As filed with the Securities and Exchange Commission on April 10, 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. 29
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)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 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.
<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 with
respect to such shares for the fiscal year ended December 31, 1995 was filed
on February 27, 1996.
This Post-Effective Amendment is being filed to add 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 to the Trust's
Registration Statement. The Prospectuses and Statements of Additional
Information for the Woodward Money Market, Government, Treasury Money Market,
Tax-Exempt Money Market, Michigan Tax-Exempt Money Market, Growth/Value,
Opportunity, Intrinsic Value, Capital Growth, International Equity, Equity
Index, Intermediate Bond, Bond, Short Bond, Municipal Bond, Michigan Municipal
Bond, Balanced, Cash Management, Treasury Prime Cash Management and U. S.
Government Securities Cash Management Funds are not being filed in this Post-
Effective Amendment.
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series G, W, X, Y, Z, AA, BB and CC Representing Interests in the
Class A, Class B and Class I Shares of the Woodward Equity Income,
Small-Cap Opportunity, Intermediate Municipal Bond, Managed
Assets Conservative, Income, International Bond, Managed
Assets Growth and International Major Markets Funds, Respectively
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
1. Cover Page.......................................... Cover page
2. Synopsis............................................ Expense Table;
Highlights
3. Financial Highlights................................ Inapplicable
4. General Description of
Registrant.......................................... Cover Page;
Highlights;
Description of the
Funds; General
Information
5. Management of Registrant ........................... Management of the
Funds
5(a). Management's Discussion of
Fund's Performance.................................. Inapplicable
6. Capital Stock and Other
Securities.......................................... How to Buy Shares;
How to Redeem
Shares;
Shareholder
Services;
Distribution and
Shareholder
Services Plans;
Dividends and
Distributions;
Taxes; Management
of the Funds;
General
Information
7. Purchase of Securities
Being Offered....................................... How to Buy Shares;
Shareholder
Services;
Management of the
Funds;
Distribution and
Shareholder
Services Plans
8. Redemption or Repurchase............................ How to Redeem
Shares;
Shareholder
Services
9. Pending Legal Proceedings........................... Inapplicable
<PAGE>
PROSPECTUS __________, 1996
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THE WOODWARD FUNDS
c/o NBD Bank
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 eight investment portfolios (the "Funds"), divided
into four general fund types: Asset Allocation; Equity; Bond; and Municipal
Bond.
ASSET ALLOCATION FUNDS BOND FUNDS
The Managed Assets Conservative Fund The Income Fund
The Managed Assets Growth Fund The International Bond Fund
EQUITY FUNDS MUNICIPAL BOND FUND
The Equity Income Fund The Intermediate Municipal Bond Fund
The Small-Cap Opportunity Fund
The International Major Markets Fund
NBD Bank ("NBD") and First Chicago Investment Management
Company ("FCIMCO") serve as each Fund's investment advisers (collectively, the
"Investment Advisers"). The Investment Advisers have engaged ANB Investment
Management and Trust Company ("ANB-IMC") to serve as sub-investment adviser to
the International Major Markets Fund and to provide day-to-day management of
that Fund's investments.
BISYS Fund Services (the "Distributor" or "BISYS") serves as
each Fund's distributor.
By this Prospectus, Class A shares, Class B shares and Class I
shares of each Fund are being offered. Class A shares are subject to a sales
charge imposed at the time of purchase. Class B shares are subject to a
contingent deferred sales charge imposed on redemptions made within up to six
years of purchase and a 12b-1 distribution fee. Class A and Class B shares are
offered to any investor. Class I shares are offered without a sales charge and
are sold only to qualified trust, custody and/or agency account clients of
First Chicago NBD Corporation ("FCN"), The First National Bank of Chicago
("FNBC"), NBD, American National Bank and Trust Company ("ANB") or their
affiliates and to certain qualified plans or other programs and to
shareholders of the Trust's money market funds with accounts of at least $1
million.
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
<PAGE>
Securities and Exchange Commission (the "SEC") and is available upon request
and without charge by writing to the Trust 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.
Investors should recognize that the share price, yield and
investment return of each Fund fluctuate and are not guaranteed.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OF OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, FIRST NATIONAL
BANK OF CHICAGO, THEIR PARENT COMPANY OR THEIR 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 POSSIBLE 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.
<PAGE>
TABLE OF CONTENTS
HIGHLIGHTS.............................................................. 3
EXPENSE TABLE........................................................... 5
DESCRIPTION OF THE FUNDS................................................ 9
HOW TO BUY SHARES....................................................... 18
SHAREHOLDER SERVICES.................................................... 23
HOW TO REDEEM SHARES.................................................... 26
MANAGEMENT OF THE FUNDS................................................. 29
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS............................. 34
DIVIDENDS AND DISTRIBUTIONS............................................. 35
TAXES................................................................... 35
PERFORMANCE INFORMATION................................................. 37
GENERAL INFORMATION..................................................... 37
APPENDIX.................................................................A-1
<PAGE>
THE WOODWARD FUNDS
Asset Allocation Funds
These Funds will follow an asset allocation strategy by
investing in Equity Securities (as defined below), Debt Securities (as defined
below) and 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 of domestic and foreign issuers ("Cash
Equivalent Securities"). "High quality" money market instruments are money
market instruments which are rated at the time of purchase within the two
highest rating categories by a Rating Agency or which are unrated at such time
but are deemed by the Investment Advisers to be comparable in quality to
instruments that are so rated. Such investments may include obligations of
foreign banks and foreign branches of U.S. banks:
The Managed Assets Conservative Fund seeks to provide long-term
total return; capital appreciation is a secondary consideration.
The Managed Assets Growth Fund seeks to achieve long-term total
return; current income is a secondary consideration.
Equity Funds
These Funds will invest principally in common stocks, preferred
stocks and convertible securities, including those in the form of depositary
receipts, as well as warrants to purchase such securities (collectively,
"Equity Securities"):
The Equity Income Fund seeks to provide income; capital
appreciation and growth of earnings are secondary, but nonetheless important,
goals. In seeking to achieve its objective, this Fund will invest primarily in
income-producing Equity Securities of domestic issuers.
The Small-Cap Opportunity Fund seeks long-term capital
appreciation. In seeking to achieve its objective, this Fund will invest
primarily in Equity Securities of companies with small capitalizations.
The International Major Markets Fund seeks to achieve long-term
capital appreciation. In seeking to achieve its objective, this Fund will
invest primarily in Equity Securities of foreign issuers.
Bond Funds
These Funds will invest principally in a broad range of debt
securities ("Debt Securities"). Debt Securities in which the Bond Funds
normally invest include: (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; (vi) securities
representing interests in pools of assets; and (vii) 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:
<PAGE>
The Income Fund seeks to provide as high a level of current
income as is consistent with relative stability of principal. In seeking to
achieve its objective, this Fund will invest primarily in a portfolio of U.S.
dollar denominated investment grade Debt Securities of domestic and foreign
issuers which, under normal market conditions, will have a dollar-weighted
average maturity expected to range between 3 and 10 years.
The International Bond Fund seeks both long-term capital
appreciation and current income. In seeking to achieve its objective, the Fund
will invest primarily in investment grade Debt Securities of foreign issuers.
Municipal Bond Fund
This Fund will invest principally in obligations issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their respective political subdivisions, agencies
(including multi-state agencies), instrumentalities and authorities, the
interest from which is, in the opinion of bond counsel for the issuers, exempt
from regular federal income tax ("Municipal Obligations"):
The Intermediate Municipal Bond Fund seeks to provide as high a
level of current income exempt from federal income tax as is consistent with
relative stability of principal. In seeking to achieve its objective, this
Fund will invest primarily in a portfolio of investment grade Municipal
Obligations which, under normal conditions, will have a dollar-weighted
average maturity expected to range between 3 and 10 years.
-2-
<PAGE>
HIGHLIGHTS
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Each Fund's investment objective is set forth on page __ of
this Prospectus. The differences in objectives and policies among the Funds
determine the types of portfolio securities in which each Fund invests and can
be expected to affect each Fund's yield or rate of return and the degree of
risk to which each Fund is subject.
INVESTMENT ADVISERS
NBD and FCIMCO are the Investment Advisers to each of the
Funds. Each Fund has agreed to pay the Investment Advisers an annual fee as
set forth under "Management of the Funds." The Investment Adviser has engaged
ANB-IMC to serve as sub-investment adviser to the International Major Markets
Fund.
ALTERNATIVE PURCHASE METHODS
Each Fund offers Class A shares, Class B shares and Class I
shares. Each share represents an identical pro rata interest in a Fund's
investment portfolio.
Class A shares are sold at net asset value per share plus an
initial sales charge imposed at the time of purchase. The initial sales charge
may be reduced or waived for certain purchases. Class A shares of each Fund
are subject to a shareholder servicing fee.
Class B shares are sold at net asset value per share with no
initial sales charge at the time of purchase; as a result, the entire purchase
price is immediately invested in the Fund. Class B shares may be subject to a
contingent deferred sales charge ("CDSC") and are subject to a distribution
fee and shareholder servicing fee.
Class I shares are sold at net asset value with no sales charge
to qualified trust, custody and/or agency account clients of FNBC, ANB or
their affiliates and to certain qualified benefit plans or other programs and
to shareholder's of the Trust's money market funds with accounts of at least
$1 million.
See "How to Buy Shares" and "How to Redeem Shares."
HOW TO BUY SHARES
Orders for the purchase of Class A and Class B shares may be
placed through a number of institutions including the Investment Advisers,
FNBC, ANB and their affiliates, including First NBD Investment Services,
Inc. ("FNIS"), a registered broker-dealer, the Distributor and certain banks,
securities dealers and other industry professionals such as investment
advisers, accountants and estate planning firms (collectively, "Service
Agents").
Investors purchasing Class I shares through their Fiduciary
Accounts (as defined under How to Buy Shares-Alternative Purchase Options) at
the Investment Advisers, FCN, FNBC, ANB or their affiliates should contact
such entity directly for appropriate instructions, as well as for information
about conditions pertaining to the account and any related fees. Class I
shares may be purchased for a Fiduciary Account or
-3-
<PAGE>
Eligible Retirement Plan (as defined under How to Buy Shares-Alternative
Purchase Options) only by a custodian, trustee, investment manager or other
entity authorized to act on behalf of such Account or Plan.
The minimum initial investment is $1,000. All subsequent
investments must be at least $100.
See "How to Buy Shares."
SHAREHOLDER SERVICES
The Funds offer shareholders certain services and privileges
including: Exchange Privilege, Letter of Intent and Automatic Investment Plan.
Certain services and privileges may not be available through all Service
Agents.
See "Shareholder Services."
HOW TO REDEEM SHARES
Generally, investors should contact their representatives at
the Investment Advisers, FNBC, ANB or appropriate Service Agent for redemption
instructions. Investors who are not clients of the Investment Advisers, FNBC,
ANB or a Service Agent may redeem Fund shares by written request to the
transfer agent.
See "How to Redeem Shares."
-4-
<PAGE>
<TABLE>
<CAPTION>
EXPENSE TABLE
Class A Class B Class I
-------------------------------- ------------------- ---------
Short Bond
and all Other All All
Intermediate Bond Other Short Bond Other
Shareholder Transaction Expenses Bond Funds Funds Funds Fund Funds All Funds
- -------------------------------- ------------ ----- ----- ---------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge
Imposed on Purchases (as a
percentage of offering price 3.00% 4.50% 5.00% None None None
---- ---- ---- ---- ---- ----
Sales Charge on Reinvested
Dividends None None None None None None
---- ---- ---- ---- ---- ----
Maximum Deferred Sales
Charge Imposed On Redemptions
(as a percentage of the amount
subject to charge) None* None* None* 3.00% 5.00% None
---- ---- ---- ---- ---- ----
Redemption Fees None None None None None None
---- ---- ---- ---- ---- ----
Exchange Fees None None None None None None
---- ---- ---- ---- ---- ----
<FN>
* A contingent deferred sales charge of up to 1.00% may be assessed on
certain redemptions of Class A shares purchased without an initial
sales charge as part of an investment of $1 million or more.
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily net assets)
Class A Shares
Example
An investor would pay the
following expenses on a
$1,000 investment, assuming
(1) 5% annual return and (2)
redemption at the end of each
period:
Contractual Management Total
Management Fees 12b-1 Other Operating
Fees After Waivers Fees Expenses* Expenses* 1 Year 3 Years
----------- ------------- ----- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION
FUNDS:
Managed Assets 0.65% 0.55% None 0.70% 1.25% $ $
Conservative Fund
Managed Assets Growth 0.65% 0.54% None 0.31% 1.25% $ $
Fund
---- ---- ---- ---- ----- ---- ----
EQUITY FUNDS:
Equity Income Fund 0.50% 0.50% None 0.54% 1.04% $ $
Small-Cap Opportunity 0.70% 0.70% None 0.85% 1.55% $ $
Fund
International Major 0.80% 0.80% None 0.80% 1.60% $ $
Markets Fund
---- ---- ---- ---- ----- ---- ----
BOND FUNDS:
Income Fund 0.40% 0.40% None 0.50% 0.90% $ $
International Bond 0.70% 0.28% None 1.20% 1.48% $ $
Fund
---- ---- ---- ---- ----- ---- ----
MUNICIPAL BOND FUND:
Intermediate 0.40% 0.40% None 0.52% 0.92% $ $
Municipal Bond Fund
---- ---- ---- ---- ----- ---- ----
<FN>
* After expense reimbursements or fee waivers.
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Class B Shares
Example
An investor would pay the
following expenses on a
$1,000 investment, assuming
(1) 5% annual return and (2)
except where noted,
redemption at the end of
each time period:
Management
Contractual Fees Total
Management After 12b-1 Other Operating
Fees Waivers Fees Expenses* Expenses* 1 Year 3 Years
----------- ---------- ----- --------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION
FUNDS:
Managed Assets 0.65% 0.55% 0.75% 0.70% 2.00% $/$** $/$**
Conservative Fund
Managed Assets Growth 0.65% 0.54% 0.75% 0.31% 2.00% $/$** $/$**
Fund
---- ---- ---- ---- ---- --- ---
EQUITY FUNDS:
Equity Income Fund 0.50% 0.50% 0.75% 0.54% 1.79% $/$** $/$**
Small-Cap Opportunity 0.70% 0.70% 0.75% 0.85% 2.30% $/$** $/$**
Fund
International Major 0.80% 0.80% 0.75% 0.80% 2.35% $/$** $/$**
Markets Fund
---- ---- ---- ---- ---- --- ---
BOND FUNDS:
Income Fund 0.40% 0.40% 0.75% 0.50% 1.65% $/$** $/$**
International Bond 0.70% 0.28% 0.75% 1.20% 2.23% $/$** $/$**
Fund
---- ---- ---- ---- ---- --- ---
MUNICIPAL BOND FUNDS:
Intermediate 0.40% 0.40% 0.75% 0.52% 1.67% $/$** $/$**
Municipal Bond Fund
==== ==== ==== ==== ==== === ===
<FN>
* After expense reimbursements or fee waivers.
** Assuming no redemption of Class B shares.
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Class I Shares
Example
An investor would pay
the following
expenses on a $1,000
investment, assuming (1)
5% annual return and (2)
redemption at the end of
each period:
Contractual Management Total
Management Fees After 12b-1 Other Operating
Fees Waivers Fees Expenses* Expenses* 1 Year 3 Years
----------- ---------- ----- -------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET ALLOCATION FUNDS:
Managed Assets 0.65% 0.55% None 0.30% 0.85% $ $
Conservative Fund
Managed Assets Growth 0.65% 0.54% None 0.30% 0.84% $ $
Fund
---- ---- ---- ---- ---- ---- ----
EQUITY FUNDS:
Equity Income Fund 0.50% 0.50% None 0.20% 0.70% $ $
Small-Cap Opportunity 0.70% 0.70% None 0.24% 0.94% $ $
Fund
International Major 0.80% 0.80% None 0.28% 1.08% $ $
Markets Fund
---- ---- ---- ---- ---- ---- ----
BOND FUNDS:
Income Fund 0.40% 0.40% None 0.21% 0.61% $ $
International Bond Fund 0.70% 0.28% None 0.55% 0.83% $ $
---- ---- ---- ---- ---- ---- ----
MUNICIPAL BOND FUNDS:
Intermediate Municipal 0.40% 0.40% None 0.20% 0.60% $ $
Bond Fund
---- ---- ---- ---- ---- ---- ----
<FN>
* After expense reimbursements or fee waivers.
The amounts listed in the examples should not be considered as
representative of future expenses and actual expenses may be greater
or less than those indicated. Moreover, while each example assumes a
5% annual return, a Fund's actual performance may result in an actual
return greater or less than 5%.
The purpose of the foregoing tables is to assist investors in
understanding the various costs and expenses that an investor in a
Fund will bear, directly or indirectly, the payment of which will
reduce investors' return on an annual basis. Long-term investors in
Class B shares of a Fund could pay more in 12b-1 fees than the
economic equivalent of paying a front-end sales charge. The Investment
Advisers, FNBC, ANB and their affiliates and certain Service Agents
may charge their clients fees which are not reflected in the foregoing
table in connection with an investment in the Funds.
See "How to Buy Shares," "Management of the Funds" and "Distribution
Plans and Shareholder Services Plans." Other Expenses and Total
Operating Expenses for each Fund are based on estimated amounts for
the current fiscal year. With respect to each Fund, the Investment
Advisers have undertaken to _______________________.
</TABLE>
-8-
<PAGE>
DESCRIPTION OF THE FUNDS
General
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 27 investment portfolios, each of which
consists of a separate pool of assets with separate investment objectives and
policies. This prospectus, however, contains only eight portfolios. Under the
1940 Act, each Fund is classified as a diversified investment portfolio (the
"Diversified Funds") except for the International Major Markets, International
Bond and Intermediate Municipal Bond Funds (the "Non-Diversified Funds"),
which are each classified as a non-diversified portfolio.
