As filed with the Securities and Exchange Commission on April 30, 1996
Registration No. 33-86186/811-8854
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
POST-EFFECTIVE AMENDMENT NO. 2
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 1
THE WOODWARD VARIABLE ANNUITY FUND
(Exact Name of Registrant as Specified in Charter)
c/o NBD Bank
900 Tower Drive
P.O. Box 7058
Troy, Michigan 48007-7058
(Address of Principal Executive Offices)
Registrant's Telephone Number:
(313) 259-0729
W. Bruce McConnel, III
DRINKER BIDDLE & REATH
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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<PAGE>
Registrant has previously registered an indefinite number of its shares of
beneficial interest, including shares of Series A, B, C, D and E 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 Series A, B, C, D and
E for the fiscal year ending December 31, 1995 was filed on February 29,
1996.
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<PAGE>
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PROSPECTUS May 1, 1996
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THE WOODWARD VARIABLE ANNUITY FUND
c/o NBD Bank, Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
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The Woodward Variable Annuity Fund (the "Trust") is an open-end,
management investment company, shares of which are currently offered only to
separate accounts ("Separate Accounts") funding variable annuity contracts
("Variable Annuity Contracts") issued by Hartford Life Insurance Company and
ITT Hartford Life and Annuity Insurance Company (the "Hartford Companies"). In
the future, shares may be sold to affiliated or unaffiliated entities of the
Hartford Companies. The Hartford Companies will invest in shares of the Trust
in accordance with allocation instructions received from Variable Annuity
Contract owners, which allocation rights are further described in the
Prospectus for such contracts. The Hartford Companies will redeem shares to
the extent necessary to provide benefits under the Variable Annuity Contracts.
Shares of the Trust are not offered to the general public.
The Trust is offering in this Prospectus shares in the following
investment portfolios which have their own investment objectives and policies
as described in this Prospectus:
Woodward Balanced Fund
Woodward Growth/Value Fund
Woodward Opportunity Fund
Woodward Capital Growth Fund
Woodward Money Market Fund
The Woodward Balanced Fund ("Balanced Portfolio"), Woodward Growth/Value
Fund ("Growth/Value Portfolio"), Woodward Opportunity Fund ("Opportunity
Portfolio"), Woodward Capital Growth Fund ("Capital Growth Portfolio") and
Woodward Money Market Fund ("Money Market Portfolio") (each, a "Portfolio")
are advised by NBD Bank ("NBD" or the "Adviser") and are distributed by First
of Michigan Corporation ("FoM" or "Co-Distributor") and Essex National
Securities, Inc. ("Essex" or "Co-Distributor").
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Additional information about the
Trust, contained in a Statement of Additional Information, has been filed with
the Securities and Exchange Commission (the "SEC") and is available upon
request without charge by writing to The Woodward Variable Annuity Fund at the
address above. The Statement of Additional Information bears the same date as
this Prospectus and is incorporated by reference in its entirety into the
Prospectus.
This Prospectus must be accompanied by a current Prospectus for the
Variable Annuity Contracts issued by Hartford Life Insurance Company or ITT
Hartford Life and Annuity Insurance Company. Both Prospectuses should be read
and retained for future reference.
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SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, NBD BANK, ITS PARENT COMPANY
OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY GOVERNMENTAL AGENCY.
THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. INVESTMENT IN THE TRUST
INVOLVES RISKS, INCLUDING THE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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INVESTMENT ADVISER:
[ LOGO ] NBD Bank
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Highlights ........................... 3
Introduction ................................... 4
Investment Objectives, Policies and Risk Factors 4
Other Investment Policies ...................... 8
Purchase and Redemption of Trust Shares ........ 19
Net Asset Value and Pricing of Shares .......... 20
Performance and Yield Information .............. 21
Dividends and Distributions .................... 22
Taxes .......................................... 22
Management ..................................... 22
Description of the Trust and Its Shares ........ 25
Miscellaneous .................................. 26
</TABLE>
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FINANCIAL HIGHLIGHTS
The table below provides supplementary information to the Portfolios'
financial statements contained in the Statement of Additional Information and
sets forth certain information concerning the historic investment results of
Portfolio shares. The table presents a per share analysis of how each
Portfolio's net asset value has changed during the period presented.
The table has been derived from the Woodward Balanced, Growth/Value,
Opportunity, Capital Growth, and Money Market Portfolios financial statements
which have been audited by Arthur Anderson LLP, the Trust's independent public
accountants, whose report thereon is contained in the Statement of Additional
Information along with the financial statements. The financial data included
in this table should be read in conjunction with the financial statements and
related notes included in the Statement of Additional Information. Further
information about the performance of the Portfolios is available in the Annual
Report to Shareholders. The Statement of Additional Information and the Annual
Report to Shareholders may be obtained free of charge, by written request,
from ITT Hartford Life and Annuity Insurance Company, Attn: Individual Annuity
Operations, PO Box 5085, Hartford, CT 06102-5085.
<TABLE>
<CAPTION>
Balanced Growth/Value Opportunity Capital Growth Money Market
Fund Fund Fund Fund Fund
Period Ended Period Ended Period Ended Period Ended Period Ended
Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 1.00
Income from investment
operations:
Net investment income........... 0.25 0.13 0.05 0.05 0.03
Net realized and unrealized
gains (losses) on investment.. 1.27 1.63 1.02 1.38 --
Total from investment operations.... 1.52 1.76 1.07 1.43 0.03
Less distributions:
From net investment income........ (0.25) (0.13) (0.05) (0.05) (0.03)
From realized gains............... -- (0.00) -- (0.01) --
In excess of reaalized gains...... -- -- (0.00) -- --
Total distributions................. (0.25) (0.13) (0.05) (0.06) (0.03)
Net asset value, end of period...... $ 11.27 $ 11.63 $ 11.02 $ 11.37 $ 1.00
Total Return........................ 20.15%(a) 22.75%(a) 14.20%(a) 18.82%(a) 5.41%(a)
Ratios/Supplemental Data
Net assets, end of period........... $11,210,876 $3,753,691 $4,972,365 $6,434,936 $1,175,892
Ratio of expenses
to average net assets............. 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a) 0.50%(a)
Ratio of net investment
income to average net assets...... 3.61%(a) 1.78%(a) 0.67%(a) 0.81%(a) 5.27%(a)
Ratio of expenses to average
net assets without fee
waivers/reimbursed expenses....... 2.34%(a) 4.93%(a) 4.64%(a) 3.15%(a) 10.48%(a)
Ratio of net investment
income (loss) to average net
assets without fee waivers/
reimbursed expenses............... 2.12%(a) (2.30%)(a) (3.12%)(a) (1.49%)(a) (4.71%)(a)
Portfolio turnover rate............. 14.05% 17.47% 32.11% 4.46% N/A
Average Commission Rate............. $ 0.10 $ 0.14 $ 0.11 $ 0.11 N/A
<FN>
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(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
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INTRODUCTION
The Trust is an open-end management investment company registered under
the Investment Company Act of 1940 ("1940 Act"). The Trust currently consists
of five investment portfolios, each of which consists of a separate pool of
assets with separate investment objective and policies. Each Portfolio is
classified as a diversified investment portfolio under the 1940 Act.
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
General
The investment objective of each Portfolio may not be changed without
approval of the holders of at least a majority of the outstanding shares of
that Portfolio. See "Miscellaneous" in the Statement of Additional
Information. Except as noted below under "Investment Limitations," each
Portfolio's investment policies may be changed without a vote of shareholders.
There can be no assurance that the Portfolios will achieve their respective
investment objectives.
Balanced Portfolio
The investment objective of the Balanced Portfolio is to achieve
long-term total return through a combination of capital appreciation and
current income. The Portfolio seeks to achieve its investment objective by
investing its assets primarily in three major asset groups: equity securities;
fixed income securities; and cash equivalent securities. In pursuing the
Portfolio's investment objective, NBD allocates the Portfolio's investments
primarily based on its evaluation of the long-term relative attractiveness of
the major asset groups. The Adviser bases its evaluations of relative
attractiveness on its outlook for the capital market. This outlook includes,
but is not limited to, judgments about where the economy appears to be in the
business cycle together with expectations for inflation, interest rates, and
long-term corporate earnings growth.
Under normal market conditions, the Balanced Portfolio's policy is to
invest at least 25% of the value of its total assets in fixed income senior
securities and no more than 75% in equity securities. Compliance with these
percentage requirements may limit the ability of the Portfolio to maximize
total return. The actual percentage of assets invested in equity securities,
fixed income securities and cash equivalent securities will vary from time to
time, depending on the judgment of the Adviser as to general market and
economic conditions, trends in yields, interest rates and changes in fiscal
and monetary developments.
Equity Securities. The equity securities in which the Balanced Portfolio
normally invests are common stocks, preferred stocks, rights, warrants and
securities convertible into common or preferred stocks. The equity portion of
the Portfolio's investments will be invested primarily in publicly traded
stocks of companies incorporated in the United States, although up to 20% of
its total assets may be invested in the equity securities of foreign issuers,
either directly or through American Depository Receipts.
The Adviser selects equity securities for the Balanced Portfolio based
on such factors as general financial condition, price/earnings, price/cash
flow and price/book value ratios, above average current dividend yields
relative to the equity market, market share, product leadership and other
investment criteria. The Portfolio invests in the equity securities of
companies which the Adviser believes have earnings growth expectations that
exceed those implied by the market's current valuation and that will increase
at a faster rate than within the general equity market. The Adviser may also
select equity securities of companies with small to intermediate market
capitalization which enjoy enhanced growth prospects, operate in market
niches, and have greater ability to respond to new business opportunities, all
of which increase their likelihood of attaining superior levels of
profitability and investment returns. The Adviser may also select equity
securities of companies it believes represent a value or potential worth which
is not fully recognized by prevailing market prices.
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<PAGE>
Debt Securities. The Balanced Portfolio invests the fixed income portion
of its portfolio of investments in a broad range of debt securities rated
"investment grade" or higher at the time of purchase, or unrated investments
deemed by the Adviser to be of comparable quality. Debt securities in which
the Portfolio normally invests are: (i) obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities; (ii) corporate, bank
and commercial obligations; (iii) securities issued or guaranteed by foreign
governments, their agencies or instrumentalities; (iv) securities issued by
supranational banks; (v) mortgage backed securities; and (vi) securities
representing interests in pools of assets. Investments include fixed and
variable-rate bonds, zero coupon bonds, debentures, and various types of
demand instruments. Obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities may include mortgage backed securities, as
well as "stripped securities" (both interest-only and principal-only) and
custodial receipts for Treasury securities. Most fixed income obligations
acquired by the Portfolio will be issued by companies or governmental entities
located within the United States. Up to 15% of the total assets of the
Portfolio may, however, be invested in dollar-denominated debt obligations
(including cash equivalent securities) of foreign issuers.
The Adviser manages the fixed income portion of the Balanced Portfolio
based on anticipated interest rate changes and the use of active management
strategies such as sector rotation, intra-sector adjustments and yield curve
and convexity considerations. In use of such active management strategies, the
Adviser seeks value in investment grade fixed income securities. Sector
rotation involves the Adviser selecting among different economic or industry
sectors based upon apparent or relative attractiveness. Thus at times a sector
offers yield advantages relative to other sectors. An intra-sector adjustment
occurs when the Adviser determines to select a particular issue within a
sector. Yield curve considerations involve the Adviser attempting to compare
the relationship between time to maturity and yield to maturity in order to
identify the relative value in the relationship. Convexity considerations
consist of the Adviser seeking securities that rise in price more quickly, or
decline in price less quickly, than the typical security of that price risk
level and therefore enable the Adviser to obtain an additional return when
interest rates change dramatically.
In acquiring particular fixed income securities for the Balanced
Portfolio, the Adviser will consider, among other things, historical yield
relationships between private and governmental debt securities, intermarket
yield relationships among various industry sectors, current economic cycles
and the attractiveness and creditworthiness of particular issuers. Depending
upon the Adviser's analysis of these and other factors, the Portfolio's
holdings of issues in particular industry sectors may be overweighted when
compared to the relative industry weightings in the Lehman Brothers Aggregate
Bond Index, or other recognized indices. The value of the fixed income portion
of the Portfolio can be expected to vary inversely with changes in prevailing
interest rates.
Cash Equivalent Securities and Other Investments. The cash equivalent
securities in which the Balanced Portfolio normally invests are short-term
obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, "high quality" money market instruments such as
certificates of deposit, bankers' acceptances, guaranteed investment
contracts, time deposits, repurchase agreements, reverse repurchase
agreements, short-term obligations issued by state and local governmental
issuers which carry yields that are competitive with those of other types of
high quality money market instruments, commercial paper, notes, other
short-term obligations and variable rate master demand notes. "High quality"
money market instruments are money market instruments which are rated at the
time of purchase within the two highest rating categories or which are unrated
at such time but are deemed by the Adviser to be of comparable quality. Such
investments may include obligations of foreign banks and foreign branches of
U.S. banks. The Portfolio may also invest its cash balances in securities
issued by other investment companies which invest in high-quality, short-term
debt securities. As a shareholder of another investment company, the Portfolio
would bear, along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees. These expenses would
be in addition to the advisory and other expenses that the Portfolio bears
directly in connection with its own operations.
The Balanced Portfolio may also enter into futures contracts and related
options and utilize options as more fully described below.
5
<PAGE>
Growth/Value Portfolio
The investment objective of the Growth/Value Portfolio is to achieve
long-term capital appreciation and, secondarily, to produce current income
approximating that prevailing within the general equity market. The Portfolio
seeks to achieve this objective by investing primarily in equity securities of
relatively large companies. NBD believes that well managed, larger companies
historically have provided investors with attractive returns, high liquidity
and lower than average volatility. The Portfolio invests in companies which
the Adviser believes have earnings growth expectations that exceed those
implied by the market's current valuation. In addition, the Portfolio seeks to
maintain a portfolio of companies whose earnings will increase at a faster
rate than within the general equity market. The equity portion of the
portfolio generally will be constructed in a "bottom-up" manner. "Bottom-up"
refers to an analytical approach to securities selection which first focuses
on the company and company-related matters as contrasted to a "top-down"
analysis which first focuses on the industry or the economy. In the Adviser's
opinion this procedure may generally be expected to result in a portfolio
characterized by lower price/earnings ratios, above average growth prospects,
and average market risk.
Opportunity Portfolio
The investment objective of the Opportunity Portfolio is to achieve
long-term capital appreciation and, secondarily, to maintain a moderate level
of dividend income. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies with small to intermediate market
capitalization. NBD believes that there are many companies in this size range
that enjoy enhanced growth prospects, operate in more stable market niches,
and have greater ability to respond to new business opportunities, all of
which increase their likelihood of attaining superior levels of profitability
and investment returns. However, they may escape many investors' attention
because they are less well known than some larger companies. Shares of these
companies may also be more volatile than those of larger companies, so the
Opportunity Portfolio can be expected to exhibit somewhat greater volatility
than market indices dominated by very large companies. The Adviser intends to
reduce the volatility and enhance the potential return of the Portfolio's
holdings by concentrating on companies which have demonstrated records of
superior profitability, maintain conservative balance sheets, and are, in
general, of above-average quality, although stocks of lesser quality may be
purchased by the Portfolio if the Adviser believes they offer sufficient
opportunity for capital appreciation.
Capital Growth Portfolio
The investment objective of the Capital Growth Portfolio is to maximize
long-term capital appreciation with current income not a significant
consideration. The Portfolio seeks to achieve this objective by investing
primarily in equity securities of companies with a market capitalization of at
least $1 billion. In selecting investments for the Portfolio, NBD will employ
screening techniques and a research intensive approach emphasizing superior,
sustainable annual earnings growth which is supported by strong revenue
growth, margin expansion and conservative financial leverage. Because of this
growth orientation, certain market sectors may be over represented in the
Portfolio's investments; however, investments will be diversified among
industry groups and individual issuers. The value of the Portfolio's
investments will fluctuate based on market and specific industry conditions,
and other factors such as investment-style preferences. It is anticipated
that, generally, the dividend yield of the Portfolio will be less than or
equal to that of the broad equity market and will likely fluctuate. Therefore,
the Portfolio is intended for investors seeking long-term capital
appreciation.
Investment Policies Applicable to the Growth/Value, Opportunity and
Capital Growth Portfolios
The Growth/Value, Opportunity and Capital Growth Portfolios invest
primarily in publicly traded common stocks of companies incorporated in the
United States, although each such Portfolio may also invest up to 25% of its
total assets in the securities of foreign issuers, either directly or through
American Depository Receipts. In addition, they may invest in securities
convertible into common stock, such as certain bonds and preferred stocks, and
may invest up to 5% of their respective net assets in other types
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<PAGE>
of securities having common stock characteristics (such as rights and warrants
to purchase equity securities). The Portfolios may also enter into futures
contracts and related options and may utilize options as more fully described
below. Under normal market conditions, each Portfolio expects to invest at
least 65% of the value of its total assets in equity securities. Each
Portfolio may also hold up to 35% of its total assets in short-term
obligations issued or guaranteed by the U.S. Government, or its agencies or
instrumentalities, money market instruments, repurchase agreements and cash.
Money Market Portfolio
The investment objective of the Money Market Portfolio is to provide a
high level of current income consistent with the preservation of capital and
liquidity. In seeking to achieve its investment objective, the Portfolio
invests in the following high quality "money market" instruments:
(1) Obligations issued or guaranteed as to payment of principal and
interest by the U.S. Government, its agencies or instrumentalities
("U.S. Government Obligations");
(2) U.S. dollar denominated obligations issued or guaranteed by the
government of Canada, a Province of Canada, or an instrumentality or
political subdivision thereof;
(3) Certificates of deposit, bankers' acceptances and time deposits of
U.S. banks or other U.S. financial institutions (including foreign
branches of such banks and institutions) having total assets in
excess of $1 billion and which are members of the Federal Reserve
System or the Federal Deposit Insurance Corporation ("FDIC");
(4) Certificates of deposit, bankers' acceptances and time deposits of
foreign banks and U.S. branches of foreign banks having assets in
excess of the equivalent of $1 billion;
(5) Commercial paper, guaranteed investment contracts, other short-term
obligations and variable rate master demand notes, bonds, debentures
and notes;
(6) Repurchase agreements relating to the above instruments; and
(7) Subject to the limits prescribed by the 1940 Act, securities issued
by other investment companies which invest in high quality,
short-term debt securities and which determine their net asset value
per share based on the amortized cost or penny-rounding method.
The Money Market Portfolio will only purchase "eligible securities" that
present minimal credit risks as determined by NBD pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities include (i)
U.S. Government Obligations, (ii) securities that are rated (at the time of
purchase) by nationally recognized statistical rating organizations ("Rating
Agencies") in the two highest rating categories for such securities, and (iii)
certain securities that are not so rated but are of comparable quality to
rated eligible securities as determined by the Adviser.
In accordance with current SEC regulations, the Money Market Portfolio
will limit its purchases of the securities of any one issuer (other than U.S.
Government Obligations and repurchase agreements collateralized by such
obligations) to 5% of its total assets, except that the Portfolio may invest
more than 5% but no more than 25% of its total assets in "First Tier
Securities" of one issuer for a period of up to three business days. First
Tier Securities include eligible securities that (i) if rated by more than one
Rating Agency, are rated (at the time of purchase) by two or more Rating
Agencies in the highest rating category for such securities, (ii) if rated by
only one Rating Agency, are rated by such Rating Agency in its highest rating
category for such securities, (iii) have no short-term rating but have been
issued by an issuer that has other outstanding short-term obligations that
have been rated in accordance with (i) or (ii) above and are comparable in
priority and security to such securities, and (iv) are certain unrated
securities that have been determined by the Adviser to be of comparable
quality to such securities pursuant to guidelines established by the Trust's
Board of Trustees. In addition, the Portfolio will limit its investments in
"Second Tier Securities" (which are eligible securities other than First Tier
Securities)
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to 5% of its total assets, with investments in any one issuer of such
securities being limited to no more than 1% of its total assets or $1 million,
whichever is greater. See "Investment Objectives, Policies and Risk Factors"
in the Statement of Additional Information for a more complete description of
eligible securities.
The Money Market Portfolio is managed so that the average maturity of
all instruments in the Portfolio (on a dollar-weighted basis) will not exceed
90 days. In no event will the Portfolio purchase any securities which are
deemed to mature more than 13 months from the date of purchase (except for
certain variable and floating rate instruments and securities underlying
repurchase agreements and collateral underlying loans of portfolio
securities).
Securities in which the Money Market Portfolio invests may earn a lower
level of current income than long term or lower quality securities, which
generally have less liquidity, greater market risks and more fluctuations in
market value.
OTHER INVESTMENT POLICIES
Ratings
If not rated as commercial paper, debt obligations acquired by the
Balanced, Growth/Value, Opportunity and Capital Growth Portfolios will be
investment grade at the time of purchase, i.e., obligations rated AAA, AA, A
or BBB by Standard & Poor's Rating Group, Division of McGraw Hill ("S&P"),
Fitch Investor Service ("Fitch"), Duff & Phelps Credit Co. ("Duff") or IBCA,
Inc. ("IBCA"), or Aaa, Aa, A or Baa by Moody's Investors Service, Inc.
("Moody's") (each, a "Rating Agency") or be unrated but deemed by the Adviser
to be comparable in quality at the time of purchase to instruments that are so
rated. \Obligations rated in the lowest of the top four investment grade
rating categories (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) are
considered to have less capacity to pay interest and repay principal and have
certain speculative characteristics. The debt ratings are described in the
Statement of Additional Information.
Short-Term Investments
The Growth/Value, Opportunity and Capital Growth Portfolios may hold
short-term U.S. Government Obligations, "high quality" money market
instruments such as certificates of deposit, bankers' acceptances and time
deposits (i.e. those rated at the time of purchase within the two highest
rating categories or which are unrated at such time but are deemed by the
Adviser to be of comparable quality), repurchase agreements, reverse
repurchase agreements, short-term obligations issued by state and local
governmental issuers which carry yields that are competitive with those of
other types of high quality money market instruments, commercial paper, notes,
other short-term obligations, variable rate master demand notes, and cash,
pending investment, to meet anticipated redemption requests or if, in the
opinion of NBD, suitable equity securities in which the Growth/Value,
Opportunity and Capital Growth Portfolios invest are unavailable. Such
investments may be in such proportions as, in the opinion of the Adviser,
existing circumstances may warrant, and may include obligations of foreign
banks and foreign branches of U.S banks. These Portfolios may also invest
their cash balances in securities issued by other investment companies which
invest in high-quality, short-term debt securities. As a shareholder of
another investment company, a Portfolio would bear, along with other
shareholders, its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the advisory
and other expenses that the Portfolio bears directly in connection with its
own operations. These short-term investments are described in greater detail
in the Statement of Additional Information.
U.S. Government Obligations
Each Portfolio may invest in all types of U.S. Government securities,
including U.S. Treasury bonds, notes and bills, and obligations of Federal
Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal
Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association,
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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 Balanced, Growth/Value, Opportunity and Capital Growth Portfolios may also
invest in interests in the foregoing securities, including collateralized
mortgage obligations guaranteed by a U.S. Government agency or
instrumentality, and in Government-backed trusts which hold obligations of
foreign governments that are guaranteed or backed by the full faith and credit
of the United States.
Obligations of certain U.S. Government agencies and instrumentalities,
such as those of the Government National Mortgage Association, are supported
by the full faith and credit of the U.S. Treasury; others, such as the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities have historically involved little risk of loss of principal
if held to maturity. However, no assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not legally obligated to do so.
Stripped Government Obligations
The Balanced Portfolio may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government obligations.
These participations, which may be issued by the U.S. Government (or a U.S.
Government agency or instrumentality) or by private issuers such as banks and
other institutions, are issued at a discount to their "face value," and may
include stripped mortgage backed securities ("SMBS"), which are derivative
multi-class mortgage securities. Stripped securities, particularly SMBS, may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. If the underlying obligations
experience greater than anticipated prepayments of principal, the Balanced
Portfolio may fail to fully recoup its initial investment in these securities.
The market value of the class consisting entirely of principal payments
generally may be more volatile in response to changes in interest rates than
other classes. The yields on a class of SMBS that receives all or most of the
interest are generally higher than prevailing market yields on other mortgage
backed obligations because their cash flow patterns are more volatile and
there is a greater risk that the initial investment will not be fully
recouped.
Custodial Receipts for Treasury Securities
The Balanced Portfolio may purchase participations in trusts that hold
U.S. Treasury securities (such as TIGRs and CATs) where the trust
participations evidence ownership in either the future interest payments or
the future principal payments on the U.S. Treasury obligations. These
participations are normally issued at a discount to their "face value," and
may exhibit greater price volatility than ordinary debt securities because of
the manner in which their principal and interest are returned to investors.
Repurchase Agreements
To increase its income, each Portfolio may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). The Portfolios will not enter into repurchase agreements with
the Adviser, the Co-Distributors, or any of their affiliates. The seller under
a repurchase agreement will be
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required to maintain the value of the securities subject to the agreement at
not less than the repurchase price, marked to market daily. Default by the
seller would, however, expose the Portfolios to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying obligations.
Lending Portfolio Securities
To increase income or offset expenses, the Balanced, Growth/Value,
Opportunity and Capital Growth Portfolios may lend their 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 Portfolio exceeds
one-third of the value of its total assets. Loans of securities involve risks
of delay in receiving additional collateral or in recovering the securities
loaned or possible loss of rights in the collateral should the borrower of the
securities become insolvent. Loans will be made only to borrowers that provide
the requisite collateral comprised of liquid assets and when, in NBD's
judgment, the income to be earned from the loan justifies the attendant risks.
Borrowings
Each Portfolio may borrow money for temporary purposes in accordance
with the investment limitations described below. Borrowings may be effected
through reverse repurchase agreements under which a Portfolio would sell
portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Portfolio may decline below the price of the securities
it is obligated to repurchase. Whenever a Portfolio enters into a reverse
repurchase agreement it will place in a segregated custodial account liquid
assets equal to the repurchase price marked to market daily (including accrued
interest) and will subsequently monitor the account to ensure such equivalent
value is maintained.
Asset Backed Securities
Asset Backed Securities held by the Balanced Portfolio arise through the
grouping by governmental, government-related and private organizations of
loans, receivables and other assets originated by various lenders, as
described below.
The yield characteristics of Asset Backed Securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e., loans) generally may be prepaid at any time. As a result, if an Asset
Backed Security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an Asset Backed Security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Portfolio, the maturity of Asset Backed Securities
will be based on estimates of average life.
Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Like other fixed income securities, when interest rates rise the value of an
Asset Backed Security generally will decline; however, when interest rates
decline, the value of an Asset Backed Security with prepayment features may
not increase as much as that of other fixed income securities, and, as noted
above, changes in market rates of interest may accelerate or retard
prepayments and thus affect maturities.
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These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the
trading market for short-term mortgages and Asset Backed Securities is
ordinarily quite liquid, in times of financial stress the trading market for
these securities sometimes becomes restricted.
Mortgage Backed Securities. Asset Backed Securities acquired by the
Balanced Portfolio consist of both mortgage and non-mortgage backed
securities. Mortgage backed securities represent an ownership interest in a
pool of mortgages, the interest on which is in most cases issued and
guaranteed by an agency or instrumentality of the U.S. Government, although
not necessarily by the U.S. Government itself. Mortgage backed securities
include collateralized mortgage obligations and mortgage pass-through
certificates.
Collateralized mortgage obligations ("CMOs") provide the holder with a
specified interest in the cash flow of a pool of underlying mortgages or other
mortgage backed securities. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed
or floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways.
These multiple class securities may be issued or guaranteed by U.S. Government
agencies or instrumentalities, including the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by trusts formed
by private originators of, or investors in, mortgage loans. Classes in CMOs
which the Portfolio may hold are known as "regular" interests. CMOs also issue
"residual" interests, which in general are junior to and more volatile than
regular interests. The Portfolio does 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 Balanced Portfolio may invest is a GNMA Certificate which are backed as to
the timely payment of principal and interest by the full faith and credit of
the U.S. Government. Another type is a 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 a
rating agency or, if unrated, will be in the Adviser's opinion equivalent in
credit quality to such rating. Mortgage backed securities issued by private
issuers, whether or not such obligations are subject to guarantees by the
private issuer, may entail greater risk than obligations directly or
indirectly guaranteed by the U.S. Government.
Non-Mortgage Backed Securities. The Balanced Portfolio may also invest
in non-mortgage backed securities including interests in pools of receivables,
such as motor vehicle installment purchase obligations and credit card
receivables. Such securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in the
underlying pools of assets. Such securities may also be debt instruments,
which are also known as collateralized obligations and are generally issued as
the debt of a special purpose entity organized solely for the purpose of
owning such assets and issuing such debt. Non-mortgage backed securities are
not issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the
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obligations backing such receivables. Therefore, there is a possibility that
recoveries on repossessed collateral may not, in some cases, be able to
support payments on these securities.
Variable and Floating Rate Instruments
Each Portfolio may purchase rated and unrated variable and floating rate
obligations. In the case of the Money Market Portfolio, if such an obligation
has a stated maturity in excess of 13 months, it will, in any event, permit
such Portfolio to demand payment of the principal of the instrument at least
once every 13 months on not more than thirty days' notice (unless the
instrument is a U.S. Government Obligation), and provide that the demand
feature may be sold, transferred, or assigned only with the underlying
instrument involved. Such instruments may include variable rate demand notes
which are unsecured instruments that permit the indebtedness thereunder to
vary in addition to providing for periodic adjustments in the interest rate.
The Balanced Portfolio may invest in inverse floating rate debt
instruments ("inverse floaters") which may or may not be leveraged. The
interest rate of an inverse floater resets in the opposite direction from the
market rate of interest to which it is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of risk inherent in leveraged inverse floaters is
associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of the instruments if the issuer defaulted on its payment
obligation or during periods that the Portfolio is not entitled to exercise
demand rights, and the Portfolio could, for these or other reasons, suffer a
loss with respect to such instruments. Variable and floating rate instruments
(including inverse floaters) will be subject to a Portfolio's limitation on
illiquid investments. See "Illiquid Securities."
Zero Coupon Obligations
Zero coupon obligations are discount debt obligations that do not make
periodic interest payments although income is generally imputed to the holder
on a current basis. Such obligations may have higher price volatility than
those which require the payment of interest periodically. The Adviser will
consider the liquidity needs of the Balanced Portfolio when any investment in
zero coupon obligations is made.
Supranational Bank Obligations
The Balanced Portfolio may invest in obligations of supranational banks.
Supranational banks are international banking institutions designed or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will
be undertaken or met in the future.
Foreign Securities
As stated above, the Balanced, Growth/Value, Opportunity and Capital
Growth Portfolios may invest up to 25%, 25%, 25% and 20% of their respective
total assets (exclusive of short-term cash investments) in foreign securities.
Investments in foreign securities, whether made directly or indirectly,
involve certain inherent risks, such as political or economic instability of
the issuer or the country of issue, the difficulty of predicting international
trade patterns, changes in exchange rates of foreign currencies and the
possibility of adverse changes in investment or exchange control regulations.
There may be less publicly available information about a foreign company than
about a U.S. company. Listed foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic companies. Further, foreign stock markets are
generally not as developed or efficient as those in the U.S. and in
most foreign markets volume and liquidity are less than in the U.S. Fixed
commissions on foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges, and there is generally less
government supervision and
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regulation of foreign stock exchanges, brokers and listed companies than in
the U.S. With respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, limitations or the removal of funds or
other assets or diplomatic developments that could affect investment within
those countries. Because of these and other factors, securities of foreign
companies acquired by the Portfolios may be subject to greater fluctuation in
price than securities of domestic companies.
