42-Z, 7.000%, 7/25/22 1,644,947 1,620,098
1992-G Class 59-C, 6.000%, 12/25/21 1,300,000 1,261,831
1992-G Class 61-Z, 7.000%, 10/25/22 1,028,251 946,207
1993-G Class 19-K, 6.500%, 6/25/19 2,208,259 2,169,833
1993-G Class 27-SE, IF, 8/25/23 1,343,715 863,337
1994-G Class 13-ZB, 7.000%, 11/17/24 2,359,038 2,258,067
Government National Mortgage Assn. Pass Thru
Securities
Guaranteed Remic Trust:
1994 Class 4-SA, IO, IF, 10/16/22 7,700,000 490,875
Government National Mortgage Assn. Pass Thru
Pool:
#023594, 8.500%, 7/15/08 453,589 479,352
#190923, 9.000%, 12/15/16 445,009 474,753
#297628, 8.000%, 9/15/22 3,428,413 3,581,557
#313110, 7.500%, 11/15/22 2,076,338 2,140,142
#345288, 7.500%, 3/15/23 852,574 878,329
International Bank For Reconstruction &
Development, 2/15/15 2,000,000 576,830
------------
(Cost $217,452,161) 232,446,081
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 421,754,340
------------
(Cost $391,557,152)
CORPORATE BONDS AND NOTES -- 9.07%
Finance -- 7.54%
American Express Co., 11.625%, 12/12/00 1,400,000 1,562,750
Associates Corp. of North America:
9.125%, 4/1/00 2,350,000 2,652,372
8.150%, 8/1/09 3,085,000 3,516,838
Chase Manhattan Grantor Trust, Series 95-B,
5.900%, 11/15/01 1,692,081 1,702,943
Collaterized Mortgage Obligation Trust CMO:
Series 10, Class Z, 8.950%, 12/1/16 3,070,227 3,121,344
Series 12, Class D, 9.500%, 2/1/17 889,933 953,517
Series 16, Class Q, 14.750%, 3/20/18 491,993 521,513
Ford Credit Grantor Trust, Series 94-A, 6.350%,
5/15/99 2,040,088 2,061,344
Ford Motor Credit Co., 9.625%, 2/27/96 2,150,000 2,161,761
General Motors Acceptance Corp. Medium Term Note,
7.550%, 1/14/97 2,500,000 2,550,125
Government National Mortgage Assn. Backed Trust I
CMO, Class A, Zero Coupon, PO, 5/20/17 354,912 278,101
Kidder Peabody Mortgage Assets Trust CMO, Series
24 Class E, 8.940%, 4/1/19 1,125,000 1,162,405
Merrill Lynch Trust Series 43 Class E CMO 6.500%,
8/27/15 4,000,000 3,979,956
Morgan Stanley Mortgage Trust CMO:
Series 35-2, HB, IF, 4/20/21 5,248 760,996
Series 37-2, HB, IF, 7/20/21 5,996 779,480
Series 39-3, PO, 12/20/21 999,131 815,851
PaineWebber CMO Trust:
Series H-4, 8.750%, 4/1/18 1,030,480 1,080,241
Series P-4, 8.500%, 8/1/19 2,479,357 2,620,405
Rural Housing Trust 1987-1 Sr. Mortgage Pass Thru
Ctf., Class 3-B, 7.330%, 4/1/26 1,199,436 1,225,594
Shearson Lehman, Inc. CMO, Mortgage Backed
Sequential Pay Bond, Series U, Sequence U-1,
8.750%, 8/27/17 322,556 325,249
Standard Credit Card Master Trust Asset Backed
Ctf., Series 1995-5, Class A, Adjustable Rate,
5/8/00 2,000,000 2,000,620
Toyota Auto Receivables Grantor Trust, Series
95-A Class A, 5.850%, 3/15/01 1,314,302 1,320,767
World Omni Automobile LSE SEC Trust, Series 95-5
Class A, 6.050%, 11/25/01 1,500,000 1,513,619
------------
(Cost $39,352,083) 38,667,791
------------
Industrial -- 1.24%
Boeing Co., 7.950%, 8/15/24 1,730,000 2,036,573
Dominos Pizza Funding Corp., Series A, Adjustable
Rate, 4/1/96 995,000 1,005,235
General Motors Corp., 8.800%, 3/1/21 2,695,000 3,321,668
------------
(Cost $5,521,130) 6,363,476
------------
Public Utility -- 0.29%
Nippon Telegraph & Telephone Corp., 9.500%,
7/27/98 1,355,000 1,479,850
------------
(Cost $1,447,437)
TOTAL CORPORATE BONDS AND NOTES 46,511,117
------------
(Cost $46,320,650)
FOREIGN -- 3.25%
African Development Bank Note, 9.300%, 7/1/00 1,572,000 1,784,786
Kingdom of Belgium Put Euro Dollar, 9.200%, 6/28/10 2,000,000 2,542,500
Metropolis of Tokyo, 8.700%, 10/05/99 2,250,000 2,483,620
National Australia Bank Ltd, 9.700%, 10/15/98 800,000 879,136
Province of Ontario, 15.750%, 3/15/12 1,415,000 1,653,031
Province of Ontario Eurobond, 7.000%, 1/27/99 4,300,000 4,461,250
Province of Quebec, 9.125%, 8/22/01 2,515,000 2,849,809
------------
(Cost $15,916,088) 16,654,13
------------
TOTAL INVESTMENTS $512,978,615
============
(Cost $481,852,916)
</TABLE>
<PAGE>
THE WOODWARD FUNDS
BOND FUND
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1995
Notes to Portfolio of Investments
(a) The Funds invest in securities whose value is derived from an underlying
pool of mortgages or consumer loans. Some of these securities are
collateralized mortgage obligations (CMOs). CMOs are debt securities
issued by U.S. government agencies or by financial institutions and other
mortgage lenders which are collateralized by a pool of mortgages held
under an indenture. Descriptions of certain collateralized mortgage
obligations are as follows:
Adjustable Rate (AR)
Inverse Floaters (IF) represent securities that pay interest at a rate
that increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these
securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not
be fully recouped. These securities are subject to accelerated principal
paydowns as a result of prepayments or refinancing of the underlying pool
of mortgage instruments. As a result, interest income may be reduced
considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as
those associated with IO securities. Unlike IO's, the owner also has a
right to receive a very small portion of principal. The high interest rate
results from taking interest payments from other classes in the REMIC
Trust and allocating them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion
only on an underlying pool of mortgage loans. The market value of these
securities is extremely volatile in response to changes in market interest
rates. As prepayments on the underlying mortgages of these securities
increase, the yield on these securities increases.
(b) Based upon estimated future cash flows, income is currently not being
recognized on certain IO, HB, and CMO securities with an aggregate market
value of $1,496,849. The book cost of certain IO and HB securities
includes a write down in the amount of $6,056,100 taken during 1993 to
properly state the net realizable value of the securities. The write down
results in a lower cost of investments than the tax cost disclosed in Note
4 in Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
INTERMEDIATE BOND FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 3.30%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05, and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $8,248,085 $ 8,248,085
Nikko Securities, Revolving Repurchase Agreement,
5.90%, 1/2/96 (secured by various U.S. Treasury
Bills with maturities ranging fom 9/19/96 through
10/17/96, and U.S. Treasury Notes with maturities
ranging from 5/31/96 through 8/15/00, all held at
the Bank of New York) 5,000,000 5,000,000
------------
(Cost $13,248,085) 13,248,085
------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 85.73%
U.S. Treasury Securities -- 47.10%
Principal Strip from U.S. Treasury Securities
due:
2/15/99 6,900,000 5,864,655
Strip from U.S. Treasury Securities due:
5/15/98 6,600,000 5,840,472
11/15/98 7,600,000 6,549,376
2/15/99 2,760,000 2,345,503
5/15/05 5,660,000 3,330,967
8/15/08 6,350,000 3,046,667
2/15/09 4,300,000 1,996,318
U.S. Treasury Bonds:
12.750%, 11/15/10 6,731,000 10,252,121
10.375%, 11/12/12 4,800,000 6,636,000
U.S. Treasury Notes:
7.375%, 5/15/96 540,000 544,136
6.125%, 7/31/96 1,000,000 1,004,840
7.250%, 11/15/96 2,000,000 2,033,120
6.750%, 2/28/97 5,000,000 5,085,150
8.500%, 4/15/97 11,640,000 12,107,462
6.875%, 4/30/97 10,000,000 10,206,200
8.500%, 5/15/97 11,470,000 11,961,031
6.750%, 5/31/97 2,000,000 2,041,240
8.625%, 8/15/97 3,000,000 3,157,500
8.750%, 10/15/97 9,950,000 10,545,408
8.875%, 11/15/97 19,985,000 21,271,434
7.875%, 1/15/98 23,710,000 24,913,994
8.125%, 2/15/98 8,300,000 8,777,250
7.875%, 4/15/98 12,425,000 13,120,055
5.125%, 4/30/98 3,320,000 3,313,260
5.375%, 5/31/98 4,500,000 4,514,760
6.875%, 7/31/99 8,000,000 8,400,000
------------
(Cost $185,580,125) 188,858,919
------------
Agency Obligations -- 38.63%
Federal Home Loan Mortgage Corp. Participation
Ctf.:
#170269, 12.000%, 8/01/15 1,533,401 1,718,840
#252600, 7.500%, 9/1/08 369,227 379,170
#252601, 8.000%, 6/1/01 389,128 400,802
#555238, 12.000%, 7/1/19 673,464 755,147
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 10 Class D, 10.000%, 7/15/18 1,998,034 2,050,621
Series 11 Class D, 9.500%, 7/15/19 500,000 556,429
Series 14 Class A, 9.000%, 12/15/19 44,298 44,434
Series 18 Class A, 9.000%, 11/15/19 80,381 80,707
Series 23 Class E, 9.400%, 8/15/19 548,697 566,458
Series 30 Class C, 9.500%, 5/15/18 731,331 747,009
Series 32 Class B, 9.500%, 8/15/19 2,718,733 2,773,404
Series 38 Class C, 9.500%, 1/15/19 397,968 408,490
Series 39 Class E, 10.000%, 10/15/19 876,507 898,953
Series 41 Class I, HB, 84.000%, 5/15/20 105,777 248,577
Series 47 Class F, 10.000%, 6/15/20 500,000 559,415
Series 51 Class D, 10.000%, 5/15/19 525,068 528,013
Series 56 Class E, 9.600%, 5/15/20 2,599,353 2,593,528
Series 63 Class F, 9.350%, 10/15/19 315,973 320,447
Series 82 Class D, 8.900%, 10/15/20 700,000 712,683
Series 99 Class Z, 9.500%, 1/15/21 2,181,715 2,347,545
Series 115 Class G, 9.000%, 3/15/18 684,605 683,762
Series 129 Class E, 8.850%, 6/15/09 2,700,000 2,750,248
Series 191 Class D, 9.000%, 9/15/21 203,506 203,398
Series 204 Class E, HB, IF, 5/15/23 7,008 154,175
Series 1022 Class G, 8.000%, 2/15/19 654,626 657,826
Series 1072 Class A, HB, 1008.500%, 5/15/06 23,438 463,139
Series 1079 Class S, IF, 5/15/21 999,510 1,126,317
Series 1084 Class F, AR, 5/15/21 500,000 509,979
Series 1084 Class S, IF, 5/15/21 350,000 455,000
Series 1098 Class M, HB, 10.080%, 6/15/06 3,474 72,602
Series 1144 Class KB, 8.500%, 9/15/21 2,000,000 2,117,078
Series 1172 Class L, HB, 1167.776%, 11/15/21 18,197 527,720
Series 1196 Class B, HB, IF, 1/15/22 61,111 611,721
Series 1295 Class JB, 4.500%, 3/15/07 1,500,000 1,358,503
Series 1298 Class L, HB, 981.86%, 6/15/07 6,000 219,000
Series 1329 Class S, IO, IF, 8/15/99 4,297,785 231,006
Series 1360 Class PK, 10.000%, 12/15/20 2,000,000 2,295,898
Series 1378 Class H, 10.000%, 1/15/21 1,500,000 1,728,119
Series 1418 Class B, 6.500%, 11/15/19 1,250,000 1,251,701
Series 1456 Class G, 6.500%, 12/15/18 3,000,000 3,003,147
Series 1465 Class SA, IO, IF, 2/15/08 26,873,569 1,326,748
Series 1489 Class L, 5.500%, 4/15/08 1,744,840 1,702,351
Series 1506 Class F, AR, 5/15/08 1,088,476 1,093,918
Series 1506 Class SD, IO, IF, 5/15/08 15,122,475 699,414
Series 1506 Class S, IF, 5/15/08 388,742 353,755
Series 1508 Class KB, IF, 5/15/23 4,613,657 296,981
Series 1531 Class K, 6.000%, 4/15/08 1,040,448 1,009,212
Series 1583 Class NS, IF, 9/15/23 982,727 727,218
Series 1585 Class NB, IF, 9/15/23 2,513,255 2,035,737
Series 1586 Class A, 6.000%, 9/15/08 1,377,285 1,325,208
Series 1595 Class S, IO, IF, 10/15/13 20,963,156 851,523
Series 1628 Class S, IF, 12/15/23 2,500,000 1,575,000
Series 1640 Class A, 5.500%, 10/15/07 1,992,442 1,940,477
Series 1655 Class F, AR, 12/15/08 970,128 962,852
Series 1655 Class SA, IF, 12/15/08 223,945 166,978
Series 1689 Class SD, IF, 10/15/23 1,500,000 1,335,000
Series 1694 Class SE, IF, 5/15/23 1,086,730 988,924
Series 1706 Class LA, 7.000%, 3/15/24 3,400,068 3,331,213
Series 1757-A Class A, 9.500%, 5/15/23 2,649,144 2,818,027
Series 1796-A, Class S, IF, 2/15/09 1,391,843 1,050,841
GNMA Series 29 Class SD, IO, IF, 4/25/24 14,249,782 356,245
Federal National Mortgage Assn. Mortgage Backed
Securities Stripped Trust:
46, Class 1, 7.000%, 12/25/03 290,697 292,877
50, Class 2, IO, 10.500%, 3/25/19 286,367 74,278
Federal National Mortgage Assn. Pass Thru
Securities
Gtd. Remic Trust:
1988 Class 7-Z, 9.250%, 4/25/18 823,889 878,726
1988 Class 17-B, 9.400%, 10/25/17 128,067 132,130
1989 Class 26-D, 10.000%, 5/25/04 1,000,000 1,057,759
1989 Class 27-D, 10.000%, 1/25/16 1,510,067 1,556,259
1989 Class 34-D, 9.850%, 7/25/13 750,247 760,142
1989 Class 70-G, 8.000%, 10/25/19 2,000,000 2,122,378
1989 Class 73-C, PO, 10/25/19 275,805 215,472
1989 Class 78-H, 9.400%, 11/25/19 1,750,000 1,950,233
1990 Class 1-D, 8.800%, 1/25/20 950,000 1,009,431
1990 Class 60-K, 5.500%, 6/25/20 1,250,000 1,189,449
1990 Class 63-H, 9.500%, 6/25/20 755,000 841,658
1990 Class 93-G, 5.500%, 8/25/20 1,250,000 1,189,724
1990 Class 94-H, HB, 505.000%, 8/25/20 21,561 312,639
1990 Class 95-J, HB, 1118.040%, 8/25/20 10,222 327,119
1990 Class 102-J, 6.500%, 8/25/20 4,600,000 4,588,817
1990 Class 106-H, 8.500%, 1/25/19 879,775 881,341
1990 Class 134-SC, IF, 11/25/20 719,616 787,979
1990 Class 140-K, HB, 652.145%, 12/25/20 21,687 397,964
1991 Class 4-N, HB, 758.750%, 1/25/06 3,966 57,503
1991 Class 7-K, HB, 908.500%, 2/25/21 2,002 43,052
1991 Class 20-M, HB, 908.750%, 3/25/06 2,044 33,936
1991 Class 33-J, HB, 1008.250%, 4/25/06 4,803 96,448
1991 Class 55-G, HB, 1148.550%, 2/25/05 4,442 17,769
1991 Class 161-H, 7.500%, 2/25/21 780,627 794,256
1992 Class 13-S, HB, IF, 1/25/99 10,539 77,988
1992 Class 137-BA, 3.500%, 1/25/17 1,969,426 1,896,831
1992 Class 199-S, IO, IF, 11/25/99 9,074,832 402,650
1992 Class 204-B, 6.000%, 10/25/20 2,000,000 1,935,078
1993 Class 8-SB, IO, IF, 8/25/06 15,386,138 701,916
1993 Class 12-S, IO, IF, 2/25/23 4,781,380 304,813
1993 Class 12-SB, HB, IF, 2/25/23 52,736 487,806
1993 Class 19-G, 5.000%, 5/25/19 3,530,000 3,347,778
1993 Class 38-S, IO, IF, 11/25/22 31,190,042 857,726
1993 Class 58-J, 5.50%, 4/25/23 1,549,351 1,447,884
1993 Class 94-K, 6.750%, 5/25/23 866,124 847,649
1993 Class 110-SC, IO, IF, 7/25/23 4,235,993 177,361
1993 Class 113-S, IO, IF, 7/25/23 7,935,546 456,294
1993 Class 139-SG, IF, 8/25/23 2,597,473 2,013,847
1993 Class 152-D, PO, 8/25/23 700,000 549,500
1993 Class 155-LA, 6.500%, 5/25/23 1,735,889 1,712,488
1993 Class 155-SB, IO, IF, 9/25/23 7,696,354 418,451
1993 Class 156-SD, IF, 10/25/19 1,000,000 720,000
1993 Class 167-S, IF, 9/25/23 2,138,284 1,582,330
1993 Class 190-SE, IF, 10/25/08 1,495,403 1,162,197
1993 Class 207-SC, IF, 11/25/23 2,366,706 1,727,695
1993 Class 209-KB, 5.659%, 8/25/08 2,804,924 2,677,045
1993 Class 214-L, 6.000%, 12/25/08 1,677,520 1,658,009
1993 Class 220-SD, IF, 11/25/13 1,242,669 965,777
1993 Class 223-FB, AR, 12/25/23 721,333 710,513
1993 Class 223-SB, IF, 12/25/23 651,339 521,071
1993 Class X225-C VO, IF, 12/25/22 2,000,000 1,820,000
1994 Class 8-G, PO, 11/25/23 1,730,627 1,254,705
1994 Class 19-C, 5.000%, 1/25/24 2,082,214 1,924,984
1994 Class 26-G, PO, 2/25/24 2,199,391 1,407,610
1994 Class 30-LA, 6.500%, 2/25/09 2,123,344 2,097,416
1994 Class 36-SE, IF, 11/25/23 1,198,454 958,764
1994 Class 36-SG, IO, IF, 8/25/23 3,480,275 181,601
1994 Class 39-F, AR, 3/25/24 1,019,837 1,012,820
1994 Class 39-S, IF, 3/25/24 392,245 348,361
1994 Class 53-CA, PO, 11/25/23 3,352,442 2,321,566
1994 Class 59-PK, 6.000%, 3/25/24 2,826,135 2,747,424
1994 Class 82-SA, IO, IF, 5/25/23 20,541,515 551,951
1995 Class 13-B, 6.500%, 3/25/09 2,497,397 2,441,980
1995 Class X-G1C C, 1/25/25 1,000,000 1,096,116
1992-G Class 27-SQ, HB, IF, 5/25/22 3,907 563,973
1992-G Class 42-Z, 7.000%, 7/25/22 630,973 621,441
1993-G Class 8-PG, 6.500%, 7/25/18 1,000,000 997,249
1993-G Class 13-G, 6.000%, 6/25/20 1,000,000 981,369
1993-G Class 19-K, 6.500%, 6/25/19 1,613,728 1,585,647
1993-G Class 27-SE, IF, 8/25/23 1,535,674 986,671
1994-G Class 13-ZB, 7.000%, 11/17/24 2,359,038 2,258,069
Federal National Mortgage Assn. Pass Thru Pool:
#111366, AR, 8/01/19 517,219 534,649
#116612, AR, 3/01/19 1,643,700 1,700,782
#160330, 6.345%, 3/1/99 2,391,210 2,433,057
#303306, 12.500%, 1/1/16 1,440,515 1,660,552
Government National Mortgage Assn. Pass Thru
Pool:
#297628, 8.000%, 9/15/22 2,285,609 2,387,705
#313110, 7.500%, 11/15/22 1,922,535 1,981,613
------------
(Cost $149,905,032) 154,886,744
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 343,745,663
------------
(Cost $335,485,157)
CORPORATE BONDS AND NOTES -- 9.24%
Finance -- 8.45%
American Express Co., 11.625%, 12/12/00 1,250,000 1,395,313
American Express Credit Corp., 8.500%, 6/15/99 300,000 325,020
Associates Corp. of North America:
9.125%, 4/1/00 1,675,000 1,890,521
8.150%, 8/1/09 3,625,000 4,132,427
Bear Stearns Secured Investments, Inc. CMO,
Series 88-7B, 9.250%, 12/1/18 576,823 574,723
Case Equipment Loan Trust Asset Backed Ctf.
1994 Series A, Class A2, 4.650%, 8/15/99 1,398,171 1,389,794
1994 Series C, Class A2, 8.100%, 6/15/01 2,000,000 2,089,818
Chase Manhattan Grantor Trust Automobile Loan
Pass Thru Ctfs. Series 1995-B, Class A,
5.900%, 11/15/01 1,450,355 1,459,665
Collaterized Mortgage Obligation Trust CMO:
Series 10, Class Z, 8.950%, 12/1/16 4,950,742 5,033,167
Series 12, Class D, 9.500%, 2/1/17 444,966 476,759
Series 16 Class Q, 14.750%, 3/20/18 277,484 294,133
Collaterized Mortgage Securities Corp. CMO:
Series 88-2 Class B, 8.800%, 4/20/19 585,723 617,454
General Motors Acceptance Corp. Medium Term Note,
7.550%, 1/14/97 4,735,000 4,829,937
Goldman Sachs Trust 7-C CMO, Series 7, Class C-2,
9.100%, 4/27/17 16,195 16,184
Merrill Lynch Trust 43-E CMO, Series 43, Class E,
6.500%, 8/27/15 1,500,000 1,492,483
Morgan Stanley Mortgage Trust, CMO:
Series 35-2, HB, IF, 4/20/21 3,999 579,806
Series 37-2, HB, IF, 7/20/21 4,065 528,466
Series 39-3, PO, 12/20/21 777,102 634,550
Rural Housing Trust 1987-1, Senior Mortgage
Pass-Thru Ctf.,
Sub Class 3-B, 7.330%, 4/1/26 536,660 548,364
Standard Credit Card Master Trust Asset Backed
Ctf.
Series 1995-5, Class A, IF, 5/8/00 200,000 200,062
Series 1995-10, Class A, 5.900%, 2/7/01 2,520,000 2,547,339
Toyota Auto Receivable Grantor Trust Asset Backed
Ctf.
Series 1995-A, Class A, 5.850%, 3/15/01 1,311,436 1,317,887
World Omni Automobile Lse Sec Trust Asset Backed
Ctf.
Series 1995-A, Class A, 6.050%, 11/25/01 1,500,000 1,513,619
------------
(Cost $33,041,515) 33,887,491
------------
Industrial -- 0.79%
Boeing Co., 8.375%, 3/1/96 3,020,000 3,034,257
Dominos Pizza Funding Corp., Series A, Adjustable
Rate, 4/1/96 145,000 146,492
------------
(Cost $3,183,157) 3,180,749
------------
TOTAL CORPORATE BONDS AND NOTES 37,068,240
------------
(Cost $36,224,672)
FOREIGN -- 1.73%
African Development Bank Note, 9.300%, 7/1/00 983,000 1,116,059
Metropolis of Tokyo, 8.700%, 10/5/99 1,500,000 1,655,746
National Australia Bank Ltd., 9.700%, 10/15/98 400,000 439,568
Province of Ontario Eurobond, 7.000%, 1/27/99 3,600,000 3,735,000
------------
(Cost $6,758,488) 6,946,373
------------
TOTAL INVESTMENTS $401,008,361
============
(Cost $391,716,402)
</TABLE>
<PAGE>
THE WOODWARD FUNDS
INTERMEDIATE BOND FUND
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1995
Notes to Portfolio of Investments
(a) The Funds invest in securities whose value is derived from an underlying
pool of mortgages or consumer loans. Some of these securities are
collateralized mortgage obligations (CMOs). CMOs are debt securities
issued by U.S. government agencies or by financial institutions and other
mortgage lenders which are collateralized by a pool of mortgages held
under an indenture. Descriptions of certain collateralized mortgage
obligations are as follows:
Adjustable Rate (AR)
Inverse Floaters (IF) represent securities that pay interest at a rate
that increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these
securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not
be fully recouped. These securities are subject to accelerated principal
paydowns as a result of prepayments or refinancing of the underlying pool
of mortgage instruments. As a result, interest income may be reduced
considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as
those associated with IO securities. Unlike IO's, the owner also has a
right to receive a very small portion of principal. The high interest rate
results from taking interest payments from other classes in the REMIC
Trust and allocating them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion
only on an underlying pool of mortgage loans. The market value of these
securities is extremely volatile in response to changes in market interest
rates. As prepayments on the underlying mortgages of these securities
increase, the yield on these securities increases.
(b) Based upon estimated future cash flows, income is currently not being
recognized on certain IO, HB, and CMO securities with an aggregate market
value of $1,408,358. The book cost of certain IO and HB securities
includes a write down in the amount of $2,639,653 taken during 1993 to
properly state the net realizable value of the securities. The write down
results in a lower cost of investments than the tax cost disclosed in Note
4 in Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
SHORT BOND FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 0.16%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05, and U.S. Treasury Notes,
5.500%, 11/15/98, all held at Chemical Bank) $ 262,082 $ 262,082
------------
(Cost $262,082)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 87.11%
U.S. Treasury Securities -- 71.75%
Strips from U.S. Treasury Note Principal due:
5/15/96 380,000 372,997
8/15/98 500,000 436,475
U.S. Treasury Notes:
5.875%, 5/31/96 1,430,000 1,433,575
7.625%, 5/31/96 3,200,000 3,229,984
7.875%, 7/15/96 1,500,000 1,520,160
6.125%, 7/31/96 4,000,000 4,019,360
8.000%, 10/15/96 1,000,000 1,020,620
7.500%, 1/31/97 1,945,000 1,990,883
6.625%, 3/31/97 500,000 508,280
8.500%, 4/15/97 2,750,000 2,860,440
6.500%, 5/15/97 10,500,000 10,675,560
8.500%, 5/15/97 500,000 521,405
6.750%, 5/31/97 600,000 612,372
6.125%, 5/31/97 25,490,000 25,816,552
8.500%, 7/15/97 250,000 262,070
8.750%, 10/15/97 490,000 519,322
8.875%, 11/15/97 4,000,000 4,257,480
5.750%, 10/31/97 250,000 252,422
7.875%, 1/15/98 11,265,000 11,837,037
5.625%, 1/31/98 1,450,000 1,462,006
7.875%, 4/15/98 3,200,000 3,379,008
5.125%, 4/30/98 1,000,000 997,970
9.000%, 5/15/98 4,500,000 4,874,062
5.375%, 5/31/98 1,100,000 1,103,608
5.125%, 6/30/98 4,500,000 4,490,865
5.250%, 7/31/98 3,000,000 3,000,930
5.125%, 11/30/98 5,000,000 4,983,600
5.125%, 12/31/98 500,000 498,280
5.875%, 3/31/99 1,000,000 1,017,810
7.000%, 4/15/99 1,000,000 1,051,250
6.500%, 4/30/99 3,000,000 3,109,680
6.750%, 5/31/99 2,200,000 2,298,309
6.750%, 6/30/99 990,000 1,035,164
6.375%, 7/15/99 1,700,000 1,761,353
6.875%, 8/31/99 1,000,000 1,050,940
7.125%, 9/30/99 1,000,000 1,060,000
7.500%, 10/31/99 1,500,000 1,610,385
7.750%, 11/30/99 2,250,000 2,438,078
7.750%, 12/31/99 1,000,000 1,085,936
7.750%, 1/31/00 1,300,000 1,412,937
------------
(Cost $114,151,228) 115,869,165
------------
Agency Obligations -- 15.36%
Federal Home Loan Bank Consolidated Bond:
4.265%, 3/12/96 500,000 499,050
4.410%, 7/8/96 665,000 661,350
4.410%, 8/26/96 1,000,000 994,950
4.750%, 1/13/97 1,500,000 1,492,600
4.920%, 2/24/97 1,000,000 996,180
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 2 Class Z, 9.300%, 3/15/19 1,418,594 1,515,951
Series 10 Class D, 10.000%, 7/15/18 285,434 292,946
Series 11 Class C, 9.500%, 4/15/19 266,023 277,662
Series 81 Class A, 8.125%, 11/15/20 450,236 461,492
Series 85 Class C, 8.600%, 1/15/21 1,000,000 1,056,045
Series 99 Class Z, 9.500%, 1/15/21 1,090,858 1,173,773
Series 192 Class H, 9.000%, 7/15/21 521,411 535,744
Series 1045 Class G, HB, 1066.2085%, 2/15/21 2,536 67,572
Series 1096 Class D, 7.000%, 6/15/20 1,344,241 1,350,867
Series 1238 Class E, 6.500%, 2/15/04 329,352 329,282
Series 1477 Class F, 6.650%, 5/15/18 300,000 305,973
Series 1559 Class VF, 6.250%, 2/15/20 500,000 502,214
Series 1578 Class C, 5.500%, 11/15/12 1,000,000 998,689
Series 1603 Class F, 5.750%, 4/15/21 500,000 489,739
Series 1623 Class PC, 5.000%, 11/15/07 300,000 297,525
Federal National Mortgage Assn. Medium Term Note,
4.920%, 9/28/98 220,000 215,181
Federal National Mortgage Assn. Mortgage Backed
Securities
Stripped Trust 268, Class 2, IO, 9.000%,
12/25/21 282,888 69,485
Federal National Mortgage Assn. Pass Thru
Securities:
Pool #070226, AR, 1/1/19 362,325 362,778
Pool #111366, AR, 8/1/19 417,754 431,832
Pool #116612, AR, 3/1/19 918,538 950,437
Federal National Mortgage Assn. Pass Thru
Securities
Gtd. Remic Trust:
1988 Class 7-Z, 9.250%, 4/25/18 895,532 955,137
1988 Class 15-A, 9.000%, 6/25/18 188,049 198,405
1988 Class 16-B, 9.500%, 6/25/18 1,124,388 1,212,273
1988 Class 17-B, 9.400%, 10/25/17 64,034 66,065
1988 Class 19-H, 9.500%, 7/25/17 267,638 269,709
1989 Class 27-D, 10.000%, 1/25/16 206,859 213,186
1989 Class 31-D, 9.150%, 8/25/18 358,340 367,269
1989 Class 73-C, PO, 10/25/19 212,157 165,748
1990 Class 77-C, 9.000%, 7/25/19 387,757 404,463
1990 Class 94-C, 8.000%, 1/25/19 183,675 186,015
1991 Class 16-G, 8.000%, 3/25/04 1,050,000 1,066,830
1991 Class 41-O, 9.000%, 8/25/06 375,000 392,591
1992 Class 13-S, HB, IF, 1/25/99 4,479 33,146
1992 Class 137-BA, 3.500%, 1/25/17 328,238 316,139
1993 Class 35-C, 5.500%, 10/25/01 200,000 199,310
1993 Class 85-PD, 5.500%, 7/25/03 300,000 299,181
1993 Class 107-D, 6.500%, 12/25/06 400,000 409,600
1994-G Class 7-PB, 6.000%, 4/17/08 1,000,000 1,002,659
1994-G Class 8-B, 6.650%, 8/17/07 700,000 707,000
------------
(Cost $24,493,755) 24,794,043
------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 140,663,208
------------
(Cost $138,644,983)
CORPORATE BONDS AND NOTES -- 12.73%
Finance -- 10.62%
American Southwest Financial Corp. CMO, Series
67-D,
9.450%, 3/1/15 464,754 467,208
Associates Corp. of North America:
8.800%, 3/1/96 405,000 407,048
9.700%, 5/1/97 765,000 805,392
6.800%, 12/15/97 800,000 819,067
8.500%, 1/10/00 500,000 547,895
7.550%, 8/23/01 250,000 268,825
Associates Corp. of North America Medium Term
Note
Tranche #SR 00455, 7.480%, 7/27/02 300,000 322,988
Bear Stearns Secured Investments, Inc. CMO,
Series 88-7B, 9.250%, 12/1/18 288,412 287,361
Beneficial Finance Corp. Medium Term Note:
Tranche #00107, 9.250%, 10/15/96 1,150,000 1,182,456
Tranche #00490, 7.200%, 2/21/97 400,000 407,515
Tranche #00659, 7.340%, 11/26/99 200,000 210,421
CFC-7 Grantor Trust Asset Backed Ctf., 8.650%,
10/15/96 262,064 262,983
Chemical Bank Grantor Trust 1989-B Participation
Marine Contracts, Class 1, 8.900%, 12/15/96 212,785 218,927
Citicorp Mortgage Securities, Inc. Remic Pass
Thru Ctf.,
Series 89-16, Class A-1, AR, 4/1/19 336,678 336,678
Collaterized Mortgage Obligation Trust CMO:
Series 12, Class D, 9.500%, 2/1/17 222,483 238,379
Collaterized Mortgage Securities Corp. CMO:
Series 88-16, Class B, 9.100%, 2/27/18 44,941 44,948
Ford Credit Grantor Trust Asset Backed Ctf.
Series 1994-B, Class A, 7.300%, 10/15/99 242,975 248,028
Ford Motor Credit Co.:
8.625%, 4/15/96 475,000 479,028
9.500%, 4/15/00 590,000 669,731
Ford Motor Credit Co. Euro Dollar Debenture,
9.625%, 2/27/96 500,000 502,735
Ford Motor Credit Co. Medium Term Note:
9.750%, 5/6/96 1,005,000 1,019,900
9.000%, 7/26/96 500,000 509,726
Tranche #TR 00493, 6.450%, 7/21/97 300,000 304,111
Tranche #00281, 7.470%, 7/29/99 1,000,000 1,054,275
Tranche #00442, 7.590%, 4/6/00 300,000 319,328
General Electric Capital Corp., 8.750%, 11/26/96 500,000 514,477
General Electric Capital Corp. Medium Term Note
Tranche #TR 00624, 7.665%, 2/3/97 500,000 512,393
General Motors Acceptance Corp. Medium Term Note
Tranche #00162, 7.750%, 2/20/97 250,000 255,992
Goldman Sachs CMO:
Trust 4, Series C-3, 9.450%, 10/27/03 269,782 271,120
Trust 7, Class 2-C, 9.100%, 4/27/17 7,393 7,388
Lomas Mortgage Funding Corp. II, CMO, Series
88-1A,
9.000%, 9/20/15 62,912 63,463
MBNA Master Credit Card Trust Asset Backed Ctf.:
Trust 91-1, Series 1991-1A, 7.750%, 10/15/98 1,000,000 1,017,229
Trust 92-1, Series 1992-1A, 7.250%, 6/15/99 750,000 768,682
Morgan Stanley Mortgage Trust, CMO, Series 38-4,
PO, 11/20/21 71,667 56,258
Ryland Acceptance Corp. Four, CMO, Series 78,
Class 78-B, 9.550%, 3/1/16 653,661 675,166
Shearson Lehman, Inc. CMO, Mortgage Backed
Sequential Pay Bond, Series U, Sequence U-1,
8.750%, 8/27/17 30,833 31,141
Western Financial Grantor Trust Auto Receivable P/T Ctf:
1993-4, Class A1, 4.600%, 4/1/99 614,418 609,109
1994-3, Class A, 6.650%, 12/1/99 423,509 430,607
------------
(Cost $18,335,649) 18,581,444
------------
Industrial -- 2.11%
Coca-Cola Co., 7.750%, 2/15/96 290,000 290,799
Ford Holdings Inc.:
9.250%, 3/1/00 468,000 525,722
9.250%, 7/15/97 861,000 907,744
General Electric Co., 7.875%, 5/1/96 488,000 491,940
Pepsico, Inc.:
7.875%, 8/15/96 445,000 451,858
7.000%, 11/15/96 182,000 184,628
Waste Management Inc., 7.875%, 8/15/96 550,000 558,133
------------
(Cost $1,957,205) 1,977,358
------------
TOTAL CORPORATE BONDS AND NOTES 20,558,802
------------
(Cost $20,292,854)
TOTAL INVESTMENTS $161,484,092
============
(Cost $159,199,919)
</TABLE>
<PAGE>
THE WOODWARD FUNDS
SHORT BOND FUND
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1995
Notes to Portfolio of Investments
The Funds invest in securities whose value is derived from an underlying
pool of mortgages or consumer loans. Some of these securities are
collateralized mortgage obligations (CMOs). CMOs are debt securities
issued by U.S. government agencies or by financial institutions and other
mortgage lenders which are collateralized by a pool of mortgages held
under an indenture. Descriptions of certain collateralized mortgage
obligations are as follows:
Adjustable Rate (AR)
Inverse Floaters (IF) represent securities that pay interest at a rate
that increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these
securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not
be fully recouped. These securities are subject to accelerated principal
paydowns as a result of prepayments or refinancing of the underlying pool
of mortgage instruments. As a result, interest income may be reduced
considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as
those associated with IO securities. Unlike IO's, the owner also has a
right to receive a very small portion of principal. The high interest rate
results from taking interest payments from other classes in the REMIC
Trust and allocating them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion
only on an underlying pool of mortgage loans. The market value of these
securities is extremely volatile in response to changes in market interest
rates. As prepayments on the underlying mortgages of these securities
increase, the yield on these securities increases.
<PAGE>
THE WOODWARD FUNDS
BOND FUNDS
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Funds (Woodward) was organized as a Massachusetts business
trust on April 21, 1987, and registered under the Investment Company Act of
1940, as amended, as an open-end investment company. As of December 31, 1995,
Woodward consisted of seventeen separate series of which there were five Bond
Funds, as described below. Woodward Bond Fund Woodward Intermediate Bond Fund
Woodward Short Bond Fund Woodward Municipal Bond Fund Woodward Michigan
Municipal Fund
The Bond and Intermediate Bond Funds commenced operations on June 1,
1991. The Municipal Bond and Michigan Municipal Bond Funds commenced
operations February 1, 1993. The Short Bond Fund commenced operations on
September 17, 1994.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Bond Funds in the preparation of the financial statements. The policies
are in conformity with generally accepted accounting principles for investment
companies. Following generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments
The Bond Funds value investment securities at market value which is
determined by a pricing service based upon quoted market prices or dealer
quotes. Securities for which market prices or dealer quotes are not readily
available are valued by the investment advisor, NBD Bank (NBD) in accordance
with procedures approved by the Board of Trustees.