Investment Objectives and Policies
Each Fund's investment objective is set forth on page of this
Prospectus. The investment objective of a Fund may not be changed without
approval of the holders of a majority (as defined in the 1940 Act) of such
Fund's outstanding voting securities. See "General Information." Except as
noted below under "Investment Limitations," a Fund's investment policies may
be changed without a vote of shareholders. There can be no assurance that a
Fund will achieve its objective.
The following section should be read in conjunction with
"Certain Portfolio Securities" in the Appendix.
ASSET ALLOCATION FUNDS
Each Asset Allocation Fund follows an asset allocation strategy
by investing in Equity Securities, Debt Securities and Cash Equivalent
Securities of domestic and foreign issuers. For each Asset Allocation Fund,
the asset classes, market sectors, securities and portfolio strategies
selected will be those that the Investment Advisers believe prudent and offer
the greatest potential for achieving the relevant Asset Allocation Fund's
investment objective. The Investment Advisers have broad latitude in selecting
investments and portfolio strategies. See "Risk Factors-Foreign Securities"
below.
The equity portion of each of the Asset Allocation Fund's
investments will be invested primarily in publicly traded stocks of companies
incorporated in the United States, although up to 25% of its total assets may
be invested in the Equity Securities of foreign issuers, either directly or
through Depository Receipts.
The Asset Allocation Funds invest the fixed income portion of
their portfolios of investments in a broad range of Debt Securities rated
"investment grade" or higher at the time of purchase, (i.e., no lower than Baa
by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's
Ratings Group ("S&P"), Fitch Investors Service, L.P. ("Fitch") or Duff &
Phelps Credit Rating Co. ("Duff") (each a "Rating Agency")) or unrated
investments deemed by the Investment Advisers to be comparable in quality at
the time of purchase to instruments that are so rated. Most Debt Securities
acquired by an Assets Allocation Fund will be issued by companies or
governmental entities located within the United States. Up to 15% of the total
assets of a Fund may, however, be invested in dollar-denominated debt
obligations (including Cash Equivalent Securities) of foreign issuers.
An Asset Allocation Fund may also invest its cash balances in
securities issued by other investment companies. As a shareholder of another
investment company, an Asset Allocation Fund 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 an Asset Allocation Fund bears directly in connection
with its own operations.
The Asset Allocation Funds may also enter into futures
contracts and related options and utilize options as more fully described
below.
The following table sets forth for each Asset Allocation Fund
the asset classes, benchmark percentages and asset class strategy ranges
within which the Investment Advisers generally intend to manage the Fund's
assets:
-9-
<PAGE>
<TABLE>
<CAPTION>
Managed Assets Managed Assets
Conservative Fund Growth Fund
----------------------- ----------------------
Benchmark Strategy Benchmark Strategy
Asset Class Percentage Range Percentage Range
- ----------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Equity 25% to 65% to
Securities: 40% 55% 80% 95%
-- ------ -- ------
Debt
Securities &
Cash
Equivalent 45% to 5% to
Securities: 60% 75% 20% 35%
-- ------ -- ------
</TABLE>
Compliance with these percentage requirements may limit the
ability of a Fund to maximize total return. The actual percentage of assets
invested in Equity Securities, Debt Securities and Cash Equivalent Securities
will vary from time to time and may be outside the strategy range, depending
on the judgment of the Investment Advisers as to general market and economic
conditions, trends in yields, interest rates and changes in fiscal and
monetary developments.
Each Asset Allocation Fund also may engage in futures and
options transactions and other derivative securities transactions, such as
interest rate and equity index swaps, foreign exchange transactions and
lending portfolio securities, each of which involves risk. Each Asset
Allocation Fund may also invest in foreign currency transactions and options
on foreign currency transactions and may invest in currency futures and
options on currency futures. See "Risk Factors" below and "Certain Portfolio
Securities" in the Appendix.
EQUITY FUNDS
The Equity Income and Small-Cap Opportunity Funds invest
primarily in publicly traded common stocks of companies incorporated in the
United States, although each such Fund may also invest up to 25% of its total
assets in the securities of foreign issuers, either directly or through
Depository Receipts. The International Major Markets Fund invests primarily in
Equity Securities of foreign issuers, either directly or through Depository
Receipts and similar securities which may be sponsored or unsponsored. See
"Risk Factors-Foreign Securities" below. In addition, each Equity Fund 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 Equity Funds may also enter
into futures contracts and related options and may utilize options. In
addition, the International Major Markets Fund may invest in foreign currency
and options on foreign currency transactions. Under normal market conditions,
each Fund expects to invest at least 65% of the value of its total assets in
Equity Securities. Each Equity Fund may hold up to 35% of its total assets in
investment grade Debt Securities and Cash Equivalent Securities and, in the
case of the International Major Markets Fund, debt securities of foreign
issuers, foreign governments and agencies.
The Equity Income Fund will invest primarily in
income-producing Equity Securities of domestic issuers. The Investment
Advisers will be particularly alert to companies which pay above-average
dividends, yet offer opportunities for capital appreciation and growth of
earnings. In addition, the Fund may invest up to 35% of the value of its net
assets in convertible securities that generally have features similar to both
common stocks and bonds and offer the potential for current income and capital
appreciation over time.
The Small-Cap Opportunity Fund invests in Equity Securities of
small domestic issuers with market capitalizations of $100 million to $1
billion. The Investment Advisers will consider some of the following factors
in making their investment decisions: high quality management, significant
equity ownership positions by management, a leading or dominant position in a
major product line, a sound financial position and a relatively high rate of
return on invested capital. The Fund also
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may invest in companies that offer the possibility of accelerating earnings
growth because of management changes, new products or structural changes in
industry or the economy.
The International Major Markets Fund will invest primarily in
Equity Securities of issuers located in the countries included in the Morgan
Stanley Capital International - Europe, Australia and Far East (EAFE) Index.
The EAFE Index is a broadly diversified international index composed of the
Equity Securities of approximately 1,000 companies located in developed
markets outside the United States. The Investment Advisers and ANB-IMC intend
to generally hold a majority of assets in the "big four" stock markets (Japan,
the United Kingdom, Germany, and France) which account for 70% of EAFE's
market capitalization. The Investment Advisers and ANB-IMC will shift the
Fund's equity and currency exposure among these four major countries to
emphasize or de-emphasize regions of the international market based on such
region's relative attractiveness. In making these shifts, the Investment
Advisers and ANB-IMC will use a computer-based model which takes into account
a number of factors, including relative economic strength, relative inflation
rates, relative valuation of equity markets, bond yield differentials,
forecasts of trade flows and financial market volatility. See "Risk Factors -
Foreign Securities" below.
The Fund will focus on identifying those countries among the
"big four" offering the greatest relative potential investment return, rather
than selecting individual companies in each country which will outperform the
major stock market index of their respective countries. Thus, the individual
stocks purchased will generally be chosen through a statistical procedure to
approximate the investment performance of the relevant country index. The Fund
is not an index fund and is neither sponsored by nor affiliated with Morgan
Stanley Capital International.
BOND FUNDS
Each of the Bond Funds will invest at least 65% of the value of
its total assets under normal market conditions in Debt Securities. When the
Investment Advisers believe it advisable for temporary defensive purposes or
in anticipation of otherwise investing cash positions, each Bond Fund may
invest in Cash Equivalent Securities. In addition, each Bond Fund may invest
in custodial receipts for Treasury securities and in "stripped securities"
(both interest-only and principal-only). Most obligations acquired by the
Funds will be issued by companies or governmental entities located within the
United States. Up to 15% of the total assets of the Income Fund may be
invested dollar denominated debt obligations (including Cash Equivalent
Securities) of foreign issuers. The International Bond Fund which has no such
limitation.
Each Bond Fund also may engage in futures and options
transactions and other derivative instruments transactions, such as interest
rate swaps, forward contracts, lending portfolio securities, and the
International Bond Fund may engage in foreign exchange transactions, each of
which involves risk. See "Risk Factors" below and "Certain Portfolio
Securities" in the Appendix.
The Debt Securities in which the Income Fund may invest will be
rated investment grade, or if unrated, will be deemed by the Investment
Advisers to be comparable in quality at the time of purchase to instruments
that are so rated. By so restricting its investments, the Fund's ability to
maximize total rate of return will be limited. Under normal market conditions,
at least 65% of the value of the International Bond Fund's total assets will
consist of Debt Securities rated A or better by Moody's, S&P, Fitch or Duff.
The remainder of the International Bond Fund's assets may be invested in Debt
Securities rated no lower than B by Moody's, S&P, Fitch and Duff. The Fund
also may invest in Debt Securities which, while not rated, are determined by
the Investment Advisers to be of comparable quality to those rated securities
in which the Fund may invest. 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. See "Risk Factors--Lower Rated
Securities" below.
The Investment Advisers manage the Bond Funds based on
anticipated interest rate changes and the use of active management strategies
which may include sector rotation, intra-sector adjustments and yield curve
and convexity considerations. Sector rotation involves the Investment Advisers
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
Investment Advisers determine to select a particular issue within a sector.
Yield curve considerations involve the Investment 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 Investment Advisers seeking securities that rise
in price
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more quickly, or decline in price less quickly, than the typical security of
that price risk level and therefore enable the Investment Advisers to obtain
an additional return when interest rates change dramatically.
In acquiring particular Debt Securities, the Investment
Advisers may 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
Investment Advisers' analysis of these and other factors, a Fund's holdings of
issues in particular industry sectors may be overweighted or underweighted
when compared to the relative industry weightings in recognized indices. The
value of the Funds can be expected to vary inversely with changes in
prevailing interest rates.
The Income Fund invests in a portfolio of U.S. dollar
denominated Debt Securities of domestic and foreign issuers which, under
normal market conditions, will have a dollar-weighted average maturity
expected to range between 3 and 10 years.
The International Bond Fund will invest in Debt Securities of
issuers located throughout the world, except the United States. The Fund also
may invest in convertible preferred stocks. The Fund may hold foreign
currency, and may purchase debt securities or hold currencies in combination
with forward currency exchange contracts. The Fund will be alert to
opportunities to profit from fluctuations in currency exchange rates. The Fund
will be particularly alert to favorable arbitrage opportunities (such as those
resulting from favorable interest rate differentials) arising from the
relative yields of the various types of securities in which the Fund may
invest and market conditions generally. The Fund may invest without
restriction in companies in, or governments of, developing countries.
Developing countries have economic structures that are generally less diverse
and mature, and political systems that are less stable, than those of
developed countries. The markets of developing countries may be more volatile
than the markets of more mature economies; however, such markets may provide
higher rates of return to investors. See "Risk Factors- Foreign Securities"
below.
MUNICIPAL BOND FUND
The Intermediate Municipal Bond Fund invests in a portfolio of
investment grade Municipal Obligations which, under normal market conditions,
will have a dollar-weighted average maturity expected to range between 3 and
10 years.
It is a fundamental policy of the Fund to invest (except when
maintaining a temporary defensive position) at least 80% of the value of its
net assets in Municipal Obligations. From time to time, the Funds may invest
in an amount not to exceed 20% of the value of the Fund's net assets, or
without limitation for temporary defensive purposes, in taxable Cash
Equivalent Securities. Dividends paid by the Fund that are attributable to
income earned by it from these securities will be taxable to investors.
See "Dividends, Distributions and Taxes."
Municipal Obligations in which the Fund invests will be rated
at least Baa, MIG-2/VMIG-2 or Prime 2 (P-2) by Moody's, BBB, SP-2 or A-2 by
S&P, BBB or F-2 by Fitch or BBB or Duff-2 by Duff or, if unrated, determined
by the Investment Advisers to be comparable in quality to instruments that are
so rated. The Fund also may engage in futures and options transactions and
other derivative instruments transactions, such as interest rate swaps and
lending portfolio securities, each of which involves risk.
See "Risk Factors" below and "Certain Portfolio Securities" in the Appendix.
INVESTMENT LIMITATIONS
Each Fund 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 Fund without the affirmative vote of
the holders of a majority of the Fund'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."
Each Fund may not:
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1. Purchase any securities which would cause 25% or more of the
value of a Fund'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, any state,
territory or possession of the United States, the District of Columbia or any
of their authorities, agencies, instrumentalities or political subdivisions
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, and (d) personal credit and business
credit businesses will be considered separate industries.
2. Make loans, except that each Fund 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, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under the 1940 Act.
The Diversified Funds 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 Fund'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 Fund, except that up to 25% of the value of a Fund's total
assets may be invested without regard to these limitations.
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; and (ii) in certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection with
such guarantee.
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 Fund'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 Fund's shares in certain
states, the Funds may make commitments more restrictive than the investment
policies and limitations described above. Should a Fund determine that any
such commitment is no longer in the best interests of the Fund, it will revoke
the commitment by terminating sales of its shares in the state involved.
RISK FACTORS
General
Since each Fund can pursue different types of investments, the
risks of investing will vary depending on the Fund selected for investment.
Before selecting a Fund in which to invest, the investor should assess the
risks associated with the types of investments made by the Fund. The net asset
value per share of each Fund is not fixed and should be expected to fluctuate.
Investors should consider each Fund as a supplement to an overall investment
program and should invest only if they are willing to undertake the risks
involved. See also the Appendix beginning on page A-1 for further discussion
of certain considerations.
Each Fund may engage in various investment techniques to the
extent described herein. The use of investment techniques such as engaging in
financial futures and options transactions, purchasing securities on a forward
commitment basis, and lending portfolio securities involves greater risk than
that incurred by many other funds with similar objectives that do not engage
in such techniques. See "Appendix-Investment Techniques." Futures and options
transactions involve the use of derivative instruments. Using these techniques
may produce higher than normal portfolio turnover and may affect the degree to
which a Fund's net asset value fluctuates. Higher portfolio turnover rates are
likely to result in comparatively greater brokerage commissions or transaction
costs. In addition, short-term gains realized from portfolio transactions are
taxable to shareholders as ordinary gains.
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Equity Securities
(Asset Allocation and Equity Funds only) Investors should be
aware that Equity Securities fluctuate in value, often based on factors
unrelated to the value of the issuer of the securities, and that fluctuations
can be pronounced. Changes in the value of a Fund's portfolio securities will
result in changes in the value of such Fund's shares and thus the Fund's yield
and total return to investors.
The securities of the smaller companies may be subject to more
abrupt or erratic market movements than larger, more established companies,
both because the securities typically are traded in lower volume and because
the issuers typically are subject to a greater degree to changes in earnings
and prospects.
Debt Securities
(All Funds) Investors should be aware that even though
interest-bearing securities are investments which promise a stable stream of
income, the prices of such securities generally are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. The values of Debt Securities also may be affected by
changes in the credit rating or financial condition of the issuing entities.
Certain securities that may be purchased by these Funds, such as those rated
Baa by Moody's and BBB by S&P, Fitch and Duff, may be subject to such risk
with respect to the issuing entity and to greater market fluctuations than
certain lower yielding, higher rated Debt Securities. See "Lower Rated
Securities" below and "Appendix-Certain Portfolio Securities-Ratings" and
Appendix in the Statement of Additional Information.
Municipal Obligations
(Asset Allocation and Bond Funds and the Intermediate Municipal
Bond Fund only) Investors should be aware that when a Fund's assets are
concentrated in obligations payable from revenues of similar projects or
issued by issuers located in the same state, or in industrial development
bonds, it will be subject to the particular risks (including legal and
economic conditions) relating to such securities to a greater extent than if
its assets were not so concentrated.
Payment on Municipal Obligations held by the Funds relating to
certain projects may be secured by mortgages or deeds of trust. In the event
of a default, enforcement of a mortgage or deed of trust will be subject to
statutory enforcement procedures and limitations on obtaining deficiency
judgments. Moreover, collection of the proceeds from that foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Obligations.
Lower Rated Securities
(International Bond Fund only) Investors should carefully
consider the relative risks of investing in the higher yielding (and,
therefore, higher risk) debt securities rated below investment grade by
Moody's, S&P, Fitch or Duff (commonly known as junk bonds). The International
Bond Fund may invest up to 35% of its net assets in debt securities rated as
low as B by Moody's, S&P, Fitch and Duff and unrated debt securities deemed by
the Investment Advisers to be comparable in quality at the time of purchase to
instruments that are so rated. The International Bond Fund intends to invest
less than 35% of the value of its net assets in such securities.
The market price and yield of securities rated Baa or lower by
Moody's and BBB or lower by S&P, Fitch or Duff are more volatile than those of
higher rated securities. Factors adversely affecting the market price and
yield of these securities will adversely affect the Fund's net asset value. In
addition, the retail secondary market for these securities may be less liquid
than that of higher rated securities; adverse conditions could make it
difficult at times for the Fund to sell certain securities or could result in
lower prices than those used in calculating such Fund's net asset value.
The market values of certain lower rated debt securities tend
to reflect specific developments with respect to the issuer to a greater
extent than do higher rated securities, which react primarily to fluctuations
in the general level of interest rates, and tend to be more sensitive to
economic conditions than are higher rated securities. Issuers of such debt
securities often are highly
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leveraged and may not have available to them more traditional methods of
financing. Therefore, the risk associated with acquiring the securities of
such issuers generally is greater than is the case with higher rated
securities.
Securities rated below investment grade generally are not meant
for short-term investing and may be subject to certain risks with respect to
the issuing entity and to greater market fluctuations than certain lower
yielding, higher rated Debt Securities. Securities rated BBB by S&P, Fitch or
Duff or Baa by Moody's are judged to have speculative elements; their future
cannot be considered as well assured and often the protection of interest and
principal payments may be very moderate and may face 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. Securities rated C by Moody's are regarded as having
extremely poor prospects of ever attaining any real investment standing.