American Depository Receipts ("ADRs")
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
may invest in securities of foreign issuers in the form of ADRs or similar
securities representing securities of foreign issuers. These securities may
not be denominated in the same currency as the securities they represent. ADRs
are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying foreign securities and are denominated
in U.S. dollars. Certain such institutions issuing ADRs may not be sponsored
by the issuer. A non-sponsored depository may not provide the same shareholder
information that a sponsored depository is required to provide under its
contractual arrangements with the issuer.
European Depository Receipts ("EDRs")
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
may invest in securities of foreign issuers in the form of EDRs or similar
securities representing securities of foreign issuers. These securities may
not be denominated in the same currency as the securities they represent. EDRs
are receipts issued by a European financial institution evidencing ownership
of the underlying foreign securities and are generally denominated in foreign
currencies. Generally, EDRs, in bearer form, are designed for use in the
European securities markets.
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, the
Balanced, Growth/Value, Opportunity and Capital Growth Portfolios seek the
opportunity, through the conversion feature, to participate in the capital
appreciation of the common stock into which the securities are convertible,
while earning higher current income than is available from the common stock.
Convertible securities acquired by the Portfolios will be rated investment
grade by S&P, Moody's, Duff, Fitch or IBCA, or if unrated, will be of
comparable quality as determined by NBD. Subsequent to its purchase by a
Portfolio, a rated security may cease to be rated or its rating may be reduced
below the minimum rating required for purchase by the Portfolio. The Adviser
will consider such an event in determining whether a Portfolio should continue
to hold the security. NBD expects, however, to promptly sell any securities
that are non-investment grade as a result of these events that exceed 5% of a
Portfolio's net assets where it has determined that such sale is in the best
interest of the Portfolio.
Warrants
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
may invest up to 5% of their respective 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 specified price valid for a specified period of time. The prices
of warrants do not necessarily correlate with the prices of the underlying
securities.
Illiquid Securities
In accordance with their fundamental investment limitations described
below, the Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
will not knowingly invest more than 15% of the value of their respective net
assets in securities that are illiquid and the Money Market Portfolio will not
knowingly invest more than 10% of the value of its net assets in securities
that are illiquid. Securities having legal or contractual restrictions on
resale or no readily available market, and instruments
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(including repurchase agreements, variable and floating rate instruments and
time deposits) that do not provide for payment to the Portfolios within seven
days after notice are subject to this 15% or 10% limit. Securities that have
legal or contractual restrictions on resale but have a readily available
market are not deemed to be illiquid for purposes of this limitation.
The Portfolios may purchase securities which are not registered under
the Securities Act of 1933, as amended (the "1933 Act"), but which can be sold
to "qualified institutional buyers" in accordance with Rule 144A under the
1933 Act. Any such security will not be considered to be illiquid so long as
it is determined by the Board of Trustees or the Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in the Portfolios during any
period that qualified institutional buyers become uninterested in purchasing
these restricted securities. The ability to sell to qualified institutional
buyers under Rule 144A is a recent development, and it is not possible to
predict how this market will develop. The Board of Trustees will carefully
monitor any investments by the Portfolios in these securities.
When-Issued Purchases and Forward Commitments
Each Portfolio may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Portfolio to lock-in a price or
yield on a security it owns or intends to purchase, regardless of future
changes in interest rates. When-issued and forward commitment transactions
involve the risk, however, that the yield obtained in a transaction may be
less favorable than the yield available in the market when the securities
delivery takes place. When a Portfolio enters into such transactions, the
Trust's Custodian will maintain in a segregated account cash or liquid
portfolio securities equal to the amount of the commitment. A Portfolio's
forward commitments and when-issued purchases are not expected to exceed 25%
of the value of its total assets absent unusual market conditions. The
Portfolios do not earn income with respect to these transactions until the
subject securities are delivered to the Portfolios. The Portfolios do not
intend to engage in when-issued purchases and forward commitments for
speculative purposes but only in furtherance of their investment objectives.
Foreign Currency Transactions
The Balanced Portfolio may engage in currency exchange transactions to
the extent consistent with its investment objective or to hedge its portfolio.
The Portfolio will conduct its currency exchange transactions either on a spot
(i.e., cash) basis at the rate prevailing in the currency exchange market, or
through entering into forward contracts to purchase or sell currencies. A
forward currency exchange contract involves an obligation to purchase or sell
a specific currency at a future date, which must be more than two days from
the date of the contract, at a price set at the time of the contract. Forward
currency exchange contracts are entered into in the interbank market conducted
directly between currency traders (typically commercial banks or other
financial institutions) and their customers. They may be used to reduce the
level of volatility caused by changes in foreign currency exchange rates or
when such transactions are economically appropriate for the reduction of risks
in the ongoing management of the Portfolios. Although forward currency
exchange contracts may be used to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of such currency
increase. The Portfolio also may combine forward currency exchange contracts
with investments in securities denominated in other currencies.
The Balanced Portfolio will maintain in a segregated custodial account
cash or U.S. Government securities or other high quality liquid debt
securities at least equal to the aggregate amount of its total assets
committed to the consummation of its forward currency exchange contracts, plus
accrued interest, in accordance with applicable requirements of the SEC.
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Options on Foreign Currency
The Balanced Portfolio 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 options 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 Portfolio may use
foreign currency options for the same purposes as forward currency exchange
and futures transactions, as described herein. See also "Options" and
"Currency Futures and Options on Currency Futures" below.
Futures Contracts and Related Options
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
may trade futures contracts and options on futures contracts in U.S. domestic
markets, such as the Chicago Board of Trade and the International Monetary
Market of the Chicago Mercantile Exchange. Each such Portfolio may purchase
and sell futures contracts which obligate it to take or make delivery of
certain securities at maturity, as well as stock index futures contracts which
are bilateral agreements pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value (which assigns relative values to the
common stocks included in the index) at the close of the last trading day of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the underlying stocks in the index is made. The
Balanced and Capital Growth Portfolios may also enter into contracts for the
future delivery of fixed-income securities commonly known as interest rate
futures contracts.
A Portfolio may sell a futures contract in order to offset an expected
decrease in the value of its portfolio that might otherwise result from a
market decline or currency exchange fluctuation. A Portfolio may do so either
to hedge the value of its securities portfolio as a whole, or to protect
against declines occurring prior to sales of securities in the value of the
securities to be sold. In addition, a Portfolio may utilize futures contracts
in anticipation of changes in the composition of its holdings or in currency
exchange rates.
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
may also purchase options on futures contracts and may purchase and write put
and call options on stock indices listed on U.S. exchanges or traded in the
over-the-counter market. A futures option gives the holder, in return for the
premium paid, the right to buy (call) from or sell (put) to the writer of the
option a futures contract at a specified price at any time during the period
of the option.
When a Portfolio sells an option on a futures contract, it becomes
obligated to purchase or sell a futures contract if the option is exercised.
In anticipation of a market advance, a Portfolio may purchase call options on
futures contracts as a substitute for the purchase of futures contracts to
hedge against a possible increase in the price of securities which the
Portfolio intends to purchase. Similarly, if the value of a Portfolio's
portfolio securities is expected to decline, the Portfolio might purchase put
options or sell call options on futures contracts rather than sell futures
contracts.
Each Portfolio's commodities transactions must constitute bona fide
hedging or other permissible transactions pursuant to regulations promulgated
by the Commodities and Futures Trading Commission ("CFTC"). In addition, a
Portfolio may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of its assets, after taking into account unrealized profits
and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in the-money amount may be excluded in calculating the
percentage limitation. Pursuant to SEC requirements, a Portfolio may be
required to segregate cash or high quality money market instruments in
connection with its commodities transactions in an amount generally equal to
the value of the underlying commodity. The Trust intends to comply with the
regulations of the CFTC exempting the Portfolios from registration as a
"commodity pool operator".
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For a more detailed description of futures contracts and related
options, see Appendix B to the Statement of Additional Information.
Currency Futures and Options on Currency Futures
The Balanced Portfolio may purchase and sell currency futures contracts
and options thereon. By selling foreign currency futures, the Portfolio can
establish the number of U.S. dollars that it will receive in the delivery
month for a certain amount of a foreign currency. In this way, if the
Portfolio anticipates a decline of a foreign currency against the U.S. dollar,
the Portfolio can attempt to fix the U.S. dollar value of some or all of its
securities that are denominated in that currency. By purchasing foreign
currency futures, the Portfolio can establish the number of U.S. dollars that
it will be required to pay for a specified amount of a foreign currency in the
delivery month. Thus, if the Portfolio intends to buy securities in the future
and expects the U.S. dollar to decline against the relevant foreign currency
during the period before the purchase is effected, the Portfolio, for the
price of the currency future, can attempt to fix the price in U.S. dollars of
the securities it intends to acquire.
The purchase of options on currency futures will allow the Portfolio,
for the price of the premium it must pay for the option, to decide whether or
not to buy (in the case of a call option) or to sell (in the case of a put
option) a futures contract at a specified price at any time during the period
before the option expires. If the Portfolio, in purchasing an option, has been
correct in its judgment concerning the direction in which the price of a
foreign currency would move as against the U.S. dollar, it may exercise the
option and thereby take a futures position to hedge against the risk it had
correctly anticipated or close out the option position at a gain that will
offset, to some extent, currency exchange losses otherwise suffered by the
Portfolio. If exchange rates move in a way the Portfolio did not anticipate,
the Portfolio will have incurred the expense of the option without obtaining
the expected benefit. As a result, the Portfolio's profits on the underlying
securities transactions may be reduced or overall losses may be incurred.
Options
The Balanced and Capital Growth Portfolios may purchase and sell put and
call options listed on a national securities exchange and issued by the
Options Clearing Corporation for hedging purposes. Such transactions may be
effected on a principal basis with primary reporting dealers in U.S.
Government securities in an amount not exceeding 5% of a Portfolio's total
assets, as described further in the Statement of Additional Information. Such
options may relate to particular securities or to various bond indexes.
Purchasing options is a specialized investment technique which entails a
substantial risk of a complete loss of the amounts paid as premiums to the
writer of the option.
The Balanced and Capital Growth Portfolios may purchase and sell put
options on portfolio securities at or about the same time that they purchase
the underlying security or at a later time. By buying a put, a Portfolio
limits its risk of loss from a decline in the market value of the security
until the put expires. Any appreciation in the value of and yield otherwise
available from the underlying security, however, will be partially offset by
the amount of the premium paid for the put option and any related transaction
costs. Call options may be purchased by a Portfolio in order to acquire the
underlying security at a later date at a price that avoids any additional cost
that would result from an increase in the market value of the security. The
Portfolios may also purchase call options to increase its return to investors
at a time when the call is expected to increase in value due to anticipated
appreciation of the underlying security. Prior to its expiration, a purchased
put or call option may be sold in a closing sale transaction (a sale by a
Portfolio, prior to the exercise of an option that it has purchased, of an
option of the same series), and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the
option plus the related transaction costs.
In addition, the Balanced and Capital Growth Portfolios may write
covered call and secured put options. A covered call option means that a
Portfolio owns or has the right to acquire the underlying security subject to
call at all times during the option period. A secured put option means that a
Portfolio maintains in a segregated account with its custodian cash or U.S.
Government securities in an amount
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not less than the exercise price of the option at all times during the option
period. Such options will be listed on a national securities exchange and
issued by the Options Clearing Corporation and may be effected on a principal
basis with primary reporting dealers in U.S. Government securities. The
aggregate value of the securities subject to options written by a Portfolio
will not exceed 25% of the value of its total assets. In order to close out an
option position prior to maturity, a Portfolio may enter into a "closing
purchase transaction" by purchasing a call or put option (depending upon the
position being closed out) on the same security with the same exercise price
and expiration date as the option which it previously wrote.
By writing a covered call option, the Balanced or Capital Growth
Portfolio forgoes the opportunity to profit from an increase in the market
price of the underlying security above the exercise price except insofar as
the premium represents such a profit, and it is not able to sell the
underlying security until the option expires or is exercised or the Portfolio
effects a closing purchase transaction by purchasing an option of the same
series. If the Portfolio writes a secured put option, it assumes the risk of
loss should the market value of the underlying security decline below the
exercise price of the option. The use of covered call and secured put options
will not be a primary investment technique of the Balanced and Capital Growth
Portfolios.
For additional information relating to option trading practices,
including particular risks thereof, see the Statement of Additional
Information.
Risk Factors Associated with Futures, Related Options and Currency
Transactions
To the extent a Portfolio (other than the Money Market Portfolio) is
engaging in a futures transaction as a hedging device, due to the risk of an
imperfect correlation between securities in its portfolio that are the subject
of a hedging transaction and the futures contract used as a hedging device, it
is possible that the hedge will not be fully effective in that, for example,
losses on the portfolio securities may be in excess of gains on the futures
contract or losses on the futures contract may be in excess of gains on the
portfolio securities that were the subject of the hedge. In futures contracts
based on indices, the risk of imperfect correlation increases as the
composition of the Portfolio varies from the composition of the index. In an
effort to compensate for the imperfect correlation of movements in the price
of the securities being hedged and movements in the price of futures
contracts, the Portfolio may buy or sell futures contracts in a greater or
lesser dollar amount than the dollar amount of the securities being hedged if
the historical volatility of the futures contract has been less or greater
than that of the securities. Such "over hedging" or "under hedging" may
adversely affect the Portfolio's net investment results if market movements
are not as anticipated when the hedge is established.
Successful use of futures by a Portfolio also is subject to the
Adviser's ability to predict correctly movements in the direction of
securities prices, interest rates, currency exchange rates and other economic
factors. For example, if the Portfolio has hedged against the possibility of a
decline in the market adversely affecting the value of securities held in its
portfolio and prices increase instead, the Portfolio will lose part or all of
the benefit of the increased value of securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.
Although a Portfolio intends to enter into futures contracts and options
transactions only if there is an active market for such contracts, no
assurance can be given that a liquid market will exist for any particular
contract at any particular time. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contracts prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the
Portfolio to substantial losses. If it is not possible, or the Portfolio
determines not, to close a futures
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position in anticipation of adverse price movements, it will be required to
make daily cash payments of variation margin. In such circumstances, an
increase in the value of the portion of the portfolio being hedged, if any,
may offset partially or completely losses on the futures contract.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. The foreign
currency market offers less protection against defaults in the forward trading
of currencies than is available when trading in currencies occurs on an
exchange. Since a forward currency contract is not guaranteed by an exchange
or clearinghouse, a default on the contract would deprive the Portfolio of
unrealized profits or force the Portfolio to cover its commitments for
purchase or resale, if any, at the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
are principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance of the contract. In addition,
unless a Portfolio hedges against fluctuations in the exchange rate between
the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Portfolio might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Portfolio could
incur losses as a result of those changes. Transactions on foreign exchanges
may include both commodities which are traded on domestic exchanges and those
which are not.
Risk Factors Associated with Derivative Instruments
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
may purchase "derivative" instruments. "Derivative" instruments are
instruments that derive value from the performance of underlying assets,
interest or currency exchange rates, or indices, and include (but are not
limited to) futures contracts, options, forward currency contracts and
structured debt obligations (including collateralized mortgage obligations and
other types of asset-backed securities, "stripped" securities and various
floating rate instruments, including "inverse" floaters).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the "derivative" instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Portfolio will be unable to sell a "derivative" instrument when it
wants because of lack of market depth or market disruption; pricing risk that
the value of a "derivative" instrument (such as an option) will not correlate
exactly to the value of the underlying assets, rates or indices on which it is
based; and operations risk that loss will occur as a result of inadequate
systems and controls, human error or otherwise. Some "derivative" instruments
are more complex than others, and for those instruments that have been
developed recently, data are lacking regarding their actual performance over
complete market cycles.
The Adviser will evaluate the risks presented by the "derivative"
instruments purchased by the Balanced, Growth/Value, Opportunity and Capital
Growth Portfolios, and will determine, in connection with its day-to-day
management of the Portfolios, how they will be used in furtherance of the
Portfolios' investment objectives. It is possible, however, that the Adviser's
evaluations will prove to be inaccurate or incomplete and, even when accurate
and complete, it is possible that the Portfolios will, because of the risks
discussed above, incur loss as a result of their investments in "derivative"
instruments.
Portfolio Turnover
Generally, the Balanced, Growth/Value, Opportunity and Capital Growth
Portfolios will purchase securities for capital appreciation or investment
income, or both, and not for short-term trading profits. However, a Portfolio
may sell a portfolio investment soon after its acquisition if the Adviser
believes that
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such a disposition is consistent with or in furtherance of the Portfolio's
investment objective. Portfolio investments may be sold for a variety of
reasons, such as more favorable investment opportunities or other
circumstances. As a result, a Portfolio is likely to have correspondingly
greater brokerage commissions and other transaction costs which are borne
indirectly by shareholders. Portfolio turnover may also result in the
realization of substantial net capital gains. See "Taxes -- Federal" in the
Prospectus and "Additional Information Concerning Taxes" in the Statement of
Additional Information. While it is not possible to accurately predict
portfolio turnover rates, the annual turnover rate for each of the Balanced,
Growth/Value, Opportunity and Capital Growth Portfolios is not expected to
exceed 100%.
Investment Limitations
Each Portfolio is subject to a number of investment limitations. The
following investment limitations are matters of fundamental policy and may not
be changed with respect to a Portfolio without the affirmative vote of the
holders of a majority of the Portfolio's outstanding shares. Other investment
limitations that cannot be changed without a vote of shareholders are
contained in the Statement of Additional Information under "Investment
Objectives, Policies and Risk Factors."
No Portfolio may:
1. Purchase securities of any one issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, immediately after such purchase, more than 5%
of the value of the Portfolio's total assets would be invested in the
securities of such issuer, or more than 10% of the issuer's
outstanding voting securities would be owned by the Portfolio, except
that up to 25% of the value of the Portfolio's total assets may be
invested without regard to these limitations.
2. Purchase any securities which would cause 25% or more of the value of
the Portfolio's total assets at the time of purchase to be invested
in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that: (a) there is
no limitation with respect to obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements secured by such instruments; (b) wholly-owned finance
companies will be considered to be in the industries of their parents
if their activities are primarily related to financing the activities
of the parents; (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) in the case of the Money Market Portfolio only, there is no
limitation with respect to domestic bank obligations.
3. Invest more than 15% of its net assets in illiquid investments in the
case of the Balanced, Growth/Value, Opportunity and Capital Growth
Portfolios, and invest more than 10% of its net assets in illiquid
investments in the case of the Money Market Portfolio. See "Illiquid
Securities" above.
4. Make loans, except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with
its investment objective and policies and may lend portfolio
securities in an amount not exceeding one-third of its total assets.
5. Borrow money or issue senior securities, except that the Portfolio
may borrow from banks and enter into reverse repurchase agreements
for temporary purposes in amounts not in excess of 10% of the value
of its total assets at the time of such borrowing; or mortgage,
pledge or hypothecate any assets, except in connection with any such
borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of the Portfolio's total assets
at the time of such borrowing. No Portfolio will purchase securities
while its borrowings (including reverse repurchase agreements) in
excess of 5% of its total assets are outstanding. Securities held in
escrow or separate accounts in connection with the Portfolios'
investment practices described in the Statement of Additional
Information or in this Prospectus are not deemed to be pledged for
purposes of this limitation.
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6. The Money Market Portfolio may not, with respect to 75% of its
assets, invest more than 5% of its assets in the securities of any
one issuer, except U.S. Government Obligations. For purposes of this
investment limitation: (i) a security is considered to be issued by
the government entity (or entities) whose assets and revenues back
the security; (ii) in certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in
connection with such guarantee; and (iii) U.S. Government Obligations
(including securities backed by the full faith and credit of the
United States) are deemed to be U.S. Government Obligations for
purposes of the 1940 Act.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of a Portfolio's portfolio securities will not constitute a violation of
such limitation for purposes of the 1940 Act.
In order to permit the sale of a Portfolio's shares in certain states,
the Portfolio may make commitments more restrictive than the investment
policies and limitations described above. Should the Trust determine that any
such commitment is no longer in the best interests of the Portfolio, it will
revoke the commitment by terminating sales of its shares in the state
involved.
PURCHASE AND REDEMPTION OF TRUST SHARES
Co-Distributors
The shares of each Portfolio are sold on a continuous basis by the
Trust's co-distributors, First of Michigan Corporation ("FoM") and Essex
National Securities, Inc. ("Essex") (each, a "Co-Distributor"). FoM is a
registered broker/dealer with offices at 100 Renaissance Center, 26th floor,
Detroit, Michigan 48243. Essex is a registered broker/dealer with offices at
215 Gateway Road West, Napa, California 94558. The Co-Distributors do not
receive any distribution fees from the Trust for their services.
Purchase and Redemption of Shares
Investors may not purchase or redeem shares of the Portfolios directly,
but only through Variable Annuity Contracts offered through Separate Accounts
of the Hartford Companies. Investors should refer to the Prospectus of the
Variable Annuity Contracts for information on how to purchase such contracts,
how to select specific Portfolios of the Trust as investment options for the
contracts and how to redeem monies from the Trust.
The Separate Accounts of the Hartford Companies place orders to purchase
and redeem shares of the Portfolios based on, among other things, the amount
of premium payments to be invested and the amount of surrender and transfer
requests (as defined in the Prospectus describing the Variable Annuity
Contracts issued by the Hartford Companies) to be effected on that day
pursuant to Variable Annuity Contracts. Orders received by the Trust are
effected on days on which the New York Stock Exchange and the Adviser are open
for trading. Orders for the purchase of Portfolio shares are effected at the
net asset value per share next calculated after an order is received in good
order by the Trust. Redemptions are effected at the net asset value per share
next calculated after a redemption request is received in good order by the
Trust. Payment for redemptions will be made by the Trust within seven days
after the request is received. The Trust may suspend the right of redemption
under certain extraordinary circumstances in accordance with SEC rules.
The Portfolios do not assess any fees upon purchase or redemption.
However, surrender charges, mortality and expense risk fees and other charges
may be assessed by the Hartford Companies under the Variable Annuity
Contracts. Such fees should be described in the Prospectus of such contracts.
The Trust assumes no responsibility for any such Prospectus.
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NET ASSET VALUE AND PRICING OF SHARES
The net asset value of each Portfolio for purposes of pricing purchase
and redemption orders is determined by the Adviser as of 12:00 Noon Eastern
Time in the case of the Money Market Portfolio and in the case of all other
Portfolios as of the close of trading on the floor of the New York Stock
Exchange ("Exchange") (currently, 4:00 p.m., New York time), on each day the
Exchange, the Adviser or its bank affiliates are open for business
("Business Day") except: (i) those holidays which the Exchange, the Adviser
or its 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 Portfolio will be determined and its
shares will be priced as of such Early Closing Time. Net asset value per share
is calculated by dividing the value of all securities and other assets
belonging to a Portfolio, less its liabilities, by the number of the
Portfolio's outstanding shares.
Securities held by the Balanced, Growth/Value, Opportunity and Capital
Growth Portfolios which are traded on a recognized U.S. stock exchange are
valued at the last sale price on the securities exchange on which such
securities are primarily traded or at the last sale price on the national
securities market. Securities which are primarily traded on foreign securities
exchanges are generally valued at the latest closing price on their respective
exchanges, except when an occurrence subsequent to the time a value was
established is likely to have changed such value, in which case the fair value
of those securities will be determined through consideration of other factors
by the Adviser under the supervision of the Board of Trustees. Securities,
whether U.S. or foreign, traded on only over-the-counter markets and
securities for which there were no transactions are valued at the average of
the current bid and asked prices. Fixed income securities held by the
Portfolios are valued according to the broadest and most representative
market, which ordinarily will be the over-the-counter markets, whether in the
United States or in foreign countries. Securities are valued at the average of
the current bid and asked prices. Securities for which accurate market
quotations are not readily available, and other assets are valued at fair
value by the Adviser under the supervision of the Board of Trustees.
Securities may be valued on the basis of prices provided by independent
pricing services when the Adviser believes such prices reflect the fair market
value of such securities. The prices provided by pricing services take into
account institutional size trading in similar groups of securities and any
developments related to specific securities. For valuation purposes, the value
of assets and liabilities expressed in foreign currencies will be converted to
U.S. dollars equivalent at the prevailing market rate on the day of valuation.
The Portfolios' open futures contracts will be "marked-to-market."
The assets of the Money Market Portfolio are valued based upon the
amortized cost method. Although the Trust seeks to maintain the net asset
value per share of the Portfolio at $1.00, there can be no assurance that the
net asset value will not vary.
PERFORMANCE AND YIELD INFORMATION
From time to time, in advertisements or in reports to shareholders, the
performance and/or yield of the Portfolios may be compared to those of other
mutual funds with similar investment objectives and to stock or bond 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 and yield of the Portfolios' shares may be
compared to data prepared by Lipper Analytical Services, Inc. In addition, the
performance and yield of the Portfolios may be compared to the Standard &
Poor's 500 Stock Index, an index of unmanaged groups of common stocks,
the Consumer Price Index, the Dow Jones Industrial Average, a recognized
unmanaged index of common stocks of thirty industrial companies listed on the
New York Stock Exchange, the ICB -- Donoghue's Money Fund Report or various
indices such as the Lehman Aggregate Bond Index in the case of the Balanced
Portfolio. Performance and yield data as reported in national financial
publications such as Money Magazine, Forbes, Barron's, The Wall Street Journal
and The New York Times or in publications of a local or regional nature, may
also be used in comparing the performance of the Portfolio.
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The Money Market Portfolio's "yield" refers to the income generated in
the Portfolio over a seven-day period identified in the advertisement. This
income is annualized, i.e., the income during a particular week is assumed to
be generated each week over a 52-week period and is shown as a percentage of
the investment. The Money Market Portfolio may also advertise its "effective
yield" which is calculated similarly but, when annualized, income is assumed
to be reinvested, thereby making the "effective yield" slightly higher because
of the compounding effect of the assumed reinvestment.
The Balanced, Growth/Value, Opportunity and Capital Growth Portfolios
calculate their total returns on an "average annual total return" basis for
various periods from the date they commenced investment operations and for
other periods as permitted under the rules of the SEC. Average annual total
return reflects the average annual percentage change in value of an investment
in a Portfolio 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 Portfolio's shares and assume that any dividends and capital gain
distributions made by the Portfolio during the period are reinvested in
Portfolio shares. When considering average total return figures for periods
longer than one year, it is important to note that a Portfolio'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 each Portfolio is based on historical earnings and will
fluctuate and is not intended to indicate future performance. The investment
return and principal value of an investment in the Portfolios will fluctuate
so that a shareholder's shares, when redeemed, may be worth more or less than
their original cost. The Portfolios' performance data may not provide a basis
for comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Yield and total return data should also be
considered in light of the risks associated with each Portfolio's portfolio
composition, quality, maturity, operating expenses and market conditions.
Yields and total returns quoted for the Portfolios include the effect of
deducting the Portfolios' expenses, but may not include charges and expenses
attributable to a particular Variable Annuity Contract. Since shares of the
Portfolios can be purchased only through a Variable Annuity Contract,
investors should carefully review the Prospectus of the Variable Annuity
Contract selected for information on relevant charges and expenses. Including
these charges in the quotations of the Portfolios' yield and total return
would have the effect of decreasing performance. Performance information for
the Portfolios must always be accompanied by, and be reviewed with,
performance information for the Segregated Accounts which invest in the
Portfolios.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income are declared and paid quarterly by
the Balanced, Growth/Value, Opportunity and Capital Growth Portfolios and
declared daily and paid monthly by the Money Market Portfolio. Net realized
capital gains, if any, are distributed at least annually.
Dividends and distributions will reduce a Portfolio's net asset value by
the amount of the dividend or distribution. All dividends and distributions
are automatically reinvested in additional shares of the Portfolio at their
net asset value per share determined on the payment date.
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TAXES
Each Portfolio intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), which will
relieve the Portfolio of liability for federal income taxes to the extent its
earnings are distributed in accordance with the Code. In order to so qualify,
a Portfolio must comply with certain distribution, diversification, source of
income and other applicable requirements. If for any taxable year a Portfolio
does not qualify for the special federal tax treatment afforded regulated
investment companies, all of the Portfolio's taxable income would be subject
to tax at regular corporate rates without any deduction for distributions to
shareholders. In such event, a Portfolio's distributions to segregated asset
accounts holding shares of the Portfolio would be taxable as ordinary income
to the extent of the Portfolio's current and accumulated earnings and profits.
A failure of a Portfolio to qualify as a regulated investment company also
could result in the loss of the tax favored status of variable annuity
contracts based on a segregated asset account which invests in the Portfolio.
Under Code Section 817(h), a segregated asset account upon which a
variable annuity contract is based must be "adequately diversified." A
segregated asset account will be adequately diversified if it complies with
certain diversification tests set forth in Treasury regulations. If a
regulated investment company satisfies certain conditions relating to the
ownership of its shares, a segregated asset account investing in such
investment company will be entitled to treat its pro rata portion of each
asset of the investment company as an asset for purposes of these
diversification tests. The Portfolios intend to meet these ownership
conditions and to comply with the diversification tests noted above.
Accordingly, a segregated asset account investing solely in shares of a
Portfolio will be adequately diversified. However, the failure of a Portfolio
to meet such conditions and to comply with such tests could cause the owners
of Variable Annuity Contracts based on such account to recognize ordinary
income each year in the amount of any net appreciation of such contract during
the year.
Provided that a Portfolio and a segregated asset account investing in
the Portfolio satisfy the above requirements, any distributions from the
Portfolio to such account will be exempt from current federal income taxation
to the extent that such distributions accumulate in a Variable Annuity
Contract.
Persons investing in a variable annuity contract offered by a segregated
asset account investing in a Portfolio should refer to the Prospectus with
respect to such contract for further tax information.
The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus and is
subject to change by legislative or administrative action. Each prospective
investor should consult his own tax adviser as to the tax consequences of
investments in the Portfolios.
MANAGEMENT
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management of
the business and affairs of the Trust. The Trustees and executive officers of
the Trust and their principal occupations for the last five years are set
forth below. Each Trustee has an address at The Woodward Variable Annuity
Fund, c/o NBD Bank, Transfer Agent, 611 Woodward Avenue, Detroit, Michigan
48226. Information on the compensation paid by the Trust to its Trustees and
officers and their background is included in the Statement of Additional
Information.
*Earl I. Heenan, Jr., Chairman and President
Director (since 1995), Vice Chairman (1988-1995) and President
(1955-1988), Detroit Mortgage & Realty Company; President (1989-1992), Trustee
(since 1966), Cottage Hospital of Grosse Pointe (affiliate of Henry Ford
Health System); Trustee, Henry Ford Health Sciences Center (since 1987);
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Trustee, Henry Ford Continuing Care Corporation (since 1980); Trustee, Earhart
Foundation (since 1980); Trustee, The Woodward Funds (since 1987). 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 (1978-1994); Trustee
(since 1977) and Chairman (since 1983); Charles J. Strosacker Foundation;
Trustee (1989-1993), Higgins Lake Foundation; Trustee, The Woodward Funds
(since 1987). He is 75 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); Trustee, The Woodward Funds (since 1991). He is
70 years old and his address is 2733 Glenbrook Court, Bloomfield Hills,
Michigan 48302.
Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1986-1990) and
Director (1986-1995), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director
(1992-1995), Central Macomb County Chamber of Commerce; Vice-Chairman,
Michigan Higher Education Facilities Authority (since 1991); Trustee, The
Woodward Funds (since 1992). He is 53 years old and his address is
3650 Shorewood Drive, North Lakeport, Michigan 48059.
John P. Gould, Trustee
Steven G. Rothmeier Professor (since January, 1996) and Distinguished
Service Professor of Economics (since 1984), University of Chicago, Graduate
School of Business (on the faculty since 1965); Dean of the University of
Chicago Graduate School of Business (1983-1993); Member of Economic Club of
Chicago and Commercial Club of Chicago; Director of Harbor Capital Advisors
and Dimensional Fund Advisors; Trustee, Prairie Family of Funds and The
Woodward Funds. He is 57 years old and his address is University of Chicago,
Graduate School of Business, 1101 East 58th Street, Chicago, Illinois 60637.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern University
(since 1985); Director of Planning and Policy Development for the University
of Colorado (1981-1985); Member of the Board of Directors of Evanston
Hospital, Chicago Metropolitan YMCA, Chicago Network and United Charities;
Member of Chicago Economics Club; Trustee, Prairie Family of Funds and The
Woodward Funds. She is 48 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
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1985); Director, Oakland Commerce Bank (since 1984) and Michigan Opera Theater
(since 1981); Trustee, The Woodward Funds (since 1987). 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; Trustee, The Woodward Funds (since 1993). He is 67 years old, and his
address is One American Square, 34th Floor, Indianapolis, Indiana 46204.