Investment security purchases and sales are accounted for on the day
after trade date.
Woodward invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD, acting under the supervision of the Board
of Trustees, has established the following additional policies and procedures
relating to Woodward's investments in securities subject to repurchase
agreements: 1) the value of the underlying collateral is required to equal or
exceed 102% of the funds advanced under the repurchase agreement including
accrued interest; 2) collateral is marked to market daily by NBD or its third
party custodian to assure its value remains at least equal to 102% of the
repurchase agreement amount; and 3) funds are not disbursed by Woodward or its
agent unless collateral is presented or acknowledged by the collateral
custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments. Bond
premiums and discounts are amortized/accreted as required by the Internal
Revenue Code. Premiums and discounts on mortgage-backed securities are
amortized/accreted using the effective interest rate method. As prepayments on
the underlying mortgages increase or decrease the expected life, the yield is
adjusted to amortize/accrete the security to its new expected life.
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
<PAGE>
Net realized gains differ for financial statement and tax purposes
primarily because of the recognition of wash sale transactions for all Funds
and write downs for book purposes on the Bond and Intermediate Bond funds (See
notes to Portfolio of Investments). Also, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed may differ
from the year the income or realized gains were recorded by the Fund.
As of December 31, 1995, the Bond Funds had capital loss carryforwards
and related expiration dates as follows:
<TABLE>
<CAPTION>
Fund 2002 2003 Total
- ---- ---- ---- -----
<S> <C> <C> <C>
Bond $19,955,806 $1,041,792 $20,997,598
Intermediate Bond 3,916,956 2,190,497 6,107,453
</TABLE>
Shareholder Dividends
Dividends from net investment income are declared and paid monthly by the
Bond Funds. Net realized capital gains are distributed annually. Distributions
from net investment income and net realized gains are made during each year to
avoid the 4% excise tax imposed on regulated investment companies by the
Internal Revenue Code.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of each series.
When Issued/To Be Announced (TBA) Securities.
The Bond Funds may purchase securities on a "when issued" basis. These
securities have been registered by a municipality or government agency, but
have not yet been issued to the public. These transactions involve a
commitment by the Funds to purchase particular securities, with payment and
delivery taking place at a future date, for which all specific information,
such as the face amount and maturity date of such investment security, is not
known at the time of the trade. These transactions are subject to market
fluctuations and the risk that the value at delivery may be more or less than
the purchase price at which the transactions were entered. The current value
of these securities is determined in the same manner as that of other
portfolio securities. Although the Bond Funds generally purchase these
securities with the intention of acquisition, such securities may be sold
before the settlement date.
Expenses
Expenses are charged daily as a percentage of the Fund's assets. Woodward
monitors the rate at which expenses are charged to ensure that a proper amount
of expense is charged to income each year. This percentage is subject to
revision if there is a change in the estimate of the future net assets of
Woodward or a change in expectations as to the level of actual expenses.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Pursuant to
their Distribution Agreement with Woodward, FoM is entitled to receive a fee
at the annual rate of .005% of the Bond Funds's average net assets and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of Woodward's investment portfolios attributable to
investments by clients of Essex.
NBD is the investment advisor pursuant to the Advisory Agreement. For its
advisory services to Woodward, NBD is entitled to a fee, computed daily and
payable monthly. Under the Advisory Agreement, NBD also provides Woodward with
certain administrative services, such as maintaining Woodward's general ledger
and assisting in the preparation of various regulatory reports. NBD receives
no additional compensation for such services.
A reorganization of Woodward and The Prairie Funds is being considered by
the Board of Trustees of both funds. In connection with the proposed
reorganization, the Board of Trustees of Woodward and the Board of Trustees of
Prairie must approve certain reorganization agreements. The transaction is
intended to be effected as a tax-free reorganization under the Internal
Revenue Code, so that none of the Funds' shareholders will recognize taxable
gains or losses as a result of the reorganization. A proxy
statement/prospectus describing the reorganization and the reasons therefore
will be sent to shareholders.
<PAGE>
NBD, FoM, and Essex have agreed that they may waive their fees in whole
or in part; and, if in part, may specify the particular fund to which such
waiver relates as may be required to satisfy any expense limitation imposed by
state securities laws or other applicable laws. At present, no restrictive
expense limitation is imposed on Woodward. Restrictive limitations could be
imposed as a result of changes in current state laws and regulations in those
states where Woodward has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations. For the year ended December 31, 1995, NBD reimbursed the Short
Bond, Municipal Bond, and Michigan Municipal Bond Funds for certain expenses
in the amount of $65,761, $88,071, and $119,481 respectively.
On March 10, 1994, Woodward adopted the Woodward Funds Deferred
Compensation Plan (the "Plan"), an unfunded, nonqualified deferred
compensation plan. The Plan allows an individual Trustee to elect to defer
receipt of all or a percentage of fees which otherwise would be payable for
services performed.
NBD is also compensated for its services as Woodward's Custodian,
Transfer Agent and Dividend Disbursing Agent, and is reimbursed for certain
out of pocket expenses incurred on behalf of Woodward.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions based on the aggregate cost of investments for federal income tax
purposes, excluding short-term securities, is as follows:
<TABLE>
<CAPTION>
INTERMEDIATE SHORT
BOND FUND BOND FUND BOND FUND
--------- ------------ ---------
<S> <C> <C> <C>
Gross Unrealized
Gains $ 35,731,180 $ 13,566,717 $ 2,333,204
Gross Unrealized
Losses (11,032,156) (7,073,022) (49,031)
------------ ------------ ------------
$ 24,699,024 $ 6,493,695 $ 2,284,173
============ ============ ============
Federal Income Tax
Cost $488,279,591 $394,514,666 $159,199,919
Purchases $191,486,673 $141,628,950 $129,641,103
Sales & Maturities, at value $189,618,003 $176,498,989 $ 31,673,292
</TABLE>
<PAGE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee
rates payable to NBD, and amounts paid to NBD, FoM, and Essex pursuant to the
agreements described in Note 3 for the year ended December 31, 1995. The rates
shown are stated as a percentage of each fund's average net assets.
<TABLE>
<CAPTION>
INTERMEDIATE SHORT
Effective Date BOND FUND BOND FUND BOND FUND
- -------------- --------- ------------ ---------
<S> <C> <C> <C>
Expense Rates:
January 1 0.74% 0.73% 0.75%
March 21 0.74% 0.73% 0.75%
NBD Advisory Fee:
January 1 0.65% 0.65% 0.65%
Amounts Paid:
Advisory Fee to NBD $3,121,267 $2,650,418 $650,298
Distribution Fees to FoM
& Essex $ 51,487 $ 28,779 $ 5,165
Other Fees & Out of Pocket
Expenses to NBD $ 124,183 $ 92,054 $ 36,588
Expense reimbursement by NBD -- -- $(65,761)
</TABLE>
(6) Portfolio Composition
Although the Municipal Bond Fund has a diversified investment portfolio,
the Fund has investments greater than 10% of its total investments in the
state of Illinois. The Michigan Municipal Bond Fund does not have a
diversified portfolio since all of its investments are within the state of
Michigan. Such concentrations within particular states may subject the Funds
more significantly to economic changes occuring within those states.
<PAGE>
THE WOODWARD FUNDS
BOND FUNDS
FINANCIAL HIGHLIGHTS
The Financial Highlights present a per share analysis of how the Bond
Funds' net asset values have changed during the periods presented. Additional
quantitative measures expressed in ratio form analyze important relationships
between certain items presented in the financial statements. These financial
highlights have been derived from the financial statements of the Bond Funds
and other information for the periods presented.
<TABLE>
<CAPTION>
Bond Fund
-------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Period ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.01 $ 10.32 $ 10.25 $ 10.55 $ 10.00
Income from investment operations:
Net investment income 0.63 0.61 0.76 0.83 0.51
Net realized and unrealized gains
(losses) on investments 1.45 (1.31) 0.38 (0.17) 0.57
------------ ------------- ------------ ------------ ------------
Total from investment operations 2.08 (0.70) 1.14 0.66 1.08
------------ ------------- ------------ ------------ ------------
Less distributions:
From net investment income (0.64) (0.59) (0.76) (0.83) (0.51)
From realized gains -- (0.02) (0.31) (0.13) (0.02)
------------ ------------- ------------ ------------ ------------
Total distributions (0.64) (0.61) (1.07) (0.96) (0.53)
------------ ------------- ------------ ------------ ------------
Net asset value, end of period $ 10.45 $ 9.01 $ 10.32 $ 10.25 $ 10.55
============ ============= ============ ============ ============
Total Return (b) 23.75% (6.99%) 11.39% 6.56% 18.45%(a)
Ratios/Supplemental Data
Net assets, end of period $517,565,579 $427,168,395 $501,196,278 $321,758,333 $237,673,316
Ratio of expenses to average net assets 0.74% 0.74% 0.73% 0.73% 0.75%(a)
Ratio of net investment income to
average net assets 6.39% 6.36% 7.20% 8.08% 8.44%(a)
Portfolio turnover rate 41.91% 75.67% 111.52% 90.45% 8.19%
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Intermediate Bond Fund
-----------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Period ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.21 $ 10.41 $ 10.28 $ 10.55 $ 10.00
Income from investment operations:
Net investment income 0.59 0.56 0.59 0.71 0.40
Net realized and unrealized gains (losses)
on investments 1.16 (1.20) 0.26 (0.10) 0.57
------------ ------------ ------------ ------------ ------------
Total from investment operations 1.75 (0.64) 0.85 0.61 0.97
------------ ------------ ------------ ------------ ------------
Less distributions:
From net investment income (0.59) (0.55) (0.59) (0.71) (0.40)
From realized gains -- (0.01) (0.13) (0.17) (0.02)
------------ ------------ ------------ ------------ ------------
Total distributions (0.59) (0.56) (0.72) (0.88) (0.42)
------------ ------------ ------------ ------------ ------------
Net asset value, end of period $ 10.37 $ 9.21 $ 10.41 $ 10.28 $ 10.55
============ ============ ============ ============ ============
Total Return (b) 19.48% (6.31%) 8.41% 6.00% 16.62%(a)
Ratios/Supplemental Data
Net assets, end of period $405,309,939 $393,019,168 $429,789,857 $220,432,255 $130,367,032
Ratio of expenses to average net assets 0.73% 0.74% 0.74% 0.74% 0.75%(a)
Ratio of net investment income to average net
assets 5.98% 5.73% 5.44% 6.91% 6.59%(a)
Portfolio turnover rate 36.47% 54.60% 92.80% 56.30% 7.38%
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Short Bond Fund
------------------------------
Year ended Period ended
Dec. 31, 1995 Dec. 31, 1994
------------- -------------
<S> <C> <C>
Net asset value, beginning of period $ 9.84 $ 10.00
Income from investment operations:
Net investment income 0.58 0.17
Net realized and unrealized gains
(losses) on investments 0.39 (0.16)
------------ ------------
Total from investment operations 0.97 0.01
------------ ------------
Less distributions:
From net investment income (0.58) (0.17)
From realized gains (0.00) --
------------ ------------
Total distributions (0.58) (0.17)
------------ ------------
Net asset value, end of period $ 10.23 $ 9.84
============ ===========
Total Return (b) 10.07% 0.21%(a)
Ratios/Supplemental Data
Net assets, end of period $163,336,855 $64,239,163
Ratio of expenses to average net assets 0.75% 0.75%(a)
Ratio of net investment income to
average net assets 5.74% 5.92%(a)
Ratio of expenses to average net assets
without fee waivers/ reimbursed expenses 0.81% 0.93%(a)
Ratio of net investment income to average
net assets without fee waivers/
reimbursed expenses 5.68% 5.74%(a)
Portfolio turnover rate 30.94% 10.20%
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward Bond Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the Bond Funds of THE WOODWARD
FUNDS (comprising, as indicated in Note 1, the Bond, Intermediate Bond, Short
Bond, Municipal Bond and Michigan Municipal Bond Funds) as of December 31,
1995, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods from
inception (as indicated in Note 1) through December 31, 1995. 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 and
financial highlights 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 physical counts and
confirmation of securities owned as of December 31, 1995, by inspection and
correspondence with custodians, banks 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective funds constituting the Bond Funds of The
Woodward Funds as of December 31, 1995, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended and the financial highlights for each of the periods
from inception (as indicated in Note 1) through December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
<PAGE>
CROSS REFERENCE SHEET
Series P and Q Representing Interests in the
Class A and Class I Shares of the Woodward Municipal Bond
and Michigan Municipal Bond Funds, Respectively
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page.................................... Cover Page
11. Table of Contents............................. Table of Contents
12. General Information and History............... Description of Shares
13. Investment Objectives and Policies............ Investment Objective,
Policies and Risk
Factors
14. Management of Registrant...................... Management
15. Control Persons and Principal................. Description of Shares
Holders of Securities
16. Investment Advisory and Other Services........ Management
17. Brokerage Allocation and other Practices...... Investment Objective,
Policies and Risk
Factors
18. Capital Stock and Other Securities............ Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing.............. Net Asset Value
of Securities Being Offered
Additional Purchase and
Redemption Information
20. Tax Status.................................... Additional Information
Concerning Taxes
21. Underwriters.................................. Not Applicable
22. Calculation of Performance Data............... Additional Information
on Performance
23. Financial Statements.......................... Audited Financial
Statements
-15-
<PAGE>
April 15, 1996
for
CLASS I AND CLASS A SHARES OF THE:
WOODWARD MUNICIPAL BOND FUND
WOODWARD MICHIGAN MUNICIPAL BOND FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Funds'
Prospectuses dated April 15, 1996 pertaining to all classes of shares of the
Woodward Municipal Bond Fund (the "Municipal Bond Portfolio") and Woodward
Michigan Municipal Bond Fund (the "Michigan Municipal Bond Portfolio") (each,
a "Portfolio" and collectively, the "Portfolios"), and is incorporated by
reference in its entirety into the Prospectuses. Because this Additional
Statement is not itself a prospectus, no investment in shares of the
Portfolios should be made solely upon the information contained herein. Copies
of the Portfolios' Prospectuses may be obtained from any office of the Co-
Distributors by writing or calling the Co-Distributors or the Trust.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectuses.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives, Policies and Risk Factors.................... 1
Net Asset Value..................................................... 11
Additional Purchase and Redemption Information...................... 12
Description of Shares............................................... 13
Additional Information Concerning Taxes............................. 15
Management.......................................................... 20
Independent Public Accountants...................................... 25
Counsel............................................................. 26
Additional Information on Performance............................... 26
Appendix A.......................................................... A-1
Appendix B.......................................................... B-1
Appendix C.......................................................... C-1
Report of Independent Public Accountants
and Financial Statements.......................................... FS-1
-i-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Portfolios' respective
investment objectives and policies as set forth in their Prospectuses.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolios may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for each
Portfolio.
The annualized portfolio turnover rate for each Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements
which enable the Portfolios to receive favorable tax treatment. Portfolio
turnover will not be a limiting factor in making portfolio decisions, and the
Portfolios may engage in short term trading to achieve their respective
investment objectives.
Purchases of money market instruments by the Portfolios are
made from dealers, underwriters and issuers. The Portfolios currently do not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-
<PAGE>
counter market are generally on a net basis (i.e., without commission) through
dealers, or otherwise involve transactions directly with the issuer of an
instrument.
For the fiscal year ended December 31, 1995, 1994 and the
period from February 1, 1993 (commencement of operations) through December 31,
1993, the Municipal Bond and Michigan Municipal Bond Portfolios paid no
brokerage commissions.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. A Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
The Advisory Agreement for the Portfolios provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for each Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause a Portfolio
to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer
for effecting the same transaction, provided that the Adviser determines in
good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in
terms of either the particular transaction or the overall responsibilities of
the Adviser to the Portfolios. Such brokerage and research services might
consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their
comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolios. The Trustees will
periodically review any commissions paid by the Portfolios to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolios. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other
accounts for which investment
-2-
<PAGE>
discretion is exercised by the Adviser. Conversely, a Portfolio may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Adviser, the
Co-Distributors or an affiliated person of any of them (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted
by the SEC or its staff. In addition, a Portfolio will not purchase securities
during the existence of any underwriting or selling group relating thereto of
which a Co-Distributor or the Adviser, or an affiliated person of either of
them, is a member, except to the extent permitted by the SEC or its staff.
Under certain circumstances, the Portfolios may be at a disadvantage because
of these limitations in comparison with other investment companies which have
similar investment objectives but are not subject to such limitations.
Investment decisions for each Portfolio are made independently
from those for the other Portfolios and for any other investment companies and
accounts advised or managed by the Adviser. Such other investment companies
and accounts may also invest in the same securities as the Portfolios. To the
extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
one or more of the Portfolios and another investment company or account, the
transaction will be averaged as to price and available investments allocated
as to amount, in a manner which the Adviser believes to be equitable to each
Portfolio and such other investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold by the Portfolio.
Government Obligations
As stated in the Prospectuses, pursuant to their investment
objectives the Portfolios may invest in U.S.
Government Obligations.
Bank Obligations
In accordance with their respective investment objective, the
Portfolios may purchase bank obligations, which include banker's acceptances,
negotiable certificates of deposit and non-negotiable time deposits, including
U.S. dollar-
-3-
<PAGE>
denominated instruments issued or supported by the credit of U.S. or foreign
banks or savings institutions. Although the Portfolios invest in obligations
of foreign banks or foreign branches of U.S. banks only where the Adviser
deems the instrument to present minimal credit risks, such investments may
nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
Commercial paper, including variable and floating rate notes
and other short term corporate obligations, must be rated in one of the two
highest categories by at least two Rating Agencies, or if not rated, have been
issued by a corporation having an outstanding bond issue rated A or higher by
a Rating Agency. Bonds and other short term obligations (if not rated as
commercial paper) purchased by the Portfolios must be rated BBB or Baa, or
higher, by a Rating Agency, respectively, or if unrated, be of comparable
investment quality in the judgment of the Adviser.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolios, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of instruments if the issuer defaulted on its payment obligation or
during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Portfolios may invest from time to time in securities issued
by other investment companies which invest in high quality, short term debt
securities. Each of the Portfolios intends to limit its investments so that,
as determined immediately after a securities purchase is made: (a) not more
than 5% of the value of the Portfolio's total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of the Portfolio's total assets will be invested in the aggregate in
securities of
-4-
<PAGE>
investment companies as a group; and (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Portfolio or
the Trust as a whole.
Lending Securities
When a Portfolio lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectuses generally equals the price paid by a Portfolio plus
interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the
Trust's Custodian, in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by the Portfolios under the 1940 Act. At the time a Portfolio enters into a
reverse repurchase agreement, it will place in a segregated custodial account
liquid assets such as U.S. Government securities or other liquid high-grade
debt securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Portfolio may
decline below the price of the securities it is obligated to repurchase.
Options Trading
As stated in the Prospectuses, the Portfolios may purchase and
sell put and call options listed on a national securities exchange and issued
by the Options Clearing Corporation. Such transactions may be effected on a
principal basis with primary reporting dealers in U.S. Government securities
in an amount not exceeding 5% of a Portfolio's net assets. This is a highly
specialized activity which entails greater than ordinary investment risks.
Regardless of how much the market price of the underlying security increases
or decreases, the option buyer's risk is limited to the amount of the original
investment for the purchase of the option. However, options may be more
volatile than the underlying securities, and
-5-
<PAGE>
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. A listed
call option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking
the obligations under the option contract. A listed put option gives the
purchaser the right to sell to a clearing corporation the underlying security
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security. Put and call options
purchased by a Portfolio will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
A Portfolio's obligation to sell a security subject to a
covered call option written by it, or to purchase a security subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, will not be
able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Portfolio will write an option on a
particular security only if the Adviser believes that a liquid secondary
market will exist on an exchange for options of the same series which will
permit the Portfolio to make a closing purchase transaction in order to close
out its position.
When a Portfolio writes a covered call option, an amount equal
to the net premium (the premium less the commission) received by the Portfolio
is included in the liability section of
-6-
<PAGE>
the Portfolio's statement of assets and liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked-to-market to reflect
the current value of the option written. The current value of the traded
option is the last sale price or, in the absence of a sale, the average of the
closing bid and asked prices. If an option expires on the stipulated
expiration date or if the Portfolio enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a
covered call option may be offset by a decline in the market price of the
underlying security during the option period. If a covered call option is
exercised, the Portfolio may deliver the underlying security held by it or
purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Portfolio will realize a gain or loss. If a secured put option is
exercised, the amount paid by the Portfolio involved for the underlying
security will be partially offset by the amount of the premium previously paid
to the Portfolio. Premiums from expired options written by a Portfolio and net
gains from closing purchase transactions are treated as short-term capital
gains for federal income tax purposes, and losses on closing purchase
transactions are short-term capital losses.
When-Issued Purchases and Forward Commitments
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities
are delivered to the Portfolio on the settlement date. In these cases the
Portfolio may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
Municipal Securities
As stated in the Prospectuses, the Portfolios may invest in
Municipal Securities including general obligation securities, revenue
securities, notes, and moral obligation bonds, which are normally issued by
special purpose authorities. There are, of course, variations in the quality
of Municipal
-7-
<PAGE>
Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend in part on a
variety of factors, including general market conditions, the financial
condition of the issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating
of the issue. The ratings of Municipal Securities by Rating Agencies represent
their opinions as to the quality of Municipal Securities. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality, and Municipal Securities with the same maturity, interest rate and
rating may have different yields while Municipal Securities with the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by a Portfolio, a Municipal Security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Portfolio. The Adviser will consider such an event in
determining whether the Portfolio should continue to hold the obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Portfolios will depend upon the ability of the
issuers to meet their obligations. The District of Columbia, each state, each
possession and territory of the United States, each of their political
subdivisions, agencies, instrumentalities and authorities and each state
agency of which a state is a member is a separate "issuer" as that term is
used in this Additional Statement and in the Prospectuses. The
non-governmental user of facilities financed by a private activity bond is
also considered to be an "issuer". An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights or remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by Federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. The power or ability of an issuer to
meet its obligations for the payment of interest or principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Certain of the Municipal Securities held by the Portfolios may
be insured at the time of issuance as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
Municipal Securities at the time of original issuance. In the event that the
issuer defaults with respect to interest or principal payments, the insurer
will be notified and will be required to make payment to the bondholders.
There is, however, no guarantee that the insurer will meet its obligations. In
addition, such
-8-
<PAGE>
insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
From time to time proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Securities. For example, pursuant to
federal tax legislation passed in 1986 interest on certain private activity
bonds must be included in an investor's federal alternative minimum taxable
income, and corporate investors must include all tax-exempt interest in their
federal alternative minimum taxable income. The Trust cannot predict what
legislation, if any, may be proposed in Congress in the future as regards the
federal income tax status of interest on Municipal Securities in general, or
which proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of municipal securities for
investments by the Portfolios and their liquidity and value. In such event,
the Board of Trustees would re-evaluate the Portfolios' investment objectives
and policies and consider changes in their structure or possible dissolution.
Stand-By Commitments
The Portfolios may acquire "stand-by commitments" with respect
to Municipal Securities they hold. Under a stand-by commitment, a dealer
agrees to purchase at the Portfolio's option specified Municipal Securities at
a specified price. Stand-by commitments may be exercisable by the Portfolios
at any time before the maturity of the underlying Municipal Securities and may
be sold, transferred or assigned only with the instruments involved.
The Portfolios expect that stand-by commitments will generally
be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Portfolios may pay for a stand-by
commitment either separately in cash or by paying a higher price for Municipal
Securities which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). The Portfolios
will acquire a stand-by commitment unless immediately after the acquisition,
with respect to 75% of its assets not more than 5% of its total assets will be
invested in instruments subject to a demand feature, including stand-by
commitments, with the same institution.
The Portfolios intend to enter into stand-by commitments only
with dealers, banks and broker-dealers which, in the Adviser's opinion,
present minimal credit risks. The Portfolios' reliance upon the credit of
these dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Securities that are subject to the commitment. Thus, the
risk of loss to the Portfolios in connection with a "stand-by
-9-
<PAGE>
commitment" will not be qualitatively different from the risk of loss faced by
a person that is holding securities pending settlement after having agreed to
sell the securities in the ordinary course of business.
The Portfolios will acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a stand-by commitment will
not affect the valuation or assumed maturity of the underlying Municipal
Securities which will continue to be valued in accordance with the amortized
cost method. The actual stand-by commitment will be valued at zero in
determining net asset value. Where a Portfolio pays directly or indirectly for
a stand-by commitment, its cost will be reflected as an unrealized loss for
the period during which the commitment is held by the Portfolio and will be
reflected in realized gain or loss when the commitment is exercised or
expires.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectuses, the Portfolios are subject to the following investment
limitations which may not be changed without approval of the holders of the
majority of the outstanding shares of the affected Portfolio (as defined under
"Description of Shares" below).
Neither of the Portfolios may:
1. Purchase or sell real estate, except that each Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Portfolio might be deemed to be
an underwriter upon the disposition of portfolio securities acquired within
the limitation on purchases of restricted securities and except to the extent
that the purchase of obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for
-10-
<PAGE>
transactions in options on securities, indices of securities, futures
contracts and options on futures contracts.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to a Portfolio's transactions in futures contracts
and related options, and (b) a Portfolio may obtain short-term credit as may
be necessary for the clearance of purchases and sales of portfolio securities.
6. Purchase securities of companies for the purpose of
exercising control.
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that each Portfolio
may, to the extent appropriate to its investment objective, purchase publicly
traded securities of companies engaging in whole or in part in such activities
and may enter into futures contracts and related options.
In order to permit the sale of a Portfolio's shares in certain
states, the Trust may make commitments with respect to a Portfolio more
restrictive than the investment policies and limitations described above and
in its Prospectuses. As of the date of this Statement of Additional
Information, the Trust has made commitments that the Municipal Bond Portfolio
will not invest more than 5% of its total assets in securities of issuers
which have been in continuous operation for less than three years, and that
the Municipal Bond and Michigan Municipal Bond Portfolios will not invest more
than 15% of their total assets in such "unseasoned issuers" which are
restricted as to disposition. Should the Trust determine that any such
commitment is no longer in the best interests of a particular Portfolio, it
will revoke the commitment by terminating sales of the Portfolio's shares in
the state involved and, in the case of investors in Texas, give notice of such
action.
NET ASSET VALUE
"Assets which belong to" a Portfolio consist of the
consideration received upon the issuance of shares of the Portfolio together
with all income, earnings, profits and proceeds derived from the investment
thereof, including any proceeds from the sale of such investments, any funds
or payments derived from any reinvestment of such proceeds, and a portion of
any general assets of the Trust not belonging to a particular investment
portfolio. Assets belonging to a Portfolio are charged with the direct
liabilities of the Trust which are normally allocated in proportion to the
relative net asset values of all of the Trust's investment portfolios at the
time of allocation. Subject to the provisions of the Declaration of
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<PAGE>
Trust, determinations by the Board of Trustees as to the direct and allocable
liabilities, and the allocable portion of any general assets, with respect to
a Portfolio are conclusive.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are offered and sold on a continuous
basis by the Trust's sponsors and Co-Distributors, FoM and Essex, acting as
agent. As described in their Prospectuses, Class I shares of the Portfolios
are sold primarily to NBD and its affiliated and correspondent banks acting on
behalf of their respective customers. Class A shares of the Portfolios are
sold to the public ("Investors") primarily through financial institutions such
as banks, brokers and dealers. The Co- Distributors may be entitled to a sales
charge on the sale of Class A shares of the Portfolios as described in the
Prospectuses.
An illustration of the computation of the public offering price
per Class A share of the Portfolios, based on the value of the Portfolios'
total net assets and total number of shares outstanding on March 15, 1996,
is as follows:
<TABLE>
<CAPTION>
TABLE
Michigan
Municipal Municipal
Bond Bond
Portfolio Portfolio
--------- ---------
<S> <C> <C>
Net Assets............................ $80,308,585 $52,877,558
Number of Shares Outstanding.......... 7,788,167 5,156,229
Net Asset Value Per Share............. $10.31 $10.26
Sales Charge, 4.75 percent
of offering price (4.99
percent of net asset value
per share)........................... $ .51 $ .51
----------- -----------
Offering Price to Public.............. $10.82 $10.77
</TABLE>
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when:
(a) trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted
such suspension; or (d) an emergency exists as determined by the SEC. (The
Trust may also suspend or postpone the recordation of the transfer of shares
upon the occurrence of any of the foregoing conditions).
-12-
<PAGE>
In addition to the situations described in the Prospectuses
under "Redemption of Shares," the Trust may redeem shares involuntarily to
reimburse the Portfolios for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Portfolio shares as provided in the
Prospectuses from time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
Total sales charges paid by shareholders of the Municipal Bond
and Michigan Municipal Bond Portfolios for the fiscal years ended December 31,
1995 and 1994 were $11,707 and $105,322, and $23,507 and $151,042,
respectively. Total sales charges paid by shareholders of the Municipal Bond
and Michigan Municipal Bond Portfolios for the fiscal period from February 1,
1993 (commencement of operations) through December 31, 1993 were $300,627
and $737,222, respectively.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust, which
was amended and restated as of May 1, 1992, authorizes the Board of Trustees
to divide shares into two or more series, each series relating to a separate
portfolio of investments, and divide the shares of any series into two or more
classes. The number of shares of each series and/or of a class within each
series shall be unlimited. The Trust does not intend to issue share
certificates.
In the event of a liquidation or dissolution of the Trust or an
individual Portfolio, shareholders of a particular Portfolio would be entitled
to receive the assets available for distribution belonging to such Portfolio.
If there are any assets, income, earnings, proceeds, funds or payments, which
are not readily identifiable as belonging to any particular Portfolio, the
Trustees shall allocate them among any one or more of the Portfolios as they,
in their sole discretion, deem fair and equitable.
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<PAGE>
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Portfolio affected by the matter. A Portfolio is
affected by a matter unless it is clear that the interests of each Portfolio
in the matter are substantially identical or that the matter does not affect
any interest of the Portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if approved by a
majority of the outstanding shares of such Portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to particular Portfolios.
When used in the Prospectuses or in this Additional Statement,
a "majority" of shareholders means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust or the applicable Portfolio present at a meeting if the holders
of more than 50% of the outstanding shares are present in person or by proxy,
or (2) more than 50% of the outstanding shares of the Trust or the applicable
portfolio.
As of March 29, 1996, Trussal & Co., a nominee of NBD's Trust
Division, 900 Tower Drive, 10th Floor, Troy, Michigan 48098, held of record
84.92% and 61.43% of the outstanding shares of the Municipal Bond and Michigan
Municipal Bond Portfolios, respectively. The Trustees and officers of the
Trust, as a group, owned less than 1% of the outstanding shares of the
Portfolios. Furthermore, as of March 29, 1996 with respect to the Municipal
Bond Portfolio, the following persons may have beneficially owned 5% or more
of the outstanding shares of such Portfolios:
<TABLE>
<CAPTION>
Percent of
Outstanding
Number of Shares Shares
---------------- ------
Municipal Bond Portfolio
- ------------------------
<S> <C> <C>
Charles J. Lefler Revocable 620,328 7.74%
Trust
39740 Walker Court
Northville, MI 48167
Consumers Power Non Union 1,493,370 18.64%
</TABLE>
-14-
<PAGE>
Wel-Ret Health
212 West Michigan Avenue
Jackson, MI 49201
To the Trust's knowledge, there were no persons who
beneficially owned 5% or more of the outstanding shares of the Michigan
Municipal Bond Portfolio as of March 29, 1996.
When issued for payment as described in the Portfolio's
Prospectuses and this Additional Statement, shares of the Portfolios will be
fully paid and non-assessable by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of duties. It also provides that all third parties shall
look solely to the Trust property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the
affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Portfolios or their shareholders, and
the discussion here and in the Prospectuses is not intended as a substitute
for careful tax planning and is based on tax laws and regulations which are in
effect on the date hereof; such laws and regulations may be changed by
legislative or administrative action. Investors are advised to consult their
tax advisers with specific reference to their own tax situations.
Each Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, each Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectuses, certain requirements with respect
to the source of its income for a taxable year. At least 90% of the gross
income of each Portfolio must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including but not
limited to gains
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<PAGE>
from options, futures, or forward contracts) derived with respect to the
Portfolio's business of investing in such stock, securities or currencies. The
Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to the Portfolio's principal
business of investing in stock or securities, or options and futures with
respect to stock or securities. Any income derived by a Portfolio from a
partnership or trust is treated as derived with respect to the Portfolio's
business of investing in stock, securities or currencies only to the extent
that such income is attributable to items of income which would have been
qualifying income if realized by the Portfolio in the same manner as by the
partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Portfolio's gross income for
a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by a Portfolio upon maturity or
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
Each Portfolio will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Portfolio's taxable year.
Shareholders should note that, upon the sale or exchange of Portfolio shares,
if the shareholder has not held such shares for at least six months, any loss
on the sale or exchange of those shares will be treated as long term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum nominal
rate of 39.6%, however, because of limitations on itemized deductions
otherwise allowable and the phase-out of personal exemptions, the maximum
effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum nominal rate of
28%. For corporations, long term capital gains and ordinary income are
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<PAGE>
both taxable at a maximum nominal rate of 35% (or at a maximum effective
marginal rate of 39% in the case of corporations having taxable income between
$100,000 and $335,000).
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Portfolio intends
to make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each
calendar year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions (whether or not derived from interest on
Municipal Securities) would be taxable as ordinary income to shareholders to
the extent of the Portfolio's current and accumulated earnings and profits and
would be eligible for the dividends received deduction for corporations.
Each Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding
by the Internal Revenue Service for failure properly to include on their
return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
Depending upon the extent of the Portfolios' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Portfolios may be subject to the tax
laws of such states or localities. In addition, in those states and localities
which have income tax laws, the treatment of the Portfolios and their
shareholders under such laws may differ from their treatment under federal
income tax laws.
As described above and in the Portfolios' Prospectuses, the
Portfolios are designed to provide investors with current tax-exempt interest
income. The Portfolios are not intended to constitute a balanced investment
program and are not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Portfolios would not be suitable for tax-exempt institutions and
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<PAGE>
may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and IRAs since such plans and accounts are generally
tax-exempt and, therefore, would not only fail to gain any additional benefit
from the Portfolios' dividends being tax-exempt, but such dividends would be
ultimately taxable to the beneficiaries when distributed to them. In addition,
the Portfolios may not be appropriate investments for entities which are
"substantial users" of facilities financed by private activity bonds or
"related persons" thereof. "Substantial user" is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5%
of the total revenues derived by all users of such facilities, or who occupies
more than 5% of the usable area of such facilities or for whom such facilities
or a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" include certain related natural persons, affiliated
corporations, a partnership and its partners and an S Corporation and its
shareholders.
Each Portfolio's policy is to pay each year as federal
exempt-interest dividends substantially all of its Municipal Securities
interest income net of certain deductions. In order for a Portfolio to pay
exempt-interest dividends with respect to any taxable year, at the close of
each quarter of its taxable year at least 50% of the aggregate value of the
Portfolio's assets must consist of exempt-interest obligations. After the
close of its taxable year, each Portfolio will notify its shareholders of the
portion of the dividends paid by it which constitutes an exempt-interest
dividend with respect to such taxable year. However, the aggregate amount of
dividends so designated by a Portfolio cannot exceed the excess of the amount
of interest exempt from tax under Section 103 of the Code received by the
Portfolio during the taxable year over any amounts disallowed as deductions
under Sections 265 and 171(a)(2) of the Code. The percentage of total
dividends paid by a Portfolio with respect to any taxable year which qualify
as federal exempt-interest dividends will be the same for all shareholders
receiving dividends for such year.
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry the Portfolios' shares, equal to the
percentage of the total non-capital gain dividends distributed during the
shareholder's taxable year that are exempt-interest dividends, is not
deductible for federal income tax purposes.
Michigan Taxes
As stated in the Prospectuses, dividends paid by the Michigan
Municipal Bond Portfolio that are derived from interest
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<PAGE>
attributable to tax-exempt Michigan Municipal Securities will be exempt from
Michigan income tax, Michigan intangibles tax and Michigan single business
tax. Conversely, to the extent that such Portfolio's dividends are derived
from interest on obligations other than Michigan Municipal Securities or
certain U.S. Government obligations (or are derived from short-term or
long-term gains), such dividends will be subject to Michigan income tax,
Michigan intangibles tax and Michigan single business tax, even though the
dividends may be exempt for federal income tax purposes.
In particular, gross interest income and dividends derived from
obligations or securities of the State of Michigan and its political
subdivisions, exempt from federal income tax, are exempt from Michigan income
tax under Act No. 281, Public Acts of Michigan, 1967, as amended ("Michigan
Income Tax Act"), from Michigan intangibles tax under Act No. 301, Public Acts
of Michigan, 1939, as amended ("Michigan Intangibles Tax Act") and from
Michigan single business tax under Act. No. 228, Public Acts of Michigan,
1975, as amended ("Michigan Single Business Tax Act"). The Michigan Income Tax
Act levies a flat rate income tax on individuals, estates and trusts. The
Michigan Intangibles Tax Act levies a tax on the ownership of intangible
personal property of individuals, estates, trusts and certain corporations.
The Single Business Tax Act levies a tax of 2.30% upon the "adjusted tax base"
of most individuals, financial institutions, partnerships, joint ventures,
corporations, estates and trusts engaged in "business activity" as defined in
the Act.
The transfer of Portfolio shares by a shareholder is subject to
Michigan taxes measured by gain on the sale, payment or other disposition
thereof. In addition, the transfer of Portfolio shares by a shareholder may be
subject to Michigan estate or inheritance tax under Act No. 188, Public Acts
of Michigan, 1899, as amended ("Michigan Estate Tax").
The foregoing is only a summary of some of the important
Michigan state tax considerations generally affecting the Michigan Municipal
Bond Portfolio and its shareholders. No attempt has been made to present a
detailed explanation of the Michigan state tax treatment of the Portfolio or
its shareholders, and this discussion is not intended as a substitute for
careful planning. Accordingly, potential investors in the Portfolios should
consult their tax advisers with respect to the application of such taxes to
the receipt of Portfolio dividends and as to their own Michigan state tax
situation, in general.
