As filed with the Securities and Exchange Commission on October 7, 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. 5
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 4
PEGASUS 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):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 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.
-1-
<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.
-2-
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series A, B, C, D and E Representing Interests in the
Pegasus Managed Assets Balanced, Growth and Value,
Mid-Cap Opportunity, Growth and Money Market Funds, respectively
Form N-1A Part A Item Prospectus Caption
1. Cover Page........................................... Cover Page
2. Synopsis............................................. Not Applicable
3. Financial Highlights................................. Financial
Highlights
4. General Description of
Registrant........................................... Cover Page;
Introduction;
Investment
Objectives,
Policies and Risk
Factors; Other
Investment
Policies;
Description of the
Trust and its
Shares; Miscel-
laneous
5. Management of Registrant ............................ Management
6. Capital Stock and Other
Securities........................................... Purchase and
Redemption of
Trust Shares; Net
Asset Value and
Pricing of Shares;
Dividends and
Distributions;
Taxes; Management;
Description of the
Trust and its
Shares; Miscel-
laneous
7. Purchase of Securities
Being Offered........................................ Purchase and
Redemption of
Trust Shares; Net
Asset Value and
Pricing of Shares;
Management
8. Redemption or Repurchase............................. Purchase and
Redemption of
Trust Shares; Net
Asset Value and
Pricing of Shares
9. Pending Legal Proceedings............................ Inapplicable
-3-
<PAGE>
PROSPECTUS OCTOBER 7, 1996
- ------------------------------------------------------------------------------
Pegasus Variable Annuity Fund
c/o NBD Bank
900 Tower Drive
Troy, Michigan 48098
- ------------------------------------------------------------------------------
The Pegasus 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 five
investment portfolios (the "Funds"), divided into three general fund types:
Asset Allocation; Equity; and Money Market.
ASSET ALLOCATION FUND EQUITY FUNDS
The Managed Assets Balanced Fund The Growth and Value Fund
The Mid-Cap Opportunity Fund
MONEY MARKET FUND The Growth Fund
The Money Market Fund
First Chicago NBD Investment Management Company ("FCNIMCO") serves as
each Fund's investment adviser (the "Investment Adviser").
NBD Bank (the "Custodian" or "NBD") serves as each Fund's custodian.
BISYS Fund Services (the "Distributor" or "BISYS") serves as each Fund's
distributor.
This Prospectus sets forth concisely information that a prospective
investor should consider before investing. Investors should read this
Prospectus and retain it for future reference. Additional information about
the Trust, contained in a Statement of Additional Information, has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge by writing to the Trust at the above address. The
Statement of Additional Information bears the same date as this Prospectus and
is incorporated by reference into this Prospectus in its entirety.
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.
SHARES OF THE TRUST ARE NOT BANK DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED OR OTHERWISE SUPPORTED BY, FIRST CHICAGO NBD
CORPORATION, OR ITS AFFILIATES, AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY
THE U.S. GOVERNMENT, FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY
GOVERNMENTAL AGENCY. INVESTMENT IN THE TRUST INVOLVES RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
DESCRIPTION OF THE FUNDS ............................ 5
PURCHASE AND REDEMPTION OF TRUST SHARES ............. 10
NET ASSET VALUE AND PRICING OF SHARES ............... 10
MANAGEMENT OF THE FUNDS ............................. 11
DIVIDENDS AND DISTRIBUTIONS ......................... 13
TAXES ............................................... 13
PERFORMANCE INFORMATION ............................. 14
GENERAL INFORMATION ................................. 15
APPENDIX ............................................ A-1
</TABLE>
<PAGE>
PEGASUS VARIABLE ANNUITY FUND
ASSET ALLOCATION FUND
The Managed Assets Balanced Fund (formerly, the "Balanced Fund") will follow
an asset allocation strategy by investing in Equity Securities (as defined
below), Debt Securities (as defined below) and short-term obligations issued
or guaranteed by the U.S. Government, or its agencies or instrumentalities,
"high quality" money market instruments such as certificates of deposit,
bankers' acceptances, time deposits, repurchase agreements, reverse repurchase
agreements, short-term obligations issued by state and local governmental
issuers which carry yields that are competitive with those of other types of
high quality money market instruments, commercial paper, notes, other
short-term obligations and variable rate master demand notes of domestic and
foreign issuers ("Cash Equivalent Securities"). "High quality" money market
instruments are money market instruments which are rated at the time of
purchase within the two highest rating categories by a Rating Agency or which
are unrated at such time but are deemed by the Investment Adviser to be
comparable in quality to instruments that are so rated. Such investments may
include obligations of foreign banks and foreign branches of U.S. banks.
The Managed Assets Balanced Fund
seeks to achieve long-term total return through a combination of capital
appreciation and current income.
EQUITY FUNDS
These Funds will invest principally in common stocks, preferred stocks and
convertible securities, including those in the form of depository receipts, as
well as warrants to purchase such securities (collectively, "Equity
Securities"):
The Growth and Value Fund (formerly, the "Growth/Value Fund") seeks to achieve
long-term capital growth, with income a secondary consideration. In seeking to
achieve its objective, this Fund will invest primarily in Equity Securities of
larger companies that are attractively priced relative to their growth
potential.
The Mid-Cap Opportunity Fund (formerly, the "Opportunity Fund") seeks to
achieve long-term capital appreciation. In seeking to achieve its objective,
this Fund will invest primarily in Equity Securities of companies with
intermediate market capitalizations.
The Growth Fund (formerly, the "Capital Growth Fund")
seeks long-term capital appreciation. In seeking to achieve its objective,
this Fund will invest primarily in Equity Securities of domestic issuers
believed by the Investment Adviser to have above-average growth
characteristics.
MONEY MARKET FUND
The Money Market Fund seeks to maintain a net asset value of $1.00 per share
for purchases and redemptions. To do so, the Fund uses the amortized cost
method of valuing its securities pursuant to Rule 2a-7 under the Investment
Company Act of 1940 (the "1940 Act").
The Money Market Fund
seeks to provide a high level of current income consistent with the
preservation of capital and liquidity. This Fund will invest in high quality
"money market" instruments described below.
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides supplementary information to the Funds'
financial statements contained in the Statement of Additional Information and
sets forth certain information concerning the historic investment results of
Fund shares. The table presents a per share analysis of how each Fund's net
asset value has changed during the period presented. The table has been
derived from the financial statements of the Managed Assets Balanced, Growth
and Value, Mid-Cap Opportunity, Growth and Money Market Funds, which have been
audited by Arthur Andersen LLP, the Trust's independent public accountants,
whose report thereon is contained in the Statement of Additional Information
along with the financial statements. The financial data included in 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 Funds 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.
<PAGE>
<TABLE>
<CAPTION>
Managed Assets Growth and
Balanced Fund** Value Fund**
------------------------------------ ------------------------------------
Six Months Period* Six Months Period*
Ended Ended Ended Ended
June 30, 1996 Dec. 31, June 30, 1996 Dec. 31,
(Unaudited) 1995 (Unaudited) 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 11.27 $ 10.00 $ 11.63 $ 10.00
--------------- --------------- --------------- ---------------
Income from investment
operations:
Net investment income 0.19 0.25 0.08 0.13
Net realized and unrealized
gains on investment 0.26 1.27 0.88 1.63
--------------- --------------- --------------- ---------------
Total from investment
operations 0.45 1.52 0.96 1.76
--------------- --------------- --------------- ---------------
Less distributions:
From net investment income (0.20) (0.25) (0.07) (0.13)
From realized gains -- -- -- (0.00)
In excess of realized gains -- -- -- --
--------------- --------------- --------------- ---------------
Total distributions (0.20) (0.25) (0.07) (0.13)
--------------- --------------- --------------- ---------------
Net asset value, end of period $ 11.52 $ 11.27 $ 12.52 $ 11.63
--------------- --------------- --------------- ---------------
Total Return 8.03%(a) 20.15%(a) 16.55%(a) 22.75%(a)
--------------- --------------- --------------- ---------------
Ratios/Supplemental
Data
Net assets, end of period $ 14,309,326 $ 11,210,876 $ 5,355,162 $ 3,753,691
--------------- --------------- --------------- ---------------
Ratio of expenses to average net
assets 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a)
--------------- --------------- --------------- ---------------
Ratio of net investment income
to average net assets 3.39%(a) 3.61%(a) 1.30%(a) 1.78%(a)
--------------- --------------- --------------- ---------------
Ratio of expenses to average net
assets without fee
waivers/reimbursed expenses 1.45%(a) 2.34%(a) 2.28%(a) 4.93%(a)
--------------- --------------- --------------- ---------------
Ratio of net investment income
loss) to average net assets
without fee waivers/reimbursed
expenses 2.79%(a) 2.12%(a) (0.13)%(a) (2.30%)(a)
--------------- --------------- --------------- ---------------
Portfolio turnover rate 15.97% 14.05% 20.76% 17.47%
--------------- --------------- --------------- ---------------
Average Commission Rate $ 0.08 $ 0.10 $ 0.11 $ 0.14
--------------- --------------- --------------- ---------------
<FN>
* Each Fund commenced investment operations on March 30, 1995.
** Prior to October 7, 1996, the names of the Funds were the Woodward
Balanced, Woodward Growth/Value, Woodward Opportunity, Woodward Capital
Growth and Woodward Money Market Funds.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap Opportunity Growth
Fund** Fund**
------------------------------------ ------------------------------------
Six Months Period* Six Months Period*
Ended Ended Ended Ended
June 30, 1996 Dec. 31, June 30, 1996 Dec. 31,
(Unaudited) 1995 (Unaudited) 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period $ 11.02 $ 10.00 $ 11.37 $ 10.00
--------------- --------------- --------------- ---------------
Income from investment
operations:
Net investment income 0.01 0.05 0.01 0.05
Net realized and unrealized
gains on investment 1.14 1.02 0.80 1.38
--------------- --------------- --------------- ---------------
Total from investment
operations 1.15 1.07 0.81 1.43
--------------- --------------- --------------- ---------------
Less distributions:
From net investment income (0.01) (0.05) (0.01) (0.05)
From realized gains -- -- -- (0.01)
In excess of realized gains -- (0.00) -- --
--------------- --------------- --------------- ---------------
Total distributions (0.01) (0.05) (0.01) (0.06)
--------------- --------------- --------------- ---------------
Net asset value, end of period $ 12.16 $ 11.02 $ 12.17 $ 11.37
--------------- --------------- --------------- ---------------
Total Return 20.91%(a) 14.20%(a) 14.21%(a) 18.82%(a)
--------------- --------------- --------------- ---------------
Ratios/Supplemental
Data
Net assets, end of period $ 6,175,997 $ 4,972,365 $7,930,670 $ 6,434,936
--------------- --------------- --------------- ---------------
Ratio of expenses to average net
assets 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a)
--------------- --------------- --------------- ---------------
Ratio of net investment income
to average net assets 0.23%(a) 0.67%(a) 0.17%(a) 0.81%(a)
--------------- --------------- --------------- ---------------
Ratio of expenses to average net
assets without fee
waivers/reimbursed expenses 2.08%(a) 4.64%(a) 1.23%(a) 3.15%(a)
--------------- --------------- --------------- ---------------
Ratio of net investment income
loss) to average net assets
without fee waivers/reimbursed
expenses (1.00)%(a) (3.12%)(a) (0.21)%(a) (1.49%)(a)
--------------- --------------- --------------- ---------------
Portfolio turnover rate 25.87% 32.11% 14.19% 4.46%
--------------- --------------- --------------- ---------------
Average Commission Rate $ 0.07 $ 0.11 $ 0.05 $ 0.11
--------------- --------------- --------------- ---------------
<FN>
* Each Fund commenced investment operations on March 30, 1995.
** Prior to October 7, 1996, the names of the Funds were the Woodward
Balanced, Woodward Growth/Value, Woodward Opportunity, Woodward Capital
Growth and Woodward Money Market Funds.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Money Market
Fund**
------------------------------------
Six Months Period*
Ended Ended
June 30, 1996 Dec. 31,
(Unaudited) 1995
--------------- ---------------
<S> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00
--------------- ---------------
Income from investment
operations:
Net investment income 0.02 0.03
Net realized and unrealized gains on
investment -- --
--------------- ---------------
Total from investment
operations 0.02 0.03
--------------- ---------------
Less distributions:
From net investment income (0.02) (0.03)
From realized gains -- --
In excess of realized gains -- --
--------------- ---------------
Total distributions (0.02) (0.03)
--------------- ---------------
Net asset value, end of period $ 1.00 $ 1.00
--------------- ---------------
Total Return 4.84%(a) 5.41%(a)
--------------- ---------------
Ratios/Supplemental
Data
Net assets, end of period $ 1,316,061 $ 1,175,892
--------------- ---------------
Ratio of expenses to average net assets 0.50%(a) 0.50%(a)
--------------- ---------------
Ratio of net investment income
to average net assets 4.79%(a) 5.27%(a)
--------------- ---------------
Ratio of expenses to average net assets
without fee waivers/reimbursed expenses 4.15%(a) 10.48%(a)
--------------- ---------------
Ratio of net investment income loss) to
average net assets without fee
waivers/reimbursed expenses 1.18%(a) (4.71%)(a)
--------------- ---------------
Portfolio turnover rate N/A N/A
--------------- ---------------
Average Commission Rate N/A N/A
--------------- ---------------
<FN>
* Each Fund commenced investment operations on March 30, 1995.
** Prior to October 7, 1996, the names of the Funds were the Woodward
Balanced, Woodward Growth/Value, Woodward Opportunity, Woodward Capital
Growth and Woodward Money Market Funds.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
<PAGE>
DESCRIPTION OF THE FUNDS
General
The Trust is an open-end management investment company registered under
the 1940 Act. The Trust currently consists of five investment portfolios, each
of which consists of a separate pool of assets with separate investment
objectives and policies. Under the 1940 Act, each Fund is classified as a
diversified investment portfolio.
Investment Objectives and Policies
The investment objective of a Fund may not be changed without approval
of the holders of a majority (as defined in the 1940 Act) of such Fund's
outstanding voting securities. See "General Information." Except as noted
below under "Investment Limitations," a Fund's investment policies may be
changed without a vote of shareholders. There can be no assurance that a Fund
will achieve its objective.
The following sections should be read in conjunction with the
description of investments in which the Funds may invest, as set forth in
"Supplemental Information."
Asset Allocation Fund
The Managed Assets Balanced Fund follows an asset allocation strategy by
investing in Equity Securities, Debt Securities and Cash Equivalent Securities
of domestic and foreign issuers. The Investment Adviser will select those
asset classes, market sectors, securities and portfolio strategies that
it believes prudent and offer the greatest potential for achieving the
Fund's investment objective. The Investment Adviser has broad latitude
in selecting investments and portfolio strategies. See "Risk Factors --
Foreign Securities" below.