Donald L. Tuttle, Trustee
Vice President (since 1995), Senior Vice President (1992-1995),
Association for Investment Management and Research; Professor of Finance,
Indiana University (1970-1991); Vice President, Trust & Investment Advisers,
Inc. (1990-1991); Director, Federal Home Loan Bank of Indianapolis
(1981-1985); Trustee, The Woodward Funds (since 1993). He is 61 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.
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* Trustees who are "interested persons" of the Trust, as defined in the 1940
Act.
Investment Adviser, Custodian and Transfer Agent
The Trust's investment adviser is NBD, a wholly owned subsidiary of
First Chicago NBD Corporation, a bank holding company. NBD has offices at 611
Woodward Avenue, Detroit, Michigan 48226. As of December 31, 1995, NBD was
providing investment management and advisory services for accounts aggregating
approximately $37.9 billion. NBD has been in the business of providing such
services since 1933. Included among NBD's accounts are pension and profit
sharing funds for major corporations and state and local governments,
commingled trust funds and a variety of institutional and personal advisory
accounts, estates and trusts. NBD also acts as investment adviser for other
registered investment company portfolios.
NBD provides investment advisory and certain administrative services to
the Trust pursuant to an Advisory Agreement. Subject to the overall
supervision of the Board of Trustees, NBD makes investment decisions for each
of the Trust's Portfolios.
Claude B. Erb, First Vice President is primarily responsible for the
day-to-day portfolio management of the Balanced Portfolio. Mr. Erb joined
First Chicago NBD Corporation in 1993, after receiving his MBA in finance from
the University of California.
Jeffrey C. Beard, First Vice President, and Gary L. Konsler, First Vice
President are primarily responsible for the day-to-day management of the
Growth/Value and Capital Growth Portfolios. Mr. Beard joined NBD in 1982 after
receiving an MBA in Finance from Michigan State University in 1981. Mr. Konsler
joined NBD in 1973 after receiving a JD from Indiana University.
Ronald L. Doyle, First Vice President, and Joseph R. Gatz, Vice
President, are primarily responsible for the day-to-day management of the
Opportunity Portfolio. Mr. Doyle joined NBD in 1982 after receiving his MBA in
Finance from Michigan State University. Mr. Gatz joined NBD in 1986 after
receiving an MBA from Indiana University.
For its services under the Advisory Agreement, NBD is entitled to
receive an advisory fee, computed daily and payable monthly, at an annual rate
of .75% of the average daily net assets of each of the Balanced, Growth/Value,
Opportunity and Capital Growth Portfolios. Shareholders should note
25
<PAGE>
that the fees payable by each of these Portfolios are higher than those
payable by most other investment companies. However, the Trust believes that
the fees are within the range of fees payable by balanced and equity funds.
For its services under the Advisory Agreement with respect to the Money Market
Portfolio, NBD is entitled to receive an advisory fee, computed daily and
payable monthly, at an annual rate of .45% of the Portfolio's average daily
net assets. NBD may voluntarily waive its fees in whole or in part with
respect to a Portfolio.
NBD also receives compensation as the Trust's custodian and transfer
agent under separate agreements. The fees payable by the Trust for these
services are described in the Statement of Additional Information.
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling, or distributing the shares of a
registered, open-end investment company continuously engaged in the issuance
of its shares, and prohibit banks generally from underwriting securities, but
do not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Adviser and the Trust believe that the Adviser may perform the
advisory, custodial and transfer agency services for the Trust described in
this Prospectus without violation of such banking laws or regulations.
However, future changes in legal requirements relating to the permissible
activities of banks and their affiliates, as well as future interpretations of
present requirements, could prevent the Adviser from continuing to perform
investment advisory, custodial or transfer agency services for the Trust.
If the Adviser were prohibited from performing investment advisory,
custodial or transfer agency services for the Trust, it is expected that the
Board of Trustees of the Trust would recommend that shareholders approve new
agreements with another entity or entities qualified to perform such services
and selected by the Board. The Trust does not anticipate that investors would
suffer any adverse financial consequences as a result of these occurrences.
Co-Distributors
FoM, a Delaware corporation and a wholly owned subsidiary of First of
Michigan Capital Corporation, is a Co-Distributor of the Trust's shares. It is
engaged in the securities underwriting and securities and commodities
brokerage business and is a member of the New York Stock Exchange, Inc., other
major securities and commodities exchanges, and the National Association of
Securities Dealers, Inc. FoM participates as a member of various selling
groups or as agent of other investment companies, executes orders on behalf of
investment companies for the purchase and sale of their securities and sells
securities to such companies as a broker or dealer in securities. On December
31, 1995, FoM had a net worth of $37,231,000.
Essex, a New York corporation, is a wholly owned subsidiary of CUC
International, Inc. Essex is engaged in the business of securities brokerage
through financial institutions and is a member of the National Association of
Securities Dealers, Inc. Essex has entered into dealer agreements with the
distributors of various investment companies and executes orders on behalf of
such companies for the purchase and sale of their securities. As of December
31, 1995, Essex had a net worth of $1,945,000.
FoM and Essex act as Co-Distributors of the Trust's shares pursuant to
their Distribution Agreement with the Trust. They receive no distribution fees
from the Trust for their services.
Trust Expenses
The Trust is responsible for the payment of its expenses. These include,
for example, fees payable to NBD as Adviser, or expenses otherwise incurred by
the Trust in connection with the management of the investment of the Trust's
assets such as brokerage fees, commissions and other transaction charges, the
fees and expenses of NBD as the Trust's Custodian and as its Transfer Agent,
outside auditing and legal expenses, all taxes and corporate fees payable by
the Trust, SEC fees, state securities qualification
26
<PAGE>
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to shareholders, costs of shareholder reports and shareholder
meetings, and any extraordinary expenses. Each of the Trust's Portfolios also
pays for brokerage commissions and transfer taxes (if any) in connection with
the purchase and sale of portfolio securities. Expenses attributable to a
particular Portfolio of the Trust will be charged to that Portfolio, and
expenses not readily identifiable as belonging to a particular Portfolio will
be allocated by the Board of Trustees among one or more Portfolios in such a
manner as it shall deem fair and equitable. The Statement of Additional
Information describes in more detail the fees and expenses borne by the Trust.
DESCRIPTION OF THE TRUST AND ITS SHARES
The Trust was organized as a Delaware business trust as of November 7,
1994 under a Trust Instrument. The Trust is a series fund having five series
of shares of beneficial interest, each of which evidences an interest in a
separate investment portfolio. The Trust Instrument 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. Series A, Series B, Series C, Series D and Series E shares of the
Trust represent interests in the Balanced Fund, Growth/Value Fund, Opportunity
Fund, Capital Growth Fund and Money Market Fund, respectively. Each share has
$.10 par value, represents an equal proportionate interest in the Portfolio
with other shares of the same class outstanding, and is entitled to such
dividends and distributions out of the income earned on the assets belonging
to the Portfolio as are declared in the discretion of the Board of Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. The rights accompanying Portfolio
shares are legally vested in the Separate Accounts offered by the Hartford
Companies. However, to the extent required by law, the Hartford Companies will
vote Portfolio shares held in the Separate Accounts in a manner consistent
with timely voting instructions received from the holders of Variable Annuity
Contracts. To the extent required by law, the Hartford Companies will vote
Portfolio shares held in the Separate Accounts for which no timely
instructions are received from the holders of Variable Annuity Contracts, as
well as shares they own, in the same proportion as those shares for which
voting instructions are received. Additional information concerning voting
rights of the participants in the Separate Accounts are more fully set forth
in the Prospectus relating to those accounts issued by the Hartford Companies.
Because NBD serves the Trust as both Custodian and as Adviser, the
Trustees have established a procedure requiring three annual verifications,
two of which are unannounced, of all investments held pursuant to the
Custodian Agreement, to be conducted by the Trust's independent accountants.
The Trust is not required under Delaware law to hold annual shareholder
meetings and intends to do so only if required by the 1940 Act. Shareholders
have the right to call a meeting of shareholders to consider the removal of
one or more Trustees and such meeting will be called when requested by the
holders of record of 10% or more of the Trust's outstanding shares. To the
extent required by law, the Trust will assist in shareholder communications in
such matters.
Hartford Life Insurance Company provided the initial capital for the
Trust by purchasing 300,000 shares of the Balanced Portfolio, 50,000
shares of the Growth/Value Portfolio, 50,000 shares of the Opportunity
Portfolio, 50,000 shares of the Capital Growth Portfolio and 500,000 shares of
the Money Market Portfolio, for an aggregate purchase price of $5,000,000, on
March 30, 1995.
27
<PAGE>
MISCELLANEOUS
The Trust Instrument provides that the obligations of the Trust entered
into in the name or on behalf thereof by any of the Trustees, representatives
or agents are made not individually, but in such capacities, and are not
binding upon any of the Trustees, shareholders or representatives of the Trust
personally, but bind only the property of the Trust or any Portfolio thereof,
and all persons dealing with any Portfolio of the Trust must look solely to
the Trust property belonging to such Portfolio for the enforcement of any
claims against the Trust.
Inquiries regarding the Trust should be made in writing to the Trust's
office c/o NBD Bank, Transfer Agent for The Woodward Variable Annuity Fund,
P.O. Box 7058, Troy, Michigan 48007-7058. Holders of Variable Annuity
Contracts issued by the Hartford Companies for which shares of the Portfolios
are the investment vehicle will receive from the Hartford Companies unaudited
semi-annual financial statements and year-end financial statements audited by
the Trust's independent certified public accountants. Each report will show
the investments owned by the Portfolios and the market values of the
investments and will provide other information about the Portfolios and their
operations.
28
<PAGE>
No person has been authorized to give WOODWARD
any information or to make any BALANCED FUND
representations not contained in this
Prospectus, or in the Trust's
Statement of Additional Information WOODWARD
incorporated herein by reference, in GROWTH/VALUE FUND
connection with the offering made by
this Prospectus and, if given or
made, such information or WOODWARD
representations must not be relied OPPORTUNITY FUND
upon as having been authorized by the
Trust, Adviser or Co-Distributors.
This Prospectus does not constitute WOODWARD
an offering by the Trust or by its CAPITAL GROWTH
Co-Distributors in any jurisdiction FUND
in which such offering may not
lawfully be made.
WOODWARD
MONEY MARKET FUND
THE WOODWARD
VARIABLE ANNUITY
FUND
Investment Adviser:
NBD Bank
Detroit, Michigan 48226
Co-Distributors:
First of Michigan Corporation
Detroit, Michigan 48243
Essex National Securities, Inc. Prospectus
Napa, California 94558 May 1, 1996
Custodian and Transfer Agent:
NBD Bank
Troy, Michigan 48007-7058
Legal Counsel:
Drinker Biddle & Reath
Philadelphia, Pennsylvania 19107-3496
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
for
WOODWARD BALANCED FUND
WOODWARD GROWTH/VALUE FUND
WOODWARD OPPORTUNITY FUND
WOODWARD CAPITAL GROWTH FUND
WOODWARD MONEY MARKET FUND
of
THE WOODWARD VARIABLE ANNUITY FUND
c/o NBD Bank
Transfer Agent
P.O. Box 7058
Troy, Michigan 48007-7058
This Statement of Additional Information (the "Additional
Statement") is meant to be read in conjunction with The Woodward Variable
Annuity Fund's Prospectus dated May 1, 1996 for the Woodward Balanced Fund
(the "Balanced Portfolio"), Woodward Growth/Value Fund (the "Growth/Value
Portfolio"), Woodward Opportunity Fund (the "Opportunity Portfolio"), Woodward
Capital Growth Fund (the "Capital Growth Portfolio"), and Woodward Money
Market Fund (the "Money Market Portfolio") (each, a "Portfolio" and
collectively, the "Portfolios"), and is incorporated by reference in its
entirety into the Prospectus. The Balanced, Growth/Value, Opportunity and
Capital Growth Portfolios are sometimes referred to herein as the "Non-Money
Market Portfolios". Because this Additional Statement is not itself a
prospectus, no investment in shares of the Portfolios should be made solely
upon the information contained herein. Copies of the Portfolios' Prospectus
may be obtained from any office of the Co-Distributors by writing or calling
the Co- Distributors, the Trust or the Hartford Companies. 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......................... 1
NET ASSET VALUE.......................................................... 14
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................... 16
DESCRIPTION OF SHARES.................................................... 16
ADDITIONAL INFORMATION CONCERNING TAXES.................................. 18
MANAGEMENT............................................................... 20
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 23
COUNSEL.................................................................. 23
ADDITIONAL INFORMATION ON PERFORMANCE.................................... 23
MISCELLANEOUS............................................................ 26
APPENDIX A...............................................................A-1
APPENDIX B...............................................................B-1
AUDITED FINANCIAL STATEMENTS............................................FS-1
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INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Portfolios' respective
investment objectives and policies as set forth in the Prospectus.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Portfolios may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Adviser is responsible for, makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for each
Portfolio.
The annualized portfolio turnover rate for each Portfolio is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover of
the Non-Money Market Portfolios may vary greatly from year to year as well as
within a particular year, and may be affected by cash requirements for
redemption of shares and by requirements which enable the Portfolios to
receive favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions, and the Non-Money Market Portfolios may
engage in short term trading to achieve their respective investment
objectives.
Purchases of money market instruments by the Portfolios are
made from dealers, underwriters and issuers. The Portfolios currently do not
expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a "net" basis acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the
payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may
<PAGE>
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.
For the period ended December 31, 1995, the Woodward Balanced,
Growth/Value, Opportunity and Capital Growth Portfolios paid brokerage
commissions of $22,655, $13,521, $24,872 and $16,571, respectively.
The Portfolios may participate, if and when practicable, in
bidding for the purchase of portfolio securities directly from an issuer in
order to take advantage of the lower purchase price available to members of a
bidding group. A Portfolio will engage in this practice, however, only when
the Adviser, in its sole discretion, believes such practice to be otherwise in
the Portfolio's interests.
The Advisory Agreement for the Portfolios provides that, in
executing portfolio transactions and selecting brokers or dealers, the Adviser
will seek to obtain the best overall terms available for each Portfolio. In
assessing the best overall terms available for any transaction, the Adviser
shall consider factors it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, both for the specific transaction and on a continuing
basis. In addition, the Agreement authorizes the Adviser to cause a Portfolio
to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer
for effecting the same transaction, provided that the Adviser determines in
good faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in
terms of either the particular transaction or the overall responsibilities of
the Adviser to the Portfolios. Such brokerage and research services might
consist of reports and statistics relating to specific companies or
industries, general summaries of groups of stocks or bonds and their
comparative earnings and yields, or broad overviews of the stock, bond and
government securities markets and the economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Adviser and
does not reduce the advisory fees payable by the Portfolios. The Trustees will
periodically review any commissions paid by the Portfolios to consider whether
the commissions paid over representative periods of time appear to be
reasonable in relation to the benefits inuring to the Portfolios. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other
accounts for which investment discretion is exercised by the Adviser.
Conversely, a Portfolio may be the primary beneficiary of the research or
services received as a result of portfolio transactions effected for such
other account or investment company.
-2-
<PAGE>
The Trust will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in or enter into
repurchase or reverse repurchase agreements with the Adviser, the
Co-Distributors or an affiliated person of any of them (as such term is
defined in the 1940 Act) acting as principal, except to the extent permitted
by the SEC or its staff. In addition, a Portfolio will not purchase securities
during the existence of any underwriting or selling group relating thereto of
which a Co-Distributor or the Adviser, or an affiliated person of either of
them, is a member, except to the extent permitted by the SEC or its staff.
Under certain circumstances, the Portfolios may be at a disadvantage because
of these limitations in comparison with other investment companies which have
similar investment objectives but are not subject to such limitations.
Investment decisions for each Portfolio are made independently
from those for the other Portfolios and for any other investment companies and
accounts advised or managed by the Adviser. Such other investment companies
and accounts may also invest in the same securities as the Portfolios. To the
extent permitted by law, the Adviser may aggregate the securities to be sold
or purchased for the Portfolios with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
one or more of the Portfolios and another investment company or account, the
transaction will be averaged as to price and available investments allocated
as to amount, in a manner which the Adviser believes to be equitable to each
Portfolio and such other investment company or account. In some instances,
this investment procedure may adversely affect the price paid or received by a
Portfolio or the size of the position obtained or sold by the Portfolio.
Eligible Securities for the Money Market Portfolio
The Money Market Portfolio may purchase "eligible securities"
that present minimal credit risks as determined by the Adviser pursuant to
guidelines established by the Trust's Board of Trustees. Eligible securities
generally include: (1) securities that are rated by two or more Rating
Agencies (or the only Rating Agency which has issued a rating) in one of the
two highest rating categories for short term debt securities; (2) securities
that have no short term rating, if the issuer has other outstanding short term
obligations that are comparable in priority and security as determined by the
Adviser ("Comparable Obligations") and that have been rated in accordance with
(1) above; (3) securities that have no short term rating, but are determined
to be of comparable quality to a security satisfying (1) or (2) above, and the
issuer does not have Comparable Obligations rated by a Rating Agency; and (4)
obligations that
-3-
<PAGE>
carry a demand feature that complies with (1), (2) or (3) above, and are
unconditional (i.e., readily exercisable in the event of default) or, if
conditional, either they or the long term obligations of the issuer of the
demand obligation are (a) rated by two or more Rating Agencies (or the only
Rating Agency which has issued a rating) in one of the two highest categories
for long term debt obligations, or (b) determined by the Adviser to be of
comparable quality to securities which are so rated. The Board of Trustees
will approve or ratify any purchases by the Money Market Portfolio of
securities that are rated by only one Rating Agency or that qualify under (3)
above.
Government Obligations
As stated in the Prospectus, pursuant to its investment
objective each Portfolio may invest in U.S. Government
Obligations.
Bank Obligations
In accordance with its investment objective, a Portfolio may
purchase bank obligations, which include bankers' acceptances, negotiable
certificates of deposit and non-negotiable time deposits, including U.S.
dollar-denominated instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions. Although the Portfolios invest in
obligations of foreign banks or foreign branches of U.S. banks only where the
Adviser deems the instrument to present minimal credit risks, such investments
may nevertheless entail risks that are different from those of investments in
domestic obligations of U.S. banks due to differences in political, regulatory
and economic systems and conditions. All investments in bank obligations are
limited to the obligations of financial institutions having more than $1.0
billion in total assets at the time of purchase.
Commercial Paper
Commercial paper, including variable and floating rate notes
and other short term corporate obligations, must be rated in one of the two
highest categories by at least two Rating Agencies, or if not rated, in the
case of the Money Market Portfolio, must have been independently determined by
the Adviser to be of comparable quality or, in the case of the Non-Money
Market Portfolios, have been issued by a corporation having an outstanding
bond issue rated A or higher by a Rating Agency. Bonds and other short term
obligations (if not rated as commercial paper) purchased by the Non-Money
Market Portfolios must be rated BBB or Baa, or higher, by a Rating Agency,
respectively, or if unrated, be of comparable investment quality in the
judgment of the Adviser.
-4-
<PAGE>
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by the Portfolios, the Adviser will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
notes and will continuously monitor their financial status to meet payment on
demand. The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Portfolio
to dispose of instruments if the issuer defaulted on its payment obligation or
during periods that the Portfolio is not entitled to exercise its demand
rights, and the Portfolio could, for these or other reasons, suffer a loss
with respect to such instruments.
Other Investment Companies
Subject to 1940 Act limitations and pursuant to applicable SEC
requirements, each Portfolio may invest from time to time in securities issued
by other investment companies which invest in high quality, short term debt
securities. Each Portfolio intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than
5% of the value of the Portfolio's total assets will be invested in the
securities of any one investment company; (b) not more than 10% of the value
of the Portfolio's total assets will be invested in the aggregate in
securities of investment companies as a group; and (c) not more than 3% of the
outstanding voting stock of any one investment company will be owned by the
Portfolio or the Trust as a whole.
Lending Securities
When a Portfolio lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Portfolio if a
material event affecting the investment is to occur.
Repurchase and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectus generally equals the price paid by a Portfolio plus interest
negotiated on the basis of current short term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Trust's Custodian,
in the Federal Reserve/Treasury book-entry system or by another authorized
securities depository. Repurchase agreements are considered to be loans under
the 1940 Act.
-5-
<PAGE>
Reverse repurchase agreements are considered to be borrowings by the
Portfolios under the 1940 Act.
Options Trading
As stated in the Prospectus, the Balanced Portfolio may
purchase and sell put and call options listed on a national securities
exchange and issued by the Options Clearing Corporation. Such transactions may
be effected on a principal basis with primary reporting dealers in U.S.
Government securities in an amount not exceeding 5% of the Portfolio's net
assets. This is a highly specialized activity which entails greater than
ordinary investment risks. Regardless of how much the market price of the
underlying security increases or decreases, the option buyer's risk is limited
to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. A listed
call option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking
the obligations under the option contract. A listed put option gives the
purchaser the right to sell to a clearing corporation the underlying security
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the market price of the security. Put and call options
purchased by the Portfolio will be valued at the last sale price or, in the
absence of such a price, at the mean between bid and asked prices.
The Balanced Portfolio's obligation to sell a security subject
to a covered call option written by it, or to purchase a security subject to a
secured put option written by it, may be terminated prior to the expiration
date of the option by the Portfolio executing a closing purchase transaction,
which is effected by purchasing on an exchange an option of the same series
(i.e., same underlying security, exercise price and expiration date) as the
option previously written. Such a purchase does not result in the ownership of
an option. A closing purchase transaction will ordinarily be effected to
realize a profit on an outstanding option, to prevent an underlying security
from being called, to permit the sale of the underlying security or to permit
the writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Portfolio will have incurred a loss in the transaction. An option position
may be closed out only on an
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<PAGE>
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. The
Portfolio will write an option on a particular security only if the Adviser
believes that a liquid secondary market will exist on an exchange for options
of the same series which will permit the Portfolio to make a closing purchase
transaction in order to close out its position.
When the Balanced Portfolio writes a covered call option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio's
statement of assets and liabilities as a deferred credit. The amount of the
deferred credit will be subsequently marked-to-market to reflect the current
value of the option written. The current value of the traded option is the
last sale price or, in the absence of a sale, the average of the closing bid
and asked prices. If an option expires on the stipulated expiration date or if
the Portfolio enters into a closing purchase transaction, it will realize a
gain (or loss if the cost of a closing purchase transaction exceeds the net
premium received when the option is sold) and the deferred credit related to
such option will be eliminated. Any gain on a covered call option may be
offset by a decline in the market price of the underlying security during the
option period. If a covered call option is exercised, the Portfolio may
deliver the underlying security held by it or purchase the underlying security
in the open market. In either event, the proceeds of the sale will be
increased by the net premium originally received and the Portfolio will
realize a gain or loss. If a secured put option is exercised, the amount paid
by the Portfolio for the underlying security will be partially offset by the
amount of the premium previously paid to the Portfolio. Premiums from expired
options written by the Portfolio and net gains from closing purchase
transactions are treated as short-term capital gains for federal income tax
purposes, and losses on closing purchase transactions are short-term capital
losses.
Stock Index Options
The Balanced, Growth/Value, Opportunity and Capital Growth
Portfolios may purchase and write put and call options on stock indexes listed
on U.S. securities exchanges or traded in the over-the-counter market. A stock
index fluctuates with changes in the market values of the stocks included in
the index.
-7-
<PAGE>
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.
When-Issued Purchases and Forward Commitments
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities
are delivered to the Portfolio on the settlement date. In these cases the
Portfolio may realize a capital gain or loss.
When a Portfolio engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
Mortgage Backed Securities
Mortgage Backed Securities Generally. Mortgage backed
securities held by the Balanced Portfolio represent an ownership interest in a
pool of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. The mortgagor's
monthly payments to his lending institution are "passed-through" to an
investor such as the Portfolio. Most issuers or poolers provide
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<PAGE>
guarantees of payments, regardless of whether or not the mortgagor actually
makes the payment. The guarantees made by issuers or poolers are supported by
various forms of credit, collateral, guarantees or insurance, including
individual loan, title, pool and hazard insurance purchased by the issuers or
poolers so that they can meet their obligations under the policies. Mortgage
backed securities issued by private issuers or poolers, whether or not such
securities are subject to guarantees, may entail greater risk than securities
directly or indirectly guaranteed by the U.S. Government.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid. Additional payments
are caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be
incurred. Some mortgage backed securities are described as "modified
pass-through". These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("PC's"), which represent interests in mortgages
from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers which include state and federally-chartered savings and loan
credit unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA.
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
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<PAGE>
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 Portfolio may
purchase pools of variable rate mortgages ("VRM"), growing equity mortgages
("GEM"), graduated payment mortgages ("GPM") and other types where the
principal and interest payment procedures vary. VRM's are mortgages which
reset the mortgage's interest rate periodically with changes in open market
interest rates. To the extent that the Portfolio is actually invested in
VRM's, its interest income will vary with changes in the applicable interest
rate on pools of VRM's. GPM and GEM pools maintain constant interest rates,
with varying levels of principal repayment over the life of the mortgage.
These different interest and principal payment procedures should not impact
the Portfolio's net asset value since the prices at which these securities are
valued will reflect the payment procedures.
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<PAGE>
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. Actual
prepayment experience may cause the yield to differ from the assumed average
life yield.
Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yields of the
Balanced Portfolio. The compounding effect from reinvestments of monthly
payments received by the Portfolio will increase its yields to shareholders,
compared to bonds that pay interest semi-annually.
Municipal Securities
To the extent consistent with its investment objective, the
Balanced Portfolio may invest in municipal securities including general
obligation securities, revenue securities, notes, and moral obligation bonds,
which are normally issued by special purpose authorities ("Municipal
Securities"). There are, of course, variations in the quality of Municipal
Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend in part on a
variety of factors, including general market conditions, the financial
condition of the issuer, general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating
of the issue. The ratings of Municipal Securities by Rating Agencies represent
their opinions as to the quality of Municipal Securities. It should be
emphasized, however, that ratings are general and are not absolute standards
of quality, and Municipal Securities with the same maturity, interest rate and
rating may have different yields while Municipal Securities with the same
maturity and interest rate with different ratings may have the same yield.
Subsequent to its purchase by the Portfolio, a
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Municipal Security may cease to be rated or its rating may be reduced below
the minimum rating required for purchased by the Portfolio. The Adviser will
consider such an event in determining whether the Portfolio should continue to
hold the obligation.
The payment of principal and interest on most Municipal
Securities purchased by the Balanced Portfolio will depend upon the ability of
the issuers to meet their obligations. The District of Columbia, each state,
each possession and territory of the United States, each of their political
subdivisions, agencies, instrumentalities and authorities and each state
agency of which a state is a member is a separate "issuer" as that term is
used in this Additional Statement and in the Prospectus. The non-governmental
user of facilities financed by a private activity bond is also considered to
be an "issuer". An issuer's obligations under its Municipal Securities are
subject to the provisions of bankruptcy, insolvency, and other laws affecting
the rights or remedies of creditors, such as the Federal Bankruptcy Code, and
laws, if any, which may be enacted by Federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest or principal of its Municipal
Securities may be materially adversely affected by litigation or other
conditions.
Certain of the Municipal Securities held by the Balanced
Portfolio may be insured at the time of issuance as to the timely payment of
principal and interest. The insurance policies will usually be obtained by the
issuer of the Municipal Securities at the time of original issuance. In the
event that the issuer defaults with respect to interest or principal payments,
the insurer will be notified and will be required to make payment to the
bondholders. There is, however, no guarantee that the insurer will meet its
obligations. In addition, such insurance will not protect against market
fluctuations caused by changes in interest rates and other factors.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectus, the Portfolios are subject to the following investment limitations
which may not be changed without approval of the holders of the majority of
the outstanding shares of the affected Portfolio (as defined under
"Miscellaneous" below).
None of the Portfolios may:
1. Purchase or sell real estate, except that each
Portfolio may purchase securities of issuers which deal in real
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estate and may purchase securities which are secured by interests
in real estate.
2. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Portfolio might be deemed to be
an underwriter upon the disposition of portfolio securities acquired within
the limitation on purchases of restricted securities and except to the extent
that the purchase of obligations directly from the issuer thereof in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
4. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except for the following in the case of the
Non-Money Market Portfolios: transactions in options on securities, foreign
currencies or indices; indices of securities; futures contracts; options on
futures contracts; forward foreign currency exchange contracts; other
contracts for the future delivery of foreign currency; and similar
instruments.
5. Purchase securities on margin, make short sales of
securities or maintain a short position, except that (a) this investment
limitation shall not apply to the Non-Money Market Portfolios' transactions in
options on securities, foreign currencies or indices, indices of securities,
futures contracts, options on future contracts, forward foreign currency
exchange contracts, other contracts, forward foreign currency exchange
contracts, other contracts for the future delivery of foreign currency and
similar instruments, and (b) each Portfolio may obtain short-term credit as
may be necessary for the clearance of purchases and sales of portfolio
securities.
6. Purchase securities of companies for the purpose
of exercising control.
7. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that, to the extent
appropriate to its investment objective, (a) each Portfolio may purchase
publicly traded securities of companies engaging in whole or in part in such
activities, and (b) each Non-Money Market Portfolio may enter into
transactions in options on securities, foreign currencies or indices, indices
of securities, futures contracts, options on futures contracts, forward
foreign currency exchange contracts, other contracts for the future delivery
of foreign currency and similar instruments.
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<PAGE>
In order to permit the sale of a Portfolio's shares in certain
states, the Trust may make commitments with respect to a Portfolio more
restrictive than the investment policies and limitations described above and
in the Prospectus. Should the Trust determine that any such commitment is no
longer in the best interests of a particular Portfolio, it will revoke the
commitment by terminating sales of the Portfolio's shares in the state
involved and, in the case of investors in Texas, give notice of such action.
NET ASSET VALUE
Non-Money Market Portfolios
The net asset value per share of each Non-Money Market
Portfolio is calculated by adding the value of all portfolio securities and
other assets belonging to the Portfolio, subtracting the liabilities charged
to the Portfolio, and dividing the result by the number of shares of the
Portfolio outstanding. "Assets which belong to" a Portfolio consist of the
consideration received upon the issuance of shares of the Portfolio together
with all income, earnings, profits and proceeds derived from the investment
thereof, including any proceeds from the sale of such investments, any funds
or payments derived from any reinvestment of such proceeds, and a portion of
any general assets of the Trust not belonging to a particular investment
portfolio. Assets belonging to a Portfolio are charged with the direct
liabilities of the Portfolio and with a share of the general liabilities of
the Trust which are normally allocated in proportion to the relative net asset
values of all of the Trust's Portfolios at the time of allocation. Subject to
the provisions of the Trust Instrument, determinations by the Board of
Trustees as to the direct and allocable liabilities, and the allocable portion
of any general assets, with respect to a portfolio are conclusive.