-19-
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the
Prospectuses. Each Trustee has an address at The Woodward Funds, c/o NBD Bank,
611 Woodward Avenue, Detroit, Michigan 48226.
Effective May 1, 1995, each Trustee receives from the Trust and
The Woodward Variable Annuity Fund a total annual fee of $17,000 and a fee of
$2,000 for each Board of Trustees meeting attended. The Chairman is entitled
to additional compensation of $4,250 per year for his services to the Trusts
in that capacity. These fees are allocated among the investment portfolios of
the Trust and The Woodward Variable Annuity Fund based on their relative net
assets. All Trustees are reimbursed for out of pocket expenses incurred in
connection with attendance at meetings. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Trusts.
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1995:
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
- ------------------------------ ------------------- -------------------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee $21,250 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr., $24,437.50 $24,437.50(2)+
Chairman and President++
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee++ $21,250 $21,250(2)+
Donald G. Sutherland, Trustee++ $21,250 $21,250(2)+
Donald L. Tuttle, Trustee++ $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
<FN>
- ----------------------
-20-
<PAGE>
* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Variable Annuity Fund,
Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24,437.50, $21,500, $21,500 and
$21,500 accrued during The Woodward Funds' fiscal year ended December 31,
1995 for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and
Donald L. Tuttle, respectively.
- --------------------------------
</TABLE>
Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectuses. For the fiscal year ended December
31, 1995, the Trust paid NBD fees for advisory services in the amounts of
$444,288 and $327,020 with respect to the Municipal Bond Portfolio and
Michigan Municipal Bond Portfolio, respectively. For the same period,
NBD reimbursed the respective Portfolios in the amounts of $88,071 and
$119,481 for certain other expenses. For the fiscal year ended
December 31, 1994, the Trust paid NBD fees for advisory services
$402,986 and $286,599 with respect to the Municipal Bond Portfolio
and Michigan Municipal Bond Portfolio, respectively. For the same period,
NBD reimbursed the respective Portfolios in the amounts of $70,000 and
$120,000 for certain other expenses. For the fiscal year ended December 31,
1994, NBD voluntarily waived advisory fees in the amounts of $150,712 and
$108,612 with respect to the Municipal Bond and Michigan Municipal Bond
Portfolios, respectively. For the fiscal period from February 1, 1993
(commencement of operations) through December 31, 1993, NBD voluntarily waived
its entire fees for advisory services of $191,142 and $146,227 with respect to
the Municipal Bond and Michigan Municipal Bond Portfolios. For the same
period, NBD reimbursed the respective Portfolios in the amounts of $75,841 and
$83,732 for certain other expenses.
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by the Trust. Joint purchase of investments for the
Trust and for NBD's own investment portfolio will not be made. NBD's
Commercial Banking Department may have deposit, loan and other commercial
banking relationships with issuers of securities purchased by the Trust,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of securities purchased by the Trust.
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<PAGE>
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a
pro rata share of the transaction costs incurred in making the bulk purchase.
See "Investment Objectives, Policies and Risk Factors - Portfolio
Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the Trust as a result of changes in current
state laws and regulations in those states where the Trust has qualified its
shares, or by a decision of the Trustees to qualify the shares in other states
having restrictive expense limitations. To the Trust's knowledge, of the
expense limitations in effect on the date of this Additional Statement none is
more restrictive than two and one-half percent (2-1/2%) of the first $30
million of a Portfolio's average annual net assets, two percent (2%) of the
next $70 million of the average annual net assets and one and one-half percent
(1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of each Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers
of national banks. These regulations provide, in general, that assets managed
by a national bank as fiduciary may not be invested in stock or obligations
of, or property acquired from, the bank, its affiliates or their directors,
officers or employees, and further provide that fiduciary assets may not be
sold or transferred, by loan or otherwise, to the bank or persons connected
with the bank as described above.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error
-22-
<PAGE>
or by failure of a shareholder to provide available funds in connection with
the purchase of shares will not be deemed to be the making of a loan to the
Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Shareholder Servicing Plan
As stated in the Prospectus for Class A shares of the
Portfolios, the Trust may enter into Servicing Agreements with Shareholder
Servicing Agents which may include NBD and its affiliates. The Servicing
Agreements provide that the Shareholder Servicing Agents will render
shareholder administrative support services to their customers who are the
beneficial owners of Class A shares in consideration for the Portfolios'
payment of up to .25% (on an annualized basis) of the average daily net asset
value of Class A shares beneficially owned by such customers and held by the
Shareholder Servicing Agents and, at the Trust's option, it may reimburse the
Shareholder Servicing Agents' out-of-pocket expenses. Such services may
include: (i) processing dividend and distribution payments from a Portfolio;
(ii) providing information periodically to customers showing their share
positions; (iii) arranging for bank wires; (iv) responding to customer
inquiries; (v) providing subaccounting with respect to shares beneficially
owned by customers or the information necessary for such subaccounting; (vi)
forwarding shareholder communications; (vii) processing share exchange and
redemption requests from customers; (viii) assisting customers in changing
dividend options, account designations and addresses; and (ix) other similar
services requested by the Trust. Banks acting as Shareholder Servicing Agents
are prohibited from engaging in any activity primarily intended to result in
the sale of Portfolio shares. However, Shareholder Servicing Agents other than
banks may be requested to provide marketing assistance (e.g., forwarding sales
literature and advertising to their customers) in connection with the
distribution of Portfolio shares.
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended in connection with the Trust's arrangements
with Shareholder Servicing Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not
-23-
<PAGE>
"interested persons" of the Trust as defined in the 1940 Act and have no
direct or indirect financial interest in such arrangements (the "Disinterested
Trustees").
Any material amendment to the Trust's arrangements with
Shareholder Servicing Agents under the Shareholder Servicing Agreements must
be approved by a majority of the Board of Trustees (including a majority of
the Disinterested Trustees).
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of each Portfolio, (ii)
collects and makes disbursements of money on behalf of each Portfolio, (iii)
issues and redeems shares of each Portfolio, (iv) collects and receives all
income and other payments and distributions on account of the portfolio
securities of each Portfolio, (v) addresses and mails all communications by
the Trust to its shareholders, including reports to shareholders, dividend and
distribution notices and proxy materials for any meeting of shareholders, (vi)
maintains shareholder accounts, (vii) makes periodic reports to the Trust's
Board of Trustees concerning the Trust's operations, and (viii) maintains
on-line computer capability for determining the status of shareholder
accounts.
For its services as Custodian, NBD is entitled to receive from
the Portfolios at the following annual rates based on the aggregate market
value of such Portfolios' portfolio securities, held as Custodian: .03% of the
first $20 million; .025% of the next $20 million; .02% of the next $20
million; .015% of the next $40 million; .0125% of the next $200 million; and
.01% of the balance over $300,000,000. NBD will receive an annual account fee
of $1,000 and $1.54 per month per asset held in each of these Portfolios. In
addition, NBD, as Custodian, is entitled to receive $50 for each cash
statement and inventory statement and $13 for each pass-through certificate
payment, $35 for each option transaction requiring escrow receipts and $20 for
all other security transactions.
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from each Portfolio of $11,000, $15 annually per account
in the Municipal Bond and Michigan Municipal Bond Portfolios for the
preparation of statements of account, and $1.00 for each confirmation of
purchase and redemption transactions. Charges for providing computer equipment
and maintaining a computerized investment system are expected to approximate
$350 per month for each Portfolio.
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<PAGE>
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which act under the Distribution Agreement as sponsors and
Co-Distributors for the Trust. For the fiscal year ended December 31, 1995,
the Municipal Bond and Michigan Municipal Bond Portfolios paid FoM for its
services a fee of $3,418 and $2,516, respectively. For the fiscal year ended
December 31, 1994, the Municipal Bond and Michigan Municipal Bond Portfolios
paid FoM for its services a fee of $2,572 and $1,814, respectively. For the
fiscal period from February 1, 1993 (commencement of operations) through
December 31, 1993, the Municipal Bond and Michigan Municipal Bond Portfolios
paid FoM for its services a fee of $2,933 and $2,250, respectively. For the
fiscal years ending December 31, 1994 and 1993, FoM incurred expenses of $0
with respect to the Portfolios for the printing and mailing of prospectuses to
other than current shareholders. For the fiscal year ended December 31, 1993,
FoM was reimbursed for these expenses. For the fiscal year ended December 31,
1995, the Municipal Bond and Michigan Municipal Bond Portfolios paid Essex for
its services a fee of $9,913 and $16,696, respectively. For the period from
April 20, 1994 (date of Distribution Agreement with Essex) through December
31, 1994, the Municipal Bond and Michigan Municipal Bond Portfolios paid Essex
for its services a fee of $9,016 and $16,068, respectively. Additional
information concerning fees for services performed by FoM and Essex, the
review of such fees under the Trust's plan for the payment of distribution
expenses and the services provided by FoM and Essex are described in the
Prospectuses.
As stated in the Prospectuses, the Trust's Board of Trustees is
permitted, among other things, to allocate distribution fees which are
attributable to the Class A shares in a Portfolio exclusively to such shares.
As of the date hereof, the Board of Trustees has not exercised its discretion
to make any such allocations for the current fiscal year.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen, LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serve as auditors for the
Trust. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectuses have
been audited by Arthur Andersen, LLP, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
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<PAGE>
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, are counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of each class of
shares of each Portfolio for various periods may be quoted in advertisements,
shareholder reports or other communications to shareholders. Performance
information is generally available by calling 1-800-338-7262 (outside
Michigan) or 1-800-637-9504 (within Michigan).
Yield Calculations. A Portfolio's yield is calculated by
dividing the Portfolio's net investment income per share (as described below)
earned during a 30-day period by the maximum offering price per share on the
last day of the period and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. A Portfolio's net
investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements. This calculation can
be expressed as follows:
a-b 6
Yield = 2 [(----- + 1) - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income earned
during the period (variable "a" in the formula), dividend income on equity
securities held by a Portfolio is recognized by accruing 1/360 of the stated
dividend rate of the security each
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day that the security is in the portfolio. Each Portfolio calculates interest
earned on any debt obligations held in its portfolio by computing the yield to
maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each month, or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest), and
dividing the result by 360 and multiplying the quotient by the market value of
the obligation (including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent month that
the obligation is in the portfolio. For purposes of this calculation, it is
assumed that each month contains 30 days. The maturity of an obligation with a
call provision is the next call date on which the obligation reasonably may be
expected to be called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula generally calls
for amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Undeclared earned income may be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the 30-day base
period, has not been declared as a dividend, but is reasonably expected to be
and is declared as a dividend shortly thereafter.
For the 30-day period ended December 31, 1995, the yields,
calculated as set forth above (taking into account the deduction of the
maximum sales charge), of the Municipal Bond and Michigan Municipal Bond
Portfolios were 3.54% and 3.45%, respectively. The 30-day yields (calculated
without taking into account the deduction of the maximum applicable sales
charge) for the fiscal year ended December 31, 1995, of the same Portfolios
were 3.81% and 3.73%, respectively.
The tax-equivalent yields for the 30-day period ended December
31, 1995, (taking into account the deduction of the maximum sales charge), of
the Municipal Bond and Michigan Municipal Bond Portfolios (assuming a 39.6%
federal tax rate for both Portfolios and a 4.4% Michigan income tax rate for
the Michigan Municipal Bond Portfolio) were 5.86% and 5.71%, respectively. The
tax-equivalent yields for the 30-day period ended December 31, 1995, (without
taking into account the deduction of the maximum sales charge), of the same
Portfolios were 6.31% and 6.18%, respectively.
Total Return Calculations. Each Portfolio computes its "average
annual total return" for a class by determining the average annual compounded
rates of return during specified periods that equate the initial amount
invested to the ending
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<PAGE>
redeemable value of such investment. This is done by dividing the ending
redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years
(or fractional portion thereof) covered by the computation and subtracting one
from the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, ex-
pressed in terms of years.
The Portfolios compute their aggregate total returns by
determining the aggregate rates of return during specified periods that
likewise equate the initial amount invested to the ending redeemable value of
such investment. The formula for calculating aggregate total return is as
follows:
ERV
T = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and including all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Portfolio's mean (or median) account size for any fees that vary
with the size of the account. The ending redeemable value (variable "ERV" in
each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the
end of the period covered by the computation. Each Portfolio's average annual
total return may reflect the deduction of the maximum sales load imposed on
purchases.
The average annual total return (taking into account the
deduction of the maximum applicable sales charge) for the one-year period
ended December 31, 1995 for the Municipal Bond and Michigan Municipal Bond
Portfolios was 11.00% and 10.96%,
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<PAGE>
respectively. The aggregate total return (taking into account the deduction of
the maximum applicable sales charge) for the same period for the Municipal
Bond and Michigan Municipal Bond Portfolios was 16.81% and 16.00%,
respectively.
The average annual total return (without taking into account the
deduction of the maximum applicable sales charge) for the one year period
ended December 31, 1995 for the Municipal Bond and Michigan Municipal Bond
Portfolios were 16.54% and 16.49%, respectively. The aggregate total return
(without taking into account the deduction of the maximum applicable sales
charge) for the same period for the Municipal Bond and Michigan Municipal Bond
Portfolios was 22.64% and 21.74%, respectively.
The Portfolios may also from time to time include in
advertisements, sales literature, communications to shareholders and other
materials ("Literature") total return figures that are not calculated
according to the formulas set forth above in order to compare more accurately
a Portfolio's performance with other measures of investment return. For
example, in comparing the Portfolios' total returns with data published by
Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the performance of an index,
the Portfolios may calculate their returns for the period of time specified in
the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the reinvestment date. Percentage increases are determined
by subtracting the initial value of the investment from the ending value and
by dividing the remainder by the beginning value. The Portfolios do not, for
these purposes, deduct from the initial value invested any amount representing
sales charges. The Portfolios will, however, disclose the maximum sales charge
and will also disclose that the performance data does not reflect sales
charges and that inclusion of sales charges would reduce the performance
quoted.
The Portfolios may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original Portfolio investment, but also of the additional
Portfolio shares received through reinvestment. As a result, the value of the
Portfolio investment would increase more quickly than if dividends or other
distributions had been paid in cash.
The Portfolios may also include discussions or illustrations of
the potential investment goals of a prospective investor, investment
management strategies, techniques, policies
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<PAGE>
or investment suitability of a Portfolio (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic accounting rebalancing, the advantages and disadvantages of
investing in tax-deferred and taxable instruments), economic conditions, the
relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications
to shareholders may summarize the substance of information contained in
shareholder reports (including the investment composition of a Portfolio), as
well as the view of the Trust as to current market, economy, trade and
interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a
Portfolio. The Portfolios may also include in advertisements charts, graphs or
drawings which compare the investment objective, return potential, relative
stability and/or growth possibilities of the Portfolio and/or other mutual
funds, or illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury
bills and shares of a Portfolio. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to
be derived by an investment in a Portfolio and/or other mutual funds,
shareholder profiles and hypothetical investor scenarios, timely information
on financial management, tax and retirement planning and investment
alternatives to certificates of deposit and other financial instruments. Such
advertisements or communicators may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
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<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade.
A-2
<PAGE>
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one
A-3
<PAGE>
year or less which are issued by United States commercial banks, thrifts and
non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
A-4
<PAGE>
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
"D" - Obligations which have a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly 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 "C" 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.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
A-5
<PAGE>
"B" - Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating 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. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest
return is indexed to equities, commodities, or currencies; certain swaps and
options; and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
A-6
<PAGE>
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds 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 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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
A-7
<PAGE>
(P)... - When applied to forward delivery bonds, indicates that
the rating is provisional pending delivery of the bonds. The rating may be
revised prior to delivery if changes ooccur in the legal documents or the
underlying credit quality of the bonds.
The following summarizes the long-term debt ratings used by Duff
& Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
A-8
<PAGE>
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment
A-9
<PAGE>
of principal and interest is substantial. Adverse changes in business,
economic or financial conditions may increase investment risk albeit not very
significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
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"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established
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cash flows, superior liquidity support or demonstrated broad-based access to
the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality
and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in their Prospectuses, each of the Portfolios may enter
into futures contracts and related hedging purposes.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained
fairly predictable relationships. Accordingly, the Portfolios may use interest
rate futures as a defense, or hedge, against anticipated interest rate changes
and not for speculation. As described below, this would include the use of
futures contract sales to protect against expected increases in interest rates
and futures contract purchases to offset the impact of interest rate declines.
The Portfolios presently could accomplish a similar result to
that which they hope to achieve through the use of futures contracts by
selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase, or conversely,
selling short-term bonds and investing in long-term bonds when interest rates
are expected to decline. However, because of the liquidity that is often
available in the futures market the protection is more likely to be achieved,
perhaps at a lower cost and without changing the rate of interest being earned
by the Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Portfolio, as seller, to
deliver the specific type of financial instrument called for in the contract
at a specific future time for a specified price. A futures contract purchase
would create an obligation by the Portfolio, as purchaser, to take delivery of
the specific type of financial instrument at a specific future time at a
specific price. The specific securities delivered or taken, respectively, at
settlement date, would not be determined until at or near that date. The
determination would be in accordance with the rules of the exchange on which
the futures contract sale or purchase was made.
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Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery
date. If the price in the sale exceeds the price in the offsetting purchase,
the Portfolio is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Portfolio's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
Portfolio realizes a gain, and if the purchase price exceeds the offsetting
sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange.
The Portfolios would deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the
exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Portfolios may trade in any futures contract for which there exists
a public market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. The Portfolios would engage in
an interest rate futures contract sale to maintain the income advantage from
continued holding of a long-term bond while endeavoring to avoid part or all
of the loss in market value that would otherwise accompany a decline in
long-term securities prices. Assume that the market value of a certain
security in a Portfolio tends to move in concert with the futures market
prices of long-term United States Treasury bonds ("Treasury bonds"). The
Adviser wishes to fix the current market value of this portfolio security
until some point in the future. Assume the portfolio security has a market
value of 100, and the Adviser believes that, because of an anticipated rise in
interest rates, the value will decline to 95. The Portfolio might enter into
futures contract sales of Treasury bonds for an equivalent of 98. If the
market value of the portfolio security does indeed decline from 100 to 95, the
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equivalent futures market price for the Treasury bonds might also decline from
98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and
the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the
above example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Portfolios would
engage in an interest rate futures contract purchase when it is not fully
invested in long-term bonds but wishes to defer for a time the purchase of
long-term bonds in light of the availability of advantageous interim
investments, e.g., shorter-term securities whose yields are greater than those
available on long-term bonds. The Portfolio's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Portfolio would be endeavoring at the same time to eliminate
the effect of all or part of an expected increase in market price of the
long-term bonds that the Portfolio may purchase.
For example, assume that the market price of a long-term bond
that the Portfolio may purchase, currently yielding 10%, tends to move in
concert with futures market prices of Treasury bonds. The Adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the Adviser believes
that, because of an anticipated fall in interest rates, the price will have
risen to 105 (and the yield will have dropped to about 9 1/2%) in four months.
The Portfolio might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Portfolio would assign a
pool of investments in short-term securities that are either maturing in four
months or earmarked for sale in four months, for purchase of the long-term
bond at an assumed market price of 100. Assume these short-term
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securities are yielding 15%. If the market price of the long-term bond does
indeed rise from 100 to 105, the equivalent futures market price for Treasury
bonds might also rise from 98 to 103. In that case, the 5-point increase in
the price that the Portfolio pays for the long-term bond would be offset by
the 5-point gain realized by closing out the futures contract purchase.
The Adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
A bond index assigns relative values to the bonds included
in the index and the index fluctuates with changes in the market values
of the bonds included. Some Futures contracts are traded on organized
exchanges regulated by the Commodity Futures Trading Commission.
Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each
contract.
The Portfolios may sell index futures contracts in order to
offset a decrease in market value of its portfolio securities that might
otherwise result from a market decline. A Portfolio may do so either to hedge
the value of its portfolio as a whole, or to protect against declines,
occurring prior to sales of securities, in the value of the securities to be
sold. Conversely, the Portfolios may purchase index futures contracts
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in anticipation of purchases of securities. In a substantial majority of these
transactions, the Portfolios may purchase such securities upon termination of
the long futures position, but a long futures position may be terminated
without a corresponding purchase of securities.
In addition, the Portfolios may utilize index futures contracts
in anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio
will decline prior to the time of sale.
The following are examples of transactions in bond index futures
(net of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Bond Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Bond Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A BOND PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Bond Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Bond Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Bond Portfolio-Own Buy 16 Index Futures at 120
Bond with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and the Portfolio had entered into an anticipatory
purchase hedge, or market value increased and the Portfolio had hedged its
stock portfolio, the results of the Portfolio's transactions in stock index
futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Bond Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Bond Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A BOND PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Bond Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Bond Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Bond Portfolio-Own Buy 16 Index Futures at 130
Bond with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
Unlike when a Portfolio purchases or sells a security, no price
is paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's Custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying security
or index fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as marking to the market. For
example, when a Portfolio has purchased a futures contract and the price of
the contract has risen in response to a rise in the underlying instruments,
that position will have increased in value and the Portfolio will be entitled
to receive from the broker a variation margin payment equal to that increase
in value. Conversely, where a Portfolio has purchased a futures contract and
the price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any
time prior to expiration of the futures contract, the Adviser may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Portfolio's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the
Portfolio, and the Portfolio realizes a loss or gain.
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IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by
a Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on
the future which will not be completely offset by movements in the price of
the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged and
movements in the price of futures contracts, a Portfolio may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, of if otherwise deemed to be appropriate by the Adviser.
Conversely, a Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Adviser.
It is also possible that, where a Portfolio has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the
value of securities held by the Portfolio may decline. If this occurred, the
Portfolio would lose money on the future and also experience a decline in
value in its portfolio securities.
Where futures are purchased to hedge against a possible increase
in the price of securities before a Portfolio is able to invest its cash (or
cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if the Portfolio then concludes
not to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, the Portfolio will
realize a loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value
of the futures contracts (or options),
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will be deposited in a segregated account with the Portfolio's Custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the
price of futures, a correct forecast of general market trends or interest rate
movements by the Adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although a
Portfolio intends to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may
not be possible to close a futures investment position, and in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will
in fact correlate with the price movements in the futures contract and thus
provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected
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by "daily price fluctuation limits" established by commodity exchanges which
limit the amount of fluctuation in a futures contract price during a single
trading day. Once the daily limit has been reached in the contract, no trades
may be entered into at a price beyond the limit, thus preventing the
liquidation of open futures positions.
Successful use of futures by a Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the
market. For example, if a Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
V. Options on Futures Contracts
The Portfolios may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of
the securities being hedged, an option may or may not be less risky than
ownership of the futures contract or such securities. In general, the market
prices of options can be expected to be more volatile than the market prices
on the underlying futures contract. Compared to the purchase or
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sale of futures contracts, however, the purchase of call or put options on
futures contracts may frequently involve less potential risk to a Portfolio
because the maximum amount at risk is the premium paid for the options (plus
transaction costs).
VI. Accounting and Tax Treatment
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by a Portfolio at the close of
the Portfolio's taxable year will be treated for federal income tax purposes
as sold for their fair market value on the last business day of such year, a
process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Portfolio holds the
futures contract ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by a Portfolio in a subsequent sale or other disposition of
those futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Portfolio in a prior year as a result of the
constructive sale of the contracts. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the
Portfolio, losses as to such contracts to sell will be subject to certain loss
deferral rules which limit the amount of loss currently deductible on either
part of the straddle to the amount thereof which exceeds the unrecognized gain
(if any) with respect to the other part of the straddle, and to certain wash
sales regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts
to sell which are properly identified as such, a Portfolio may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the
last business day of the Portfolio's taxable year, but gains and losses will
be subject to such short sales, wash sales, loss deferral rules and the
requirement to capitalize interest and carrying charges. Under temporary
regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and
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losses would be recognized and offset on a periodic basis during the taxable
year. Under either election, the 40%-60% rule will apply to the net gain or
loss attributable to the futures contracts, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures generally receive federal tax treatment similar to that
described above.
Certain foreign currency contracts entered into by a Portfolio
may be subject to the "marking-to-market" process and the 40%-60% rule in a
manner similar to that described in the preceding paragraph for futures
contracts. To receive such federal income tax treatment, a foreign currency
contract must meet the following conditions: (1) the contract must require
delivery of a foreign currency of a type in which regulated futures contracts
are traded or upon which the settlement value of the contract depends; (2) the
contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Additional Statement, the Treasury Department has not
issued any such regulations. Other foreign currency contracts entered into by
a Portfolio may result in the creation of one or more straddles for federal
income tax purposes, in which case certain loss deferral, short sales, and
wash sales rules and the requirement to capitalize interest and carrying
charges may apply.
As described more fully in "Additional Information Concerning
Taxes", a regulated investment company must derive less than 30% of its gross
income from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months. With respect to
futures contracts and other financial instruments subject to the
marking-to-market rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale
under the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date
the contract or instrument is acquired and the termination date. In
determining whether the 30% test is met for a taxable year, increases and
decreases in the value of each Portfolio's futures contracts and other
investments that qualify
B-12
<PAGE>
as part of a "designated hedge," as defined in the Code, may be
netted.
B-13
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF ASSETS AND LIABILITIES (Continued)
December 31, 1995
MICHIGAN
MUNICIPAL MUNICIPAL
BOND FUND BOND FUND
----------- -----------
<S> <C> <C>
Investment in securities:
At cost $75,750,865 $51,219,137
=========== ===========
At value (Note 2) $78,252,712 $52,778,540
Cash -- 94,074
Receivable for securities sold -- --
Interest receivable 1,277,409 716,553
Deferred organization costs, net (Note 2) 6,315 6,315
Prepaids and other assets 36,597 18,137
----------- ------------
TOTAL ASSETS 79,573,033 53,613,619
----------- -----------
LIABILITIES:
Payable for securities purchased 2,372,029 --
Accrued investment advisory fee 41,971 29,027
Accrued distribution fees 1,295 1,907
Accrued custodial fee 1,459 1,318
Dividends payable 190,088 125,268
Other payables and accrued expenses 2,627 2,939
----------- -----------
TOTAL LIABILITIES 2,609,469 160,459
----------- -----------
NET ASSETS $76,963,564 $53,453,160
=========== ===========
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 720,543 $ 504,175
Additional paid-in capital 74,166,371 51,420,410
Accumulated undistributed net investment income 5,107 1,934
Accumulated undistributed net realized gains (losses (430,304) (32,762)
Net unrealized appreciation on investments 2,501,847 1,559,403
----------- -----------
TOTAL NET ASSETS $76,963,564 $53,453,160
=========== ===========
Shares of capital stock outstanding 7,205,434 5,041,749
=========== ===========
Net asset value and redemption price per share $ 10.68 $ 10.60
=========== ===========
Maximum offering price per share $ 11.21 $ 11.13
=========== ===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF OPERATIONS (Continued)
For the Year Ended December 31, 1995
MICHIGAN
MUNICIPAL MUNICIPAL
BOND FUND BOND FUND
---------- -----------
<S> <C> <C>
INTEREST INCOME (Note 2) $ 3,692,331 $2,756,908
----------- ----------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 444,288 327,020
Distribution fees 13,331 19,211
Professional fees 54,065 54,065
Custodial fee 17,836 15,729
Transfer and dividend disbursing agent fees 11,521 16,438
Amortization of deferred organization costs 3,031 3,031
Marketing expenses 34,056 33,105
Security pricing services 18,692 18,692
Registration, filing fees and other expenses 33,300 31,536
Less:
Expense reimbursement (88,071) (119,481)
----------- ----------
NET EXPENSES 542,049 399,346
----------- ----------
NET INVESTMENT INCOME 3,150,282 2,357,562
----------- ----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses) (132,105) 95,495
Net change in unrealized appreciation on
investments 7,347,301 5,119,573
----------- ----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 7,215,196 5,215,068
----------- ----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $10,365,478 $7,572,630
=========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
BOND FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
MICHIGAN
MUNICIPAL BOND FUND MUNICIPAL BOND FUND
----------------------------- -----------------------------
Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,150,282 $ 3,064,874 $ 2,357,562 $ 2,210,323
Net realized gains (losses) (132,105) (297,451) 95,495 (128,351)
Net change in unrealized appreciation
(depreciation) on investments 7,347,301 (6,604,737) 5,119,573 (4,621,088)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets from
operations 10,365,478 (3,837,314) 7,572,630 (2,539,116)
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (3,149,113) (3,086,808) (2,358,540) (2,226,665)
From realized gains -- -- -- --
------------ ------------ ------------ ------------
Total distributions (3,149,113) (3,086,808) (2,358,540) (2,226,665)
------------ ------------ ------------ ------------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 25,660,467 29,816,164 12,994,627 20,635,934
Net asset value of shares issued in reinvestment
of distributions to shareholders 964,584 1,002,601 927,746 1,084,833
------------ ------------ ------------ ------------
26,625,051 30,818,765 13,922,373 21,720,767
Less: payments for shares redeemed (18,133,625) (17,342,844) (10,946,362) (13,805,722)
------------ ------------ ------------ ------------
Net increase in net assets from capital share
transactions 8,491,426 13,475,921 2,976,011 7,915,045
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS 15,707,791 6,551,799 8,190,101 3,149,264
NET ASSETS:
Beginning of year 61,255,773 54,703,974 45,263,059 42,113,795
------------ ------------ ------------ ------------
End of year $ 76,963,564 $ 61,255,773 $ 53,453,160 $ 45,263,059
============ ============ ============ ============
CAPITAL SHARE TRANSACTIONS:
Shares sold 2,502,764 2,923,798 1,290,446 2,066,281
Shares issued in reinvestment of distributions
to shareholders 93,325 100,547 90,653 109,478
------------ ------------ ------------ ------------
2,596,089 3,024,345 1,381,098 2,175,759
Less: shares redeemed (1,774,851) (1,757,269) (1,085,688) (1,401,752)
------------ ------------ ------------ ------------
NET INCREASE IN SHARES OUTSTANDING 821,238 1,267,076 295,410 774,007
CAPITAL SHARES:
Beginning of year 6,384,196 5,117,120 4,746,339 3,972,332
------------ ------------ ------------ ------------
End of year 7,205,434 6,384,196 5,041,749 4,746,339
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
MUNICIPAL BONDS -- 99.94%
Alaska -- 3.33%
Fairbanks North Star Borough Series S (MBIA
Insured), 5.45%, 3/1/06 $2,500,000 $ 2,602,825
Arizona -- 2.19%
Phoenix General Obligation Refunding Series A,
5.00%, 7/1/03 1,000,000 1,036,700
Salt River Project Agricultural Improvement Power
District Revenue, Electric System Series D,
6.00%, 1/1/08 625,000 680,319
-----------
1,717,019
-----------
California -- 1.34%
Los Angeles Waste Water System Revenue Series D
(MBIA Insured) 6.25%, 12/1/15 1,000,000 1,052,030
-----------
Florida -- 5.17%
Florida State Board of Education Capital Outlay
Public Education Series C, 5.10%, 6/1/09 1,650,000 1,656,765
Florida State Pollution Control Series Y, 6.40%,
7/1/08 1,400,000 1,527,624
Gainesville Utilities System Revenue Series B,
5.50%, 10/1/13 850,000 860,804
-----------
4,045,193
-----------
Georgia -- 0.86%
Georgia State Housing and Finance Authorit Revenue
Series B, 6.10%, 12/1/12 650,000 669,922
Illinois -- 14.15%
Chicago Metropolitan Water Capital Improvement,
5.50%, 12/1/12 1,000,000 1,046,100
Chicago School Finance Authority (FGIC Insured)
Series A, 5.20%, 6/1/06 1,000,000 1,020,120
DuPage Co. Forest Preservation District, 6.00%,
11/1/03 1,750,000 1,910,790
Evanston General Obligation Unlimited Tax, 6.10%,
12/1/09 1,000,000 1,082,480
Illinois Dedicated Tax Revenue (AMBAC Insured)
Civic Center, 6.25%, 12/15/11 250,000 280,255
Illinois Health Facilities Authority Revenue
Northwestern Memorial Hospital Series A, 5.60%,
8/15/06 1,000,000 1,056,800
Illinois Housing Development, Series A, 5.95%,
7/1/21 2,000,000 2,013,240
Illinois State Toll Highway Authority Revenue,
Series A, Variable Rate, 1/1/10 2,666,000 2,666,000
-----------
11,075,785
-----------
Indiana -- 9.53%
Ball State University Revenue (FGIC Insured)
Student Fee Series G, 6.125%, 7/1/09 400,000 427,724
Fort Wayne Sewer Works Improvement Revenue Indiana
(FGIC Insured), 5.75%, 8/1/10 1,100,000 1,131,482
Indiana State Vocational Technology Revenue Series
D, 5.90%, 7/1/06 1,000,000 1,077,090
Indiana Transportation Finance Authority, Series A
6.25%, 11/1/16 1,500,000 1,551,255
North Adams Community Schools Participation Ctfs.,
5.75%, 7/15/12 1,000,000 1,031,960
Perry Township Multi School Corporation Revenue,
5.20%, 1/15/11 1,200,000 1,176,672
St. Joseph Co. Hospital Authority Facilities
Revenue (MBIA Insured), Memorial Hospital South
Bend Project, 6.25%, 8/15/12 1,000,000 1,064,990
-----------
7,461,173
-----------
Kentucky -- 1.60%
Kentucky State Turnpike Authority Economic
Development Revenue (AMBAC Insured) Refunding,
5.50%, 7/1/06 1,175,000 1,250,223
-----------
Maryland -- 1.31%
Maryland State Community Development Administration
Dept. Housing & Community Development, First
Series, 5.80%, 4/1/07 1,000,000 1,026,520
-----------
Massachusetts -- 3.68%
Massachusetts General Obligation Series A, 5.25%,
2/1/08 500,000 503,930
Massachusetts State Finance Agency, Series F 6.00%,
1/1/15 2,265,000 2,377,781
-----------
2,881,711
-----------
Michigan -- 8.66%
Grand Rapids Water Supply System Revenue (FGIC
Insured), 6.30%, 1/1/04 250,000 272,323
Michigan State Building Authority Revenue Series I,
6.40%, 10/1/04 600,000 659,724
Michigan State Housing Development Authority
Revenue Series C, 6.375%, 12/1/11 1,450,000 1,514,293
Michigan State Trunk Line Revenue Series B-2,
5.75%, 10/1/12 500,000 510,315
Rochester Community School District School Building
& Site Unlimited Tax, 6.50%, 5/1/06 250,000 278,455
Royal Oak Hospital Finance Authority Revenue,
William Beaumont Hospital:
Series C, 7.20%, 1/1/05 250,000 276,582
Series G, 5.60%, 11/15/11 850,000 860,225
Saranac Community School District, 6.00%, 5/1/13 250,000 263,870
Wyandotte Electric Revenue, 6.25%, 10/1/17 2,000,000 2,140,200
-----------
6,775,987
-----------
Missouri -- 2.48%
Kansas City School District Building Revenue
Elementary School Project Series D, 5.10%, 2/1/07 1,905,000 1,937,995
-----------
Nevada -- 1.54%
Nevada General Obligation Series B Prison Board
Limited Tax, 6.30%, 4/1/05 1,100,000 1,201,310
-----------
Gloucester Co. Improvement Authority Gtd. Revenue,
Solid Waste Landfill Project Series AA, 6.20%,
9/1/07 400,000 428,084
Monmouth Co. General Obligation Utility Unlimited
Tax, 7.00%, 8/1/08 250,000 282,723
-----------
710,807
-----------
New York -- 2.27%
New York State Thruway Authority Highway Revenue
Series B, 5.125%, 4/1/15 1,500,000 1,482,705
Tri-Borough Bridge & Tunnel Authority Revenue
General Purpose Series X, 6.625%, 1/1/12 250,000 290,767
-----------
1,773,472
-----------
North Carolina -- 5.37%
Charlotte North Carolina General Obligation
Series A, 5.50%, 7/1/07 1,000,000 1,057,440
Mecklenberg County General Obligation Unlimited
Tax, 5.50%, 4/1/12 2,000,000 2,096,180
North Carolina Municipal Power Agency Catawba
Electric Revenue, 6.00%, 1/1/05 1,000,000 1,049,610
-----------
4,203,230
-----------
Ohio -- 6.66%
Franklin Co. Hospital Revenue, Children's Hospital
Series A, 6.50%, 5/1/07 950,000 1,035,329
Ohio State Building Authority Revenue, State
Facilities Adult Correctional Building Fund
Series A, 6.125%, 10/1/09 250,000 269,080
Ohio State Water Development Authority Revenue
(MBIA Insured), 5.75%, 12/1/05 1,000,000 1,072,750
Ohio General Obligation State of Public & Sewer
Imports Unlimited Tax, 6.00%, 8/1/07 1,000,000 1,103,350
Ohio Housing Financial Agency Mortgage Revenue
Residential GNMA Series A-1, 6.20%, 9/1/14 1,670,000 1,732,542
-----------
5,213,051
-----------
South Dakota -- 3.09%
South Dakota Housing Development Authority Revenue
Series C, 6.25%, 5/1/15 1,000,000 1,024,390
South Dakota State Building Authority Lease Revenue
(AMBAC Insured), 6.625%, 9/1/12 1,200,000 1,390,464
-----------
2,414,854
-----------
Tennessee -- 1.31%
Metropolitan Government Nashville/Davis County
Revenue, 7.00%, 1/1/14 1,000,000 1,022,250
-----------
Texas -- 6.68%
Austin Utilities System Revenue (AMBAC Insured),
6.50%, 5/15/11 250,000 273,917
El Paso General Obligation Unlimited Tax, 5.00%,
8/15/09 500,000 498,505
Harris Co. Flood Control District Refunding General
Obligation, 6.25%, 10/1/05 250,000 269,060
Houston General Obligation Series C, 6.00%, 3/1/05 400,000 427,328
Round Rock General Obligation (AMBAC Insured)
Unlimited Tax, 5.30%, 8/15/05 500,000 515,450
San Antonio Water Revenue (MBIA Insured), 6.50%,
5/15/10 250,000 275,483
Tarrant Co. Water Control & Improvement District #1
Revenue Series A, 6.10%, 3/1/05 400,000 423,912
Texas General Obligation, 7.70%, 8/1/06 1,305,000 1,444,257
Texas General Obligation Refunding Series A
Unlimited Tax 6.00%, 10/1/05 1,000,000 1,102,350
-----------
5,230,262
-----------
Virginia -- 9.29%
Norfolk Virginia General Obligation 7.00%, 10/1/07 1,500,000 1,643,494
Virginia State Housing Development Authority
Revenue, 5.60%, 11/1/10 1,500,000 1,496,880
Virginia State Housing Development Commonwealth
Series H, 6.20%, 1/1/08 1,000,000 1,035,660
Virginia State Public School Authority Revenue
Series A, 6.25%, 1/1/11 500,000 524,575
Virginia State Transportation Board Contract
Revenue #58 Corridor, 6.00%, 5/15/19 2,500,000 2,567,650
-----------
7,268,259
-----------
Washington -- 3.17%
Kent General Obligation (AMBAC Insured) Unlimited
Tax, 5.40%, 12/1/06 1,300,000 1,360,021
King Co. General Obligation Series A, 7.00%,
12/1/07 550,000 617,034
Seattle General Obligation, 4.90%, 12/1/05 500,000 506,420
-----------
2,483,475
-----------
Wisconsin -- 5.35%
Wisconsin Housing and Economic Development
Authority Revenue Series A, 6.15%, 9/1/17 1,500,000 1,525,305
Wisconsin Public Power System Revenue (AMBAC
Insured), Power Supply System Series A:
5.20%, 7/1/06 400,000 410,560
5.30%, 7/1/08 700,000 710,969
Wisconsin State Health & Educational Facilities
Authority Revenue, Lutheran Hospital Benevolent
Development Fund Series A, 5.60%, 2/15/09 450,000 462,920
Wisconsin State Transportation Revenue Series B,
5.75%, 7/1/12 1,000,000 1,077,410
-----------
4,187,164
-----------
TOTAL MUNICIPAL BONDS 78,204,517
-----------
(Cost $75,702,670)
TEMPORARY CASH INVESTMENT -- 0.06%
Woodward Tax Exempt Money Market Fund 48,195 48,195
-----------
(Cost $48,195)
TOTAL INVESTMENTS $78,252,712
===========
(Cost $75,750,865)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD FUNDS
WOODWARD MICHIGAN MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
MUNICIPAL BONDS -- 98.62%
Michigan -- 98.62%
Allegan Public School District General Obligation
(AMBAC Insured), Unlimited Tax, 5.75%, 5/1/12 $ 200,000 $ 208,860
Ann Arbor General Obligation Resource Recovery
Improvements, Series A, 6.375%, 9/1/10 525,000 560,726
Dearborn Economic Division Oakwood Obligation
Group Series, 5.60%, 11/15/08 1,690,000 1,759,882
Detroit Sewer Disposal Revenue (FGIC Insured):
6.00%, 7/1/00 1,225,000 1,312,575
Series A, Sewer Improvement, 5.30%, 7/1/06 455,000 470,443
East China Township School District School
Building & Site, Unlimited Tax, 6.00%, 5/1/03 400,000 431,500
Eastern Michigan University General Obligation
Revenue (AMBAC Insured), 5.125%, 6/1/11 500,000 495,250
Eastern Michigan University General Sinking Fund,
6.375%, 6/1/14 1,000,000 1,070,030
Fenton Area Public Schools, 7.00%, 5/1/04 250,000 275,880
Ferndale School District, 5.50%, 5/1/11 1,000,000 1,022,880
Grand Haven Electric Revenue, 5.25%, 7/1/13 1,315,000 1,317,919
Grand Traverse Co. Hospital Finance Authority
Revenue (AMBAC Insured), Munson Healthcare
Series A, 5.90%, 7/1/04 1,000,000 1,078,450
Hartland Consolidated School District General
Obligation (AMBAC Insured), Unlimited Tax,
6.00%, 5/1/11 650,000 695,895
Holland Electric Revenue:
5.00%, 7/1/09 625,000 620,756
Kent Co. Building Authority Limited Tax, 6.45%,
12/1/02 620,000 671,981
Lansing Building Authority (AMBAC Insured),
6.00%, 6/1/05 1,000,000 1,101,210
Livingston Co. General Obligation Bldg. Authority
Limited Tax, 5.80%, 7/1/08 1,330,000 1,408,975
Marysville Public School District, 5.60%, 5/1/09 620,000 644,626
Michigan General Obligation Environmental
Protection Program:
6.25%, 11/1/08 450,000 507,928
Michigan Municipal Bond Authority Revenue:
Equipment & Real Property Financing Program G,
5.70%, 5/1/05 365,000 381,732
Local Government Loan Program Series A, 5.70%,
8/1/07 1,145,000 1,200,361
Michigan State Building Authority Revenue
Series I:
6.40%, 10/1/04 400,000 439,816
(AMBAC Insured), 5.00%, 10/1/06 950,000 960,897
Michigan State Comprehensive Transportation
Revenue Series B, 5.75%, 5/15/11 2,140,000 2,187,915
Michigan State Hospital Finance Authority
Revenue:
Detroit Medical Center -- B (AMBAC Insured),
5.00%, 8/15/06 1,000,000 1,004,040
Henry Ford Hospital, 6.00%, 9/1/11 1,250,000 1,315,425
Henry Ford Hospital, 5.75%, 9/1/17 750,000 758,092
Mercy Mt. Clemens, 6.25%, 5/15/11 500,000 525,855
Sisters of Mercy (MBIA Insured):
Series P, 5.00%, 8/15/06 460,000 458,845
Series H, 7.50%, 8/15/07 250,000 270,133
Michigan State Housing Development Authority
Revenue:
Rental, Series A, 6.20%, 4/1/03 1,000,000 1,055,990
Single Family Mortgage Series B, 6.30%, 4/1/03 1,000,000 1,002,180
Series C, 6.375%, 12/1/11 750,000 783,255
Michigan State University Revenue Series A:
6.125%, 8/15/07 500,000 533,515
6.25%, 8/15/15 2,000,000 2,112,140
Newaygo Public Schools General Obligation
Unlimited Tax, 6.00%, 5/1/12 300,000 318,339
Norway Vulcan Area Schools, 5.75%, 5/1/13 250,000 257,998
Novi Community Schools, 6.125%, 5/1/13 750,000 807,645
Novi General Obligation Series A & B Recreational
Facilities & Public Improvements, 5.00%,
10/1/11 725,000 706,433
Oak Park School District (AMBAC Insured):
6.00%, 6/1/09 250,000 266,470
Oakland County General Obligation Segment I & II
Evergreen Farmington Sewer Disposal System,
6.80%, 11/1/03 750,000 814,965
Oakland Community College Refunding & Improvement
Limited Tax:
5.15%, 5/1/09 910,000 898,707
General Obligation, 5.20%, 5/1/10 700,000 689,527
Okemos Public School District, 6.30%, 5/1/06 655,000 725,393
Ottawa Co. General Obligation Water Supply
System, 6.00%, 8/1/08 1,950,000 2,100,735
Perry Public Schools General Obligation Unlimited
Tax, 6.00%, 5/1/12 250,000 263,870
Rockford Public Schools, 5.875%, 5/1/12 500,000 522,905
Royal Oak Hospital Finance Authority Revenue,
William Beaumont Hospital -- G, 5.60%, 11/15/11 2,000,000 2,024,060
Saranac Community School District, 6.00%, 5/1/13 250,000 263,870
Traverse City Area Public School District,
Series I, 5.70%, 5/1/12 2,400,000 2,500,800
Troy City School District, School Improvements,
6.40%, 5/1/12 400,000 426,076
University of Michigan Revenue Hospital Series A:
5.75%, 12/1/12 850,000 859,409
5.50%, 12/1/21 450,000 445,077
University of Michigan Revenue Medical Service
Plan, 6.20%, 12/1/03 1,000,000 1,100,100
University of Michigan Revenue Student Fee
Series A, 5.25%, 4/1/15 1,000,000 997,510
Washtenaw Community College Unlimited Tax, 6.25%,
4/1/07 1,000,000 1,048,770
Wayne State University (AMBAC Insured):
5.50%, 11/15/07 1,000,000 1,044,180
5.65%, 11/15/15 800,000 813,904
Wayne Westland Community Schools (FGIC Insured),
Unlimited Tax, 5.75%, 5/1/11 350,000 360,951
Webberville Community School, 5.60%, 5/1/11 500,000 511,415
Western University Revenue (FGIC Insured), 6.25%,
11/15/12 250,000 270,172
Wyoming Public School, 5.875%, 5/1/13 350,000 367,010
-----------
TOTAL MUNICIPAL BONDS 52,052,248
-----------
(Cost $50,492,845)
TEMPORARY CASH INVESTMENT -- 1.38%
Woodward Michigan Tax-Exempt Money Market Fund 726,292 726,292
-----------
(Cost $726,292)
TOTAL INVESTMENTS $52,778,540
===========
(Cost $51,219,137)
</TABLE>
<PAGE>
THE WOODWARD FUNDS
BOND FUNDS
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Funds (Woodward) was organized as a Massachusetts business
trust on April 21, 1987, and registered under the Investment Company Act of
1940, as amended, as an open-end investment company. As of December 31, 1995,
Woodward consisted of seventeen separate series of which there were five Bond
Funds, as described below. Woodward Bond Fund Woodward Intermediate Bond Fund
Woodward Short Bond Fund Woodward Municipal Bond Fund Woodward Michigan
Municipal Fund
The Bond and Intermediate Bond Funds commenced operations on June 1,
1991. The Municipal Bond and Michigan Municipal Bond Funds commenced
operations February 1, 1993. The Short Bond Fund commenced operations on
September 17, 1994.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed by
the Bond Funds in the preparation of the financial statements. The policies
are in conformity with generally accepted accounting principles for investment
companies. Following generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Investments
The Bond Funds value investment securities at market value which is
determined by a pricing service based upon quoted market prices or dealer
quotes. Securities for which market prices or dealer quotes are not readily
available are valued by the investment advisor, NBD Bank (NBD) in accordance
with procedures approved by the Board of Trustees.