The equity portion of the Fund's investments will be invested primarily
in publicly traded stocks of companies incorporated in the United States,
although up to 25% of its total assets may be invested in the Equity
Securities of foreign issuers, either directly or through Depository Receipts.
The Fund 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 (i.e., no lower than Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group ("S&P"),
Fitch Investors Service, L.P. ("Fitch") or Duff & Phelps Credit Rating Co.
("Duff") (each a "Rating Agency")), or unrated investments deemed by the
Investment Adviser to be comparable in quality at the time of purchase to
instruments that are so rated. Obligations rated in the lowest of the top
four rating categories (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA)
are considered to have less capacity to pay interest and repay principal
and have certain speculative characteristics. Most Debt Securities acquired
by the Fund will be issued by companies or governmental entities located
within the United States. Up to 15% of the total assets of the Fund may,
however, be invested in dollar-denominated debt obligations (including
Cash Equivalent Securities) of foreign issuers.
The following table sets forth the asset classes, benchmark percentages
and asset class strategy ranges within which the Investment Adviser generally
intends to manage the Fund's assets:
<TABLE>
<CAPTION>
Managed Assets
Balanced Fund
-----------------------
Benchmark Strategy
Asset Class Percentage Range
- ----------- ---------- ----------
<S> <C> <C>
Equity Securities: 60% 45% to 75%
--- ----------
Debt Securities & Cash Equivalent Securities: 40% 25% to 55%
--- ----------
</TABLE>
Compliance with these percentage requirements may limit the ability of
the Fund to maximize total return. The actual percentage of assets invested in
Equity Securities, Debt Securities and Cash Equivalent Securities will vary
from time to time and may be outside the strategy range, depending on the
judgment of the Investment Adviser as to general market and economic
conditions, trends in yields, interest rates and changes in fiscal and
monetary developments.
<PAGE>
The Fund also may engage in futures and options transactions and other
derivative instruments, such as interest rate and equity index swaps and
foreign exchange transactions, each of which involves risk. The Fund may also
lend its portfolio securities, invest in foreign currency transactions and
options on foreign currency transactions and may invest in currency futures
and options on currency futures for investment or hedging purposes. As
permitted under applicable law, the Fund may also invest its cash balances
in securities issued by other investment companies. See "Risk Factors"
below and "Supplemental Information."
Equity Funds
The Growth and Value, Mid-Cap Opportunity and Growth Funds invest
primarily in publicly traded common stocks of companies incorporated in the
United States, although each such Fund may also invest up to 25% of its total
assets in the Equity Securities of foreign issuers, either directly or through
Depository Receipts. See "Risk Factors -- Foreign Securities" below. In
addition, each Equity Fund may invest in securities convertible into common
stock, such as certain bonds and preferred stocks, and may invest up to 5% of
their respective net assets in other types of securities having common stock
characteristics (such as rights and warrants to purchase equity securities).
Each Equity Fund is permitted to invest up to 5% of its net assets in lower
rated convertible securities. The Equity Funds may also enter into futures
contracts and related options and may utilize options and other derivative
instruments such as equity index swaps, each of which involves risk. Each
Equity Fund may also lend its portfolios securities. Under normal market
conditions, each Fund expects to invest at least 65% of the value of its total
assets in Equity Securities. Each Equity Fund may hold up to 35% of its total
assets in investment grade Debt Securities and Cash Equivalent Securities.
The Growth and Value Fund invests primarily in Equity Securities of
companies believed by the Investment Adviser to represent a value or potential
worth which is not fully recognized by prevailing market prices. The Fund
invests in companies which the Investment Adviser believes have earnings
growth expectations that exceed those implied by the market's current
valuation. In addition, the Fund seeks to maintain a portfolio of companies
whose earnings will increase at a faster rate than within the general equity
market.
The Mid-Cap Opportunity Fund invests in Equity Securities of companies
with market capitalizations of $500 million to $3 billion. The Investment
Adviser believes that there are many companies in this size range that enjoy
enhanced growth prospects, operate in more stable market niches, and have
greater ability to respond to new business opportunities, all of which
increase their likelihood of attaining superior levels of profitability and
investment returns.
The Growth Fund will invest primarily in Equity Securities of domestic
issuers believed by the Investment Adviser to have above-average growth
characteristics. The Investment Adviser may consider some of the following
factors in making its investment decisions: the development of new or improved
products or services, a favorable outlook for growth in the industry, patterns
of increasing sales and earnings, the probability of increased operating
efficiencies, cyclical conditions, or other signs that the company is expected
to show greater than average earnings growth and capital appreciation.
Money Market Fund
The Money Market Fund invests in the following high quality "money
market" instruments: (1) U.S. Government Obligations (as defined below); (2)
U.S. dollar dominated obligations issued or guaranteed by the government of
Canada, a Province of Canada, or an instrumentality or political subdivision
thereof; (3) certificates of deposit, bankers' acceptances and time deposits
of U.S. banks or other U.S. financial institutions (including foreign branches
of such banks and institutions) having total assets in excess of $1 billion
and which are members of the Federal Reserve System or the Federal Deposit
Insurance Corporation ("FDIC"); (4) certificates of deposit, bankers'
acceptances and time deposits of foreign banks and U.S. branches of foreign
banks having assets in excess of the equivalent of $1 billion; (5) commercial
paper, other short-term obligations and variable rate master demand notes,
bonds, debentures and notes; and (6) repurchase agreements relating to the
above instruments.
The Money Market Fund seeks to maintain a net asset value of $1.00 per
share for purchases and redemptions. To do so, the Fund uses the amortized
cost method of valuing its securities pursuant to Rule 2a-7 under the 1940
Act, certain requirements of which are summarized below.
<PAGE>
The Fund will only purchase "eligible securities" that present minimal
credit risks as determined by the Investment Adviser pursuant to guidelines
established by the Trust's Board of Trustees. Eligible securities include (i)
obligations issued or guaranteed as to payment of principal and interest by
the U.S. Government, its agencies or instrumentalities ("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 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 Investment Adviser. See "Investment
Objectives, Policies and Risk Factors" in the Statement of Additional
Information for a more complete description of eligible securities. A
description of ratings is contained in the Statement of Additional
Information.
The Fund is managed so that the average maturity of all instruments in
the Fund (on a dollar-weighted basis) will not exceed 90 days. In no event
will the Fund 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).
In accordance with current SEC regulations, the Money Market Fund 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 Fund 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 Investment Adviser to be of comparable quality to such
securities pursuant to guidelines established by the Trust's Board of
Trustees. In addition, the Money Market Fund will limit its investments in
"Second Tier Securities" (which are eligible securities other than First Tier
Securities) to 5% of its total assets, with investments in any one issuer of
such securities being limited to no more than 1% of its respective total
assets or $1 million, whichever is greater. Because of these limitations, the
Money Market Fund will not be able to purchase lower rated or longer term
securities from which a higher income, although a greater degree of risk,
might be derived.
For further information regarding the amortized cost method of valuing
securities, see "Determination of Net Asset Value" in the Statement of
Additional Information. There can be no assurance that the Fund will be able
to maintain a stable net asset value of $1.00 per share.
Investment Limitations
Each Fund is subject to a number of investment limitations. Except as
noted, the following investment limitations are matters of fundamental policy
and may not be changed with respect to a particular Fund without the
affirmative vote of the holders of a majority of the Fund's outstanding
shares. Other investment limitations that cannot be changed without a vote of
shareholders are contained in the Statement of Additional Information under
"Investment Objectives, Policies and Risk Factors."
Each Fund may not:
1. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S. Government, any state,
territory or possession of the United States, the District of Columbia or any
of their authorities, agencies, instrumentalities or political subdivisions and
repurchase agreements secured by such instruments, (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents,
(c) utilities will be divided according to their services, for example, gas,
gas transmission, electric and gas, electric and telephone will each be
considered a separate industry, (d) personal credit and business credit
businesses will be considered separate industries and (e) in the case of the
Money Market Fund only, there is no limitation with respect to domestic bank
obligations.
<PAGE>
2. Make loans, except that each Fund may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities in an
amount not exceeding one-third of its total assets.
3. Borrow money, issue senior securities or mortgage, pledge or
hypothecate its assets except to the extent permitted under the 1940 Act.
4. 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 Fund's total
assets would be invested in the securities of such issuer, or more than 10% of
the issuer's outstanding voting securities would be owned by the Fund, except
that up to 25% of the value of the Fund's total assets may be invested without
regard to these limitations.
Generally, if a percentage limitation is satisfied at the time of
investment, a later increase or decrease in such percentage resulting from a
change in the value of a Fund's portfolio securities will not constitute a
violation of such limitation for purposes of the 1940 Act.
Risk Factors
General
Before selecting a Fund in which to invest, the investor should assess
the risks associated with the types of investments made by the Fund. Investors
should consider each Fund as a supplement to an overall investment program and
should invest only if they are willing to undertake the risks involved. The
following should be read in conjunction with "Supplemental Information"
beginning on page A-1 of this Prospectus, and the Statement of Additional
Information, which provides further discussion of securities in which the
Funds may invest and the investment risks associated with these investments.
Equity Securities
(Managed Assets Balanced Fund and Equity Funds only)
The securities of smaller companies may be subject to more abrupt or
erratic market movements than larger, more established companies, both because
the securities typically are traded in lower volume and because the issuers
typically are subject to a greater degree to changes in earnings and
prospects.
Debt Securities
(All Funds) Investors should be aware that even though interest-bearing
securities are investments which promise a stable stream of income, the prices
of such securities generally are inversely affected by changes in interest
rates and, therefore, are subject to the risk of market price fluctuations.
The values of Debt Securities also may be affected by changes in the credit
rating or financial condition of the issuing entities. Also see "Lower Rated
Securities" below and the Statement of Additional Information.
LOWER RATED SECURITIES
(Equity Funds only) Investors should carefully consider the relative
risks of investing in the higher yielding (and, therefore, higher risk) debt
securities rated below investment grade by Moody's, S&P, Fitch or Duff
(commonly known as junk bonds). The Equity Funds are permitted to invest up to
5% of their respective net assets in lower rated convertible securities.
<PAGE>
The market values of certain lower rated debt securities tend to reflect
specific developments with respect to the issuer to a greater extent than do
higher rated securities, which react primarily to fluctuations in the general
level of interest rates, and tend to be more sensitive to economic conditions
than are higher rated securities. Issuers of such debt securities often are
highly leveraged and may not have available to them more traditional methods
of financing.
Securities rated below investment grade generally are not meant for
short-term investing and may be subject to certain risks with respect to the
issuing entity and to greater market fluctuations than certain lower yielding,
higher rated Debt Securities. Securities rated BBB or Baa by a Rating Agency
are judged to have speculative elements; their future cannot be considered as
well assured and often the protection of interest and principal payments may
be very moderate and may face major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. Factors
adversely affecting the market price and yield of these securities, including
a Fund's ability to sell securities in a market that may be less liquid than
the market for higher rated securities, will adversely affect a Fund's net
asset value. In addition, the retail secondary market for these securities may
be less liquid than that of higher rated securities; adverse conditions could
make it difficult at times for a Fund to sell certain securities or could
result in lower prices than those used in calculating the Fund's net asset
value. The Investment Adviser will continually evaluate these securities and
the ability of the issuers of such securities to pay interest and principal.
A Fund's ability to achieve its investment objectives may be more dependent
on the Investment Adviser's credit analysis than might be the case of a fund
that invested in higher rated securities. See the Appendix in the Statement of
Additional Information for a general description of securities ratings.
Foreign Securities
(All Non-Money Market Funds Only) Foreign securities markets, and
especially those of developing countries, generally are not as developed or
efficient as those in the United States. Investment in securities of foreign
issuers, whether made directly or indirectly, involves inherent risks, such as
political or economic instability of the issuer or the country of issue, the
difficulty of predicting international trade patterns, changes in exchange
rates of foreign currencies, the possibility of adverse changes in investment
or exchange control regulations, and may be less liquid and more volatile than
securities of comparable U.S. issuers. Developing countries have economic
structures that are generally less diverse and mature, and political systems
that are less stable, than those of developed countries. The markets of
developing countries may be more volatile than the markets of more mature
economies.
Foreign Currency and Foreign Commodity Transactions
(Managed Assets Balanced Fund only) Currency exchange rates may
fluctuate significantly over short periods of time. They generally are
determined by the forces of supply and demand in the foreign exchange markets
and the relative merits of investments in different countries, actual or
perceived changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the United States or abroad.
The foreign currency market offers less protection against defaults in
the forward trading of currencies than is available when trading currencies on
an exchange. Since a forward currency contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive the Fund of
unrealized profits or force such Fund to cover its commitments for purchase or
resale, if any, at the current market price.
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the Commodity Futures Trading
Commission (the "CFTC") and may be subject to greater risks than trading on
domestic exchanges. For example, some foreign exchanges are principal markets
so that no common clearing facility exists and an investor may look only to
the broker for performance of the contract. In addition, any profits that the
Fund might realize in trading could be eliminated by adverse changes in the
exchange rate, or the Fund could incur losses as a result of those changes.
Transactions on foreign exchanges may include both commodities which are
traded on domestic exchanges and those which are not.
<PAGE>
Mortgage Related Securities
(Managed Assets Balanced Fund only) No assurance can be given as to the
liquidity of the market for certain mortgage backed securities, such as
collateralized mortgage obligations and stripped mortgage backed securities.
Determination as to the liquidity of interest-only and principal-only fixed
mortgage backed securities issued by the U.S. Government or its agencies and
instrumentalities will be made in accordance with guidelines established by
the Board. Mortgage-related securities may be considered a derivative
instrument.
Derivative Instruments
(All Non-Money Market Funds Only) Each Fund may purchase certain
"derivative instruments." Derivative instruments are instruments that derive
value from the performance of underlying assets, interest or currency exchange
rates, or indices, and include, but are not limited to, futures contracts,
options, forward currency contracts and structured debt obligations (including
collateralized mortgage obligations and other types of asset backed
securities, "stripped" securities and various floating rate instruments,
including inverse floaters).
Derivative instruments present, to varying degrees, market risk that the
performance of the underlying assets, exchange rates or indices will decline;
credit risk that the dealer or other counterparty to the transaction will fail
to pay its obligations; volatility and leveraging risk that, if interest or
exchange rates change adversely, the value of the derivative instrument will
decline more than the assets, rates or indices on which it is based; liquidity
risk that a Fund will be unable to sell a derivative instrument when it wants
because of lack of market depth or market disruption; pricing risk that the
value of a derivative instrument (such as an option) will not correlate
exactly to the value of the underlying assets, rates or indices on which it is
based; and operations risk that loss will occur as a result of inadequate
systems and controls, human error or otherwise. Some derivative instruments
are more complex than others, and for those instruments that have been
developed recently, data are lacking regarding their actual performance over
complete market cycles.