Money Market Portfolios
The Money Market Portfolio intends to value its portfolio
securities based upon their amortized cost in accordance with Rule 2a-7 under
the 1940 Act. Where it is not appropriate to value a security by the amortized
cost method, the security will be valued either by market quotations, or by
fair value as determined by the Board of Trustees. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the securities. The value of portfolio securities
held by the Portfolio will vary inversely to changes in prevailing interest
rates. Thus, if interest rates have increased from the time a security was
purchased, such security, if sold, might be sold at
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a price less than its cost. Similarly, if interest rates have declined from
the time a security was purchased, such security, if sold, might be sold at a
price greater than its purchase cost. In either instance, if the security is
held to maturity, no gain or loss will be realized.
Pursuant to Rule 2a-7, the Money Market Portfolio is required
to maintain a dollar-weighted average portfolio maturity of 90 days or less,
to purchase securities having remaining maturities of 13 months or less only,
and to invest only in securities determined by the Board of Trustees to be of
high quality with minimal credit risks. The Board of Trustees has established
procedures designed to stabilize, to the extent reasonably possible, the
Portfolio's price per share as computed for the purpose of sales and
redemptions at $1.00. These procedures include review of the investment
holdings by the Board of Trustees, at such intervals as it may deem
appropriate, to determine whether the Portfolio's net asset value calculated
by using available market quotations deviates from $1.00 per share based on
amortized cost. The extent of any deviation will be examined by the Board of
Trustees. If the deviation exceeds 1/2 of 1%, the Board of Trustees will
promptly consider what action, if any, will be initiated. In the event the
Board of Trustees determines that a deviation exists which may result in
material dilution or other unfair results to investors or existing
shareholders, it has agreed to take such corrective actions as it deems
necessary and appropriate to eliminate or reduce, to the extent reasonably
practicable, any such dilution or unfair results. These actions may include
selling portfolio securities prior to maturity to realize capital gains or
losses or to shorten the Portfolio's average maturity, withholding or reducing
dividends, redeeming shares in kind, splitting, combining or otherwise
recapitalizing outstanding shares or establishing a net asset value per share
by using available market quotations.
The Money Market Portfolio calculates its dividends based on
its daily net investment income which consists of (1) accrued interest and
other income plus or minus amortized purchase discount or premium, (2) plus or
minus all realized gains and losses on portfolio securities and (3) minus
accrued expenses allocated to the Portfolio. Expenses of the Portfolio are
accrued each day. As the Portfolio's portfolio securities are normally valued
at amortized cost, unrealized gains or losses on such securities based on
their market values will not normally be recognized. However, should the net
asset value deviate significantly from market value, the Trustees could decide
to value the securities at market value and then unrealized gains and losses
would be included in net investment income.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are offered and sold on a continuous
basis by the Trust's Co-Distributors, FoM and Essex. As described in the
Prospectus, shares of the Portfolios are sold and redeemed at their net asset
value as next determined after receipt of the purchase or redemption order.
Each purchase is confirmed to the Separate Account in a written statement of
the number of shares purchased and the aggregate number of shares currently
held.
Under the 1940 Act, the Trust may suspend the right of
redemption or postpone the date of payment for shares of any Portfolio during
any period when (a) trading in the markets the Portfolio normally utilizes is
restricted, or an emergency, as defined by the rules and regulations of the
SEC, exists making disposal of the Portfolio's investments or determination of
its net asset value not reasonably practicable; (b) the New York Stock
Exchange is closed (other than customary weekend and holiday closings); or (c)
the SEC has by order permitted such suspension.
DESCRIPTION OF SHARES
The Trust is a business trust organized under Delaware law as
of November 7, 1994. 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 Portfolio, shareholders of a particular Portfolio would be entitled
to receive the assets available for distribution belonging to such Portfolio.
If there are any assets, income, earnings, proceeds, funds or payments, which
are not readily identifiable as belonging to any particular Portfolio, the
Trustees shall allocate them among any one or more of the Portfolios as they,
in their sole discretion, deem fair and equitable.
Rule 18f-2 under the 1940 Act provides that any matter required
to be submitted to the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Portfolio affected by the matter. A Portfolio is
affected by a matter unless it is clear that the interests of each Portfolio
in the matter are substantially identical or that the matter does
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not affect any interest of the Portfolio. Under the Rule, the approval of an
investment advisory agreement or any change in a fundamental investment policy
would be effectively acted upon with respect to a Portfolio only if approved
by a majority of the outstanding shares of such Portfolio. However, the Rule
also provides that the ratification of the appointment of independent
accountants, the approval of principal underwriting contracts and the election
of Trustees may be effectively acted upon by shareholders of the Trust voting
together in the aggregate without regard to particular Portfolios.
When used in the Prospectus or this Additional Statement, a
"majority" of shareholders means the vote of the lesser of (1) 67% of the
shares of the Trust or the applicable Portfolio present at a meeting if the
holders of more than 50% of the outstanding shares are present in person or by
proxy, or (2) more than 50% of the outstanding shares of the Trust or the
applicable portfolio.
The Trust Instrument provides that the Trustees, when acting in
their capacity as such, will not be personally liable to any person other than
the Trust or a beneficial owner for any act, omission or obligation of the
Trust or any Trustee. A Trustee shall not be liable for any act or omission in
his capacity as Trustee, or for any act or omission of any officer or employee
of the Trust or of any other person or party, provided that nothing contained
in the Trust Instrument or in the Delaware Business Trust law shall protect
any Trustee against any liability to the Trust or to shareholders of record to
which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
When issued for payment as described in the Trust's Prospectus
and this Additional Statement, shares of the Portfolios will be fully paid and
non-assessable by the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
Shares of the Portfolios are offered only to Separate Accounts
that fund Variable Annuity Contracts issued by the Hartford Companies. See the
Prospectus for such contracts for a discussion of the special taxation of
insurance companies with respect to the Separate Accounts and the Variable
Annuity Contracts, and the holders thereof.
Taxes In General
The following summarizes certain additional tax considerations
generally affecting the Portfolios and their shareholders that are not
described in the Prospectus. No
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attempt is made to present a detailed explanation of the tax treatment of the
Portfolios or their shareholders, and the discussion here and in the
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 Portfolio is treated as a separate corporate entity under
the Code and intends to qualify as a regulated investment company. In order to
so qualify, each Portfolio must satisfy certain requirements with respect to
the distribution and sources of its income for a taxable year. At least 90% of
the gross income of each Portfolio must be derived from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stocks, securities or foreign currencies, and other income
(including but not limited to gains from options, futures, or forward
contracts) derived with respect to the Portfolio's business of investing in
such stock, securities or currencies. The Treasury Department may by
regulation exclude from qualifying income foreign currency gains which are not
directly related to the Portfolio's principal business of investing in stock
or securities, or options and futures with respect to stock or securities. Any
income derived by a Portfolio from a partnership or trust is treated as
derived with respect to the Portfolio's business of investing in stock,
securities or currencies only to the extent that such income is attributable
to items of income which would have been qualifying income if realized by the
Portfolio in the same manner as by the partnership or trust.
Another requirement for qualification as a regulated investment
company under the Code is that less than 30% of a Portfolio's gross income for
a taxable year must be derived from gains realized on the sale or other
disposition of the following investments held for less than three months: (1)
stock and securities (as defined in Section 2(a)(36) of the 1940 Act); (2)
options, futures and forward contracts other than those on foreign currencies;
and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Portfolio's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by a Portfolio upon maturity or
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of this requirement. However, any other income which is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose. See
Appendix B -- "Accounting and Tax Treatment" -
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for a general discussion of the federal tax treatment of futures contracts,
related options thereon and other financial instruments, including their
treatment under the 30% test.
As noted in the Prospectus, each Portfolio must, and intends
to, comply with the diversification requirements imposed by Section 817(h) of
the Code and the regulations thereunder. For information concerning the
consequences of failure to meet the requirements of Section 817(h), see the
Prospectus for the Variable Annuity Contracts.
A 4% nondeductible excise tax is imposed on regulated
investment companies that fail to currently distribute an amount equal to
specified percentages of their ordinary taxable income and capital gain net
income (excess of capital gains over capital losses). Each Portfolio intends
to make sufficient distributions or deemed distributions of its ordinary
taxable income and any capital gain net income prior to the end of each
calendar year to avoid liability for this excise tax.
If for any taxable year a Portfolio does not qualify for the
special federal income tax treatment afforded regulated investment companies,
all of its taxable income will be subject to federal income tax at regular
corporate rates (without any deduction for distributions to its shareholders).
In such event, dividend distributions would be taxable as ordinary income to
shareholders to the extent of the Portfolio's current and accumulated earnings
and profits.
Depending upon the extent of the Portfolios' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Portfolios may be subject to the tax
laws of such states or localities. In addition, in those states and localities
which have income tax laws, the treatment of the Portfolios and their
shareholders under such laws may differ from their treatment under federal
income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust and their
principal occupations for the last five years are set forth in the Prospectus.
Each Trustee has an address at The Woodward Variable Annuity Fund, c/o NBD
Bank, Transfer Agent, 611 Woodward Avenue, Detroit, Michigan 48226. Each
Trustee also serves as a trustee of The Woodward Funds, a registered
investment company advised by NBD Bank.
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Each Trustee receives from the Trust and The Woodward Funds 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
Funds 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:
<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 $0 $21,250(2)+
Nicholas J. DeGrazia, Trustee $0 $21,250(2)+
John P. Gould, Trustee *** $30,000(4)+
Earl I. Heenan, Jr.,++ $0 $24,437.50(2)+
Chairman and President
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee++ $0 $21,250(2)+
Donald G. Sutherland, Trustee++ $0 $21,250(2)+
Donald L. Tuttle, Trustee++ $0 $21,250(2)+
Eugene C. Yehle, Trustee $0 $21,250(2)+
and Treasurer
<FN>
- ----------------------
* Amount does not include reimbursed expenses for attending Board meetings,
which are estimated to be approximately $350 for all the Trustees as a group.
** The Fund Complex consists of the Trust, Woodward Funds, Prairie Funds,
Prairie Institutional Funds, Prairie Intermediate Bond Fund and Prairie
Municipal Bond Fund, Inc.
*** Mr. Gould and Mrs. McCoy were not trustees of the Trust during the fiscal
year ended December 31, 1995.
+ Total number of other investment companies within the Fund Complex from
which the Trustee receives compensation for serving as a trustee.
++ Deferred compensation in the amounts of $24, 437.50, $21,500, $21,500, and
$21,500 accrued during The Woodward Funds' fiscal year ended December 31, 1995
for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and Donald L.
Tuttle, respectively.
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Investment Adviser
Information about NBD and its duties and compensation as
Adviser is contained in the Prospectus. For the period from March 30, 1995
(commencement of operations) through December 31, 1995, the Trust paid NBD
fees for advisory services of $40,501, $12,510, $16,064, $20,847 and $2,731
with respect to the Balanced, Growth/Value, Opportunity, Capital Growth and
Money Market Portfolios. For the same period, NBD reimbursed the Balanced,
Growth/Value, Opportunity, Capital Growth and Money Market Portfolios in the
amounts of $80,459, $67,776, $80,078, $63,458 and $60,828, respectively, for
certain other expenses.
NBD's own investment portfolio may include bank certificates of
deposit, bankers' acceptances, and corporate debt obligations, any of which
may also be purchased by the Trust. Joint purchase of investments for the
Trust and for NBD's own investment portfolio will not be made. NBD's
Commercial Banking Department may have deposit, loan and other commercial
banking relationships with issuers of securities purchased by the Trust,
including outstanding loans to such issuers which may be repaid in whole or in
part with the proceeds of securities purchased by the Trust.
Investment decisions for the Trust and other fiduciary accounts
are made by NBD's Trust Investment Division solely from the standpoint of the
independent interest of the Trust and such other fiduciary accounts. NBD's
Trust Investment Division performs independent analyses of publicly available
information, the results of which are not made publicly available. In making
investment decisions for the Trust, personnel of NBD's Trust Investment
Division do not obtain information from any other division or department of
NBD or otherwise, which is not publicly available. NBD's Trust Investment
Division executes transactions for the Trust only with unaffiliated dealers
but such dealers may be customers of other divisions of NBD. NBD may make bulk
purchases of securities for the Trust and for other customer accounts (but not
for its own investment portfolio), in which case the Trust will be charged a
pro rata share of the transaction costs incurred in making the bulk purchase.
See "Investment Objectives, Policies and Risk Factors - Portfolio
Transactions" above.
NBD has agreed as Adviser that it will reimburse the Trust such
portions of its fees as may be required to satisfy any expense limitations
imposed by state securities laws or other applicable laws. Restrictive
limitations may be imposed on the Trust as a result of changes in current
state laws and regulations in those states where the Trust has qualified its
shares, or by a decision of the Trustees to qualify the shares
-21-
<PAGE>
in other states having restrictive expense limitations. To the Trust's
knowledge, of the expense limitations in effect on the date of this Additional
Statement none is more restrictive than two and one-half percent (2-1/2%) of
the first $30 million of a Portfolio's average annual net assets, two percent
(2%) of the next $70 million of the average annual net assets and one and
one-half percent (1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, NBD is obligated to
manage the investment of each Portfolio's assets in accordance with applicable
laws and regulations, including, to the extent applicable, the regulations and
rulings of the various governmental bank regulatory agencies.
NBD will not accept Trust shares as collateral for a loan which
is for the purpose of purchasing Trust shares, and will not make loans to the
Trust. Inadvertent overdrafts of the Trust's account with the Custodian
occasioned by clerical error or by failure of a shareholder to provide
available funds in connection with the purchase of shares will not be deemed
to be the making of a loan to the Trust by NBD.
Under the Advisory Agreement, NBD is not liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in
connection with the performance of such Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of NBD in the performance of its duties or from its
reckless disregard of its duties and obligations under the Agreement.
Custodian and Transfer Agent
As Custodian and as Transfer Agent for the Trust, NBD (i)
maintains a separate account or accounts in the name of each Portfolio, (ii)
collects and makes disbursements of money on behalf of each Portfolio, (iii)
collects and receives all income and other payments and distributions on
account of the portfolio securities of each Portfolio, (iv) 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, and (v) makes periodic reports to the Trust's Board
of Trustees concerning the Trust's operations.
For its services as Custodian, NBD is entitled to receive from
the Balanced, Growth/Value, Opportunity and Capital Growth Portfolios fees at
the following annual rates based on the aggregate market value of such
Portfolios' portfolio securities, held as Custodian: .03% of the first $20
million;
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<PAGE>
.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 security held in each of these Portfolios. In addition, NBD, as
Custodian, is entitled to receive $50 for each cash statement and inventory
statement and $13 for each pass-through certificate payment, $35 for each
option transaction requiring escrow receipts and $20 for all other security
transactions.
For its services as Custodian, NBD is entitled to receive from
the Money Market Portfolio $11.00 for each clearing and settlement transaction
and $23.00 for each accounting and safekeeping service with respect to
investments, in addition to activity charges for master control and master
settlement accounts.
For its services as Transfer Agent, NBD is entitled to receive
a minimum annual fee from each Portfolio of $11,000, $12 annually per account
in the Balanced, Growth/Value, Opportunity, and Capital Growth Portfolios and
$15 annually per account in the Money Market Portfolio for the preparation of
statements of account, and $1.00 for each confirmation of purchase and
redemption transactions. Charges for providing computer equipment and
maintaining a computerized investment system are expected to approximate $350
per month for each Portfolio.
Sponsors and Co-Distributors
The Trust's shares are offered on a continuous basis through
FoM and Essex, which act under the Distribution Agreement as Co-Distributors
for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants,
One Detroit Center, 500 Woodward Avenue, Detroit, Michigan 48226-3424, serve
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, are counsel to the Trust.
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<PAGE>
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each Portfolio and the
yield of the Money Market Portfolio for various periods may be quoted in
advertisements, shareholder reports or other communications to shareholders.
Performance information is generally available by calling 1-800-338-7262
(outside Michigan) or 1-800-637-9504 (within Michigan).
Non-Money Market Portfolios
Total Return Calculations. Each Non-Money Market Portfolio
computes its "average annual total return" by determining the average annual
compounded rates of return during specified periods that equate the initial
amount invested to the ending redeemable value of such investment. This is
done by dividing the ending redeemable value of a hypothetical $1,000 initial
payment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result. This calculation can be expressed as
follows:
ERV 1/n
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of
the period covered by the computation of a
hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, ex-
pressed in terms of years.
The Portfolios compute their aggregate total returns by
determining the aggregate rates of return during specified periods that
likewise equate the initial amount invested to the ending redeemable value of
such investment. The formula for calculating aggregate total return is as
follows:
ERV 1/n
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
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<PAGE>
the period. The ending redeemable value (variable "ERV" in each formula) is
determined by assuming complete redemption of the hypothetical investment and
the deduction of all nonrecurring charges at the end of the period covered by
the computations.
The average annual total returns and aggregate annual total
returns for the Balanced, Growth/Value, Opportunity and Capital Growth
Portfolios for the period from March 30, 1995 (commencement of operations)
through December 31, 1995 are shown below:
</TABLE>
<TABLE>
<CAPTION>
Average Annual Aggregate Annual
Total Return Total Return
From Inception From Inception
Through 12/31/95 Through 12/31/95
---------------- ----------------
<S> <C> <C>
Balanced Portfolio 20.15% 20.15%
- --------------------
Inception: March 30, 1995
Growth/Value 22.75% 22.75%
- -------------
Inception: March 30, 1995
Opportunity Portfolio 14.20% 14.20%
- ---------------------
Inception: March 30, 1995
Capital Growth Portfolio 18.82% 18.82%
- -------------------------
Inception: March 30, 1995
</TABLE>
Money Market Portfolio
The "yield" and "effective yield" of the Money Market Portfolio
described in the Prospectus are calculated according to formulas prescribed by
the SEC. The standardized seven-day yield for the Portfolio is computed
separately by determining the net change, exclusive of capital changes, in the
value of a hypothetical pre-existing account in the Portfolio having a balance
of one share at the beginning of the period, dividing the net change in
account value by the value of the account at the beginning of the base period
to obtain the base period return, and multiplying the base period return by
(365/7). The net change in the value of an account in the Portfolio includes
the value of additional shares purchased with dividends from the original
share, and dividends declared on both the original share and any such
additional shares and all fees that are charged to all shareholder accounts in
proportion to the length of the base period and the Portfolio's average
account size. The capital changes to be excluded from the calculation of the
net change in account value are realized gains and losses from the sale of
securities and unrealized appreciation and depreciation. The effective
annualized yield for the Portfolio is computed by compounding the Portfolio's
unannualized base period return (calculated as above) by adding 1 to the base
period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result. The fees which may be imposed by
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<PAGE>
financial intermediaries on their customers for cash management and other
services are not reflected in the Portfolio's calculations of yields.
Because the Money Market Portfolio values its portfolio on an
amortized cost basis, it does not believe that there is likely to be any
material difference between net income for dividend and standardized yield
quotation purposes.
For the seven day period ended December 31, 1995, the annualized
yields and effective yields for the Money Market Portfolio were 5.091% and
5.220%, respectively.
Other Performance Information
The Portfolios may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Portfolio
investment are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of a Portfolio would increase the value,
not only of the original Portfolio investment, but also of the additional
Portfolio shares received through reinvestment. As a result, the value of the
Portfolio investment would increase more quickly than if dividends or other
distributions had been paid in cash. The Portfolios may also include
discussions or illustrations of the potential investment goals of a
prospective investor, investment management techniques, policies or investment
suitability of a Portfolio, economic conditions, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Portfolio), as well as the view of the Trust as to current market, economy,
trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to a Portfolio. The Portfolios may also include in advertisements
charts, graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to,
stocks, bonds, treasury bills and shares of a Portfolio. In addition,
advertisements or shareholder communications may include a discussion of
certain attributes or benefits to be derived by an investment in a Portfolio.
Such advertisements or communicators may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein.
-26-
<PAGE>
MISCELLANEOUS
As used in this Statement of Additional Information and the
Portfolios' Prospectus, a "majority of the outstanding shares" of a Portfolio
or a class of shares means the lesser of (1) 67% of the shares of the
particular Portfolio or class represented at a meeting at which the holders of
more than 50% of the outstanding shares of such Portfolio or class are present
in person or by proxy, or (2) more than 50% of the outstanding shares of such
Portfolio or class.
As of April 19, 1996, all of the issued and outstanding shares of
each Portfolio were owned by Hartford Life Insurance Company, a Connecticut
corporation with principal offices at 200 Hopmeadow Street, Simsbury,
Connecticut 06089 and ITT Hartford Life and Annuity Insurance Company,
Separate Account Six, a Wisconsin corporation with principal offices at 505
Highway 169 North, Minneapolis, Minnesota 55441, however its mailing address
is PO Box 5085, Hartford, Ct 06102-5085. All such shares are held in Separate
Accounts pursuant to Variable Annuity Contracts.
-27-
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely
payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely
payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D- 1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely
payment. Short-term liquidity, including internal operating
factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and
other protection factors qualify issue as investment grade. Risk
factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
A-2
<PAGE>
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment
default.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-
A-3
<PAGE>
dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment grade
category and indicates that while the debt is more susceptible to adverse
developments (both internal and external) than obligations with higher
ratings, capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as
non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations supported by the highest capacity
for timely repayment.
"A1" - Obligations are supported by the highest
capacity for timely repayment.
"A2" - Obligations are supported by a satisfactory capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment. Such capacity is more susceptible to adverse changes in
business, economic or financial conditions than for obligations in higher
categories.
"B" - Obligations for which the capacity for timely repayment is
susceptible to adverse changes in business, economic or financial conditions.
"C" - Obligations for which there is an inadequate capacity to
ensure timely repayment.
A-4
<PAGE>
"D" - Obligations which have a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and 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
A-5
<PAGE>
used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The "C"
rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest
return is indexed to equities, commodities, or currencies; certain swaps and
options; and interest only and principal only mortgage securities.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are 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
A-6
<PAGE>
likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
(P)... - When applied to forward delivery bonds,
indicates that the rating is provisional pending delivery of the
bonds. The rating may be revised prior to delivery if changes
ooccur in the legal documents or the underlying credit quality of
the bonds.
A-7
<PAGE>
The following summarizes the long-term debt ratings used by Duff
& Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality.
The risk factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.
"AA" - Debt is considered of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable and greater in periods of
economic stress.
"BBB" - Debt possesses below average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of
these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the "AA,"
"A," "BBB," "BB" and "B" ratings may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch
for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+."
A-8
<PAGE>
"A" - Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" Bonds that
possess one of these ratings are considered by Fitch to be speculative
investments. The ratings "BB" to "C" represent Fitch's assessment of the
likelihood of timely payment of principal and interest in accordance with the
terms of obligation for bond issues not in default. For defaulted bonds, the
rating "DDD" to "D" is an assessment of the ultimate recovery value through
reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "C" may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an
original maturity of more than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions may
increase investment risk albeit not very significantly.
"A" - Obligations for which there is a low expectation
of investment risk. Capacity for timely repayment of principal
and interest is strong, although adverse changes in business,
A-9
<PAGE>
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.
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"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term
debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
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"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate
quality, carrying specific risk but having protection commonly regarded as
required of an investment security and not distinctly or predominantly
speculative.
"SG" - Loans bearing this designation are of speculative quality
and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in their Prospectus, each of the Non-Money Market
Portfolios 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, the Balanced Portfolio may use
interest rate futures as a defense, or hedge, against anticipated interest
rate changes and not for speculation. As described below, this would include
the use of futures contract sales to protect against expected increases in
interest rates and futures contract purchases to offset the impact of interest
rate declines.
The Balanced Portfolio presently could accomplish a similar
result to that which they hope to achieve through the use of futures contracts
by selling bonds with long maturities and investing in bonds with short
maturities when interest rates are expected to increase, or conversely,
selling short-term bonds and investing in long-term bonds when interest rates
are expected to decline. However, because of the liquidity that is often
available in the futures market the protection is more likely to be achieved,
perhaps at a lower cost and without changing the rate of interest being earned
by the Portfolio, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Balanced Portfolio, as
seller, to deliver the specific type of financial instrument called for in the
contract at a specific future time for a specified price. A futures contract
purchase would create an obligation by the Portfolio, as purchaser, to take
delivery of the specific type of financial instrument at a specific future
time at a specific price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near
that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
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Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the
Portfolio's entering into a futures contract purchase for the same aggregate
amount of the specific type of financial instrument and the same delivery
date. If the price in the sale exceeds the price in the offsetting purchase,
the Portfolio is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Portfolio pays the
difference and realizes a loss. Similarly, the closing out of a futures
contract purchase is effected by the Portfolio's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the
Portfolio realizes a gain, and if the purchase price exceeds the offsetting
sale price, the Portfolio realizes a loss.
Interest rate futures contracts are traded in an auction
environment on the floors of several exchanges principally, the Chicago Board
of Trade, the Chicago Mercantile Exchange and the New York Futures Exchange.
The Portfolio would deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the
exchange membership.
A public market now exists in futures contracts covering various
financial instruments including long-term United States Treasury Bonds and
Notes; three-month United States Treasury Bills; and ninety-day commercial
paper. The Intermediate Bond and the Bond Portfolios may trade in any futures
contract for which there exists a public market, including, without
limitation, the foregoing instruments.
Examples of Futures Contract Sale. The Balanced Portfolio would
engage in an interest rate futures contract sale to maintain the income
advantage from continued holding of a long-term bond while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany a
decline in long-term securities prices. Assume that the market value of a
certain security in the Portfolio tends to move in concert with the futures
market prices of long-term United States Treasury bonds ("Treasury bonds").
The Adviser wishes to fix the current market value of this portfolio security
until some point in the future. Assume the portfolio security has a market
value of 100, and the Adviser believes that, because of an anticipated rise in
interest rates, the value will decline to 95. The Portfolio might enter into
futures contract sales of Treasury bonds for an equivalent of 98. If the
market value of the portfolio security
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does indeed decline from 100 to 95, the equivalent futures market price for
the Treasury bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
The Adviser could be wrong in its forecast of interest rates and
the equivalent futures market price could rise above 98. In this case, the
market value of the portfolio securities, including the portfolio security
being protected, would increase. The benefit of this increase would be reduced
by the loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Portfolio in the
above example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Balanced Portfolio
would engage in an interest rate futures contract purchase when it is not
fully invested in long-term bonds but wishes to defer for a time the purchase
of long-term bonds in light of the availability of advantageous interim
investments, e.g., shorter-term securities whose yields are greater than those
available on long-term bonds. The Portfolio's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Portfolio would be endeavoring at the same time to eliminate
the effect of all or part of an expected increase in market price of the
long-term bonds that the Portfolio may purchase.
For example, assume that the market price of a long-term bond
that the Portfolio may purchase, currently yielding 10%, tends to move in
concert with futures market prices of Treasury bonds. The Adviser wishes to
fix the current market price (and thus 10% yield) of the long-term bond until
the time (four months away in this example) when it may purchase the bond.
Assume the long-term bond has a market price of 100, and the Adviser believes
that, because of an anticipated fall in interest rates, the price will have
risen to 105 (and the yield will have dropped to about 9 1/2%) in four months.
The Portfolio might enter into futures contracts purchases of Treasury bonds
for an equivalent price of 98. At the same time, the Portfolio would assign a
pool of investments in short-term securities that are either maturing in four
months or earmarked for sale in four
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months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of
the long-term bond does indeed rise from 100 to 105, the equivalent futures
market price for Treasury bonds might also rise from 98 to 103. In that case,
the 5-point increase in the price that the Portfolio pays for the long-term
bond would be offset by the 5-point gain realized by closing out the futures
contract purchase.
The Adviser could be wrong in its forecast of interest rates;
long-term interest rates might rise to above 10%; and the equivalent futures
market price could fall below 98. If short-term rates at the same time fall to
10% or below, it is possible that the Portfolio would continue with its
purchase program for long-term bonds. The market price of available long-term
bonds would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term
rates, it is possible that the Portfolio would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
A stock or bond index assigns relative values to the stocks or
bonds included in the index and the index fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as the Standard & Poor's 500
or the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
gas stocks. Futures contracts are traded on organized exchanges regulated by
the Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of
the parties to each contract.
The Balanced, Growth/Value, Opportunity and Capital Growth
Portfolios may sell index futures contracts in order to offset a decrease in
market value of its portfolio securities that might otherwise result from a
market decline. A Portfolio
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may do so either to hedge the value of its portfolio as a whole, or to protect
against declines, occurring prior to sales of securities, in the value of the
securities to be sold. Conversely, the Portfolios may purchase index futures
contracts in anticipation of purchases of securities. In a substantial
majority of these transactions, the Portfolios may purchase such securities
upon termination of the long futures position, but a long futures position may
be terminated without a corresponding purchase of securities.
In addition, the Portfolios may utilize index futures contracts
in anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Portfolio may also sell futures contracts in connection
with this strategy, in order to protect against the possibility that the value
of the securities to be sold as part of the restructuring of the portfolio
will decline prior to the time of sale.
The following are examples of transactions in stock index futures
(net of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures
Equity Portfolio at 125
Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
If, however, the market moved in the opposite direction, that is,
market value decreased and the Portfolio had entered into an anticipatory
purchase hedge, or market value increased and the Portfolio had hedged its
stock portfolio, the results of the Portfolio's transactions in stock index
futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
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Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
Unlike when a Portfolio purchases or sells a security, no price
is paid or received by the Portfolio upon the purchase or sale of a futures
contract. Initially, the Portfolio will be required to deposit with the broker
or in a segregated account with the Portfolio's Custodian an amount of cash or
cash equivalents, the value of which may vary but is generally equal to 10% or
less of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Portfolio upon
termination of the futures contract assuming all contractual obligations have
been satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying security
or index fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as marking to the market. For
example, when a Portfolio has purchased a futures contract and the price of
the contract has risen in response to a rise in the underlying instruments,
that position will have increased in value and the Portfolio will be entitled
to receive from the broker a variation margin payment equal to that increase
in value. Conversely, where a Portfolio has purchased a futures contract and
the price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Portfolio
would be required to make a variation margin payment to the broker. At any
time prior to expiration of the futures contract, the Adviser may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Portfolio's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or
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released to the Portfolio, and the Portfolio realizes a loss or
gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by
a Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the securities being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on
the future. If the price of the future moves more than the price of the hedged
securities, the Portfolio involved will experience either a loss or gain on
the future which will not be completely offset by movements in the price of
the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged and
movements in the price of futures contracts, a Portfolio may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of the
prices of such securities has been greater than the volatility over such time
period of the future, of if otherwise deemed to be appropriate by the Adviser.
Conversely, a Portfolio may buy or sell fewer futures contracts if the
volatility over a particular time period of the prices of the securities being
hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Adviser.
It is also possible that, where a Portfolio has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the
value of securities held by the Portfolio may decline. If this occurred, the
Portfolio would lose money on the future and also experience a decline in
value in its portfolio securities.
Where futures are purchased to hedge against a possible increase
in the price of securities before a Portfolio is able to invest its cash (or
cash equivalents) in securities (or options) in an orderly fashion, it is
possible that the market may decline instead; if the Portfolio then concludes
not to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, the Portfolio will
realize a loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
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In instances involving the purchase of futures contracts by a
Portfolio, an amount of cash and cash equivalents, equal to the market value
of the futures contracts (or options), will be deposited in a segregated
account with the Portfolio's Custodian and/or in a margin account with a
broker to collateralize the position and thereby insure that the use of such
futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. Second, with respect
to financial futures contracts, the liquidity of the futures market depends on
participants entering into off-setting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures
market may also cause temporary price distortions. Due to the possibility of
price distortion in the futures market, and because of the imperfect
correlation between the movements in the cash market and movements in the
price of futures, a correct forecast of general market trends or interest rate
movements by the adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. Although a
Portfolio intends to purchase or sell futures only on exchanges or boards of
trade where there appear to be active secondary markets, there is no assurance
that a liquid secondary market on any exchange or board of trade will exist
for any particular contract or at any particular time. In such event, it may
not be possible to close a futures investment position, and in the event of
adverse price movements, a Portfolio would continue to be required to make
daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contract can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the securities will
in fact
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correlate with the price movements in the futures contract and thus provide an
offset on a futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
Successful use of futures by a Portfolio is also subject to the
Adviser's ability to predict correctly movements in the direction of the
market. For example, if a Portfolio has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Portfolio will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Portfolio may have to sell securities at a time
when it may be disadvantageous to do so.