Securities rated D by S&P, Fitch and Duff are in default and the payment of
interest and/or repayment of principal is in arrears. Such securities, though
high yielding, are characterized by great risk. See Appendix in the Statement
of Additional Information for a general description of securities ratings.
The Investment Advisers will continually evaluate these
securities and the ability of the issuers of such securities to pay interest
and principal. The Fund's ability to achieve its investment objectives may be
more dependent on the Investment Advisers' credit analysis than might be the
case for a fund that invested in higher rated securities. See "Certain
Portfolio Securities-Ratings" in the Appendix.
Foreign Securities
(Asset Allocation, Equity and Bond Funds) Foreign securities
markets generally are not as developed or efficient as those in the United
States. Securities of foreign issuers, whether made directly or indirectly,
involve 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, the
possibility of adverse changes in investment or exchange control regulations,
and may be less liquid and more volatile than securities of comparable U.S.
issuers. Similarly, volume and liquidity in most foreign securities markets
are less than in the United States and, at times, volatility of price can be
greater than in the United States. In addition, there may be less publicly
available information about a non-U.S. issuer, and non-U.S. issuers generally
are not subject to uniform accounting and financial reporting standards,
practices and requirements comparable to those applicable to U.S. issuers. See
"Certain Portfolio Securities" in the Appendix.
Foreign Currency Exchanges
(Asset Allocation Funds and the International Major Markets and
International Bond Funds only) 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
currencies on an exchange. Since a forward currency contract is not guaranteed
by an exchange or clearinghouse, a default on the contract would deprive the
Fund of unrealized profits or force such Fund to cover its commitments for
purchase or resale, if any, at the current market price.
Foreign Commodity Transactions
(Asset Allocation Funds and the International Major Markets and
International Bond Funds only) Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the Commodity
Futures Trading Commission (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 an investor
may look only to the broker for performance of the contract. In addition, any
profits that the Fund might realize in trading could be eliminated by adverse
changes
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in the exchange rate, or such Fund 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.
Mortgage-Related Securities
(Asset Allocation and Bond Funds only) No assurance can be
given as to the liquidity of the market for certain mortgage-backed
securities, such as collateralized mortgage obligations and stripped
mortgage-backed securities. Determination as to the liquidity of interest-only
and principal-only fixed mortgage-backed securities issued by the U.S.
Government or its agencies and instrumentalities will be made in accordance
with guidelines established by the Board. Mortgage-related securities are
considered a derivative instrument. See "Certain Portfolio
Securities-Asset-Backed Securities" and "Illiquid Securities" in the Appendix.
Risk Factors Associated with Derivative Instruments
Each Fund 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 Fund 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 Investment Advisers will evaluate the risks presented by
the derivative instruments purchased by the Funds, and will determine, in
connection with their day-to-day management of the Funds, how they will be
used in furtherance of the Funds' investment objectives. It is possible,
however, that the Investment Advisers' evaluations will prove to be inaccurate
or incomplete and, even when accurate and complete, it is possible that the
Funds will, because of the risks discussed above, incur loss as a result of
their investments in derivative instruments.
Other Investment Considerations
Investment decisions for each Fund are made independently from
those of the other investment companies or investment advisory accounts that
may be advised by the Investment Advisers. However, if such other investment
companies or managed accounts are prepared to invest in, or desire to dispose
of, securities in which a fund invests at the same time as the Fund, available
investments or opportunities for sales will be allocated equitably to each of
them. In some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by a Fund or the price paid or received
by a Fund.
The classification of the International Major Markets,
International Bond and Intermediate Municipal Bond Funds as "non-diversified"
investment companies means that the proportion of each Fund's assets that may
be invested in the securities of a single issuer is not limited by the 1940
Act. A "diversified" investment company is required by the 1940 Act generally,
with respect to 75% of its total assets, to invest not more than 5% of such
assets in the securities of a single issuer and to hold not more than 10% of
the voting securities of any single issuer. Each Non-Diversified Fund,
however, intends to conduct its operations so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which requires that, at the end of each quarter of its
taxable year, (i) at least 50% of the market value of its total assets be
invested in cash, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to
an amount not greater than 5% of the value of the Fund's total assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets be invested in
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<PAGE>
the securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies). Since a relatively high
percentage of the Fund's assets may be invested in the securities of a limited
number of issuers, some of which may be within the same industry or economic
sector, its portfolio securities may be more susceptible to any single
economic, political or regulatory occurrence than the portfolio securities of
a diversified investment company.
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HOW TO BUY SHARES
Alternative Purchase Options
This Prospectus offers investors three Classes of shares of
each Fund for investment, Class A, Class B and Class I shares, each of which
represents an identical pro rata interest in a Fund's investment portfolio.
Class A shares and Class B shares are offered to any investor. Orders for
purchases of Class I shares, however, may be placed only for certain eligible
investors as described below. An investor who is not eligible to purchase
Class I shares may choose either Class A or Class B shares based on which
class best suits the investor's needs, given the offering price, the length of
time the investor expects to hold the shares and any other relevant
circumstances.
Class A shares are sold at net asset value per share plus an
initial sales charge imposed at the time of purchase. The initial sales charge
may be reduced or waived for certain purchases. Class A shares of each Fund
are subject to a shareholder servicing fee. Class B shares are sold at net
asset value per share with no initial sales charge at the time of purchase; as
a result, the entire purchase price is immediately invested in the Fund. Class
B shares may be subject to a CDSC and are subject to a distribution fee and
shareholder servicing fee.
Class A and Class B shares are offered to the general public
and may be purchased through a number of institutions, including FCN, the
Investment Advisers, ANB and their affiliates, other Service Agents, and
directly through the Distributor.
Class I shares are sold at net asset value with no sales charge
and are sold exclusively to qualified trust, custody and/or agency account
clients of FCN or its affiliates ("Fiduciary Accounts"), to qualified plans
with plan assets of at least $100 million invested in shares of the Funds or
other investment companies or accounts advised by either NBD or FCIMCO
("Eligible Retirement Plans") and to shareholders of the Trust's money market
funds with accounts of at least $1 million. Class I shares are not subject to
an annual service fee or distribution fee.
Class B shares will receive lower per share dividends and at
any given time the performance of Class B should be expected to be lower than
for shares of each other Class because of the higher expenses borne by Class
B. Similarly, Class A shares will receive lower per share dividends, and the
performance of Class A should be expected to be lower, than Class I shares
because of the higher expenses borne by Class A.
An investor who is not eligible to purchase Class I shares
should consider whether, during the anticipated life of the investor's
investment in the Fund, the accumulated distribution fee and CDSC on Class B
shares prior to conversion would be less than the initial sales charge, if
any, on Class A shares purchased at the same time, and to what extent, if any,
such differential would be off-set by the return of Class A. Additionally,
investors qualifying for reduced initial sales charges who expect to maintain
their investment for an extended period of time might consider purchasing
Class A shares because the accumulated continuing distribution fees on Class B
shares may exceed the initial sales charge on Class A shares during the life
of the investment.
Information Applicable To All Purchasers
When purchasing Fund shares, an investor must specify the Class
of shares being purchased. If no Class of shares is specified, Class A shares
will be purchased.
The minimum initial investment for each Class is $1,000.
However, for IRAs and other retirement plans, the minimum initial purchase is
$250. All subsequent investments must be at least $100. The initial investment
must be accompanied by the Account Application. The Investment Advisers and
Service Agents may impose initial or subsequent investment minimums which are
higher or lower than those specified above and may impose different minimums
for different types of accounts or purchase arrangements. The Funds reserve
the right to reject any purchase order.
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<PAGE>
If an order is received by the Transfer Agent by the close of
trading on the floor of the New York Stock Exchange (the "Exchange") on
any Business Day (as defined below), shares will be purchased at the public
offering price determined as of the close of trading on the floor of the
Exchange on that day. Otherwise, shares will be purchased at the public
offering price determined as of the close of trading on the floor of the
Exchange on the next Business Day.
Federal regulations require that an investor provide a
certified Taxpayer Identification Number ("TIN") upon opening or reopening an
account. See the Statement of Additional Information [and the Account
Application] for information concerning this requirement. Failure to furnish a
certified TIN to the Fund could subject an investor to a $50 penalty imposed
by the Internal Revenue Service (the "IRS").
Share certificates will not be issued. It is not recommended
that the Intermediate Municipal Bond Fund be used as a vehicle for Keogh, IRA
or other qualified retirement plans.
Net Asset Value
As to each Fund, net asset value per share of each Class is
computed by dividing the value of the Fund's net assets represented by such
Class (i.e., the value of its assets less liabilities) by the total number of
shares of such Class outstanding.
Shares for each Fund are sold on a continuous basis at the
public offering price (i.e., net asset value plus the applicable sales load,
if any, set forth below). Net asset value per share of the Funds is determined
as of the close of trading on the floor of the Exchange (currently 4:00 p.m.,
New York time), on each day the New York Stock Exchange is open for business
(the "Business Days") except: (i) those holidays which the Exchange, the
Investment Advisers or any of their bank affiliates observe (currently
New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day); and (ii) those business days on which
the Exchange closes prior to the close of its regular trading hours ("Early
Closing Time") in which event the net asset value of each Fund will be
determined and its shares will be priced as of such Early Closing Time.
Securities held by the Funds 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. Debt Securities
held by the Funds 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 Investment Advisers under the supervision of the Board of
Trustees. Securities may be valued on the basis of prices provided by
independent pricing services when the Investment Advisers believe 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 Fund's open futures contracts will be
"marked-to-market."
Class A Shares
Class A shares are sold at net asset value per share plus a
maximum initial sales charge of 3.00% for the Income and Intermediate
Municipal Bond Funds, 4.50% for the International Bond Fund and 5.00% for the
remaining Funds of the public offering price imposed at the time of purchase.
Class A shares of each Fund are subject to an annual service fee at the rate
of up to 0.25% of the value of the average daily net assets of Class A. See
"Distribution Plans and Shareholder Services Plans." Class A shares held by
investors who after purchasing Class A shares establish a Fiduciary Account
will convert to Class I shares automatically upon the establishment of such
Account, based on the relative net asset values for shares of each such Class.
-19-
<PAGE>
The public offering price for Class A shares of each Fund is
the net asset value per share plus a sales load as shown below.
<TABLE>
<CAPTION>
ASSET ALLOCATION FUNDS and EQUITY FUNDS
Total Sales Load
---------------------------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000 5.00 5.26 4.50
$50,000 to less than $100,000 4.50 4.71 4.00
$100,000 to less than $250,000 3.50 3.63 3.00
$250,000 to less than $500,000 2.50 2.56 2.00
$500,000 to less than $1,000,000 2.00 2.04 1.75
$1,000,000 and above none none none
</TABLE>
<TABLE>
<CAPTION>
INCOME and INTERNATIONAL BOND FUNDS
Total Sales Load
---------------------------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000 4.50 4.71 4.00
$50,000 to less than $100,000 4.00 4.17 3.50
$100,000 to less than $250,000 3.00 3.09 2.50
$250,000 to less than $500,000 2.00 2.04 1.50
$500,000 to less than $1,000,000 1.50 1.52 1.25
$1,000,000 and above none none none
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE MUNICIPAL BOND FUND
Total Sales Load
---------------------------------- Dealers'
As a % of As a % of Reallowance
offering price net asset value as a % of
Amount of Transaction per share per share offering price
- --------------------- -------------- --------------- --------------
<S> <C> <C> <C>
Less than $50,000 3.00 3.09 2.75
$50,000 to less than $100,000 2.50 2.56 2.25
$100,000 to less than $250,000 2.00 2.04 1.75
$250,000 to less than $500,000 1.50 1.52 1.25
$500,000 to less than $1,000,000 1.00 1.01 0.75
$1,000,000 and above none none none
</TABLE>
With respect to purchases of $1,000,000 or more of Class A
shares or other purchases of Class A shares made at net asset value (as
described below) of each Fund made through Service Agents, the Distributor may
pay such Service Agents from its own funds a fee of 1.00% for each Fund for
the first $2 million of the amount invested, 0.80% of the next $1 million and
0.50% thereafter to compensate Service Agents for their distribution
assistance in connection with such purchases. In addition, at its expense, the
Distributor may provide additional compensation and promotional incentives to
dealers in connection with the sales of shares of the Funds. Compensation may
include promotional and other merchandise, sales and training programs and
other special events sponsored by dealers. Compensation may also include
payment for reasonable expenses incurred in connection with trips taken by
invited registered representatives for meetings or seminars of a business
nature.
Full-time employees of NASD member firms which have entered
into an agreement with the Distributor pertaining to the sale of Fund shares
(or which otherwise have a brokerage-related or clearing arrangement with an
NASD member firm with respect to sales of Fund shares), their spouses and
minor children, and accounts opened by a bank, trust company or thrift
institution, acting as a fiduciary or custodian, may purchase Class A shares
for themselves or itself, as the case may be, at net asset value, provided
that they have furnished the Distributor appropriate notification of such
status at the time of the investment and such other information as it may
request from time to time in order to verify eligibility for this privilege.
In, addition, Class A shares may be purchased at net asset value for accounts
registered under the Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act which are opened through FNIS and 401(k) and other defined
contribution or qualified retirement plan accounts advised by FCN for which
FNBC or its subsidiaries or affiliates has served as administrator or trustee
since at least June 1, 1995 or NBD or its subsidiaries or affiliates has
served as administrator or Trustee since January 1, 1996. Class A shares are
also offered at net asset value to directors and full-time or part-time
employees of FCN, or any of its affiliates and subsidiaries, retired employees
of FCN, or any of its affiliates and subsidiaries, Board members of a fund
advised by the Investment Advisers, including members of the Funds' Board of
Trustees, or the spouses, children, grandchildren, siblings, parents,
grandparents and in-laws of any of the foregoing individuals.
Class A shares may be purchased at net asset value through
certain broker-dealers, registered investment advisers and other financial
institutions which have entered into an agreement with the Distributor, which
includes a requirement that such shares be sold for the benefit of clients
participating in a "wrap account" or a similar program under which such
clients pay a fee to such broker-dealer, registered investment adviser or
other financial institution. The Investment Advisers will pay a fee of up to
1.5% of the amount invested by a participant in its Investment Architect
Account or any other wrap account to FNIS, FNBC or other third-parties.
Class A shares also may be purchased at net asset value,
without a sales charge, with the proceeds from the redemption of shares of an
investment company sold with a sales charge or commission or annuity contract
or guaranteed investment contract subject to a surrender charge. This also
includes shares of an investment company that were or would be subject to a
-21-
<PAGE>
contingent deferred sales charge upon redemption. The purchase must be made
within 60 days of the redemption, and the Transfer Agent must be notified in
writing by the investor at the time the purchase is made.
Class A shares also will be offered at net asset value without
a sales load to employees participating in qualified plans or other programs
where (i) the employers or affiliated employers maintaining such plans or
programs have a minimum of 200 employees eligible for participation in such
plans or programs or (ii) such plan's or program's assets exceed one million
dollars ("Eligible Benefit Plans").
If an investor purchases Class A shares without an initial
sales charge as part of an investment of at least $1,000,000 or other method
as described above, and redeems those shares within a certain period after
purchase, a CDSC will be imposed at the time of redemption as described below
unless the investor qualifies for a waiver of the CDSC as described below
under "Class B Shares - Waiver of CDSC." The terms set forth under "How to
Redeem Shares-Contingent Deferred Sales Charge-- Class B" (other than the
amount of the CDSC and its time periods) are applicable to the Class A shares
subject to a CDSC. The following table sets forth the rates of such CDSC for
the indicated time periods:
<TABLE>
<CAPTION>
CDSC as a % of
Amount Invested or Year Since Purchase
Redemption Proceeds Payment Was Made
------------------- -------------------
<S> <C> <C>
1.00% First
0.50% Second
</TABLE>
Class B Shares
The public offering price for Class B shares is the net asset
value per share of that Class. No initial sales charge is imposed at the time
of purchase. As a result, the entire purchase price is immediately invested in
the Fund. Class B shares are subject to a maximum 5.00% CDSC, which is
assessed only if Class B shares are redeemed within six years (five years in
the case of the Short Bond Fund) of purchase. See "How To Redeem Shares"
below. Class B shares are subject to an annual service fee and distribution
fee. See "Distribution Plans and Shareholder Services Plans." Approximately
eight years (seven years in the case of the Short Bond Fund) after the date of
purchase, Class B shares automatically will convert to Class A shares, based
on the relative net asset values for shares of each such Class, and will no
longer be subject to the distribution fee. Class B shares that have been
acquired through the reinvestment of dividends and distributions will be
converted on a pro rata basis together with other Class B shares, in the
proportion that a shareholder's Class B shares converting to Class A shares
bears to the total Class B shares not acquired through the reinvestment of
dividends and distributions.
The Distributor will compensate certain Service Agents for
selling Class B shares at the time of purchase from its own assets. Proceeds
of the CDSC and distribution fees payable to the Distributor, in part, would
be used to defray these expenses.
-22-
<PAGE>
Class I Shares
The public offering price for Class I shares is the net asset
value per share of that Class. No sales charge is imposed for Class I shares.
Class I shares held by investors who after purchasing Class I
shares for their Fiduciary Accounts withdraw from such Accounts will convert
to Class A shares automatically upon such withdrawal, based on the relative
net asset values for shares of each such Class, and will be subject to the
annual service fee charged to Class A shares.