PURCHASE AND REDEMPTION OF TRUST SHARES
Distributor
The shares of each Fund are sold on a continuous basis by the Trust's
Distributor. The Distributor does not receive any distribution fees from the
Trust for its services.
Purchase and Redemption of Shares
Investors may not purchase or redeem shares of the Funds 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 Funds 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 Funds 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 Fund 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 Funds 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.
NET ASSET VALUE AND PRICING OF SHARES
Net asset value per share is computed by dividing the value of a Fund's
net assets (i.e., the value of its assets less liabilities) by the total
number of outstanding shares of the Fund.
<PAGE>
Non-Money Market Funds
The net asset value of each Fund for purposes of pricing purchase and
redemption orders is determined by the Investment Adviser 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 is open for business (a
"Business Day") except: (i) those holidays which the Exchange observes
(currently, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day); and (ii)
those Business Days on which the Exchange closes prior to the close of its
regular trading hours ("Early Closing Time") in which event the net asset
value of each Fund will be determined and its shares will be priced as of such
Early Closing Time.
Securities held by the Non-Money Market Funds which are traded on a
recognized U.S. stock exchange are valued 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 Investment 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. Debt Securities held by
the Funds are valued according to the broadest and most representative market,
which ordinarily will be the over-the-counter markets, whether in the United
States or in foreign countries. Such securities are valued at the average of
the current bid and asked prices. Securities for which accurate market
quotations are not readily available, and other assets are valued at fair
value by the Investment 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 Investment 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 Funds' open futures contracts will be
"marked-to-market."
Money Market Fund
The net asset value of the Fund for purposes of pricing purchase and
redemption orders is determined by the Investment Adviser as of 12:00 p.m.,
Eastern Time, on each Business Day except: those holidays which the
Exchange, the Investment Adviser or its bank affiliates observe (currently New
Year's Day, Dr. Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day).
The assets of the Money Market Fund are valued based upon the amortized
cost method. Although the Trust seeks to maintain the net asset value per
share of the Fund at $1.00, there can be no assurance that the net asset value
will not vary.
<PAGE>
MANAGEMENT OF THE FUNDS
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the management of
the business and affairs of the Trust. Information about the Trustees and
officers of the Trust is contained in the Statement of Additional Information.
Investment Adviser and Administrators
First Chicago NBD Investment Management Company, located at Three First
National Plaza, Chicago, Illinois 60670, is each Fund's Investment Adviser.
FCNIMCO is a registered investment adviser and a wholly-owned subsidiary of
The First National Bank of Chicago ("FNBC"), which in turn is a wholly-owned
subsidiary of First Chicago NBD Corporation ("FCN"), a registered bank holding
company. FCNIMCO also acts as investment adviser for other registered
investment company portfolios.
FCNIMCO serves as Investment Adviser for the Trust pursuant to an
Investment Advisory Agreement dated as of October 7, 1996. Under the Investment
Advisory Agreement, FCNIMCO provides the day-to-day management of each Fund's
investments, subject to the overall authority of the Trust's Board of Trustees
and in conformity with Delaware law and the stated policies of the Trust.
FCNIMCO is responsible for making investment decisions for the Trust, placing
purchase and sale orders (which may be allocated to various dealers based on
their sales of Fund shares) and providing research, statistical analysis and
continuous supervision of each Fund's investment portfolio.
Under the terms of the Investment Advisory Agreement, the Investment
Adviser is entitled to a monthly fee as a percentage of each Fund's daily net
assets. Each Fund's current contractual fee for advisory services and
contractual and advisory fee rates for advisory and administrative services
under prior agreements for the fiscal year ended December 31, 1995 are set
forth below.
<TABLE>
<CAPTION>
Contractual Fee Rate
Contractual Fee Rate For Administration Effective Rate for Advisory
Current for Advisory Services Services for and Administrative Services
Contractual for Year Ended Year Ended for Year Ended
Advisory Fee Rate December 31, 1995 December 31, 1995 December 31, 1995
----------------- --------------------- --------------------- ---------------------------
<S> <C> <C> <C> <C>
ASSET ALLOCATION FUND:
Managed Assets Balanced Fund 0.65% 0.75% * 0.57%
----- -----
EQUITY FUNDS:
Growth and Value Fund 0.60% 0.75% * 0.75%
Mid-Cap Opportunity Fund 0.60% 0.75% * 0.75%
Growth Fund 0.60% 0.65% 0.15% 0.68%
----- ----- ----- -----
MONEY MARKET FUND:
Money Market Fund 0.30% 0.45% * 0.44%
of first $1 billion, of first $1 billion,
.275% of next $1 .425% of next $1
billion, .25% of billion, .40% of
amount in excess of amount in excess of
$2 billion $2 billion
</TABLE>
Claude B. Erb, First Vice President and Director of Investment Planning
is primarily responsible for the day-to-day management of the Managed Assets
Balanced Fund. Mr. Erb served as Deputy Chief Investment Officer and
Senior Vice President of Trust Services of America and TSA Capital Management
from 1986 through 1992. Mr. Erb joined FCN in 1993.
Gary L. Konsler, First Vice President, and Jeffrey C. Beard, First Vice
President, are primarily responsible for the day-to-day management of the
Growth and Value, and Growth Funds. Mr. Beard joined FCN in 1982 and Mr.
Konsler joined FCN in 1973.
Ronald L. Doyle, First Vice President, and Joseph R. Gatz, Vice
President, are primarily responsible for the day-to-day management of the
Mid-Cap Opportunity Fund. Mr. Doyle joined FCN in 1982 and Mr. Gatz joined FCN
in 1986.
<PAGE>
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing, controlling or distributing the shares of a
registered open-end investment company continuously engaged in the issuance of
its shares, and prohibit banks generally from underwriting securities, but do
not prohibit such a bank holding company or affiliate from acting as
investment adviser, transfer agent, or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
a customer. The Investment Adviser believes that the Investment Adviser and
NBD may perform the advisory, administrative and custodial services for the
Trust described in this Prospectus, and that the Investment Adviser and its
affiliates, subject to such banking laws and regulations, may perform the
shareholder services contemplated by this Prospectus, without violation of
such banking laws or regulations. However, future changes in legal
requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the Investment Adviser and NBD from continuing to perform investment
advisory or custodial services for the Trust or require the Investment Adviser
and its affiliates to alter or discontinue the services provided by them to
shareholders.
If the Investment Adviser were prohibited from performing investment
advisory services for the Trust, it is expected that the Board of Trustees
would recommend that shareholders approve a new agreement with another entity
or entities qualified to perform such services and selected by the Board. If
the Investment Adviser or its affiliates were required to discontinue all or
part of their shareholder servicing activities, their customers would be
permitted to remain the beneficial owners of Fund shares and alternative means
for continuing the servicing of such customers would be sought. The Trust does
not anticipate that investors would suffer any adverse financial consequences
as a result of these occurrences.
FCNIMCO and BISYS serve as the Trust's Co-Administrators pursuant to an
Administration Agreement with the Trust. Under the Administration Agreement,
FCNIMCO and BISYS generally assist in all aspects of the Trust's operations,
other than providing investment advice, subject to the overall authority of
the Trust's Board in accordance with Delaware law. Under the terms of the
Administration Agreement, FCNIMCO and BISYS are entitled jointly to a monthly
administration fee at the annual rate of .15% of each Fund's average net
assets.
Distributor
BISYS Fund Services, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Trust's principal underwriter and distributor of the
Funds' shares.
Transfer and Dividend Disbursing Agent and Custodian
First Data Investor Services Group, Inc., 4400 Computer Drive,
Westborough, Massachusetts 01581-5120 serves as the Trust's Transfer and
Dividend Disbursing Agent (the "Transfer Agent"). NBD Bank, a
wholly-owned subsidiary of FCN, serves as the Trust's custodian (the
"Custodian"). NBD conducts its custody services on behalf of the Trust at 900
Tower Drive, Troy, Michigan 48098.
Expenses
All expenses incurred in the operation of the Trust are borne by such
company, except to the extent specifically assumed by the Trust's service
providers. The expenses borne by the Trust include: organizational costs,
taxes, interest, loan commitment fees, interest and distributions paid on
securities sold short, brokerage fees and commissions, if any, fees of Board
members, Securities and Exchange Commission fees, state Blue Sky qualification
fees, advisory fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, industry association fees, outside
auditing and legal expenses, costs of maintaining each Fund's existence, costs
of independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
shareholders' reports and meetings, costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders, and any extraordinary expenses.
Expenses attributable to a particular Fund are charged against the assets of
that Fund; other expenses of the Trust are allocated among such Funds on the
basis determined by the Board, including, but not limited to, proportionately
in relation to the net assets of each such Fund.
<PAGE>
The imposition of the advisory fee, as well as other operating expenses,
will have the effect of reducing the total return to investors. From time to
time, the Investment Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering that Fund's overall expense ratio and increasing total return to
investors at the time such amounts are waived or assumed, as the case may be.
The Fund will not pay the Investment Adviser at a later time for any amounts
which may be waived, nor will the Fund reimburse the Investment Adviser for
any amounts which may be assumed.
DIVIDENDS AND DISTRIBUTIONS
The Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity and
Growth Funds declare and pay dividends from net investment income quarterly,
usually on the last Business Day of the quarter. The Money Market Fund
declares dividends from net investment income on each of its Business Days.
Dividends usually are paid on the last Business Day of each month.
Each Fund will make distributions from net realized securities gains, if
any, once a year, but may make distributions on a more frequent basis to
comply with the distribution requirements of the Code, in all events in a
manner consistent with the provisions of the 1940 Act. Dividends are
automatically reinvested in additional shares of the same Fund from which
they were paid at net asset value, unless payment in cash is requested.
TAXES
Federal
Each Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
generally will relieve the Funds of liability for federal income taxes to the
extent their earnings are distributed in accordance with the Code. In order to
so qualify, a Fund must comply with certain distribution, diversification,
source of income and other applicable requirements. If for any taxable year a
Fund does not qualify for the special federal tax treatment afforded regulated
investment companies, all of the Fund's taxable income would be subject to tax
at regular corporate rates without any deduction for distributions to
shareholders. In such event, a Fund's distributions to segregated asset
accounts holding shares of the Fund would be taxable as ordinary income to the
extent of the Fund's current and accumulated earnings and profits. A failure
of a Fund 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 Fund.
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 Funds 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 Fund will be
adequately diversified. However, the failure of a Fund 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 Fund and a segregated asset account investing in the
Fund satisfy the above requirements, any distributions from the Fund 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 Fund 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 Funds.
<PAGE>
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders the
performance of the Funds may be compared to the performance of other mutual
funds with similar investment objectives and to stock and other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For
example, the performance of a Fund's shares may be compared to data prepared
by Lipper Analytical Services, Inc. In addition, the performance of the Funds
may be compared to the Standard & Poor's 500 Index, an index of unmanaged
groups of common stocks, the Consumer Price Index, or the Dow Jones Industrial
Average, a recognized unmanaged index of common stocks of thirty industrial
companies listed on the New York Stock Exchange. The yields of the Money
Market Fund may be compared to the Donoghue's Money Fund Average which is an
average compiled by IBC/Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market funds,
or to the average yields reported by the Bank Rate Monitor for money market
deposit accounts offered by the 50 leading banks and thrift institutions in
the top five standard metropolitan statistical areas. Performance data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications
of a local or regional nature, may also be used in comparing the performance
of a Fund.
In the case of the Non-Money Market Funds, "yield" refers to the income
generated by an investment in the Fund over a thirty-day period identified in
the advertisement. This income is then "annualized," i.e., the income
generated by the investment during the respective period is assumed to be
earned and reinvested at a constant rate and compounded semi-annually and is
shown as a percentage of the investment.
In the case of the Money Market Fund, "yield" refers to the income
generated by an investment in the Fund over a seven-day period identified in
the advertisement. This income is then "annualized," i.e., the income
generated by the investment during the respective period is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The Fund 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 Non-Money Market Funds calculate their total returns on an "average
annual total return" basis for various periods from the date they commenced
investment operations and for other periods as permitted under the rules of
the SEC. Average annual total return reflects the average annual percentage
change in value of an investment in a Fund over the measuring period. Total
returns may also be calculated on an "aggregate total return basis" for
various periods. Aggregate total return reflects the total percentage change
in value over the measuring period. Both methods of calculating total return
also reflect changes in the price of a Fund's shares and assume that any
dividends and capital gain distributions made by the Fund during the period
are reinvested in Fund shares. When considering average total return figures
for periods longer than one year, it is important to note that a Fund's annual
total return for any one year in the period might have been greater or less
than the average for the entire period.
Performance of the Funds is based on historical earnings and will
fluctuate and is not intended to indicate future performance. The investment
performance of an investment in the Non-Money Market Funds will fluctuate so
that a shareholder's shares, when redeemed, may be worth more or less than
their original cost. A Fund's performance data may not provide a basis for
comparison with bank deposits and other investments which provide a fixed
yield for a stated period of time. Performance data should also be considered
in light of the risks associated with a Fund's portfolio composition, quality,
maturity, operating expenses and market conditions. Any fees charged by
financial institutions directly to their customer accounts in connection with
investments in Fund shares will not be reflected in a Fund's performance
calculations.
The average annual total returns and aggregate annual total returns for
the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity and Growth
Funds for the period from March 30, 1995 (commencement of operations) through
June 30, 1996 are shown below:
<PAGE>
<TABLE>
<CAPTION>
Average Annualized Aggregate
Total Return Total Return
From Inception From Inception
Through 12/31/95 Through 12/31/95
------------------ ----------------
<S> <C> <C>
Managed Assets Balanced Fund
Inception: March 30, 1995 15.540% 19.872%
------ ------
Growth and Value Fund
Inception: March 30, 1995 21.251% 27.353%
------ ------
Mid-Cap Opportunity Fund
Inception: March 30, 1995 17.404% 22.303%
------ ------
Growth Fund
Inception: March 30, 1995 17.500% 22.429%
------ ------
</TABLE>
GENERAL INFORMATION
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") each 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 Managed Assets Balanced Fund, Growth and
Value Fund, Mid-Cap Opportunity Fund, Growth Fund and Money Market Fund,
respectively. Each share has $.10 par value, represents an equal proportionate
interest in the Fund with other shares of the same class outstanding, and is
entitled to such dividends and distributions out of the income earned on the
assets belonging to the Fund as are declared in the discretion of the Board of
Trustees.