Investment security purchases and sales are accounted for on the day
after trade date.
Woodward invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD, acting under the supervision of the Board
of Trustees, has established the following additional policies and procedures
relating to Woodward's investments in securities subject to repurchase
agreements: 1) the value of the underlying collateral is required to equal or
exceed 102% of the funds advanced under the repurchase agreement including
accrued interest; 2) collateral is marked to market daily by NBD or its third
party custodian to assure its value remains at least equal to 102% of the
repurchase agreement amount; and 3) funds are not disbursed by Woodward or its
agent unless collateral is presented or acknowledged by the collateral
custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments. Bond
premiums and discounts are amortized/accreted as required by the Internal
Revenue Code. Premiums and discounts on mortgage-backed securities are
amortized/accreted using the effective interest rate method. As prepayments on
the underlying mortgages increase or decrease the expected life, the yield is
adjusted to amortize/accrete the security to its new expected life.
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
<PAGE>
Net realized gains differ for financial statement and tax purposes
primarily because of the recognition of wash sale transactions for all Funds
and write downs for book purposes on the Bond and Intermediate Bond funds (See
notes to Portfolio of Investments). Also, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed may differ
from the year the income or realized gains were recorded by the Fund.
As of December 31, 1995, the Bond Funds had capital loss carryforwards
and related expiration dates as follows:
<TABLE>
<CAPTION>
Fund 2002 2003 Total
- ---- ---- ---- -----
<S> <C> <C> <C>
Municipal Bond $ 96,878 $333,098 $429,976
Michigan Municipal Bond 29,400 -- 29,400
</TABLE>
Shareholder Dividends
Dividends from net investment income are declared and paid monthly by the
Bond Funds. Net realized capital gains are distributed annually. Distributions
from net investment income and net realized gains are made during each year to
avoid the 4% excise tax imposed on regulated investment companies by the
Internal Revenue Code.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of each series.
When Issued/To Be Announced (TBA) Securities.
The Bond Funds may purchase securities on a "when issued" basis. These
securities have been registered by a municipality or government agency, but
have not yet been issued to the public. These transactions involve a
commitment by the Funds to purchase particular securities, with payment and
delivery taking place at a future date, for which all specific information,
such as the face amount and maturity date of such investment security, is not
known at the time of the trade. These transactions are subject to market
fluctuations and the risk that the value at delivery may be more or less than
the purchase price at which the transactions were entered. The current value
of these securities is determined in the same manner as that of other
portfolio securities. Although the Bond Funds generally purchase these
securities with the intention of acquisition, such securities may be sold
before the settlement date.
Expenses
Expenses are charged daily as a percentage of the Fund's assets. Woodward
monitors the rate at which expenses are charged to ensure that a proper amount
of expense is charged to income each year. This percentage is subject to
revision if there is a change in the estimate of the future net assets of
Woodward or a change in expectations as to the level of actual expenses.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Pursuant to
their Distribution Agreement with Woodward, FoM is entitled to receive a fee
at the annual rate of .005% of the Bond Funds's average net assets and Essex
is entitled to receive a fee at the annual rate of .10% of the aggregate
average net assets of Woodward's investment portfolios attributable to
investments by clients of Essex.
NBD is the investment advisor pursuant to the Advisory Agreement. For its
advisory services to Woodward, NBD is entitled to a fee, computed daily and
payable monthly. Under the Advisory Agreement, NBD also provides Woodward with
certain administrative services, such as maintaining Woodward's general ledger
and assisting in the preparation of various regulatory reports. NBD receives
no additional compensation for such services.
A reorganization of Woodward and The Prairie Funds is being considered by
the Board of Trustees of both funds. In connection with the proposed
reorganization, the Board of Trustees of Woodward and the Board of Trustees of
Prairie must approve certain reorganization agreements. The transaction is
intended to be effected as a tax-free reorganization under the Internal
Revenue Code, so that none of the Funds' shareholders will recognize taxable
gains or losses as a result of the reorganization. A proxy
statement/prospectus describing the reorganization and the reasons therefore
will be sent to shareholders.
<PAGE>
NBD, FoM, and Essex have agreed that they may waive their fees in whole
or in part; and, if in part, may specify the particular fund to which such
waiver relates as may be required to satisfy any expense limitation imposed by
state securities laws or other applicable laws. At present, no restrictive
expense limitation is imposed on Woodward. Restrictive limitations could be
imposed as a result of changes in current state laws and regulations in those
states where Woodward has qualified its shares, or by a decision of the
Trustees to qualify the shares in other states having restrictive expense
limitations. For the year ended December 31, 1995, NBD reimbursed the Short
Bond, Municipal Bond, and Michigan Municipal Bond Funds for certain expenses
in the amount of $65,761, $88,071, and $119,481 respectively.
On March 10, 1994, Woodward adopted the Woodward Funds Deferred
Compensation Plan (the "Plan"), an unfunded, nonqualified deferred
compensation plan. The Plan allows an individual Trustee to elect to defer
receipt of all or a percentage of fees which otherwise would be payable for
services performed.
NBD is also compensated for its services as Woodward's Custodian,
Transfer Agent and Dividend Disbursing Agent, and is reimbursed for certain
out of pocket expenses incurred on behalf of Woodward.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions based on the aggregate cost of investments for federal income tax
purposes, excluding short-term securities, is as follows:
<TABLE>
<CAPTION>
MUNICIPAL MUNICIPAL
BOND FUND BOND FUND
--------- ---------
<S> <C> <C>
Gross Unrealized
Gains $ 2,346,519 $ 1,652,718
Gross Unrealized
Losses (155,328) (93,315)
------------ ------------
$ 2,501,847 $ 1,559,403
============ ============
Federal Income Tax
Cost $ 75,750,865 $ 51,219,137
Purchases $ 24,624,824 $ 16,596,409
Sales & Maturities, at value $ 13,656,636 $ 13,193,153
</TABLE>
<PAGE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee
rates payable to NBD, and amounts paid to NBD, FoM, and Essex pursuant to the
agreements described in Note 3 for the year ended December 31, 1995. The rates
shown are stated as a percentage of each fund's average net assets.
<TABLE>
<CAPTION>
MICHIGAN
MUNICIPAL MUNICIPAL
Effective Date BOND FUND BOND FUND
- -------------- --------- ---------
<S> <C> <C>
Expense Rates:
January 1 0.77% 0.77%
March 21 0.80% 0.80%
NBD Advisory Fee:
January 1 0.65% 0.65%
Amounts Paid:
Advisory Fee to NBD $444,288 $ 327,020
Distribution Fees to FoM
& Essex $ 13,331 $ 19,211
Other Fees & Out of Pocket
Expenses to NBD $ 33,445 $ 34,020
Expense reimbursement by NBD $(88,071) $(119,481)
</TABLE>
(6) Portfolio Composition
Although the Municipal Bond Fund has a diversified investment portfolio,
the Fund has investments greater than 10% of its total investments in the
state of Illinois. The Michigan Municipal Bond Fund does not have a
diversified portfolio since all of its investments are within the state of
Michigan. Such concentrations within particular states may subject the Funds
more significantly to economic changes occuring within those states.
<PAGE>
<TABLE>
<CAPTION>
Municipal Bond Fund
---------------------------------------------
Year ended Year ended Period ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.59 $ 10.69 $ 10.00
Income from investment operations:
Net investment income 0.48 0.50 0.45
Net realized and unrealized gains
(losses) on investments 1.08 (1.11) 0.69
----------- ----------- -----------
Total from investment operations 1.56 (0.61) 1.14
----------- ----------- -----------
Less distributions:
From net investment income (0.47) (0.49) (0.44)
From realized gains -- -- (0.01)
----------- ----------- -----------
Total distributions (0.47) (0.49) (0.45)
----------- ----------- -----------
Net asset value, end of period $ 10.68 $ 9.59 $ 10.69
=========== =========== ===========
Total Return (b) 16.54% (5.72%) 12.69%(a)
Ratios/Supplemental Data
Net assets, end of period $76,963,564 $61,255,773 $54,703,974
Ratio of expenses to average net assets 0.79% 0.53% 0.19%(a)
Ratio of net investment income to
average net assets 4.63% 4.94% 5.27%(a)
Ratio of expenses to average net assets
without fee waivers/ reimbursed expenses 0.93% 0.88% 1.12%(a)
Ratio of net investment income to average
net assets without fee waivers/
reimbursed expenses 4.49% 4.59% 4.34%(a)
Portfolio turnover rate 20.46% 19.11% 11.12%
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Michigan Municipal Bond Fund
---------------------------------------------
Year ended Year ended Period ended
Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 9.54 $ 10.60 $ 10.00
Income from investment operations:
Net investment income 0.48 0.50 0.44
Net realized and unrealized gains (losses)
on investments 1.06 (1.06) 0.59
----------- ----------- -----------
Total from investment operations 1.54 (0.56) 1.03
----------- ----------- -----------
Less distributions:
From net investment income (0.48) (0.50) (0.43)
From realized gains -- -- --
----------- ----------- -----------
Total distributions (0.48) (0.50) (0.43)
----------- ----------- -----------
Net asset value, end of period $ 10.60 $ 9.54 $ 10.60
=========== =========== ===========
Total Return (b) 16.49% (5.42%) 11.50%(a)
Ratios/Supplemental Data
Net assets, end of period $53,453,160 $45,263,059 $42,113,795
Ratio of expenses to average net assets 0.79% 0.53% 0.19%(a)
Ratio of net investment income to average net assets 4.71% 5.01% 5.12%(a)
Ratio of expenses to average net assets without fee
waivers/ reimbursed expenses 1.04% 1.05% 1.21%(a)
Ratio of net investment income to average net assets
without fee waivers/reimbursed expenses 4.46% 4.49% 4.10%(a)
Portfolio turnover rate 26.97% 25.93% 41.70%
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward Bond Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the Bond Funds of THE WOODWARD
FUNDS (comprising, as indicated in Note 1, the Bond, Intermediate Bond, Short
Bond, Municipal Bond and Michigan Municipal Bond Funds) as of December 31,
1995, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods from
inception (as indicated in Note 1) through December 31, 1995. 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 and
financial highlights 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 physical counts and
confirmation of securities owned as of December 31, 1995, by inspection and
correspondence with custodians, banks 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, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective funds constituting the Bond Funds of The
Woodward Funds as of December 31, 1995, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended and the financial highlights for each of the periods
from inception (as indicated in Note 1) through December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
<PAGE>
CROSS REFERENCE SHEET
Series V Representing Interests in the
Class A and Class I Shares of the
Woodward U.S. Government Income Fund
Statement of Additional
Form N-1A Part B Item Information Caption
- --------------------- -----------------------
10. Cover Page................................... Cover Page
11. Table of Contents............................ Table of Contents
12. General Information and History.............. Description of Shares
13. Investment Objectives and Policies........... Investment Objective,
Policies and Risk
Factors
14. Management of Registrant..................... Management
15. Control Persons and Principal................ Description of Shares
Holders of Securities
16. Investment Advisory and Other Services....... Management
17. Brokerage Allocation and other Practices..... Investment Objective,
Policies and Risk
Factors
18. Capital Stock and Other Securities........... Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing............. Net Asset Value
of Securities Being Offered
Additional Purchase and
Redemption Information
20. Tax Status................................... Additional Information
Concerning Taxes
21. Underwriters................................. Not Applicable
22. Calculation of Performance Data.............. Additional Information
on Performance
23. Financial Statements......................... Audited Financial
Statements
-17-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
_________, 1996
for
CLASS I AND CLASS A SHARES OF THE:
WOODWARD U.S. GOVERNMENT INCOME FUND
of
THE WOODWARD FUNDS
c/o NBD Bank, N.A.
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Funds'
Prospectus dated April __, 1996 pertaining to all classes of the Woodward U.S.
Government Income Fund (the "U.S. Government Income Portfolio" or the
"Portfolio"), and is incorporated by reference in its entirety into the
Prospectus. Because this Additional Statement is not itself a prospectus, no
investment in shares of the Portfolio should be made solely upon the
information contained herein. Copies of the Portfolio's Prospectus may be
obtained from any office of the Co-Distributors by writing or calling the
Co-Distributors or the Trust. Capitalized terms used but not defined herein
have the same meanings as in the Prospectus.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objective, Policies and Risk Factors.................... 1
Additional Purchase and Redemption Information..................... 11
Description of Shares.............................................. 12
Additional Information Concerning Taxes............................ 14
Management......................................................... 16
Independent Public Accountants..................................... 21
Counsel............................................................ 21
Additional Information on Performance.............................. 21
Appendix A......................................................... A-1
Appendix B......................................................... B-1
-i-
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
The following supplements the investment objective and policies
of the U.S. Government Income Portfolio of The Woodward Funds as set forth in
its Prospectus.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolio may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for the
Portfolio.
The annualized portfolio turnover rate for the Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover of
the Portfolio may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Portfolio to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making
portfolio decisions, and the Portfolio may engage in short term trading to
achieve its investment objective.
Purchases of money market instruments by the Portfolio are made
from dealers, underwriters and issuers. The Portfolio currently does not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-counter market are
<PAGE>
generally on a net basis (i.e., without commission) through dealers, or
otherwise involve transactions directly with the issuer of an instrument.
The Portfolio may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. The Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
The Advisory Agreement for the Portfolio provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for the Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause the
Portfolio to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction, provided that the Adviser
determines in good faith that such commission is reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either the particular transaction or the overall
responsibilities of the Adviser to the Portfolio. Such brokerage and research
services might consist of reports and statistics relating to specific
companies or industries, general summaries of groups of stocks or bonds and
their comparative earnings and yields, or broad overviews of the stock, bond
and government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolio. The Trustees will
periodically review any commissions paid by the Portfolio to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolio. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised by the Adviser.
Conversely, the Portfolio may be the primary beneficiary of the research or
services received as a result of portfolio transactions effected for such
other account or investment company.
-2-
<PAGE>
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with, or engage in securities
lending transactions with, the Adviser, the Co-Distributors or an affiliated
person of any of them (as such term is defined in the 1940 Act) acting as
principal, except to the extent permitted by the SEC. In addition, the
Portfolio will not purchase securities during the existence of any
underwriting or selling group relating thereto of which the Co- Distributor or
the Adviser, or an affiliated person of either of them, is a member, except to
the extent permitted by the SEC. Under certain circumstances, the Portfolio
may be at a disadvantage because of these limitations in comparison with other
investment companies which have similar investment objectives but are not
subject to such limitations.
Investment decisions for the Portfolio are made independently
from those for the Trust's other portfolios and for any other investment
companies and accounts advised or managed by the Adviser. Such other
investment companies and accounts may also invest in the same securities as
the Portfolio. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Portfolio with those to be sold or
purchased for other investment companies or accounts in executing
transactions. When a purchase or sale of the same security is made at
substantially the same time on behalf of one or more of the Portfolio and
another investment company or account, the transaction will be averaged as to
price and available investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each portfolio and such other investment
company or account. In some instances, this investment procedure may adversely
affect the price paid or received by the Portfolio or the size of the position
obtained or sold by the Portfolio.
U.S. Government Obligations
As stated in the Prospectus, pursuant to its investment
objective the Portfolio invests in various U.S. Government
obligations.
Stripped U.S. Government Obligations. Within the past several
years, the Treasury Department has facilitated transfers of ownership of zero
coupon securities by accounting separately for the beneficial ownership of
particular interest coupon and principal payments on Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the Treasury Department is known as "STRIPS"
or "Separate Trading of Registered Interest and Principal of Securities." The
Portfolio may purchase securities registered in the STRIPS program. Under the
STRIPS program, the Portfolio will be able to have its beneficial ownership of
zero coupon securities recorded directly in the book-entry record-keeping
-3-
<PAGE>
system in lieu of having to hold certificates or other evidences of
ownership of the underlying U.S. Treasury securities.
In addition, the Portfolio may acquire U.S. Government
obligations and their unmatured interest coupons that have been separated
("stripped") by their holder, typically a custodian bank or investment
brokerage firm. Having separated the interest coupons from the underlying
principal of the U.S. Government obligations, the holder will resell the
stripped securities in custodial receipt programs with a number of different
names, including "Treasury Income Growth Receipts" ("TIGRs") and "Certificate
of Accrual on Treasury Securities" ("CATS"). The stripped coupons are sold
separately from the underlying principal, which is usually sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. The underlying U.S. Treasury bonds and notes themselves are
held in book-entry form at the Federal Reserve Bank or, in the case of bearer
securities (i.e., unregistered securities which are ostensibly owned by the
bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. The Trust is
not aware of any binding legislative, judicial or administrative authority on
this issue.
As described in the Prospectus, the Portfolio may also purchase
stripped mortgage-backed securities ("SMBS"). SMBS that are interest only or
principal only and not issued by the U.S. Government may be considered
illiquid securities if they can not be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of net asset value per share.
Mortgage Backed Securities
Mortgage Backed Securities Generally. Mortgage backed
securities held by the Portfolio represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his lending institution are "passed-through" to an investor such
as the Portfolio.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
-4-
<PAGE>
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid. Additional payments
are caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be
incurred. Some mortgage backed securities are described as "modified
pass-through". These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("PC's"), which represent interests in mortgages
from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers which include state and federally-chartered savings and loan
credit unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA.
The principal guarantor of mortgage backed securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S
Government, the timely payment of principal and interest on securities issued
by approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
The Trust expects that governmental entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or
interest payment may vary or whose terms to maturity may be shorter than
previously customary. As new types of mortgage backed securities are developed
and offered in the market, the Trust may consider making investments in such
new types of securities.
Underlying Mortgages. Pools consist of whole mortgage
loans or participations in loans. The majority of these loans are
made to purchasers of one to four family homes. The terms and
-5-
<PAGE>
characteristics of the mortgage instruments are generally uniform within a
pool but may vary among pools. For example, in addition to fixed-rate,
fixed-term mortgages, the Portfolio may purchase pools of variable rate
mortgages ("VRM"), growing equity mortgages ("GEM"), graduated payment
mortgages ("GPM") and other types where the principal and interest payment
procedures vary. VRMs are mortgages which reset the mortgage's interest rate
periodically with changes in open market interest rates. To the extent that
the Portfolio is actually invested in VRMs, its interest income will vary with
changes in the applicable interest rate on pools of VRMs. GPM and GEM pools
maintain constant interest rates, with varying levels of principal repayment
over the life of the mortgage. These different interest and principal payment
procedures should not impact the Portfolio's net asset value since the prices
at which these securities are valued will reflect the payment procedures.
All poolers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Poolers also establish
credit standards and underwriting criteria for individual mortgages included
in the pools.
Average Life. The average life of pass-through pools varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments
is affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
Returns on Mortgage Backed Securities. Yields on mortgage
backed pass-through securities are typically quoted based on the maturity of
the underlying instruments and the associated average life assumption. Actual
prepayment experience may cause the yield to differ due to changes in the
expected average life.
Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yields of the
Portfolio. The compounding effect from reinvestments of monthly payments
received by the Portfolio will increase its yield to shareholders, compared to
bonds that pay interest semi-annually.
-6-
<PAGE>
Options Trading
As stated in its Prospectus, the U.S. Government Income
Portfolio may purchase and sell put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation. Such
transactions may be effected on a principal basis with primary reporting
dealers in U.S. Government securities in an amount not exceeding 5% of the
Portfolio's net assets. This is a highly specialized activity which entails
greater than ordinary investment risks. Regardless of how much the market
price of the underlying security increases or decreases, the option buyer's
risk is limited to the amount of the original investment for the purchase of
the option. However, options may be more volatile than the underlying
securities, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
securities. A listed call option gives the purchaser of the option the right
to buy from a clearing corporation, and a writer has the obligation to sell to
the clearing corporation, the underlying security at the stated exercise price
at any time prior to the expiration of the option, regardless of the market
price of the security. The premium paid to the writer is in consideration for
undertaking the obligations under the option contract. A listed put option
gives the purchaser the right to sell to a clearing corporation the underlying
security at the stated exercise price at any time prior to the expiration date
of the option, regardless of the market price of the security. Put and call
options purchased by the Portfolio will be valued at the last sale price or,
in the absence of such a price, at the mean between bid and asked prices.
The Portfolio's obligation to sell a security subject to a
covered call option written by it, or to purchase a security subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase
-7-
<PAGE>
transaction, will not be able to sell the underlying security until the option
expires or the underlying security is delivered upon exercise with the result
that the writer in such circumstances will be subject to the risk of market
decline in the underlying security during such period. The Portfolio will
write an option on a particular security only if the Adviser believes that a
liquid secondary market will exist on an exchange for options of the same
series which will permit the Portfolio to make a closing purchase transaction
in order to close out its position.
When the Portfolio writes a covered call option, an amount
equal to the net premium (the premium less the commission) received by the
Portfolio is included in the liability section of the Portfolio's statement of
assets and liabilities as a deferred credit. The amount of the deferred credit
will be subsequently marked-to-market to reflect the current value of the
option written. The current value of the traded option is the last sale price
or, in the absence of a sale, the average of the closing bid and asked prices.
If an option expires on the stipulated expiration date or if the Portfolio
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received
when the option is sold) and the deferred credit related to such option will
be eliminated. Any gain on a covered call option may be offset by a decline in
the market price of the underlying security during the option period. If a
covered call option is exercised, the Portfolio may deliver the underlying
security held by it or purchase the underlying security in the open market. In
either event, the proceeds of the sale will be increased by the net premium
originally received and the Portfolio will realize a gain or loss. If a
secured put option is exercised, the amount paid by the Portfolio for the
underlying security will be partially offset by the amount of the premium
previously paid to the Portfolio. Premiums from expired options written by the
Portfolio and net gains from closing purchase transactions are treated as
short-term capital gains for federal income tax purposes, and losses on
closing purchase transactions are short-term capital losses.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolio, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for the
Portfolio to dispose of instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
its demand rights, and the Portfolio could, for these or other reasons, suffer
a loss with respect to such instruments.
-8-
<PAGE>
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, the Portfolio may invest from time to time in securities issued
by other investment companies which invest primarily in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. The
Portfolio intends to limit its investments so that, as determined immediately
after a securities purchase is made: (a) not more than 5% of the value of its
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; and (c) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by the Portfolio or the Trust as a whole.
Repurchase and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectus generally equals the price paid by the Portfolio plus
interest negotiated on the basis of current short term rates (which may be
more or less than the rate on the securities underlying the repurchase
agreement). Securities subject to repurchase agreements are held by the
Trust's Custodian, in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans under the 1940 Act. Reverse repurchase agreements are considered
to be borrowings by the Portfolio under the 1940 Act.
Lending Securities
When the Portfolio lends its securities, it continues to
receive interest or dividends on the securities loaned and may simultaneously
earn interest on the investment of the cash collateral. Although voting
rights, or rights to consent, attendant to securities on loan pass to the
borrower, such loans will be called so that the securities may be voted by the
Portfolio if a material event affecting the investment is to occur.
When-Issued Purchases and Forward Commitments
The Portfolio will purchase securities on a when-issued basis
or purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however,
the Portfolio may dispose of or renegotiate a commitment after it is entered
into, and may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. In these
cases the Portfolio may realize a capital gain or loss.
-9-
<PAGE>
When the Portfolio engages in when-issued and forward
commitment transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Portfolio's incurring a loss
or missing an opportunity to obtain a price considered to be advantageous.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectus, the Portfolio is subject to the following investment limitations
which may not be changed without approval of the holders of the majority of
its outstanding shares (as defined under "Description of Shares" below).
The U.S. Government Income Portfolio may not:
1. Purchase or sell real estate, except that the Portfolio may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as the Portfolio might be deemed to
be an underwriter upon the disposition of portfolio securities acquired within
the limitation on purchases of restricted securities and except to the extent
that the purchase of obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for transactions in options on securities,
indices of securities, futures contracts, options on futures contracts, and
similar instruments.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to the Portfolio's transactions in options on
securities or indices of securities, futures contracts, options on future
contracts, and similar instruments, and (b) the Portfolio may obtain
short-term credit as may be necessary for the clearance of purchases and sales
of portfolio securities.
6. Purchase securities of companies for the purpose of
exercising control.
-10-
<PAGE>
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that the Portfolio may,
to the extent appropriate to its investment objective, purchase publicly
traded securities of companies engaging in whole or in part in such activities
and may enter into transactions in options on securities, indices of
securities, futures contracts, options on futures contracts, and similar
instruments.
In order to permit the sale of the Portfolio's shares in
certain states, the Trust may make commitments with respect to the Portfolio
more restrictive than the investment policies and limitations described above
and in its Prospectus. Should the Trust determine that any such commitment is
no longer in the best interests of the Portfolio, it will revoke the
commitment by terminating sales of the Portfolio's shares in the state
involved.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolio are offered and sold on a continuous
basis by the Trust's sponsors and Co-Distributors, FoM and Essex, acting as
agent. As described in its Prospectus, Institutional shares of the Portfolio
are sold primarily to NBD and its affiliated and correspondent banks (the
"Banks") acting on behalf of their respective customers. Retail shares of the
Portfolio are sold to the public ("Investors") primarily through financial
institutions such as banks, brokers and dealers.
An illustration of the computation of the initial public
offering price per Retail share of the U.S. Government Income Portfolio, based
on the estimated value of the Portfolio's total net assets upon commencement
of operations, is as follows:
<TABLE>
<CAPTION>
TABLE
U.S. Government
Income Portfolio
----------------
<S> <C>
Net Assets ............................ $ 100,000,000
Number of Shares Outstanding .......... 10,000,000
===============
Net Asset Value Per Share ............. $ 10.00
Sales Charge, 4.50 percent
of offering price (4.71
percent of net asset value
per share) ........................... $ .47
---------------
Offering Price to Public .............. $ 10.47
===============
</TABLE>
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<PAGE>
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares during any period when
(a) trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted
such suspension; or (d) an emergency exists as determined by the SEC. (The
Trust may also suspend or postpone the recordation of the transfer of shares
upon the occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectus under
"Redemption of Shares," the Trust may redeem shares involuntarily to reimburse
the Portfolio for any loss sustained by reason of the failure of a shareholder
to make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder
which is applicable to Portfolio shares as provided in the Prospectus from
time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under
Massachusetts law on April 21, 1987. The Trust's Declaration of Trust, which
was amended and restated as of May 1, 1992, authorizes the Board of Trustees
to divide shares into two or more series, each series relating to a separate
portfolio of investments, and divide the shares of any series into two or more
classes. The number of shares of each series and/or of a class within each
series shall be unlimited. The Trust does not intend to issue share
certificates.
In the event of a liquidation or dissolution of the Trust or an
individual portfolio, shareholders of a particular portfolio would be entitled
to receive the assets available for distribution belonging to such Portfolio.
If there are any assets, income, earnings, proceeds, funds or payments, which
are not readily identifiable as belonging to any particular portfolio, the
Trustees shall allocate them among any one or more of the portfolios as they,
in their sole discretion, deem fair and equitable.
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<PAGE>
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each portfolio affected by the matter. A portfolio is
affected by a matter unless it is clear that the interests of each portfolio
in the matter are substantially identical or that the matter does not affect
any interest of the portfolio. Under the Rule, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a portfolio only if approved by a
majority of the outstanding shares of such portfolio. However, the Rule also
provides that the ratification of the appointment of independent accountants,
the approval of principal underwriting contracts and the election of Trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to particular portfolios.
When used in the Prospectuses or this Additional Statement, a
"majority" of shareholders means the vote of the lesser of (1) 67% of the
shares of the Trust or the applicable portfolio present at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy, or (2) more than 50% of the outstanding shares of the Trust or the
applicable portfolio.
When issued for payment as described in the Trust's Prospectus
and this Additional Statement, shares of the Portfolios will be fully paid and
non-assessable by the Trust.
The Declaration of Trust provides that the Trustees, officers,
employees and agents of the Trust will not be liable to the Trust or to a
shareholder, nor will any such person be liable to any third party in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, willful misfeasance, gross negligence, or
reckless disregard of duties. It also provides that all third parties shall
look solely to the Trust property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the
affairs of the Trust.
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<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described
in the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Portfolio or its shareholders, and the discussion here
and in the Prospectus is not intended as a substitute for careful tax planning
and is based on tax laws and regulations which are in effect on the date
hereof; such laws and regulations may be changed by legislative or
administrative action. Investors are advised to consult their tax advisers
with specific reference to their own tax situations.
The Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, the Portfolio must satisfy, in addition to the distribution
requirement described in the Prospectus, certain requirements with respect to
the source of its income for a taxable year. At least 90% of the gross income
of the Portfolio must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
stocks, securities or foreign currencies, and other income (including but not
limited to gains from options, futures, or forward contracts) derived with
respect to the Portfolio's business of investing in such stock, securities or
currencies. The Treasury Department may by regulation exclude from qualifying
income foreign currency gains which are not directly related to the
Portfolio's principal business of investing in stock or securities, or options
and futures with respect to stock or securities. Any income derived by the
Portfolio from a partnership or trust is treated as derived with respect to
the Portfolio's business of investing in stock, securities or currencies only
to the extent that such income is attributable to items of income which would
have been qualifying income if realized by the Portfolio in the same manner as
by the partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of the Portfolio's gross income
for a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to the Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and, with respect to taxable debt securities, accrued market discount)
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<PAGE>
received by the Portfolio upon maturity or disposition of a security held for
less than three months will not be treated as gross income derived from the
sale or other disposition of such security within the meaning of this
requirement. However, any other income which is attributable to realized
market appreciation will be treated as gross income from the sale or other
disposition of securities for this purpose.