Right of Accumulation-Class A Shares
Reduced sales loads apply to any purchase of Class A shares
where the dollar amount of shares being purchased, plus the value of shares of
such Fund, shares of other Funds and shares of certain other investment
companies advised by the Investment Advisers purchased with a sales load or
acquired by a previous exchange of shares purchased with a sales load
(hereinafter referred to as "Eligible Funds") held by an investor and any
related "purchaser" as defined in the Statement of Additional Information, is
$50,000 or more. If, for example, an investor previously purchased and still
holds Class A shares of the Equity Income Fund, or of any other Eligible Fund
or combination thereof, with an aggregate current market value of $40,000 and
subsequently purchases Class A shares of such Fund or an Eligible Fund having
a current value of $20,000, the sales load applicable to the subsequent
purchase would be reduced to 4.50% of the offering price (4.71% of the net
asset value). All present holdings of Eligible Funds may be combined to
determine the current offering price of the aggregate investment in
ascertaining the sales load applicable to each subsequent purchase.
To qualify for reduced sales loads, at the time of a purchase
an investor must notify the Transfer Agent. The reduced sales load is subject
to confirmation of the investor's holdings through a check of appropriate
records.
SHAREHOLDER SERVICES
The Exchange Privilege and Automatic Investment Plan are
available to shareholders of any Class. The Letter of Intent and Reinstatement
Privilege are available only for Class A and Class B shareholders,
respectively. Such services and privileges may not be available to clients of
certain Service Agents and some Service Agents may impose certain conditions
on their clients which are different from those described in this Prospectus.
Each investor should consult his Service Agent in this regard.
EXCHANGE PRIVILEGE
The Exchange Privilege enables an investor to purchase, in
exchange for shares of a Fund which have been owned for at least 30 days,
shares of the same Class of the other Funds or the other investment portfolios
of the Trust. This privilege may be expanded to permit exchanges between a
Fund and
-23-
<PAGE>
other funds that, in the future, may be advised by the Investment Advisers.
Exchanges may be made to the extent the shares being received in the exchange
are offered for sale in the shareholder's state of residence.
Shares of the same Class of Funds purchased by exchange will be
purchased on the basis of relative net asset value per share as follows:
A. Shares of Funds purchased with or without a sales load may
be exchanged without a sales load for shares of other Funds and investment
portfolios of the Trust sold without a sales load.
B. Shares of Funds purchased without a sales load may be
exchanged for shares of other Funds and investment portfolios of the Trust
sold with a sales load, and the applicable sales load will be deducted.
C. 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.
D. 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.
E. A qualified or non-qualified employee benefit plan with
assets of at least $1 million or 200 eligible lives may be exchanged from
Class B shares to Class A shares on or after January 1 of the year following
the year of the plan's eligibility, provided that the sponsor of the plan has
so notified the Service Agent of its eligibility and in turn, the Service
Agent has notified the Trust of such eligibility.
To accomplish an exchange under item C above, shareholders must
notify the Transfer Agent of their prior ownership of Fund shares and their
account number.
No fees currently are charged shareholders directly in
connection with exchanges although the Funds reserve the right, upon not less
than 60 days' written notice, to charge shareholders a nominal fee in
accordance with rules promulgated by the Securities and Exchange Commission.
The Funds reserve the right to reject any exchange request in whole or in
part. The Exchange Privilege may be modified or terminated at any time upon
notice to shareholders.
The exchange of shares of one Fund for shares of another is
treated for federal income tax purposes as a sale of the shares given in
exchange by the shareholder and, therefore, an exchanging shareholder may
realize a taxable gain or loss.
-24-
<PAGE>
LETTER OF INTENT-CLASS A SHARES
By signing a Letter of Intent form, available from the
Distributor, the Investment Advisers, certain of their affiliates or certain
Service Agents, an investor becomes eligible for the reduced sales load
applicable to the total number of Eligible Fund shares purchased in a 13-month
period (beginning up to 30 days before the date of execution of the Letter of
Intent) pursuant to the terms and conditions set forth in the Letter of
Intent. A minimum initial purchase of $10,000 is required. To compute the
applicable sales load, the offering price of shares the investor holds (on the
date of submission of the Letter of Intent) in any Eligible Fund 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 5% of the amount
indicated in the Letter of Intent for payment of a higher sales load if the
investor does not purchase the full amount indicated in the Letter of Intent.
The escrow will be released when the investor fulfills the terms of the Letter
of Intent by purchasing the specified amount. Assuming completion of the total
minimum investment specified under a Letter of Intent, an adjustment will be
made to reflect any reduced sales load applicable to shares purchased during
the 30-day period before submission of the Letter of Intent. In addition, if
the investor's purchases qualify for a further sales load reduction, the sales
load will be adjusted to reflect the investor's total purchase at the end of
13 months. If total purchases are less than the amount specified, the investor
will be notified that a deduction from escrow to cover the difference between
the sales load actually paid and the sales load applicable to the aggregate
purchases actually made will be assessed. Signing a Letter of Intent does not
bind the investor to purchase, or the Trust to sell, the total amount
indicated at the sales load in effect at the time of signing, but the investor
must complete the intended purchase to obtain the reduced sales load. At the
time an investor purchases Class A shares, the investor must indicate his or
her intention to do so under a Letter of Intent.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan permits an investor to purchase
shares in amounts of at least $100 at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, shares may be purchased by transferring funds from the
bank account designated by the investor. At the investor's option, the account
designated will be debited in the specified amount, on any day between the
first and the twenty-fifth day of the month. Only an account maintained at a
domestic financial institution which is an Automated Clearing House member may
be so designated. To establish an Automatic Investment Plan account, the
investor must check the appropriate box and supply the necessary information
on the Account Application. Investors may obtain the necessary applications
from the Distributor. Investors should be aware that periodic investment plans
do not guarantee a profit and will not protect an investor against loss in a
declining market. An investor may cancel his or her participation in the Plan
or change the amount of purchase at any time by mailing written notification
to the Transfer Agent and such notification will be effective three business
days following receipt. The Funds may modify or terminate the Automatic
Investment Plan at any time or charge a service fee. No such fee currently is
contemplated.
-25-
<PAGE>
REINSTATEMENT PRIVILEGE
The Reinstatement Privilege enables investors who have redeemed
Class A or Class B shares to purchase, within 120 days of such redemption,
Class A shares without the imposition of a sales load in an amount not to
exceed the redemption proceeds received. Class A shares so reinstated or
purchased will be offered at a purchase price equal to the then-current net
asset value of Class A determined after a reinstatement request and payment
for Class A shares are received by the Transfer Agent. This privilege also
enables such investors to reinstate their account for the purpose of
exercising the Exchange Privilege. To use the Reinstatement Privilege, an
investor must submit a written reinstatement request to the Transfer Agent.
The reinstatement request and payment must be received within 120 days of the
trade date of the redemption. There currently are no restrictions on the
number of times an investor may use this privilege.
Option to Make Systematic Withdrawals
The Systematic Withdrawal Plan permits investors who own shares of a
Fund having a minimum value of $15,000 at the time he elects under the
Systematic Withdrawal Plan to 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.
Cross Reinvestment of Dividend Plan
The Trust makes available to investors a Cross Reinvestment of
Dividend Plan pursuant to which an investor who owns shares of any Fund
with a minimum value of $10,000 at the time he elects may have dividends
paid by such Fund automatically reinvested into shares of another Fund in
which he has invested a minimum of $1,000. Investors 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 and Class B 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
Distributor for information as to applications and annual fees. The minimum
investment for an IRA is $250. Investors should also consult their tax
advisers to determine whether the benefits of an IRA are available or
appropriate.
HOW TO REDEEM SHARES
IN GENERAL
An investor may request redemption of his shares at any time.
Redemption requests should be transmitted to the Transfer Agent as described
below. An investor who has purchased shares through his Fiduciary Account or
as a participant in an Eligible Retirement Plan must redeem shares by
following instructions pertaining to such Account or Plan. It is the
responsibility of the entity authorized to act on behalf of such Account or
Plan to transmit the redemption order to the Transfer Agent and credit the
investor's account with the redemption proceeds on a timely basis. When a
request is received in proper form, the Fund will redeem the shares at the
next determined net asset value as described below. If an investor holds Fund
shares of more than one Class, any request for redemption must specify the
Class of shares being redeemed. If an investor fails to specify the Class of
shares to be redeemed, Class A shares will be redeemed first. If an investor
owns fewer shares of the Class than specified to be redeemed, the redemption
request may be delayed until the Transfer Agent receives further instructions
from the investor or his Service Agent.
The Funds impose no charges when shares are redeemed. However,
the Trust may impose a CDSC as described below. Service Agents may charge a
nominal fee for effecting redemptions of Fund shares. The value of the shares
redeemed may be more or less than their original cost, depending upon the
Fund's then-current net asset value.
<PAGE>
A Fund ordinarily will make payment for all shares redeemed
within seven days after receipt by the Transfer Agent of a redemption request
in proper form, except as provided by the rules of the Securities and Exchange
Commission. However, if an investor has purchased Fund shares by check or
through the Automatic Investment Plan and subsequently submits a written
redemption request to the Transfer Agent, the redemption proceeds will be
transmitted to the investor promptly upon bank clearance of the investor's
purchase check or Automatic Investment Plan order, which may take up to eight
business days or more. In addition, the Fund will not honor Redemption Checks
for a period of eight business days after receipt by the Transfer Agent of the
purchase check or Automatic Investment Plan order against which such
redemption is requested. These procedures will not apply if the investor
otherwise has a sufficient collected balance in his or her account to cover
the redemption request. Prior to the time any redemption is effective,
dividends on
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<PAGE>
such shares will accrue and be payable, and the investor will be entitled to
exercise all other rights of beneficial ownership. Fund shares will not be
redeemed until the Transfer Agent has received the investor's Account
Application.
Each Fund reserves the right to redeem an investor's account at
the Fund's option upon not less than 60 days' written notice if the account's
net asset value is $1,000 or less and remains so during the notice period.
CLASS B SHARES
Contingent Deferred Sales Charge
A CDSC payable to the Distributor may be imposed on redemptions
of Class B shares depending on the number of years such shares were held by
the investor. The following table sets forth the rates of the CDSC applied for
the Funds:
<TABLE>
<CAPTION>
Short Bond Fund Only All Other Funds
-------------------- -------------------
CDSC as a % of CDSC as a % of
Year Since Amount Invested or Amount Invested or
Purchase Payment Was Made Redemption Proceeds Redemption Proceeds
- ------------------------- ------------------- -------------------
<S> <C> <C>
First 3.00 5.00
Second 3.00 4.00
Third 2.00 3.00
Fourth 2.00 3.00
Fifth 1.00 2.00
Sixth None 1.00
Seventh * None
Eighth N/A *
<FN>
* Conversion to Class A shares.
</TABLE>
In determining whether a CDSC is applicable to a redemption,
the calculation will be made in a manner that results in the lowest possible
rate. Class B shares redeemed will not be subject to a CDSC to the extent that
the value of such shares represents capital appreciation or reinvestment of
dividends or distributions. It will be assumed that the redemption is made
first of Class B shares acquired pursuant to the reinvestment of dividends and
distributions or representing any capital appreciation in the value of the
Class B shares held by the investor; then of Class B shares held for the
longest period of time.
-27-
<PAGE>
Waiver Of CDSC
The CDSC will be waived in connection with (a) redemptions made
within one year after the death of the shareholder, (b) redemptions by
shareholders after age 70-1/2 for purposes of the minimum required
distribution from an IRA, Keogh plan or custodial account pursuant to Section
403(b) of the Code, (c) distributions from a qualified plan upon retirement or
termination of employment, (d) redemptions of shares acquired through a
contribution in excess of permitted amounts, (e) in-service withdrawals from
tax qualified plans by participants and (f) redemptions initiated by a Fund of
accounts with net assets of less than $1,000.
Conversion Of Class B Shares
Class B shares automatically convert to Class A shares (and
thus become subject to the lower expenses borne by Class A shares) at the
beginning of the eighth year (seventh year in the case of the Short Bond Fund)
after the date of purchase, together with the pro rata portion of all Class B
shares representing dividends and other distributions paid in additional Class
B shares. The conversion will be effected at the relative net asset values per
share of the two Classes on the first business day of the month following the
seventh anniversary (sixth anniversary in the case of the Short Bond Fund) of
the original purchase. If any exchanges of Class B shares during the
eight-year or seven-year, as the case may be, period occurred, the holding
period for the shares exchanged will be counted toward the eight-year or
seven-year, as the case may be, period. At the time of the conversion the net
asset value per share of the Class A shares may be higher or lower than the
net asset value per share of the Class B shares; as a result, depending on the
relative net asset values per share, a shareholder may receive fewer or more
Class A shares than the number of Class B shares converted.
Each Fund reserves the right to cease offering Class B shares
for sale at any time or reject any order for the purchase of Class B shares
and to cease offering any services provided by a Service Agent.
REDEMPTION PROCEDURES
An investor who has purchased shares through his account at
FCN, the Investment Advisers or a Service Agent must redeem shares by
following instructions pertaining to such account. If an investor has given
his Service Agent authority to instruct the Transfer Agent to redeem shares
and to credit the proceeds of such redemption to a designated account at the
Service Agent, the investor may redeem shares only in this manner and in
accordance with a written redemption request described below. It is the
responsibility of FCN, the Investment Advisers or the Service Agent, as the
case may be, to transmit the redemption order and credit the investor's
account with the redemption proceeds on a timely basis.
If you sell shares having a net asset value of $50,000 or more,
the signatures of registered owners or their legal representatives must be
guaranteed by a bank, broker-dealer or certain other financial institutions.
See the Transfer Agent for more information about where to obtain a signature
guarantee. If you want your redemption proceeds sent to an address other than
your address as it appears on the Transfer Agent's records, a signature
guarantee is required. The Transfer Agent usually requires additional
documentation for the sale of shares by a corporation, partnership, agent or
fiduciary, or a surviving joint owner.
-28-
<PAGE>
You may use the Transfer Agent's Telephone Redemption Privilege
to redeem shares valued up to $50,000 from your account, unless you have
notified the Transfer Agent of an address change within the preceding 15 days.
Unless an investor indicates otherwise on the account application, the
Transfer Agent will be authorized to act upon redemption and transfer
instructions received by telephone from a shareholder, or any person claiming
to act as his or her representative, who can provide the Transfer Agent with
his or her account registration and address as it appears on the Transfer
Agent's records. With the telephone redemption or exchange privilege, an
investor authorizes the Transfer Agent to act on telephone instructions from
any person representing himself or herself to be the investor, or a
representative of the investor's Service Agent, and reasonably believed by the
Transfer Agent to be genuine. The Trust will require the Transfer Agent to
employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Trust or the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Trust nor
the Transfer Agent will be liable for following telephone instructions
reasonably believed to be genuine.
During times of drastic economic or market conditions, an
investor may experience difficulty in contacting the Transfer Agent by
telephone to request a redemption or exchange of Fund shares. In such cases,
investors should consider using the other redemption procedures described
herein. Use of these other redemption procedures may result in the investor's
redemption request being processed at a later time than it would have been if
telephone redemption had been used. During the delay, the Fund's net asset
value may fluctuate.
WRITTEN REDEMPTION REQUESTS
Investors may redeem shares by written request mailed to the
Transfer Agent at 611 Woodward Avenue, Detroit, Michigan 48226. Redemption
requests must be signed by each shareholder, including each owner of a joint
account, and each signature must be guaranteed for redemptions greater than
$50,000. The Transfer Agent has adopted standards and procedures pursuant to
which signature-guarantees in proper form generally will be accepted from
domestic banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
("STAMP"), and the Stock Exchanges Medallion Program.
MANAGEMENT OF THE FUNDS
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
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<PAGE>
years are set forth below: Each Trustee has an address at the Trust, 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
President, Chief Operating Officer and Director, Lionel Trains, Inc.
(since 1990); 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. From 1983 to 1993, Dean of the University
of Chicago Graduate School of Business. Dean Gould also serves as Director of
Harpor Capital Advisors. Mr. Gould is also a Board member of The Woodward
Funds and three other funds in the Prairie Family of Funds. He is 55 years old
and his address is 1101 East 58th Street, Chicago, Illinois 60637.
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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 a member of the Chicago Economics
Club. Mrs. McCoy is also a Board member of The Woodward Funds and three other
funds in the 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
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 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.
* Denotes Interested Trustee.
--------------------------------
The Trustees receive fees and are reimbursed for their expenses
in connection with each meeting of the Board of Trustees they attend.
Additional information about the officers of the Trust and on the compensation
paid by the Trust to its Trustees and officers is included in the Statement of
Additional Information.
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INVESTMENT ADVISERS AND ADMINISTRATORS
First Chicago Investment Management Company, located at Three
First National Plaza, Chicago, Illinois 60670, and NBD Bank, located at 611
Woodward Avenue, Detroit, Michigan 48226, are each Fund's Investment Advisers.
FCIMCO is a registered investment adviser and a 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. NBD is a wholly-owned subsidiary of First Chicago NBD Corporation.
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.
FCIMCO and NBD serve as Investment Advisers for the Trust
pursuant to an Investment Advisory Agreement dated as of April 12, 1996. Under
the Investment Advisory Agreement, FCIMCO and NBD provide the day-to-day
management of each Fund's investments, subject to the overall authority of the
Trust's Board of Trustees and in conformity with Massachusetts law and the
stated policies of the Trust FCIMCO and NBD are responsible for making
investment decisions for the Trust, placing purchase and sale orders (which
may be allocated to various dealers based on their sales of Fund shares) and
providing research, statistical analysis and continuous supervision of each
Fund's investment portfolio.