Shareholders are entitled to one vote for each full share held, and a
proportionate fractional vote for each fractional share held, and each Series
entitled to vote on a matter will vote thereon in the aggregate and not by
Series, except as otherwise expressly required by law or when the Board of
Trustees determines that the matter to be voted on affects only the interests
of shareholders of a particular Series. The rights accompanying Fund 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 Fund
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 Fund 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 Custodian, 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 Managed Assets Balanced Fund, 50,000
shares of the Growth and Value, 50,000 shares of the Mid-Cap Opportunity Fund,
50,000 shares of the Growth Fund and 50,000 shares of the Money Market Fund,
for an aggregate purchase price of $5,000,000, on March 30, 1995.
<PAGE>
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 Fund thereof, and
all persons dealing with any Fund of the Trust must look solely to the Trust
property belonging to such Fund 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, for the Pegasus Variable Annuity Fund, 900 Tower Drive,
Troy, Michigan 48098. Holders of Variable Annuity Contracts issued by the
Hartford Companies for which shares of the Funds 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 public accountants. Each report will show the investments owned
by the Funds and the market values of the investments and will provide other
information about the Funds and their operations.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and in the
Funds' official sales literature in connection with the offer of the Funds'
shares, and, if given or made, such other information or representations must
not be relied upon as having been authorized. This Prospectus does not
constitute an offer in any State in which, or to any person to whom, such
offering may not lawfully be made.
SUPPLEMENTAL INFORMATION
Ratings
The ratings of Moody's, S&P, Fitch and Duff represent their opinions as
to the quality of the obligations which they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and, although
ratings may be useful in evaluating the safety of interest and principal
payments, they do not evaluate the market value risk of such obligations.
Therefore, although these ratings may be an initial criterion for selection of
portfolio investments, the Investment Adviser also will evaluate such
obligations and the ability of their issuers to pay interest and principal.
Each Fund will rely on the Investment Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issuer.
Short-Term Investments
Each Non-Money Market Fund may hold the types of Cash Equivalent
Securities described under Asset Allocation Fund above.
U.S. Government Obligations
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include U.S. Treasury securities that differ in their
interest rates, maturities and times of issuance. Treasury Bills have initial
maturities of one year or less; Treasury Notes have initial maturities of one
to ten years; and Treasury Bonds generally have initial maturities of greater
than ten years. Some obligations issued or guaranteed by U.S. Government
agencies and instrumentalities, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the U.S. Treasury; others,
such as those issued by the Federal National Mortgage Association, by
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. These securities bear fixed, floating or variable rates of
interest. Principal and interest may fluctuate based on generally recognized
reference rates or the relationship of rates. While the U.S. Government
provides financial support to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so,
because it is not so obligated by law. Some of these investments may be
variable or floating rate instruments.
The Non-Money Market Funds may also invest in interests in the foregoing
securities, including collateralized mortgage obligations guaranteed by a U.S.
Government agency or instrumentality, and in Government-backed trusts which
hold obligations of foreign governments that are guaranteed or backed by the
full faith and credit of the United States.
<PAGE>
Bank Obligations
Bank obligations include certificates of deposit, time deposits,
bankers' acceptances and other short-term obligations of domestic banks,
foreign subsidiaries of domestic banks, foreign branches of domestic banks,
and domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions. Because the Funds may invest in
securities backed by banks and other financial institutions, changes in the
credit quality of these entities could cause losses to a Fund and affect its
share price.
Obligations issued or guaranteed by foreign branches of U.S. banks
(commonly known as "Eurodollar" obligations) or U.S. branches of foreign banks
(commonly known as "Yankee dollar" obligations) may be general obligations of
the parent bank or obligations only of the issuing branch. Where the
obligation is only that of the issuing branch, the parent bank has no legal
duty to pay such obligation. Such obligations would thus be subject to risks
comparable to those which would be present if the issuing branch were a
separate bank. The Money Market Fund will not invest in a Eurodollar
obligation if upon making such investment the total Eurodollar obligations
which are not general obligations of domestic parent banks would thereby
exceed 25% of the total assets of the Money Market Fund.
Obligations of foreign issuers may involve risks that are different than
those of obligations of domestic issuers. These risks include unfavorable
political and economic developments, possible imposition of withholding taxes
of interest income, possible seizure or nationalization of foreign deposits,
possible establishment of exchange controls, or adoption of other foreign
governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. In addition, foreign branches of
U.S. Banks and foreign banks may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting, and
recordkeeping standards than those applicable to domestic branches of U.S.
banks and, generally, there may be less publicly available information
regarding such issuers. The Trust could also encounter difficulties in
obtaining or enforcing a judgment against a foreign issuer (including a
foreign branch of a U.S. bank).
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period
of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by each Fund will not benefit from insurance from
the Bank Insurance Fund or the Savings Association Insurance Fund administered
by the FDIC.
Bankers' acceptances are credit instruments evidencing the obligation of
a bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Certain Corporate Obligations
Commercial paper in which the Funds may invest consists of short-term,
unsecured promissory notes issued by domestic or foreign entities to finance
short-term credit needs.
Commercial paper issued by corporations and other institutions,
including variable rate notes and other short-term corporate obligations, must
be rated in one of the two highest categories by at least two Rating Agencies,
or if not rated, must have been independently determined by the Investment
Adviser to be of comparable quality.
<PAGE>
Guaranteed Investment Contracts
Each Fund may make limited investments in guaranteed investment
contracts ("GICs") issued by highly rated U.S. insurance companies. Pursuant
to such contracts, a Fund makes cash contributions to a deposit fund of the
insurance company's general account. The insurance company then credits to the
Fund on a monthly basis guaranteed interest which is based on an index (in
most cases this index will be the Salomon Brothers CD Index). The GICs provide
that this guaranteed interest will not be less than a certain minimum rate.
Generally, a GIC allows a purchaser to buy an annuity with the monies
accumulated under contract; however, the Funds will not purchase any such
annuity. A GIC is a general obligation of the issuing insurance company and
not a separate account. The purchase price paid for a GIC becomes a part of
the general assets of the issuer, and the contract is paid from the general
assets of the issuer. The Funds will only purchase GICs from issuers which meet
quality and credit standards established by the Investment Adviser. Generally,
GICs are not assignable or transferable without the permission of the issuing
insurance companies, and an active secondary market in GICs does not currently
exist. Therefore, GICs are considered by the Funds to be illiquid investments
and subject to the limitation on illiquid investments set forth below.
Variable and Floating Rate Instruments
Each Non-Money Market Fund may invest in variable and floating
instruments, including without limitation, inverse floating rate debt
instruments ("inverse floaters") some of which may be leveraged. The interest
rate of an inverse floater resets in the opposite direction from the market
rate of interest to which it is indexed. An inverse floater may be considered
to be leveraged to the extent that its interest rate varies by a magnitude
that exceeds the magnitude of the change in the index rate of interest. The
higher degree of leverage inherent in inverse floaters is associated with
greater volatility in their market values.
The Money Market Fund may purchase rated and unrated variable and
floating rate obligations which may have stated maturities in excess of 13
months but will, in any event, permit the Fund to demand payment of the
principal of the instrument at least once every 13 months on not more than
thirty days' notice (unless the instrument is a U.S. Government Obligation),
provided that the demand feature may be sold, transferred, or assigned only
with the underlying instrument involved. Such instruments may include variable
rate demand notes which are unsecured instruments that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate.
The absence of an active secondary market with respect to particular
variable and floating rate instruments could make it difficult for a Fund to
dispose of the instruments if the issuer defaulted on its payment obligation
or during periods that the Fund is not entitled to exercise demand rights, and
the Fund could, for these or other reasons, suffer a loss with respect to such
instruments. In the absence of an active secondary market, variable and
floating rate instruments (including inverse floaters) will be subject to a
Fund's limitation on illiquid investments. See "Illiquid Securities."
Repurchase and Reverse Repurchase Agreements
To increase its income, each Fund may agree to purchase portfolio
securities from financial institutions subject to the seller's agreement to
repurchase them at a mutually agreed-upon date and price ("repurchase
agreements"). No Fund will enter into repurchase agreements with the
Investment Adviser, the Distributor, or any of their affiliates, except as may
be permitted by the SEC. The seller under a repurchase agreement will be
required to maintain the value of the securities subject to the agreement at
not less than the repurchase price, marked to market daily. Default by the
seller would, however, expose a Fund to possible loss because of adverse
market action or delay in connection with the disposition of the underlying
obligations.
Each Fund may also obtain funds for temporary purposes by entering into
reverse repurchase agreements. Pursuant to such agreements, the Funds will
sell portfolio securities to financial institutions such as banks and
broker-dealers and agree to repurchase them at a particular date and price.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price of the securities it is
obligated to repurchase. Whenever a Fund 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.
<PAGE>
Lending Portfolio Securities
To increase income or offset expenses, each Fund may lend its portfolio
securities to financial institutions such as banks and broker-dealers in
accordance with the investment limitations described below. Agreements would
require that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned plus
accrued interest. Collateral for such loans could include cash or securities
of the U.S. Government, its agencies or instrumentalities, some of which may
bear maturities exceeding 13 months. Such loans will not be made if, as a
result, the aggregate of all outstanding loans of a particular Fund exceeds
one-third of the value of its total assets. Loans of securities involve risk
of delay in receiving additional collateral or in recovering the securities
loaned or possible loss of rights in the collateral should the borrower of the
securities become insolvent. Loans will be made only to borrowers that provide
the requisite collateral comprised of liquid assets and when, in the
Investment Adviser's judgment, the income to be earned from the loan justifies
the attendant risks.
Zero Coupon Obligations
Each Non-Money Market Fund may invest in zero coupon obligations which
are discount debt obligations that do not make periodic interest payments
although income is generally imputed to the holder on a current basis. Such
obligations may have higher price volatility than those which require the
payment of interest periodically. The Investment Adviser will consider the
liquidity needs of the Funds when any investment in zero coupon obligations is
made.
Federal income tax law requires the holder of a zero coupon security or
of certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. To maintain its qualification as a
regulated investment company and avoid liability for federal income taxes,
each Fund that invests in such securities may be required to distribute such
income accrued with respect to these securities and may have to dispose of
portfolio securities under disadvantageous circumstances in order to generate
cash to satisfy these distribution requirements. Such Fund will not be able to
purchase additional income producing securities with cash used to make such
distributions and its current income may be reduced as a result.
When Issued Purchases and Forward Commitments
The Funds may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. These
transactions, which involve a commitment by a Fund to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), permit the Fund to lock-in a price or yield
on a security it owns or intends to purchase, regardless of future changes in
interest rates. When-issued and forward commitment transactions involve the
risk, however, that the yield obtained in a transaction may be less favorable
than the yield available in the market when the securities delivery takes
place. Each Fund's forward commitments and when-issued purchases are not
expected to exceed 25% of the value of its total assets absent unusual market
conditions. The Funds do not earn income with respect to these transactions
until the subject securities are delivered to the Funds. The Funds do not
intend to engage in when-issued purchases and forward commitments for
speculative purposes but only in furtherance of their investment objectives.
Foreign Securities
Investments by the Non-Money Market Funds in foreign securities, with
respect to certain foreign countries, exposes a Fund to the possibility of
expropriation or confiscatory taxation, limitations on the removal of funds or
other assets or diplomatic developments that could affect investment within
those countries. Similarly, volume and liquidity in most foreign securities
markets are less than in the United States and, at times, volatility of price
can be greater than in the United States. In addition, there may be less
publicly available information about a non-U.S. issuer, and non-U.S. issuers
generally are not subject to uniform accounting and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
issuers. Because of these and other factors, securities of foreign companies
acquired by a Fund may be subject to greater fluctuation in price than
securities of domestic companies.
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations. Some currency exchange costs may be incurred
when a Fund changes investments from one country to another.
<PAGE>
Furthermore, some securities purchased by each of the Funds may be
subject to brokerage taxes levied by foreign governments, which have the
effect of increasing the costs of such investments and reducing the realized
gain or increasing the realized loss on such securities at the time of sale.
Income received by the Funds from sources within foreign countries may be
reduced by withholding or other taxes imposed by such countries. Tax
conventions between certain countries and the United States, however, may
reduce or eliminate such taxes. All such taxes paid by a Fund will reduce its
net income available for distribution to investors.
Depository Receipts
Each Non-Money Market Fund may invest in securities of foreign issuers
in the forms of American Depository Receipt ("ADRs"), European Depository
Receipts ("EDRs") and 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. 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.
EDRs are receipts issued by a European financial institution evidencing
ownership of the underlying foreign securities and are generally denominated
in foreign currencies. Generally, EDRs, in bearer form, are designed for use
in the European securities markets.
Supranational Bank Obligations
The Non-Money Market Funds may invest in obligations of supranational
banks. Supranational banks are international banking institutions designed or
supported by national governments to promote economic reconstruction,
development or trade between nations (e.g., the World Bank). Obligations of
supranational banks may be supported by appropriated but unpaid commitments of
their member countries and there is no assurance that these commitments will
be undertaken or met in the future.
Convertible Securities
Each Non-Money Market Fund may invest in convertible securities. A
convertible security is a security that may be converted either at a stated
price or rate within a specified period of time into a specified number of
shares of common stock. By investing in convertible securities, a Fund
seeks the opportunity, through the conversion feature, to participate in the
capital appreciation of the common stock into which the securities are
convertible, while earning higher current income than is available from the
common stock.
Securities of Investment Companies
Each Non-Money Market Fund may invest in securities issued by open and
closed-end investment companies which principally invest in securities in
which the Fund invests. The Money Market Fund may invest in securities
issued by other investment companies which invest in high quality,
short-term debt securities and which determine their net asset value per
share based on the amortized cost or penny-rounding method. Under the 1940
Act, a Fund's investment in such securities, subject to certain exceptions,
currently is limited to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's net assets with respect to any
one investment company and (iii) 10% of the Fund's net assets in the
aggregate. Such purchases will be made in the open market where no
commission or profit to a sponsor or dealer results from the purchase
other than the customary brokers' commissions. As a shareholder of
another investment company, a Fund would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
<PAGE>
Asset Backed Securities
Asset Backed Securities acquired by the Managed Assets Balanced Fund
consists of both mortgage and non-mortgage backed securities. Asset Backed
Securities arise through the grouping by governmental, government-related and
private organizations of loans, receivables and other assets originated by
various lenders ("Asset Backed Securities"), as described below.
The yield characteristics of Asset Backed Securities differ from
traditional debt securities. A major difference is that the principal amount
of the obligations may be prepaid at any time because the underlying assets
(i.e. loans) generally may be prepaid at any time. As a result, if an Asset
Backed Security is purchased at a premium, a prepayment rate that is faster
than expected will reduce yield to maturity, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield to
maturity. Conversely, if an Asset Backed Security is purchased at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will decrease, yield to maturity. In calculating the average
weighted maturity of the Funds, the maturity of Asset Backed Securities will
be based on estimates of average life.