V. Options on Futures Contracts
The Balanced, Growth/Value, Opportunity and Capital Growth
Portfolios may purchase options on the futures contracts described above. A
futures option gives the holder, in return for the premium paid, the right to
buy (call) from or sell (put) to the writer of the option a futures contract
at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the
option by selling, or purchasing, an option of the same series, at which time
the person entering into the closing transaction will realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying
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futures contract will not be fully reflected in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract. Compared to the purchase or sale of futures contracts,
however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to a Portfolio because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
Although permitted by their fundamental investment policies, the Portfolios do
not currently intend to write futures options, and will not do so in the
future absent any necessary regulatory approvals.
VI. Accounting and Tax Treatment
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by a Portfolio at the close of
the Portfolio's taxable year will be treated for federal income tax purposes
as sold for their fair market value on the last business day of such year, a
process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Portfolio holds the
futures contract ("the 40%-60% rule"). The amount of any capital gain or loss
actually realized by a Portfolio in a subsequent sale or other disposition of
those futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Portfolio in a prior year as a result of the
constructive sale of the contracts. With respect to futures contracts to sell,
which will be regarded as parts of a "mixed straddle" because their values
fluctuate inversely to the values of specific securities held by the
Portfolio, losses as to such contracts to sell will be subject to certain loss
deferral rules which limit the amount of loss currently deductible on either
part of the straddle to the amount thereof which exceeds the unrecognized gain
(if any) with respect to the other part of the straddle, and to certain wash
sales regulations. Under short sales rules, which will also be applicable, the
holding period of the securities forming part of the straddle will (if they
have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
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Notwithstanding the rules described above, with respect to futures contracts
to sell which are properly identified as such, a Portfolio may make an
election which will exempt (in whole or in part) those identified futures
contracts from being treated for federal income tax purposes as sold on the
last business day of the Portfolio's taxable year, but gains and losses will
be subject to such short sales, wash sales, loss deferral rules and the
requirement to capitalize interest and carrying charges. Under temporary
regulations, a Portfolio would be allowed (in lieu of the foregoing) to elect
either (1) to offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) to establish a mixed straddle account for which gains and
losses would be recognized and offset on a periodic basis during the taxable
year. Under either election, the 40%-60% rule will apply to the net gain or
loss attributable to the futures contracts, but in the case of a mixed
straddle account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures generally receive federal tax treatment similar to that
described above.
Certain foreign currency contracts entered into by a Portfolio
may be subject to the "marking-to-market" process and the 40%-60% rule in a
manner similar to that described in the preceding paragraph for futures
contracts. To receive such federal income tax treatment, a foreign currency
contract must meet the following conditions: (1) the contract must require
delivery of a foreign currency of a type in which regulated futures contracts
are traded or upon which the settlement value of the contract depends; (2) the
contract must be entered into at arm's length at a price determined by
reference to the price in the interbank market; and (3) the contract must be
traded in the interbank market. The Treasury Department has broad authority to
issue regulations under the provisions respecting foreign currency contracts.
As of the date of this Additional Statement, the Treasury Department has not
issued any such regulations. Other foreign currency contracts entered into by
a Portfolio may result in the creation of one or more straddles for federal
income tax purposes, in which case certain loss deferral, short sales, and
wash sales rules and the requirement to capitalize interest and carrying
charges may apply.
As described more fully in "Additional Information Concerning
Taxes", a regulated investment company must derive less than 30% of its gross
income from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months. With respect to
futures contracts and other financial instruments subject to the
marking-to-market rules, the Internal Revenue Service has ruled in
B-12
<PAGE>
private letter rulings that a gain realized from such a futures contract or
financial instrument will be treated as being derived from a security held for
three months or more (regardless of the actual period for which the contract
or instrument is held) if the gain arises as a result of a constructive sale
under the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date
the contract or instrument is acquired and the termination date. In
determining whether the 30% test is met for a taxable year, increases and
decreases in the value of each Portfolio's futures contracts and other
investments that qualify as part of a "designated hedge," as defined in the
Code, may be netted.
B-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
The Woodward Variable Annuity Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of THE WOODWARD VARIABLE ANNUITY FUND
(comprising, as indicated in Note 1, the Balanced, Growth/Value, Opportunity,
Capital Growth and Money Market Funds) as of December 31, 1995, and the
related statements of operations, the statements of changes in net assets and
the financial highlights for the period from inception (as indicated in Note
1) through December 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included physical counts and
confirmation of securities owned as of December 31, 1995, by inspection and
correspondence with custodians, banks and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective funds constituting The Woodward Variable
Annuity Fund as of December 31, 1995, and the results of their operations, the
changes in their net assets and the financial highlights for the period from
inception (as indicated in Note 1) through December 31, 1995 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 19, 1996.
FS-1
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
BALANCED GROWTH/VALUE OPPORTUNITY CAPITAL GROWTH MONEY MARKET
FUND FUND FUND FUND FUND
----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investment in securities:
At cost $10,304,271 $3,372,053 $4,643,314 $5,914,427 $1,116,942
=========== ========== ========== ========== ==========
At value (Note 2) $11,057,591 $3,682,218 $4,878,819 $6,425,745 $1,121,034
Cash -- -- -- -- 16,276
Receivable for securities sold 11,794 -- 66,978 -- --
Receivable for shares purchased 72,720 43,692 2,310 2,333 --
Income receivable 57,106 7,666 5,065 5,699 5,246
Deferred organization costs, net (Note 2) 25,155 25,155 25,155 25,155 25,155
Prepaids and other assets 12,774 4,560 6,484 5,489 11,910
----------- ---------- ---------- ---------- ----------
TOTAL ASSETS 11,237,140 3,763,291 4,984,811 6,464,421 1,179,621
----------- ---------- ---------- ---------- ----------
LIABILITIES:
Payable for securities purchased 6,654 2,495 3,327 19,961 --
Accrued investment advisory fees 6,866 2,299 2,976 4,014 437
Accrued custodial fees 4,143 1,861 2,716 1,066 625
Dividends payable -- -- -- -- 495
Other payables and accrued expenses 8,601 2,945 3,427 4,444 2,172
----------- ---------- ---------- ---------- ----------
TOTAL LIABILITIES 26,264 9,600 12,446 29,485 3,729
----------- ---------- ---------- ---------- ----------
NET ASSETS $11,210,876 $3,753,691 $4,972,365 $6,434,936 $1,175,892
=========== ========== ========== ========== ==========
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) $ 99,514 $ 32,280 $ 45,113 $ 56,584 $ 117,589
Additional paid-in capital 10,304,398 3,378,827 4,728,998 5,863,045 1,058,303
Accumulated undistributed net investment income 1,628 22 43 50 --
Accumulated undistributed net realized gains (losses) 52,016 32,397 (37,294) 3,939 --
Net unrealized appreciation on investments 753,320 310,165 235,505 511,318 --
----------- ---------- ---------- ---------- ----------
TOTAL NET ASSETS $11,210,876 $3,753,691 $4,972,365 $6,434,936 $1,175,892
=========== ========== ========== ========== ==========
Shares of capital stock outstanding 995,136 322,802 451,125 565,837 1,175,892
=========== ========== ========== ========== ==========
Net asset value and redemption price per share $ 11.27 $ 11.63 $ 11.02 $ 11.37 $ 1.00
=========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-2
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF OPERATIONS
For the Period Ended December 31, 1995
BALANCED GROWTH/VALUE OPPORTUNITY CAPITAL GROWTH MONEY MARKET
FUND FUND FUND FUND FUND
-------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (Note 2):
Interest $182,069 $ 7,942 $ 12,754 $ 14,905 $ 35,048
Dividends 58,307 35,714 19,400 30,878 --
-------- -------- -------- -------- --------
TOTAL INVESTMENT INCOME 240,376 43,656 32,154 45,783 35,048
-------- -------- -------- -------- --------
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee 40,501 12,510 16,064 20,847 2,731
Professional fees 13,669 13,524 14,396 13,524 13,524
Custodial fee 29,452 19,441 31,017 14,326 5,176
Transfer and dividend disbursing agent fees 3,337 3,321 3,344 3,346 3,246
Amortization of deferred organization costs 4,439 4,439 4,439 4,439 4,439
Marketing expense 26,604 26,604 26,604 26,604 26,604
Registration, filing fees and other expenses 8,242 2,056 2,178 3,872 8,156
Less: Expense reimbursement (80,459) (67,776) (80,078) (63,458) (60,828)
-------- -------- -------- -------- --------
NET EXPENSES 45,785 14,119 17,964 23,500 3,048
-------- -------- -------- -------- --------
NET INVESTMENT INCOME 194,591 29,537 14,190 22,283 32,000
-------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS:
Net realized gains (losses) 52,016 35,828 (36,276) 8,122 --
Net change in unrealized appreciation on
investments 753,320 310,165 235,505 511,318 --
-------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 805,336 345,993 199,229 519,440 --
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS FROM OPERATIONS $999,927 $375,530 $213,419 $541,723 $ 32,000
======== ======== ======== ======== ========
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-3
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
BALANCED GROWTH/VALUE OPPORTUNITY CAPITAL GROWTH MONEY MARKET
FUND FUND FUND FUND FUND
------------- ------------ ----------- -------------- ------------
Period Ended Period Ended Period Ended Period Ended Period Ended
Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income $ 194,591 $ 29,537 $ 14,190 $ 22,283 $ 32,000
Net realized gains (losses) 52,016 35,828 (36,276) 8,122 --
Net change in unrealized appreciation on
investments 753,320 310,165 235,505 511,318 --
----------- ---------- ---------- ---------- ----------
Net increase in net assets from operations 999,927 375,530 213,419 541,723 32,000
----------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income (192,963) (29,515) (14,147) (22,233) (32,000)
From realized gains -- (3,431) -- (4,183) --
In excess of realized gains -- -- (1,018) -- --
----------- ---------- ---------- ---------- ----------
Total distributions (192,963) (32,946) (15,165) (26,416) (32,000)
----------- ---------- ---------- ---------- ----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 10,294,774 3,508,134 4,792,328 6,001,443 1,168,068
Net asset value of shares
issued in reinvestment of distributions to
shareholders 192,963 32,946 15,165 26,416 31,505
----------- ---------- ---------- ---------- ----------
10,487,737 3,541,080 4,807,493 6,027,859 1,199,573
Less: payments for shares redeemed (83,825) (129,973) (33,382) (108,230) (23,681)
----------- ---------- ---------- ---------- ----------
Net increase in net assets from capital share
transactions 10,403,912 3,411,107 4,774,111 5,919,629 1,175,892
----------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS 11,210,876 3,753,691 4,972,365 6,434,936 1,175,892
NET ASSETS:
Beginning of period -- -- -- -- --
----------- ---------- ---------- ---------- ----------
End of period $11,210,876 $3,753,691 $4,972,365 $6,434,936 $1,175,892
=========== ========== ========== ========== ==========
CAPITAL SHARE TRANSACTIONS:
Shares sold 985,257 331,700 452,879 573,282 1,168,068
Shares issued in reinvestment of
distributions to shareholders 17,604 2,942 1,398 2,411 31,505
----------- ---------- ---------- ---------- ----------
1,002,861 334,642 454,277 575,693 1,199,573
Less: shares redeemed (7,725) (11,840) (3,152) (9,856) (23,681)
----------- ---------- ---------- ---------- ----------
NET INCREASE IN SHARES OUTSTANDING 995,136 322,802 451,125 565,837 1,175,892
CAPITAL SHARES:
Beginning of period -- -- -- -- --
----------- ---------- ---------- ---------- ----------
End of period 995,136 322,802 451,125 565,837 1,175,892
=========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-4
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY BALANCED FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 13.90%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05, and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $1,536,830 $1,536,830
----------
(Cost $1,536,830)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 34.16%
U.S. Treasury Securities -- 15.45%
Principal Strip from U.S. Treasury Securities
due:
11/15/18 100,000 24,289
8/15/20 450,000 97,956
Strip from U.S. Treasury Securities due:
5/15/13 250,000 86,937
U.S. Treasury Bonds:
12.750%, 11/15/10 300,000 456,936
10.375%, 11/15/12 150,000 207,375
U.S. Treasury Notes:
6.125%, 7/31/96 325,000 326,573
7.875%, 1/15/98 50,000 52,539
5.250%, 7/31/98 350,000 350,109
6.375%, 8/15/02 100,000 105,094
----------
(Cost $1,578,180) 1,707,808
----------
Agency Obligations -- 18.71%
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 11 Class D, 9.500%, 7/15/19 50,000 55,643
Series 22 Class C, 9.500%, 4/15/20 13,811 15,647
Series 47 Class F, 10.000%, 6/15/20 100,000 111,883
Series 1084 Class F, AR, 5/15/21 100,000 101,996
Series 1084 Class S, IF, 5/15/21 70,000 91,000
Series 1297 Class H, 7.500%, 1/15/20 39,217 40,177
Series 1360 Class PK, 10.000%, 12/15/20 25,000 28,699
Series 1378 Class H, 10.000%, 1/15/21 50,000 57,604
Series 1489 Class L, 5.500%, 4/15/08 83,485 81,452
Series 1491 Class MA, 6.750%, 11/15/22 130,357 128,825
Series 1483 Class E, 6.500%, 2/15/20 40,000 39,976
Series 1531 Class K, 6.000%, 4/15/08 86,704 84,101
Series 1585 Class NB, IF, 9/15/23 24,166 19,574
Series 1586 Class A, 6.000%, 9/15/08 33,592 32,322
Series 1604 Class SE, IF, 11/15/08 46,758 37,407
Series 1606 Class LD, IF, 5/15/08 30,763 23,082
Series 1686 Class A, 5.000%, 2/15/24 46,225 41,220
Series 1757-A Class A, 9.500%, 5/15/23 88,305 93,934
Series 1796-A Class S, IF, 2/15/09 25,000 18,875
Federal National Mortgage Assn. Pass Thru
Securities: Guaranteed Remic Trust:
1989 Class 69-G, 7.600%, 10/25/19 50,000 51,587
1990 Class 1-D, 8.800%, 1/25/20 50,000 53,128
1990 Class 143-J, 8.750%, 12/25/20 75,000 80,406
1991 Class 144-PZ, 8.500%, 6/25/21 71,161 75,277
1993 Class 32-K, 6.000%, 3/25/23 41,974 40,361
1993 Class 139-SG, IF, 8/25/23 86,582 67,128
1993 Class 155-LA, 6.500%, 5/25/23 43,397 42,812
1993 Class 190-SE, IF, 10/25/08 49,847 38,740
1993 Class 214-L, 6.000%, 12/25/08 83,876 82,900
1993 Class 223-FB, AR, 12/25/23 37,914 37,345
1993 Class 223-SB, IF, 12/25/23 14,582 11,666
1994 Class 19-C, 5.000%, 1/25/24 41,644 38,500
1995 Class 13-B, 6.500%, 3/25/09 96,054 93,922
1992-G Class 42-Z, 7.000%, 7/25/22 63,097 62,144
1994-G Class 13-ZB, 7.000%, 11/17/24 53,615 51,320
Government National Mortgage Assn. Pass Thru
Ctfs. Guaranteed Remic Series 1994, Class SA,
IF, 10/16/22 302,600 19,291
FS-5
<PAGE>
Government National Mortgage Assn. Pass Thru
Pool:
#297628, 8.000%, 9/15/22 38,093 39,795
#313110, 7.500%, 11/15/22 76,901 79,264
----------
(Cost $1,977,423) 2,069,003
----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS 3,776,811
----------
(Cost $3,555,603)
CORPORATE BONDS AND NOTES -- 0.91%
Finance -- 0.91%
Ford Credit Grantor Trust Asset Backed Ctf.
Series 1994-A, Class A, 6.350%, 5/15/99 52,136 52,679
Nationsbank Auto Grantor Trust Asset Backed Ctf.
Series 1995-A, Class A, 5.85%, 6/15/02 48,214 48,491
----------
TOTAL CORPORATE BONDS AND NOTES 101,170
----------
(COST $100,592)
Shares
-------
COMMON STOCKS -- 51.03%
Aerospace -- 1.35%
Boeing Co. 1,900 148,912
-----------
Air Transport -- 0.14%
Air Express International Corp. 700 16,100
-----------
Apparel -- 0.87%
Nine West Group, Inc. * 350 13,125
Russell Corp. 3,000 83,250
-----------
96,375
-----------
Banks -- 2.44%
Barnett Banks, Inc. 1,600 94,400
Charter One Financial, Inc. 550 16,844
Commerce Bancshares, Inc. 210 8,032
Fleet Financial Group, Inc. 3,200 130,400
TCF Financial Corp. 600 19,875
-----------
269,551
-----------
Business Machines -- 1.05%
Autodesk, Inc. 1,750 59,938
Diebold, Inc. 300 16,612
InterVoice, Inc. * 300 5,700
Komag, Inc. * 400 18,450
Xilinx, Inc. * 500 15,250
-----------
115,950
-----------
Business Services -- 3.91%
American Management System, Inc. * 450 13,500
CDI Corp. * 400 7,200
Deluxe Corp. 2,900 84,100
DST Systems, Inc. * 200 5,700
Dun & Bradstreet Corp. 1,500 97,125
G & K Services, Inc. Class A 400 10,200
Interpublic Group of Companies, Inc. 1,700 73,738
Omnicom Group, Inc. 400 14,900
SunGard Data Systems, Inc. * 500 14,250
WMX Technologies, Inc. 3,000 89,625
Zilog, Inc. * 600 21,975
-----------
432,313
-----------
Chemicals -- 2.91%
Dow Chemical Co. 1,300 91,488
Great Lakes Chemical Corp. 1,800 129,600
RPM, Inc. 1,000 16,500
Sigma-Aldrich Corp. 1,700 84,150
-----------
321,738
-----------
FS-6
<PAGE>
Construction -- 3.36%
Crane Co. 600 22,125
Masco Corp. 3,200 100,400
Stanley Works 2,000 103,000
York International Corp. 3,100 145,700
-----------
371,225
-----------
Consumer Durables -- 1.10%
Durakon Industries, Inc. * 400 5,000
Invacare Corp. 200 5,050
Leggett & Platt, Inc. 400 9,700
Rubbermaid, Inc. 4,000 102,000
-----------
121,750
-----------
Containers -- 0.62%
AptarGroup, Inc. 500 18,687
Crown Cork & Seal Co., Inc. * 1,200 50,100
-----------
68,787
-----------
Drugs and Medicine -- 5.77%
Abbott Laboratories 2,200 91,850
Bristol-Myers Squibb Co. 1,400 120,225
Community Health System, Inc. 300 10,688
Health Care & Retirement Corp. * 300 10,500
Merck & Co., Inc. 1,500 98,625
Scherer (R.P.) Corp. * 250 12,281
Schering-Plough Corp. 2,600 142,350
Sybron International Corp. * 600 14,250
US Healthcare, Inc. 2,700 125,550
Vivra, Inc. * 450 11,306
-----------
637,625
-----------
Electronics -- 2.23%
Allen Group Inc. 600 13,425
Belden, Inc. 850 21,888
Dynatech Corp. * 1,000 17,000
General Motors Corp. Class E 2,700 140,400
Holophane Corp. * 575 12,506
MEMC Electronic Materials * 350 11,419
Molex, Inc. Class A Non-Voting 450 13,781
3COM Corp. * 200 9,325
Vishay Intertechnology, Inc. * 200 6,300
-----------
246,044
-----------
Energy and Utilities -- 1.51%
Entergy Corp. 1,500 43,875
MCN Corp. 5,300 123,225
-----------
167,100
-----------
Energy Raw Materials -- 2.36%
Apache Corp. 600 17,700
Burlington Resources, Inc. 2,000 78,500
Schlumberger Ltd. 2,200 152,350
Southwestern Energy Co. 1,000 12,750
-----------
261,300
-----------
Food and Agriculture -- 1.85%
ConAgra, Inc. 1,700 70,125
Sysco Corp. 3,700 120,250
Universal Foods Corp. 350 14,044
-----------
204,419
-----------
Insurance -- 3.62%
American International Group, Inc. 1,225 113,312
Chubb Corp. 1,500 145,125
Citizens Corp. 700 13,038
First Colony Corp. 4,500 114,187
Transatlantic Holdings, Inc. 200 14,675
-----------
400,337
-----------
FS-7
<PAGE>
International Oil -- 0.64%
Royal Dutch Petroleum Co., N.Y.
Registry 500 70,562
-----------
Liquor -- 0.97%
Anheuser Busch Companies, Inc. 1,600 107,000
-----------
Media -- 2.29%
Banta Corp. 400 17,600
Gannett Co., Inc. 2,000 122,750
Washington Post Co. Class B 400 112,800
-----------
253,150
-----------
Miscellaneous and Conglomerates --
1.10%
Arctco, Inc. 600 7,800
Culligan Water Technologies, Inc. * 400 9,700
DENTSPLY International, Inc. 450 18,000
Department 56, Inc. * 150 5,756
Greenfield Industries, Inc. 650 20,313
Health Management Associates, Inc.
Class A * 550 14,369
Littlefuse, Inc. * 400 14,700
Minerals Technologies, Inc. 400 14,600
Wolverine Tube, Inc. * 450 16,875
-----------
122,113
-----------
Miscellaneous Finance -- 1.21%
A.G. Edwards, Inc. 600 14,325
Executive Risk, Inc. 600 17,400
FINOVA Group, Inc. 650 31,363
GMAC Investment Corp. 250 11,000
Idex Corp. 300 12,300
PMI Group, Inc. 450 20,362
Prudential Reinsurance Holding 700 16,362
Scotsman Industries, Inc. 600 10,575
-----------
133,687
-----------
Motor Vehicles -- 1.34%
Excel Industries, Inc. 800 11,200
General Motors Corp. 1,800 95,175
Harley-Davidson, Inc. 750 21,562
Myers Industries, Inc. 530 8,679
Superior Industries International 450 11,869
-----------
148,485
-----------
Non-Durables and Entertainment --
0.76%
Cracker Barrel Old Country Store,
Inc. 4,000 69,000
Lancaster Colony Corp. 400 14,900
-----------
83,900
-----------
Non-Ferrous Metals -- 0.07%
DT Industries, Inc. 600 8,100
-----------
Producer Goods -- 2.61%
General Electric Co. 1,400 100,800
Hubbell, Inc. Class B 400 26,300
Juno Lighting, Inc. 800 12,800
Stewart & Stevenson Services, Inc. 4,300 108,575
Teleflex, Inc. 200 8,200
Trimas Corp. 700 13,213
Watts Industries, Inc. Class A 800 18,600
-----------
288,488
-----------
Retail -- 0.92%
Cato Corp. Class A 1,600 12,400
Kohls Corp. * 200 10,500
Talbots, Inc. 250 7,188
Toys R Us * 3,300 71,775
-----------
101,863
-----------
FS-8
<PAGE>
Telephone -- 3.00%
AT&T Corp. 1,400 90,650
Century Telephone Enterprises, Inc. 3,000 95,250
MCI Communications Corp. 5,600 146,300
-----------
332,200
-----------
Travel and Recreation -- 0.13%
Callaway Golf Co. 650.00 14,706
-----------
Trucking and Freight -- 0.90%
Ryder System, Inc. 4,000 99,000
-----------
TOTAL COMMON STOCKS 5,642,780
-----------
(Cost $5,111,246)
TOTAL INVESTMENTS $11,057,591
===========
(Cost $10,304,271)
<FN>
* Non-income producing security
</TABLE>
FS-9<PAGE>
THE WOODWARD VARIABLE ANNUITY BALANCED FUND
PORTFOLIO OF INVESTMENTS (Continued)
December 31, 1995
Notes to Portfolio of Investments
The Fund invests in securities whose value is derived from an underlying pool
of mortgages or consumer loans. Some of these securities are collateralized
mortgage obligations (CMOs). CMOs are debt securities issued by U.S.
government agencies or by financial institutions and other mortgage lenders
which are collateralized by a pool of mortgages held under an indenture.
Adjustable Rate (AR)
Inverse Floaters represent securities that pay interest at a rate that
increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these
securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow paters are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. These securities are subject to accelerated principal paydowns as a
result of prepayments or refinancing of the underlying pool of mortgage
instruments. As a result, interest income may be reduced considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as
those associated with IO securities. Unlike IO's the owner also has a right to
receive a very small portion of principal. The high interest rate results from
taking interest payments from other classes in the REMIC Trust and allocating
them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion only
on an underlying pool of mortgage loans. The market value of these securities
is extremely volatile in response to changes in market interest rates. As
prepayment on the underlying mortgages of these securities increase, the yield
on these securities increases.