The Investment Advisers have engaged ANB-IMC, located at 1
North LaSalle Street, Chicago, Illinois 60690, to serve as the International
Major Markets Fund's sub-investment adviser. ANB-IMC, a registered investment
adviser formed in 1973, is a wholly-owned subsidiary of American National Bank
and Trust Company, which in turn is a wholly-owned subsidiary of FCIMCO
Corporation. ANB-IMC, subject to the supervision and approval of the
Investment Advisers, provides investment advisory assistance and the
day-to-day management of the International Major Markets Fund's investments,
as well as investment research and statistical information, under a Sub-
Investment Advisory Agreement with the Investment Advisers, subject to the
overall authority of the Board in accordance with Massachusetts law.
Under the terms of the Investment Advisory Agreement, the
Investment Advisers are entitled jointly to a monthly fee as a percentage of
each Fund's daily net assets. Each Fund's contractual advisory fee is set
forth below.
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<TABLE>
<CAPTION>
Contractual
Advisory Fee
------------
<S> <C>
ASSET ALLOCATION FUNDS:
Managed Assets Conservative Fund 0.65%
Managed Assets Growth Fund 0.65%
EQUITY FUNDS:
Equity Income Fund 0.50%
Small-Cap Opportunity Fund 0.70%
International Major Markets Fund 0.80%
BOND FUNDS:
Income Fund 0.40%
International Bond Fund 0.70%
MUNICIPAL BOND FUND
Intermediate Municipal Bond Fund 0.40%
</TABLE>
Under the Sub-Investment Advisory Agreement between the Trust,
Investment Advisers and ANB-IMC, The Investment Advisers have agreed to pay
ANB-IMC a monthly fee at the annual rate of 0.40% of the value of the
International Major Markets Fund's average daily net assets. Although the fee
payable by the International Major Markets Fund is higher than the fee payable
by other funds, the Investment Advisers believe that it is within the range of
fees payable by funds with comparable investment objectives and policies.
Claude B. Erb, First Vice President and Director of Investment Planning is
primarily responsible for the day-to-day management of the Managed Assets
Conservative, Managed Assets Growth and International Bond Funds. Mr. Erb
has received his AB in Economics from the University of California at
Berkeley and MBA in Finance from the University of California at Los
Angeles and has served as Deputy Chief Investment Officer and Senior Vice
President of Trust Services of America and TSA Capital Management from 1986
through 1992. Mr. Erb joined FCN in 1993.
Chris M. Gassen, Vice President, and F. Richard Neumann, Vice President,
are primarily responsible for the day-to-day management of the Equity Income
Fund. Mr. Gassen joined FCN in 1985 after receiving an MBA in Finance from
Indiana University. Mr. Neumann joined FCN in 1981 after receiving an MBA
in Finance/Accounting from the University of Chicago.
Ronald L. Doyle, Vice President, and Joseph R. Gatz, Second Vice President,
are primarily responsible for the day-to-day management of the Small-Cap
Opportunity Fund. Mr. Doyle joined FCN in 1982 after receiving his MBA in
Finance from Michigan State University. Mr. Gatz joined FCN in 1986 after
receiving an MBA from Indiana University.
Ricardo F. Cipicchio, Vice President, and Mark M. Jackson, Vice President,
are primarily responsible for the day-to-day management of the Income Fund.
Mr. Cipicchio received his BS in Petroleum Engineering from West Virginia
University and MBA in Finance from the University of Michigan. Mr.
Cipicchio joined FCN in 1989. Mr. Jackson received his BS in Finance from
Miami University and has served as portfolio manager for Alexander Hamilton
Life Insurance Company, 1993-1996, and as portfolio manager for Public
Employees Retirement System of Ohio, 1988-1993. Mr. Jackson is expected to
join FCN in April, 1996.
Robert T. Grabowski, First Vice President and manager of the municipal desk
at FCN, is the person primarily responsible for the day-to-day management
of the Intermediate Municipal Bond Fund. Mr. Grabowski has been the manager
of the municipal desk for ten years.
Peter M. Jankovskis, is primarily responsible for the day-to-day management
of the International Major Markets Fund. Mr. Jankovskis has been employed
by ANB-IMC since 1993 and, prior thereto, was a faculty member at the
University of California at Santa Barbara.
FCIMCO, NBD and BISYS serve as the Trust's Co-Administrators
pursuant to an Administration Agreement with the Trust. Under the
Administration Agreement, FCIMCO, NBD and BISYS generally assist in all
aspects of the Trust's operations, other than providing investment advice,
subject to the overall authority of the Trust's Board in accordance with
Massachusetts law. Under the terms of the Administration Agreement, FCIMCO,
NBD and BISYS are entitled jointly to a monthly administration fee at the
annual rate of .15% of each Fund's average daily net assets.
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 Investment Advisers and the Trust believe that the Investment
Adviser may perform the advisory, administrative and custodial services for
the Trust described in this Prospectus, and that the Investment Adviser,
subject to such banking laws and regulations, may perform the shareholder
services contemplated by this Prospectus, without violation on 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 Investment Advisers
from continuing to perform investment advisory or custodial services for the
Trust or require the Investment Advisers to alter or discontinue the services
provided by them to shareholders.
If the Investment Advisers were prohibited from performing
investment advisory or custodial 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 Investment Advisers or their affiliates were
required to discontinue all or part of its shareholder servicing activities,
their customers would be permitted to remain the beneficial owners of Fund
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.
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<PAGE>
Distributor
The Distributor, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Trust's principal underwriter and distributor of the
Funds' shares.
Transfer and Dividend Disbursing Agent and Custodian
NBD, is the Trust's Transfer and Dividend Disbursing Agent (the
"Transfer Agent"). c/o NBD Bank, P.O. Box 7058, Troy, Michigan 48007-7058 is
the Trust's Custodian. NBD is a wholly-owned subsidiary of First Chicago NBD
Corporation, a registered bank holding company.
EXPENSES
All expenses incurred in the operation of the Trust are borne
by such company, except to the extent specifically assumed by the Investment
Advisers. The expenses borne by the Trust include: 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, 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 maintaining each Fund's existence, costs
of independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders, and any extraordinary expenses.
In addition, Class B shares are subject to an annual distribution fee for
advertising, marketing and distributing such shares and Class A and Class B
shares are subject to an annual service fee for ongoing personal services
relating to shareholder accounts and services related to the maintenance of
shareholder accounts. See "Distribution Plans and Shareholder Services Plans."
Expenses attributable to a particular Fund or Class are charged against the
assets of that Fund or Class, respectively; other expenses of the Trust are
allocated among such Funds on the basis determined by the Board, including,
but not limited to, proportionately in relation to the net assets of each such
Fund.
The imposition of the advisory fee, as well as other operating
expenses, including the fees paid under any Distribution Plan and Shareholder
Services Plan, will have the effect of reducing the total return to investors.
From time to time, the Investment Advisers may waive receipt of their fees
and/or voluntarily assume certain expenses of a Fund, which would have the
effect of lowering that Fund's overall expense ratio and increasing total
return to investors at the time such amounts are waived or assumed, as the
case may be. The Fund will not pay the Investment Advisers at a later time for
any amounts which may be waived, nor will the Fund reimburse the Investment
Advisers for any amounts which may be assumed.
DISTRIBUTION AND SHAREHOLDER SERVICES PLANS
Class B shares of each Fund are subject to an annual
distribution fee pursuant to a Distribution Plan. Class A and Class B shares
of each Fund are subject to an annual service fee pursuant to a Shareholder
Services Plan.
DISTRIBUTION PLAN
(Class B only) Under a Distribution Plan adopted pursuant to
Rule 12b-1 under the 1940 Act, the Trust has agreed to pay the Distributor for
advertising, marketing and distributing shares of a Fund at an aggregate
annual rate not to exceed .75% of the value of the average daily net assets of
Class B shares. The Distributor may pay one or more Service Agents in respect
of these services. The Investment Advisers and their subsidiaries and
affiliates may act as Service Agents and receive fees under the Distribution
Plan. The Distributor determines the amount, if any, to be paid to Service
Agents under the Distribution Plan and the basis on which such payments are
made. The fees payable under the Distribution Plan are payable without regard
to actual expenses incurred.
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<PAGE>
SHAREHOLDER SERVICES PLAN
(Class A and Class B) Under a Shareholder Services Plan, the
Trust pays the Distributor for the provision of certain services to the
holders of Class A and Class B shares a fee at an annual rate not to exceed
.25% of the value of the average daily net assets of such shares. The services
provided may include personal services relating to shareholder accounts, such
as answering shareholder inquiries regarding the Fund and providing reports
and other information and services related to the maintenance of shareholder
accounts. Under the Shareholder Services Plan, the Distributor may make
payments to Service Agents in respect of these services. The Investment
Advisers and their subsidiaries and affiliates may act as Service Agents and
receive fees under the Shareholder Services Plan. The Distributor determines
the amounts to be paid to Service Agents.
DIVIDENDS AND DISTRIBUTIONS
The Managed Assets Growth, Small-Cap Opportunity and
International Major Markets Funds declare and pay dividends from net
investment income quarterly, usually on the last Business Day of the quarter.
The Bond Funds and the Managed Assets Conservative, Equity Income and
Intermediate Municipal Bond Funds declare and pay dividends from net
investment income monthly, usually on the last Business Day of the month.
Each Fund will make distributions from net realized securities
gains, if any, once a year, but may make distributions on a more frequent
basis to comply with the distribution requirements of the Code, in all events
in a manner consistent with the provisions of the 1940 Act. Dividends are
automatically reinvested in additional Fund shares of the same Class from
which they were paid at net asset value, unless payment in cash is requested.
TAXES
Federal
Each Fund intends to qualify as a "regulated investment
company" under the Code. Such qualification will relieve the Funds 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 Fund 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 Fund'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 Fund 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 each Fund'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 Fund from domestic
corporations for the taxable year. Dividends derived from tax-exempt interest
income ("exempt-interest dividends") paid by the Intermediate Municipal Bond
Fund may be treated by its 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 Intermediate
Municipal Bond Fund and designated as an exempt-interest dividend in a written
notice mailed to its shareholders not later than sixty days after the close of
such Fund's taxable year which does not exceed in its aggregate the net
Municipal Obligations interest received by the Fund for the taxable year.
Substantially all of each Fund's net realized long-term capital
gains, if any, will be distributed at least annually to its shareholders. The
Funds will generally have no tax liability with respect to such gains and the
distributions will be taxable to
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<PAGE>
Fund 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 Fund and received by
the shareholders and paid by a Fund on December 31 of such year if such
dividends are paid during January of the following year.
Prior to purchasing shares of a Fund, 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 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 Fund 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 Fund 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 Fund
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 Major Markets and International Bond Funds from
foreign securities will be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of a Fund's total assets at the
close of any taxable year consists of equity or debt securities of foreign
corporations, the Fund 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. A Fund may
make this election. As a consequence, the amount of such foreign taxes paid by
a Fund 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 Funds and their shareholders and is not
intended as a substitute for careful tax planning. Accordingly, potential
investors in the Funds should consult their tax advisers with specific
reference to their own tax situation.
State and Local
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.
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PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to
shareholders the performance of the Funds 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, the performance of a Fund's shares may be compared
to data prepared by Lipper Analytical Services, Inc. In addition, the
performance of the Funds 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 Fund.
A Fund's "yield" refers to the income generated by an
investment in a Fund over a thirty-day period for the Bond Funds identified in
the advertisement. This income is then "annualized," i.e., the income
generated by the investment during the respective period is assumed to be
earned and reinvested at a constant rate and compounded semi-annually and is
shown as a percentage of the investment. The Intermediate Municipal Bond Fund
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 Fund. The "tax- equivalent yield" will be computed by
dividing the tax-exempt portion of the Fund's yield by a denominator
consisting of one minus a stated federal income tax rate and adding the
product to that portion, if any, of the Fund's yield which is not tax-exempt.
The Funds 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 reflects the average annual percentage
change in value of an investment in the Funds 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 a Fund's shares and assume that any
dividends and capital gain distributions made by the Fund during the period
are reinvested in Fund shares. When considering average total return figures
for periods longer than one year, it is important to note that a Fund's 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 the Funds is based on historical earnings and
will fluctuate and is not intended to indicate future performance. The
investment performance of an investment in the Funds will fluctuate so that a
shareholder's shares, when redeemed, may be worth more or less than their
original cost. A Fund's 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 Fund'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 Fund shares will not be reflected in a Fund's performance
calculations.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on
April 21, 1987 under a Declaration of Trust. The Trust is a series fund having
twenty-seven 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 Funds described herein,
the Trust offers the following investment portfolios: the Managed Assets
Balanced, Growth, Mid-Cap Opportunity, Intrinsic Value, Growth and Value,
Equity Index, International Equity, Intermediate Bond, Bond, Short Bond,
Municipal Bond, Michigan Municipal Bond, Money Market, Treasury Money Market,
Municipal Money Market, Michigan Municipal Money Market, Cash Management, U.S.
Government Securities Cash Management and Treasury Prime Cash Management
Funds.
Each Fund other than the Cash Management, U.S. Government Cash
Management and Treasury Prime Cash Management Fund and the Funds contained
herein offer three Classes of shares; Class A, Class B and Class I. The Cash
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Management, U.S. Government Cash Management and Treasury Prime Cash Management
Funds offer two Classes of shares; Class S and Class I. 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 Fund 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 Fund 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 the date of this Prospectus, the Distributor owned all
the outstanding shares of each Funds. It is contemplated that the public
offering of the shares of the Funds will reduce the Distributor's holdings to
less than 5% of the total shares outstanding of each such Fund.
Because NBD serves the Trust as both Custodian and as an
Investment 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.
No person has been authorized to give any information or to
make any representations other than those contained in this Prospectus and in
the Funds' official sales literature in connection with the offer of the
Funds' shares, and, if given or made, such other information or
representations must not be relied upon as having been authorized. This
Prospectus does not constitute an offer in any State in which, or to any
person to whom, such offering may not lawfully be made.
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APPENDIX
CERTAIN PORTFOLIO SECURITIES
Ratings - The ratings of Moody's, S&P, Fitch and Duff represent
their opinions as to the quality of the obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and
subjective and, although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market value risk of
such obligations. Therefore, although these ratings may be an initial
criterion for selection of portfolio investments, the Investment Advisers also
will evaluate such obligations and the ability of their issuers to pay
interest and principal. Each Fund will rely on the Investment Advisers'
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the Investment Advisers will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, the quality of the issuer's
management and regulatory matters. It also is possible that a Rating Agency
might not timely change the rating on a particular issue to reflect subsequent
events. Once the rating of a security held by a Fund has been changed, the
Investment Advisers will consider all circumstances deemed relevant in
determining whether such Fund should continue to hold the security.
Short-Term Investments - Each Fund may hold the types of
short-term U.S. Government obligations described under Asset Allocation Funds
above.
U.S. Government Obligations - The Funds 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 Funds 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. 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.
Bank Obligations - Bank obligations in which the Funds may
invest include certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations of domestic banks, foreign subsidiaries of
domestic banks, foreign branches of domestic banks, and domestic and foreign
branches of foreign banks, domestic savings and loan associations and other
banking institutions. With respect to such securities issued by foreign
branches of domestic banks, foreign subsidiaries of domestic banks, and
domestic and foreign branches of foreign banks, a Fund may be subject to
additional investment risks that are different in some respects from those
incurred by a fund which invests only in debt obligations of U.S. domestic
issuers. Such risks include possible future political and economic
developments, the possible imposition of foreign withholding taxes on interest
income payable on the securities, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which
might adversely affect the payment of principal and interest on these
securities and the possible seizure or nationalization of foreign deposits.
Certificates of deposit are negotiable certificates evidencing
the obligation of a bank to repay funds deposited with it for a specified
period of time.
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Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Time deposits which may be held by each Fund will not benefit from insurance
from the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the FDIC.
Bankers' acceptances are credit instruments evidencing the
obligation of a bank to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay
the face amount of the instrument upon maturity. The other short-term
obligations may include uninsured, direct obligations bearing fixed, floating
or variable interest rates.
Certain Corporate Obligations - Commercial paper in which the
Funds may invest consists of short-term, unsecured promissory notes issued by
domestic or foreign entities to finance short-term credit needs.
Variable and Floating Rate Instruments - Each Fund may invest
in variable and floating instruments, including without limitation, 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 Fund to dispose of the instruments if the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise demand
rights, and the Fund 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 Fund's limitation on illiquid
investments. See "Illiquid Securities."
Repurchase and Reverse Repurchase Agreements - To increase its
income, each Fund 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 Fund will
enter into repurchase agreements with the Investment Advisers, the
Distributor, 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 Fund to possible loss because
of adverse market action or delay in connection with the disposition of the
underlying obligations.
Each Fund may also obtain funds for temporary purposes by
entering into reverse repurchase agreements. Pursuant to such agreements, the
Funds 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 Fund may decline below the price of the securities it
is obligated to repurchase.
Lending Portfolio Securities - To increase income or offset
expenses, each Fund 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 Fund
exceeds one-third of the value of its total assets. Loans of securities
involve risk 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 Investment Advisers' judgment, the income to be earned from the
loan justifies the attendant risks.
Zero Coupon Obligations - Each Fund 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 Investment Advisers
will consider the liquidity needs of the Funds when any investment in zero
coupon obligations is made.
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Federal income tax law requires the holder of a zero coupon
security or of certain pay-in-kind bonds to accrue income with respect to
these securities prior to the receipt of cash payments. To maintain its
qualification as a regulated investment company and avoid liability for
Federal income taxes, each Fund that invests in such securities may be
required to distribute such income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements. Such Fund will not be able to purchase additional income
producing securities with cash used to make such distributions and its current
income may be reduced as a result.
When Issued Purchases and Forward Commitments - The Funds 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 Fund to purchase or sell particular securities with payment
and delivery taking place at a future date (perhaps one or two months later),
permit the Fund 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 Fund'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 Funds do not
earn income with respect to these transactions until the subject securities
are delivered to the Funds. The Funds do not intend to engage in when-issued
purchases and forward commitments for speculative purposes but only in
furtherance of their investment objectives.