Prepayments on Asset Backed Securities generally increase with falling
interest rates and decrease with rising interest rates. Prepayment rates are
also influenced by a variety of economic and social factors. In general, the
collateral supporting non-mortgage backed securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments.
Like other fixed income securities, when interest rates rise the value of an
Asset Backed Security with prepayment features may not increase as much as
that of other fixed income securities, and, as noted above, changes in market
rates of interest may accelerate or retard prepayments and thus affect
maturities.
These characteristics may result in higher level of price volatility for
these assets under certain market conditions. In addition, while the trading
market for short-term mortgages and Asset Backed Securities is ordinarily
quite liquid, in times of financial stress the trading market for these
securities sometimes becomes restricted.
Mortgage backed securities 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 ("CMOs"), real estate investment trusts ("REITs") and
mortgage pass-through certificates.
CMOs provide the holder with a specified interest in the cash flow of a
pool of underlying mortgages or other mortgage backed securities. Issuers of
CMOs ordinarily elect to be taxed as pass-through entities known as real
estate mortgage investment conduits ("REMICs"). CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may
be structured in a variety of ways. The multiple class securities may be
issued or guaranteed by U.S. Government agencies or instrumentalities,
including the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"), or issued by trusts formed by private originators of,
or investors in, mortgage loans. Classes in CMOs which the Funds may hold are
known as "regular" interests. CMOs also issue "residual" interests, which in
general are junior to and more volatile than regular interests. The Funds do
not intend to purchase residual interests.
Mortgage pass-through certificates provide the holder with a pro rata
interest in the underlying mortgages. One type of such certificate in which
the Funds may invest is a GNMA Certificate which is backed as to the timely
payment of principal and interest by the full faith and credit of the U.S.
Government. Another type is a FNMA Certificate, the principal and interest of
which are guaranteed only by FNMA itself, not by the full faith and credit of
the U.S. Government. Another type is a FHLMC Participation Certificate which
is guaranteed by FHLMC as to timely payment of principal and interest.
However, like a FNMA security, it is not guaranteed by the full faith and
credit of the U.S. Government. Privately issued mortgage backed securities
will carry a rating at the time of purchase of at least A by S&P or by Moody's
or, if unrated, will be in the Investment 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.
<PAGE>
The Asset Allocation Fund may also invest in non-mortgage backed
securities including interest in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage backed securities are not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
Stripped Government Obligations
The Asset Allocation Fund may purchase Treasury receipts and other
"stripped" securities that evidence ownership in either the future interest
payments or the future principal payments on U.S. Government obligations.
These participations, which may be issued by the U.S. Government (or a U.S.
Government agency or instrumentality) or by private issuers such as banks and
other institutions, are issued at a discount to their "face value," and may
include stripped mortgage backed securities ("SMBS"), which are derivative
multi-class mortgage securities. Stripped securities, particularly SMBS, may
exhibit greater price volatility than ordinary debt securities because of the
manner in which their principal and interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of
mortgage backed obligations. A common type of SMBS will have one class
receiving all of the interest, while the other class will receive all of the
principal. However, in some instances, one class will receive some of the
interest and most of the principal while the other class will receive most of
the interest and the remainder of the principal. With respect to investments
in interest only securities, should the underlying obligations experience
greater than anticipated prepayments of principal, the Fund may fail to fully
recoup its initial investment in these securities. The market value of the
class consisting entirely of principal payments may be more volatile in
response to change in interest rates. The yields on a class SMBS that receives
all or most of the interest are generally higher than prevailing market yields
on other mortgage backed obligations because their cash flow patterns
are more volatile. For interest only securities, there is a greater risk that
the initial investment will not be fully recouped.
Municipal and Related Obligations
Municipal Obligations that may be acquired by the Asset Allocation Fund
may include general obligations, revenue obligations, notes and moral
obligations bonds. The Fund currently intends to invest no more than 25% of
its total assets in Municipal Obligations. General obligations are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue obligations are payable only from the
revenues derived from a particular facility, class of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source
such as the user of the facility being financed. Private activity bonds (i.e.
bonds issued by industrial development authorities) are in most cases revenue
securities and are not payable from the unrestricted revenues of the issuer.
Consequently, the credit quality of a private activity bond is usually
directly related to the credit standing of the private user of the facility
involved. Although interest paid on private activity bonds is exempt from
regular federal income tax, it may be treated as a specific tax preference
item under the federal alternative minimum tax. Where a regulated investment
company receives such interest, a proportionate share of any exempt-interest
dividend paid by the investment company may be treated as such a preference
item to the shareholder. See "Description of the Funds -- Risk Factors --
Municipal Obligations." (See also "Taxes").
<PAGE>
Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Moral obligation bonds are
normally issued by a special purpose public authority. If the issuer of a
moral obligation bond is unable to meet its debt service obligations from
current revenues, it may draw on a reserve fund, the restoration of which is a
moral commitment but not a legal obligation of the state or municipality which
created the issuer. Municipal Obligations also include municipal
lease/purchase agreements which are similar to installment purchase contracts
for property or equipment issued by municipalities. The Investment Adviser
will only invest in rated municipal lease/purchase agreements.
There are, of course, variations in the quality of Municipal Obligations
both within a particular classification and between classifications, and the
yields on Municipal Obligations depend upon a variety of factors, including
general money market conditions, the financial condition of the issuer,
general conditions of the municipal bond market, the size of a particular
offering, the maturity of the obligation and the rating of the issue.
Stand-By Commitments
The Asset Allocation Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, the Fund obligates a broker, dealer or bank to repurchase, at the
Fund's option, specified securities at a specified price and, in this respect,
stand-by commitments are comparable to put options. The exercise of a stand-by
commitment therefore is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The Fund may pay for stand-by commitments if such action is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing such securities yield to
investors.
Custodial Receipts and Certificates of Participation
The Asset Allocation Fund may purchase participations in trusts that
hold U.S. Treasury securities (such as TIGRs and CATs) where the trust
participations evidence ownership in either the future interest payments or
the future principal payments on the U.S. Treasury obligations. These
participations are normally issued at a discount to their "face value," and
may exhibit greater price volatility than ordinary debt securities because of
the manner in which their principal and interest are returned to investors.
Options Transactions
Each Non-Money Market Fund is permitted to invest up to 5% of its
assets, represented by the premium paid, in the purchase of call and put
options. Options transactions are a form of derivative security.
Each Non-Money Market Fund is permitted to purchase call and put options
in respect of specific securities (or groups or "baskets" of specific
securities) in which the Fund may invest. Each Fund may write (i.e., sell)
covered call option contracts on securities owned by the Fund not exceeding 25%
of the market value of its net assets at the time such option contracts are
written. Each Fund also may purchase call options to enter into closing
purchase transactions. Each Fund also may write covered put option contracts
to the extent of 25% of the value of its net assets at the time such option
contracts are written. A call option gives the purchaser of the option the
right to buy, and obligates the writer to sell, the underlying security at
the exercise price at any time during the option period. Conversely, a put
option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying security at the exercise price at any time
during the option period. A covered put option sold by a Fund exposes the
Fund during the term of the option to a decline in price of the underlying
security or securities. A put option sold by a Fund is covered when, among
other things, cash or liquid securities are placed in a segregated account
with the Fund's custodian to fulfill the obligation undertaken.
Each Non-Money Market Fund also may purchase and sell call and put
options on foreign currency for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot
price of the currency at the time the option expires. Put options convey
the right to sell the underlying currency at a price which is anticipated
to be higher than the spot price of the currency at the time the option
expires.
<PAGE>
Each Non-Money Market Fund also may purchase cash-settled options on
interest rate swaps, interest rate swaps denominated in foreign currency and
equity index swaps. See "Interest Rate and Equity Index Swaps" below. A
cash-settled option on a swap gives the purchaser the right, but not the
obligation, in return for the premium paid, to receive an amount of cash equal
to the value of the underlying swap as of the exercise date. These options
typically are purchased in privately negotiated transactions from financial
institutions, including securities brokerage firms.
Each Non-Money Market Fund may purchase and sell call and put options on
stock indices listed on U.S. securities exchanges or traded in the
over-the-counter market. A stock index fluctuates with changes in the market
values of the stocks included in the index. Because the value of an index
option depends upon movements in the level of the index rather than the price
of a particular stock, whether a Fund will realize a gain or loss from the
purchase or writing of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of certain
indices, in an industry or market segment, rather than movements in the price
of a particular stock.
Futures Contracts and Options on Futures Contracts
Each Non-Money Market Fund may enter into futures contracts and options
on future contracts. They may enter into stock index futures contracts and may
enter into interest rate futures contracts and currency futures contracts, and
options with respect thereto. See "Options Transactions" above. These
transactions will be entered into as a substitute for comparable market
positions in the underlying securities or for hedging purposes.
A Fund may not engage in such transactions if the sum of the amount of
initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%. To
the extent a Fund engages in the use of futures and options on futures for
other than bona fide hedging purposes, the Fund may be subject to additional
risk. Although none of these Funds would be a commodity pool, each would be
subject to rules of the CFTC limiting the extent to which it could engage in
these transactions. Futures and options transactions are a form of derivative
security. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements.
Such sales of securities may, but will not necessarily, be at increased prices
which reflect the rising market. A Fund may have to sell securities at a time
when it may be disadvantageous to do so.
Foreign Currency Transactions
The Asset Allocation Fund may engage in currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or through entering into forward contracts to purchase or
sell currencies. A forward currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which must be more
than two days from the date of the contract, at a price set at the time
of the contract. These contracts are entered into in the interbank market
conducted directly between currency traders (typically commercial banks or
other financial institutions) and their customers. They may be used to reduce
the level of volatility caused by changes in foreign currency exchange rates
or when such transactions are economically appropriate for the reduction of
risks in the ongoing management of the Fund. 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 Fund also may combine forward currency exchange contracts with
investments in securities denominated in other currencies.
The Fund also may maintain short positions in forward currency exchange
transactions, which would involve it agreeing to exchange an amount of a
currency it did not currently own for another currency at a future date in
anticipation of a decline in the value of the currency sold relative to the
currency the Fund contracted to receive in the exchange.
<PAGE>
Options on Foreign Currency
The Asset Allocation Fund may purchase and sell call and put options on
foreign currency for the purpose of hedging against changes in future currency
exchange rates. Call options convey the right to buy the underlying currency
at a price which is expected to be lower than the spot price of the currency
at the time the option expires. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than the spot
price of the currency at the time the option expires. The Fund 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".
Risks Associated with Futures, Options and Currency and Options
To the extent a Non-Money Market Fund is engaging in a futures
transaction as a hedging device, due to the risk of an imperfect correlation
between securities in its portfolio that are the subject of a hedging
transaction and the futures contract or option used as a hedging device, it
is possible that the hedge will not be fully effective. In futures contracts
and options based on indices, the risk of imperfect correlation increases as
the composition of the Fund varies from the composition of the index. In an
effort to compensate for the imperfect correlation of movements in the price
of the securities being hedged and movements in the price of contracts,
the Fund may buy or sell futures contracts or option in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than
that of the securities. Such "over hedging" or "under hedging" may adversely
affect the Fund's net investment results if market movements are not as
anticipated when the hedge is established.
Successful use of futures by a Non-Money Market Fund also is subject to
the Investment Adviser's ability to predict correctly movements in the
direction of securities prices, interest rates, currency exchange rates and
other economic factors. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Although a Non-Money Market Fund intends to enter into futures contracts
and options transactions only if there is an active market for such contracts,
no assurance can be given that a liquid market will exist for any particular
contract at any particular time. See "Illiquid Securities" above. Many futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a
price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contracts prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Fund to
substantial losses. If it is not possible, or the Fund determines not, to
close a futures position in anticipation of adverse price movements, the Fund
will be required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may offset partially or completely losses on the futures
contract.
Currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in
the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad. The foreign
currency market offers less protection against defaults in the forward trading
of currencies than is available when trading in currencies occurs on an
exchange. Since a forward currency contract is not guaranteed by an exchange
or clearinghouse, a default on the contract would deprive the Fund of
unrealized profits or force the Fund to cover its commitments for purchase or
resale, if any, at the current market price.
<PAGE>
Unlike trading on domestic commodity exchanges, trading on foreign
commodity exchanges is not regulated by the CFTC and may be subject to greater
risks than trading on domestic exchanges. For example, some foreign exchanges
are principal markets so that no common clearing facility exists and a trader
may look only to the broker for performance on the contract. In addition,
unless the Fund hedges against fluctuations in the exchange rate between the
U.S. dollar and the currencies in which trading is done on foreign exchanges,
any profits that the Fund might realize in trading could be eliminated by
adverse changes in the exchange rate, or the Fund could incur losses as a
result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Interest Rate and Equity Index Swaps
Each Non-Money Market Fund may enter into interest rate swaps and equity
index swaps, to the extent described under "Description of the
Funds-Management Policies," in pursuit of its investment objective.
Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest (for example,
an exchange of floating-rate payments for fixed-rate payments). Equity index
swaps involve the exchange by a Fund with another party of cash flows based
upon the performance of an index or a portion of an index which usually
includes dividends. In each case, the exchange commitments can involve
payments to be made in the same currency or in different currencies. Swaps are
a form of derivative security.
Each Non-Money Market Fund usually will enter into swaps on a net basis.
In so doing, the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. If a
Fund enters into a swap, it would maintain a segregated account in the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap. Each of these Funds will enter into swap transactions with
counterparties only if: (i) for transactions with maturities under one
year, such counterparty has outstanding short-term paper rated at least A-1
by S&P, Prime-1 by Moody's, F-1 by Fitch or Duff-1 by Duff, or (ii) for
transactions with maturities greater than one year, the counterparty has
outstanding debt securities rated at least Aa by Moody's or AA by S&P,
Fitch or Duff.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. There is no limit on the amount of swap
transactions that may be entered into by a Non-Money Market Fund. These
transactions do not involve the delivery of securities or other underlying
assets or principal. Accordingly, the risk of loss with respect to swaps is
limited to the net amount of payments that a Fund is contractually
obligated to make. If the other party to a swap defaults, the relevant
Fund's risk of loss consists of the net amount of payments that such Fund
contractually is entitled to receive.
Illiquid Securities
Each Non-Money Market Fund will not knowingly invest more than 15% of
the value of its net assets in securities that are illiquid and the
Money Market Fund 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 (including repurchase agreements, variable and floating rate
instruments, GICs and time deposits) that do not provide for payment to the
Funds within seven days after notice are subject to this limitation.