The Portfolio will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Portfolio's taxable year.
Shareholders should note that, upon the sale or exchange of Portfolio shares,
if the shareholder has not held such shares for at least six months, any loss
on the sale or exchange of those shares will be treated as long term capital
loss to the extent of the capital gain dividends received with respect to the
shares.
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). The Portfolio intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year
to avoid liability for this excise tax.
If for any taxable year the Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions (whether or not derived from interest on
Municipal Securities) would be taxable as ordinary income to shareholders to
the extent of the Portfolio's current and accumulated earnings and profits,
and would be eligible for the dividends received deduction for corporations.
The Portfolio may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, or who are subject to
withholding by the Internal Revenue Service for failure properly to include on
their return payments of taxable interest or dividends, or who have failed to
certify to the Portfolio that they are not subject to backup withholding when
required to do so or that they are "exempt recipients."
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<PAGE>
Depending upon the extent of the Portfolio's activities in
states and localities in which its offices are maintained, in which its agents
or independent contractors are located or in which it is otherwise deemed to
be conducting business, the Portfolio may be subject to the tax laws of such
states or localities. In addition, in those states and localities which have
income tax laws, the treatment of the Portfolio and its shareholders under
such laws may differ from their treatment under federal income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the Prospectus.
Each Trustee has an address at The Woodward Funds, c/o NBD Bank, N.A., 611
Woodward Avenue, Detroit, Michigan 48226.
Effective May 1, 1995, each Trustee receives from the Trust and
The Woodward Variable Annuity Fund a total annual fee of $17,000 and a fee of
$2,000 for each Board of Trustees meeting attended. The Chairman is entitled
to additional compensation of $4,250 per year for his services to the Trusts
in that capacity. These fees are allocated among the investment portfolios of
the Trust and The Woodward Variable Annuity Fund based on their relative net
assets. All Trustees are reimbursed for out of pocket expenses incurred in
connection with attendance at meetings. Drinker Biddle & Reath, of which Mr.
McConnel is a partner, receives legal fees as counsel to the Trusts.
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<PAGE>
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
- ------------------------------ ----------- --------------
<S> <C> <C>
Will M. Caldwell, Trustee $21,250 $21,250(2)+
Nicholas J. DeGrazia, Trustee $21,250 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr., $24,437.50 $24,437.50(2)+
Chairman and President
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee $21,250 $21,250(2)+
Donald G. Sutherland, Trustee $21,250 $21,250(2)+
Donald L. Tuttle, Trustee $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
<FN>
- ----------------------
* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Variable Annuity Fund,
Prairie Funds, Prairie Institutional Funds, Prairie Intermediate Bond Fund and
Prairie Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $_________, $__________,
$_________, $__________, $__________, $_________, $__________, $_________ and
$__________ accrued during The Woodward Funds' fiscal year ended December 31,
1995 for each of the above-named Trustees, respectively.
- --------------------------------
</TABLE>
Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectus.
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, corporate debt obligations, equity securities
and other investments, any of which
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<PAGE>
may also be purchased by the Trust. Joint purchase of investments for the
Trust and for NBD's own investment portfolio will not be made. NBD's
Commercial Banking Department may have deposit, loan and other commercial
banking relationships with issuers of securities purchased by the Trust,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of securities purchased by the Trust.
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a
pro rata share of the transaction costs incurred in making the bulk purchase.
See "Investment Objective and Policies - Portfolio Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the Trust as a result of changes in current
state laws and regulations in those states where the Trust has qualified its
shares, or by a decision of the Trustees to qualify the shares in other states
having restrictive expense limitations. To the Trust's knowledge, of the
expense limitations in effect on the date of this Additional Statement none is
more restrictive than two and one-half percent (2-1/2%) of the first $30
million of a portfolio's average annual net assets, two percent (2%) of the
next $70 million of the average annual net assets and one and one-half percent
(1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of the Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the U.S. Comptroller of the Currency relating to fiduciary powers
of national banks. These regulations provide, in general, that assets managed
by a national bank as fiduciary may not be invested in stock or obligations
of, or property acquired from, the bank, its affiliates or their directors,
officers or employees, and further provide that fiduciary assets may not be
sold or
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<PAGE>
transferred, by loan or otherwise, to the bank or persons connected with the
bank as described above.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed
to be the making of a loan to the Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Shareholder Servicing Plan
As stated in the Prospectus, the Trust may enter into Servicing
Agreements with Shareholder Servicing Agents which may include NBD and its
affiliates. The Servicing Agreements provide that the Shareholder Servicing
Agents will render shareholder administrative support services to their
customers who are the beneficial owners of Portfolio shares in consideration
for the Portfolio's payment of up to .25% (on an annualized basis) of the
average daily net asset value of the shares beneficially owned by such
customers and held by the Shareholder Servicing Agents and, at the Trust's
option, it may reimburse the Shareholder Servicing Agents' out-of-pocket
expenses. Such services may include: (i) processing dividend and distribution
payments from the Portfolio; (ii) providing information periodically to
customers showing their share positions; (iii) arranging for bank wires; (iv)
responding to customer inquiries; (v) providing subaccounting with respect to
shares beneficially owned by customers or the information necessary for such
subaccounting; (vi) forwarding shareholder communications; (vii) processing
share exchange and redemption requests from customers; (viii) assisting
customers in changing dividend options, account designations and addresses;
and (ix) other similar services requested by the Trust. Banks acting as
Shareholder Servicing Agents are prohibited from engaging in any activity
primarily intended to result in the sale of Portfolio shares. However,
Shareholder Servicing Agents other than banks may be requested to provide
marketing assistance (e.g., forwarding sales literature and advertising to
their customers) in connection with the distribution of Portfolio shares.
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<PAGE>
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended in connection with the Trust's arrangements
with Shareholder Servicing Agents and the purposes for which the expenditures
were made. In addition, such arrangements are approved annually by a majority
of the Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust as defined in the 1940 Act and have no direct or
indirect financial interest in such arrangements (the "Disinterested
Trustees").
Any material amendment to the Trust's arrangements with
Shareholder Servicing Agents under the Shareholder Servicing Agreements must
be approved by a majority of the Board of Trustees (including a majority of
the Disinterested Trustees).
As stated in the Prospectus, in the future the Trust may
implement the Servicing Plan described above with respect to Retail shares
only in the Portfolio. In such event, the Trust would enter into shareholder
servicing agreements with Shareholder Servicing Agents pursuant to which they
would agree to provide shareholder administrative support services to their
customers who beneficially own Retail shares of the Portfolio in consideration
for the payment of up to .25% (on an annualized basis) of the average daily
net asset value of such Retail shares. Further, pursuant to an exemptive order
issued by the SEC, the Trust is permitted, among other things, to allocate the
Servicing Fees which are attributable to the Retail shares exclusively to such
shares. As of the date hereof, the Board of Trustees has not exercised its
discretion to make any such allocations for the current fiscal year.
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of the Portfolio, (ii)
collects and makes disbursements of money on behalf of the Portfolio, (iii)
issues and redeems shares of the Portfolio, (iv) collects and receives all
income and other payments and distributions on account of the portfolio
securities of the Portfolio, (v) addresses and mails all communications by the
Trust to its shareholders, including reports to shareholders, dividend and
distribution notices and proxy materials for any meeting of shareholders, (vi)
maintains shareholder accounts, (vii) makes periodic reports to the Trust's
Board of Trustees concerning the Trust's operations, and (viii) maintains
on-line computer capability for determining the status of shareholder
accounts.
For its services as Custodian, NBD is entitled to receive from
the Portfolio an annual fee based on the aggregate market value of the
Portfolio's portfolio securities, held as Custodian as follows: .03% of the
first $20 million; .025% of the next $20
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million; .02% of the next $20 million; .015% of the next $40 million; .0125%
of the next $200 million; and .01% of the balance over $300,000,000. NBD will
receive an annual account fee of $1,000 and $1.54 per month per asset held in
the Portfolio. In addition, NBD, as Custodian, is entitled to receive $50 for
each cash statement and inventory statement and $13 for each pass-through
certificate payment, $35 for each option transaction requiring escrow receipts
and $20 for all other security transactions.
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from the Portfolio of $11,000, $12 annually per account
in the Portfolio for the preparation of statements of account, and $1.00 for
each confirmation of purchase and redemption transactions. Charges for
providing computer equipment and maintaining a computerized investment system
are expected to approximate $350 per month for the Portfolio. As stated in the
Prospectus for the Portfolio, the Trust may allocate transfer agency fees
separately to the Institutional shares and Retail shares in the Portfolio. In
such event, transfer agency fees allocated to Retail shares in the Portfolio
will be expected to be higher than those allocated to Institutional shares in
the Portfolio.
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which acts under the Distribution Agreement as sponsors and
Co-Distributors for the Trust. Additional information concerning fees for its
services, the review of such fees under the Trust's plan for the payment of
distribution expenses and the services provided by FoM and Essex are described
in the Prospectus.
As stated in the Prospectuses, pursuant to an exemptive order
issued by the SEC, the Trust's Board of Trustees is permitted, among other
things, to allocate distribution fees which are attributable to the Retail
shares in a Portfolio exclusively to such shares. As of the date hereof, the
Board of Trustees has not exercised its discretion to make any such
allocations for the current fiscal year.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serve as auditors for the
Trust. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectuses have
been audited by Arthur Andersen LLP, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
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<PAGE>
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary
of the Trust, is a partner), Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107-3496, are
counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, yield and total return of the Portfolio for
various periods may be quoted in advertisements, shareholder reports or other
communications to shareholders. Performance information is generally available
by calling 1-800- 688-3350.
Yield Calculations. The Portfolio's yield is calculated by
dividing its net investment income per share (as described below) earned
during a 30-day period by the maximum offering price per share on the last day
of the period and annualizing the result on a semi-annual basis by adding one
to the quotient, raising the sum to the power of six, subtracting one from the
result and then doubling the difference. The Portfolio's net investment income
per share earned during the period is based on the average daily number of
shares outstanding during the period entitled to receive dividends and
includes dividends and interest earned during the period minus expenses
accrued for the period, net of reimbursements. This calculation can be
expressed as follows:
a-b 6
Yield = 2 [(----- + 1) - 1]
cd
Where: a = dividends and interest earned during the
period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
d = maximum offering price per share on the
last day of the period.
For the purpose of determining net investment income
earned during the period (variable "a" in the formula), dividend
income on equity securities held by the Portfolio is recognized by
accruing 1/360 of the stated dividend rate of the security each
day that the security is in the portfolio. The Portfolio
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calculates interest earned on any debt obligations held in its portfolio by
computing the yield to maturity of each obligation held by it based on the
market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual
accrued interest), and dividing the result by 360 and multiplying the quotient
by the market value of the obligation (including actual accrued interest) in
order to determine the interest income on the obligation for each day of the
subsequent month that the obligation is in the portfolio. For purposes of this
calculation, it is assumed that each month contains 30 days. The maturity of
an obligation with a call provision is the next call date on which the
obligation reasonably may be expected to be called or, if none, the maturity
date. With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium. The
amortization schedule will be adjusted monthly to reflect changes in the
market values of such debt obligations.
Undeclared earned income may be subtracted from the maximum
offering price per share (variable "d" in the formula). Undeclared earned
income is the net investment income which, at the end of the 30-day base
period, has not been declared as a dividend, but is reasonably expected to be
and is declared as a dividend shortly thereafter.
Total Return Calculations. The Portfolio computes its "average
annual total return" by determining the average annual compounded rates of
return during specified periods that equate the initial amount invested to the
ending redeemable value of such investment. This is done by dividing the
ending redeemable value of a hypothetical $1,000 initial payment by $1,000 and
raising the quotient to a power equal to one divided by the number of years
(or fractional portion thereof) covered by the computation and subtracting one
from the result. This calculation can be expressed as follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the
period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
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<PAGE>
n = period covered by the computation, ex-
pressed in terms of years.
The Portfolio computes its "aggregate total returns" by
determining the aggregate rates of return during specified periods that
likewise equate the initial amount invested to the ending redeemable value of
such investment. The formula for calculating aggregate total return is as
follows:
ERV
T = [(----- - 1)]
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees charged to all shareholder accounts, assuming an account size
equal to the Portfolio's mean (or median) account size for any fees that vary
with the size of the account. The maximum sales load and other charges
deducted from payments are deducted from the initial $1,000 payment (variable
"P" in the formula). The ending redeemable value (variable "ERV" in each
formula) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the end of the
period covered by the computations.
The Portfolio may also from time to time include in
advertisements, sales literature, communications to shareholders and other
materials ("Literature") a total return figure in order to compare more
accurately its performance with other measures of investment return. For
example, in comparing the Portfolio's total return with data published by
Lipper Analytical Services, Inc., CDA Investment Technologies, Inc. or
Weisenberger Investment Company Service, or with the performance of an index,
the Portfolio may calculate its total return for the period of time specified
in the advertisement or communication by assuming the investment of $10,000 in
shares and assuming the value on the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value. The
Portfolio does not, for these purposes, deduct from the initial value invested
any amount representing sales charges. The Portfolio will, however, disclose
the maximum sales charge and will also disclose that the performance data do
not reflect sales charges and that inclusion of sale charges would reduce the
performance quoted.
The Portfolio may also from time to time include discussions or
illustrations of the effects of compounding in Literature. "Compounding"
refers to the fact that, if dividends or other distributions on the Portfolio
investment are reinvested
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<PAGE>
by being paid in additional Portfolio shares, any future income or capital
appreciation of the Portfolio would increase the value, not only of the
original Portfolio investment, but also of the additional Portfolio shares
received through reinvestment. As a result, the value of the Portfolio
investment would increase more quickly than if dividends or other
distributions had been paid in cash.
In addition, the Portfolio may also include in Literature
discussions and/or illustrations of the potential investment goals of a
prospective investor, investment management strategies, techniques, policies
or investment suitability of the Portfolio (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic accounting rebalancing, the advantages and disadvantages of
investing in tax-deferred and taxable investments), economic conditions, the
relationship between sectors of the economy and the economy as a whole,
various securities markets, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury securities. From time to time, Literature may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Portfolio), as well as the views of the Adviser
as to current market, economy, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related
matters believed to be of relevance to the Portfolio. The Portfolio may also
include in Literature charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Portfolio and/or other mutual funds, or illustrate the potential risks and
rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, Treasury securities and shares of the Portfolio
and/or other mutual funds. Literature may include a discussion of certain
attributes or benefits to be derived by an investment in the Portfolio and/or
other mutual funds, shareholder profiles and hypothetical investor scenarios,
timely information on financial management, tax and retirement planning and
investment alternatives to certificates of deposit and other financial
instruments. Such Literature may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong
safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes and
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
<PAGE>
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "Duff 1," "Duff 2" and "Duff 3." Duff
& Phelps employs three designations, "Duff 1+," "Duff 1" and "Duff 1-," within
the highest rating category. The following summarizes the rating categories
used by Duff & Phelps for commercial paper:
"Duff 1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"Duff 2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"Duff 3" - Debt possesses satisfactory liquidity, and
other protection factors qualify issue as investment grade. Risk
A-2
<PAGE>
factors are larger and subject to more variation. Nevertheless, timely payment
is expected.
"Duff 4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"Duff 5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three years. The
following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or
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interest of unsubordinated instruments having a maturity of one year or less
which is issued by United States commercial banks, thrifts and non-bank banks;
non-United States banks; and broker-dealers. The following summarizes the
ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1" - Obligations are supported by the highest capacity for
timely repayment. Where issues possess a particularly strong credit feature, a
rating of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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<PAGE>
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues 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 debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly 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 "C" 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.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
A-5
<PAGE>
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating 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 such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest
return is indexed to equities, commodities, or currencies; certain swaps and
options; and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
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"Aa" - Bonds 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 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 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.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Moody's applies numerical modifiers 1, 2 and 3 in each generic
classification from "Aa" to "B" in its bond rating system. The modifier 1
indicates that the issuer 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 issuer ranks at the lower end of its generic rating
category.
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<PAGE>
The following summarizes the long-term debt ratings used by Duff
& Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
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<PAGE>
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and
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<PAGE>
interest is strong, although adverse changes in business, economic or
financial conditions may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in higher categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is very high.
"AA" - This designation indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
A-10
<PAGE>
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt
is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
A-11
<PAGE>
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality
and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-12
<PAGE>
APPENDIX B
As stated in its Prospectus, the U.S. Government Income Portfolio
may enter into futures contracts and related options for hedging purposes.
During the current fiscal year, the U.S. Government Income Portfolio intends
to limit its transactions in futures contracts and related options so that not
more than 5% of its net assets are at risk. Furthermore, in no event would the
Portfolio purchase or sell futures contracts, or related options thereon, for
hedging purposes if, immediately thereafter, the aggregate initial margin that
is required to be posted by the Portfolio under the rules of the exchange on
which the futures contract (or futures option) is traded, plus any premiums
paid by the Portfolio on its open futures options positions, exceeds 5% of the
Portfolio's total assets, after taking into account any unrealized profits and
unrealized losses on the Portfolio's open contracts and excluding the amount
that a futures option is "in-the-money" at the time of purchase. (An option to
buy a futures contract is "in-the-money" if the value of the contract that is
subject to the option exceeds the exercise price; an option to sell a futures
contract is "in-the-money" if the exercise price exceeds the value of the
contract that is the subject of the option.)
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained
fairly predictable relationships. Accordingly, the Portfolio may use interest
rate futures as a defense, or hedge, against anticipated interest rate changes
and not for speculation. As described below, this would include the use of
futures contract sales to protect against expected increases in interest rates
and futures contract purchases to offset the impact of interest rate declines.
The Portfolio presently could accomplish a similar result to that
which it hopes to achieve through the use of futures contracts by selling
bonds with long maturities and investing in bonds with short maturities when
interest rates are expected to increase, or conversely, selling short-term
bonds and investing in long-term bonds when interest rates are expected to
decline. However, because of the liquidity that is often available in the
<PAGE>
futures market the protection is more likely to be achieved, perhaps at a
lower cost and without changing the rate of interest being earned by the
Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Portfolio, as seller,
to deliver the specific type of financial instrument called for in the
contract at a specific future time for a specified price. A futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of the specific type of financial instrument at a specific future
time at a specific price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near
that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery
date. If the price in the sale exceeds the price in the offsetting purchase,
the Portfolio is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Portfolio's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
Portfolio realizes a gain, and if the purchase price exceeds the offsetting
sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago
Board of Trade, the Chicago Mercantile Exchange and the New York Futures
Exchange. The Portfolio would deal only in standardized contracts on
recognized exchanges. Each exchange guarantees performance under contract
provisions through a clearing corporation, a nonprofit organization managed by
the exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Incomes and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Portfolio may trade in any futures contract for which there exists
a public market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. The Portfolio would
engage in an interest rate futures contract sale to maintain the
<PAGE>
income advantage from continued holding of a long-term bond while endeavoring
to avoid part or all of the loss in market value that would otherwise
accompany a decline in long-term securities prices. Assume that the market
value of a certain security in the Portfolio tends to move in concert with the
futures market prices of long-term United States Treasury bonds ("Treasury
bonds"). The Adviser wishes to fix the current market value of this portfolio
security until some point in the future. Assume the portfolio security has a
market value of 100, and the Adviser believes that, because of an anticipated
rise in interest rates, the value will decline to 95. The Portfolio might
enter into futures contract sales of Treasury bonds for an equivalent of 98.
If the market value of the portfolio security does indeed decline from 100 to
95, the equivalent futures market price for the Treasury bonds might also
decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and
the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the
above example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Portfolio would engage
in an interest rate futures contract purchase when it is not fully invested in
long-term bonds but wishes to defer for a time the purchase of long-term bonds
in light of the availability of advantageous interim investments, e.g.,
shorter-term securities whose yields are greater than those available on
long-term bonds. The Portfolio's basic motivation would be to maintain for a
time the income advantage from investing in the short-term securities; the
Portfolio would be endeavoring at the same time to eliminate the effect of all
or part of an expected increase in market price of the long-term bonds that
the Portfolio may purchase.
For example, assume that the market price of a long-term bond
that the Portfolio may purchase, currently yielding 10%, tends to move in
concert with futures market prices of Treasury
<PAGE>
bonds. The Adviser wishes to fix the current market price (and thus 10% yield)
of the long-term bond until the time (four months away in this example) when
it may purchase the bond. Assume the long-term bond has a market price of 100,
and the Adviser believes that, because of an anticipated fall in interest
rates, the price will have risen to 105 (and the yield will have dropped to
about 9 1/2%) in four months. The Portfolio might enter into futures contracts
purchases of Treasury bonds for an equivalent price of 98. At the same time,
the Portfolio would assign a pool of investments in short-term securities that
are either maturing in four months or earmarked for sale in four months, for
purchase of the long-term bond at an assumed market price of 100. Assume these
short-term securities are yielding 15%. If the market price of the long-term
bond does indeed rise from 100 to 105, the equivalent futures market price for
Treasury bonds might also rise from 98 to 103. In that case, the 5-point
increase in the price that the Portfolio pays for the long-term bond would be
offset by the 5-point gain realized by closing out the futures contract
purchase.
The Adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
A bond index assigns relative values to the bonds included in the
index and the index fluctuates with changes in the market values of the bonds
included. Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of
the parties to each contract.
<PAGE>
The Portfolio may sell index futures contracts in order to offset
a decrease in market value of its portfolio securities that might otherwise
result from a market decline. The Portfolio may do so either to hedge the
value of its portfolio as a whole, or to protect against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Portfolio may purchase index futures contracts in anticipation
of purchases of securities. In a substantial majority of these transactions,
the Portfolio may purchase such securities upon termination of the long
futures position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of
industry groups represented in its holdings it may, prior to making purchases
of the actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio
will decline prior to the time of sale.
III. Margin Payments
Unlike when the Portfolio purchases or sells a security, no price
is paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's Custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying security
or index fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as marking to the market. For
example, when the Portfolio has purchased a futures contract and the price of
the contract has risen in response to a rise in the underlying instruments,
that position will have increased in value and the Portfolio will be entitled
to receive from the broker a variation margin payment equal to that increase
<PAGE>
in value. Conversely, where the Portfolio has purchased a futures contract and
the price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any
time prior to expiration of the futures contract, the Adviser may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Portfolio's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the
Portfolio, and the Portfolio realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by
the Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio will experience either a loss or gain on the future
which will not be completely offset by movements in the price of the
securities which are the subject of the hedge. To compensate for the imperfect
correlation of movements in the price of securities being hedged and movements
in the price of futures contracts, the Portfolio may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities
being hedged if the volatility over a particular time period of the prices of
such securities has been greater than the volatility over such time period of
the future, of if otherwise deemed to be appropriate by the Adviser.
Conversely, the Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Adviser.
It is also possible that, where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the
value of securities held by the Portfolio may decline. If this occurred, the
Portfolio would lose money on the future and also experience a decline in
value in its portfolio securities.
<PAGE>
Where futures are purchased to hedge against a possible increase
in the price of securities before the Portfolio is able to invest its cash (or
cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if the Portfolio then concludes
not to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, the Portfolio will
realize a loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
In instances involving the purchase of futures contracts by the
Portfolio, an amount of cash and cash equivalents, equal to the market value
of the futures contracts (or options), will be deposited in a segregated
account with the Portfolio's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the
price of futures, a correct forecast of general market trends or interest rate
movements by the Adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although
the Portfolio intends to purchase or sell futures only on exchanges or boards
of trade where there appear to be active secondary markets, there is no
assurance that a liquid secondary market on any exchange or board of trade
will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures investment position, and in
the event of adverse price movements, the Portfolio would
<PAGE>
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
Successful use of futures by the Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the
market. For example, if the Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. The Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
V. Options on Futures Contracts
The Portfolio may purchase options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in
<PAGE>
futures contracts (for example, the existence of a liquid secondary market).
In addition, the purchase of an option also entails the risk that changes in
the value of the underlying futures contract will not be fully reflected in
the value of the option purchased. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Portfolio because
the maximum amount at risk is the premium paid for the options (plus
transaction costs). Although permitted by its fundamental investment policies,
the Portfolio does not currently intend to write futures options, and will not
do so in the future absent any necessary regulatory approvals.
VI. Accounting Treatment
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(1) Included in Part A of the Registration Statement
are the following audited tables:
(i) Financial Highlights for the fiscal years
ended December 31, 1995, 1994, 1993, 1992,
1991, 1990, 1989 and 1988 with respect to
the Woodward Money Market, Government and
Tax- Exempt Money Market Funds;
(ii) Financial Highlights for the fiscal years ended
December 31, 1995, 1994, 1993, 1992 and 1991 with
respect to the Woodward Michigan Tax-Exempt Money
Market Fund;
(iii) Financial Highlights for the fiscal years ended
December 31, 1995, 1994, and 1993 with respect to
the Woodward Treasury Money Market
Fund;
(iv) Financial Highlights for the fiscal years ended
December 31, 1995, 1994, 1993, 1992 and the fiscal
period ended December 31, 1991 with respect to the
Woodward Growth/Value, Opportunity and Intrinsic
Value Funds;
(v) Financial Highlights for the fiscal year
ended December 31, 1995 and the fiscal
period ended December 31, 1994 with
respect to the Woodward Capital Growth and
International
Equity Funds;
(vi) Financial Highlights for the fiscal years ended
December 31, 1995 and 1994 with respect to the
Woodward Balanced Fund;
(vii) Financial Highlights for the fiscal years ended
December 31, 1995, 1994, 1993 and fiscal period
ended December 31, 1992 with respect to the
Woodward Equity Index Fund;
(viii) Financial Highlights for the fiscal years ended
December 31, 1995, 1994, 1993, 1992 and fiscal
period ended December 31, 1991 with
C-1
<PAGE>
respect to the Woodward Bond and Intermediate
Bond Funds;
(ix) Financial Highlights for the fiscal year ended
December 31, 1995 and the fiscal period ended
December 31, 1994 with respect to the Woodward
Short Bond Fund; and
(x) Financial Highlights for the fiscal years
ended December 31, 1995, 1994 and fiscal
period ended December 31, 1993 with
respect to the Woodward Municipal Bond and
Michigan Municipal Bond Funds.
(2) Included in Part B of the Registration Statement
are the following audited financial statements:
(i) With respect to the Woodward Money market,
Government, Treasury Money Market, Tax-Exempt
Money Market, Michigan Tax-Exempt Money
Market, Growth/Value, Opportunity, Intrinsic
Value, Capital Growth, Balanced, Equity
Index, International Equity, Bond,
Intermediate Bond, Short Bond, Municipal Bond
and Michigan Municipal Bond Funds:
Reports of Independent Public Accountants
for the fiscal year ended December 31,
1995;
Statement of Assets and Liabilities -
December 31, 1995;
Statements of Operations for the year
ended December 31, 1995;
Statement of Changes in Net Assets for
the years ended December 31, 1995
and 1994;
Portfolio of Investments- December 31,
1995;
Notes to Financial Statements.
(ii) Financial Highlights for the fiscal years
ended December 31, 1995, 1994, 1993, 1992
and 1991 with respect to the Woodward
Money Market, Government, Tax-Exempt Money
Market and Michigan Tax-Exempt Money
Market Funds;
(iii) Financial Highlights for the fiscal years
ended December 31, 1995, 1994 and 1993
with respect to the Woodward Treasury
Money Market
Fund;
(iv) With respect to the Woodward Growth/Value,
Opportunity and Intrinsic Value Funds:
C-2
<PAGE>
Financial Highlights for the
fiscal years ended December 31,
1995, 1994, 1993, 1992 and fiscal
period ended December 31, 1991;
(v) With respect to the Woodward Equity Index
Fund:
Financial Highlights for the
fiscal years ended December 31,
1995, 1994, 1993 and fiscal period
ended December 31, 1992;
(vi) With respect to the Woodward Balanced Fund:
Financial Highlights for the fiscal
years ended December 31, 1995 and 1994;
(vii) With respect to the Woodward Capital Growth
and International Equity Funds:
Financial Highlights for the
fiscal years ended December 31,
1995 and fiscal period ended
December 31, 1994;
(viii) With respect to the Woodward Bond and
Intermediate Bond Funds:
Financial Highlights for the
fiscal years ended December 31,
1995, 1994, 1993, 1992 and fiscal
period ended December 31, 1991;
(ix) With respect to the Woodward Short Bond Fund:
Financial Highlights for the
fiscal years ended December 31,
1995 and fiscal period ended
December 31, 1994; and
(x) With respect to the Woodward Municipal Bond
and Michigan Municipal Bond Funds:
Financial Highlights for the
fiscal years ended December 31,
1995, 1994 and fiscal period ended
December 31, 1993.
(b) Exhibits:
(1) (a) Amended and Restated Declaration of Trust
dated as of May 1, 1992 is incorporated
herein by reference to exhibit (1)(b) of
Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form
C-3
<PAGE>
N-1A filed with the Commission on
September 8, 1992.
(2) Bylaws of Registrant is incorporated herein
by reference to exhibit (2) of Pre-Effective
Amendment No. 1 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on July 24, 1987.
(3) None.
(4) None.
(5) (a) Form of Co-Advisory Agreement among Regis-
trant, NBD Bank ("NBD") and First Chicago
Investment Management Company ("FCIMCO") is
incorporated herein by reference to exhibit
(5)(a) of Post-Effective Amendment No. 28 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
April 5, 1996.
(b) Advisory Agreement between Registrant and
NBD dated November 28, 1995 is
incorporated herein by reference to
exhibit (5)(b) of Post-Effective Amendment
No. 28 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on April 5, 1996.
(c) Form of Sub-Advisory Agreement among NBD,
FCIMCO and ANB Investment Management and
Trust Company ("ANB-IMC").
(6) (a) Form of Distribution Agreement between
Registrant and BISYS Fund Services ("BISYS")
is incorporated herein by reference to
exhibit (6)(a) of Post-Effective Amendment
No. 28 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on April 5, 1996.
(b) Distribution Agreement dated March 15, 1995
among Registrant, FoM and Essex relating to
Series A, B, C, M, N, O, P, Q, R, S, T, U and
V is incorporated herein by reference to
exhibit (6)(a) of Post-Effective Amendment
No. 25 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on July 28, 1995.
(7) Deferred Compensation Plan.
C-4
<PAGE>
(8) (a) Amended and Restated Custodian Agreement
dated May 16, 1989 between Registrant and
National Bank of Detroit for Series A, B, C,
H, I, J, K and L of the Registrant is
incorporated herein by reference to exhibit
(8)(b) of Post-Effective Amendment No. 3 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
April 30, 1990.
(b) Addendum No. 1 dated January 23, 1991 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
Woodward Michigan Tax-Exempt Money Market
Fund (Series M) is incorporated herein by
reference to exhibit (8)(c) of Post-Effective
Amendment No. 5 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on February 28, 1991.
(c) Addendum No. 2 dated April 28, 1992 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
Woodward Equity Index Fund (Series N) is
incorporated herein by reference to exhibit
(8)(d) of Post-Effective Amendment No. 10 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
September 8, 1992.
(d) Addendum No. 3 dated January 1, 1993 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
Woodward Treasury Money Market Fund (Series
O) is incorporated herein by reference to
exhibit (8)(e) of Post-Effective Amendment
No. 14 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on April 29, 1993.
(e) Addendum No. 4 dated February 1, 1993 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
Woodward Municipal Bond Fund (Series P) and
the Woodward Michigan Municipal Bond Fund
(Series Q) is incorporated herein by
reference to exhibit (8)(f) of Post-Effective
Amendment No. 14 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on April 29, 1993.
(f) Addendum No. 5 dated January 1, 1994 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
C-5
<PAGE>
Woodward Balanced Fund (Series R) is
incorporated herein by reference to exhibit
(8)(g) of Post-Effective Amendment No. 22 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on July
29, 1994.
(g) Addendum No. 6 dated July 1, 1994 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
Woodward Capital Growth and Short Bond Funds
(Series S and U) is incorporated herein by
reference to exhibit (8)(h) of Post-Effective
Amendment No. 23 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on January 27, 1995.
(h) Addendum No. 7 dated November 30, 1994 to the
Amended and Restated Custodian Agreement
between Registrant and NBD relating to the
Woodward International Equity Fund (Series T)
is incorporated herein by reference to
exhibit (8)(i) of Post-Effective Amendment
No. 25 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on July 28, 1995.
(i) Form of Addendum No. 8 to the Amended and
Restated Custodian Agreement between
Registrant and NBD relating to the Woodward
Cash Management, U.S. Government Securities
Cash Management, Treasury Prime Cash
Management, Equity Income, Small Cap
Opportunity, Intermediate Municipal Bond,
Income, International Bond, Managed Assets
Conservative, Managed Assets Growth and Major
Markets Funds is incorporated herein by
reference to exhibit (8)(i) of Post-Effective
Amendment No. 28 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on April 5, 1996.
(j) Form of Addendum No. 9 to the Amended and
Restated Custodian Agreement between
Registrant and NBD relating to the Woodward
U.S. Government Income Fund (Series V) is
incorporated herein by reference to exhibit
(8)(k) of Post-Effective Amendment No. 17 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
November 1, 1993.
(k) Global Custody Agreement dated November 21,
1994 between Barclays Bank, PLC and NBD
C-6
<PAGE>
relating to Series A, B, C, M, N, O, P, Q,
R, S, T, U and V is incorporated herein by
reference to exhibit (8)(k) of
Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on
Form N-1A filed with the Commission on
July 28, 1995.
(9) (a) Form of Co-Administration Agreement among the
Registrant, NBD, FCIMCO and BISYS is
incorporated herein by reference to exhibit
(9)(a) of Post-Effective Amendment No. 28 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
April 5, 1996.
(b) Amended and Restated Transfer Agency and
Dividend Disbursement Agreement dated May 16,
1989 between Registrant and NBD (formerly,
National Bank of Detroit) for Series A, B, C,
H, I, J, K and L of the Registrant is
incorporated herein by reference to exhibit
(9)(b) of Post-Effective Amendment No. 3 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
April 30, 1990.
(c) Addendum No. 1 dated January 23, 1991 to the
Amended and Restated Transfer Agency and
Dividend Disbursement Agreement between
Registrant and NBD relating to the Woodward
Michigan Tax-Exempt Money Market Fund
(Series M) is incorporated herein by
reference to exhibit (9)(c) of Post-Effective
Amendment No. 5 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on February 28, 1991.
(d) Addendum No. 2 dated April 28, 1992 to the
Amended and Restated Transfer Agency and
Dividend Disbursement Agreement between
Registrant and NBD relating to the Woodward
Equity Index Fund (Series N) is incorporated
herein by reference to exhibit (9)(d) of
Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form
N-1A filed with the Commission on September
8, 1992.
(e) Addendum No. 3 dated January 1, 1993 to the
Amended and Restated Transfer Agency and
Dividend Disbursement Agreement between
Registrant and NBD relating to the Woodward
Treasury Money Market Fund (Series O) is
incorporated herein by reference to exhibit
C-7
<PAGE>
(9)(e) of Post-Effective Amendment No. 14 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on April
29, 1993.
(f) Addendum No. 4 dated February 1, 1993 to the
Amended and Restated Transfer Agency and
Dividend Disbursement Agreement between
Registrant and NBD relating to the Woodward
Municipal Bond Fund (Series P) and the
Woodward Michigan Municipal Bond Fund (Series
Q) is incorporated herein by reference to
exhibit (9)(f) of Post-Effective Amendment
No. 14 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on April 29, 1993.
(g) Addendum No. 5 dated January 1, 1994 to the
Amended and Restated Transfer Agency and
Dividend Disbursement Agreement between
Registrant and NBD relating to the Woodward
Balanced Fund (Series R) is incorporated
herein by reference to exhibit (9)(g) of
Post-Effective Amendment No. 22 to the
Registrant's Registration Statement on Form
N-1A filed with the Commission on July 29,
1994.
(h) Addendum No. 6 dated July 1, 1994 to the
Amended and Restated Transfer Agency and
Dividend Disbursement Agreement between
Registrant and NBD relating to the Woodward
Capital Growth, International Equity and
Short Bond Funds (Series S, T and U) is
incorporated herein by reference to exhibit
(9)(h) of Post-Effective Amendment No. 23 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
January 27, 1995.
(i) Form of Addendum No. 7 to the Amended and
Restated Transfer Agency and Dividend
Disbursement Agreement between Registrant and
NBD relating to the Woodward Cash Management
Fund, Treasury Prime Cash Management Fund and
U.S. Government Securities Cash Management
Fund is incorporated herein by reference to
exhibit (9)(i) of Post-Effective Amendment
No. 28 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on April 5, 1996.
(j) Form of Addendum No. 8 to the Amended and
Restated Transfer Agency and Dividend
C-8
<PAGE>
Disbursement Agreement between Registrant
and NBD relating to the Woodward Managed
Assets Conservative Fund, Managed Assets
Growth Fund, Equity Income Fund, Small-Cap
Opportunity Fund, International Major
Markets Fund, Income Fund, International
Bond Fund and Intermediate Municipal Bond
Fund.
(k) Form of Broker-Dealer Agreement between
FoM and Broker-Dealers is incorporated
herein by reference to exhibit (9)(c) of
Post-Effective Amendment No. 2 to the
Registrant's Registration Statement on
Form N-1A filed with the Commission on
March 2, 1989.
(l) Bank Agreement between FoM and BHC
Securities, Inc. dated June 15, 1992 is
incorporated herein by reference to exhibit
(9)(h) of Post-Effective Amendment No. 10 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
September 8, 1992.
(m) Bank Agreement between FoM and NBD
Securities, Inc. dated June 8, 1992 is
incorporated herein by reference to exhibit
(9)(i) of Post-Effective Amendment No. 10 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on
September 8, 1992.
(n) Revised Shareholder Services Plan including
form of Service Agreement adopted by the
Board of Trustees on November 16, 1993 is
incorporated herein by reference to exhibit
(9)(t) of Post-Effective Amendment No. 22 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on July
29, 1994.
(o) Form of Distribution and Services Plan
including form of Agreement is
incorporated herein by reference to
exhibit (9)(n) of Post-Effective Amendment
No. 28 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on April 5, 1996.
(p) Shareholder Services Plan including form of
Service Agreement with respect to Class A
Shares.
(q) Shareholder Administrative Services Plan
including form of Service Agreement.