Foreign Securities - Investments by the Asset Allocation,
Equity and Bond Funds in foreign securities, with respect to certain foreign
countries, exposes a Fund to the 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 Fund
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 Fund 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 Funds 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 Fund will reduce its net income available for distribution to
investors.
American Depository Receipts ("ADRs") - Each Asset Allocation
and Equity Fund may invest in securities of foreign issuers in the forms 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") - Each Asset Allocation
and Equity Fund may invests 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 Asset Allocation, Equity
and Bond Funds 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
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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 - Each Fund may invest in 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
Fund 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.
Warrants - Each Asset Allocation and Equity Fund 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 underlying securities.
Securities of Investment Companies - Each Fund may invest in
securities issued by open and closed-end investment companies which
principally invest in securities in which the Fund invests. Under the 1940
Act, a Fund's investment in such securities, subject to certain exceptions,
currently is limited to (i) 3% of the total voting stock of any one investment
company, (ii) 5% of the Fund's net assets with respect to any one investment
company and (iii) 10% of the Funds net assets in the aggregate. Such purchases
will be made in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary brokers'
commissions. As a shareholder of another investment company, a Fund 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 Fund bears directly
in connection with its own operations.
Asset Backed Securities - Asset backed securities held by the
Asset Allocation and Bond Funds 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 Funds, 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 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 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 Asset Allocation and Bond Funds 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.
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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 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 Funds 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 Funds 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 Funds 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 Investment Advisers' 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 Asset Allocation and Bond
Funds may also invest in non-mortgage backed securities including interest 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.
Stripped Government Obligations - The Asset Allocation and Bond
Funds and the Intermediate Municipal Bond Fund 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
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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 Fund 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
change in interest rates. The yields on a class 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.
Municipal and Related Obligations - Municipal Obligations that
may be acquired by the Asset Allocation and Bond Funds and the Intermediate
Municipal Bond Fund may include general obligations, revenue obligations,
notes and moral obligations bonds. Each of these Funds, other than the
Intermediate Municipal Bond Fund, currently intends to invest no more than 25%
of its respective total assets in Municipal Obligations. 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. From time to time,
the Intermediate Municipal Bond Fund may invest more than 25% of the value of
its total assets in industrial development bonds which, although issued by
industrial development authorities, may be backed only by the assets and
revenues of the nongovernmental users. Where a regulated investment company
receives such interest, a proportionate share of any exempt-interest dividend
paid by the investment company may be treated as such a preference item to the
shareholder. The Intermediate Municipal Bond Fund may invest without
limitation in such Municipal Obligations if the Investment Advisers determine
that their purchase is consistent with such Fund's investment objective. See
"Description of the Funds - Risk Factors-Municipal Obligations." (See also
"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 authority. 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 Obligations also include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. The Investment Advisers
will only invest in rated municipal lease/purchase agreements.
There are, of course, variations in the quality of Municipal
Obligations both within a particular classification and between
classifications, and the yields on Municipal Obligations 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.
The Intermediate Municipal Bond Fund may invest more than 25%
of the value of its total assets in Municipal Obligations which are related in
such a way that an economic, business or political development or change
affecting one such security also would affect the other securities; for
example, securities the interest upon which is paid from revenues of similar
types of projects, or securities of issuers that are located in the same
state. As a result, the Intermediate Municipal Bond Fund may be subject to
greater risk as compared to a fund that does not follow this practice.
Certain municipal lease/purchase obligations in which the
Intermediate Municipal Bond Fund may invest may contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease/purchase obligations are
secured by the leased property, disposition of the leased property in the
event of foreclosure might prove difficult. In evaluating the credit quality
of a municipal lease/purchase obligation that is unrated, the Investment
Advisers will consider, on an ongoing basis, a number of factors including the
likelihood that the issuing municipality will discontinue appropriating
funding for the leased property.
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Among other securities, the Intermediate Municipal Bond Fund
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.
Opinions relating to the validity of Municipal Obligations and
to the exemption of interest thereon from federal income tax are rendered by
bond counsel to the respective issues at the time of issuance. Neither the
Funds nor the Investment Advisers will review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions.
Certain provisions in the Code relating to the issuance of
Municipal Obligations may reduce the volume of Municipal Obligations
qualifying for Federal tax exemption. One effect of these provisions could be
to increase the cost of the Municipal Obligations available for purchase by
the Intermediate Municipal Bond Fund and thus reduce the available yield.
Shareholders of the Intermediate Municipal Bond Fund should consult their tax
advisers concerning the effect of these provisions on an investment in the
Fund. Proposals that may restrict or eliminate the income tax exemption for
interest on Municipal Obligations may be introduced in the future. If any such
proposal were enacted that would reduce the availability of Municipal
Obligations for investment by any of these Funds so as to adversely affect its
shareholders, the Board would reevaluate the affected Fund's investment
objective and policies and submit possible changes in the Fund's structure to
shareholders for their consideration. If legislation were enacted that would
treat a type of Municipal Obligation as taxable, the Intermediate Municipal
Bond Fund would treat such security as a permissible taxable investment within
the applicable limits set forth herein.
Custodial Receipts and Certificates of Participation - The
Asset Allocation and Bond Funds and the Intermediate Municipal Bond Fund 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.
Securities acquired by the Intermediate Municipal Bond Fund may
be in the forms of custodial receipts evidencing rights to receive a specific
future interest payment, principal payment or both on certain Municipal
Obligations. 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
Intermediate Municipal Bond Fund 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 the
Fund an undivided interest in a pool of Municipal Obligations. Certificates of
participation may have fixed, floating or variable rates of interest. If a
certificate of participation is unrated, the Investment Advisers will have
determined that the instrument is of comparable quality to those instruments
in which the Investment Advisers may invest pursuant to guidelines approved by
the Board of Trustees. For certain certificates of participation, the Fund
will have the right to demand payment, on not more than 30 days' notice, for
all or any part of such Fund's participation interest, plus accrued interest.
As to these instruments, the Fund 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).
Tender Option Bonds - The Intermediate Municipal Bond Fund may
hold tender option bonds, which are Municipal Obligations (generally held
pursuant to a custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing
short-term tax exempt rates, that has been coupled with the agreement of a
third party, such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution and receive
the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between
the Municipal Obligation's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax exempt rate. The Investment Advisers, on behalf of a
Fund, will consider on an ongoing basis the creditworthiness of the issuer of
the underlying Municipal Obligation, of any custodian and of the third party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in
payment of principal or interest on the underlying Municipal Obligations and
for other
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reasons. No Fund will invest more than 15% of the value of its net assets in
securities that are illiquid, which would include tender option bonds as to
which it cannot exercise the tender feature on not more than seven days'
notice if there is no secondary market available for these obligations.
Stand-By Commitments - The Asset Allocation and Bond Funds and
the Intermediate Municipal Bond Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a Fund obligates a broker, dealer or bank to repurchase, at the
Fund's option, specified securities at a specified price and, in this respect,
stand-by commitments are comparable to put options. The exercise of a stand-by
commitment therefore is subject to the ability of the seller to make payment
on demand. A Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. A Fund may pay for stand-by commitments if such action is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing such securities yield to
investors.
Options Transactions - Each Fund is permitted to invest up to
5% of their respective assets, represented by the premium paid, in the
purchase of call and put options. Options transactions are a form of
derivative security.
Each Fund is permitted to purchase call and put options in
respect of specific securities (or groups or "baskets" of specific securities)
in which the Fund may invest. Each Fund may write (i.e., sell) covered call
option contracts on securities owned by the Fund not exceeding 25% of the
market value of its net assets at the time such option contracts are written.
Each Fund also may purchase call options to enter into closing purchase
transactions. Each Fund also may write covered put option contracts to the
extent of 25% of the value of its net assets at the time such option contracts
are written. A call option gives the purchaser of the option the right to buy,
and obligates the writer to sell, the underlying security at the exercise
price at any time during the option period. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy,
the underlying security at the exercise price at any time during the option
period. A covered put option sold by a Fund exposes the Fund during the term
of the option to a decline in price of the underlying security or securities.
A put option sold by a Fund is covered when, among other things, cash or
liquid securities are placed in a segregated account with the Fund's custodian
to fulfill the obligation undertaken.
Each Fund also 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.
Each Fund also may purchase cash-settled options on interest
rate swaps, interest rate swaps denominated in foreign currency and equity
index swaps. See "Interest Rate and Equity Index Swaps" below. A cash-settled
option on a swap gives the purchaser the right, but not the obligation, in
return for the premium paid, to receive an amount of cash equal to the value
of the underlying swap as of the exercise date. These options typically are
purchased in privately negotiated transactions from financial institutions,
including securities brokerage firms.
Each Fund may purchase and sell call and put options on stock
indexes listed on U.S. securities exchanges or traded in the over-the-counter
market. A stock index fluctuates with changes in the market values of the
stocks included in the index. Because the value of an index option depends
upon movements in the level of the index rather than the price of a particular
stock, whether a Fund will realize a gain or loss from the purchase or writing
of options on an index depends upon movements in the level of stock prices in
the stock market generally or, in the case of certain indexes, in an industry
or market segment, rather than movements in the price of a particular stock.
Successful use by a Fund of options will be subject to the
Investment Advisers' ability to predict correctly movements in the direction
of individual stocks, the stock market generally, foreign currencies or
interest rates. To the extent the Investment Advisers' predictions are
incorrect, the Fund may incur losses which could adversely affect the value of
a shareholder's investment.
A-8
<PAGE>
Futures Contracts and Options on Futures Contracts - Each Fund
may enter into futures contracts and options on future contracts. The Asset
Allocation and Equity Funds may enter into stock index futures contracts and
all Funds may enter into interest rate futures contracts and currency futures
contracts, and options with respect thereto. See "Options Transactions" above.
These transactions will be entered into as a substitute for comparable market
positions in the underlying securities or for hedging purposes. Although none
of these Funds would be a commodity pool, each would be subject to rules of
the CFTC limiting the extent to which it could engage in these transactions.
Futures and options transactions are a form of derivative security.
Each of these Funds' commodities transactions must constitute
bona fide hedging or other permissible transactions pursuant to regulations
promulgated by the CFTC. In addition, a Fund 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 the Fund's 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 5%. To the extent a Fund engages in the use
of futures and options on futures for other than bona fide hedging purposes,
the Fund may be subject to additional risk.
Successful use of futures by a Fund also is subject to the
Investment Advisers' ability to predict correctly movements in the direction
of the market, interest rates or foreign currencies and, to the extent the
transaction is entered into for hedging purposes, to ascertain the appropriate
correlation between the transaction being hedged and the price movements of
the futures contract. For example, if a Fund 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 Fund 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 Fund 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. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Pursuant to regulations and/or published positions of the
Securities and Exchange Commission, each of these Funds 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 segregation of such assets will have the effect of
limiting the Fund's ability otherwise to invest those assets.
Foreign Currency Transactions - The Asset Allocation Funds and
the International Major Markets and International Bond Funds may engage in
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. These 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 Funds. 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 Funds also may combine forward currency exchange
contracts with investments in securities denominated in other currencies.
Each of these Funds also may maintain short positions in
forward currency exchange transactions, which would involve it 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 such Fund contracted to receive in the exchange.
Options on Foreign Currency - The Asset Allocation Funds and
the International Major Markets and International Bond Funds 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 Funds may use foreign
A-9<PAGE>
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.
Risks Associated with Futures, Options and Currency and Options
- - To the extent a Fund 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 Fund 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 contracts, the Fund 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 Fund's net investment results if
market movements are not as anticipated when the hedge is established.
Successful use of futures by a Fund also is subject to the
Investment Advisers' ability to predict correctly movements in the direction
of securities prices, interest rates, currency exchange rates and other
economic factors. For example, if the Fund 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 Fund 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 Fund 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 Fund may have to sell securities at a time when it may be disadvantageous
to do so.
Although a Fund 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 Fund to
substantial losses. If it is not possible, or the Fund determines not, to
close a futures position in anticipation of adverse price movements, the Fund
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 Fund
of unrealized profits or force the Fund 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 on the contract. In
addition, unless the Fund 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 Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund 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.
A-10<PAGE>
Future Developments - Each Fund may take advantage of
opportunities in the area of options and futures contracts, options on futures
contracts and any other derivative investments which are not presently
contemplated for use by a Fund or which are not currently available but which
may be developed, to the extent such opportunities are both consistent with a
Fund's investment objective and legally permissible for such Fund. Before
entering into such transactions or making any such investment, the Fund will
provide appropriate disclosure in its prospectus.
Interest Rate and Equity Index Swaps - Each Fund may enter into
interest rate swaps and equity index swaps, to the extent described under
"Description of the Funds-Management Policies," in pursuit of their respective
investment objectives. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating-rate payments for fixed-rate payments).
Equity index swaps involve the exchange by a Fund with another party of cash
flows based upon the performance of an index or a portion of an index which
usually includes dividends. In each case, the exchange commitments can involve
payments to be made in the same currency or in different currencies. Swaps are
a form of derivative security.
Each Fund usually will enter into swaps on a net basis. In so
doing, the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. If a Fund
enters into a swap, it would maintain a segregated account in the full amount
accrued on a daily basis of the Fund's obligations with respect to the swap.
Each of these Funds will enter into swap transactions with counterparties only
if: (i) for transactions with maturities under one year, such counterparty has
outstanding short-term paper rated at least A-1 by S&P, Prime-1 by Moody's,
F-1 by Fitch or Duff-1 by Duff, or (ii) for transactions with maturities
greater than one year, the counterparty has outstanding debt securities rated
at least Aa by Moody's or AA by S&P, Fitch or Duff.
The use of swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. There is no limit on the amount of
swap transactions that may be entered into by a Fund. These transactions do
not involve the delivery of securities or other underlying assets or
principal. Accordingly, the risk of loss with respect to swaps is limited to
the net amount of payments that a Fund is contractually obligated to make. If
the other party to a swap defaults, the relevant Fund's risk of loss consists
of the net amount of payments that such Fund contractually is entitled to
receive.
Illiquid Securities - Each Fund will not knowingly invest more
than 15% of the value of its 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 Funds 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 Funds 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 Investment Advisers,
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 Fund 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 Fund in these securities.
Portfolio Turnover - Generally, the Funds will purchase
securities for capital appreciation or investment income, or both, and not for
short-term trading profits. However, a Fund may sell a portfolio investment
soon after its acquisition if the Investment Advisers believe that such a
disposition is consistent with or in furtherance of the Fund's investment
objective. Fund investments may be sold for a variety of reasons, such as more
favorable investment opportunities or other circumstances. As a result, such
Funds are likely to have correspondingly greater brokerage commissions and
other transaction costs which are borne indirectly by shareholders. Fund
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
A-11
<PAGE>
to accurately predict portfolio turnover rates, the annual turnover rate for
the Managed Assets Conservative, Managed Assets Growth, Equity Income,
Small-Cap Opportunity, International Major Markets, Income, International Bond
and Intermediate Municipal Bond Funds are not expected to exceed 100%, 100%,
100%, 150%, 100%, 100%, 100%, and 100%, respectively.
A-12
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
CROSS REFERENCE SHEET
Series G, W, X, Y, Z, AA, BB and CC Representing Interests in the
Class A, Class B and Class I Shares of the Woodward Equity Income,
Small-Cap Opportunity, Intermediate Municipal Bond, Managed
Assets Conservative, Income, International Bond, Managed
Assets Growth and International Major Markets Funds, Respectively
Form N-1A Part B Item Prospectus Caption
- --------------------- ------------------
10. Cover Page.......................................... Cover page
11. Table of Contents................................... Table of Contents
12. General Information and History..................... Inapplicable
13. Investment Objectives and
Policies............................................ Investment
Objectives,
Policies and Risk
Factors
14. Management of the Fund ............................. Management
15. Control Persons and Principal Holders
of Securities....................................... Management
16. Investment Advisory and
Other Services...................................... Management;
Counsel;
Independent Public
Accountants
17. Brokerage Allocation and
Other Practices..................................... Management
18. Capital Stock and Other Securities.................. Description of
Shares
19. Purchase, Redemption and Pricing
of Securities Being Offered......................... Additional
Purchase and
Redemption
Information
20. Tax Status.......................................... Additional
Information
Concerning Taxes
21. Underwriters........................................ Management
22. Calculation of Performance Data..................... Additional
Information on
Performance
Part C
Information to be included in Part C is set forth under the appropriate
item so numbered in Part C to this Registration Statement.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
_____________, 1996
for
CLASS A, CLASS B AND CLASS I SHARES
OF THE:
MANAGED ASSETS CONSERVATIVE FUND
MANAGED ASSETS GROWTH FUND
EQUITY INCOME FUND
SMALL-CAP OPPORTUNITY FUND
INTERNATIONAL MAJOR MARKETS FUND
INCOME FUND
INTERNATIONAL BOND FUND
INTERMEDIATE MUNICIPAL BOND FUND
of
THE WOODWARD FUNDS
c/o NBD Bank
P.O. Box 7058
Troy, Michigan 48007-7058
This Statement of Additional Information ("Additional Statement")
is meant to be read in conjunction with The Woodward Funds' Prospectus dated
_____________, 1996 pertaining to all classes of shares of the Funds listed
above (the "Prospectus") (each, a "Fund" and collectively, the "Funds"), as it
may be revised from time to time, and is incorporated by reference in its
entirety into that Prospectus. Because this Additional Statement is not itself
a prospectus, no investment in shares of the Funds should be made solely upon
the information contained herein. Copies of the Funds' Prospectus may be
obtained from any office of the Distributor by writing or calling the
Distributor or the Trust at the address or telephone number listed above.