FS-10
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 7.59%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $ 279,343 $ 279,343
----------
(Cost $279,343)
Shares
------
COMMON STOCKS -- 92.41%
Aerospace -- 2.98%
Boeing Co. 1,400 109,725
----------
Apparel -- 1.66%
Russell Corp. 2,200 61,050
----------
Banks -- 4.47%
Barnett Banks, Inc. 1,200 70,800
Fleet Financial Group, Inc. 2,300 93,725
----------
164,525
----------
Business Machines -- 0.84%
Autodesk, Inc. 900 30,825
----------
Business Services -- 7.06%
Deluxe Corp. 2,200 63,800
Dun & Bradstreet Corp. 1,100 71,225
Interpublic Group of Companies, Inc. 1,300 56,387
WMX Technologies, Inc. 2,300 68,713
----------
260,125
----------
Chemicals -- 5.87%
Dow Chemical Co. 900 63,337
Great Lakes Chemical Corp. 1,300 93,600
Sigma-Aldrich Corp. 1,200 59,400
----------
216,337
----------
Construction -- 6.99%
Masco Corp. 2,300 72,162
Stanley Works 1,500 77,250
York International Corp. 2,300 108,100
----------
257,512
----------
Consumer Durables -- 2.08%
Rubbermaid, Inc. 3,000 76,500
----------
Containers -- 1.02%
Crown Cork & Seal Co. Inc. * 900 37,575
----------
Drugs and Medicine -- 11.46%
Abbott Laboratories Corp. 1,600 66,800
Bristol-Myers Squibb Co. 1,000 85,875
Merck & Co., Inc. 1,100 72,325
Schering-Plough Corp. 1,900 104,025
US HealthCare, Inc. 2,000 93,000
----------
422,025
----------
Electronics -- 2.82%
General Motors Corp. Class E 2,000 104,000
----------
Energy and Utilities -- 3.40%
Entergy Corp. 1,100 32,175
MCN Corp. 4,000 93,000
----------
125,175
----------
FS-11<PAGE>
Energy Raw Materials -- 4.61%
Burlington Resources, Inc. 1,500 58,875
Schlumberger Ltd. 1,600 110,800
----------
169,675
----------
Food and Agriculture -- 3.84%
ConAgra, Inc. 1,300 53,625
Sysco Corp. 2,700 87,750
----------
141,375
----------
Insurance -- 7.49%
American International Group, Inc. 900 83,250
Chubb Corp. 1,100 106,425
First Colony Corp. 3,400 86,275
----------
275,950
----------
International Oil -- 1.53%
Royal Dutch Petroleum Co., N.Y. Registry 400 56,450
----------
Liquor -- 2.18%
Anheuser-Busch Companies, Inc. 1,200 80,250
----------
Media -- 4.80%
Gannett Co., Inc. 1,500 92,063
Washington Post Co. Class B 300 84,600
----------
176,663
----------
Motor Vehicles -- 1.87%
General Motors Corp. 1,300 68,738
----------
Non-Durables and Entertainment -- 1.22%
Cracker Barrel Old Country Store, Inc. 2,600 44,850
----------
Producer Goods -- 4.07%
General Electric Co. 1,100 79,200
Stewart & Stevenson Services, Inc. 2,800 70,700
----------
149,900
Retail -- 1.48%
----------
Toys R Us * 2,500 54,375
----------
Telephone -- 6.72%
AT&T Corp. 1,000 64,750
Century Telephone Enterprises, Inc. 2,300 73,025
MCI Communications Corp. 4,200 109,725
----------
247,500
----------
Trucking and Freight -- 1.95%
Ryder System, Inc. 2,900 71,775
----------
TOTAL COMMON STOCKS 3,402,875
----------
TOTAL INVESTMENTS $3,682,218
==========
(Cost $3,372,053)
<FN>
* Non-income producing security
</TABLE>
FS-12
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 4.83%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05, and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $235,635 $ 235,635
----------
(Cost $235,635)
Shares
------
COMMON STOCKS -- 95.17%
Air Transport -- 1.51%
Air Express International Corp. 3,200 73,600
----------
Apparel -- 1.15%
Nine West Group, Inc. * 1,500 56,250
----------
Banks -- 4.45%
Charter One Financial, Inc. 2,750 84,219
Commerce Bancshares, Inc. 1,045 39,971
TCF Financial Corp. 2,800 92,750
----------
216,940
----------
Business Machines -- 5.69%
Autodesk, Inc. 1,700 58,225
Diebold, Inc. 1,300 71,987
InterVoice, Inc. * 1,300 24,700
Komag, Inc. * 1,400 64,575
Xilinx, Inc. * 1,900 57,950
----------
277,437
----------
Business Services -- 8.20%
American Management Systems, Inc. * 2,400 72,000
CDI Corp. * 1,500 27,000
DST Systems, Inc. * 900 25,650
G & K Services, Inc. Class A 1,800 45,900
Omnicom Group, Inc. 1,800 67,050
SunGard Data Systems, Inc. * 2,550 72,675
Zilog, Inc. * 2,450 89,731
----------
400,006
----------
Chemicals -- 1.43
RPM, Inc. 4,225 69,713
----------
Construction -- 2.31%
Crane Co. 3,050 112,469
----------
Consumer Durables -- 2.10%
Durakon Industries, Inc. * 2,200 27,500
Invacare Corp. 900 22,725
Leggett & Platt, Inc. 2,000 48,500
Sunrise Medical, Inc. * 200 3,700
----------
102,425
----------
Containers -- 1.76%
AptarGroup, Inc. 2,300 85,962
----------
Drugs and Medicine -- 5.85%
Community Health System, Inc. * 1,400 49,875
Health Care & Retirement Corp. * 1,400 49,000
Scherer (R.P.) Corp. * 900 44,212
Sybron International Corp.* 3,500 83,125
Vivra, Inc. * 2,350 59,044
----------
285,256
----------
FS-13
<PAGE>
Electronics -- 9.35%
Allen Group, Inc. 2,800 62,650
Belden, Inc. 3,900 100,425
Dynatech Corp. * 4,400 74,800
Holophane Corp. * 2,925 63,619
MEMC Electronic Materials * 1,450 47,306
Molex, Inc. Class A Non-Voting 1,825 55,891
3COM Corp. * 500 23,313
Vishay Intertechnology, Inc. * 900 28,350
----------
456,354
----------
Energy Raw Materials -- 2.84%
Apache Corp. 2,800 82,600
Southwestern Energy Co. 4,400 56,100
----------
138,700
----------
Food and Agriculture -- 1.15%
Universal Foods Corp. 1,400 56,175
----------
Insurance -- 3.10%
Citizens Corp. 3,600 67,050
Transatlantic Holdings, Inc. 1,150 84,381
----------
151,431
----------
Media -- 1.53%
Banta Corp. 1,700 74,800
----------
Miscellaneous and Conglomerates -- 11.38%
Arctco, Inc. 2,700 35,100
Culligan Water Technologies, Inc. * 2,000 48,500
DENTSPLY International, Inc. 1,950 78,000
Department 56, Inc. * 650 24,944
Greenfield Industries, Inc. 2,950 92,187
Health Management Associates, Inc. Class A * 2,650 69,231
Littlefuse, Inc. * 1,800 66,150
Minerals Technologies, Inc. 1,600 58,400
Wolverine Tube, Inc. * 2,200 82,500
----------
555,012
----------
Miscellaneous Finance -- 12.06%
CMAC Investment Corp. 1,400 61,600
A.G. Edwards, Inc. 3,100 74,012
Executive Risk, Inc. 2,600 75,400
FINOVA Group, Inc. 2,750 132,687
Idex Corp. 1,200 49,200
PMI Group, Inc. 1,750 79,188
Prudential Reinsurance Holdings 3,100 72,463
Scotsman Industries, Inc. 2,500 44,063
----------
588,613
----------
Motor Vehicles -- 4.84%
Excel Industries, Inc. 3,500 49,000
Harley-Davidson, Inc. 3,500 100,625
Myers Industries, Inc. 2,530 41,429
Superior Industries International 1,700 44,837
----------
235,891
----------
Non-Durables and Entertainment -- 1.45%
Lancaster Colony Corp. 1,900 70,775
----------
Non-Ferrous Metals -- 0.80%
DT Industries, Inc. 2,900 39,150
----------
Producer Goods -- 8.10%
Hubbell, Inc. Class B 1,700 111,775
Juno Lighting, Inc. 3,600 57,600
Stewart & Stevenson Services, Inc. 2,000 50,500
Teleflex, Inc. 700 28,700
Trimas Corp. 3,200 60,400
Watts Industries, Inc. Class A 3,700 86,025
----------
395,000
----------
FS-14<PAGE>
Retail -- 2.73%
Cato Corp. Class A 7,400 57,350
Kohls Corp. * 900 47,250
Talbots, Inc. 1,000 28,750
----------
133,350
----------
Travel and Recreation -- 1.39%
Callaway Golf Co. 3,000 67,875
----------
TOTAL COMMON STOCKS 4,643,184
----------
(Cost $4,407,679)
TOTAL INVESTMENTS $4,878,819
==========
(Cost $4,643,314)
<FN>
* Non-income producing security
</TABLE>
FS-15
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 3.88%
Salomon Brothers, Revolving Repurchase Agreement,
5.93%, 1/2/96, (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/96
through 11/15/05 and U.S. Treasury Notes, 5.50%,
11/15/98, all held at Chemical Bank) $249,370 $ 249,370
----------
(Cost $249,370)
Shares
------
COMMON STOCKS -- 96.12%
Banks -- 3.27%
Banc One Corp. 1,200 45,300
Norwest Corp. 5,000 165,000
----------
210,300
----------
Business Machines -- 4.33%
Autodesk, Inc. 3,000 102,750
Microsoft Corp. * 2,000 175,500
----------
278,250
----------
Business Services -- 5.32%
Automatic Data Processing, Inc. 1,400 103,950
Interpublic Group of Companies, Inc. 3,000 130,125
WMX Technologies, Inc. 3,600 107,550
----------
341,625
----------
Chemicals -- 5.50%
Great Lakes Chemical Corp. 2,500 180,000
Sigma-Aldrich Corp. 3,500 173,250
----------
353,250
----------
Construction -- 5.28%
Fluor Corp. 3,000 198,000
York International Corp. 3,000 141,000
----------
339,000
----------
Consumer Durables -- 3.20%
Newell Co. 4,400 113,850
Rubbermaid, Inc. 3,600 91,800
----------
205,650
----------
Containers -- 2.92%
Crown Cork & Seal Co., Inc. * 4,500 187,875
----------
Drugs and Medicine -- 12.18%
Johnson & Johnson 2,200 188,375
Medtronic, Inc. 2,000 111,750
Pall Corp. 6,000 161,250
Stryker Corp. 3,000 157,500
United Healthcare Corp. 2,500 163,750
----------
782,625
----------
Electronics -- 6.82%
General Motors Corp. Class E 3,500 182,000
Hewlett Packard Co. 1,500 125,625
Intel Corp. 2,300 130,525
----------
438,150
----------
Energy and Utilities -- 2.08%
Enron Corp. 3,500 133,438
----------
FS-16
<PAGE>
Energy Raw Materials -- 3.78%
Schlumberger Ltd. 1,900 131,575
Western Atlas, Inc. * 2,200 111,100
----------
242,675
----------
Food and Agriculture -- 3.09%
CPC International, Inc. 1,000 68,625
Sysco Corp. 4,000 130,000
----------
198,625
----------
Insurance -- 6.01%
AFLAC, Inc. 4,000 173,500
American International Group, Inc. 2,300 212,750
----------
386,250
----------
Media -- 2.14%
Donnelley (R.R.) & Sons Co. 3,500 137,812
----------
Miscellaneous & Conglomerates -- 3.22%
Duracell International, Inc. 4,000 207,000
----------
Non-Durables and Entertainment -- 5.15%
Cracker Barrel Old Country Store, Inc. 9,000 155,250
Service Corp International 4,000 176,000
----------
331,250
----------
Producer Goods -- 3.24%
Illinois Tool Works, Inc. 1,600 94,400
Stewart & Stevenson Services, Inc. 4,500 113,625
----------
208,025
----------
Retail -- 7.00%
Albertsons, Inc. 3,000 98,625
Home Depot, Inc. 4,000 191,500
Toys R Us * 1,300 28,275
Walgreen Co. 4,400 131,450
----------
449,850
----------
Telephone -- 4.25%
AirTouch Communications, Inc. * 5,500 155,375
MCI Communications Corp. 4,500 117,563
----------
272,938
----------
Tobacco -- 1.30%
UST, Inc. 2,500 83,437
----------
Travel and Recreation -- 6.04%
Carnival Corp. Class A 5,000 121,875
Disney (Walt) Co. 2,400 141,600
Gaylord Entertainment Co. Class A 4,500 124,875
388,350
----------
TOTAL COMMON STOCKS 6,176,375
----------
(Cost $5,665,057)
TOTAL INVESTMENTS $6,425,745
==========
(Cost $5,914,427)
<FN>
* Non-income producing security
</TABLE>
FS-17
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
December 31, 1995
Amortized
Cost
Description Face Amount (Note 2)
----------- ----------- --------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 32.19%
American General Finance, Inc. Master Note, 5.85%,
1/2/96 $ 25,000 $ 25,000
Paccar Leasing Corp. Master Note, 5.85%, 1/2/96 25,000 25,000
Pitney Bowes Credit Corp. Master Note, 5.80%,
1/2/96 25,000 25,000
Transamerica Finance Group, Inc. Master Note,
5.85%, 1/2/96 25,000 25,000
NationsBank Capital Markets, Inc., Revolving
Repurchase Agreement, 6.00%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 2/15/96 through 11/15/05 at various
interest rates ranging from 0.00% to 12.375%, all
held at Chemical Bank) 170,907 170,907
Nikko Securities Co. International, Inc., Revolving
Repurchase Agreement, 5.90%, 1/2/96 (secured by
various U.S. Treasury obligations with maturities
ranging from 5/31/96 through 8/15/00 at various
interest rates ranging from 0.00% to 8.75%, all
held at the Bank of New York) 90,000 90,000
----------
360,907
----------
COMMERCIAL PAPER -- 52.64%
Abbey National North America, 5.64%, 3/6/96 20,000 19,798
Air Products & Chemicals, Inc., 5.64%, 3/14/96 40,000 39,547
American Express Credit Corp., 5.62%, 6/14/96 20,000 19,498
B.A.T. Capital Corp., 5.77%, 1/23/96 20,000 19,930
Barton Capital Corp., 5.80%, 1/26/96 25,000 24,900
Bass Finance (C.I.) Ltd., 5.71%, 2/14/96 20,000 19,861
BCI Funding Corp., 5.74%, 2/9/96 20,000 19,877
BEAL Cayman Ltd., 5.73%, 2/23/96 20,000 19,833
CPC International, Inc., 5.69%, 2/9/96 20,000 19,877
Echlin, Inc., 5.76%, 1/18/96 40,000 39,892
Electronic Data Systems Corp., 5.56%, 3/21/96 45,000 44,451
Engelhard Corp., 5.75%, 1/19/96 30,000 29,914
Enterprise Funding Corp., 5.76%, 1/16/96 20,000 19,952
Explorer Pipeline Co., 5.76%, 1/24/96 25,000 24,908
International Lease Finance Corp., 5.76%, 1/9/96 20,000 19,974
Monsanto Co., 5.69%, 2/8/96 20,000 19,881
Preferred Receivable Funding Corp., 5.73%, 2/2/96 25,000 24,873
Ranger Funding Corp., 5.75%, 1/12/96 20,000 19,965
San Paolo U.S. Financial Co., 5.68%, 3/15/96 30,000 29,654
Sheffield Receivables Corp., 5.73%, 2/1/96 20,000 19,902
St. Michael Finance Ltd., 5.75%, 2/20/96 35,000 34,723
Sunbelt-Dix Inc., 5.79%, 2/13/96 20,000 19,863
Sweden (Kingdom of), 5.72%, 3/1/96 20,000 19,811
WMX Technologies, Inc., 5.50%, 9/9/96 20,000 19,258
----------
590,142
----------
NOTES -- 5.80%
J.P. Morgan, 5.75%, 8/7/96 20,000 19,976
Seattle First National Bank, 5.51%, 6/14/96 45,000 45,000
----------
64,976
----------
CERTIFICATES OF DEPOSIT -- 9.37%
Bayerische Vereinsbank AG, 5.95%, 7/22/96 20,000 20,000
Canadian Imperial Bank of Commerce, 5.95%, 10/23/96 20,000 20,000
Harris Trust & Savings Bank, 5.72%, 2/29/96 25,000 25,000
Royal Bank of Canada, 6.60%, 4/3/96 20,000 20,003
Toronto-Dominion Bank, Euro, 6.80%, 3/11/96 20,000 20,006
----------
105,009
----------
TOTAL INVESTMENTS $1,121,034
==========
</TABLE>
FS-18
<PAGE>
THE WOODWARD VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Commencement of Operations
The Woodward Variable Annuity Fund (the "Trust") was organized as a
Delaware business trust on November 7, 1994, and registered under the
Investment Company Act of 1940, as amended, as an open-end investment company.
As of December 31, 1995, the Trust consisted of five separate series of which
there were four Equity Funds and one Money Market Fund, as described below.
Equity Funds:
Woodward Variable Annuity Balanced Fund
Woodward Variable Annuity Growth/Value Fund
Woodward Variable Annuity Opportunity Fund
Woodward Variable Annuity Capital Growth Fund
Money Market Fund:
Woodward Variable Annuity Money Market Fund
The Trust commenced operations on March 30, 1995. Shares of the Trust are
made available to serve as the underlying investment media of the variable
annuity contracts issued by Separate Account Six of the ITT Hartford Life &
Annuity Insurance Company. Orders for the Trust's shares are executed in
accordance with the investment instructions of the contract owners.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of the financial statements. The policies are in conformity
with generally accepted accounting principles for investment companies.
Following generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Investments
The Equity Funds value investment securities at market value which is
determined by a pricing service based upon quoted market prices or dealer
quotes. Securities for which market prices or dealer quotes are not readily
available are valued by the investment advisor, NBD Bank (NBD) in accordance
with procedures approved by the Board of Trustees.
Pursuant to Rule 2a-7 of the Investment Company Act of 1940, the Money
Market Fund utilizes the amortized cost method to determine the carrying value
of investment securities. Under this method, investment securities are valued
for both financial reporting and federal tax purposes at amortized cost and
any discount or premium is amortized from the date of acquisition to maturity.
The use of this method results in a carrying value which approximates market
value. Market value is determined based upon quoted market prices or dealer
quotes.
Investment security purchases and sales are accounted for on the day
after trade date by the Equity Funds and on the trade date for the Money
Market Fund.
The Trust invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open
market desk will do business. NBD, acting under the supervision of the Board
of Trustees, has established the following additional policies and procedures
relating to the Trust's investments in securities subject to repurchase
agreements: 1) the value of the underlying collateral is required to equal or
exceed 102% of the funds advanced under the repurchase agreement including
accrued interest; 2) collateral is marked to market daily by NBD to assure its
value remains at least equal to 102% of the repurchase agreement amount; and
3) funds are not disbursed by the Trust or its agent unless collateral is
presented or acknowledged by the collateral custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments. Bond
premiums and discounts are amortized/accreted as required by the Internal
Revenue Code. Premiums and discounts on mortgage-backed securities are
amortized/accreted using the effective interest rate method. As prepayments on
the underlying mortgages increase or decrease the expected life, the yield is
adjusted to amortize/accrete the security to its new expected life. Dividends
are recorded on the ex-dividend date.
FS-19
<PAGE>
Federal Income Taxes
It is Woodward's policy to comply with the requirements of Subchapter M
of the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute net investment income and realized gains to its
shareholders. Therefore, no federal income tax provision is required in the
accompanying financial statements.
Net realized gains differ for financial statement and tax purposes
primarily because of the recognition of wash sale transactions and
post-October 31 capital losses. Also, due to the timing of dividend
distributions, the fiscal year in which amounts are distributed may differ
from the year that the income or realized gains were recorded by the funds.
Certain book-to-tax timing differences for the funds are reflected as excess
distributions in the Statements of Changes in Net Assets. These distributions
do not constitute a tax return of capital.
Shareholder Dividends
Dividends from net investment income are declared and paid quarterly by
the Equity Funds. Net realized capital gains are distributed annually.
Distributions from net investment income and net realized gains are made
during each year to avoid the 4% excise tax imposed on regulated investment
companies by the Internal Revenue Code.
On each business day except those holidays the New York Stock Exchange
(Exchange), NBD or its bank affiliates observe, the Money Market Fund net
investment income is declared as a dividend, at the close of the Exchange, to
shareholders of record at such close. Such dividends are paid monthly.
Deferred Organization Costs
Organization costs are being amortized on a straight-line basis over the
five year period beginning with the commencement of operations of each series.
Expenses
Expenses are charged daily as a percentage of the respective Fund's net
assets. The Trust monitors the rate at which expenses are charged to ensure
that a proper amount of expense is charged to income each year. This
percentage is subject to revision if there is a change in the estimate of the
future net assets of Woodward or a change in expectations as to the level of
actual expenses.
(3) Transactions with Affiliates
First of Michigan Corporation (FoM) and Essex National Securities, Inc.
(Essex) act as sponsors and co-distributors of Woodward's shares. Neither FoM
nor Essex is entitled to any fee pursuant to their Distribution Agreement with
the Trust.
NBD is the investment advisor pursuant to the Advisory Agreement. For its
advisory services to the Trust, NBD is entitled to a fee, computed daily and
payable monthly. Under the Advisory Agreement, NBD also provides the Trust
with certain administrative services, such as maintaining the Trust's general
ledger and assisting in the preparation of various regulatory reports. NBD
receives no additional compensation for such services.
NBD has agreed that it may waive its fees in whole or in part; and, if in
part, may specify the particular fund to which such waiver relates as may be
required to satisfy any expense limitation imposed by state securities laws or
other applicable laws. At present, no restrictive expense limitation is
imposed on the Trust. Restrictive limitations could be imposed 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. For the period
ended December 31, 1995, NBD reimbursed the Balanced Fund, Growth/Value Fund,
Opportunity Fund, Capital Growth Fund and the Money Market Fund for certain
expenses in the amounts of $80,459, $67,776, $80,078, $63,458 and $60,828,
respectively.
NBD is also compensated for its services as the Trust Custodian, Transfer
Agent and Dividend Disbursing Agent, and is reimbursed for certain expenses
incurred on behalf of the Trust.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
FS-20
<PAGE>
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions based on the aggregate cost of investments for federal income tax
purposes, excluding short-term securities, is as follows:
<TABLE>
<CAPTION>
Balanced Growth/Value Opportunity
Fund Fund Fund
----------- ----------- ------------
<S> <C> <C> <C>
Gross Unrealized Gains $ 869,453 $ 368,851 $ 374,459
Gross Unrealized Losses (116,975) (59,980) (155,832)
----------- ---------- ----------
$ 752,478 $ 308,871 $ 218,627
=========== ========== ==========
Federal Income Tax Cost $10,305,113 $3,373,347 $4,660,192
Purchases $ 9,121,220 $3,414,752 $5,283,805
Sales & Maturities $ 845,127 $ 357,869 $ 839,848
</TABLE>
<TABLE>
<CAPTION>
Capital Growth Money Market
Fund Fund
-------------- ------------
<S> <C> <C>
Gross Unrealized Gains $ 659,291 $ --
Gross Unrealized Losses (147,973) --
---------- ----------
$ 511,318 $ --
========== ==========
Federal Income Tax Cost $5,914,427 $1,121,034
Purchases $5,809,051 $8,666,719
Sales & Maturities $ 152,116 $7,549,777
</TABLE>
(5) Expenses
Following is a summary of total expense rates charged, advisory fee rates
payable to NBD, and amounts paid to NBD, pursuant to the agreements described
in Note 3 for the year ended December 31, 1995. The rates shown are stated as a
percentage of each fund's average net assets.
<TABLE>
<CAPTION>
Balanced Growth/Value Opportunity
Effective Date Fund Fund Fund
-------------- -------- ------------ -----------
<S> <C> <C> <C>
Expense Rates:
March 30 0.85% 0.85% 0.85%
NBD Advisory Fee:
March 30 0.75% 0.75% 0.75%
Amounts Paid:
Advisory Fee to NBD $ 40,501 $ 12,510 $ 16,064
Other Fees & Out of Pocket Expenses to NBD $ 32,789 $ 22,762 $ 34,361
Expense
Reimbursements by NBD $(80,459) $(67,776) $(80,078)
</TABLE>
<TABLE>
<CAPTION>
Capital Growth Money Market
Effective Date Fund Fund
-------------- -------------- ------------
<S> <C> <C>
Expense Rates:
March 30 0.85% 0.50%
NBD Advisory Fee:
March 30 0.75% 0.45%
Amounts Paid:
Advisory Fee to NBD $ 20,847 $ 2,731
Other Fees & Out of Pocket Expenses to NBD $ 17,672 $ 8,422
Expense
Reimbursements by NBD $(63,458) $(60,828)
</TABLE>
FS-21
<PAGE>
(6) Equity of Affiliates:
As of December 31, 1995, Hartford Life Insurance Company held direct
interest in shares as follows:
<TABLE>
<CAPTION>
Percent of
Total
Shares Shares
------ ---------
<S> <C> <C>
Balanced Fund 306,897 30.84%
Growth/Value Fund 50,580 15.67%
Opportunity Fund 50,235 11.14%
Capital Growth Fund 50,291 8.89%
Money Market Fund 520,213 44.24%
</TABLE>
FS-22
<PAGE>
THE WOODWARD VARIABLE ANNUITY FUND
FINANCIAL HIGHLIGHTS
The Financial Highlights present a per share analysis of how the Variable
Annuity Funds' net asset values have changed during the periods presented.
Additional quantitative measures expressed in ratio form analyze important
relationships between certain items presented in the financial statements.
These financial highlights have been derived from the financial statements of
the Funds and other information for the period presented.
<TABLE>
<CAPTION>
Balanced Growth/Value Opportunity Capital Growth Money Market
Fund Fund Fund Fund Fund
------------- ------------- ------------- -------------- -------------
Period Ended Period Ended Period Ended Period Ended Period Ended
Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995 Dec. 31, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 1.00
Income from investment operations:
Net investment income 0.25 0.13 0.05 0.05 0.03
Net realized and unrealized
gains on investments 1.27 1.63 1.02 1.38 --
----------- ---------- ---------- ---------- ----------
Total from investment operations 1.52 1.76 1.07 1.43 0.03
----------- ---------- ---------- ---------- ----------
Less distributions:
From net investment income (0.25) (0.13) (0.05) (0.05) (0.03)
From realized gains -- (0.00) -- (0.01) --
In excess of realized gains -- -- (0.00) -- --
----------- ---------- ---------- ---------- ----------
Total distributions (0.25) (0.13) (0.05) (0.06) (0.03)
----------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 11.27 $ 11.63 $ 11.02 $ 11.37 $ 1.00
=========== ========== ========== ========== ==========
Total Return (b) 20.15%(a) 22.75%(a) 14.20%(a) 18.82%(a) 5.41%(a)
Ratios/Supplemental Data
Net assets, end of period $11,210,876 $3,753,691 $4,972,365 $6,434,936 $1,175,892
Ratio of expenses to average net assets 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a) 0.50%(a)
Ratio of net investment income
to average net assets 3.61%(a) 1.78%(a) 0.67%(a) 0.81%(a) 5.27%(a)
Ratio of expenses to average
net assets without fee
waivers/ reimbursed expenses 2.34%(a) 4.93%(a) 4.64%(a) 3.15%(a) 10.48%(a)
Ratio of net investment income to
average net assets without fee
waivers/reimbursed expenses 2.12%(a) (2.30)%(a) (3.12)%(a) (1.49)%(a) (4.71)%(a)
Portfolio turnover rate 14.05% 17.47% 32.11% 4.46% N/A
Average commission rate $ 0.10 $ 0.14 $ 0.11 $ 0.11 N/A
<FN>
- ----------------
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
FS-23
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
(1) Included in Part A of the Registration Statement
are the following audited tables:
(i) Financial Highlights for the period ended
December 31, 1995 with respect to the Woodward
Variable Annuity Funds' Balanced, Growth/Value,
Opportunity, Capital Growth and Money Market
Funds.
(2) Included in Part B of the Registration Statement are the
following audited financial statements:
(i) With respect to the Woodward Variable Annuity
Funds' Balanced, Growth/Value, Opportunity,
Capital Growth and Money Market Funds:
Report of Independent Accountants for the
period ended December 31, 1995;
Statements of Assets and Liabilities -
December 31, 1995;
Statements of Operations for the period ended
December 31, 1995;
Statements of Changes in Net Assets for the
period ended December 31, 1995;
Portfolio of Investments - December 31, 1995;
Notes to Financial Statements.
(b) Exhibits:
(1) Trust Instrument dated November 7, 1994 is
incorporated herein by reference to exhibit
(1) of the Registrant's Registration
Statement on Form N-1A filed with the
Commission on November 10, 1994.
(2) Bylaws of Registrant is incorporated herein
by reference to exhibit (2) of the
C-1
<PAGE>
Registrant's Registration Statement on Form N-1A
filed with the Commission on November 10, 1994.
(3) Not Applicable.
(4) Not Applicable.
(5)(a) Advisory Agreement dated March 30, 1995 between
Registrant and NBD Bank is incorporated herein by
reference to exhibit (5) of the Registrant's
Registration Statement on Form N-1A filed with the
Commission on August 30, 1995.
(b) Advisory Agreement betweeen Registrant and
NBD dated November 28, 1995.
(c) Form of Co-Advisory Agreement among
Registrant, NBD Bank ("NBD") and First
Chicago Investment Management Company
("FCIMCO").
(6) Distribution Agreement dated March 30, 1995
among Registrant, First of Michigan
Corporation ("FoM") and Essex National
Securities, Inc. ("Essex") is incorporated
herein by reference to exhibit (6) of the
Registrant's Registration Statement on Form
N-1A filed with the Commission on August 30,
1995.
(a) Form of Distribution Agreement among
Registrant and BISYS.
(7) Not Applicable.
(8) Custodian Agreement dated March 30, 1995
between Registrant and NBD Bank is
incorporated herein by reference to exhibit
(8) of the Registrant's Registration
Statement on Form N-1A filed with the
Commission on August 30, 1995.
(9)(a) Transfer and Dividend Disbursing Agency Agreement dated
March 30, 1995 between Registrant and NBD Bank is
incorporated herein by reference to exhibit (9)(a) of
the Registrant's Registration Statement on Form N-1A
filed with the Commission on August 30, 1995.
C-2
<PAGE>
(b) Participation Agreement dated March 30, 1995 between
Registrant and Hartford Life Insurance Company is
incorporated herein by reference to exhibit (9)(b) of
the Registrant's Registration Statement on Form N-1A
filed with the Commission on August 30, 1995.
(c) Form of Co-Administration Agreement among
Registrant, NBD, FCIMCO and BISYS.
*(10) Opinion of Drinker Biddle & Reath, counsel
for the Registrant.
(11)(a)Consent of Arthur Andersen LLP.
(b)Consent of Drinker Biddle & Reath.
(12) Not Applicable.
(13)(a)Purchase Agreement dated March 29, 1995 between
Registrant and Christina T. Simmons is incorporated
herein by reference to exhibit (13)(a) of the
Registrant's Registration Statement on Form N-1A filed
with the Commission on August 30, 1995.
(b)Purchase Agreement dated March 30, 1995 between
Registrant and Hartford Life Insurance Company is
incorporated herein by reference to exhibit (13)(b) of
the Registrant's Registration Statement on Form N-1A
filed with the Commission on August 30, 1995.
(14) Not Applicable.
(15) Not Applicable.
(16) Schedules of Performance Computations with
respect to the Woodward Balanced,
Growth/Value, Opportunity, Capital Growth and
Money Market Funds is incorporated herein by
reference to exhibit (16) of the Registrant's
Registration Statement on Form N-1A filed
with the Commission on August 30, 1995.
(27) Financial Data Schedules with respect to the
Woodward Balanced, Growth/Value, Opportunity,
Capital Growth and Money Market Funds.
- --------
* Registrant's Rule 24f-2 Notice and related Opinion of Counsel was
filed under Rule 24f-2 on February 29, 1996.
C-3
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
Registrant is controlled by its Board of Trustees, the members
of which also serve as members of the Board of Trustees of The Woodward Funds.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Registrant was organized primarily for the purpose of providing
a vehicle for the investment of assets received by separate investment
accounts ("Separate Accounts") established by participating life insurance
companies. The assets in such Separate Accounts are, under state law, assets
of the life insurance companies which have established such Separate Accounts.
Thus, at any time such life insurance companies will own Registrant's
outstanding shares that are purchased with Separate Account assets; however,
where required to do so, such life insurance companies will vote such shares
only in accordance with instructions received from owners of the contracts
pursuant to which monies are invested in such Separate Accounts.
<TABLE>
<CAPTION>
Number
of
Record
Title of Class Holders
-------------- -------
<S> <C>
Series A Shares of beneficial interest ($.10 par value) 2
Series B Shares of beneficial interest ($.10 par value) 2
Series C Shares of beneficial interest ($.10 par value) 2
Series D Shares of beneficial interest ($.10 par value) 2
Series E Shares of beneficial interest ($.10 par value) 2
</TABLE>
ITEM 27. INDEMNIFICATION
Indemnification of Registrant's principal underwriters against
certain losses is provided for in Section 11 of the Distribution Agreement
incorporated herein by reference as Exhibit (6). Indemnification of
Registrant's Custodian is provided for in Article XII of the Custodian
Agreement incorporated herein by reference as Exhibit (8). Indemnification of
Registrant's Transfer Agent and Dividend Disbursing Agent is provided for in
Article III of the Transfer Agency and Dividend Disbursing Agreement
incorporated herein by reference as Exhibit (9)(a). Registrant intends to
obtain 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 Declaration of Trust incorporated herein by reference
as Exhibit (1), provides as follows:
C-4
<PAGE>
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:
C-5
<PAGE>
(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
C-6
<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
also provides 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 ADVISER
The Registrant's co-investment adviser, NBD, is a state chartered bank
incorporated under the laws of Michigan which is wholly-owned by NBD Bancorp,
Inc., a Delaware corporation. NBD conducts a general banking and trust
business.
(a) To the Registrant's knowledge, none of the directors or officers
of NBD, except as set forth below, is, or has been at any time during the
Registrant's past two fiscal years, engaged
C-7
<PAGE>
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.
C-8
<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.
C-9
<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 The Woodward Funds and Renaissance
Assets Trust, registered investment companies. 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
C-10
<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
C-11
<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) In the future BISYS Fund Services Inc. will act as
distributor and co-administrator for the Registrant.
BISYS Fund Services also distributes the securities of
The Woodward Funds, 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:
C-12
<PAGE>
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 adviser, custodian, and transfer and dividend
disbursing agent).
(b) First 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
Trust Instrument, Bylaws and Minute Books).
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes to call a meeting of shareholders
for the purpose of voting upon the question of removal
C-13
<PAGE>
of a trustee or trustees if requested to do so by the holders
of at least 10% of Registrant's outstanding shares. Registrant
will stand ready to assist shareholder communications in
connection with any meeting of shareholders as prescribed in
Section 16(c) of the Investment Company Act of 1940.
(b) Registrant undertakes to furnish each person to whom a
Prospectus is delivered a copy of the Registrant's most recent
annual report to shareholders, upon request without charge.
C-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 2 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 30th day of April, 1996.
THE WOODWARD VARIABLE ANNUITY FUND
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 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 30, 1996
/s/ Eugene C. Yehle
- -------------------------
Eugene C. Yehle Trustee April 30, 1996
/s/ Will M. Caldwell
- -------------------------
Will M. Caldwell Trustee April 30, 1996
/s/ Julius L. Pallone
- -------------------------
Julius L. Pallone Trustee April 30, 1996
/s/ Nicholas J. De Grazia
- -------------------------
Nicholas J. De Grazia Trustee April 30, 1996
/s/ Donald G. Sutherland
- -------------------------
Donald G. Sutherland Trustee April 30, 1996
/s/ Donald L. Tuttle
- -------------------------
Donald L. Tuttle Trustee April 30, 1996
/s/ John P. Gould
- -------------------------
John P. Gould Trustee April 30, 1996
/s/ Marilyn McCoy
- -------------------------
Marilyn McCoy Trustee April 30, 1996
C-15
<PAGE>
EXHIBIT INDEX
(5)(b) Advisory Agreement betweeen Registrant
and NBD dated November 28, 1995.
(5)(c) Form of Co-Advisory Agreement among
Registrant, NBD Bank ("NBD") and First
Chicago Investment Management Company
("FCIMCO").
(6)(a) Form of Distribution Agreement among
Registrant and BISYS.
(9)(c) Form of Co-Administration Agreement
among Registrant, NBD, FCIMCO and BISYS.
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath.
(27) Financial Data Schedules with respect to
the Woodward Balanced Growth/Value,
Opportunity, Capital Growth and Money
Market Funds.
Exhibit (5)(b)
THE WOODWARD VARIABLE ANNUITY FUND
ADVISORY AGREEMENT
This Agreement, dated as of the 28th day of November, 1995, is entered
into between NBD BANK ("NBD" or the "Adviser"), a state chartered bank
incorporated under the laws of Michigan, having its principal office and place
of business at 611 Woodward Avenue, Detroit, Michigan, and THE WOODWARD
VARIABLE ANNUITY FUND (the "Trust"), a business trust organized under the laws
of the State of Delaware, having its principal office and place of business
c/o NBD Bank, 900 Tower Drive, Troy, Michigan;
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Trust desires to retain NBD as investment adviser to the
Woodward Balanced Fund, Woodward Growth/Value Fund, Woodward Opportunity Fund,
Woodward Capital Growth Fund and Woodward Money Market Fund (individually, a
"Fund" and collectively, the "Funds");
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. (a) The Trust hereby appoints the Adviser
to act as investment adviser for each of the Funds of the Trust
for the period and on the terms set forth in this Agreement. The
Adviser accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
(b) In the event that the Trust establishes one or more
investment portfolios other than the Funds with respect to which it desires to
retain the Adviser to act as investment adviser hereunder, the Trust shall
notify the Adviser in writing. If the Adviser is willing to render such
services it shall notify the Trust in writing whereupon, subject to such
shareholder approval as may be required pursuant to Paragraph 8 hereof, such
portfolio shall become a Fund hereunder and the compensation payable by such
new Fund to the Adviser will be as agreed in writing at the time.