C-9
<PAGE>
*(10) Opinion of Drinker Biddle & Reath, counsel
for the Registrant.
(11) (a) Consent of Arthur Andersen LLP.
(b) Consent of Drinker Biddle & Reath.
(12) None.
(13) Letter dated May 8, 1987 from FoM to the
effect that its purchase of shares of the
Registrant will be made for investment
purposes without any present intention of
redeeming or reselling, is incorporated
herein by reference to exhibit (13) of Pre-
Effective Statement No. 1 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on July 24, 1987.
(14) None.
(15) (a) Revised Service and Distribution Plan
relating to Registrant's distribution
expenses pursuant to Rule 12b-1, effective
April 20, 1994, is incorporated herein by
reference to exhibit (15)(l) of Post-
Effective Amendment No. 22 of the
Registrant's Registration Statement on Form
N-1A filed with the Commission on July 29,
1994.
(b) Distribution Plan for Class B Shares.
(16) (a) Schedules of Performance Computations are
incorporated herein by reference to
exhibit (16) of Post-Effective Amendment
No. 5 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on
February 28, 1991.
(b) Schedules of Performance Computations with
respect to the Woodward Michigan Tax-Exempt
Money Market Fund, Growth/Value Fund,
Opportunity Fund, Intrinsic Value Fund,
Intermediate Bond Fund and Bond Fund are
incorporated herein by reference to
Exhibit (16)(b) of Post-Effective
Amendment No. 7 to the Registrant's
Registration Statement on Form N-1A filed
with the Commission on December 3, 1991.
[FN]
- ---------
* Registrant's Rule 24f-2 Notice and related Opinion of Counsel
relating to Series A, B, C, H, I, J, K, L, M, N, O, P, Q, R, S, T and
U was filed with the SEC on February 27, 1996.
C-10
<PAGE>
(c) Schedules of Performance Computations with
respect to the Woodward Equity Index Fund and
the Woodward Treasury Money Market Fund are
incorporated herein by reference to Exhibit
16(c) of Post-Effective Amendment No. 14 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on April
29, 1993.
(d) Schedules of Performance Computations with
respect to the Woodward Municipal Bond Fund
and Woodward Michigan Municipal Bond Fund are
incorporated herein by reference to Exhibit
16(d) of Post-Effective Amendment No. 15 to
the Registrant's Registration Statement on
Form N-1A filed with the Commission on July
30, 1993.
(e) Schedules of Performance Computations with
respect to the Woodward Balanced Fund are
incorporated herein by reference to
Exhibit 16(e) of Post-Effective Amendment
No. 22 to the Registrant's Registration
Statement on Form N-1A filed with the
Commission on July 29, 1994.
(f) Schedules of Performance Computations with
respect to the Woodward Capital Growth and
Short Bond Funds are incorporated herein by
reference to exhibit (16)(f) of Post-
Effective Amendment No. 23 to the
Registrant's Registration Statement on Form
N-1A filed with the Commission on January 27,
1995.
(g) Schedules of Performance Computations with
respect to the Woodward International
Equity Fund is incorporated herein by
reference to exhibit (16)(g) of
Post-Effective Amendment No. 25 to the
Registrant's Registration Statement on
Form N-1A filed with the Commission on
July 28, 1995.
(17) None.
(18) (a) Rule 18f-3 Plan.
(b) Amended Rule 18f-3 Plan.
C-11
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is controlled by its Board of Trustees. However,
under the Investment Company Act of 1940, NBD Bank may be deemed a controlling
person of the Registrant because such entity possesses or shares investment or
voting power with respect to more than 25% of the outstanding shares of the
Registrant.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
The following table sets forth information as to all record
holders of Registrant's securities as of February 29, 1996:
<TABLE>
<CAPTION>
Number
of
Record
Title of Class Holders
-------------- -------
<S> <C>
Series A Shares of beneficial interest ($.10 par value) 651
Series B Shares of beneficial interest ($.10 par value) 3576
Series C Shares of beneficial interest ($.10 par value) 441
Series H Shares of beneficial interest ($.10 par value) 4604
Series I Shares of beneficial interest ($.10 par value) 7947
Series J Shares of beneficial interest ($.10 par value) 1918
Series K Shares of beneficial interest ($.10 par value) 845
Series L Shares of beneficial interest ($.10 par value) 1961
Series M Shares of beneficial interest ($.10 par value) 265
Series N Shares of beneficial interest ($.10 par value) 292
Series O Shares of beneficial interest ($.10 par value) 124
Series P Shares of beneficial interest ($.10 par value) 398
Series Q Shares of beneficial interest ($.10 par value) 680
Series R Shares of beneficial interest ($.10 par value) 882
Series S Shares of beneficial interest ($.10 par value) 651
Series T Shares of beneficial interest ($.10 par value) 243
Series U Shares of beneficial interest ($.10 par value) 29
</TABLE>
ITEM 27. INDEMNIFICATION
Indemnification of Registrant's current principal
underwriters against certain losses is provided for in Section 11 of the
Distribution Agreement incorporated herein by reference as Exhibit (6)(b).
Indemnification of Registrant's proposed principal underwriter against certain
losses is provided for in Section 10 of the Distribution Agreement filed as
Exhibit (6)(a). Indemnification of Registrant's Custodian is provided for in
Article XII of the Amended and Restated Custodian Agreement incorporated
herein by reference as Exhibit (8)(a). Indemnification of Registrant's
Transfer Agent and Dividend Disbursing Agent is provided for in Article III of
the Amended and Restated Transfer Agency and Dividend Disbursing Agreement
incorporated herein by reference as Exhibit (9)(b). Registrant
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<PAGE>
has obtained from a major insurance carrier a trustees' and officers'
liability policy covering certain types of errors and omissions. In addition,
Section 5.4 of the Registrant's Amended and Restated Declaration of Trust
incorporated herein by reference as Exhibit (1)(a), provides as follows:
5.4 Mandatory Indemnification.
(a) Subject only to the provisions hereof, every
person who is or has been a Trustee, officer, employee or agent of
the Trust and every person who serves at the Trust's request as
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall be
indemnified by the Trust to the fullest extent permitted by law
against all liabilities and against all expenses reasonably incurred
or paid by him in connection with any debt, claim, action, demand,
suit, proceeding, judgment, decree, liability or obligation of any
kind in which he becomes involved as a party or otherwise or is
threatened by virtue of his being or having been a Trustee, officer,
employee or agent of the Trust or of another corporation,
partnership, joint venture, trust or other enterprise at the request
of the Trust and against amounts paid or incurred by him in the
compromise or settlement thereof.
(b) The words "claim", "action", "suit", or
"proceeding" shall apply to all claims, actions, suits or proceedings
(civil, criminal, administrative, legislative, investigative or
other, including appeals), actual or threatened, and the words
"liabilities" and "expenses" shall include, without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(c) No indemnification shall be provided here-
under to a Trustee or officer:
(i) against any liability to the Trust
or the Shareholders by reason of willful
misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the
conduct of his office ("disabling conduct");
(ii) with respect to any matter as to
which he shall, by the court or other body by or
before which the proceeding was brought or engaged,
have been finally adjudicated to be liable by
reason of disabling conduct;
(iii) in the absence of a final adjudication
on the merits that such Trustee or officer did not
C-13
<PAGE>
engage in disabling conduct, unless a reasonable
determination, based upon a review of the facts
that the person to be indemnified is not liable by
reason of such conduct, is made:
(A) by vote of a majority of a quorum of the
Trustees who are neither Interested Persons nor
parties to the proceedings; or
(B) by independent legal counsel, in a written
opinion.
(d) The rights of indemnification herein provided
may be insured against by policies maintained by the Trust, shall be
severable, shall not affect any other rights to which any Trustee,
officer, employee or agent may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee, officer,
employee, or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person; provided, however,
that no person may satisfy any right of indemnity or reimbursement
granted herein except out of the property of the Trust, and no other
person shall be personally liable to provide indemnity or
reimbursement hereunder (except an insurer or surety or person
otherwise bound by contract).
(e) Expenses in connection with the preparation and
presentation of a defense to any claim, action, suit or proceeding of
the character described in paragraph (a) of this Section 5.4 may be
paid by the Trust prior to final disposition thereof upon receipt of
a written undertaking by or on behalf of the Trustee, officer,
employee or agent to reimburse the Trust if it is ultimately
determined under this Section 5.4 that he is not entitled to
indemnification. Such undertaking shall be secured by a surety bond
or other suitable insurance or such security as the Trustees shall
require unless a majority of a quorum of the Trustees who are neither
Interested Persons nor parties to the proceeding, or independent
legal counsel in a written opinion, shall have determined, based on
readily available facts, that there is reason to believe that the
indemnitee ultimately will be found to be entitled to
indemnification.
Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to trustees,
officers and controlling persons of Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
C-14
<PAGE>
payment by Registrant of expenses incurred or paid by a trustee,
officer or controlling person of Registrant in the successful defense
of any action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Section 5.1 of the Registrant's Declaration of
Trust, incorporated herein by reference as Exhibit (1), also provided
indemnification of shareholders of the Registrant.
Section 5.1 states as follows:
5.1 Limitation of Personal Liability and Indemnification of
Shareholders. The Trustees, officers, employees or agents of the
Trust shall have no power to bind any Shareholder personally or to
call upon any Shareholder for the payment of any sum of money or
assessment whatsoever, other than such as the Shareholder may at any
time agree to pay by way of subscription to any Shares or otherwise.
No Shareholder or former Shareholder of the Trust
shall be liable solely by reason of his being or having been a
Shareholder for any debt, claim, action, demand, suit, proceeding,
judgment, decree, liability or obligation of any kind, against, or
with respect to, the Trust arising out of any action taken or omitted
for or on behalf of the Trust, and the Trust shall be solely liable
therefor and resort shall be had solely to the Trust Property for the
payment or performance thereof.
Each Shareholder or former Shareholder of the Trust
(or their heirs, executors, administrators or other legal
representatives or, in case of a corporate entity, its corporate or
general successor) shall be entitled to indemnity and reimbursement
out of the Trust Property to the full extent of such liability and
the costs of any litigation or other proceedings in which such
liability shall have been determined, including, without limitation,
the fees and disbursements of counsel if, contrary to the provisions
hereof, such Shareholder or former Shareholder of the Trust shall be
held to personal liability.
C-15
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
The Registrant's co-investment adviser, NBD, is a state chartered
bank incorporated under the laws of Michigan which is wholly-owned by NBD
Bancorp, Inc., a Delaware corporation. NBD conducts a general banking and
trust business.
(a) To the Registrant's knowledge, none of the directors or officers
of NBD, except as set forth below, is, or has been at any time during the
Registrant's past two fiscal years, engaged in any other business, profession,
vocation, or employment of a substantial nature, except that certain directors
and officers and certain executives of NBD also hold various positions with,
and are engaged in business for, NBD Bancorp, Inc., which owns all of the
outstanding stock of NBD. Set forth below are the names and principal business
of the directors and certain of the senior executive officers of NBD who are
engaged in any other business, profession, vocation or employment of a
substantial nature.
Terence E. Adderley
President and Chief Executive Officer, Kelly Services, Inc.;
and Director of Kelly Services, Inc. and The Detroit Edison
Company.
James K. Baker
Chairman, Arvin Industries, Inc.; Director of Amcast
Industrial Corporation, Geon Company, CINergy Corp., and
Tokheim Corp.
Don H. Barden
Chairman and President, Barden Companies, Inc.; Director of
National Cable TV Association and C-SPAN, the Cable
Satellite Public Affairs Network.
Siegfried Buschmann
Chairman and Chief Executive Officer, The Budd Company.
Bernard B. Butcher
Retired Senior Consultant and Director of The Dow Chemical
Company.
John W. Day
Retired Executive Vice President, Allied-Signal, Inc.; and
President, Allied-Signal International, Inc.
Maureen A. Fay, O.P.
President, University of Detroit Mercy.
C-16
<PAGE>
Charles T. Fisher III
Retired Chairman and President, NBD Bancorp, Inc.; and NBD Bank; and
Director of AMR Corporation , General Motors Corporation, and JANNOCK
Limited (Toronto).
Alfred R. Glancy III
Chairman, President, and Chief Executive Officer of MCN Corporation;
Chairman of Michigan Consolidated Gas Company; and Director of MLX
Corp.
Dennis J. Gormley
Chairman, President and Chief Executive Officer, Federal-Mogul
Corporation; and Director of Cooper Tire and Rubber Company.
Joseph L. Hudson, Jr.
Chairman, Hudson-Webber Foundation.
Verne G. Istock
Chairman and Chief Executive Officer, NBD Bancorp, Inc. and NBD Bank
and Director of Handleman Company; and Kelly Services, Inc.; Grand
Trunk Corp.
Thomas H. Jeffs II
President and Chief Operating Officer, NBD Bancorp, Inc. and NBD
Bank; and Director of MCN Corporation.
John E. Lobbia
Chairman and Chief Executive Officer, The Detroit Edison Company.
Richard A. Manoogian
Chairman and Chief Executive Officer, Masco Corporation and
MascoTech, Inc.; and Chairman of TriMas Corporation.
William T. McCormick, Jr.
Chairman and Chief Executive Officer, CMS Energy Corporation;
Chairman, Consumers Power Company; and Director of Rockwell
International Corporation and Schlumberger, Ltd.
Thomas E. Reilly, Jr.
Chairman of the Board, Reilly Industries, Inc. and Director of Lilly
Industries, Inc.
Irving Rose
Partner, Edward Rose & Sons (Residential Builders).
Robert C. Stempel
Retired Chairman and Chief Executive Officer, General Motors
Corporation.
C-17
<PAGE>
Peter W. Stroh
Chairman and Chief Executive Officer, The Stroh Companies, Inc.;
Chairman, The Stroh Brewery Company and Director of Masco
Corporation.
Ormand J. Wade
Retired Vice Chairman, American Information Technologies Corporation
(Ameritech) and Director of Illinois Tool Works, Inc.; and Andrew
Corp.
(b) The Registrant's future co-investment adviser, FCIMCO, is a
registered investment adviser and wholly-owned subsidiary of The First
National Bank of Chicago ("FNBC"), which in turn is a wholly-owned
subsidiary of First Chicago NBD Corporation, a registered bank holding
company.
Registrant is fulfilling the requirement of this Item 28 to
provide a list of the officers and directors of First Chicago Investment
Management Company ("FCIMCO"), together with information as to any other
business, profession, vocation or employment of a substantial nature engaged
in by FCIMCO or those of its officers and directors during the past two years,
by incorporating by reference the information contained in the Form ADV filed
with the SEC pursuant to the Investment Advisers Act of 1940 by FCIMCO (SEC
File No. 801-47947).
ITEM 29. PRINCIPAL UNDERWRITERS
(a) FoM is one of the Registrant's current principal underwriters.
FoM currently acts as principal underwriter for Renaissance Assets Trust, a
registered investment company. Except for the foregoing, FoM does not act as
principal underwriter, depositor or investment adviser for any other
registered investment company.
(b) The following information is submitted with respect to each
director and officer of FoM, the principal business address of which is 100
Renaissance Center, 26th Floor, Detroit, Michigan
48243:
Position with Position with
Name Underwriter Registrant
---- ------------- -------------
Steve Gasper, Jr. President, Chief None
Executive Officer,
Director
William H. Cuddy Chairman of the Board None
of Directors
C-18
<PAGE>
Position with Position with
Name Underwriter Registrant
---- ------------- -------------
Joseph M. Mengden Director None
Craig P. Baker Director None
Geoffrey B. Baker Director None
Gerard M. Lavin Director None
Thomas A. McDonnell Director None
Conrad W. Koski Executive Vice None
President and
Treasurer
Hal H. Smith, III Executive Vice President None
Anthony Calice Senior Vice President None
Lenore P. Denys Senior Vice President None
and Secretary
Ernest J. Gargaro, Jr. Vice President - Tax None
Incentive Planning/
Qualified Plans
Thomas Enright Vice President None
Ned Evans Vice President None
Martha M. Feazell Vice President None
John Freeman Vice President None
Perry Foor Vice President None
Monica Glinski Vice President None
Michael Gormely Vice President None
Paul Harris Vice President None
Colleen Mahoney Vice President None
Carol McDiarmid Vice President None
Robert H. Stoetzer Vice President None
C-19
<PAGE>
Diane DeParre Vertin Vice President None
Wayne J. Wright Vice President None
(c) None
(d) Essex is one of the Registrant's current principal
underwriters. Essex does not act as principal
underwriter, depositor or investment adviser for any
other registered investment company.
(e) The following information is submitted with respect to each
director and officer of Essex, the principal business
address of which is 825 3rd Avenue, 37th Floor, New York, NY
10022:
Position with Position with
Name Underwriter Registrant
---- ------------- -------------
Kevin E. Crowe Chairman and None
Chief Executive Officer
Gerald Cunningham President None
Thomas E. Albright Senior Vice President None
Elisa Lanthier Treasurer None
William O'Loughlin Treasurer, Vice None
President
Greg Zytkowicz Secretary, Vice None
President
Robert B. Twomey Vice President None
(f) None
(g) BISYS Fund Services Inc. will act as distributor and
administrator for the Registrant. BISYS Fund Services
also distributes the securities of the American
Performance Funds, The Highmark Group, The Parkstone
Group of Funds, The Sessions Group, the AmSouth Mutual
C-20
<PAGE>
Funds, The Coventry Group, the BB&T Mutual Funds Group, the
MarketWatch Funds, The M.S.D & T Funds, Inc., The Riverfront
Funds, Inc., the Pacific Capital Funds, the MMA Praxis
Mutual Funds, the Qualivest Funds, Mountain Square Funds,
Mariner Mutual Funds Trust, Mariner Funds Trust and The
Victory Portfolios, each of which is an open-end management
investment company.
(h) To the best of Registrant's knowledge, the partners of
BISYS Fund Services are as follows:
Name and
Principal Positions and Positions and
Business Offices with Offices with
Address BISYS Fund Services Registrant
- --------- ------------------- -------------
BISYS Fund Services, Inc. Sole General Partner None
150 Clove Road
Little Falls, NJ 07424
WC Subsidiary Corporation Limited Partner None
150 Clove Road
Little Falls, NJ 07424
(i) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(a) NBD Bank, 611 Woodward Avenue, Detroit, Michigan 48226 and
900 Tower Drive, Troy, Michigan 48098 (records relating to
functions as co-advisor, co-administrator, custodian, and
transfer and dividend disbursing agent).
(b) First of Chicago Investment Management Company, Three First
National Plaza, Chicago, Illinois 60670 (records relating to
its function as co-advisor and co-administrator).
(c) First of Michigan Corporation, 100 Renaissance Center, 26th
Floor, Detroit, Michigan 48243 (records relating to its
function as co-distributor).
C-21
<PAGE>
(d) Essex National Securities, Inc., 215 Gateway Road West,
Napa, California 34550-6249 (records relating to its
functions as co-distributor).
(e) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as distributor and
co-administrator).
(f) Drinker Biddle & Reath, 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107-3496 (Registrant's
Declaration of Trust, By-Laws and Minute Books).
ITEM 31. MANAGEMENT SERVICES
Inapplicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of a trustee or trustees if
requested to do so by the holders of at least 10% of Registrant's outstanding
shares. Registrant will stand ready to assist shareholder communications in
connection with any meeting of shareholders as prescribed in Section 16(c) of
the Investment Company Act of 1940.
Registrant undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's most recent annual report
to shareholders, upon request without charge.
C-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant certifies that it meets
all of the requirements for effectiveness of this Post-Effective Amendment No.
30 to its Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Post-Effective Amendment to its
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Detroit, State of Michigan, on the
12th day of April, 1996.
THE WOODWARD FUNDS
Registrant
/s/ Earl I. Heenan, Jr.
-----------------------
Earl I. Heenan, Jr.
Chairman of the Board and President
Pursuant to the requirements of the Securities Act of 1933,
this Post-Effective Amendment to Registrant's Registration Statement has been
signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Earl I. Heenan, Jr.
- -------------------------
Earl I. Heenan, Jr. Trustee April 12, 1996
/s/ Eugene C. Yehle
- -------------------------
Eugene C. Yehle Trustee April 12, 1996
/s/ Will M. Caldwell
- -------------------------
Will M. Caldwell Trustee April 12, 1996
/s/ Julius L. Pallone
- -------------------------
Julius L. Pallone Trustee April 12, 1996
/s/ Nicholas J. De Grazia
- -------------------------
Nicholas J. De Grazia Trustee April 12, 1996
/s/ Donald G. Sutherland
- -------------------------
Donald G. Sutherland Trustee April 12, 1996
/s/ Donald L. Tuttle
- -------------------------
Donald L. Tuttle Trustee April 12, 1996
/s/ John P. Gould Trustee April 12, 1996
- -------------------------
John P. Gould
/s/ Marilyn McCoy Trustee April 12, 1996
- -------------------------
Marilyn McCoy
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
- ----------- ------- --------
(5)(c) Form of Sub-Advisory Agreement among NBD, FCIMCO
and ANB Investment Management and Trust Company
("ANB-IMC").
(7) Deferred Compensation Plan.
(9)(p) Shareholder Services Plan including form of Service
Agreement with respect to Class A Shares.
(9)(q) Shareholder Administrative Services Plan including
form of Service Agreement.
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath.
(15)(b) Distribution Plan for Class B Shares.
(18)(a) Rule 18f-3 Plan.
(18)(b) Amended Rule 18f-3 Plan.
(27) Financial Data Schedules with respect to the
Woodward Money Market, Government, Treasury Money
Market, Tax-Exempt Money Market, Michigan Tax-
Exempt Money Market, Growth/Value, Opportunity,
Intrinsic Value, Capital Growth, Balanced, Equity
Index, International Equity, Bond, Intermediate
Bond, Short Bond, Municipal Bond and Michigan
Municipal Bond Funds.
Exhibit 5(c)
FORM
SUB-ADVISORY AGREEMENT
This sub-advisory agreement (the "Agreement"), dated as of this ___
day of April, 1996, is entered into by and among NBD Bank ("NBD"), First
Chicago Investment Management Company ("FCIMCO") and ANB Investment Management
and Trust Company
("ANB-IMC").
WHEREAS, the International Major Markets Fund (the "Fund") is a
portfolio of The Woodward Funds (the "Trust"), a Massachusetts business trust
registered as an investment company under the Investment Company Act of 1940
(the "1940 Act");
WHEREAS, the Trust intends to employ NBD and FCIMCO (collectively, the
"Co-Advisers") to act as investment adviser for its funds, including the Fund,
pursuant to a written agreement (the "Co-Advisory Agreement");
WHEREAS, the Co-Advisers desire to employ ANB-IMC to act as
a sub-adviser to the Fund;
NOW, THEREFORE, the parties hereto intending to be legally bound,
hereby agree as follows:
1. Management. Subject to the supervision and approval of the
Co-Advisers, ANB-IMC will provide a continuous investment program for the
Fund, including investment research and management with respect to all
securities, investments, cash and cash equivalents in the Fund. ANB-IMC will
determine from time to time what securities and other investments will be
purchased, retained or sold by the Fund. ANB-IMC will provide the services
rendered by it hereunder in accordance with the investment objective and
policies of the Fund as stated in its prospectuses ("Prospectuses" or a
"Prospectus"), statements of additional information ("SAIs") and all
amendments and supplements thereto, the Trust's Bylaws, the Trust's Amended
and Restated Declaration of Trust and resolutions adopted from time to time by
the Trust's Board of Trustees (the "Board"). ANB-IMC will furnish to the Co-
Advisers or the Trust such statistical information, with respect to the
investments which the Fund may hold or contemplate purchasing, as the
Co-Advisers or the Trust may reasonably request. ANB-IMC shall furnish to the
Co-Advisers or the Trust from time to time information concerning important
developments materially affecting the Fund. ANB-IMC further agrees that it:
(a) will conform with all applicable Rules and Regulations
(hereinafter called the "Rules") of the Securities and
Exchange Commission ("SEC"), and will in addition
conduct its activities under
<PAGE>
this Agreement in accordance with other applicable
laws;
(b) will place all orders for the purchase and sale of
portfolio securities for the account of the Fund
with brokers or dealers selected by ANB-IMC. In
executing portfolio transactions and selecting
brokers or dealers, ANB-IMC will use its best
efforts to seek on behalf of the Trust and the
Fund the best overall terms available. In
assessing the best overall terms available for any
transaction, ANB-IMC shall consider all factors it
deems relevant, including the breadth of the
market in the security, the price of the security,
the financial condition and execution capability
of the broker or dealer, and the reasonableness of
the commission, if any, both for the specific
transaction and on a continuing basis. In
evaluating the best overall terms available, and
in selecting the broker or dealer to execute a
particular transaction, ANB-IMC may also consider
the brokerage and research services (as those
terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the
Fund and/or other accounts over which ANB-IMC or
an affiliate of ANB-IMC exercises investment
discretion. ANB-IMC is authorized, subject to the
prior approval of such policy by the Trust's
Board, to pay to a broker or dealer who provides
such brokerage and research services a commission
for executing a portfolio transaction for the Fund
which is in excess of the amount of commission
another broker or dealer would have charged for
effecting that transaction if, but only if, such
is consistent with applicable law and ANB-IMC
determines in good faith that such commission was
reasonable in relation to the value of the
brokerage and research services provided by such
broker or dealer -- viewed in terms of that
particular transaction or in terms of the overall
responsibilities of ANB-IMC to the Fund and to the
Trust.
In no instance will portfolio securities be purchased
from or sold to ANB-IMC or the Trust's principal
underwriter for the Fund or an affiliated person of
either, acting as principal or as broker, except as
permitted by law. In executing portfolio transactions
for the Fund, ANB-IMC, to the extent permitted by
applicable laws and regulations, may but shall not be
obligated to, aggregate the securities to be sold
-2-
<PAGE>
or purchased with those of other funds and their other
clients where such aggregation is not inconsistent with
applicable law and the policies set forth in the Trust's
registration statement. In such event, ANB-IMC will
allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in the manner it
considers to be the most equitable and consistent with
its fiduciary obligations to the Fund and to such other
clients;
(c) will maintain all books and records with respect
to the securities transactions of the Fund;
(d) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Trust and prior or
present shareholders of the Fund or those persons
or entities who respond to inquiries of the
Trust's principal underwriter concerning
investment in the Fund and will not use such
records and information for any purpose other than
performance of its responsibilities and duties
hereunder, except after prior notification to and
approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be
withheld where ANB-IMC may be exposed to civil or
criminal contempt proceedings for failure to
comply, when requested to divulge such information
by duly constituted authorities, or when so
requested by the Trust. Nothing contained herein
or in any other agreement executed with the Trust,
however, shall prohibit ANB-IMC and any of its
affiliates from advertising to or soliciting the
public generally with respect to other products or
services, including, but not limited to, any
advertising or marketing via radio, television,
newspapers, magazines or direct mail solicitation,
regardless of whether such advertisement or
solicitation may coincidentally include prior or
present Fund shareholders or those persons or
entities who have responded to inquiries of the
Trust's principal underwriter.
2. Services Not Exclusive. The services rendered by ANB-
IMC hereunder are not to be deemed exclusive, and ANB-IMC shall
be free to render similar services to others so long as its
services under this Agreement are not impaired thereby.
3. Expenses. ANB-IMC will bear all expenses in connection
with the performance of its services under this Agreement. All
other expenses to be incurred in the operation of the Trust
-3-
<PAGE>
(other than those borne by the Co-Advisers) will be borne by the Trust, except
to the extent specifically assumed by ANB-IMC. The expenses to be borne by the
Trust include, without limitation, the following: organizational costs, taxes,
interest, loan commitment fees, interest and distributions paid on securities
sold short, brokerage fees and commissions, if any, fees of Board members,
Securities and Exchange Commission fees and state Blue Sky qualification fees,
advisory fees, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, outside auditing
and legal expenses, costs of independent pricing services, costs of
maintaining the Fund's existence, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
preparing, printing and distributing prospectuses and statements of additional
information for regulatory purposes and for distribution to existing
stockholders, costs of stockholders' reports and meetings, and any
extraordinary expenses.
If the expenses borne by the Fund in any fiscal year exceed the
applicable expense limitations imposed by the securities regulations of any
state in which the shares are registered or qualified for sale to the public,
the Co-Advisers may deduct from the fees to be paid hereunder, or ANB-IMC will
bear such excess expense on a pro-rata basis with the Co-Advisers, in the
proportion that the sub-advisory fee payable to ANB-IMC pursuant to this
Agreement bears to the investment advisory fee with respect to the Fund
payable to the Co-Advisers pursuant to the Investment Advisory Agreement, to
the extent required by state law. The expense reimbursement obligation of
ANB-IMC will be limited to the amount of its fees hereunder for such fiscal
year; provided, however, that notwithstanding the foregoing, in accordance
with the Investment Advisory Agreement, the Co- Advisers may deduct from the
fees to be paid hereunder, or ANB- IMC will bear such excess expense on a
pro-rata basis with the Co-Advisers, in the proportion that the sub-advisory
fee payable to ANB-IMC pursuant to this Agreement bears to the investment
advisory fee with respect to the Fund payable to the Co-Advisers regardless of
the amount of such fees payable to ANB-IMC during such fiscal year to the
extent that the securities regulations of any state in which the Fund's shares
are registered or qualified for sale so require. Such expense reimbursement,
if any, will be estimated, reconciled and paid on a monthly basis.
4. Limitation of Liability of the Advisers. ANB-IMC shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of ANB-IMC
-4-
<PAGE>
in the performance of its duties or from reckless disregard of its obligations
and duties under this Agreement. Any person, even though also an officer,
Board member, partner, director, employee or agent of the Co-Advisers or of
ANB-IMC, who may be or become an officer, Board member, partner, employee or
agent of the Trust, shall be deemed, when rendering services to the Trust or
acting on any business of the Trust (other than services or business in
connection with ANB-IMC's duties hereunder) to be rendering such services to
or acting solely for the Trust and not as an officer, Board member, partner,
director, employee or agent or one under the control or direction of ANB-IMC
even though paid by either of them.
5. Duration and Termination. This Agreement shall become effective
with respect to the Fund upon approval of this Agreement by vote of a majority
of the outstanding voting securities of the Fund and, unless sooner terminated
as provided herein, shall continue with respect to the Fund until June 30,
1997. Thereafter, if not terminated, this Agreement shall continue with
respect to the Fund for successive annual periods, provided such continuance
is specifically approved at least annually (a) by the vote of a majority of
those members of the Board who are not parties to this Agreement or
"interested persons" of any such party, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Board or by vote of a
majority of the outstanding voting securities of the Fund; provided, however,
that this Agreement may be terminated with respect to the Fund, without the
payment of any penalty, by the Board or by vote of a majority of the
outstanding voting securities of the Fund on sixty (60) days' written notice,
or by ANB-IMC, on ninety (90) days' written notice to the Trust. This
Agreement will immediately terminate in the event of its assignment. (As used
in this Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 Act.)
6. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Michigan law.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
NBD BANK
Attest:
_______________________ By: ______________________
(Corporate Seal)
FIRST CHICAGO INVESTMENT
MANAGEMENT COMPANY
Attest:
_______________________ By: _______________________
(Corporate Seal)
ANB INVESTMENT MANAGEMENT and
TRUST COMPANY
Attest:
_______________________ By: ______________________
-6-
EXHIBIT 7
THE WOODWARD FUNDS
SUMMARY OF
DEFERRED COMPENSATION PLAN
Basic Plan: The Woodward Funds Deferred Compensation Plan (the "Plan") is a
nonqualified unfunded deferred compensation plan under which individual
Agreements are executed between one or more of the Trustees and The Woodward
Funds (the "Trust").
Eligibility: All members of the Board of the Trust are eligible
to participate.
Amount to be Deferred: All or a portion of the compensation earned by a
Trustee may be deferred and credited to a Deferred Compensation Account for
the Trustee.
Election to Defer: A Trustee elects to defer his compensation by executing a
Deferred Compensation Agreement prior to the beginning of the calendar year in
which the compensation will be earned. A Trustee may also elect to defer fees
subsequently earned in the calendar year of election, if such election is made
within 30 days of the Plan's effective date or within 30 days of the Trustee's
first becoming eligible to participate in the Plan. Until terminated or
replaced with a new Agreement, the Agreement will be effective for subsequent
years.
A Trustee may establish a new Agreement with respect to future compensation on
an annual basis. For example, even if a Trustee does not enter into a Deferred
Compensation Agreement during the first year he is able to do so, he will
still have the opportunity to defer compensation earned in a subsequent year
by executing an appropriate agreement prior to January 1 of the calendar year
for which he seeks deferral. A Trustee can also annually enter into a new
Agreement whereby he elects a new date on which to receive amounts deferred in
future years, or changes the percentage of compensation deferred. For each new
Agreement entered into which changes the date of receipt of deferred amounts,
a new Deferred Compensation Account will be established for the Trustee.
Earnings on Deferred Amounts: A Trustee may elect to have his Deferred
Compensation Account(s) invested in any combination of investment options
offered by the Trust. The income, gains, and losses credited to the Trustee's
Account will reflect the income, gains, and losses achieved by the chosen
investment option(s). The Trustee may also elect to change the investment
allocation of past and future deferred amounts in his Deferred Compensation
Accounts at any time upon proper notice to the Trust. The Board of Trustees
will periodically announce which investment options will be available under
the Plan. The attached Trustee Account
<PAGE>
Allocation Election Form lists the investment options currently available
under the Plan.
Distribution of Deferred Amounts: Distributions will begin as of January 31 of
the year chosen by the Trustee, or if earlier, as of January 31 of the year
following the year in which the Trustee dies, retires, resigns, becomes
disabled or otherwise ceases to be a member of the Board of Trustees as
specified in a particular Deferred Compensation Agreement. At the time the
Trustee enters into the Agreement, the Trustee will elect to receive payments
in either a single sum or as annual payments for a period of two to 15 years.
The Trustee's elections as to the time and manner of receiving payments may
not be changed with respect to any year covered by that Agreement. A Trustee
may execute a new Agreement and thereby make different elections as to the
date of receipt and manner of payments with respect to compensation for
services performed in later years.
Beneficiary Designation: May be amended at any time by written
notice to the Trust.
Hardship Distributions: Provision is made for hardship
distribution in the case of unforeseeable emergencies.
Taxability of Fees: Deferred compensation will be taxable as ordinary income
in the year distributed to the Trustee. Such distributions may be subject to
withholding pursuant to the tax laws in effect at the time of distribution. In
addition, under current law, self-employment taxes will be due on deferred
trustee's fees in the year they are received by the Trustee, rather than in
the year earned.
Security of Deferred Amounts: All deferred amounts and any earnings credited
thereon are general funds of the Trust. A Trustee's claim on a Fund will have
the same standing as that of any unsecured general creditor. The Trust will
have no obligation to set aside monies to fund its obligations under the Plan.
Annual Report: The Trust will provide each participating Trustee
with an annual statement of his Deferred Compensation Account
balance(s).
-2-
<PAGE>
THE WOODWARD FUNDS
DEFERRED COMPENSATION PLAN
1. Eligibility. Each Trustee of the Board of Trustees of The
Woodward Funds (the "Trust") shall be eligible to participate in The Woodward
Funds Deferred Compensation Plan (the "Plan").
2. Terms of Participation
(a) A Trustee may elect to participate in the
Plan by signing the Deferred Compensation Agreement (the "Agreement") in the
form attached hereto and incorporated by reference herein. A Trustee's
participation will commence on January 1 of the calendar year immediately
following the year in which the Trustee executed the Agreement, except that
when a Trustee executes an Agreement within 30 days of the Plan's effective
date or within 30 days of first becoming eligible to participate in the Plan,
participation will commence on the date of the Agreement.
(b) Participation in the Plan will continue until
the Trustee furnishes written notice to the Trust that the Trustee terminates
his participation in the Plan or until such time as the Trust terminates the
Plan pursuant to Section 6 below. Termination by a Trustee shall be made by
written notice delivered or mailed to the Treasurer of the Trust (the
"Treasurer") (or his delegate) no later than December 31 of the calendar year
preceding the calendar year in which such termination is to take effect.
(c) A Trustee who has terminated his
participation may subsequently elect to participate in the Plan by executing a
new Agreement in accordance with subsection (a) above.
(d) A Trustee may alter the amount of deferral
for any future calendar year, and/or elect a new date on which to receive
amounts deferred in future calendar years, if the Trustee and the Trust enter
into a new Agreement on or before December 31 of the calendar year preceding
the calendar year for which the new Agreement is to take effect. For each new
Agreement which changes the date of receipt of deferred amounts, a new record
account (the "Deferred Compensation Account" or "Account") will be established
for the Trustee.
3. Deferred Compensation Account. While a Trustee participates
in the Plan pursuant to an Agreement, all deferred compensation payable by the
Trust for the Trustee's services shall be credited to the Trustee's Deferred
Compensation Account under the applicable Agreement. A Trustee shall allocate
amounts
<PAGE>
in his Account(s) among the investment options available under the Plan by
submitting a written request to the Treasurer (or his delegate) on such form
as may be required by the Treasurer prior to the date deferrals are scheduled
to begin. The Board of Trustees (the "Board") shall specify from time to time
the investment options available under the Plan. The Trustee may request that
the investment allocation of his Account, including past as well as future
deferrals, be changed by submitting a written request to the Treasurer (or his
delegate) on such form as may be required by the Treasurer, or by telephoning
the Treasurer (or his delegate). Such changes shall become effective as soon
as administratively feasible after the Treasurer (or his delegate) receives
such request.
The Trustee's Account(s) with be credited with any income,
gains, and losses that would have been realized if amounts equal to the
deferred amounts had been invested in accordance with the Trustee's allocation
election on the date such deferred amounts were credited to the Trustee's
Account(s). For this purpose, any amounts that would have been received, had
amounts been invested as described above, from a chosen investment option will
be treated as if reinvested in that option on the date such amounts would have
been received.
4. Distribution. As of January 31 of the year chosen by the
Trustee in the applicable Agreement, or if earlier, as of January 31 of the
year following the year in which the first of certain events specified in the
applicable Agreement occurs, the total amount credited to the Trustee's
Account under the applicable Agreement shall be distributed to the Trustee (or
upon his death, to his designated beneficiary) in accordance with one of the
alternatives set forth below. Selection of an alternative shall be made at the
time the Trustee executes the Agreement.
(i) One single-sum payment; or
(ii) Any number of approximately equal annual
installments for a period of two to 15 years. Installments shall be paid
annually as of January 31 until the balance in the Trustee's Account is
exhausted.