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
<PAGE>
TABLE OF CONTENTS
Page
----
Investment Objectives, Policies and Risk Factors............
Additional Purchase and Redemption Information..............
Description of Shares.......................................
Additional Information Concerning Taxes.....................
Management..................................................
Independent Public Accountants..............................
Counsel.....................................................
Additional Information on Performance.......................
Appendix A.................................................. A-1
Appendix B.................................................. B-1
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Funds' respective investment
objectives and policies as set forth in the Prospectus.
Additional Information on Fund 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 Funds may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Investment Advisers are responsible for, make decisions with
respect to, and place orders for all purchases and sales of portfolio
securities for each Fund.
The annualized portfolio turnover rate for each Fund 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 Funds 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 Funds to receive favorable tax treatment. Portfolio turnover
will not be a limiting factor in making portfolio decisions, and the Funds may
engage in short term trading to achieve their respective investment
objectives.
Purchases of money market instruments by the Funds are made from
dealers, underwriters and issuers. The Funds 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-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.
<PAGE>
The Funds 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 Fund will engage in this practice, however, only when the Investment
Advisers, in their sole discretion, believe such practice to be otherwise in
the Fund's interests.
The Advisory Agreement for the Funds provides that, in executing
portfolio transactions and selecting brokers or dealers, the Investment
Advisers will seek to obtain the best overall terms available for each Fund.
In assessing the best overall terms available for any transaction, the
Investment Advisers shall consider factors they deem relevant, including the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. In addition, the Agreement authorizes the
Investment Advisers to cause a Fund 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 Investment Advisers determine 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 Investment Advisers to the
Funds. 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 Investment
Advisers and does not reduce the advisory fees payable by the Funds. The
Trustees will periodically review any commissions paid by the Funds to
consider whether the commissions paid over representative periods of time
appear to be reasonable in relation to the benefits inuring to the Funds. 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 Investment
Advisers. Conversely, a Fund 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 Investment Advisers, the
Distributor 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 under the
1940 Act. In addition, a Fund will not purchase securities during the
existence of any underwriting or selling group relating thereto of which the
Distributor or the Investment Advisers, or an affiliated person of any of
them, is a member, except to the extent permitted under the 1940 Act. Under
certain circumstances, the Funds may be at a
-2-
<PAGE>
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 Fund are made independently from
those for the other Funds and for any other investment companies and accounts
advised or managed by the Investment Advisers. Such other investment companies
and accounts may also invest in the same securities as the Funds. To the
extent permitted by law, the Investment Advisers may aggregate the securities
to be sold or purchased for the Funds 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 Funds 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 Investment Advisers
believe to be equitable to each Fund and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Fund or the size of the position obtained or sold
by the Fund.
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 Asset Allocation and Bond
Funds and the Intermediate Municipal Bond Fund may purchase securities
registered in the STRIPS program. Under the STRIPS program, the Funds 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 Asset Allocation and Bond Funds and the
Intermediate Municipal Bond Fund 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
-3-
<PAGE>
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, such Funds 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, each
Fund 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 Funds invest in
obligations of foreign banks or foreign branches of U.S. banks only where the
Investment Advisers deem 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. Except as provided in the Prospectus for the International
Bond Fund, bonds and other short term obligations (if not rated as commercial
paper) purchased by the Funds 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 Investment Advisers.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may be
acquired by each Fund, the Investment Advisers 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 Fund to dispose of instruments if the issuer defaulted on its payment
obligation or during
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<PAGE>
periods that the Fund is not entitled to exercise its demand rights, and the
Fund could, for these or other reasons, suffer a loss with respect to such
instruments.
Lending Securities
When a Fund 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 Fund 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 Prospectus generally equals the price paid by a Fund 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 a
Fund under the 1940 Act. At the time a Fund 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 Fund may decline below the
price of the securities it is obligated to repurchase.
American Depository Receipts ("ADRs")
The Asset Allocation and Equity Funds 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 Fund 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
-5-
<PAGE>
transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund 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 Fund
on the settlement date. In these cases the Fund may realize a capital gain or
loss.
When a Fund 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 Fund'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 Asset Allocation and Bond Funds 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 Funds. 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
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<PAGE>
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 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 Asset Allocation
and Bond Funds 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
-7-
<PAGE>
are mortgages which reset their interest rate periodically with changes in
open market interest rates. To the extent that a Fund 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.
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 a Fund. The
compounding effect from reinvestments of monthly payments received by a Fund
will increase its yield to shareholders, compared to bonds that pay interest
semi-annually.
Real Estate Investment Trusts
The Asset Allocation and Bond Funds may invest in equity real
estate investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may
subject a Fund to certain risks. REITs may be affected by changes in the value
of the underlying property owned by the trust. REITs are dependent upon
specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for the beneficial tax treatment available to REITs under
the Code and to maintain exemption from the 1940 Act. As a shareholder in a
REIT, a Fund would bear, along with other shareholders, its pro rata portion
of the REIT's operating expenses. These expenses would be in addition to the
advisory and other expenses a Fund bears directly in connection with its own
operations.
-8-
<PAGE>
Foreign Currency Transactions
When the Asset Allocation Funds and the International Major
Markets and International Bond Funds enter into a currency transaction, it
will deposit, if so required by applicable regulations, with its custodian
cash or readily marketable securities in a segregated account of a Fund in an
amount at least equal to the value of the Fund's total assets committed to the
consummation of the forward contract, the value of the cash or securities will
be placed in the account so that the value of the account will equal the
amount of the Fund's commitment with respect to the contract.
At or before the maturity of a forward contract, a Fund 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 Fund will obtain, on the same maturity
date, the same amount of the currency which it is obligated to deliver. If the
Fund retains the security and engages in an offsetting transaction, at the
time of execution of the offsetting transaction, the Fund 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 Fund'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 Fund 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 generally is anticipated,
a Fund 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 Fund 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.
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<PAGE>
Options Trading
As stated in the Prospectus, each Fund 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 Fund'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 Fund 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 Fund'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 Fund 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 Fund 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 Fund will write an option on a
particular security only if the Investment Advisers believe that a liquid
secondary market will exist on an exchange for options of the same series
which will permit the Fund to make a closing purchase transaction in order to
close out its position.
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<PAGE>
When a Fund writes a covered call option, an amount equal to the
net premium (the premium less the commission) received by the Fund is included
in the liability section of the Fund'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 Fund 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 Fund 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 Fund
will realize a gain or loss. If a secured put option is exercised, the amount
paid by the Fund involved for the underlying security will be partially offset
by the amount of the premium previously paid to the Fund. Premiums from
expired options written by a Fund 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.
Stock Index Options
The Asset Allocation and Equity Funds 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 Major Markets Fund
may also purchase and write put and call options on stock indexes listed 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.
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Convertible Securities
In general, the market value of a convertible security is the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., the value of the underlying shares of common
stock if the security is converted). As a fixed-income security, the market
value of a convertible security generally increases when interest rates
decline and generally decreases when interest rates rise. However, the price
of a convertible security also is influenced by the market value of the
security's underlying common stock. Thus, the price of a convertible security
generally increases as the market value of the underlying stock increases, and
generally decreases as the market value of the underlying stock declines.
Municipal and Related Obligations
To the extent consistent with its investment objective, the Asset
Allocation and Bond Funds and the Intermediate Municipal Bond Fund may invest
in Municipal Obligations. There are, of course, variations in the quality of
Municipal Obligations, both within a particular classification and between
classifications, and the yields on Municipal Obligations 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 Obligations by Rating Agencies
represent their opinions as to the quality of Municipal Obligations. It should
be emphasized, however, that ratings are general and are not absolute
standards of quality, and Municipal Obligations with the same maturity,
interest rate and rating may have different yields while Municipal Obligations
with the same maturity and interest rate with different ratings may have the
same yield. Subsequent to its purchase by a Fund, a Municipal Obligation may
cease to be rated or its rating may be reduced below the minimum rating
required for purchase by the Fund. The Investment Advisers may consider such
an event in determining whether the Fund should continue to hold the
obligation.
The payment of principal and interest on most Municipal
Obligations purchased by a Fund will depend upon the ability of the issuers to
meet their obligations. For the purpose of diversification under the 1940 Act,
the identification of the issuer of Municipal Obligations depends on the terms
and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed
only by the assets and revenues of the subdivision, such subdivision would be
deemed to be the sole issuer. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government or
some other entity guarantees a security, such a guaranty would be considered a
separate security and will be treated as an issue of such government or other
entity.
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An issuer's obligations under its Municipal Obligations 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
Obligations may be materially adversely affected by litigation or other
conditions.
Certain Municipal Obligations are subject to redemption at a date
earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Obligation and purchased and sold
separately.
Certain of the Municipal Obligations held by the Funds 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 Obligations at the time of original issuance. 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.
The Intermediate Municipal Bond Fund will purchase tender option
bonds only when the Investment Advisers are satisfied that the custodial and
tender option arrangements, including the fee payment arrangements, will not
adversely affect the tax exempt status of the underlying Municipal Obligations
and that payment of any tender fees will not have the effect of creating
taxable income for the Fund. Based on the tender option bond agreement, that
Fund expects to be able to value the tender option bond at par; however, the
value of the instrument will be monitored by the Investment Advisers to assure
that is valued at fair value.
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 Obligations. 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 Obligations in general, or which
proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of Municipal Obligations for
investments by the Funds and their liquidity and value. In such event, the
Board of Trustees would re-evaluate the Funds' investment objectives and
policies and consider changes in their structure or possible dissolution.
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<PAGE>
Stand-By Commitments
The Asset Allocation and Bond Funds and the Intermediate Municipal
Bond Fund may acquire "stand-by commitments" with respect to Municipal
Obligations it holds. Under a stand-by commitment, a dealer agrees to purchase
at the Fund's option specified Municipal Obligations at a specified price.
Stand-by commitments may be exercisable by the Funds at any time before the
maturity of the underlying Municipal Obligations and may be sold, transferred
or assigned only with the instruments involved.
The Funds expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Funds may pay for a stand-by
commitment either separately in cash or by paying a higher price for Municipal
Obligations which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). The Funds may
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 Funds intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Investment Advisers opinion,
present minimal credit risks. A Fund's reliance upon the credit of these
dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Obligations that are subject to the commitment. Thus, the
risk of loss to the Funds 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 Funds will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment will not affect the
valuation or assumed maturity of the underlying Municipal Obligations 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 Fund 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 Fund 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
Prospectus, the Funds are subject to the following investment limitations
which may not be changed without
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approval of the holders of the majority of the outstanding shares of the
affected Fund (as defined under Description of Shares below).
None of the Funds may:
1. Purchase or sell real estate, except that each Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with a Fund's
investment objective and policies: each Fund may purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indexes, and options on futures contracts or indexes, and options
on futures contracts or indexes; and each Fund may purchase publicly traded
securities of companies engaging in whole or in part in such activities.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Fund 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 Fund's investment objective, policies and limitations may be deemed
to be underwriting.
In addition to the above fundamental limitations, the Funds are
subject to the following non-fundamental limitations, which may be changed
without a shareholder vote:
None of the Funds may:
1. 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.
2. 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 similar investments.
3. 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 Fund's transactions in futures contracts and related options
and in options on securities or indices of securities and similar instruments,
and (b) each Fund may obtain short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising
control.
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5. Invest more than 15% of its total assets in illiquid
securities.
In order to permit the sale of a Fund's shares in certain states,
the Trust may make commitments with respect to a Fund 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 a particular Fund, it will revoke the commitment by terminating
sales of the Fund'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 Funds are offered and sold on a continuous basis by
the Trust's distributor, BISYS Fund Services, acting as agent.
A hypothetical illustration of the computation of the public
offering price per Class A share of the Funds, based on the value of each
Fund's total net assets equal to $1,000 and total number of shares outstanding
for each Fund equal to 100 is as follows:
<TABLE>
<CAPTION>
TABLE
Managed Managed International
Assets Assets Equity Small-Cap Major
Conservative Growth Income Opportunity Markets
Fund Fund Fund Fund Fund
------------ -------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Net Assets ................ $1,000 $1,000 $1,000 $1,000 $1,000
Number of Shares
Outstanding .............. 100 100 100 100 100
Net Asset Value Per Share . $ 10 $ 10 $ 10 $ 10 $ 10
Sales Charge, 5.00 percent
of offering price (5.26
percent of net asset value
per share) ............... $ 0.53 $ 0.53 $ 0.53 $ 0.53 $ 0.53
------ ------ ------ ------ ------
Offering Price to Public .. $10.53 $10.53 $10.53 $10.53 $10.53
====== ====== ====== ====== ======
</TABLE>
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<TABLE>
<CAPTION>
Intermediate
International Municipal
Bond Bond Income
Fund Fund Fund
------------- ------------ ----
<S> <C> <C> <C>
Net Assets ................ $1,000 $1,000 $1,000
Number of Shares
Outstanding .............. 100 100 100
Net Asset Value Per Share . $ 10 $ 10 $ 10
Sales Charge, 4.50 percent
of offering price (4.71
percent of net asset value
per share) ............... $ 0.47 $ 0.47 $ 0.47
------ ------ ------
Offering Price to Public .. $10.47 $10.47 $10.47
====== ====== ======
<CAPTION>
Income
Fund
------
<S> <C>
Net Assets ................ $1,000
Number of Shares
Outstanding .............. 100
Net Asset Value Per Share . $ 10
Sales Charge, 3.50 percent
of offering price (3.09
percent of net asset value
per share) ............... $ 0.31
------
Offering Price to Public .. $10.31
======
</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 Prospectus under
"Redemption of Shares," the Trust may redeem shares involuntarily to reimburse
the Funds 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 Fund 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
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<PAGE>
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
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 Fund, shareholders of a particular Fund would be entitled to
receive the assets available for distribution belonging to such Fund. If there
are any assets, income, earnings, proceeds, funds or payments, which are not
readily identifiable as belonging to any particular Fund, the Trustees shall
allocate them among any one or more of the Funds 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 Fund affected by the matter. A Fund is affected by
a matter unless it is clear that the interests of each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. 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 Fund only if approved by a majority of the outstanding shares of
such Fund. 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 Funds.
When used in the Prospectus 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 Fund, 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
Fund.
When issued for payment as described in the Funds' Prospectus and
this Additional Statement, shares of the Funds will be fully paid and
non-assessable by the Trust.
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<PAGE>
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 Funds and their shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Funds or their 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.
Each Fund 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 Fund 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 each
Fund 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 Fund'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 Fund's principal business
of investing in stock or securities, or options and futures with respect to
stock or securities. Any income derived by a Fund from a partnership or trust
is treated as derived with respect to the Fund'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 Fund 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 Fund'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)
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<PAGE>
foreign currencies (and options, futures and forward contracts on foreign
currencies) that are not directly related to a Fund'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 Fund 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 Fund 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 Fund's taxable year. Shareholders should
note that, upon the sale or exchange of Fund 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 Fund 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 Fund 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 Obligations) would be taxable as ordinary income to shareholders to
the extent of the Fund's current and accumulated earnings and profits and
would be eligible for the dividends received deduction for corporations.
Each Fund 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
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<PAGE>
Fund 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 Funds' 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 Funds 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 Funds and their shareholders under such
laws may differ from their treatment under federal income tax laws.
As described above and in the Prospectus, the Intermediate
Municipal Bond Fund is designed to provide investors with current tax-exempt
interest income. The Fund is not intended to constitute a balanced investment
program and is not designed for investors seeking capital appreciation or
maximum tax-exempt income irrespective of fluctuations in principal. Shares of
the Fund 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 Fund's
dividends being tax-exempt, but such dividends would be ultimately taxable to
the beneficiaries when distributed to them. In addition, the Fund 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.
The Intermediate Municipal Bond Fund's policy is to pay each year
as federal exempt-interest dividends substantially all of its Municipal
Obligations interest income net of certain deductions. In order for the Fund
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 Fund's assets must consist of exempt-interest obligations. After the
close of its taxable year, the Fund 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 the Fund cannot exceed the excess of the amount of
interest exempt from tax under Section 103 of the Code received by the Fund
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 the Fund 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.
-21-
<PAGE>
A percentage of the interest on indebtedness incurred by a
shareholder to purchase or carry the Intermediate Municipal Bond Fund's
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.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust, their ages 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,
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 the Investment Advisers.
For so long as the plan described in the section captioned
"Distribution and Shareholder Services Plans" remains in effect, the Trustees
of the Trust who are not "interested persons" of the Trust, as defined in the
1940 Act, will be selected and nominated by the Trustees who are not
"interested persons" of the Trust.
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 Trust.
The following table summarizes the compensation for each of the Trustees
for the Trust's fiscal year ending December 31, 1995 are as follows:
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<PAGE>
<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 *** $30,000(4)+
Marilyn McCoy, Trustee
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 and the 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.
</TABLE>
Board members and officers of the Trust, as a group, owned less than 1%
of any Fund's shares outstanding on April 10, 1996.
Investment Advisers
Information about the Investment Advisers and their duties and
compensation as investment adviser is contained in the Prospectus.
The Investment Advisers own investment portfolios 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 and FCIMCO's respective commercial
banking departments 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 and FCIMCO's respective trust investment divisions solely from
the standpoint of the independent interest of the Trust and such other
fiduciary accounts. NBD and FCIMCO's
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<PAGE>
respective trust investment divisions 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 and
FCIMCO's respective trust investment divisions do not obtain information from
any other division or department of the Investment Advisers or otherwise,
which is not publicly available. NBD and FCIMCO's respective trust investment
divisions executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of the Investment
Advisers. The Investment Advisers 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 and FCIMCO have agreed as Investment Advisers that they 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 Fund'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, the Investment Advisers
are obligated to manage the investment of each Fund'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.