Securities that have legal or contractual restrictions on resale but have a
readily available market are not deemed to be illiquid for purposes of this
limitation.
Each Fund may purchase securities which are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but which can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933
Act. Any such security will not be considered to be illiquid so long as it is
determined by the Board of Trustees or the Investment Adviser, acting under
guidelines approved and monitored by the Board, that an adequate trading
market exists for that security. This investment practice could have the
effect of increasing the level of illiquidity in a Fund during any period that
qualified institutional buyers become uninterested in purchasing these
restricted securities. The ability to sell to qualified institutional buyers
under Rule 144A is a recent development, and it is not possible to
predict how this market will develop. The Board of Trustees will carefully
monitor any investments by a Fund in these securities.
<PAGE>
Portfolio Turnover
Generally, the Non-Money Market Funds will purchase securities for
capital appreciation or investment income, or both, and not for short-term
trading profits. However, a Fund may sell a portfolio investment soon after
its acquisition if the Investment Adviser believes that such a disposition is
consistent with or in furtherance of the Fund's investment objective. Fund
investments may be sold for a variety of reasons, such as more favorable
investment opportunities or other circumstances. As a result, such Funds are
likely to have correspondingly greater brokerage commissions and other
transaction costs which are borne indirectly by shareholders. Fund turnover
may also result in the realization of substantial net capital gains. (See
"Taxes -- Federal" in the Prospectus and "Additional Information Concerning
Taxes" in the Statement of Additional Information.)
<PAGE>
CROSS REFERENCE SHEET
Series A, B, C, D and E Representing Interests in the
Pegasus Managed Assets Balanced, Growth and Value,
Mid-Cap Opportunity, Growth and Money Market Funds, respectively
Statement of Additional
Form N-1A Part B Item Information Caption
10.Cover Page..................................... Cover Page
11.Table of Contents.............................. Table of Contents
12.General Information and History................ Description of Shares
13.Investment Objectives and Policies............. Investment Objectives,
Policies and Risk
Factors
14.Management of Registrant....................... Management
15.Control Persons and Principal.................. Description of Shares
Holders of Securities
16.Investment Advisory and Other Services......... Management
17.Brokerage Allocation and other Practices....... Investment Objectives,
Policies and Risk
Factors
18.Capital Stock and Other Securities............. Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19.Purchase, Redemption and Pricing
of Securities Being Offered.................... Net Asset Value;
Additional Purchase
and Redemption
Information
20.Tax Status..................................... Additional Information
Concerning Taxes
21.Underwriters................................... Not Applicable
22.Calculation of Performance Data................ Additional Information
on Performance
23.Financial Statements........................... Unaudited Finanical
Statements
-4-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
October 7, 1996
for the
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID-CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
of
PEGASUS VARIABLE ANNUITY FUND
c/o NBD Bank
900 Tower Drive
Troy, Michigan 48098
This Statement of Additional Information ("Additional
Statement") is meant to be read in conjunction with the Pegasus Variable
Annuity Fund's Prospectus (the "Prospectus") dated October 7, 1996 for the
Funds listed above (each, a "Fund" and collectively, the "Funds"), and is
incorporated by reference in its entirety into the Prospectus. The Managed
Assets Balanced, Growth and Value, Mid-Cap Opportunity and Growth Funds are
sometimes referred to herein as the "Non-Money Market Funds." Because this
Additional Statement is not itself a prospectus, no investment in shares of
the Funds should be made solely upon the information contained herein. Copies
of the Funds' Prospectus may be obtained from any office of the Distributor by
writing or calling the Distributor, 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....................................................... 17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION........................ 18
DESCRIPTION OF SHARES................................................. 19
ADDITIONAL INFORMATION CONCERNING TAXES............................... 20
MANAGEMENT............................................................ 23
INDEPENDENT PUBLIC ACCOUNTANTS........................................ 27
COUNSEL............................................................... 27
ADDITIONAL INFORMATION ON PERFORMANCE................................. 27
MISCELLANEOUS......................................................... 31
APPENDIX A............................................................ 1
APPENDIX B............................................................B-1
AUDITED FINANCIAL STATEMENTS.........................................FS-1
-i-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Funds' respective
investment objectives and policies as set forth in the Prospectus.
Additional Information on 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 Funds may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Investment Adviser is responsible for, making decisions with
respect to, and placing orders for all purchases and sales of portfolio
securities for each Fund.
The annualized portfolio turnover rate for each Fund is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover of
the Non-Money Market Funds may vary greatly from year to year as well as
within a particular year, and may be affected by cash requirements for
redemption of shares and by requirements which enable the Funds to receive
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions, and the Non-Money Market Funds may engage in short
term trading to achieve their respective investment objectives.
Purchases of money market instruments by the Funds are made
from dealers, underwriters and issuers. The Funds currently do not expect to
incur any brokerage commission expense on such transactions because money
market instruments are generally traded on a "net" basis by dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-counter market are generally on a net basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument.
<PAGE>
The Funds may participate, if and when practicable, in bidding
for the purchase of portfolio securities directly from an issuer in order to
take advantage of the lower purchase price available to members of a bidding
group. A Fund will engage in this practice, however, only when the Investment
Adviser, in its sole discretion, believes such practice to be otherwise
in the Fund's interests.
For the period ended June 30, 1996, the Managed Assets
Balanced, Growth and Value, Mid-Cap Opportunity and Growth Funds paid
brokerage commissions of $9,455, $8,498, $8,393 and $3,694, respectively.
For the same period, the Money Market Fund incurred no brokerage
commissions. For the period ended December 31, 1995, the Managed Assets
Balanced, Growth and Value, Mid-Cap Opportunity and Growth Funds paid
brokerage commissions of $22,655, $13,521, $24,872 and $16, 571, respectively.
For the same period, the Money Market Fund incurred no brokerage commissions.
The Advisory Agreement for the Funds provides that, in
executing portfolio transactions and selecting brokers or dealers, the
Investment Adviser will seek to obtain the best overall terms available for
each Fund. In assessing the best overall terms available for any transaction,
the Investment 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
Investment Adviser to cause a Fund to pay a broker-dealer which furnishes
brokerage and research services a higher commission than that which might be
charged by another broker-dealer for effecting the same transaction, provided
that the Investment 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 Investment Adviser to the
Funds. Such brokerage and research services might consist of reports and
statistics relating to specific companies or industries, general summaries of
groups of stocks or bonds and their comparative earnings and yields, or broad
overviews of the stock, bond and government securities markets and the
economy.
Supplementary research information so received is in addition
to, and not in lieu of, services required to be performed by the Investment
Adviser and does not reduce the advisory fees payable by the Funds. The
Trustees will periodically review any commissions paid by the Funds to
consider whether the commissions paid over representative periods of time
appear to be reasonable in relation to the benefits inuring to the Funds. It
is possible that certain of the supplementary research or other services
received will primarily benefit one or more other investment companies or
other accounts for which investment discretion is exercised by the Investment
Adviser. Conversely, a Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other account or investment company.
-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 Investment Adviser, the
Distributor or an affiliated person of any of them (as such term is defined in
the 1940 Act) acting as principal, except to the extent permitted by the SEC
or its staff. In addition, a Fund will not purchase securities during the
existence of any underwriting or selling group relating thereto of which
Distributor or the Investment Adviser, or an affiliated person of any of
them, is a member, except to the extent permitted by the SEC or its staff.
Under certain circumstances, the Funds 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 Fund are made independently from
those for the other Funds and for any other investment companies and accounts
advised or managed by the Investment Adviser. Such other investment
companies and accounts may also invest in the same securities as the Funds. To
the extent permitted by law, the Investment Adviser may aggregate the
securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or accounts in executing
transactions. When a purchase or sale of the same security is made at
substantially the same time on behalf of one or more of the Funds and another
investment company or account, the transaction will be averaged as to price
and available investments allocated as to amount, in a manner which the
Investment Adviser believes to be equitable to each Fund and such other
investment company or account. In some instances, this investment procedure
may adversely affect the price paid or received by a Fund or the size of the
position obtained or sold by the Fund.
Eligible Securities for the Money Market Fund
The Money Market Fund may purchase "eligible securities" that
present minimal credit risks as determined by the Investment 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 Investment Adviser ("Comparable Obligations") and that
have been rated in accordance with (1) above; (3) securities that have no
short term rating, but are determined to be of comparable quality to a
security satisfying (1) or (2) above, and the issuer does not have Comparable
Obligations rated by a Rating Agency; and (4) obligations that carry a demand
feature that complies with (1), (2) or (3) above, and are unconditional (i.e.,
readily exercisable in the event of default) or, if conditional, either they
or the long term obligations of the issuer of the demand obligation are (a)
rated by two or more Rating Agencies (or the only Rating Agency which has
issued a rating) in one of the two highest categories for long term debt
obligations, or (b) determined by the Investment Adviser to be of comparable
quality to securities which are so rated.
-3-
<PAGE>
Investment Technologies
Equity Securities
Equity Securities are generally selected by the Asset
Allocation and Equity Funds 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 Investment 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.
Debt Securities
The Investment Adviser selects Debt Securities based on
anticipated interest rate changes and the use of active management strategies
which may include sector rotation, intra-sector adjustments and yield curve
and convexity considerations. Sector rotation involves the Investment 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
Investment Adviser determines to select a particular issue within a sector.
Yield curve considerations involve the Investment Adviser attempting to
compare the relationship between time to maturity and yield to maturity in
order to identify the relative value in the relationship. Convexity
considerations consist of the Investment 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 Investment Adviser
to obtain an additional return when interest rates change dramatically.
In acquiring particular Debt Securities, the Investment Adviser
may consider, among other things, historical yield relationships between
private and governmental debt securities, intermarket yield relationships
among various industry sectors, current economic cycles and the attractiveness
and creditworthiness of particular issuers. Depending upon the Investment
Adviser's analysis of these and other factors, a Fund's holdings of issues in
particular industry sectors may be overweighted or underweighted when compared
to the relative industry weightings in recognized indices. The value of the
Funds can be expected to vary inversely with changes in prevailing interest
rates.
Stripped U.S. Government Obligations
-4-
<PAGE>
Within the past several years, the Treasury Department has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve
book-entry record-keeping system. The Federal Reserve program as established
by the Treasury Department is known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities." To the extent consistent
with its respective investment objectives, the Managed Assets Balanced Fund
may purchase securities registered in the STRIPS program. Under the STRIPS
program, the Fund will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu
of having to hold certificates or other evidences of ownership of the
underlying U.S. Treasury securities.
In addition, the Managed Assets Balanced Fund may acquire U.S.
Government obligations and their unmatured interest coupons that have been
separated ("stripped") by their holder, typically a custodian bank or
investment brokerage firm. Having separated the interest coupons from the
underlying principal of the U.S. Government obligations, the holder will
resell the stripped securities in custodial receipt programs with a number of
different names, including "Treasury Income Growth Receipts" ("TIGRs") and
"Certificate of Accrual on Treasury Securities" ("CATS"). The stripped coupons
are sold separately from the underlying principal, which is usually sold at a
deep discount because the buyer receives only the right to receive a future
fixed payment on the security and does not receive any rights to periodic
interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to
the underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax purposes. The Trust is
not aware of any binding legislative, judicial or administrative authority on
this issue.
As described in the Prospectus, the Fund may also purchase
stripped mortgage-backed securities ("SMBS"). SMBS that are interest only or
principal only and not issued by the U.S. Government may be considered
illiquid securities if they can not be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of net asset value per share. See "Mortgage Backed Securities."
Custodial Receipts and Certificates of Participation
For certain certificates of participation, the Fund will have
the right to demand payment, on not more than 30 days' notice, for all or any
part of such Fund's participation interest, plus accrued interest. As to these
instruments, the Fund intends to exercise its rights to demand payment as
needed to provide liquidity, to maintain or improve the quality of its
investment portfolio or upon a default (if permitted under the terms of the
instrument).
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Bank Obligations
In accordance with their respective investment objectives,
each Fund may purchase bank obligations, which include bankers' acceptances,
negotiable certificates of deposit and non-negotiable time deposits, including
U.S. dollar-denominated instruments issued or supported by the credit of U.S.
or foreign banks or savings institutions. Although the Funds invest in
obligations of foreign banks or foreign branches of U.S. banks only where the
Investment 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 Fund, must have been independently determined by the
Investment Adviser to be of comparable quality or, in the case of the
Non-Money Market Funds, must have been issued by a corporation having an
outstanding bond issue rated A or higher by a Rating Agency. Bonds and other
short term obligations (if not rated as commercial paper) purchased by the
Non-Money Market Funds must be rated BBB or Baa, or higher, by a Rating
Agency, respectively, or if unrated, be of comparable investment quality in
the judgment of the Investment Adviser.
Variable and Floating Rate Instruments
With respect to variable and floating rate obligations that may
be acquired by each Fund, the Investment 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 Fund to dispose of instruments if the issuer defaulted on its payment
obligation or during periods that the Fund is not entitled to exercise its
demand rights, and the Fund could, for these or other reasons, suffer a loss
with respect to such instruments.
Lending Securities
When a Fund lends its securities, it continues to receive
interest or dividends on the securities loaned and may simultaneously earn
interest on the investment of the cash collateral. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans will be called so that the securities may be voted by a Fund if a
material event affecting the investment is to occur.
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Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectus generally equals the price paid by a Fund plus interest
negotiated on the basis of current short term rates (which may be more or less
than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Trust's Custodian,
in the Federal Reserve/Treasury book-entry system or by another authorized
securities depository. Repurchase agreements are considered to be loans under
the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by a Fund under the 1940 Act. At the time a Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account liquid
assets such as U.S. Government securities or other liquid high-grade debt
securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained. Reverse repurchase agreements involve
the risk that the market value of the securities sold by the Fund may decline
below the price of the securities it is obligated to repurchase.
American Depository Receipts ("ADRs")
The Non-Money Market Funds may invest in ADRs, which are
receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs may be listed on a
national securities exchange or may trade in the over-the-counter market.
Although ADR prices are denominated in U.S. dollars, the underlying security
may be denominated in a foreign currency. The underlying security may be
subject to foreign government taxes which would reduce the yield on such
securities.
When-Issued Purchases and Forward Commitments
A Fund will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into, and
may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When a Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
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Mortgage Backed Securities
Mortgage Backed Securities Generally. Mortgage backed
securities held by the Managed Assets Balanced Fund 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 Fund. Most issuers or poolers
provide guarantees of payments, regardless of whether or not the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuers or poolers so that they can meet their obligations under the policies.
Mortgage backed securities issued by private issuers or poolers, whether or
not such securities are subject to guarantees, may entail greater risk than
securities directly or indirectly guaranteed by the U.S. Government.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid. Additional payments
are caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be
incurred. Some mortgage backed securities are described as "modified
pass-through". These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("Pcs"), which represent interests in mortgages
from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal.