The amount of each installment payment, other than the final
payment, shall be equal to 1/n multiplied by the balance in the Trustee's
Account as of the previous December 31, where "n" equals the number of
payments yet to be made. The final payment will equal the balance in the
Trustee's Account as of the previous December 31. For example, if payments are
to be made in ten annual installments commencing on January 31, 2000, the
first payment will be equal to 1/10th of the December 31, 1999 balance in the
Account, and the following year's payment would be equal to 1/9th of the
December 31, 2000 balance.
-2-
<PAGE>
If the balance in the Trustee's Account as of the date of the
first scheduled payment is less than $2,000, the Trust shall instead pay such
amount in a single-sum as of that date. Further, the Trustee may not select a
period of time which will cause an annual payment to be less than $1,000.
Notwithstanding the foregoing, in the event the Trustee ceases to be a Trustee
of the Trust and becomes a proprietor, officer, partner, employee, or
otherwise becomes affiliated with any business or entity that is in
competition with the Trust, or becomes employed by any governmental agency
having jurisdiction over the affairs of the Trust, the Trust reserves the
right at the sole discretion of the Board to make an immediate single-sum
payment to the Trustee in an amount equal to the balance in the Trustee's
Account at that time.
Notwithstanding the preceding two paragraphs, the Trust may at
any time make a single-sum payment to the Trustee (or surviving beneficiary)
equal to a part or all of the balance in the Trustee's Accounts upon a showing
of an unforeseeable financial emergency caused by circumstances beyond the
control of the Trustee (or surviving beneficiary) which would result in severe
financial hardship if such payments were not made. The determination of
whether such emergency exists shall be made at the sole discretion of the
Board (with the Trustee requesting the payment not participating in the
discussion or the decision). The amount of the payment shall be limited to the
amount necessary to meet the financial emergency, and any remaining balance in
the Trustee's Accounts shall thereafter be paid at the time and in the manner
otherwise set forth in this Section.
If there is no beneficiary designation in effect at the
Trustee's death or the designated beneficiary is dead at the Trustee's death,
any amounts in the Trustee's Accounts shall be paid in a single-sum to the
Trustee's Estate. If the designated beneficiary dies after beginning to
receive installment payments, any amounts payable from the Trustee's Accounts
shall be paid in a single-sum to the beneficiary's estate at the beneficiary's
death.
5. Designation of Beneficiary. A Trustee may designate in
writing any person or legal entity as his beneficiary to receive any amounts
payable from his Accounts upon his death. If the Trustee should die without
effectively designating a surviving beneficiary, his beneficiary shall be his
estate.
6. Amendment and Termination of the Plan. The Trust reserves
the right to amend or terminate the Plan by a Board resolution. A written
notice of any such amendment or termination shall be delivered or mailed to
each participating Trustee no later than December 31 of the calendar year
preceding the calendar year in which the amendment or termination is to
-3-
<PAGE>
take effect. The balance in the Trustee's Accounts shall remain subject to the
provisions of the Plan and distribution will not be accelerated because of the
termination of the Plan.
7. Non-Assignability. The right of the Trustee or any other
person to receive payments under this Plan or any Agreement thereunder shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment, or garnishment by creditors of
the Trustee or any beneficiary.
8. Miscellaneous
(a) The Trust shall not be required to fund or
secure in any way its obligations hereunder. Nothing in the Plan or in any
Agreement thereunder and no action taken pursuant to the provisions of the
Plan or of any Agreement thereunder shall be construed to create a trust or a
fiduciary relationship of any kind. Payments under the Plan and any Agreement
thereunder shall be made when due from the general assets of the Trust.
Neither a Trustee nor his designated beneficiary shall acquire any interest in
such assets by virtue of the Plan or any Agreement thereunder. This Plan
constitutes a mere promise by the Trust to make benefit payments in the
future, and to the extent that a Trustee or his designated beneficiary
acquires a right to receive any payment from the Trust under the Plan, such
right shall be no greater than the right of any unsecured general creditor of
the Trust. The Trust and Trustee intend for this Plan to be unfunded for tax
purposes and for the purposes of Title I of the Employee Retirement Income
Security Act of 1974, as amended.
(b) The Trust shall have full power and authority
to interpret, construe and administer this Plan and any Agreement thereunder
and its interpretation and construction thereof, and actions thereunder,
including any valuation of the Trustee's Accounts, or the amount or recipient
of the payment to be made therefrom, shall be binding and conclusive on all
persons for all purposes. The Trust shall not be liable to any person for any
action taken or omitted in connection with the interpretation and
administration of this Plan and any Agreement thereunder unless attributable
to its own willful misconduct or lack of good faith.
(c) To the extent required by law, the Trust
shall withhold federal or state income or employment taxes from any payments
under the Plan or any Agreement thereunder and shall furnish the Trustee (or
beneficiary) and the applicable governmental agency or agencies with such
reports, statements or information as may be required in connection with such
payments.
(d) If the Trust shall find that any person to
whom any payment is payable under this Plan or any Agreement
thereunder is unable to care for his affairs because of illness
-4-
<PAGE>
or accident, or is a minor, any payment due (unless a prior claim therefor
shall have been made by a duly appointed guardian, committee or other legal
representative) may be paid to the spouse, a parent, or a brother or sister,
or to any person deemed by the Trust to have incurred expense for the person
who is otherwise entitled to payment, in such manner and proportions as the
Trust may determine. Any such payment shall serve to discharge the liability
of the Trust under this Agreement to make payment to the person who is
otherwise entitled to payment.
(e) All expenses incurred in administering this
Plan and any Agreement thereunder shall be paid by the Trust.
(f) Nothing in this Plan or any Agreement
thereunder shall be construed as conferring any right on the part of the
Trustee to be or remain a Trustee of the Trust or to receive any particular
amount of Trustee's fees.
(g) This Plan and any Agreement thereunder shall
be binding upon, and inure to the benefit of, the Trust, its successors and
assigns, and each Trustee and his heirs, executors, administrators, and legal
representatives.
(h) This Plan and any Agreement thereunder shall
be governed by and construed under the laws of the State of
Michigan.
Date: March 10, 1994 Adopted by the
Board of Trustees
-5-
<PAGE>
Form 1
------
THE WOODWARD FUNDS
DEFERRED COMPENSATION AGREEMENT
This Agreement is entered into this _____ day of ______________, 19___,
between The Woodward Funds (the "Trust") (consisting of the Government Fund,
Money Market Fund, Tax-Exempt Money Market Fund, Michigan Tax-Exempt Money
Market Fund, Growth/Value Fund, Opportunity Fund, Intrinsic Value Fund, Equity
Index Fund, Intermediate Bond Fund, Bond Fund, Balanced Fund, Short Bond Fund,
Capital Growth Fund, International Equity Fund, U.S. Government Income Fund
and any other investment portfolio which may be established by the Trust in
the future (each a "Fund" and collectively, the "Funds")), and
___________________________ (the "Trustee").
WHEREAS, the Trustee will be rendering valuable services to the Trust as a
member of the Board of Trustees (the "Board"), and the Trust is willing to
accommodate the Trustee's desire to be compensated for such services on a
deferred basis;
NOW, THEREFORE, the parties hereto agree as follows:
1. With respect to services performed by the Trustee for
the Trust on and after ______________, 19___, the
Trustee shall defer _____% of the amounts otherwise
payable to the Trustee for serving as a Trustee. The
deferred compensation shall be credited to a book
reserve maintained by the Trust in the Trustee's name
together with credited amounts in the nature of income,
gains, and losses (the "Account(s)"). Any Account
maintained for the Trustee shall be paid to the Trustee
on a deferred basis in accordance with the terms of
this Agreement.
2. The Trust shall credit the Trustee's Account as of the
day such amount would have been paid to the Trustee if
this Agreement were not in effect. Such Account shall
be valued at fair market value as of the last day of
the calendar year and such other dates as are necessary
for the proper administration of this Agreement, and
the Trustee shall receive a written accounting of his
Account balance(s) following such valuation.
The Trustee may request that all or a portion of the amount in
his Account be allocated among one or more of the investment
options offered by the Board under The Woodward Funds Deferred
Compensation Plan (the "Plan"). The initial allocation request
may be made at the time of enrollment. Once made, an investment
allocation
<PAGE>
Form 1
------
request shall remain in effect for all future amounts allocated
to the Trustee's Account until changed by the Trustee. The
Trustee may change his investment allocation for past deferrals
and future deferrals by submitting a written request to the
Treasurer of the Trust (the "Treasurer") (or his delegate) on
such form as may be required by the Treasurer or by telephoning
the Treasurer (or his delegate). Such changes shall become
effective as soon as administratively feasible after the
Treasurer (or his delegate) receives such request. Although the
Trust intends to invest the amounts in the Trustee's Account
according to the Trustee's requests, the Trust reserves the
right to invest the amounts in the Trustee's Account without
regard to such requests.
The Trustee agrees on behalf of the Trustee and any designated
beneficiary to assume all risks in connection with the
investment performance of any amounts which are invested or
which continue to be invested in accordance with the investment
directions of the Trustee.
Title to and beneficial ownership of any assets, whether cash
or investments, which the Trust may use to pay benefits
hereunder, shall at all times remain in the Trust, and the
Trustee and any designated beneficiary shall not have any
property interest whatsoever in any specific assets of the
Trust.
3. As of January 31, ____, or if earlier, as of January 31
of the calendar year following the calendar year the
Trustee dies or becomes disabled, the Trust (subject to
the terms of the Plan) shall: (check one)
/ / pay the Trustee (or his beneficiary) a single-sum
amount equal to the balance in the Trustee's
Account on that date; or
/ / commence making annual payments to the Trustee (or his
beneficiary) for a period of _____ (two through 15)
years.
If the second box is selected, such payments shall be made on
January 31st of each year in approximately equal annual
installments as adjusted and computed by the Trust in
accordance with the terms of the Plan,
-2-
<PAGE>
Form 1
------
with the final payment equalling the then remaining
balance in the Trustee's Account.
4. In the event that the Trustee dies before payments have
commenced or been completed under Section 3, the Trust shall
make payment in accordance with Section 3 to the Trustee's
designated beneficiary, whose name and address are:
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
If there is no beneficiary designation in effect at the
Trustee's death or the designated beneficiary is dead at the
Trustee's death, any amounts in the Trustee's Account shall be
paid in a single sum to the Trustee's estate. If the designated
beneficiary dies after beginning to receive installment
payments, any amounts payable from the Trustee's Account shall
be paid in a single sum to the beneficiary's estate at the
beneficiary's death.
5. This Agreement shall remain in effect with respect to
the Trustee's compensation for services performed as a
Trustee of the Trust in all future years unless
terminated on a prospective basis in accordance with
the terms of the Plan. The Trustee may subsequently
elect to defer his compensation by executing a new
Deferred Compensation Agreement. If a new Agreement is
entered into which changes the date of receipt of
deferred amounts, a new Trustee's Account will be
established for purposes of crediting deferrals,
income, gains, and losses under the new Agreement. Any
new Agreement shall relate solely to compensation for
services performed after the new Agreement becomes
effective and shall not alter the terms of this
Agreement with respect to the deferred payment of
compensation for services performed during any calendar
year in which this Agreement was in effect.
Notwithstanding the foregoing, the Trustee may at any
time amend the beneficiary designation hereunder by
written notice to the Trust.
6. This Agreement constitutes a mere promise by the Trust
to make benefit payments in the future, and the right
-3-
<PAGE>
Form 1
of any person to receive such payments under this Agreement
shall be no greater than the right of any unsecured general
creditor of the Trust. The Trust and Trustee intend for this
Agreement to be unfunded for tax purposes and for the purposes
of Title I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").
7. Any written notice to the Trust referred to in this
Agreement shall be made by mailing or delivering such
notice to the Trust, c/o NBD Bank, N.A., Transfer
Agent, P.O. Box 7058, Troy, Michigan 48007-7058, to the
attention of the Treasurer. Any written notice to the
Trustee referred to in this Agreement shall be made by
delivery to the Trustee in person or by mailing such
notice to the Trustee at his last known place of
residence or business address.
8. This Agreement is subject to all of the terms contained
in the Plan as attached hereto and incorporated by
reference herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the date first above written.
The Woodward Funds
By
------------------------------
, Trustee
-----------------------
--------------------------------
(Signature of Trustee)
-4-
<PAGE>
Form 1
THE WOODWARD FUNDS DEFERRED COMPENSATION PLAN
TRUSTEE ACCOUNT ALLOCATION REQUEST
I hereby request to have my Accounts under The Woodward Funds
Deferred Compensation Plan invested in the following investment options in the
percentages indicated as soon as administratively feasible. This request
supersedes any prior requests I have made with respect to such Plan, and
applies to amounts deferred in the past under the Plan as well as to future
deferrals. I hereby agree to assume all risks in connection with the
investment performance of the amounts which are invested in accordance with
this election.
Percentage
Invested Investment Option
-------- -----------------
__________ Woodward Balanced Fund
__________ Woodward Capital Growth Fund
__________ Woodward International Equity Fund
__________ Woodward Money Market Fund
__________ Woodward Opportunity Fund
100%
==========
DATED:________________, 19___ ____________________________
<PAGE>
Form 2
THE WOODWARD FUNDS
DEFERRED COMPENSATION AGREEMENT
This Agreement is entered into this ______ day of ______________, 19___,
between The Woodward Funds (the "Trust") (consisting of the Government Fund,
Money Market Fund, Tax-Exempt Money Market Fund, Michigan Tax-Exempt Money
Market Fund, Growth/Value Fund, Opportunity Fund, Intrinsic Value Fund, Equity
Index Fund, Intermediate Bond Fund, Bond Fund, Balanced Fund, Short Bond Fund,
Capital Growth Fund, International Equity Fund, U.S. Government Income Fund
and any other investment portfolio which may be established by the Trust in
the future (each a "Fund" and collectively, the "Funds")), and
_____________________________ (the "Trustee").
WHEREAS, the Trustee will be rendering valuable services to the Trust as a
member of the Board of Trustees (the "Board"), and the Trust is willing to
accommodate the Trustee's desire to be compensated for such services on a
deferred basis;
NOW, THEREFORE, the parties hereto agree as follows:
1. With respect to services performed by the Trustee for
the Trust on and after ________________, 19___, the
Trustee shall defer ______% of the amounts otherwise
payable to the Trustee for serving as a Trustee. The
deferred compensation shall be credited to a book
reserve maintained by the Trust in the Trustee's name
together with credited amounts in the nature of income,
gains, and losses (the "Account(s)"). Any Account
maintained for the Trustee shall be paid to the Trustee
on a deferred basis in accordance with the terms of
this Agreement.
2. The Trust shall credit the Trustee's Account as of the
day such amount would have been paid to the Trustee if
this Agreement were not in effect. Such Account shall
be valued at fair market value as of the last day of
the calendar year and such other dates as are necessary
for the proper administration of this Agreement, and
the Trustee shall receive a written accounting of his
Account balance(s) following such valuation.
The Trustee may request that all or a portion of the amount in
his Account be allocated among one or more of the investment
options offered by the Board under The Woodward Funds Deferred
Compensation Plan (the "Plan"). The initial allocation request
may be made at the time
<PAGE>
Form 2
------
of enrollment. Once made, an investment allocation request
shall remain in effect for all future amounts allocated to the
Trustee's Account until changed by the Trustee. The Trustee may
change his investment allocation for past deferrals and future
deferrals by submitting a written request to the Treasurer of
the Trust (the "Treasurer") (or his delegate) on such form as
may be required by the Treasurer or by telephoning the
Treasurer (or his delegate). Such changes shall become
effective as soon as administratively feasible after the
Treasurer (or his delegate) receives such request. Although the
Trust intends to invest the amounts in the Trustee's Account
according to the Trustee's requests, the Trust reserves the
right to invest the amounts in the Trustee's Account without
regard to such requests.
The Trustee agrees on behalf of the Trustee and any designated
beneficiary to assume all risks in connection with the
investment performance of any amounts which are invested or
which continue to be invested in accordance with the investment
directions of the Trustee.
Title to and beneficial ownership of any assets, whether cash
or investments, which the Trust may use to pay benefits
hereunder, shall at all times remain in the Trust, and the
Trustee and any designated beneficiary shall not have any
property interest whatsoever in any specific assets of the
Trust.
3. As of January 31, ____, or if earlier, as of January 31
of the calendar year following the calendar year the
Trustee dies, retires, resigns, becomes disabled or
otherwise ceases to be a member of the Board, the Trust
(subject to the terms of the Plan) shall: (check one)
/ / pay the Trustee (or this beneficiary) a single-sum
amount equal to the balance in the Trustee's
Account on that date; or
/ / commence making annual payments to the Trustee (or his
beneficiary) for a period of _____ (two through 15)
years.
If the second box is selected, such payments shall be made on
January 31st of each year in approximately equal annual
installments as adjusted and computed by
-2-
<PAGE>
Form 2
------
the Trust in accordance with the terms of the Plan, with the
final payment equalling the then remaining balance in the
Trustee's Account.
4. In the event that the Trustee dies before payments have
commenced or been completed under Section 3, the Trust shall
make payment in accordance with Section 3 to the Trustee's
designated beneficiary, whose name and address are:
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
If there is no beneficiary designation in effect at the
Trustee's death or the designated beneficiary is dead at the
Trustee's death, any amounts in the Trustee's Account shall be
paid in a single sum to the Trustee's estate. If the designated
beneficiary dies after beginning to receive installment
payments, any amounts payable from the Trustee's Account shall
be paid in a single sum to the beneficiary's estate at the
beneficiary's death.
5. This Agreement shall remain in effect with respect to
the Trustee's compensation for services performed as a
Trustee of the Trust in all future years unless
terminated on a prospective basis in accordance with
the terms of the Plan. The Trustee may subsequently
elect to defer his compensation by executing a new
Deferred Compensation Agreement. If a new Agreement is
entered into which changes the date of receipt of
deferred amounts, a new Trustee's Account will be
established for purposes of crediting deferrals,
income, gains, and losses under the new Agreement. Any
new Agreement shall relate solely to compensation for
services performed after the new Agreement becomes
effective and shall not alter the terms of this
Agreement with respect to the deferred payment of
compensation for services performed during any calendar
year in which this Agreement was in effect.
Notwithstanding the foregoing, the Trustee may at any
time amend the beneficiary designation hereunder by
written notice to the Trust.
-3-
<PAGE>
Form 2
------
6. This Agreement constitutes a mere promise by the Trust
to make benefit payments in the future, and the right
of any person to receive such payments under this
Agreement shall be no greater than the right of any
unsecured general creditor of the Trust. The Trust and
Trustee intend for this Agreement to be unfunded for
tax purposes and for the purposes of Title I of the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
7. Any written notice to the Trust referred to in this
Agreement shall be made by mailing or delivering such
notice to the Trust, c/o NBD Bank, N.A., Transfer
Agent, P.O. Box 7058, Troy, Michigan 48007-7058, to the
attention of the Treasurer. Any written notice to the
Trustee referred to in this Agreement shall be made by
delivery to the Trustee in person or by mailing such
notice to the Trustee at his last known place of
residence or business address.
8. This Agreement is subject to all of the terms contained
in the Plan as attached hereto and incorporated by
reference herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as
of the date first above written.
The Woodward Funds
By
-----------------------------
, Trustee
-----------------------
--------------------------------
(Signature of Trustee)
-4-
<PAGE>
Form 2
------
THE WOODWARD FUNDS DEFERRED COMPENSATION PLAN
TRUSTEE ACCOUNT ALLOCATION REQUEST
I hereby request to have my Accounts under The Woodward Funds
Deferred Compensation Plan invested in the following investment options in the
percentages indicated as soon as administratively feasible. This request
supersedes any prior requests I have made with respect to such Plan, and
applies to amounts deferred in the past under the Plan as well as to future
deferrals. I hereby agree to assume all risks in connection with the
investment performance of the amounts which are invested in accordance with
this election.
Percentage
Invested Investment Option
__________ Woodward Balanced Fund
__________ Woodward Capital Growth Fund
__________ Woodward International Equity Fund
__________ Woodward Money Market Fund
__________ Woodward Opportunity Fund
100%
==========
DATED:________________, 19___ ____________________________
Trustee
Exhibit 9(p)
April 15, 1996
Class A Only
------------
THE WOODWARD FUNDS
(the "Trust")
SHAREHOLDER SERVICES PLAN
INTRODUCTION
The Trust has adopted this Shareholder Services Plan (the "Plan") in
order to enable the Trust to bear certain shareholder service and
administrative expenses relating to the Class A shares of beneficial interest
("Retail Shares") of the Trust's portfolios (collectively, the "Funds,"
individually, a "Fund") as set forth on Exhibit A hereto. Such Exhibit may be
revised from time to time. The Plan is not to be adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "1940 Act").
Section 1. Upon the recommendation of NBD Bank, the Trust's
investment adviser ("NBD"), any officer of The Woodward Funds (the "Trust") is
authorized to execute and deliver, in the name and on behalf of the Trust,
written agreements in substantially the form attached hereto or in any other
form duly approved by the Board of Trustees ("Servicing Agreements") with the
institutional shareholders of record ("Shareholder Servicing Agents") of any
of the Trust's Funds. Such Servicing Agreements shall require the Shareholder
Servicing Agents to provide support services ("Support Services") as set forth
therein to their clients who beneficially own Class A shares of beneficial
interest in one or more of the Funds ("Class A Shares") in consideration for a
fee, computed daily and paid monthly in the manner set forth in the Servicing
Agreements, at the annual rate of up to .25% of the average daily net asset
value of Class A Shares held by the Shareholder Servicing Agents on behalf of
their clients and, at the Trust's option, reimbursement of Shareholder
Servicing Agents' out-of-pocket expenses. All expenses incurred by the Trust
in connection with Servicing Agreements for Class A Shares of a particular
Fund shall be allocated entirely to Class A of that Fund. The fee allocated to
each Fund or to Class A of a Fund shall be the several (and not joint or joint
and several) obligation of each such Fund.
Section 2. NBD shall monitor the arrangements pertaining to the
Servicing Agreements with Shareholder Servicing Agents.
Section 3. So long as this Plan is in effect, NBD shall provide
to the Trust's Board of Trustees, and the Trustees shall review, at least
quarterly, a written report of the amounts
<PAGE>
expended pursuant to this Plan and the purposes for which such expenditures
were made.
Section 4. This Plan shall become effective with respect to a
particular Fund upon the approval of the Plan (and the form of Servicing
Agreement attached hereto) by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" as defined in the
Investment Company Act of 1940 (the "Act"), of the Trust and have no direct or
indirect financial interest in the operation of this Plan or in any Servicing
Agreements or other agreements related to this Plan (the "Disinterested
Trustees"), pursuant to a vote cast in person at a meeting called for the
purpose of voting on the approval of this Plan (and form of Servicing
Agreement).
Section 5. Unless sooner terminated, this Plan shall continue
until April 30, 1997 and thereafter shall continue automatically for
successive annual periods ending on April 30, provided such continuance is
approved at least annually in the manner set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of
Trustees, provided that any material amendments of the terms of this Plan
shall become effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a
majority of the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and
nomination of those Trustees who are not "interested persons" (as defined in
the Act) of the Trust shall be committed to the discretion of the
Disinterested Trustees.
Section 9. The Trust has adopted this Shareholder Services Plan
as of April 15, 1996.
Section 10. The obligations of The Woodward Funds entered into
in the name or on behalf thereof by any of the Trustees, representatives or
agents are made not individually, but in such capacities, and are not binding
upon any of the Trustees, shareholders or representatives of the Trust
personally, but bind only the Trust property, and all persons dealing with any
series of shares in the Trust must look solely to the Trust property belonging
to such series for the enforcement of any claims against the Trust.
-2-
<PAGE>
EXHIBIT A
Class A shares:
- ---------------
Capital Growth Fund
International Equity Fund
Equity Index Fund
Growth/Value Fund
Intrinsic Value Fund
Opportunity Fund
Bond Bund
Municipal Bond Fund
Short Bond Fund
Michigan Municipal Bond Fund
Intermediate Bond Fund
Balanced Fund
Money Market Fund
Treasury Money Market Fund
Tax-Exempt Money Market Fund
Michigan Tax-Exempt Money Market Fund
Government Fund
-3-
<PAGE>
SERVICING AGREEMENT
Under Non-12b-1 Shareholder Services Plan
THE WOODWARD FUNDS
c/o NBD Bank
900 Tower Drive
Troy, Michigan 48007-7058
Ladies and Gentlemen:
We wish to enter into this Servicing Agreement with you
concerning the provision of administrative support services to our clients
("Clients") who may from time to time own of record beneficially Class A
shares of beneficial interest ("Retail Shares") in one or more of the
portfolios offered by The Woodward Funds (the "Trust") (collectively, the
"Funds," individually, the "Fund"), as set forth on Appendix A.
The terms and conditions of this Servicing Agreement are as
follows:
Section 1. We agree to provide some or all of the
following support services to Clients who may from time to time beneficially
own Retail Shares: (i) aggregating and processing purchase and redemption
requests for Retail Shares from Clients and placing net purchase and
redemption orders with our distributor; (ii) providing Clients with a service
that invests the assets of their accounts in Retail Shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend payments
from the Trust on behalf of Clients; (iv) providing information periodically
to Clients showing their positions in Retail Shares; (v) arranging for bank
wires; (vi) responding to Client inquiries relating to the services performed
by us; (vii) providing subaccounting with respect to Retail Shares
beneficially owned by Clients or the information to us necessary for
subaccounting; (viii) if required by law, forwarding shareholder
communications from the Trust (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; and (ix) providing such other similar services as you may
reasonably request to the extent we are permitted to do so under applicable
statutes, rules or regulations. We will provide to Clients a schedule of any
fees that we may charge to them relating to the investment of their assets in
Retail Shares.
Section 2. We will provide such office space and
equipment, telephone facilities and personnel (which may be any part of the
space, equipment and facilities currently used in business, or any personnel
employed by us) as may be reasonably necessary or beneficial in order to
provide the aforementioned services to Clients.
<PAGE>
Section 3. Neither we nor any of our officers,
employees or agents are authorized to make any representations concerning the
Trust or Retail Shares except those contained in the Trust's then current
prospectuses for such shares, copies of which will be supplied by the Trust to
us, or in such supplemental literature or advertising as may be authorized by
the Trust in writing.
Section 4. For all purposes of this Agreement we
will be deemed to be an independent contractor, and will have no authority to
act as agent for the Trust in any matter or in any respect. We agree to and do
release, indemnify and hold the Trust harmless from and against any and all
direct or indirect liabilities or losses resulting from requests, directions,
actions or inactions of or by us or our officers, employees or agents
regarding our responsibilities hereunder or the purchase, redemption, transfer
or registration of Retail Shares by or on behalf of Clients. We and our
employees will, upon request, be available during normal business hours to
consult with you or your designees concerning the performance of our
responsibilities under this Agreement.
Section 5. In consideration of the services and
facilities provided by us hereunder, you will pay to us, and we will accept as
full payment therefor, a fee at the annual rate of __% of 1% of the average
daily net asset value of the Retail Shares owned of record or beneficially by
Clients provided services by us hereunder (the "Clients' Retail Shares"),
which fee will be computed daily and payable monthly. For purposes of
determining the fees payable under this Section 5, the average daily net asset
value of the Clients' Retail Shares will be computed in the manner specified
in the Trust's registration statement (as the same is in effect from time to
time) in connection with the computation of the net asset value of Retail
Shares for purposes of purchases and redemptions. The fee rate stated above
may be prospectively increased or decreased by the Trust at any time upon
notice to us. Further, the Trust may, in its discretion and without notice,
suspend or withdraw the sale of Retail Shares, including the sale of such
shares to us for the account of any Client or Clients.
Section 6. Any person authorized to direct the
disposition of monies paid or payable pursuant to this Agreement will provide
to your Board of Trustees, and your Trustees will review, at least quarterly,
a written report of the amounts so expended and the purposes for which such
expenditures were made. In addition, we will furnish you or your designees
with such information as you or they may reasonably request (including,
without limitation, periodic certifications confirming the provision to
Clients of the services described herein), and will otherwise cooperate with
you and your designees (including, without limitation, any auditors designated
by you), in connection
-2-
<PAGE>
with the preparation of reports to the your Board of Trustees concerning this
Agreement and the monies paid or payable by you pursuant hereto, as well as
any other reports or filings that may be required by law.
Section 7. You may enter into other similar
Servicing Agreements with any other person or persons without our consent.
Section 8. We represent, warrant and agree that:
(i) in no event will any of the services provided by us hereunder be primarily
intended to result in the sale of any shares issued by the Trust; and (ii) the
compensation payable to us hereunder, together with any other compensation we
receive from Clients for services contemplated by this Agreement, will not be
excessive or unreasonable under the laws and instruments governing our
relationships with Clients.
Section 9. This Agreement will become effective on
the date a fully executed copy of this Agreement is received by you or your
designee. Unless sooner terminated, this Agreement will continue until April
30, 1997 and thereafter will continue automatically for successive annual
periods ending on April 30, provided such continuance is specifically approved
at least annually by you in the manner described in Section 13 hereof. This
Agreement is terminable, without penalty, at any time by you (which
termination may be by vote of a majority of your Disinterested Trustees as
defined in Section 13 hereof) or by us upon notice to the other party hereto.
Section 10. All notices and other communications
to either you or us will be duly given if mailed, telegraphed, telexed or
transmitted by similar telecommunications device to your address shown above
for you or our address shown on Appendix A for us.
Section 11. This Agreement will be construed in
accordance with the laws of the State of Illinois and is non-
assignable by the parties hereto.
Section 12. We acknowledge that all persons
dealing with you must look solely to your property for the enforcement of any
claims against you, as neither your Trustees, officers, agents nor
shareholders assume any personal liability for obligations entered into or on
your behalf.
Section 13. This Agreement has been approved by
vote of a majority of (i) your Board of Trustees and (ii) those Trustees who
are not "interested persons" (as defined in the Investment Company Act of
1940) of you and have no direct or indirect financial interest in the
operation of the Shareholder Services Plan adopted by the Trust regarding the
provision of
-3-
<PAGE>
support services to the beneficial owners of Retail Shares or in any
agreements related thereto ("Disinterested Trustees"), cast in person at a
meeting called for the purpose of voting on such approval.
Section 14. The obligations of The Woodward Funds
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities,
and are not binding upon any of the Trustees, shareholders or representatives
of the Trust personally, but bind only the Trust property, and all persons
dealing with any series of shares in the Trust must look solely to the Trust
property belonging to such series for the enforcement of any claims against
the Trust.
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and
promptly return it to us at the address shown on Appendix A.
Very truly yours,
[Name of Shareholder Servicing
Agent]
Date:________________ By:________________________________
Authorized Officer
Accepted and Agreed to:
The Woodward Funds
Date:________________ By:________________________________
Authorized Officer
-4-
<PAGE>
APPENDIX A
Please check the appropriate boxes to indicate the shares of
the Series of The Woodward Funds for which services will be provided under
this Agreement.
Class A shares:
- ---------------
/ / The Woodward Capital Growth Fund
/ / The Woodward International Equity Fund
/ / The Woodward Equity Index Fund
/ / The Woodward Growth/Value Fund
/ / The Woodward Intrinsic Value Fund
/ / The Woodward Opportunity Fund
/ / The Woodward Bond Fund
/ / The Woodward Municipal Bond Fund
/ / The Woodward Short Bond Fund
/ / The Woodward Michigan Municipal Bond Fund
/ / The Woodward Intermediate Bond Fund
/ / The Woodward Balanced Fund
/ / The Woodward Money Market Fund
/ / The Woodward Treasury Money Market Fund
/ / The Woodward Tax-Exempt Money Market Fund
/ / The Woodward Michigan Tax-Exempt Money Market Fund
/ / The Woodward Government Fund
All notices to [insert Shareholder Servicing Agent's name] should be sent to
_____________________________________________.
-5-
Exhibit 9(q)
Effective Post-Reorganization
-----------------------------
THE WOODWARD FUNDS
(the "Trust")
SHAREHOLDER ADMINISTRATIVE SERVICES PLAN
INTRODUCTION
The Trust has adopted this Shareholder Administrative Services Plan
(the "Plan") in order to enable the Trust to bear certain shareholder service
and administrative expenses relating to the Class A and Class B shares of
beneficial interest ("Retail Shares") of the Trust's portfolios (collectively,
the "Funds," individually, a "Fund") as set forth on Exhibit A hereto. Such
Exhibit may be revised from time to time. The Plan is not to be adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "1940
Act").
Section 1. The Trust shall pay to BISYS Fund Limited
Partnership d/b/a BISYS Fund Services (the "Administrator") a fee, computed
daily and paid monthly in the manner set forth in the attached form of
Servicing Agreement ("Servicing Agreement"), at the annual rate of .25% of the
average daily net asset value of the particular class of Retail Shares held by
financial institutions, securities dealers and other institutions
("Shareholder Servicing Agents") on behalf of their clients, or held by
clients of such Shareholder Servicing Agents, for the support services
("Support Services") as set forth in the particular Service Agreement. The
Administrator is authorized to execute and deliver written Service Agreements
in substantially the form attached hereto or in any other form duly approved
by the Board of Trustees with Shareholder Servicing Agents of any of the
Funds. The Administrator may pay one or more Shareholder Servicing Agents a
fee in respect of Support Services. The Administrator shall determine the
amounts to be paid to third parties and the basis on which such payments will
be made. Payments to Shareholder Servicing Agents are subject to compliance by
each such party with the terms of any Servicing Agreement between it and the
Administrator. All expenses incurred by the Trust in connection with Servicing
Agreements for a particular class or Fund shall be allocated entirely to that
class or Fund, as appropriate. The fee allocated to each Fund or to a class of
a Fund shall be the several (and not joint or joint and several) obligation of
each such Fund.
Section 2. The Administrator shall monitor the arrangements
pertaining to the Servicing Agreements with Shareholder Servicing Agents.
<PAGE>
Section 3. So long as this Plan is in effect, the Administrator
shall provide to the Trust's Board of Trustees, and the Trustees shall review,
at least quarterly, a written report of the amounts expended pursuant to this
Plan and the purposes for which such expenditures were made.
Section 4. This Plan shall become effective with respect to a
particular Fund upon the approval of the Plan (and the form of Servicing
Agreement attached hereto) by a majority of the Board of Trustees, including a
majority of the Trustees who are not "interested persons" as defined in the
Investment Company Act of 1940 (the "Act"), of the Trust and have no direct or
indirect financial interest in the operation of this Plan or in any Servicing
Agreements or other agreements related to this Plan (the "Disinterested
Trustees"), pursuant to a vote cast in person at a meeting called for the
purpose of voting on the approval of this Plan (and form of Servicing
Agreement).
Section 5. Unless sooner terminated, this Plan shall continue
until June 30, 1997 and thereafter shall continue automatically for successive
annual periods ending on the 30th of June, provided such continuance is
approved at least annually in the manner set forth in Section 4.
Section 6. This Plan may be amended at any time by the Board of
Trustees, provided that any material amendments of the terms of this Plan
shall become effective only upon the approvals set forth in Section 4.
Section 7. This Plan is terminable at any time by vote of a
majority of the Disinterested Trustees.
Section 8. While this Plan is in effect, the selection and
nomination of those Trustees who are not "interested persons" (as defined in
the Act) of the Trust shall be committed to the discretion of the
Disinterested Trustees.
Section 9. The Trust has adopted this Shareholder
Administrative Services Plan as of the effective date of the reorganization of
the Prairie Family of Funds and The Woodward Funds.
Section 10. The obligations of The Woodward Funds entered into
in the name or on behalf thereof by any of the Trustees, representatives or
agents are made not individually, but in such capacities, and are not binding
upon any of the Trustees, shareholders or representatives of the Trust
personally, but bind only the Trust property, and all persons dealing with any
series of shares in the Trust must look solely to the Trust property belonging
to such series for the enforcement of any claims against the Trust.
-2-
<PAGE>
EXHIBIT A
Class A shares and Class B shares only:
- ---------------------------------------
Growth Fund
International Equity
Fund Equity Index Fund
Growth and Value Fund
Intrinsic Value Fund
Mid-Cap Opportunity
Fund Equity Income Fund
Small-Cap Opportunity Fund
International Major Markets Fund
Bond Fund
Municipal Bond Fund
Short Bond Fund
Michigan Municipal ond Fund
Intermediate Municipal Bond Fund
Income Fund
Intermediate Bond Fund
Managed Assets Balanced Bund
Managed Assets Conservative Fund
International Bond Fund
Managed Assets Growth Fund
Class A shares only:
- --------------------
Money Market Fund
Treasury Money Market Fund
Tax-Exempt Money Market Fund
Michigan Tax-Exempt Money Market Fund
-3-
<PAGE>
SERVICING AGREEMENT
Under Non-12b-1 Shareholder Services Plan
BISYS Fund Limited Partnership d/b/a BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219-3035
Ladies and Gentlemen:
We wish to enter into this Servicing Agreement with you
concerning the provision of administrative support services to our clients
("Clients") who may from time to time own of record beneficially Class A or
Class B shares of beneficial interest ("Retail Shares") in one or more of the
portfolios offered by The Woodward Funds (collectively, the "Funds,"
individually, the "Fund"), as set forth on Appendix A.
The terms and conditions of this Servicing Agreement are as
follows:
Section 1. We agree to provide some or all of the
following support services to Clients who may from time to time beneficially
own Retail Shares: (i) aggregating and processing purchase and redemption
requests for Retail Shares from Clients and placing net purchase and
redemption orders with The Woodward Funds' (the "Trust") distributor; (ii)
providing Clients with a service that invests the assets of their accounts in
Retail Shares pursuant to specific or pre-authorized instructions; (iii)
processing dividend payments from the Trust on behalf of Clients; (iv)
providing information periodically to Clients showing their positions in
Retail Shares; (v) arranging for bank wires; (vi) responding to Client
inquiries relating to the services performed by us; (vii) providing
subaccounting with respect to Retail Shares beneficially owned by Clients or
the information to us necessary for subaccounting; (viii) if required by law,
forwarding shareholder communications from the Trust (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Clients; and (ix) providing such other
similar services as you may reasonably request to the extent we are permitted
to do so under applicable statutes, rules or regulations. We will provide to
Clients a schedule of any fees that we may charge to them relating to the
investment of their assets in Retail Shares.
Section 2. We will provide such office space and
equipment, telephone facilities and personnel (which may be any part of the
space, equipment and facilities currently used in business, or any personnel
employed by us) as may be reasonably necessary or beneficial in order to
provide the aforementioned services to Clients.