2. Management. Subject to the supervision of the Board of Trustees of
the Trust, the Adviser will provide a continuous investment program for each
of the Funds, including investment research and management with respect to all
securities, investments, cash and cash equivalents in each Fund. The Adviser
will determine from time to time what securities and other investments will be
purchased, retained or sold by the Trust for
<PAGE>
each of its Funds. The Adviser will provide the services rendered by it
hereunder in accordance with the investment objective and policies of each of
the Funds as stated in their respective Prospectuses and resolutions adopted
from time to time by its Board of Trustees. The Adviser further agrees that
it:
(a) will conform with all applicable Rules and Regulations (herein
called the "Rules") of the Securities and Exchange Commission
("SEC"), and will in addition conduct its activities under this
Agreement in accordance with other applicable law, including
but not limited to banking law;
(b) will place all orders for the purchase and sale of
portfolio securities for the account of each Fund with
brokers or dealers selected by the Adviser. In
executing portfolio transactions and selecting brokers
or dealers, the Adviser will use its best efforts to
seek on behalf of the Trust and each Fund thereof the
best overall terms available. In assessing the best
overall terms available for any transaction, the
Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security,
the price of the security, the financial condition and
execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In
evaluating the best overall terms available, and in
selecting the broker or dealer to execute a particular
transaction, the Adviser may also consider the
brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act
of 1934) provided to any Fund and/or other accounts
over which the Adviser or an affiliate of the Adviser
exercises investment discretion. The Adviser is
authorized, subject to the prior approval of the
Trust's Board of Trustees, to pay to a broker or dealer
who provides such brokerage and research services a
commission for executing a portfolio transaction for
any Fund which is in excess of the amount of commission
another broker or dealer would have charged for
effecting that transaction if, but only if, the Adviser
determines in good faith that such commission was
reasonable in relation to the value of the brokerage
and research services provided by such broker or
dealer -- viewed in terms of that particular
transaction or in terms of the overall responsibilities
of the Adviser to the particular Fund and to the Trust.
In no instance will portfolio securities be purchased
from or sold to the Adviser or the Trust's principal
underwriter for the Funds or an affiliated person of
either acting as principal or as broker, except as
<PAGE>
permitted by law. In executing portfolio transactions for any
Fund the Adviser, to the extent permitted by applicable laws
and regulations, may but shall not be obligated to, aggregate
the securities to be sold or purchased with those of other
Funds and its other clients where such aggregation is not
inconsistent with the policies set forth in the Funds'
registration statement. In such event, the Adviser will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in the manner it considers to be
the most equitable and consistent with its fiduciary
obligations to the Funds and such other clients;
(c) will not make loans to any person to purchase or carry Fund
shares or make interest bearing loans to the Trust or a Fund;
(d) will not purchase shares of a Fund for its own account;
(e) will maintain a policy and practice of conducting its
investment advisory operations independently of its
commercial banking operations. When the Adviser makes
investment recommendations for a Fund, its investment
advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed
for purchase or sale for the Fund's account are
customers of its commercial department. In dealing
with commercial customers, the Adviser's commercial
department will not inquire or take into consideration
whether securities of those customers are held by the
Funds;
(f) will maintain all books and records with respect to the
securities transactions of the Funds; keep books of account
with respect to the Funds; and furnish the Trust's Board of
Trustees such periodic and special reports as the Board may
request;
(g) will compute the net asset value, net income and realized and
unrealized capital gains and losses for each of the Funds (and
each class or series thereof, if applicable) in accordance with
the Prospectuses and resolutions of the Trust's Board of
Trustees;
(h) will monitor the Trust's arrangements with respect to services
provided by certain institutional shareholders ("Shareholder
Servicing Agents") to their customers who own Fund shares
pursuant to agreements between the Trust and such Shareholder
Servicing Agents (the "Servicing Agreements"), including, among
other things, reviewing the qualifications of Shareholder
Servicing
<PAGE>
Agents wishing to enter into Servicing Agreements with the
Trust, assisting in the execution and delivery of Servicing
Agreements, reporting to the Board of Trustees with respect to
the amounts paid or payable by the Funds from time to time
under the Servicing Agreements and the nature of the services
provided by Shareholder Servicing Agents, and maintaining
appropriate records in connection with its monitoring duties;
(i) will compile data for and prepare with respect to the
Funds timely Notices to the SEC required pursuant to
Rule 24f-2 under the 1940 Act and Semi-Annual Reports
on Form N-SAR; coordinate execution and filing by the
Trust of all federal and state tax returns and required
tax filings other than those required to be made by the
Trust's custodian and transfer agent; prepare
compliance filings pursuant to state securities laws
with the advice of the Trust's counsel; and assist to
the extent requested by the Trust with the Trust's
preparation of Annual and Semi-Annual Reports to Fund
shareholders and Registration Statements for the Funds
(on Form N-1A or any replacement therefor);
(j) will monitor each Fund's expense accruals and pay all
expenses on proper authorization from each Fund;
monitor each Fund's status as a regulated investment
company under Subchapter M of the Internal Revenue Code
of 1986, as amended from time to time; maintain each
Fund's fidelity bond as required by the 1940 Act; and
monitor compliance with the policies and limitations of
each Fund as set forth in the Prospectuses, Statements
of Additional Information, Bylaws and Trust Instrument;
(k) will assist in maintaining office facilities for the Trust at
such location as the Trust shall reasonably determine; and
furnish clerical, accounting and bookkeeping services, and
stationery and office supplies;
(l) will perform all administrative functions for the Trust and the
Funds not otherwise assigned to another person by contract or
otherwise and will generally assist in the operations of the
Trust and the Funds; and
(m) will treat confidentially and as proprietary information of the
Trust all records and other information relative to the Trust
and prior or present shareholders of the Funds or those persons
or entities who respond to inquiries of the Trust's principal
underwriter concerning investment in the Funds, and will not
use such records and information for any
<PAGE>
purpose other than performance of its responsibilities and
duties hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall not be
unreasonably withheld and may not be withheld where the Adviser
may be exposed to civil or criminal contempt proceedings for
failure to comply, when requested to divulge such information
by duly constituted authorities, or when so requested by the
Trust. Nothing contained herein, however, shall prohibit the
Adviser from advertising to or soliciting the public generally
with respect to other products or services, including, but not
limited to, any advertising or marketing via radio, television,
newspapers, magazines or direct mail solicitation, regardless
of whether such advertisement or solicitation may
coincidentally include prior or present Fund shareholders or
those persons or entities who have responded to inquiries of
the Trust's principal underwriter.
3. Services Not Exclusive. The services rendered by the Adviser
hereunder are not to be deemed exclusive, and the Adviser shall be free to
render similar services to others so long as its services under this Agreement
are not impaired thereby.
4. Books and Records. In compliance with the requirements of Rule
31a-3 of the Rules, the Adviser hereby agrees that all records which it
maintains for each Fund are the property of the Trust and further agrees to
surrender promptly to the Trust any of such records upon the Trust's request.
The Adviser further agrees to preserve for the periods prescribed by Rule
31a-2 the records required to be maintained by Rule 31a-1 of the Rules.
5. Expenses. During the term of this Agreement, the Adviser will pay
all expenses incurred by it in connection with its activities under this
Agreement other than the cost of (including brokerage commissions, if any)
securities purchased for the Funds.
In addition, if the expenses borne by any Fund in any fiscal year
exceed the applicable expense limitations imposed by the securities
regulations of any state in which the shares are registered or qualified for
sale to the public, the Adviser shall reimburse such Fund for any such excess
up to the amount of the fees payable by the particular Fund to it during such
fiscal year pursuant to paragraph 6 hereof; provided, however, that
notwithstanding the foregoing, the Adviser shall reimburse such Fund for such
excess expenses regardless of the amount of such fees payable to it during
such fiscal year to the extent that the securities regulations of any state in
which the Trust's shares are registered or qualified for sale so require.
<PAGE>
6. Compensation. For the services provided and the expenses assumed
pursuant to this Agreement, the Trust will pay the Adviser and the Adviser
will accept as full compensation therefor: (a) 4/10ths of the gross income
earned by each Fund on each loan of its securities (excluding capital gains
and losses, if any); plus (b) with respect to the Woodward Balanced Fund,
Woodward Growth/Value Fund, Woodward Opportunity Fund and Woodward Capital
Growth Fund, a fee, computed daily and payable monthly, at the annual rate of
.75% of each Fund's average daily net assets; plus (c) with respect to the
Woodward Money Market Fund, a fee, computed daily and payable monthly, at the
annual rate of .45% of such Fund's average daily net assets. The fee
attributable to each Fund shall be the several (and not joint or joint and
several) obligation of each such Fund.
7. Limitation of Liability of the Adviser. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement.
8. Duration and Termination. This Agreement shall become effective
with respect to a Fund upon approval of this Agreement by vote of a majority
of the outstanding voting securities of such Fund and, unless sooner
terminated as provided herein, shall continue with respect to such Fund until
April 30, 1996. Thereafter, if not terminated, this Agreement shall continue
with respect to a Fund for successive annual periods, provided such
continuance is specifically approved at least annually (a) by the vote of a
majority of those members of the Board of Trustees of the Trust who are not
parties to this Agreement or "interested persons" of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of such Fund; provided, however, that this
Agreement may be terminated with respect to a Fund, without the payment of any
penalty, by the Board of Trustees of the Trust, by vote of a majority of the
outstanding voting securities of such Fund, or by the Adviser, on 60 days'
written notice to the other party. This Agreement will immediately terminate
in the event of its assignment. (As used in this Agreement, the terms
"majority of the outstanding voting securities," "interested person" and
"assignment" shall have the same meaning as such terms have in the 1940 Act.)
9. Amendment of this Agreement. No provisions in this Agreement may be
changed, discharged or terminated orally, but
<PAGE>
only by an instrument in writing signed by the party against which enforcement
of the change, discharge or termination is sought, and no amendment of this
Agreement affecting a Fund shall be effective until approved by vote of the
holders of a majority of the outstanding voting securities of such Fund.
10. Names. The names "The Woodward Variable Annuity Fund" and
"Trustees of The Woodward Variable Annuity Fund" refer, respectively, to the
trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under a Trust Instrument dated as of
November 7, 1994, which is hereby referred to and a copy of which is on file
at the Office of the Secretary of State of the State of Delaware and at the
principal office of the Trust. The obligations of The Woodward Variable
Annuity Fund entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually, but in such
capacities, and are not binding upon any of the Trustees, shareholders or
representatives of the Trust personally, but bind only the Trust property, and
all persons dealing with any series of shares in the Trust must look solely to
the Trust property belonging to such series for the enforcement of any claims
against the Trust.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to
<PAGE>
the benefit of the parties hereto and their respective successors and shall be
governed by Michigan law.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE WOODWARD VARIABLE ANNUITY FUND
Attest:
/s/ Beth M. Peck By: /s/ Earl I. Heenan, Jr.
- ---------------- -----------------------
Earl I. Heenan, Jr.
President
NBD BANK
Attest:
/s/ Beth M. Peck By: /s/ Richard L. Foersterling
- ---------------- ---------------------------
First Vice President
Exhibit (5)(c)
CO-ADVISORY AGREEMENT
This Agreement, dated as of the ___ day of April, 1996, is entered
into by and among NBD Bank ("NBD"), First Chicago Investment Management
Company ("FCIMCO") and The Woodward Variable Annuity Fund (the "Trust"), a
Delaware business trust registered as an investment company under the
Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Trust desires to appoint NBD and FCIMCO to act as
co-advisers to the Trust's investment portfolios listed on Schedule 1 attached
hereto (each a "Fund" and collectively the "Funds").
WHEREAS, NBD and FCIMCO (each an "Adviser" and collectively the
"Advisers") desire to perform investment advisory services on behalf of the
Trust's Funds;
NOW, THEREFORE, the parties hereto intending to be legally bound,
hereby agree as follows:
1. Appointment. (a) The Trust hereby appoints the Advisers to act as
investment co-advisers for each of the Funds of the Trust for the period and
on the terms set forth in this Agreement. The Advisers accept such appointment
and agree to render the services herein set forth, for the compensation herein
provided. The Advisers may, in their discretion, provide such services through
their own employees or the employees of one or more affiliated companies that
are qualified to act as investment adviser to the Trust under applicable law
and are under the common control of First Chicago NBD Corporation provided (i)
that all persons, when providing services hereunder, are functioning as part
of an organized group of persons, and (ii) that such organized group of
persons is managed at all times by persons who are authorized officers of one
or both of the Advisers.
(b) In the event that the Trust establishes one or more investment
portfolios other than the Funds with respect to which it desires to retain the
Advisers to act as investment co- advisers hereunder, the Trust shall notify
the Advisers in writing. If the Advisers are willing to render such services
they shall notify the Trust in writing whereupon, subject to such shareholder
approval as may be required pursuant to Paragraph 8 hereof, such portfolio
shall become a Fund hereunder and the compensation payable by such new Fund to
the Advisers will be as agreed in writing at the time.
2. Management. Subject to the supervision of the Board of Trustees of
the Trust (the "Board"), the Advisers will provide a continuous investment
program for each of the Funds, including investment research and management
with respect to all
<PAGE>
securities, investments, cash and cash equivalents in each Fund. The Advisers
will determine from time to time what securities and other investments will be
purchased, retained or sold by the Trust for each of its Funds. The Advisers
will provide the services rendered by them hereunder in accordance with the
investment objective and policies of each of the Funds as stated in their
respective prospectuses ("Prospectuses" or a "Prospectus"), statements of
additional information ("SAIs") and all amendments and supplements thereto,
Bylaws, Amended and Restated Declaration of Trust and resolutions adopted from
time to time by the Trust's Board. The Advisers further agree that they:
(a) will conform with all applicable Rules and Regulations
(hereinafter called the "Rules") of the Securities and
Exchange Commission ("SEC"), and will in addition
conduct their activities under this Agreement in
accordance with other applicable laws;
(b) will place all orders for the purchase and sale of
portfolio securities for the account of each Fund
with brokers or dealers selected by the Advisers.
In executing portfolio transactions and selecting
brokers or dealers, the Advisers will use their
best efforts to seek on behalf of the Trust and
each Fund thereof the best overall terms
available. In assessing the best overall terms
available for any transaction, the Advisers shall
consider all 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 evaluating the best overall terms
available, and in selecting the broker or dealer
to execute a particular transaction, the Advisers
may also consider the brokerage and research
services (as those terms are defined in Section
28(e) of the Securities Exchange Act of 1934)
provided to any Fund and/or other accounts over
which the Advisers or an affiliate of the Advisers
exercises investment discretion. The Advisers are
authorized, subject to the prior approval of such
policy by the Trust's Board, to pay to a broker or
dealer who provides such brokerage and research
services a commission for executing a portfolio
transaction for any Fund which is in excess of the
amount of commission another broker or dealer
would have charged for effecting that transaction
if, but only if, such is consistent with
applicable law and the Advisers determine in good
faith that such commission was reasonable in
<PAGE>
relation to the value of the brokerage and research
services provided by such broker or dealer -- viewed in
terms of that particular transaction or in terms of the
overall responsibilities of the Advisers to the
particular Fund and to the Trust.
In no instance will portfolio securities be purchased
from or sold to the Advisers or the Trust's principal
underwriter for the Funds or an affiliated person of
either, acting as principal or as broker, except as
permitted by law. In executing portfolio transactions
for any Fund, the Advisers, to the extent permitted by
applicable laws and regulations, may but shall not be
obligated to, aggregate the securities to be sold or
purchased with those of other Funds and their other
clients where such aggregation is not inconsistent with
applicable law and the policies set forth in the Funds'
registration statement. In such event, the Advisers will
allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in the manner they
consider to be the most equitable and consistent with
their fiduciary obligations to the Funds and such other
clients;
(c) will maintain a policy and practice of conducting
their investment advisory operations independently
of their commercial banking operations. When the
Advisers make investment recommendations for a
Fund, their investment advisory personnel will not
inquire or take into consideration whether the
issuer of securities proposed for purchase or sale
for the Fund's account are customers of their
commercial departments. In dealing with
commercial customers, the Advisers' commercial
departments will not inquire or take into
consideration whether securities or those
customers are held by the Funds;
(d) will maintain all books and records with respect to the
securities transactions of the Funds; and furnish the
Trust's Board such periodic and special reports as the
Board may request;
(e) will treat confidentially and as proprietary
information of the Trust all records and other
information relative to the Trust and prior or
present shareholders of the Funds or those persons
or entities who respond to inquiries of the
Trust's principal underwriter concerning
investment in the Funds and will not use such
records and information for any purpose other than
<PAGE>
performance of their responsibilities and duties
hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall
not be unreasonably withheld and may not be withheld
where the Advisers may be exposed to civil or criminal
contempt proceedings for failure to comply, when
requested to divulge such information by duly
constituted authorities, or when so requested by the
Trust. Nothing contained herein or in any other
agreement executed with the Trust, however, shall
prohibit NBD, FCIMCO and any of their affiliates from
advertising to or soliciting the public generally with
respect to other products or services, including, but
not limited to, any advertising or marketing via radio,
television, newspapers, magazines or direct mail
solicitation, regardless of whether such advertisement
or solicitation may coincidentally include prior or
present Fund shareholders or those persons or entities
who have responded to inquiries of the Trust's principal
underwriter.
3. Services Not Exclusive. The services rendered by the Advisers
hereunder are not to be deemed exclusive, and the Advisers shall be free to
render similar services to others so long as their services under this
Agreement are not impaired thereby.
4. Expenses. During the term of this Agreement, the Advisers will pay
all expenses incurred by them in connection with their activities under this
Agreement other than the cost of securities purchased for the Funds (including
brokerage commissions, if any).
In addition, if the expenses borne by any Fund in any fiscal year
exceed the applicable expense limitations imposed by the securities
regulations of any state in which the shares are registered or qualified for
sale to the public, the Advisers jointly and severally agree to reimburse such
Fund for a portion of any excess expense in an amount equal to the portion
that the advisory fees otherwise payable by the Fund to the Advisers bear to
the total amount of investment advisory and administration fees otherwise
payable by the Fund. The expense reimbursement obligation of the Advisers is
limited to the amount of their fees hereunder for such fiscal year; provided,
however, that notwithstanding the foregoing, the Advisers shall reimburse such
Fund for a portion of any such excess expenses in an amount equal to the
proportion that the fees otherwise payable to the Advisers bear to the total
investment advisory and administration fees otherwise payable by the Fund
regardless of the amount of such fees payable to the Advisers during such
fiscal year to the extent that the securities regulations of any state in
which the Trust's shares are registered or qualified for sale so require.
<PAGE>
Such expense reimbursement, if any, will be estimated, reconciled and paid on
a monthly basis.
5. Compensation. For the services provided and the expense assumed
pursuant to this Agreement, the Trust will pay the Advisers and the Advisers
will accept as full compensation therefor the fees set forth on Schedule 2
hereof.
6. Sub-Adviser. It is understood that, subject to the prior approval
of the Board of the Trust, the Advisers may employ a sub-adviser(s) to assist
them in the performance of this Agreement, and it is agreed that the Advisers
shall be as fully responsible to the Trust for the acts and omissions of the
sub- adviser(s) as they are for their own acts and omissions. Any compensation
to be paid to such sub-adviser will be paid by the Advisers and the activities
of such subadviser will be subject to the provisions of this Agreement. The
Advisers will use their best effort to cause the sub-adviser(s) to comply with
all of the Advisers' policies, including without limitation, their codes of
ethics and their policies relating to personal trading, brokerage and
securities allocation, soft and hard dollars and compliance.
7. Limitation of Liability of the Advisers. The Advisers shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Advisers in the
performance of their duties or from reckless disregard by their obligations
and duties under this Agreement. The Advisers agree that their liability,
including the liability of any sub-adviser, under this Agreement as set forth
herein, shall be joint and several. Any person, even though also an officer,
Board member, partner, director, employee or agent of an Adviser, who may be
or become an officer, Board member, partner, employee or agent of the Trust,
shall be deemed, when rendering services to the Trust or acting on any
business of the Trust (other than services or business in connection with the
Advisers' duties as co-advisers hereunder) to be rendering such services to or
acting solely for the Trust and not as an officer, Board member, partner,
director, employee or agent or one under the control or direction of the
Advisers even though paid by either of them.
8. Duration and Termination. Subject to shareholder approval of the
Agreement and Plan of Reorganization ("Reorganization Plan") by and among The
Woodward Funds, Prairie Funds, Prairie Intermediate Bond Fund and Prairie
Municipal Bond Fund, Inc. dated ________, 1996, this Agreement shall become
effective as to each Fund upon the first reorganization involving The Woodward
Funds and one or more of the Prairie funds as described in the Reorganization
Agreement. Unless sooner terminated as provided herein, shall continue with
respect to
<PAGE>
such Fund until _____, 199_. Thereafter, if not terminated, this Agreement
shall continue with respect to a Fund for successive annual periods, provided
such continuance is specifically approved at least annually (a) by the vote of
a majority of those members of the Board of the Trust who are not parties to
this Agreement or "interested persons" of any such party, cast in person at a
meeting called for the purpose of voting on such approval, and (b) by the
Board of the Trust or by vote of a majority of the outstanding voting
securities of such Fund; provided, however, that this Agreement may be
terminated with respect to a Fund, without the payment of any penalty, by the
Board of the Trust or by vote of a majority of the outstanding voting
securities of such Fund on sixty (60) days' written notice, or by the
Advisers, on ninety (90) days' written notice to the Trust. This Agreement
will immediately terminate in the event of its assignment. (As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested person" and "assignment" shall have the same meaning as such terms
have in the 1940 Act.)
9. Amendment of this Agreement. No provisions in this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party or parties against which enforcement of the change,
discharge or termination is sought, and no amendment to this Agreement
affecting a Fund shall be effective until approved by vote of the holders of a
majority of the outstanding voting securities of such Fund.
10. Names. The obligations of the Fund entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders or representatives of the Trust personally, but bind
only the Trust property, and all persons dealing with any series of shares in
the Trust must look solely to the Trust property belonging to such series for
the enforcement of any claims against the Trust.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Michigan law.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE WOODWARD VARIABLE ANNUITY FUND
Attest:
_______________________ By: ______________________
NBD BANK
Attest:
_______________________ By: ______________________
(Corporate Seal)
FIRST CHICAGO INVESTMENT MANAGEMENT
COMPANY
Attest:
_______________________ By: _______________________
(Corporate Seal)
<PAGE>
SCHEDULE 1
LIST OF PORTFOLIOS
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
<PAGE>
SCHEDULE 2
As compensation for their services hereunder, the Trust will pay an
advisory fee, computed daily and payable monthly, at the following annual
rates for the respective Funds:
=========================================================================
Fund Fee Rate
- -------------------------------------------------------------------------
Money Market Fund .30% of the
first $1.0 billion, .275% of
the next $1 billion and .25%
of each such Fund's average
daily net assets in excess
of $2 billion
- -------------------------------------------------------------------------
Managed Assets Balanced Fund .65% of the average net assets
of the Fund
- -------------------------------------------------------------------------
Growth Fund .60% of the average net assets
Mid Cap Opportunity Fund of the respective Fund
Growth and Value Fund
=========================================================================
Net asset value shall be computed in accordance with the Funds'
Prospectuses and resolutions of the Trust's Board of Trustees. The fee for the
period from the day of the month this Agreement is entered into until the end
of that month shall be pro-rated according to the proportion which such period
bears to the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month shall be
pro-rated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. Such fee as is attributable to each Fund shall be a separate charge
to such Fund and shall be the several (and not joint or joint and several)
obligation of each such Fund.
In addition, the Advisers will receive as compensation under
this Agreement 4/10ths of the gross income earned by each Fund on each loan of
its securities (including capital gains and loss, if any).
Exhibit (6)(a)
DISTRIBUTION AGREEMENT
This Agreement is made as of this ____ day of April, 1996 by and
between The Woodward Variable Annuity Fund, a Delaware business trust (the
"Trust") and BISYS Fund Services Limited Partnership, d/b/a BISYS Fund
Services ("BISYS").
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end management
investment company;
WHEREAS, the Trust is currently offering shares of beneficial interest
(the "Shares") representing interests in the investment portfolios ("Series")
listed on Schedule 1 attached hereto;
WHEREAS, BISYS is a securities firm engaged inter alia in the business
of selling shares of investment companies either directly to investors or
through other securities dealers;
WHEREAS, the Trust desires to retain BISYS as the distributor
("Distributor") for its Series to provide for the sale and distribution of the
Shares, and BISYS is prepared to provide such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby the parties hereto
agree as follows:
Section 1. Appointment as Distributor.
(a) The Trust hereby appoints BISYS as the exclusive
Distributor and representative of the Trust to act as agent for the sale and
distribution of Shares of each Series described in the currently effective
prospectuses (hereinafter referred to as "Prospectuses" or a "Prospectus") and
registration statement ("Registration Statement") of the Trust. The Trust
during the term of this Agreement shall sell its Shares through BISYS upon the
terms and conditions set forth below.
(b) BISYS shall use its best efforts to solicit orders for the
sale of Shares. It is contemplated that BISYS will enter into sales or
servicing agreements with securities dealers, financial institutions and other
industry professionals, such as investment advisers, accountants and estate
planning firms, and in so doing will act only on its own behalf as principal.
No securities dealer or other person who enters into a servicing agreement
with BISYS shall be authorized to act as an agent for the Trust or its Series
in connection with the offering or sale of Shares to the public or otherwise.
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<PAGE>
(c) BISYS shall prepare or review, provide advice with respect
to, and file with the federal and state agencies or other organizations as
required by federal, state, and other applicable laws and regulations, all
sales literature (advertisements, brochures and shareholder communications)
for each of the Series and any classes of Shares thereof.
(d) In the event that the Trust establishes one or more
additional investment portfolios other than the Series with respect to which
it desires to retain BISYS to act as the exclusive Distributor and
representative hereunder, the Trust shall notify BISYS in writing. If BISYS is
willing to render such services it shall notify the Trust in writing
whereupon, subject to such approval as may be required pursuant to Section 13
hereof, or any necessary regulatory or shareholder approvals, such portfolio
shall become a Series hereunder and the compensation payable by such new
Series to BISYS will be as agreed in writing at the time.
Section 2. Exclusive Nature of Duties.
BISYS shall be the exclusive representative of the Trust to act
as sponsor and Distributor, except that:
(a) The Trust may, upon written notice to BISYS, from time to
time designate other principal underwriters and distributors of Shares of one
or more Series with respect to areas other than the United States as to which
BISYS may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of BISYS under this Agreement to
act as agent for the distribution of Shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full effect until
terminated in accordance with the other provisions hereof;
(b) The exclusive rights granted to BISYS to act as agent for
the distribution of Shares of the Trust shall not apply to Shares of any
Series issued in connection with the merger or consolidation of any other
investment company or personal holding company with the Trust or the
acquisition by purchase or otherwise of all (or substantially all) the assets
or the outstanding shares of any such company by the Trust;
(c) Such exclusive rights shall also not apply to Shares issued
by the Trust pursuant to reinvestment of dividends and capital gains
distributions; and
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<PAGE>
(d) The Trust acknowledges that the persons employed by BISYS
to assist in the performance of its duties under this Agreement may not devote
their full time to such service and nothing contained in this Agreement shall
be deemed to limit or restrict BISYS or any of its affiliates' right to engage
in and devote time and attention to other businesses or to render services of
whatever kind or nature.
Section 3. Distribution of Shares of the Trust.
(a) BISYS shall have the right to solicit unconditional orders
for Shares of the Trust. The price which investors shall pay for the Shares so
purchased from the Trust shall be determined as set forth in Section 3(b)
hereof.
(b) The public offering price of the Shares of any Series,
i.e., the price per share at which BISYS may offer Shares to the public, shall
be the public offering price as set forth in the Prospectus relating to such
Shares, which shall be the net asset value thereof, as determined in
accordance with the description thereof contained in the Prospectus relating
to such Shares, plus any sales charge as set forth in the Prospectus.
(c) The Trust, or any agent of the Trust designated in writing
by it, shall be promptly advised of all purchase and redemption orders for
Shares received by BISYS. Procedures may be established by the Trust and BISYS
whereby purchase orders for Shares of any Series are presented directly to the
Trust or an agent designated by the Trust upon the condition that in such
cases it shall be deemed that the sale of the Shares to be purchased is made
pursuant to Section 3 hereof. Any order may be rejected by the Trust in its
sole discretion or by BISYS, as the case may be, provided, however, that BISYS
will not arbitrarily or without reasonable cause refuse to transmit orders for
the purchase of Shares. The Trust (or its agent) will confirm orders in
accordance with the rules and regulations, or any exemptive order, of the
Securities and Exchange Commission, and will make appropriate book entries
pursuant to the instructions of BISYS. Purchase orders are effective when
Federal Funds become available to the Trust or as otherwise stated in the
Prospectus. BISYS agrees to cause such payment and such instructions received
by it to be delivered promptly to the Trust (or its agent).
Section 4. Redemption of Shares by the Trust.
(a) Any of the outstanding Shares may be tendered for
redemption at any time, and the Trust shall redeem the Shares so tendered in
accordance with its obligations and rights as set
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<PAGE>
forth in its Amended and Restated Declaration of Trust, as amended from time
to time, and in accordance with the applicable provisions contained in the
Prospectus relating to such Shares. The Trust shall pay the total amount of
the redemption price pursuant to the instructions of BISYS as the case may be,
and in accordance with the terms set forth in the Prospectus relating to the
Shares being redeemed.
(b) If any Shares sold by the Trust are redeemed or repurchased
by the Trust or by BISYS as agent or are tendered for redemption within seven
business days after the date of confirmation of the original purchase of said
Shares, BISYS, as the case may be, shall forfeit any amount above the net
asset value which it may have received in respect of such Shares, provided
that the portion of such amount reallowed by BISYS to broker/dealers or other
persons shall be repayable to the Trust only to the extent recovered by BISYS
from the broker/dealer or other person concerned. BISYS shall include in the
form of agreement with such broker/dealers and other persons a corresponding
provision for the forfeiture by them of their concession with respect to
Shares sold by them or their principals and redeemed or repurchased by the
Trust or by BISYS, as the case may be, as agent (or tendered for redemption)
within seven business days after the date of confirmation of such initial
purchases.
(c) The right of a shareholder to redeem Shares of any Series,
or to receive payment with respect to any such redemption, upon the
presentation of properly submitted redemption requests in accordance with the
procedures set forth in the Prospectus relating to such Shares, may only be
suspended in accordance with the provisions of the Investment Company Act.
Section 5. Duties and Representations of the Trust.
(a) The Trust shall furnish BISYS from time to time, for use in
connection with the sale of Shares, such information with respect to the Trust
or any relevant Series and the Shares as BISYS may reasonably request.
(b) The Trust shall take, from time to time, all necessary
action to register Shares of each Series under the Securities Act of 1933, as
amended, ("Securities Act") to the end that there will be available for sale
such number of Shares as BISYS may reasonably be expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of Shares of each Series
for sale under the securities laws of such states
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<PAGE>
as BISYS and the Trust may approve. Any such qualification may be withheld,
terminated or withdrawn by the Trust at any time in its discretion. As
provided in Section 9(c) hereof, the expense of qualification and maintenance
of qualification shall be borne by the Trust. BISYS shall furnish such
information and other material relating to its respective affairs and
activities as may be required by the Trust in connection with such
qualifications. The Trust will not confirm the sale of any Shares in any
jurisdiction in which the Shares are not qualified for offer and sale unless
the offer and sale by BISYS under the circumstances is exempt from
qualification.
(d) The Trust represents to BISYS that all Registration
Statements and Prospectuses filed by the Trust with the Securities and
Exchange Commission under the Securities Act with respect to the Shares have
been carefully prepared in conformity with the requirements of said Act and
rules and regulations of the Securities and Exchange Commission thereunder.