The Federal National Mortgage Association ("FNMA") is a U.S.
Government sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers which include state and federally-chartered savings and loan
credit unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA.
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The principal guarantor of mortgage-backed securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S
Government, the timely payment of principal and interest on securities issued
by approved institutions and backed by pools of FHA-insured or VA-guaranteed
mortgages.
Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of conventional residential mortgage
loans. Pools created by such non-governmental issuers generally offer a higher
rate of interest than government and government-related pools because there
are no direct or indirect government guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance purchased by the issuer. The insurance
and guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies.
The Trust expects that governmental or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payment may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage backed securities
are developed and offered in the market, the Trust may consider making
investments in such new types of securities.
Underlying Mortgages. Pools consist of whole mortgage loans or
participations in loans. The majority of these loans are made to purchasers of
one to four family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Managed Assets
Balanced Fund may purchase pools of variable rate mortgages ("VRM"), growing
equity mortgages ("GEM"), graduated payment mortgages ("GPM") and other types
where the principal and interest payment procedures vary. VRMs are mortgages
which reset their interest rate periodically with changes in open market
interest rates. To the extent that the Fund is actually invested in VRMs, its
interest income will vary with changes in the applicable interest rate on
pools of VRMs. GPM and GEM pools maintain constant interest rates, with
varying levels of principal repayment over the life of the mortgage.
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.
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Average Life. The average life of pass-through pools varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's term may be shortened by unscheduled or early payments of principal and
interest on the underlying mortgages. The occurrence of mortgage prepayments
is affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions.
Returns on Mortgage Backed Securities. Yields on mortgage
backed pass-through securities are typically quoted based on the maturity of
the underlying instruments and the associated average life assumption.
Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yields of the
Fund. The compounding effect from reinvestments of monthly payments received
by the Fund will increase its yield to shareholders, compared to bonds that
pay interest semi-annually.
Real Estate Investment Trusts
The Managed Assets Balance Fund may invest in equity real
estate investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in commercial real estate properties. Investments in REITs may
subject the Fund to certain risks. REITs may be affected by changes in the
value of the underlying property owned by the trust. REITs are dependent upon
specialized management skill, may not be diversified and are subject to the
risks of financing projects. REITs are also subject to heavy cash flow
dependency, defaults by borrowers, self liquidation and the possibility of
failing to qualify for the beneficial tax treatment available to REITs under
the Code and to maintain exemption from the 1940 Act. As a shareholder in a
REIT, the Fund would bear, along with other shareholders, its pro rata portion
of the REIT's operating expenses. These expenses would be in addition to the
advisory and other expenses the Fund bears directly in connection with its own
operations.
Foreign Currency Transactions
When the Managed Assets Balance Fund enters into a currency
transaction, it will deposit, if so required by applicable regulations, with
the Custodian cash or readily marketable securities in a segregated account of
the Fund in an amount at least equal to the value of the Fund's total assets
committed to the consummation of the forward contract.
At or before the maturity of a forward contract, the Fund
either may sell a security and make delivery of the currency, or retain the
security and offset its contractual obligation to deliver the currency by
purchasing a second contract pursuant to which the Fund will obtain, on the
same maturity date, the same amount of the currency which it is obligated to
deliver. If the Fund retains the security and engages in an offsetting
transaction, at the time of execution of the offsetting transaction, the Fund
will incur a gain or loss to the
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extent movement has occurred in forward contract prices. Should forward prices
decline during the period between the Fund's entering into a forward contract
for the sale of a currency and the date it enters into an offsetting contract
for the purchase of the currency, it will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the currency
it has agreed to purchase. Should forward prices increase, the Fund will
suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The cost of currency transactions varies with factors such as
the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange usually
are conducted on a principal basis, no fees or commissions are involved. The
use of forward currency exchange contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. If a devaluation generally is
anticipated, the Fund may not be able to contract to sell the currency at a
price above the devaluation level it anticipates. The requirements for
qualification as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code"), may cause the Fund to restrict the
degree to which it engages in currency transactions. See "Additional
Information Concerning Taxes."
Futures Contracts and Related Options
See Appendix B to this Additional Statement for a discussion of
futures contracts and related options.
Options Trading
As stated in the Prospectus, each Fund, other than the Money
Market Fund, may purchase and sell put and call options listed on a national
securities exchange and issued by the Options Clearing Corporation. Such
transactions may be effected on a principal basis with primary reporting
dealers in U.S. Government securities in an amount not exceeding 5% of a
Fund's net assets. This is a highly specialized activity which entails greater
than ordinary investment risks. Regardless of how much the market price of the
underlying security increases or decreases, the option buyer's risk is limited
to the amount of the original investment for the purchase of the option.
However, options may be more volatile than the underlying securities, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying securities. A listed
call option gives the purchaser of the option the right to buy from a clearing
corporation, and a writer has the obligation to sell to the clearing
corporation, the underlying security at the stated exercise price at any time
prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking
the obligations under the option contract. A listed put option gives the
purchaser the right to sell to a clearing corporation the underlying security
at the stated exercise price at any time prior to the expiration date of the
option, regardless of the
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market price of the security. Put and call options purchased by a Fund will be
valued at the last sale price or, in the absence of such a price, at the mean
between bid and asked prices.
A Fund's obligation to sell a security subject to a covered
call option written by it, or to purchase a security subject to a secured put
option written by it, may be terminated prior to the expiration date of the
option by the Fund executing a closing purchase transaction, which is effected
by purchasing on an exchange an option of the same series (i.e., same
underlying security, exercise price and expiration date) as the option
previously written. Such a purchase does not result in the ownership of an
option. A closing purchase transaction will ordinarily be effected to realize
a profit on an outstanding option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to permit the
writing of a new option containing different terms on such underlying
security. The cost of such a liquidation purchase plus transaction costs may
be greater than the premium received upon the original option, in which event
the Fund will have incurred a loss in the transaction. An option position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. There is no assurance that a liquid secondary
market on an exchange will exist for any particular option. A covered call
option writer, unable to effect a closing purchase transaction, will not be
able to sell the underlying security until the option expires or the
underlying security is delivered upon exercise with the result that the writer
in such circumstances will be subject to the risk of market decline in the
underlying security during such period. A Fund will write an option on a
particular security only if the Investment Adviser believes that a liquid
secondary market will exist on an exchange for options of the same series
which will permit the Fund to make a closing purchase transaction in order to
close out its position.
When a Fund writes a covered call option, an amount equal to
the net premium (the premium less the commission) received by the Fund is
included in the liability section of the Fund's statement of assets and
liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current value of the option
written. The current value of the traded option is the last sale price or, in
the absence of a sale, the average of the closing bid and asked prices. If an
option expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option
is sold) and the deferred credit related to such option will be eliminated.
Any gain on a covered call option may be offset by a decline in the market
price of the underlying security during the option period. If a covered call
option is exercised, the Fund may deliver the underlying security held by it
or purchase the underlying security in the open market. In either event, the
proceeds of the sale will be increased by the net premium originally received
and the Fund will realize a gain or loss. If a secured put option is
exercised, the amount paid by the Fund involved for the underlying security
will be partially offset by the amount of the premium previously paid to the
Fund. Premiums from expired options written by a Fund and net gains from
closing purchase transactions are treated as short-term capital gains for
federal income tax purposes, and losses on closing purchase transactions are
short-term capital losses.
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Stock Index Options
Each Fund, other than the Money Market Funds may purchase and
write put and call options on stock indexes listed on U.S. securities
exchanges or traded in the over-the-counter market. A stock index fluctuates
with changes in the market values of the stocks included in the index.
Options on stock indexes are similar to options on stock except
that (a) the expiration cycles of stock index options are generally monthly,
while those of stock options are currently quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or make
delivery of a stock at a specified price, an option on a stock index gives the
holder the right to receive a cash "exercise settlement amount" equal to (i)
the amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing
value of the underlying index on the date of exercise, multiplied by (ii) a
fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The amount of cash received will be equal to such
difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or it may
let the option expire unexercised.
Convertible Securities
The Non-Money Market Funds may each invest in convertible
securities. In general, the market value of a convertible security is the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., the value of the underlying shares of common
stock if the security is converted). As a fixed-income security, the market
value of a convertible security generally increases when interest rates
decline and generally decreases when interest rates rise. However, the price
of a convertible security also is influenced by the market value of the
security's underlying common stock. Thus, the price of a convertible security
generally increases as the market value of the underlying stock increases, and
generally decreases as the market value of the underlying stock declines.
Warrants
Each Non-Money Market Fund may invest up to 5% of its assets at
the time of purchase in warrants and similar rights (other than those that
have been acquired in units or attached to other securities). Warrants
represent rights to purchase securities at a specified price valid for a
specified period of time. The prices of warrants do not necessarily correlate
with the prices of underlying securities.
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Municipal and Related Obligations
To the extent consistent with its investment objective, the
Managed Assets Balanced Fund may invest in Municipal Obligations. There are,
of course, variations in the quality of Municipal Obligations, both within a
particular classification and between classifications, and the yields on
Municipal Obligations depend in part on a variety of factors, including
general market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. The ratings of
Municipal Obligations by Rating Agencies represent their opinions as to the
quality of Municipal Obligations. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and Municipal
Obligations with the same maturity, interest rate and rating may have
different yields while Municipal Obligations with the same maturity and
interest rate with different ratings may have the same yield. Subsequent to
its purchase by the Fund, a Municipal Obligation may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. The Investment Adviser may consider such an event in determining
whether the Fund should continue to hold the obligation.
The payment of principal and interest on most Municipal
Obligations purchased by the Fund will depend upon the ability of the issuers
to meet their obligations. For the purpose of diversification under the 1940
Act, the identification of the issuer of Municipal Obligations depends on the
terms and conditions of the security. When the assets and revenues of an
agency, authority, instrumentality or other political subdivision are separate
from those of the government creating the subdivision and the security is
backed only by the assets and revenues of the subdivision, such subdivision
would be deemed to be the sole issuer. Similarly, in the case of an industrial
development bond, if that bond is backed only by the assets and revenues of
the non-governmental user, then such non-governmental user would be deemed to
be the sole issuer. If, however, in either case, the creating government or
some other entity guarantees a security, such a guaranty would be considered a
separate security and will be treated as an issue of such government or other
entity.
An issuer's obligations under its Municipal Obligations are
subject to the provisions of bankruptcy, insolvency, and other laws affecting
the rights or remedies of creditors, such as the Federal Bankruptcy Code, and
any laws, that may be enacted by federal or state legislatures extending
the time for payment of principal or interest, or both, or imposing other
constraints upon enforcement of such obligations or upon the ability of
municipalities to levy taxes. The power or ability of an issuer to meet its
obligations for the payment of interest or principal of its Municipal
Obligations may be materially adversely affected by litigation or other
conditions.
Certain Municipal Obligations are subject to redemption at a
date earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Obligation and purchased and sold
separately.
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Certain of the Municipal Obligations held by the Fund may be
insured at the time of issuance as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
Municipal Obligations at the time of original issuance. There is, however, no
guarantee that the insurer will meet its obligations. In addition, such
insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
From time to time proposals have been introduced before
Congress for the purpose of restricting or eliminating the federal income tax
exemption for interest on Municipal Obligations. For example, pursuant to
federal tax legislation passed in 1986 interest on certain private activity
bonds must be included in an investor's federal alternative minimum taxable
income, and corporate investors must include all tax-exempt interest in their
federal alternative minimum taxable income. The Trust cannot predict what
legislation, if any, may be proposed in Congress in the future as regards the
federal income tax status of interest on Municipal Obligations in general, or
which proposals, if any, might be enacted. Such proposals, if enacted, might
materially adversely affect the availability of Municipal Obligations for
investments by the Fund and its liquidity and value. In such event, the Board
of Trustees would re-evaluate the Fund's investment objectives and policies
and consider changes in their structure or possible dissolution.
Stand-By Commitments
The Managed Asset Balanced Fund may acquire "stand-by
commitments" with respect to Municipal Obligations it holds. Under a stand-by
commitment, a dealer agrees to purchase at the Fund's option specified
Municipal Obligations at a specified price. Stand-by commitments may be
exercisable by the Fund at any time before the maturity of the underlying
Municipal Obligations and may be sold, transferred or assigned only with the
instruments involved.
The Fund expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for a stand-by commitment
either separately in cash or by paying a higher price for Municipal
Obligations which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). The Fund may
acquire a stand-by commitment unless immediately after the acquisition, with
respect to 75% of its assets not more than 5% of its total assets will be
invested in instruments subject to a demand feature, including stand-by
commitments, with the same institution.
The Fund intends to enter into stand-by commitments only with
dealers, banks and broker-dealers which, in the Investment Adviser's
opinion, present minimal credit risks. The Fund's reliance upon the credit of
these dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Obligations that are subject to the commitment. Thus, the
risk of loss to the Fund in connection with a "stand-by commitment"
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will not be qualitatively different from the risk of loss faced by a person
that is holding securities pending settlement after having agreed to sell the
securities in the ordinary course of business.
The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment will not affect the
valuation or assumed maturity of the underlying Municipal Obligations which
will continue to be valued in accordance with the amortized cost method. The
actual stand-by commitment will be valued at zero in determining net asset
value. Where the Fund pays directly or indirectly for a stand-by commitment,
its cost will be reflected as an unrealized loss for the period during which
the commitment is held by the Fund and will be reflected in realized gain or
loss when the commitment is exercised or expires.
Derivative Securities
The Investment Adviser will evaluate the risks presented by the
derivative instruments purchased by the Funds, and will determine, in
connection with its day-to-day management of the Funds, how they will be used
in furtherance of the Funds' investment objectives. It is possible, however,
that the Investment Adviser's evaluations will prove to be inaccurate or
incomplete and, even when accurate and complete, it is possible that the Funds
will, because of the risks discussed above, incur loss as a result of their
investments in derivative instruments.
Additional Investment Limitations
In addition to the investment limitations disclosed in the
Prospectus, the Funds are subject to the following investment limitations
which may not be changed without approval of the holders of the majority of
the outstanding shares of the affected Fund (as defined under "Description of
Shares" below).
None of the Funds may:
1. Purchase or sell real estate, except that each Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with a
Fund's investment objective and policies: each Fund may purchase and sell
options, forward contracts, futures contracts, including without limitation
those relating to indexes, and options on futures contracts or indexes; and
each Fund may purchase publicly traded securities of companies engaging in
whole or in part in such activities.
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3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance
with the Fund's investment objective, policies and limitations may be deemed
to be underwriting.