The Investment Advisers 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 the Investment Advisers.
Under the Advisory Agreement, the Investment Advisers are 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 the Investment Advisers in the
performance of their duties or from its reckless disregard of its duties and
obligations under the Agreement.
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<PAGE>
Distribution and Shareholder Servicing Plans
As stated in the Prospectus, the Trust may enter into Servicing
Agreements with Service Agents which may include the Investment Advisers and
their affiliates. The Servicing Agreements provide that the Service Agents
will render shareholder administrative support services to their customers who
are the beneficial owners of Fund shares in consideration for the Funds'
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
Service Agents and, at the Trust's option, it may reimburse the Service
Agents' out-of-pocket expenses. Such services may include: (i) processing
dividend and distribution payments from a Fund; (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 Service Agents are prohibited from engaging in any activity
primarily intended to result in the sale of Fund shares. However, Service
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 Fund shares.
Rule 12b-1 (the "Rule") adopted by the Securities and Exchange
Commission under the 1940 Act provides, among other things, that an investment
company may bear expenses of distributing its shares only pursuant to a plan
adopted in accordance with the Rule. The Trust's Board of Trustees has adopted
such a plan (the "Plan") with respect to each Fund's Class B Shares, pursuant
to which each Fund pays BISYS a fee of up to 0.75% of the average daily net
asset value attributable to such Shares for advertising, marketing and
distributing such Shares and for the provision of certain services to the
holders of such Shares. Under the Plan, BISYS may make payments to certain
financial institutions, securities dealers and other financial industry
professionals (collectively, "Service Agents") in respect of these services.
The Board of Trustees believes that there is a reasonable likelihood that the
Plan will benefit each Fund and the holders of such Shares.
The Board of Trustees reviews, at least quarterly, a written
report of the amounts expended under the Plan and in connection with the
Trust's arrangements with Service 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").
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<PAGE>
Any material amendment to the Plan and the Trust's arrangements
with Service 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 for the Funds, the Trust has
implemented the Servicing Plan described above with respect to Class A and
Class B shares of the Funds only and the Plan with respect to Class B shares
of the Funds only. The Trust will enter into shareholder servicing agreements
with Service Agents pursuant to which services to their customers who
beneficially own Class A and Class B shares of the Funds in consideration for
the payment of up to .25% (on an annualized basis) of the average daily net
asset value of such shares. The Trust has allocated the Servicing Fees which
are attributable to the Class A and Class B shares exclusively to such shares
and the Distribution Fees which are attributable to the Class B shares
exclusively to such shares.
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 Fund, (ii)
collects and makes disbursements of money on behalf of each Fund, (iii) issues
and redeems shares of each Fund, (iv) collects and receives all income and
other payments and distributions on account of the portfolio securities of
each Fund, (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
Funds at the following annual rates based on the aggregate market value
of such Funds' 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 Funds. 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 Fund of $11,000, $12 annually per account in each
such Fund 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 Fund. As stated in the
Prospectus for the Fund, the Trust may allocate transfer agency fees
attributable to each Class separately 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.
Distributor
The Trust's shares are offered on a continuous basis through
BISYS, which acts under the Distribution Agreement as Distributor for the
Trust. As stated in the Prospectus, the Trust will allocate distribution fees
which are attributable to the Class B shares in a Fund exclusively to such
shares.
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<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500 Woodward
Avenue, Detroit, Michigan 48226-3424, serves as auditors for the Trust.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, is counsel to the Trust.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each class of shares of
each Fund and the yield of the Asset Allocation and Bond Funds and the
Intermediate Municipal Bond Fund 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. Each Fund 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, expressed
in terms of years.
The Funds compute their aggregate total returns for each class by
determining the aggregate rates of return during specified periods that
likewise equate the initial amount
-27-
<PAGE>
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 Fund'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 Fund's average annual total return may
reflect the deduction of the maximum sales load imposed on purchases.
The Funds 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 Fund's
performance with other measures of investment return. For example, in
comparing the Funds' 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 Funds 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 Funds do not, for these purposes, deduct
from the initial value invested any amount representing sales charges. The
Funds 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 Funds 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 Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid
in cash.
The Funds 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 Fund (such as
value investing, market timing, dollar
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<PAGE>
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 Fund), 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 Fund. The Funds may also include in
advertisements charts, graphs or drawings which compare the investment
objective, return potential, relative stability and/or growth possibilities of
the Fund 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 Fund. In addition,
advertisements or shareholder communications may include a discussion of
certain attributes or benefits to be derived by an investment in a Fund 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.
-29-
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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 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
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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.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
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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.
"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
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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:
"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.
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"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.
"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.
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"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 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
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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 occur 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:
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"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:
"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
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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.
"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
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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.
"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.
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"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 Prospectus, each of the Funds may enter into
futures contracts and 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, a Fund 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 hedge against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by a Fund, 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 a Fund, 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 a Fund'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 Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds
the purchase price, the Fund realizes a gain, and if the purchase price
exceeds the offsetting sale price, the Fund 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 Fund would deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance
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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. A Fund may trade in any futures contract for which there exists a
public market, including, without limitation, the foregoing instruments.
Examples of Futures Contract Sale. A Fund 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 Fund tends to move in concert with the futures market prices of
long-term United States Treasury bonds ("Treasury bonds"). The Investment
Advisers wish to hedge 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 Investment Advisers believe that, because of an
anticipated rise in interest rates, the value will decline to 95. The Fund
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 Investment Advisers could be wrong in their 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 hedged, 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 Fund 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. A Fund might 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. A Fund's basic motivation would be to maintain for a time the
income advantage from investing in the short-term securities; the Fund would
be
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endeavoring at the same time to hedge the effect of all or part of an expected
increase in market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that
the Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The Investment Advisers wish to hedge
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 Investment Advisers
believe 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. A Fund might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Fund could, for example,
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 Fund pays for the long-term bond would be offset by the
5-point gain realized by closing out the futures contract purchase.
The Investment Advisers could be wrong in their 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 a Fund 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 a Fund 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
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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 Asset Allocation and Equity Funds may sell index futures
contracts in order to hedge against a decrease in market value of its
portfolio securities that might otherwise result from a market decline. A Fund
may do so either to hedge the value of its portfolio as a whole, or to hedge
against declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the Funds may purchase index futures
contracts in anticipation of purchases of securities. In a substantial
majority of these transactions, the Funds 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 Funds may utilize index futures contracts in
anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Fund 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 Fund may also sell futures contracts in connection with
this strategy, in order to hedge 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 Fund at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Fund 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
y Value of the Portfolio
Factors:
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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
If, however, the market moved in the opposite direction, that is,
market value decreased and the Fund had entered into an anticipatory purchase
hedge, or market value increased and the Fund had hedged its stock portfolio,
the results of the Fund'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
III. Margin Payments
Unlike when a Fund purchases or sells a security, no price is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund'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 Fund 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 Fund 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 Fund will be entitled to receive
from the broker a variation margin payment equal to that increase in value.
Conversely, where a Fund 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 Fund would be
required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, the Investment Advisers 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 Fund'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 Fund, and the
Fund 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
Fund 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 secu-
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rities 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 Fund 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 Fund 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 Fund 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, or
if otherwise deemed to be appropriate by the Investment Advisers. Conversely,
a Fund 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 Investment Advisers. It is
also possible that, where a Fund 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 Fund may decline. If this occurred, the Fund 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 Fund 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 Fund 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 Fund 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
Fund, 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 Fund's Custodian and/or in a margin account with a broker to collateralize
the position and thereby ensure 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. 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.
From the point of view of speculators, the deposit requirements in the futures
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<PAGE>
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 Investment Advisers 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
Fund 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 Fund 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 Fund is also subject to the
Investment Advisers' ability to predict correctly movements in the direction
of the market. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Fund 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 Fund 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 Fund may have to sell securities at a time when it may be
disadvantageous to do so.
V. Options on Futures Contracts
Each Fund 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
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<PAGE>
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 Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). Although permitted by their investment policies, the Funds 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 Fund at the close of the
Fund'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 Fund holds the futures contract ("the
40%-60% rule"). The amount of any capital gain or loss actually realized by a
Fund 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 Fund
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 Fund, 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,
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<PAGE>
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 Fund 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 Fund'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 Fund
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 Fund 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 Fund
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 Funds' 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,
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<PAGE>
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
Fund 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 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 Fund's futures contracts and other investments
that qualify as part of a "designated hedge," as defined in the Code, may be
netted.
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PART C
OTHER INFORMATION
ITEM 24.FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
None.
(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
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
Bank 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.
(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
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<PAGE>
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) None.
(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.
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<PAGE>
(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
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
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<PAGE>
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 Bank,
N.A. 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 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
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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
(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.
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(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 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, 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.
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*(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.
(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.
(c) Schedules of Performance Computations with
respect to the Woodward Equity Index Fund and
the Woodward Treasury Money Market Fund are
- --------
* Registrant's Rule 24f-2 Notice and related Opinion of Counsel relating
to Series G, W, X, Y, Z, AA, BB and CC will be filed with the SEC by
March 1, 1997.
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<PAGE>
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) None
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
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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:
Number
of
Record
Title of Class Holders
-------------- -------
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
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 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:
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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 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:
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(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 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
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<PAGE>
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.
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.
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<PAGE>
(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.
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.
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<PAGE>
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.
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.
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<PAGE>
(b) The Registrant's 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
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
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<PAGE>
Position with Position with
Name Underwriter Registrant
---- ------------- -------------
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
Diane DeParre Vertin Vice President None
Wayne J. Wright Vice President None
(c) None
(a) Essex is one of the Registrant's current principal
underwriters. Essex does not act as principal
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<PAGE>
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 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
(c) None
(a) BISYS Fund Services Inc. acts 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
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.
(b) To the best of Registrant's knowledge, the partners of
BISYS Fund Services are as follows:
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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
(c) 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).
(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
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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.
With respect to the Woodward Managed Assets Conservative,
Managed Assets Growth, Equity Income, Small Cap Opportunity, Major Markets,
Income, International Bond and Intermediate Municipal Bond Funds, Registrant
undertakes to file a post-effective amendment containing current financial
statements (which need not be certified) within four to six months from the
effective date of the filing of this Post- Effective Amendment.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Detroit,
State of Michigan, on the 10th 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 10, 1996
/s/ Eugene C. Yehle
- -------------------------
Eugene C. Yehle Trustee April 10, 1996
/s/ Will M. Caldwell
- -------------------------
Will M. Caldwell Trustee April 10, 1996
/s/ Julius L. Pallone
- -------------------------
Julius L. Pallone Trustee April 10, 1996
/s/ Nicholas J. De Grazia
- -------------------------
Nicholas J. De Grazia Trustee April 10, 1996
/s/ Donald G. Sutherland
- -------------------------
Donald G. Sutherland Trustee April 10, 1996
/s/ Donald L. Tuttle
- -------------------------
Donald L. Tuttle Trustee April 10, 1996
/s/ John P. Gould Trustee April 10, 1996
- -------------------
John P. Gould
/s/ Marilyn McCay Trustee April 10, 1996
- -------------------------
Marilyn McCay
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page No.
----------- ------- --------
(9)(j) Addendum No. 8 to Amended and Restated
Transfer Agency and Dividend 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, Major Markets Fund,
Income Fund, International Bond Fund and
Intermediate Municipal Bond Fund.
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath.
Exhibit (9)(j)
ADDENDUM NO. 8 TO AMENDED AND RESTATED
TRANSFER AGENCY AND DIVIDEND DISBURSEMENT AGREEMENT
This Addendum, dated as of the ___ day of April, 1996, is
entered into between THE WOODWARD FUNDS (the "Trust"), a Massachusetts
business trust, and NBD BANK ("NBD"), a state-chartered bank incorporated
under the laws of Michigan.
WHEREAS, the Trust and NBD have entered into an Amended and
Restated Transfer Agency and Dividend Disbursement Agreement dated May 16,
1989 (the "Transfer Agency Agreement"), pursuant to which the Trust appointed
NBD to act as transfer agent and dividend disbursing agent (the "Transfer
Agent") to the Trust's Woodward Government Fund, Woodward Money Market Fund,
Woodward Tax-Exempt Money Market Fund, Woodward Government Fiduciary Fund,
Woodward Money Market Fiduciary Fund, Woodward Tax-Exempt Money Market
Fiduciary Fund and Woodward Money Market Employee Benefit Fund (collectively,
the "Money Market Funds"), Woodward Growth/Value Fund, Woodward Opportunity
Fund, Woodward Intrinsic Value Fund, Woodward Intermediate Bond Fund, and
Woodward Bond Fund (each a "Fund");
WHEREAS, Article VII of the Transfer Agency Agreement provides
that in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain NBD to act as the Transfer Agent under
the Transfer Agency Agreement, the Trust shall so notify NBD in writing and if
NBD is willing to render such services it shall notify the Trust in writing,
and the compensation to be paid to NBD shall be that which is agreed to in
writing by the Trust and NBD;
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 1 to the Transfer
Agency Agreement dated January 23, 1991 relating to the Woodward Michigan
Tax-Exempt Money Market Fund ("Michigan Tax-Exempt Money Market Fund") (also,
a "Money Market Fund" and a "Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 2 to the Transfer
Agency Agreement dated April 28, 1992, relating to the Woodward Equity Index
Fund ("Equity Index Fund") (also, a "Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 3 to the Transfer
Agency Agreement dated January 1, 1993, relating to
<PAGE>
the Woodward Treasury Money Market Fund ("Treasury Money Market
Fund") (also, a "Money Market Fund" and a "Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 4 to the Transfer
Agency Agreement dated January 1, 1993, relating to the Woodward Municipal
Bond Fund ("Municipal Bond Fund") and Woodward Michigan Municipal Bond Fund
("Michigan Municipal Bond Fund") (each a "Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 5 to the Transfer
Agency Agreement dated January 1, 1993, relating to the Woodward Balanced Fund
("Balanced Fund") (also, a "Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 6 to the Transfer
Agency Agreement dated July 1, 1994 relating to the Woodward Capital Growth
Fund ("Capital Growth Fund"), the Woodward International Equity Fund
("International Equity Fund") and the Woodward Short Bond Fund ("Short Bond
Fund") (each a "Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust and NBD have entered into Addendum No. 7 to
the Transfer Agency Agreement dated April __, 1996 relating to
the Woodward Cash Management Fund ("Cash Management Fund"), the
Woodward Treasury Prime Cash Management Fund ("Treasury Prime
Cash Management Fund") and the Woodward U.S. Government
Securities Cash Management Fund ("U.S. Government Securities Cash
Management Fund");
WHEREAS, pursuant to Article VII of the Transfer Agency
Agreement, the Trust has notified NBD that it has established the Woodward
Managed Assets Conservative Fund ("Managed Assets Conservative Fund"), the
Woodward Managed Assets Growth ("Managed Assets Growth Fund"), the Woodward
Equity Income Fund ("Equity Income Fund"), the Woodward Small-Cap Opportunity
Fund ("Small Cap Opportunity Fund"), the Woodward International Major Markets
Fund ("Major Markets Fund"), the Woodward Income Fund ("Income Fund"), the
Woodward International Bond Fund ("International Bond Fund"), and the Woodward
Intermediate Municipal Bond Fund ("Intermediate Municipal Bond Fund"); and
that it desires to retain NBD to act as the Transfer Agent therefor, and NBD
has notified the Trust that it is willing to serve as Transfer Agent for each
of these Funds.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
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<PAGE>
1. Appointment. The Trust hereby appoints NBD to act as
Transfer Agent to the Trust for the Managed Assets Conservative Fund, the
Managed Assets Growth Fund, the Equity Income Fund, the Small-Cap Opportunity
Fund, the International Major Markets Fund, the Income Fund, the International
Bond Fund, and the Intermediate Municipal Bond Fund for the period and on the
terms set forth in the Transfer Agency Agreement, as amended. NBD hereby
accepts such appointment and agrees to render the services set forth in the
Transfer Agency Agreement, as amended, for the compensation agreed to by the
Trust and NBD pursuant to Article II of the Transfer Agency Agreement, as
amended.
2. Compensation. Article II entitled "Fees for Services of the
Agent" in the Transfer Agency Agreement shall be amended to add the following:
"As compensation for all services rendered by the Bank pursuant
to this Agreement with respect to the Managed Assets Conservative,
Managed Assets Growth, Equity Income, Small-Cap Opportunity,
International Major Markets, Income, International Bond and
Intermediate Municipal Bond Funds, the Trust shall pay to the Bank $15
annually per account in each such Fund for the preparation of
statements of account, and $1.00 for each confirmation of purchase and
redemption transactions. The Trust shall pay the Bank a monthly charge
of $350 with respect to each Fund for computer equipment and services.
NBD shall be entitled to receive a minimum annual fee with respect to
each such Fund of $11,000 for its services hereunder. The Trust will
reimburse the Bank for any out-of-pocket expenses for forms and
mailing costs used in performing its functions."
3. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Funds" as used in the Transfer Agency Agreement, as amended, shall
be deemed to include the 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. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to them in the Transfer Agency Agreement, as
amended.
4. Miscellaneous. Except to the extent supplemented hereby, the
Transfer Agency Agreement, as amended, shall remain unchanged and in full
force and effect and is hereby ratified and confirmed in all respects as
supplemented hereby.
-3-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Addendum
as of the date and year first above written.
THE WOODWARD FUNDS
By: ________________________
Earl I. Heenan, Jr.
President
NBD BANK
By: _______________________
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Exhibit (11)(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to all references to our
Firm included in or made a part of this Post- Effective Amendment No. 29 to
the Woodward Funds' registration statement on Form N-1A under the Securities
Act of 1933.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
April 9, 1996.
Exhibit (11)(b)
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. 29 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 10, 1996