The Trust represents and warrants to BISYS that any Registration Statement and
Prospectus, when such Registration Statement becomes effective, will contain
all statements required to be stated therein in conformity with said Act and
the rules and regulations of said Commission; that all statements of fact
contained in any such Registration Statement and Prospectus will be true and
correct when such Registration Statement becomes effective; and that neither
any Registration Statement nor any Prospectus when such Registration Statement
becomes effective will include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading unless such statement or omission was
made in reliance upon, and in conformity with, written information furnished
to the Trust in connection therewith by or on behalf of BISYS, as the case may
be. The Trust shall not file any amendment to any Registration Statement or
supplement to any Prospectus without giving BISYS reasonable notice thereof in
advance; provided, however, that nothing contained in this Agreement shall in
any way limit the Trust's right to file at any time such amendments to any
Registration Statement or supplements to any Prospectus, of whatever
character, as the Trust may deem advisable, such right being in all respects
absolute and unconditional.
(e) The Trust agrees to advise BISYS promptly in
writing:
(i) of any request by the Securities and Exchange
Commission for amendments to the Registration Statement
or Prospectuses then in effect or for additional
information;
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<PAGE>
(ii) in the event of the issuance by the Securities and
Exchange Commission of any stop order suspending the
effectiveness of the Registration Statement or Prospectuses
then in effect or the initiation of any proceeding for that
purpose;
(iii) of the happening of any event which makes untrue any
statement of a material fact made in the Registration Statement
or Prospectuses then in effect or which requires the making of
a change in such Registration Statement or Prospectus in order
to make the statements therein not misleading;
(iv) of all actions of the Securities and Exchange
Commission with respect to any amendments to any Registration
Statement or Prospectuses which may from time to time be filed
with the Securities and Exchange Commission;
(v) of the qualification or withdrawal or ter-
mination of qualification for sale of Shares of any
Series in any jurisdiction; and
(vi) annually on the anniversary of the date of
qualification of Shares of any Series for sale in any
jurisdiction whether or not the Shares continue to be qualified
for sale in such jurisdiction and the number of Shares so
qualified for sale.
Section 6. Duties of BISYS as the Distributor.
(a) BISYS shall devote reasonable time and effort as determined
by it to effect sales of Shares of the Trust, but shall not be obligated to
sell any specific number of Shares. The services of BISYS hereunder are not to
be deemed exclusive and nothing herein contained shall prevent BISYS from
entering into distribution arrangements with other investment companies so
long as the performance of its obligations hereunder is not impaired thereby.
(b) In selling the Shares of the Trust, BISYS shall conform
with the requirements of all federal and state laws and regulations and the
regulations of the National Association of Securities Dealers, Inc. (the
"NASD") relating to the sale of such securities. Neither BISYS nor any other
person is authorized by the Trust to give any information or to make any
representations, other than those contained in the Prospectus for each Series
or any sales literature specifically approved by the Trust for use with
respect to a particular Series.
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<PAGE>
(c) BISYS shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the NASD
and applicable law, as such requirements may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) BISYS shall have the right, acting only on its own behalf
as principal, to enter into selected dealer agreements with securities dealers
and other persons of its choice ("Selected Dealers") for the sale of Shares;
provided, however, that the form of Selected Dealers agreement shall be
approved by the Trust and that no Selected Dealer entering into a Selected
Dealer agreement with BISYS shall be authorized to act as agent for the Trust
in connection with the offer or sale of its Shares to the public or otherwise.
Shares sold to Selected Dealers shall be for resale by such dealers only in
accordance with the provisions of the Prospectus relating to such Shares.
(b) Within the United States, BISYS shall offer and sell Shares
only to such Selected Dealers as are members in good standing of the NASD.
Section 8. Acceptance of Appointment.
BISYS accepts its appointment as Distributor and agrees during
such period to render such services and to assume the obligations herein set
forth for the compensation herein provided. Unless otherwise expressly
provided or authorized herein, BISYS shall not have any authority to act for
or represent the Trust in any way or otherwise be deemed an agent of the
Trust.
Section 9. Payment of Expenses.
(a) Except as provided in Section 9(d) hereof, BISYS shall pay
without reimbursement by the Trust the costs of its personnel used in
connection with the performance of its obligations hereunder, of providing
necessary office space for the performance of its obligations hereunder and of
all related overhead expenses, of maintaining its own qualification as a
broker under State or Federal laws, and of performing its duties hereunder;
and any fees or commissions pursuant to Selected Dealer agreements described
in Section 7 hereof.
(b) The Trust agrees to pay all costs and expenses in
connection with the registration of Shares under the Securities
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<PAGE>
Act, as amended, and all expenses in connection with maintaining facilities
for the issue and transfer of Shares and for supplying information, prices and
other data to be furnished by the Trust hereunder, and all expenses in
connection with the preparation and printing of the Trust's Prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; provided, however, that except as
provided in Section 9(d) hereof, nothing contained herein shall be deemed to
require the Trust to pay any of the costs in connection with the sale of
Shares.
(c) Payments by the Trust relating to any distribution plan
within the meaning of Rule 12b-1 under the Investment Company Act (a "Plan")
adopted by the Trust's Board of Trustees (the "Board of Trustees") shall be
payable to the Distributor or its assignees, all in accordance with the terms
and conditions of such Plan. With respect to payments by the Trust relating to
the Distribution Plan relating to Class B shares: (i) payments to be made by
the Trust to the Distributor pursuant to such Plan as reimbursement of
expenses shall be for direct expenses of the Distributor authorized to be
incurred by the Trust pursuant to paragraph 1 of such Plan, (ii) upon
termination of such Plan, the benefits inuring to the Distributor shall
immediately cease, and (iii) expenses of the Distributor under such Plan in
any fiscal year of the Trust which cannot be paid by the Trust because payment
of such expenses would cause the Trust to exceed the limitation set forth in
paragraph 1 of such Plan during such fiscal year, shall not be payable to the
Distributor in any succeeding fiscal year of the Trust.
(d) Any contingent deferred sales charges and any charges
pursuant to a Plan which are payable in connection with purchases of Class B
Shares shall be payable to BISYS or its assignees, all in accordance with the
Trust's Registration Statement.
Section 10. Indemnification.
(a) The Trust shall indemnify and hold harmless BISYS, its
respective officers, directors, partners and employees and each person, if
any, who controls BISYS within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934 against
any loss, liability, claim, damage or expense (including the reasonable cost
of investigating or defending any alleged loss, liability, claim, damage or
expense and reasonable counsel fees incurred in connection therewith), arising
by reason of any person acquiring any Shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the Regis-
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<PAGE>
tration Statement or related Prospectus of any Series, as from time to time
amended and supplemented, or the annual or interim reports to shareholders of
any Series, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary in order to make
the statements therein not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, written information furnished
to the Trust in connection therewith by or on behalf of BISYS, as the case may
be; provided, however, that in no case (i) is the indemnity by the Trust in
favor of BISYS, its respective officers, directors, partners and employees and
any such controlling person to be deemed to protect BISYS, its respective
officers, directors, partners and employees or any such controlling persons
thereof against any liability to the Trust or its security holders to which
BISYS, its respective officers, directors, partners and employees or any such
controlling persons would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Trust to be liable under its indemnity agreement
contained in this paragraph with respect to any claim made against BISYS, its
respective directors, or any such controlling persons, unless BISYS, its
respective officers, directors, partners and employees or such controlling
persons, as the case may be, shall have notified the Trust in writing within
ten (10) days after the summons or other first legal process giving
information of the nature of the claim shall have been served upon BISYS, its
respective officers, directors, partners or employees or such controlling
persons (or after BISYS, its respective officers, directors, partners and
employees or such controlling persons shall have received notice of such
service on any designated agent), but failure to notify the Trust of any such
claim shall not relieve the Trust from any liability which it may have to the
person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Trust will be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the
Trust elects to assume the defense, such defense shall be conducted by counsel
chosen by the Trust and satisfactory to BISYS, its respective officers,
directors, partners and employees or such controlling person or persons,
defendant or defendants in the suit. In the event the Trust elects to assume
the defense of any such suit and retain such counsel, BISYS, its respective
officers, directors, partners and employees or such controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them. In the event the Trust does not
elect to assume the
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<PAGE>
defense of any such suit, it will reimburse BISYS, its respective officers,
directors, partners and employees or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of
any counsel retained by them. The Trust shall promptly notify BISYS of the
commencement of any litigation or proceedings against it or any of its
respective officers or trustees in connection with the issuance or sale of any
of the Shares. The Trust's indemnification agreement contained in this Section
10(a) and the Trust's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of BISYS, its respective officers, directors, partners
and employees or any controlling person, and shall survive the delivery of any
Shares. The indemnity provided for herein will be in addition to any liability
which the Trust may otherwise have.
(b) BISYS shall indemnify and hold harmless the Trust and each
of its trustees, officers, and employees and each person, if any, who controls
the Trust against any loss, liability, claim, damage, or expense described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions to state a material fact necessary to
make such statements not misleading, made in reliance upon, and in conformity
with, information furnished to the Trust in writing by BISYS or on BISYS's
behalf for use in connection with the Registration Statement or related
Prospectus of any Series, as from time to time amended, or the annual or
interim reports to shareholders of any Series. Additionally, BISYS shall
indemnify and hold harmless the Trust and each of its trustees, officers, and
employees and each person, if any, who controls the Trust against any loss,
liability, claim, damage, or expense resulting from willful misfeasance, bad
faith or gross negligence on the part of BISYS or reckless disregard by BISYS
of its duties under this Agreement. In the event any action shall be brought
against the Trust or any persons so indemnified, in respect of which indemnity
may be sought against BISYS, BISYS shall have the rights and duties given to
the Trust, and the Trust and each person so indemnified shall have the rights
and duties given to BISYS by the provisions of subsection (a) of this Section
10.
Section 11. Certain Administrative Duties of BISYS.
During normal business hours, BISYS shall provide personnel to
respond to questions with respect to the Trust or to refer such inquiries to
appropriate Trust officials.
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<PAGE>
Section 12. Duration and Termination of this Agreement.
Subject to shareholder approval of the Agreement and Plan of
Reorganization ("Reorganization Plan") by and among The Woodward Funds,
Prairie Funds, Prairie Intermediate Bond Fund and Prairie Municipal Bond Fund,
Inc. dated ________, 1996, this Agreement shall become effective as to each
Fund upon the first reorganization involving The Woodward Funds and one or
more of the Prairie funds as described in the Reorganization Agreement. This
Agreement shall remain in force with respect to any particular Series until
_________, 199_ and thereafter from year to year, so long as such continuance
is specifically approved at least annually by (a) by the Board of Trustees of
the Trust and (b) by a majority of those trustees who are not "interested
persons" of the Trust (as defined in the Investment Company Act) and who have
no direct or indirect financial interest in the operation of this Agreement,
or related Service and Distribution Plan or "interested persons" of any person
having such financial interest, cast in person at a meeting called for the
purpose of voting on such approval.
This Agreement may be terminated with respect to any particular
Series at any time, without the payment of any penalty, by a majority of those
trustees of the Trust who are not "interested persons" of the Trust and have
no direct or indirect financial interest in the operation of any Plan adopted
by the Trust or any related agreement thereto, or by vote of a majority of the
outstanding voting securities of the Trust on 60 (sixty) days written notice,
or by BISYS on 90 (ninety) days' written notice to the Trust.
The provisions of Section 10 shall survive any termination of
this Agreement.
Section 13. Amendments.
This Agreement may be amended in writing by the parties hereto
only if such amendment is specifically approved (i) by the Board of Trustees
of the Trust, and (ii) by a majority of those trustees who are not parties to
this Agreement and have no direct or indirect financial interest in the
operation of this Agreement, or "interested persons" of any such party, which
vote must be cast in person at a meeting called for the purpose of voting on
such approval.
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Section 14. Definitions of Certain Terms.
The terms "vote of a majority of the outstanding voting
securities", "assignment," and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 15. Governing Law.
This Agreement shall be construed in accordance with the laws
of the State of Michigan, without reference to principles of conflicts of law,
and with the applicable provisions of the Investment Company Act. To the
extent the applicable law of the State of Michigan or any of the provisions
herein conflict with the applicable provisions of the Investment Company Act,
the latter shall control.
Section 16. Personal Liability.
The obligations of the Trust entered into in the name or on
behalf thereof by any of the trustees of the Trust, representatives or agents
are made not individually, but in such capacities, and are not binding upon
any of the trustees, shareholders or representatives of the Trust personally,
but bind only the Trust property, and all persons dealing with any series of
shares in the Trust must look solely to the Trust property belonging to such
series for the enforcement of any claims against the Trust.
THE WOODWARD VARIABLE ANNUITY FUNDS
By ___________________________
Its_________________________
BISYS Fund Services Limited Partnership
By: BISYS Fund Services, Inc.,
its general partner
By: ______________________
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SCHEDULE 1
LIST OF PORTFOLIOS
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
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Exhibit (9)(c)
CO-ADMINISTRATION AGREEMENT
AGREEMENT dated as of April __, 1996 by and among THE WOODWARD
VARIABLE ANNUITY FUND, a Delaware business trust (the "Trust"), NBD BANK
("NBD"), a national banking association, and FIRST CHICAGO INVESTMENT
MANAGEMENT COMPANY ("FCIMCO"), a registered investment adviser, and BISYS
LIMITED PARTNERSHIP, d/b/a, BISYS FUND SERVICES (each an "Administrator" and
collectively, the "Administrators").
WHEREAS, the Trust is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust desires to retain the Administrators to
provide, as co-administrators, certain administration services for the
investment portfolios of the Trust set forth on Schedule 1 hereto (each a
"Fund" and collectively the "Funds") and the Administrators are willing to
furnish such administration services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained and intending to be legally bound, it is agreed
between the parties hereto as follows:
1. Appointment of Administrators. The Trust hereby appoints
each of the Administrators jointly to provide administration services for the
Funds on the terms and for the period set forth in this Agreement. The
Administrators each accept such respective appointments and agree to perform
the services and duties set forth in Section 3 below in return for the
compensation provided in Section 5 below.
2. Delivery of Documents. The Trust has furnished each of the
Administrators with copies, properly certified or authenticated, of each of
the following documents and will deliver to each Administrator all future
amendments and supplements, if any:
a. The Trust's Amended and Restated Declaration of Trust,
as filed with the Secretary of State of Delaware on May 1, 1992, as amended
(the "Declaration of Trust");
b. The Trust's By-Laws, as amended ("Bylaws");
c. Resolutions of the Trust's Board of Trustees ("Board of
Trustees") authorizing the execution and delivery of this Agreement;
<PAGE>
d. The Trust's most recent amendment to its registration
statement under the Securities Act of 1933, as amended, and under the 1940 Act
on Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") and supplements thereto, (such amendment as presently in effect
and as amended or supplemented from time to time, is herein called the
"Registration Statement"); and
e. The Trust's most recent prospectus(es) and statement(s)
of additional information and all amendments and supplements thereto (such
prospectus(es) and statement(s) of additional information and supplements
thereto, as presently in effect and as from time to time amended and
supplemented, are herein called the "Prospectus(es)" and the "Statement(s) of
Additional Information", respectively).
3. Services and Duties. The Administrators enter into the
following covenants jointly and severally with respect to their administration
and duties:
a. Subject to the supervision and control of the Trust's
Board of Trustees, the Administrators shall assist in supervising all aspects
of the Funds' operations, other than those investment advisory functions which
are to be performed by the Trust's investment advisers pursuant to the
Co-Advisory Agreement, those services to be performed by the custodian
pursuant to the Trust's Custodian Agreement, those services to be performed by
the distributor pursuant to the Trust's Distribution Agreement and those
services to be performed by the transfer agent pursuant to the Trust's
Transfer and Dividend Disbursing Agency Agreement. In this regard, the
Administrators' responsibilities include:
(1) Assisting in maintaining office facilities (which
may be in the offices of any of the Administrators or a corporate
affiliate but shall be in such location as the Trust shall reasonably
determine);
(2) Furnishing clerical services and stationary and
office supplies;
(3) Providing for the preparing, supervising and mailing
of confirmations for all purchase and redemption orders to
shareholders of record;
(4) Providing and supervising the operation of an
automated data processing system to process purchase and redemption
orders (the Administrators assume responsibility for the accuracy of
the data transmitted for processing or storage);
(5) Maintaining a procedure external to the transfer
agent's system to reconstruct lost purchase and redemption data; and
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<PAGE>
(6) Providing information and distributing written
communications concerning the Funds to their shareholders of record;
handling shareholder problems and calls.
b. The Administrators shall prepare or review all sales
literature (advertisements, brochures and shareholder communications) for the
Funds.
c. The Administrators shall participate to the extent
requested by the Trust and its counsel in the periodic updating of the Trust's
Registration Statement; compile data and accumulate information for and
prepare (i) reports to shareholders of record and the Commission (e.g., Annual
and Semi-Annual Reports on Form N-SAR) and (ii) notices pursuant to Rule 24f-2;
and timely file with the Commission and other federal and state agencies,
reports and documents including, without limitation, Annual and Semi-Annual
Reports on Form N-SAR, notices pursuant to Rule 24f-2 and federal and state
tax returns and required tax filings other than those required to be filed by
the Trust's custodian or transfer agent.
d. The Administrators, after consultation with the
distributor and counsel for the Trust, shall determine the jurisdictions in
which the Trust's shares shall be registered or qualified for sale. The
Administrators shall be responsible registering or qualifying shares for sale
under the securities laws of any state, maintaining such registrations or
qualifications, and for preparing compliance filings pursuant to state
securities laws with the advice of the Trust's counsel. Payment of share
registration fees and any fees for qualifying or continuing the qualification
of the Trust or the Funds as a dealer or broker shall be made by the Trust or
the Funds.
e. The Administrators shall monitor, and assist in
developing compliance procedures for the Funds, which will include without
limitation, procedures to monitor compliance with the Funds' investment
objectives, policies and limitations, tax matters, and applicable laws and
regulations.
f. The Administrators shall assist in monitoring the
regulatory and legislative developments which may affect the Trust; assist in
counseling the Trust with respect to regulatory examinations or investigations
of the Trust; and work with the Trust's counsel in connection with regulatory
matters or litigation.
g. The Administrators agree to maintain all financial
accounts, records, journals, ledgers and schedules for the Trust (other than
those maintained by the Trust's custodian and its transfer agent), and to
install and maintain a system of internal controls appropriate for entities of
the size and
-3-
<PAGE>
complexity of the Trust, and to provide reports, financial statements and
other statistical data as requested from time to time by the Administrators or
by the Trust. In addition, the Administrators shall compute the Trust's net
asset value, net income and net capital gain (loss) in accordance with the
Trust's Prospectus and resolutions of its Board of Trustees. The
Administrators shall act as liaison with the Trust's independent public
accountants and shall provide account analyses, fiscal year summaries and
other audit related schedules. The Administrators shall take all reasonable
action in the performance of its obligations under this Agreement to assure
that the necessary information is made available to such accountants for the
expression of their opinion, as such may be required by the Trust from time to
time.
h. The Administrators shall monitor each Fund's expenses,
including, but not limited to, fund accounting, and shall pay all expenses on
proper authorization from each Fund.
i. The Administrators shall monitor each Fund's status as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended from time to time.
j. The Administrators shall maintain each Fund's fidelity
bond as required by the 1940 Act.
In compliance with the requirements of Rule 31a-3 under the
1940 Act, the Administrators agree that all records which they maintain for
the Trust are the property of the Trust and further agree to surrender
promptly to the Trust any of such records upon the Trust's request. The
Administrators agree to maintain a back-up set of accounts and records of the
Trust (which back-up shall be updated on at least a weekly basis) at a
location other than that where the original accounts and records are stored.
The Administrators shall assist the Trust, the Trust's independent auditors,
or, upon approval of the Trust, any regulatory body, in any requested review
of the Trust's accounts and records, and reports by the Administrators or
their independent accountants concerning their accounting system and internal
auditing controls will be open to such entities for audit or inspection upon
reasonable request. There shall be no additional fee for these services. The
Administrators further agree to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.
If the expenses borne by any Fund in any fiscal year exceed the
applicable expense limitations imposed by the securities regulations of any
state in which the Fund's shares are registered or qualified for sale to the
public, the Administrators agree to reimburse such Fund for a portion of any
such excess expense in an amount equal to the portion that the
-4-
<PAGE>
administration fees otherwise payable by the Fund to the Administrators bear
to the total amount of the investment advisory and administration fees
otherwise payable by the Fund. The expense reimbursement obligation of the
Administrators is limited to the amount of their fees hereunder for such
fiscal year, provided, however, that notwithstanding the foregoing, the
Administrators shall reimburse such Fund for a portion of any such excess
expenses in an amount equal to the proportion that the fees otherwise payable
to the Administrators bear to the total amount of investment advisory and
administration fees otherwise payable by the Fund regardless of the amount of
fees paid to the Administrators during such fiscal year to the extent that the
securities regulations of any state having jurisdiction over the Fund so
require. Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
In performing all of their services and duties as co-
administrators, the Administrators will act in conformity with the Declaration
of Trust, Bylaws, Prospectuses and resolutions and other instructions of the
Trust's Board of Trustees and will comply with the requirements of the 1940
Act and other applicable federal or state laws.
4. Services Not Exclusive. The services rendered by the
Administrators hereunder are not to be deemed exclusive, and the
Administrators shall be free to render similar services to others so long as
their services under this Agreement are not impaired thereby.
5. Expenses Assumed as Administrators. The Administrators will
bear all expenses incurred by them in performing their services and duties as
co-administrators, except as otherwise expressly provided herein. Other
expenses to be incurred in the operation of the Funds, including taxes,
interest, brokerage fees and commissions, if any, salaries and fees of
officers and trustees who are not officers, directors, shareholders, or
employees of the Administrators, or the Trust's investment advisers or
distributor for the Funds, Commission fees and state blue sky qualification
fees, advisory, fund accounting and administration fees, charges of custodians
and transfer agents, certain insurance premiums, outside auditing and legal
expenses, costs of maintaining corporate existence, typesetting and printing
of Prospectuses for regulatory purposes and for distribution to current
shareholders of the Fund, costs of shareholders' reports and corporate
meetings, out-of-pocket expenses of obtaining price quotations from third
party pricing services, and any extraordinary expenses, will be borne by the
Trust, provided, however, that the Trust will not bear, directly or
indirectly, the cost of any activity which is primarily intended to result in
the sale of shares of the Funds, other than the costs associated with the sale
of Class B shares of the Fund pursuant to a distribution agreement and
distribution plan.
-5-
<PAGE>
6. Compensation.
In consideration of services rendered pursuant to this
Agreement, the Trust will pay to NBD and FCIMCO, as agent for the
Administrators, a fee, computed daily and payable monthly, at the annual rate
of 0.15% of the average daily net assets of each Fund. Net asset value shall
be computed in accordance with the Funds' Prospectuses and resolutions of the
Trust's Board of Trustees. The fee for the period from the day of the month
this Agreement is entered into until the end of that month shall be pro-rated
according to the proportion which such period bears to the full monthly
period. Upon any termination of this Agreement before the end of any month,
the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. Such fee as is
attributable to each Fund shall be a separate charge to such Fund and shall be
the several (and not joint or joint and several) obligation of each such Fund.
The Administrators may from time to time employ or associate
with themselves such person or persons as they may believe to be fitted to
assist them in the performance of this Agreement ("Subcontractors"). The
compensation of such Subcontractors shall be paid by the Administrators, and
no obligation shall be incurred on behalf of the Trust in such respect. The
Administrators shall provide oversight over any Subcontractor(s) who shall in
turn provide services pursuant to an agreement with the Administrators. Any
agreement entered into between the Administrators and a Subcontractor shall
acknowledge that the agreement is for the benefit of the Trust, that the
Subcontractor shall be directly liable and responsible to the Trust for the
performance of its obligations thereunder, and that the Trust may therefore
enforce its rights directly against the Subcontractor. Notwithstanding such
delegation, the Administrators shall continue to be directly liable to the
Trust for the performance of any subcontractor's obligations under such
agreement. In addition to employing Subcontractors, the Administrators may
compensate parties who provide shareholder services or other services pursuant
to contracts entered into directly between such parties and the Trust.
7. Proprietary and Confidential Information. The Administrators
will treat confidentially and as proprietary information of the Trust all
records and other information relative to the Trust and prior or present
shareholders of the Funds or those persons or entities who respond to
inquiries of the Trust's principal underwriter concerning investment in the
Funds and will not use such records and information for any purpose other than
performance of their responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Trust, which approval shall not
be unreasonably
-6-
<PAGE>
withheld and may not be withheld where the Administrators may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested
to divulge such information by duly constituted authorities, or when so
requested by the Trust.
8. Limitations of Liability. No Administrator shall be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, Board member, partner, director, employee or agent of an
Administrator, who may be or become an officer, Board member, partner,
employee or agent of the Trust, shall be deemed, when rendering services to
the Trust or acting on any business of the Trust (other than services or
business in connection with the Administrators' duties as co-administrators
hereunder) to be rendering such services to or acting solely for the Trust and
not as an officer, Board member, partner, director, employee or agent or one
under the control or direction of the Administrators even though paid by
either of them. The Administrators agree that their liability under this
Agreement, as set forth herein, shall be joint and several.
Whenever, in the course of performing their duties under this
Agreement, the Administrators determine, on the basis of information supplied
to the Administrators by the Trust or its authorized agents, that a violation
of applicable law has occurred or that, to their knowledge, a possible
violation of applicable law may have occurred or, with the passage of time,
would occur, the Administrators shall promptly notify the Trust and its
counsel. Liability arising pursuant to this section shall survive termination
of this agreement.
9. Duration and Termination. Subject to shareholder approval of
the Agreement and Plan of Reorganization ("Reorganization Plan") by and among
The Woodward Funds, Prairie Funds, Prairie Intermediate Bond Fund and Prairie
Municipal Bond Fund, Inc. dated ________, 1996, this Agreement shall become
effective as to each Fund upon the first reorganization involving The Woodward
Funds and one or more of the Prairie funds as described in the Reorganization
Agreement. This Agreement shall continue until ___________, 1998 ("Initial
Term"). Thereafter, if not terminated, this Agreement shall continue
automatically as to the Funds for successive terms of one year (each a
"Renewal Term"), provided such continuance is specifically approved at least
annually (i) by the Trust's Board of Trustees or (ii) by a vote of a majority
of the outstanding voting securities of the Funds, and provided further that
in either event such continuance is also approved by a majority of the Trust's
trustees who are not "interested persons" of any party to this Agreement, by
vote
-7-
<PAGE>
cast in person at a meeting called for the purpose of voting on such approval.
(As used in this Agreement, the terms "majority of the outstanding voting
securities," "interested person" and "assignment" shall have the same meaning
as such terms have in the 1940 Act.) On or after the Initial Term, either
party hereto may terminate this Agreement by sixty (60) days prior written
notice to the other party hereto.
The Trust shall have the right to terminate this Agreement
during the Initial Term or any Renewal Term upon forty-five (45) days written
notice if the Administrators materially breach this Agreement. A material
breach means the failure to perform the terms of this Agreement, whether in
one act or omission or a series of acts or omissions, whether or not related,
which (i) results or reasonably could be expected to result in loss or damage,
including expenses, to the Funds exceeding $50,000 in the aggregate, (ii)
results in the institution of civil or criminal proceedings by the Commission
or other regulator, other than a regular audit or examination, (iii)
constitutes gross negligence, bad faith or willful misconduct, (iv)
constitutes a violation of any law, rule or regulation applicable to the
Funds, or the Administrators or any of their affiliates as to which the
Administrators were required to comply under the terms of the Agreement where
the consequences of such violation could reasonably be expected to result in
the institution of civil or criminal proceedings by the Commission or other
governmental authorities against the Funds, or (v) evidences a quantifiable
and material decline in the overall quality of services, provided that the
Administrators shall have the right to cure the breach set forth in this
clause (v) within thirty (30) days after a written notice setting forth in
detail the nature of the breach, has been delivered to the Administrators;
provided the Administrators shall have the right to cure a breach set forth in
this clause (v) if and only if no more than two other quantifiable and
material breaches under this clause (v) have occurred within the twelve (12)
months prior to the delivery of such notice of the breach of this clause.
In the event of the termination of this Agreement, the
Administrators shall use their best efforts to assist in the transfer of their
responsibilities hereunder to any successor administrator and the
Administrators without additional compensation (it being understood that they
would be reimbursed for their reasonable out-of-pocket expenses) shall remain
responsible, which responsibility shall survive termination of this Agreement,
for all regulatory filings, tax returns and other reports which relate to
periods which concluded prior to the termination.
10. Amendment of this Agreement. No provision of this Agreement
may be changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against
-8-
<PAGE>
which enforcement of the change, discharge or termination is sought. If a
change or discharge is sought against the Trust, the instrument must be signed
by all three (3) Administrators.
11. Assignment. This Agreement will automatically and
immediately terminate in the event of its "assignment." As used in this
Agreement, the term "assignment" shall have the same meaning as such term has
in the 1940 Act.
12. Notices. All notices and other communications hereunder
shall be in writing, shall be deemed to have been given when received or when
sent by telex or facsimile, and shall be given to the following addresses (or
such other addresses as to which notice is given):
To the Administrators:
NBD Bank
611 Woodward Avenue
Detroit, Michigan
First Chicago Investment Management Company
Three First National Plaza
Chicago, Illinois 60670
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
To the Fund:
The Woodward Variable Annuity Fund
c/o W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
13. Governing Law.
This Agreement shall be construed in accordance with the laws
of the State of Michigan, without reference to principles of conflicts of law,
and with the applicable provisions of the Investment Company Act. To the
extent the applicable law of the State of Michigan or any of the provisions
herein conflict with the applicable provisions of the 1940 Act, the latter
shall control.
14. Miscellaneous.
a. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit
-9-
<PAGE>
any of the provisions hereof or otherwise affect their construction or effect.
If any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall
not be affected thereby. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors.
b. The obligations of the Trust entered into in the name or
on behalf thereof by any of the trustees, representatives or agents are made
not individually, but in such capacities, and are not binding upon any of the
trustees, shareholders or representatives of the Trust personally, but bind
only the Trust property, and all persons dealing with any series of shares in
the Trust must look solely to the Trust property belonging to such series for
the enforcement of any claims against the Trust.
15. Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute one and the same
instrument.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
THE WOODWARD VARIABLE ANNUITY FUND
By:_________________________
NBD BANK
By:_________________________
FIRST CHICAGO INVESTMENT MANAGEMENT COMPANY
By:_________________________
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc., general partner
By:_____________________
-11-
<PAGE>
SCHEDULE 1
LIST OF PORTFOLIOS
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
-12-
Exhibit (11)(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated February 19, 1996 included in The Woodward Variable Annuity Fund's
Annual Report to Shareholders for the period ended December 31, 1995 (and to
all references to our Firm) included in or made a part of this registration
statement on Form N-1A (Post-Effective Amendment No. 2 to the Woodward
Variable Annuity Fund's registration statement under the Securities Act of
1933).
ARTHUR ANDERSEN LLP
Detroit, Michigan,
April 26, 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. 2 to the
Registration Statement of The Woodward Variable Annuity Fund on Form N-1A
under the Securities Act of 1933, as amended.
DRINKER BIDDLE & REATH
----------------------
DRINKER BIDDLE & REATH
Philadelphia, PA
April 29, 1996
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<INVESTMENTS-AT-COST> 3,372
<INVESTMENTS-AT-VALUE> 3,682
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<NUMBER-OF-SHARES-SOLD> 328
<NUMBER-OF-SHARES-REDEEMED> 12
<SHARES-REINVESTED> 3
<NET-CHANGE-IN-ASSETS> 3,710
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 13
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<GROSS-EXPENSE> 14
<AVERAGE-NET-ASSETS> 2,193
<PER-SHARE-NAV-BEGIN> 10.00
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<PAID-IN-CAPITAL-COMMON> 5,918
<SHARES-COMMON-STOCK> 566
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4
<OVERDISTRIBUTION-GAINS> 0
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<NAME> The Woodward Variable Annuity Fund
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<NAME> Woodward Money Market Fund
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