-4-
<PAGE>
Section 3. Neither we nor any of our officers, employees
or agents are authorized to make any representations concerning the Trust or
Retail Shares except those contained in the Trust's then current prospectuses
for such shares, copies of which will be supplied by the Trust to us, or in
such supplemental literature or advertising as may be authorized by you in
writing.
Section 4. For all purposes of this Agreement we will be
deemed to be an independent contractor, and will have no authority to act as
agent for the Trust or you in any matter or in any respect. We agree to and do
release, indemnify and hold you and the Trust harmless from and against any
and all direct or indirect liabilities or losses resulting from requests,
directions, actions or inactions of or by us or our officers, employees or
agents regarding our responsibilities hereunder or the purchase, redemption,
transfer or registration of Retail Shares by or on behalf of Clients. We and
our employees will, upon request, be available during normal business hours to
consult with you or your designees concerning the performance of our
responsibilities under this Agreement.
Section 5. In consideration of the services and
facilities provided by us hereunder, you will pay to us, and we will accept as
full payment therefor, a fee at the annual rate of .25 of 1% of the average
daily net asset value of the Retail Shares owned of record or beneficially by
Clients provided services by us hereunder (the "Clients' Retail Shares"),
which fee will be computed daily and payable monthly. For purposes of
determining the fees payable under this Section 5, the average daily net asset
value of the Clients' Retail Shares will be computed in the manner specified
in the Trust's registration statement (as the same is in effect from time to
time) in connection with the computation of the net asset value of Retail
Shares for purposes of purchases and redemptions. The fee rate stated above
may be prospectively increased or decreased by you or the Trust, in either's
sole discretion, at any time upon notice to us. Further, the Trust may, in its
discretion and without notice, suspend or withdraw the sale of Retail Shares,
including the sale of such shares to us for the account of any Client or
Clients.
Section 6. Any person authorized to direct the
disposition of monies paid or payable pursuant to this Agreement will provide
to the Trust's Board of Trustees, and the Trust's Trustees will review, at
least quarterly, a written report of the amounts so expended and the purposes
for which such expenditures were made. In addition, we will furnish you or
your designees with such information as you or they may reasonably request
(including, without limitation, periodic certifications confirming the
provision to Clients of the services described herein), and will otherwise
cooperate with you and your designees (including, without limitation, any
auditors designated by you), in connection with the preparation of reports to
the Trust's Board of Trustees
-5-
<PAGE>
concerning this Agreement and the monies paid or payable by you pursuant
hereto, as well as any other reports or filings that may be required by law.
Section 7. You may enter into other similar
Servicing Agreements with any other person or persons without our consent.
Section 8. We represent, warrant and agree that: (i) in
no event will any of the services provided by us hereunder be primarily
intended to result in the sale of any shares issued by the Trust; and (ii) the
compensation payable to us hereunder, together with any other compensation we
receive from Clients for services contemplated by this Agreement, will not be
excessive or unreasonable under the laws and instruments governing our
relationships with Clients.
Section 9. This Agreement will become effective on the
date a fully executed copy of this Agreement is received by you or your
designee. Unless sooner terminated, this Agreement will continue until June
30, 1997 and thereafter will continue automatically for successive annual
periods ending on the 30th of June, provided such continuance is specifically
approved at least annually by the Trust in the manner described in Section 13
hereof. This Agreement is terminable, without penalty, at any time by you
(which termination may be by vote of a majority of the Trust's Disinterested
Trustees as defined in Section 13 hereof) or by us upon notice to the other
party hereto.
Section 10. All notices and other communications to
either you or us will be duly given if mailed, telegraphed, telexed or
transmitted by similar telecommunications device to your address shown above
for you or our address shown on Appendix A for us.
Section 11. This Agreement will be construed in
accordance with the laws of the State of Illinois and is non- assignable by
the parties hereto.
Section 12. All persons dealing with the Trust must look
solely to its property for the enforcement of any claims against it, as
neither the Trust's Trustees, officers, agents nor shareholders assume any
personal liability for obligations entered into or on its behalf.
Section 13. This Agreement has been approved by vote of
a majority of (i) the Trust's Board of Trustees and (ii) those Trustees who
are not "interested persons" (as defined in the Investment Company Act of
1940) of the Trust and have no direct or indirect financial interest in the
operation of the Shareholder Administrative Services Plan adopted by the Trust
regarding the provision of support services to the beneficial owners of Retail
-6-
<PAGE>
Shares or in any agreements related thereto ("Disinterested Trustees"), cast
in person at a meeting called for the purpose of voting on such approval.
Section 14. The obligations of The Woodward Funds
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities,
and are not binding upon any of the Trustees, shareholders or representatives
of the Trust personally, but bind only the Trust property, and all persons
dealing with any series of shares in the Trust must look solely to the Trust
property belonging to such series for the enforcement of any claims against
the Trust.
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and
promptly return it to us at the address shown on Appendix A.
Very truly yours,
[Name of Shareholder Servicing
Agent]
Date:________________ By:________________________________
Authorized Officer
Accepted and Agreed to:
BISYS Fund Limited Partnership
d/b/a BISYS Fund Services
Date:________________ By:________________________________
Authorized Officer
-7-
<PAGE>
APPENDIX A
Please check the appropriate boxes to indicate the shares of
the Series of The Woodward Funds for which services will be provided under
this Agreement.
Class A shares and Class B shares only:
- ---------------------------------------
/ / The Woodward Growth Fund
/ / The Woodward International Equity Fund
/ / The Woodward Equity Index Fund
/ / The Woodward Growth and Value Fund
/ / The Woodward Intrinsic Value Fund
/ / The Woodward Mid-Cap Opportunity Fund
/ / The Woodward Equity Income Fund
/ / The Woodward Small-Cap Opportunity Fund
/ / The Woodward International Major Markets Fund
/ / The Woodward Bond Fund
/ / The Woodward Municipal Bond Fund
/ / The Woodward Short Bond Fund
/ / The Woodward Michigan Municipal Bond Fund
/ / The Woodward Intermediate Municipal Bond Fund
/ / The Woodward Income Fund
/ / The Woodward Intermediate Bond Fund
/ / The Woodward Managed Assets Balanced Fund
/ / The Woodward Managed Assets Conservative Fund
-8-
<PAGE>
/ / The Woodward International Bond Fund
/ / The Woodward Managed Assets Growth Fund
Class A shares only:
- --------------------
/ / The Woodward Money Market Fund
/ / The Woodward Treasury Money Market Fund
/ / The Woodward Tax-Exempt Money Market Fund
/ / The Woodward Michigan Tax-Exempt Money Market Fund
All notices to [insert Shareholder Servicing Agent's name] should be sent
to _____________________________________________.
-9-
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated February 19, 1996 included in The Woodward Funds' Annual Reports to
Shareholders for the year ended December 31, 1995 (and to all references
to our Firm) included in or made a part of this registration statement on
Form N-1A (Post-Effective Amendment No. 30 to the Woodward Funds' registration
statement under the Securities Act of 1933).
ARTHUR ANDERSON LLP
Detroit, Michigan,
April 11, 1996
CONSENT OF COUNSEL
We hereby consent to the use of our name and to the reference
to our Firm under the caption "Counsel" in the Statement of Additional
Information that is included in Post-Effective Amendment No. 30 to the
Registration Statement on Form N-1A under the Securities Act of 1933, as
amended.
/s/ Drinker Biddle & Reath
--------------------------
Drinker Biddle & Reath
Philadelphia, Pennsylvania
April __, 1996
Exhibit 15(b)
THE WOODWARD FUNDS DISTRIBUTION PLAN
CLASS B SHARES
WHEREAS, THE WOODWARD FUNDS, a Massachusetts business trust
having its principal office and place of business in c/o NBD Bank, 900 Tower
Drive, Troy, Michigan 48007-7058 (the "Trust"), is registered under the
Investment Company Act of 1940 (the "Act"), as amended, as an open-end
management investment company;
WHEREAS, it has been proposed that the Trust adopt a
Distribution Plan (the "Plan") for its Class B shares (such shares are
hereinafter collectively called "Class B"), in accordance with Rule 12b-1
promulgated under the Act, as amended, under which the Trust would pay the
Trust's distributor (the "Distributor") for services primarily intended to
result in the sale of Class B shares of each investment portfolio of the Trust
set forth on Schedule 1 hereto, as such Schedule may be revised from time to
time (each, a "Fund");
WHEREAS, if the proposal is to be implemented, the Act and Rule
12b-1 require that a written plan describing all material aspects of the
proposed financing be adopted by the Trust;
WHEREAS, the Trust's Board of Trustees (the "Board"), in
considering whether the Trust should implement a written plan, has requested
and evaluated such information as it deemed necessary to an informed
determination as to whether a written plan should be implemented and has
considered such pertinent factors as it deemed necessary to form the basis for
a decision to use Class B assets for such purposes;
WHEREAS, in voting to approve the implementation of such a
Plan, the Board has concluded, in the exercise of its reasonable business
judgment and in light of applicable fiduciary duties, that there is a
reasonable likelihood that the Plan set forth below will benefit Class B and
its shareholders;
NOW, THEREFORE, in consideration of the foregoing, the Trust
hereby adopts this Plan in accordance with Rule 12b-1 under the Act on the
following terms and conditions:
1. The Trust may incur expenses primarily intended to
result in the sale of Class B shares issued by the Trust in an
amount not to exceed .75% per annum of the average daily net
assets of the outstanding shares of the particular Class B shares
of the Trust. Such amount shall be calculated and accrued daily
and paid monthly to the Distributor or its assignees. Such
<PAGE>
expenses may include, without limitation, expenses for the preparation,
printing, mailing and distribution or publication of advertising, of sales
literature, and of prospectuses and statements of additional information and
annual and interim reports for the particular Class B shares, including
prospectuses and statements of additional information and annual and interim
reports for other than existing Class B shareholders; and for periodic
payments to the Distributor for distribution or sales support activities. Such
expenses (except for the preparing, printing and distributing of the Trust's
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders) shall be included for purposes
of calculating the .75% per annum limitation, provided, that if any such costs
are not expenses primarily intended to result in the sale of Class B shares
issued by the Trust, they shall not be included in such limitation.
2. The reimbursement of expenses set forth in paragraph 1
above, shall be in consideration of the services relating to Class B shares to
be provided pursuant to the Distribution Agreement to be entered into between
the Trust and the Distributor.
3. The particular Class B of the Trust shall pay all costs and
expenses in connection with implementing and operating this Plan, which costs
(other than costs associated with obtaining the approvals set forth in
paragraphs 4, 5, 6 and 7) shall be included for purposes of calculating the
.75% per annum limitation set forth in paragraph 1.
4. This Plan shall become effective as of the effective date of
the reorganization of the Prairie Funds and the Trust together with any
related agreements, following approval by (i) the Trust's Board and (ii) those
trustees who are not "interested persons" of the Trust (as defined in the Act)
and have no direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on this Plan and such
related agreements.
5. This Plan shall continue in effect with respect to a Class B
until June 30, 1997 and thereafter from year to year so long as such
continuance is specifically approved by the trustees at least annually in the
manner provided in paragraph 4 hereof.
6. In each year that the Plan remains in effect, any person
authorized to direct the disposition of monies paid or payable by the Trust
pursuant to the Plan or any related agreement shall prepare and furnish to the
trustees, and the trustees
-2-
<PAGE>
shall review, at least quarterly, written reports, complying with the
requirements of Rule 12b-1 under the Act, of the amounts expended under the
Plan and purposes for which such expenditures were made.
7. The Plan may be terminated at any time with respect to any
Class B by a majority vote of the Qualified Trustees or by vote of a majority
of the outstanding voting securities of such Class B.
8. The Plan may not be amended in order to increase materially
the amount of distribution expenses provided for in paragraph 1 hereof unless
such amendment is approved by a vote of at least a "majority" (as defined in
the Act) of the outstanding shares of the affected Class B, and no material
amendment to the Plan shall be made unless approved by the trustees in the
manner provided for approval and annual renewal in paragraphs 5 and 6 hereof.
9. While this Plan is in effect, the selection and nomination
of trustees who are not "interested persons" of the Trust (as defined in the
Act) shall be committed to the discretion of the trustees then in office who
are not "interested persons" of the Trust.
10. Payments to the Distributor are subject to compliance by
the Distributor with the terms of the Distribution Agreement between the
Distributor and the Trust.
11. Any distribution agreement shall provide that (i) payments
to be made by the Trust to the Distributor pursuant to the Plan as
reimbursement of expenses shall be for direct expenses of the Distributor
authorized to be incurred by the Trust pursuant to paragraph 1 of this Plan,
(ii) upon termination of the Plan, the benefits inuring to the Distributor
shall immediately cease, and (iii) expenses of the Distributor under the Plan
in any fiscal year of the Trust which cannot be paid by the Trust because
payment of such expenses would cause the Trust to exceed the limitation set
forth in paragraph 1 of this Plan during such fiscal year, shall not be
payable to the Distributor in any succeeding fiscal year of the Trust.
-3-
<PAGE>
12. The Trust shall preserve copies of this Plan and any
related agreements and all reports made pursuant to paragraph 6 hereof, for a
period of not less than six (6) years from the date of this Plan, any
agreement or any report, as the case may be, the first two years in an easily
accessible place.
As adopted by the Board of Trustees on March 18, 1996.
-4-
<PAGE>
SCHEDULE 1
MONEY MARKET FUND
GROWTH FUND
INTERNATIONAL EQUITY FUND
EQUITY INDEX FUND
GROWTH AND VALUE FUND
INTRINSIC VALUE FUND
MID-CAP OPPORTUNITY FUND
EQUITY INCOME FUND
SMALL-CAP OPPORTUNITY FUND
BOND FUND
SHORT BOND FUND
MICHIGAN MUNICIPAL BOND FUND
INTERMEDIATE MUNICIPAL BOND FUND
MUNICIPAL BOND FUND
INTERMEDIATE BOND FUND
INCOME FUND
INTERNATIONAL BOND FUND
MANAGED ASSETS BALANCED FUND
MANAGED ASSETS CONSERVATIVE FUND
MANAGED ASSETS GROWTH FUND
INTERNATIONAL MAJOR MARKETS FUND
-5-
Exhibit 18(a)
April 15, 1996
THE WOODWARD FUNDS
(the "Trust")
Rule 18f-3 Plan
A. INTRODUCTION
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") promulgated Rule 18f-3 under the Investment Company Act of 1940,
as amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution structure without the need to obtain an exemptive
order under Section 18 of the 1940 Act. Currently, the Trust does not operate
a multi-class distribution structure although the Trust obtained an exemptive
order in 1994 allowing it to set up such a structure. However, there are
advantages to operating a multi-class system under Rule 18f-3 rather than
under the exemptive order.
Rule 18f-3, which became effective on April 3, 1995, requires an
investment company to file with the Commission, a written plan specifying all
of the differences among the classes, including the various services offered
to shareholders, the different distribution arrangements for each class, the
methods for allocating expenses relating to those differences and any
conversion features or exchange privileges. This Plan, pursuant to Rule 18f-3
for operation of a multi-class system, shall become effective on April 15,
1996.
B. ATTRIBUTES OF CLASSES
The Trust shall initially offer two classes of shares as follows:
1. Class Designation: Fund shares shall be divided into Class
A and Class I shares (see Schedule A).
2. Differences in Services: The services offered to
shareholders of each Class shall be substantially the same,
except that:
a. Right of Accumulation
Class A shares of load portfolios only.
b. Letter of Intent
Class A shares of load portfolios only.
c. Exchange Privilege
Class A shares only.
1
<PAGE>
d. Dividend Reinvestment Privilege
Class A shares only.
e. Automatic Investment Plan
Class A shares only.
f. Check Redemption Privilege
Class A shares of the money market funds only.
3. Differences in Distribution Arrangements:
a. Class A shares: Class A shares shall be available for
purchase through financial institutions such as banks,
brokers and dealers.
Class A shares of each Fund, other than the money market funds
and the Equity Index Fund, shall be offered with a front-end
sales charge. The amount of the sales charge to the Class A
shares of such Funds is set forth on Schedule B hereto.
Class A shares shall also be subject to a fee payable pursuant
to a Shareholders Services Plan which shall not initially
exceed .25% (on an annual basis) of the average daily net
assets.
Services provided under the Shareholder Services Plan adopted
for the class may include (i) establishing and maintaining
accounts and records for customers who invest in Class A
shares; (ii) assisting customers in processing purchase,
exchange and redemption requests; and (iii) responding to
customer inquiries concerning their investments.
b. Class I shares: Class I shares shall be available to
NBD and its affiliated and correspondent banks acting
on behalf of their respective customers.
Class I shares of each Fund shall be offered at net asset value
with no front-end sales charge. Class I shares shall not be
subject to a fee pursuant to a Shareholder Services Plan.
4. Expense Allocation: The fees under the Shareholder Services
Plan shall be allocated, to the extent practicable, on a
Class-by-Class basis.
Any changes in expense allocations shall be reviewed and approved by a
vote of the Board of Trustees including a majority of the independent
Trustees.
2
<PAGE>
5. Exchange Privileges: Shares of a Class shall be
exchangeable only for shares of the same Class of other
investment companies advised by NBD Bank or its affiliates.
6. Methodology for Allocating Expenses between Classes:
On a daily basis, expenses are attributable to each class of shares
depending on the nature of the expenditures. These fall into three categories:
a. Expenses incurred by the Company (e.g. trustees' fees,
audit fees, etc.) not attributable to a particular
Portfolio or a particular class thereof ("Company
Expenses");
b. Expenses incurred by a Portfolio but not attributable
to any particular class of the Portfolio's shares (e.g.
investment advisory fees) ("Portfolio Expenses"); and
c. Expenses specifically attributable to the particular
class ("Class Expenses").
In addition, fees payable pursuant to the Shareholder Services Plan
adopted for a class will be assessed to the class.
Prior to determining the day's NAV or dividends/distributions, the
following expense items must be calculated as indicated:
a. Company Expenses -- Determine daily accrual from expense budget
and allocate to each class of shares based upon the relative
net assets of each class of shares.
b. Portfolio Expenses -- Using the beginning of the day's net
assets for each class of shares, calculate the current day's
accrual for each class. The effective rate used will be the
same for all classes and is based on the total net assets of
the Portfolio.
c. Class Expenses -- Determine daily accrual from expense budget
and allocate to each class of shares based upon the relative
net assets of each class of shares.
d. Shareholder Services Fees -- Using the beginning of
the day's net assets for each class of shares,
calculate the current day's accrual.
Dated: March 18, 1996
3
<PAGE>
SCHEDULE A
The Woodward Funds
Classes A and I:
- ----------------
Capital Growth Fund
International Equity
Fund Equity Index Fund
Growth/Value Fund
Intrinsic Value Fund
Opportunity Fund Bond
Fund Short Bond Fund
Intermediate Bond Fund
Municipal Bond Fund
Michigan Municipal Bond
Fund Balanced Fund
Money Market Fund
Treasury Money Market
Fund Government Fund
Tax-Exempt Money Market Fund
Michigan Tax-Exempt Money Market Fund
4
<PAGE>
SCHEDULE B
Front-End Sales Charge:
Class A shares - The public offering price for Class A
shares shall be the net asset value per share of
the Class plus a sales load as shown below:
1. Capital Growth Fund
International Equity Fund
Growth/Value Fund
Intrinsic Value Fund
Opportunity Fund
Balanced Fund
<TABLE>
<CAPTION>
Total Sales Load
-------------------------------
As a % of As a % of
Offering Price Net Asset
Per Share Value Per
Share
-------------- ---------
<S> <C> <C>
Amount of Transaction
Less than $50,000 ........................ 5.00 5.26
$50,000 to less than $100,000............. 4.50 4.71
$100,000 to less than $250,000 ........... 3.50 3.63
$250,000 to less than $500,000 .......... 2.50 2.56
$500,000 to less than $1,000,000.......... 2.00 2.04
$1,000,000 and above ..................... none none
</TABLE>
2. Municipal Bond Fund
Michigan Municipal Bond Fund
Intermediate Bond
Bond Fund
<TABLE>
<CAPTION>
Total Sales Load
-------------------------------
As a % of As a % of
Offering Price Net Asset
Per Share Value Per
Share
-------------- ---------
<S> <C> <C>
Amount of Transaction
Less than $50,000 ........................ 4.75 4.99
$50,000 to less than $100,000 ............ 4.25 4.44
$100,000 to less than $250,000 ........... 3.50 3.63
$250,000 to less than $500,000 ........... 2.50 2.56
$500,000 to less than $1,000,000 ......... 2.00 2.04
$1,000,000 and above ..................... none none
</TABLE>
5
<PAGE>
3. Short Bond Fund
<TABLE>
<CAPTION>
Total Sales Load
-------------------------------
As a % of As a % of
Offering Price Net Asset
Per Share Value Per
Share
-------------- ---------
<S> <C> <C>
Amount of Transaction
Less than $100,000 ....................... 3.00 3.09
$100,000 to less than $250,000 ........... 2.25 2.30
$250,000 to less than $500,000 ........... 1.75 1.78
$500,000 to less than $1,000,000 ......... 1.25 1.27
$1,000,000 and above ..................... none none
</TABLE>
6
Exhibit 18(b)
Post-Reorganization
-------------------
THE WOODWARD FUNDS
(the "Trust")
Amended Rule 18f-3 Plan
(the "Plan")
A. INTRODUCTION
On February 23, 1995, the Securities and Exchange Commission (the
"Commission") adopted Rule 18f-3 under the Investment Company Act of 1940, as
amended (the "1940 Act"), which permits the creation and operation of a
multi-class distribution structure without the need to obtain an exemptive
order under Section 18 of the 1940 Act. Rule 18f-3, which became effective on
April 3, 1995, requires an investment company to file with the Commission, a
written plan specifying all of the differences among the classes, including
the various services offered to shareholders, the different distribution
arrangements for each class, the methods for allocating expenses relating to
those differences and any conversion features or exchange privileges (an
"18f-3 Plan").
On April 15, 1996, the Board authorized the Trust to operate a
multi-class distribution structure in accordance with Rule 18f-3. In
connection with the proposed reorganization with Prairie Funds, Prairie
Intermediate Bond Fund, Prairie Institutional Funds and Prairie Municipal Bond
Fund, Inc. on or about July 1, 1996 (the "Reorganization"), the Trust desires
to make certain changes to the multi-class distribution structure, as adopted.
The Trust intends to operate its multi-class distribution structure in
accordance with this Amended 18f-3 Plan beginning on the effective date of the
Reorganization.
B. ATTRIBUTES OF CLASSES
Under this Plan, the Trust is authorized to offer those classes of
shares as specified on Schedule A attached hereto.
In general, shares of each class will be identical except for
different expense variables (which may result in different returns for the
classes), certain related rights and certain shareholder services. More
particularly, each class of shares shall represent interests in the same
portfolio of investments of the particular Fund, and shall be identical in all
respects, except for: (a) the impact of expenses assessed to a class pursuant
to (i) a shareholder services plan ("Shareholder Administrative Services
Plan") and/or a distribution plan ("12b-1 Plan") adopted for that class and
(ii) any other incremental expenses identified from time to time that should
be properly
1
<PAGE>
allocated to one class so long as any changes in expense allocations are
reviewed and approved by a vote of the Board of Trustees of the Trust,
including a majority of the independent Trustees; (b) the fact that a class
shall vote separately on any matter submitted to shareholders that pertains to
(i) the Shareholder Administrative Services Plan or 12b-1 Plan adopted for
that class and (ii) any class expense borne by that class; (c) different
exchange privileges and conversion features; (d) the designation of each
class; and (e) any different shareholder services relating to a class.
C. DISTRIBUTION AND SERVICING ARRANGEMENTS
Class A shares: Class A shares shall be available for purchase by the
public through financial institutions such as banks, brokers and dealers.
Class A shares of each Fund, other than the Money Market Funds, shall be
subject to a front-end sales charge which initially shall not exceed 5.0% of
the offering price of Class A shares of each Equity and Managed Assets Fund
(3.0% with respect to the Equity Index Fund) and 4.50% of the offering price
of Class A shares of each Bond Fund (3.0% with respect to the Short Bond,
Intermediate Bond, Income and Intermediate Municipal Bond Funds). Class A
shares initially also will be subject to a fee payable pursuant to a
Shareholder Administrative Services Plan adopted for that class which will not
exceed .25% (on an annual basis) of the average daily net asset value of Class
A shares of each particular Fund beneficially owned by customers of
shareholder organizations providing such shareholder services.
Services provided under the Shareholder Administrative Services Plan
adopted for the class may include (i) aggregating and processing purchase and
redemption requests; (ii) providing a service that invests the assets of
Client accounts pursuant to specific or pre-authorized instructions; (iii)
processing dividend payments; (iv) providing information periodically to
Clients showing their positions; (v) arranging for bank wires; (vi) responding
to Client inquiries; (vii) providing subaccounting or the information
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from the Trust (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax
notices) to Clients; and (ix) providing such other similar services as may
reasonably be requested to the extent permitted under applicable statutes,
rules or regulations.
Class S shares: Class S shares shall be available for purchase by the
public through financial institutions such as banks, brokers and dealers.
Class S shares of each Fund will not be subject to a front-end sales charge.
Class S shares of the Institutional Money Market Funds also will initially be
subject to a fee payable pursuant to a 12b-1 Plan adopted for that class
2
<PAGE>
which will not exceed .25% of the average daily net assets attributable to the
outstanding Class S Shares of a Fund.
Services provided under the 12b-1 Plan adopted for Class S of the
Institutional Money Market Funds may include (i) advertising, marketing and
distributing such shares and/or (ii) the provision of shareholder and
administrative services for the beneficial owners of such shares.
Class B shares: Class B shares shall be available for purchase by the
public through financial institutions such as banks, brokers and dealers.
Class B shares of each Fund initially will not be subject to a front-end sales
charge. Class B shares will initially be subject to a contingent deferred
sales charge ("CDSC") which will be payable on certain share redemptions at a
rate which initially will not exceed 5% (3% with respect to the Short Bond,
Intermediate Bond, Income and Intermediate Municipal Bond Funds) of the lower
of (1) the net asset value of the redeemed shares or (2) the original purchase
price of the redeemed shares. Class B shares also will initially be subject to
a fee payable pursuant to a 12b-1 Plan adopted for that class which initially
will not exceed .75% (on an annual basis) of the daily net asset value of the
outstanding Class B shares.
Services provided under the 12b-1 Plan adopted for the class may
include (i) soliciting orders for the sale of shares; (ii) preparing or
reviewing, providing advice with respect to, and filing with the federal and
state agencies or other organizations as required by federal, state, and other
applicable laws and regulations, all sales literature (advertisements,
brochures and shareholder communications); and (iii) providing such other
similar services as may reasonably be requested.
Class B shares shall also be subject to a fee payable pursuant to a
Shareholder Administrative Services Plan adopted for that class which shall
not initially exceed .25% (on an annual basis) of the average daily net asset
value of Class B shares of each particular Fund beneficially owned by
customers of shareholder organizations providing such shareholder services.
Services provided under the Shareholder Administrative Services Plan
adopted for the class may include (i) aggregating and processing purchase and
redemption requests; (ii) providing a service that invests the assets of
Client accounts pursuant to specific or pre-authorized instructions; (iii)
processing dividend payments; (iv) providing information periodically to
Clients showing their positions; (v) arranging for bank wires; (vi) responding
to Client inquiries; (vii) providing subaccounting or the information
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from the Trust (such as proxies, shareholder reports, annual
and
3
<PAGE>
semi-annual financial statements and dividend, distribution and tax notices)
to Clients; and (ix) providing such other similar services as may reasonably
be requested to the extent permitted under applicable statutes, rules or
regulations.
Class I shares: Class I shares shall be available to First Chicago NBD
Corporation and its affiliated and correspondent banks acting on behalf of
their respective customers ("Fiduciary Accounts"), to qualified plans with
plan assets of at least $100 million invested in shares of the Funds of the
Trust set forth on Schedule A or other investment companies or accounts
advised by the Trust's investment adviser, or to shareholders of the Money
Market and Institutional Money Market Funds set forth on Schedule A with
accounts of at least $1 million.
Class I shares of each Fund initially shall not be subject to a
front-end sales charge or a CDSC. Class I shares initially shall not be
subject to a fee pursuant to a Shareholder Administrative Services Plan or
12b-1 Plan.
D. SHAREHOLDER SERVICES
1. Conversion Features: Class I shares held by investors
who after purchasing Class I shares withdraw from their
Fiduciary Accounts shall automatically convert to Class
A/S shares, based on the relative net asset value of
each such Class without the imposition of any sales
charge, fee or other charge upon the conversion of
shares. Such shares may be subject to an annual
service fee charged to Class A/S shares.
Class B shares shall automatically convert to Class A shares
approximately eight years (seven years in the case of the Short
Bond Fund) after the date of purchase based on the relative net
asset value of each such Class without the imposition of any
sales charge, fee or other charge upon the conversion of
shares. Such shares shall no longer be subject to fees under
the 12b-1 Plan. At that time, Class B shares that have been
acquired through the investment of dividends and distributions
("Dividend Shares") shall be converted in the proportion that a
shareholder's Class B shares (other than Dividend Shares)
converting to Class A shares bears to the total Class B shares
then held by the shareholder which were not acquired through
the reinvestment of dividends and distributions.
2. Exchange Privileges: Shares of Class A, Class S, Class
B and Class I may be exchangeable for shares of the
same Class of another Fund of the Trust or of other
investment companies advised by First Chicago NBD
4
<PAGE>
Corporation or its affiliates, based on relative net asset
values.
Shares of Funds purchased with or without a sales load may be
exchanged without a sales load for shares of other Funds sold
without a sales load.
Shares of Funds purchased without a sales load may be exchanged
for shares of other Funds sold with a sales load, and the
applicable sales load will be deducted.
Shares of Funds purchased with a sales load, shares of Funds
acquired by a previous exchange from shares purchased with a
sales load and additional shares acquired through reinvestment
of dividends or distributions of any such Funds (collectively
referred to herein as "Purchased Shares") may be exchanged for
shares of other Funds sold with a sales load (referred to
herein as "Offered Shares"), provided that, if the sales load
applicable to the Offered Shares exceeds the maximum sales load
that could have been imposed in connection with the Purchased
Shares (at the time the Purchased Shares were acquired),
without giving effect to any reduced loads, the difference will
be deducted.
Shares of Funds subject to a CDSC that are exchanged for shares
of another Fund will be subject to the higher applicable CDSC
of the two Funds, and for purposes of calculating CDSC rates
and conversion periods, if any, will be deemed to have been
held since the date the shares being exchanged were initially
purchased.
Class B shares of qualified plans under Section 401(k) of the
Internal Revenue Code with at least $1 million or 200 eligible
lives may be exchanged for Class A shares.
3. Automatic Investment Program: Investors may purchase
shares of each Fund with an automatic investment plan
whereby a shareholder may purchase shares at regular
intervals.
E. Methodology for Allocating Expenses Among Classes:
Expenses will be allocated among each class in accordance with
Rule 18f-3.
Dated: March 18, 1996
5
<PAGE>
SCHEDULE A
The Woodward Funds
18f-3 Plan
The Trust is authorized to offer the following Classes of shares in the
portfolios:
Classes A, B and I in the following Non-Money Market Funds:
- -----------------------------------------------------------
Equity Funds
- ------------
Growth Fund
International Equity Fund
Equity Index Fund
Growth and Value Fund
Intrinsic Value Fund
Mid-Cap Opportunity Fund
Equity Income Fund
Small-Cap Opportunity Fund
International Major Markets Fund
Managed Assets Funds
- --------------------
Managed Assets Balanced Fund
Managed Assets Conservative Fund
Managed Assets Growth Fund
Bond Funds
- ----------
Bond Fund
Short Bond Fund
Intermediate Bond Fund
Municipal Bond Fund
Michigan Municipal Bond Fund
Intermediate Municipal Bond Fund
Income Fund
International Bond Fund
Classes A and I in the following Money Market Funds:
- ----------------------------------------------------
Money Market Fund
Treasury Money Market Fund
Municipal Money Market Fund
Michigan Municipal Money Market Fund
Classes S and I in the following Institutional Money Market Funds:
Cash Management Fund
U.S. Government Securities Cash Management Fund
Treasury Prime Cash Management Fund
6
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000814067
<NAME> The Woodward Funds
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<NAME> Woodward Government Fund
<NUMBER> 2
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<PERIOD-END> DEC-31-1995
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<INVESTMENTS-AT-COST> 469,489
<INVESTMENTS-AT-VALUE> 469,643
<RECEIVABLES> 5,112
<ASSETS-OTHER> 42
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 474,797
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 420
<TOTAL-LIABILITIES> 420
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 474,377
<SHARES-COMMON-STOCK> 474,377
<SHARES-COMMON-PRIOR> 421,208
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 474,377
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,262
<OTHER-INCOME> 0
<EXPENSES-NET> 2,259
<NET-INVESTMENT-INCOME> 24,003
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 24,003
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<NUMBER-OF-SHARES-REDEEMED> 7,818,563
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<GROSS-EXPENSE> 2,259
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<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
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<PER-SHARE-NAV-END> 1.00
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NAME> Woodward Tax Exempt Money Market Fund
<NUMBER> 3
<MULTIPLIER> 1
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<S> <C>
<PERIOD-START> JAN-01-1995
<PERIOD-TYPE> YEAR
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<PERIOD-END> DEC-31-1995
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<INVESTMENTS-AT-COST> 566,354
<INVESTMENTS-AT-VALUE> 564,592
<RECEIVABLES> 5,204
<ASSETS-OTHER> 66
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 5,000
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<OTHER-ITEMS-LIABILITIES> 448
<TOTAL-LIABILITIES> 5,448
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<PAID-IN-CAPITAL-COMMON> 564,413
<SHARES-COMMON-STOCK> 564,413
<SHARES-COMMON-PRIOR> 550,736
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 564,413
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21,196
<OTHER-INCOME> 0
<EXPENSES-NET> 2,895
<NET-INVESTMENT-INCOME> 18,301
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 18,301
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,777,275
<NUMBER-OF-SHARES-REDEEMED> 2,766,019
<SHARES-REINVESTED> 2,422
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,458
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,895
<AVERAGE-NET-ASSETS> 546,097
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.03
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<SERIES>
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<NUMBER> 8
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<S> <C>
<PERIOD-START> JAN-01-1995
<PERIOD-TYPE> YEAR
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<INVESTMENTS-AT-COST> 598,057
<INVESTMENTS-AT-VALUE> 738,017
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 739,532
<PAYABLE-FOR-SECURITIES> 1,110
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,255
<TOTAL-LIABILITIES> 2,365
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 590,840
<SHARES-COMMON-STOCK> 55,997
<SHARES-COMMON-PRIOR> 53,537
<ACCUMULATED-NII-CURRENT> 41
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,326
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 139,960
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<INTEREST-INCOME> 2,811
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<ACCUMULATED-NII-PRIOR> 614
<ACCUMULATED-GAINS-PRIOR> (490)
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,513
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<PER-SHARE-NII> 0.21
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.16
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<S> <C>
<PERIOD-START> JAN-01-1995
<PERIOD-TYPE> YEAR
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<PERIOD-END> DEC-31-1995
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<INVESTMENTS-AT-COST> 544,177
<INVESTMENTS-AT-VALUE> 643,023
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<TOTAL-ASSETS> 651,768
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 816
<TOTAL-LIABILITIES> 816
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 550,372
<SHARES-COMMON-STOCK> 42,960
<SHARES-COMMON-PRIOR> 39,355
<ACCUMULATED-NII-CURRENT> 1
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,734
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 98,845
<NET-ASSETS> 650,952
<DIVIDEND-INCOME> 5,941
<INTEREST-INCOME> 1,558
<OTHER-INCOME> 0
<EXPENSES-NET> 5,314
<NET-INVESTMENT-INCOME> 2,185
<REALIZED-GAINS-CURRENT> 33,999
<APPREC-INCREASE-CURRENT> 70,828
<NET-CHANGE-FROM-OPS> 107,012
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,384
<DISTRIBUTIONS-OF-GAINS> 31,302
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,375
<NUMBER-OF-SHARES-REDEEMED> 7,970
<SHARES-REINVESTED> 2,200
<NET-CHANGE-IN-ASSETS> 52,627
<ACCUMULATED-NII-PRIOR> 200
<ACCUMULATED-GAINS-PRIOR> (963)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,491
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,314
<AVERAGE-NET-ASSETS> 596,039
<PER-SHARE-NAV-BEGIN> 13.34
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 2.57
<PER-SHARE-DIVIDEND> 0.06
<PER-SHARE-DISTRIBUTIONS> 0.76
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.15
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0.
<AVG-DEBT-PER-SHARE> 0
</TABLE>
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<ARTICLE> 6
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<SERIES>
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<NUMBER> 10
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-START> JAN-01-1995
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 231,448
<INVESTMENTS-AT-VALUE> 258,251
<RECEIVABLES> 843
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 259,102
<PAYABLE-FOR-SECURITIES> 2,639
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 578
<TOTAL-LIABILITIES> 3,217
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 226,564
<SHARES-COMMON-STOCK> 21,525
<SHARES-COMMON-PRIOR> 21,003
<ACCUMULATED-NII-CURRENT> 110
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,408
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26,803
<NET-ASSETS> 255,885
<DIVIDEND-INCOME> 6,150
<INTEREST-INCOME> 2,056
<OTHER-INCOME> 0
<EXPENSES-NET> 2,194
<NET-INVESTMENT-INCOME> 6,012
<REALIZED-GAINS-CURRENT> 18,391
<APPREC-INCREASE-CURRENT> 28,180
<NET-CHANGE-FROM-OPS> 52,583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,247
<DISTRIBUTIONS-OF-GAINS> 16,472
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,432
<NUMBER-OF-SHARES-REDEEMED> 4,688
<SHARES-REINVESTED> 1,778
<NET-CHANGE-IN-ASSETS> 5,993
<ACCUMULATED-NII-PRIOR> 346
<ACCUMULATED-GAINS-PRIOR> 488
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,818
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,194
<AVERAGE-NET-ASSETS> 241,410
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<TABLE> <S> <C>
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<NAME> Woodward Funds
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<NAME> Intermediate Bond Fund
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<NAME> Woodward Funds
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<NAME> Woodward Bond Fund
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
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<NAME> Michigan Tax-Exempt Money Market
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
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<NAME> Equity Index
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
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<NAME> Treasury Money Market Fund
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
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<NAME> Woodward Municipal Bond Fund
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
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<NAME> Woodward Michigan Bond Fund
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
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<NAME> Woodward Balanced Fund
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<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<CIK> 0000814067
<NAME> Woodward Funds
<SERIES>
<NAME> Capital Growth Fund
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<S> <C>
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