Each of the Non-Money market Funds may not purchase securities
of any one issuer (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if, immediately after such
purchase, more than 5% of the value of the Fund total assets would be invested
in the securities of such issues, or more than 10% of the issuer's outstanding
voting securities would be owned by the Fund except that up to 25% of the
value of the Fund's total assets may be invested without regard to these
limitations.
The Money Market Fund 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.
In addition to the above fundamental limitations, the Funds are
subject to the following non-fundamental limitations, which may be changed
without a shareholder vote:
None of the Funds may:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles, spreads,
or any combination thereof, except, as consistent with a Fund's investment
objective and policies, for transactions in options on securities or indices
of securities, futures contracts and options on futures contracts and in
similar investments.
3. Purchase securities on margin, make short sales of
securities or maintain a short position, except that, as consistent with a
Fund's investment objective and policies, (a) this investment limitation shall
not apply to a Fund's transactions in futures contracts and related options
and in options on securities or indices of securities and similar instruments,
and (b) each Fund may obtain short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
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4. Purchase securities of companies for the purpose of
exercising control.
5. Invest more than 15% (10% for the Money Market Fund) of
its total assets in illiquid securities.
No Fund intends to purchase securities while its borrowings
(including reverse repurchase agreements) in excess of 5% of its assets are
outstanding. Securities held in escrow or separate accounts in connection with
its investment practices are not deemed to be pledging for purposes of a
Fund's limitation on borrowing.
In order to permit the sale of a Fund's shares in certain
states, the Trust may make commitments with respect to a Fund more restrictive
than the investment policies and limitations described above and in its
Prospectus. Should the Trust determine that any such commitment is no longer
in the best interests of a particular Fund, it will revoke the commitment by
terminating sales of the Fund's shares in the state involved and, in the case
of investors in Texas, give notice of such action.
NET ASSET VALUE
Non-Money Market Funds
The net asset value per share of each Non-Money Market Fund is
calculated by adding the value of all portfolio securities and other assets
belonging to the Fund, subtracting the liabilities charged to the Fund, and
dividing the result by the number of shares of the Fund outstanding. "Assets
which belong to" a Fund consist of the consideration received upon the
issuance of shares of the Fund 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 Fund are
charged with the direct liabilities of the Fund 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 Funds 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 Fund are
conclusive.
Money Market Fund
The Money Market Fund 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 Fund would
receive if it
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sold the securities. The value of portfolio securities held by the Fund will
vary inversely to changes in prevailing interest rates. Thus, if interest
rates have increased from the time a security was purchased, such security, if
sold, might be sold at a price less than its cost. Similarly, if interest
rates have declined from the time a security was purchased, such security, if
sold, might be sold at a price greater than its purchase cost. In either
instance, if the security is held to maturity, no gain or loss will be
realized.
Pursuant to Rule 2a-7, the Money Market Fund 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
Fund's price per share as computed for the purpose of sales and redemptions at
$1.00. These procedures include review of the valuation of the investment
holdings by the Board of Trustees, at such intervals as it may deem
appropriate, to determine whether the Fund'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 Fund'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 Fund 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 Fund. Expenses of the Fund are accrued each day. As
the Fund'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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are offered and sold on a continuous basis
by the Trust's Distributor, BISYS Fund Services ("BISYS"), acting as agent.
[As described in the Prospectus, shares of the Funds are sold and redeemed at
their net asset value as next
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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 during any period when:
(a) trading on the New York Stock Exchange is restricted by applicable rules
and regulations of the SEC; (b) the Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted
such suspension; or (d) an emergency exists as determined by the SEC. (The
Trust may also suspend or postpone the recordation of the transfer of shares
upon the occurrence of any of the foregoing conditions).
In addition to the situations described in the Prospectus
under "Redemption of Shares," the Trust may redeem shares involuntarily to
reimburse the Funds for any loss sustained by reason of the failure of a
shareholder to make full payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a
shareholder which is applicable to Fund shares as provided in the Prospectus
from time to time.
The Trust normally redeems shares for cash. However, the
Trustees can determine that conditions exist making cash payments undesirable.
If they should so determine, redemption payments could be made in securities
valued at the value used in determining net asset value. There may be
brokerage and other costs incurred by the redeeming shareholder in selling
such securities. The Trust has elected to be covered by Rule 18f-1 under the
1940 Act, pursuant to which the Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of net asset value during any 90-day
period for any one shareholder.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized
under 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 Fund, shareholders of a particular Fund would be entitled to
receive the assets available for distribution belonging to such Fund. If there
are any assets, income, earnings, proceeds, funds or payments, which are not
readily identifiable as belonging to any particular Fund, the Trustees shall
allocate them among any one or more of the Funds as they, in their sole
discretion, deem fair and equitable.
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Rule 18f-2 under the 1940 Act provides that any matter
required to be submitted to the holders of the outstanding voting securities
of an investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each Fund affected by the matter. A Fund is affected by
a matter unless it is clear that the interests of each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
Fund. Under the Rule, the approval of an investment advisory agreement or any
change in a fundamental investment policy would be effectively acted upon with
respect to a Fund only if approved by a majority of the outstanding shares of
such Fund. However, the Rule also provides that the ratification of the
appointment of independent accountants, the approval of principal underwriting
contracts and the election of Trustees may be effectively acted upon by
shareholders of the Trust voting together in the aggregate without regard to
particular Funds.
When used in the Prospectus or this Additional Statement,
a "majority" of shareholders means, with respect to the approval of an
investment advisory agreement, a distribution plan or a change in a
fundamental investment policy, the vote of the lesser of (1) 67% of the shares
of the Trust or the applicable Fund, class or series present at a meeting if
the holders of more than 50% of the outstanding shares are present in person
or by proxy, or (2) more than 50% of the outstanding shares of the Trust or
the applicable Fund, class or series.
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 Funds will be fully
paid and non-assessable by the Trust.
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ADDITIONAL INFORMATION CONCERNING TAXES
Shares of the Funds 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 Funds and their shareholders that are
not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Funds or their shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning and is based on tax laws and regulations which are in
effect on the date hereof; such laws and regulations may be changed by
legislative or administrative action. Investors are advised to consult their
tax advisers with specific reference to their own tax situations.
Each Fund is treated as a separate corporate entity
under the Code and intends to qualify as a regulated investment company. In
order to so qualify, each Fund must distribute to its shareholders an amount
equal to at least the sum of 90% of its investment company taxable income and
90% of its net tax-exempt interest income (if any) for such year. In general,
a Fund's investment company taxable income will be its taxable income, subject
to certain adjustments and excluding the excess of any net long-term capital
gain for the taxable year over the net short-term capital loss, if any, for
such year. Each Fund also must satisfy certain requirements with respect to
the source of its income for a taxable year. At least 90% of the gross income
of each Fund must be derived from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stocks,
securities or foreign currencies, and other income (including, but not limited
to, gains from options, futures, or forward contracts) derived with respect to
the Fund's business of investing in such stock, securities or currencies. The
Treasury Department may by regulation exclude from qualifying income foreign
currency gains which are not directly related to the Fund's principal business
of investing in stock or securities, or options and futures with respect to
stock or securities. Any income derived by a Fund from a partnership or trust
is treated for this purpose as derived with respect to the Fund's business of
investing in stock, securities or currencies only to the extent that such
income is attributable to items of income which would have been qualifying
income if realized by the Fund in the same manner as by the partnership or
trust.
Another requirement for qualification as a regulated
investment company under the Code is that less than 30% of a Fund's gross
income for a taxable year must be derived from gains realized on the sale or
other disposition of the following investments held for less than three
months: (1) stock and securities (as defined in Section 2(a)(36) of the 1940
Act); (2) options, futures and forward contracts other than those on foreign
currencies;
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and (3) foreign currencies (and options, futures and forward contracts on
foreign currencies) that are not directly related to a Fund's principal
business of investing in stock and securities (and options and futures with
respect to stocks and securities). Interest (including original issue discount
and accrued market discount) received by a Fund upon maturity or disposition
of a security held for less than three months will not be treated as gross
income derived from the sale or other disposition of such security within the
meaning of this requirement. However, any other income which is attributable
to realized market appreciation will be treated as gross income from the sale
or other disposition of securities for this purpose. See Appendix B --
"Accounting and Tax Treatment" -- 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.
Each Fund will designate any distribution of long term
capital gains as a capital gain dividend in a written notice mailed to
shareholders within 60 days after the close of the Fund's taxable year.
Shareholders should note that, upon the sale or exchange of Fund shares, if
the shareholder has not held such shares for at least six months, any loss on
the sale or exchange of those shares will be treated as long term capital loss
to the extent of the capital gain dividends received with respect to the
shares.
Ordinary income of individuals is taxable at a maximum
marginal rate of 39.6%; however, because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. An
individual's long term capital gains are taxable at a maximum marginal rate
of 28%. For corporations, long term capital gains and ordinary income are both
taxable at a maximum marginal rate of 35%.
As noted in the Prospectus, each Fund 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 Fund intends to
make sufficient distributions or deemed distributions of its ordinary taxable
income and any capital gain net income prior to the end of each calendar year
to avoid liability for this excise tax.
If for any taxable year a Fund does not qualify for
the special federal income tax treatment afforded regulated investment
companies, all of its taxable income will be subject to federal income tax at
regular corporate rates (without any deduction for distributions to its
shareholders). In such event, dividend distributions (whether or not derived
from interest on Municipal Obligations) would be taxable as ordinary income to
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shareholders to the extent of the Fund's current and accumulated earnings and
profits and would be eligible for the dividends received deduction for
corporations.
Each Fund may be required in certain cases to withhold
and remit to the U.S. Treasury 31% of taxable dividends or gross proceeds
realized upon sale paid to shareholders who have failed to provide a correct
tax identification number in the manner required, who are subject to
withholding by the Internal Revenue Service for failure properly to include on
their return payments of taxable interest or dividends, or who have failed to
certify to the Fund when required to do so that they are not subject to backup
withholding or that they are "exempt recipients."
Depending upon the extent of the Funds' activities in
states and localities in which their offices are maintained, in which their
agents or independent contractors are located or in which they are otherwise
deemed to be conducting business, the Funds may be subject to the tax laws of
such states or localities. In addition, in those states and localities which
have income tax laws, the treatment of the Funds and their shareholders under
such laws may differ from their treatment under federal income tax laws.
MANAGEMENT
Trustees and Officers of the Trust
The Trustees and executive officers of the Trust,
their ages and their principal occupations for the last five years are set
forth in the Prospectus. Each Trustee has an address at the Pegasus Variable
Annuity Fund, c/o NBD Bank, 611 Woodward Avenue, Detroit, Michigan 48226. Each
Trustee also serves as a trustee of the Pegasus Funds, a registered investment
company advised by the Investment Adviser.
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, Pegasus Funds. He
is 70 years old.
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Nicholas J. De Grazia, Trustee
Consultant, Lionel L.L.C. (since 1995); President, Chief Operating
Officer and Director, Lionel Trains, Inc. (1990-1995); Vice President-Finance
and Treasurer, University of Detroit (1981-1990); President (1981-1990) and
Director (since 1986), Polymer Technologies, Inc.; President, Florence
Development Company (1987-1990); Chairman (since 1994) and Director (since
1992), Central Macomb County Chamber of Commerce; Vice Chairman, Michigan
Higher Education Facilities Authority (since 1991); Trustee, Pegasus Funds. He
is 53 years old.
John P. Gould, Trustee
Steven G. Rothmeier Professor (since January, 1996); Distinguished
Service Professor of Economics of the University of Chicago Graduate School of
Business (since 1984); 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, Pegasus Funds. He is 57 years old.
Marilyn McCoy, Trustee
Vice President of Administration and Planning of Northwestern
University (since 1985); Director of Planning and Policy Development for the
University of Colorado (1981-1985); Member of the Board of Directors of
Evanston Hospital, Chicago Metropolitan YMCA, Chicago Network and United
Charities; Member of the Chicago Economics Club; Trustee, Pegasus Funds. She
is 48 years old.
Julius L. Pallone, Trustee
President, J.L. Pallone Associates, Consultants (since 1994); Chairman
of the Board (1974-1993), Maccabees Life Insurance Company; President and
Chief Executive Officer, Royal Financial Services (1991-1993); Director,
American Council of Life Insurance of Washington, D.C. (life insurance
industry association) (1988-1993); Director, Crowley, Milner and Company
(department store) (since 1988); Trustee, Lawrence Institute of Technology
(since 1982); Director, Detroit Symphony Orchestra (since 1985); Director,
Oakland Commerce Bank (since 1984) and Michigan Opera Theater (since 1981);
Trustee, Pegasus Funds. He is 65 years old.
*Donald G. Sutherland, Trustee
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis,
Indiana; Trustee, Pegasus Funds. He is 67 years old.
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Donald L. Tuttle, Trustee
Vice President (since 1995), Senior Vice President (1992-1995),
Association for Investment Management and Research; Senior Professor of
Finance, Indiana University (1970-1991); Vice President, Trust & Investment
Advisers, Inc. (1990-1991); Director, Federal Home Loan Bank of Indianapolis
(1981 to 1985); Trustee, Pegasus Funds. He is 61 years old.
Mark A. Dillion, Vice President
An employee of the Distributor. He is 33 years old and his address is 3435
Seltzer Road, Columbus, Ohio 43219-3035.
Alaina Metz, Vice President
An employee of the Distributor since June 1995. Prior to joining the
Distributor Ms. Metz was a supervisor at Alliance Capital Management L.P. in
New York. She is 29 years old and her address is 3435 Seltzer Road, Columbus,
Ohio 43219-3035.
D'Ray Brewer, Treasurer
An employee of the Distributor. She is 37 years old and her address is 3435
Seltzer Road, Columbus, Ohio 43219-3035.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia,
Pennsylvania. He is 53 years old, and his address is 1345 Chestnut Street,
Philadelphia, Pennsylvania 19107.
* Denotes Interested Trustee.
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Each Trustee receives from the Trust and the Pegasus
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 Funds of the Trust and the Pegasus 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.
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The following table summarizes the compensation for
each of the Trustees for the Trust's fiscal year ending December 31, 1995 are
as follows:
(3)
Total
Compensation
(2) From Fund and
Aggregate Fund Complex**
(1) Compensation Paid to Board
Name of Board Member from Fund* Member
-------------------- ----------- --------------
Will M. Caldwell, Trustee $ 21,250 $ 21,250(2)+
Nicholas J. DeGrazia, Trustee $ 21,250 $ 21,250(2)+
John P. Gould, Trustee
*** $ 30,000(4)+
Earl I. Heenan, Jr., ++
Chairman and President $24,437.50 $24,437.50(2)+
Marilyn McCoy, Trustee
*** $ 30,000(4)+
Julius L. Pallone, Trustee ++
$ 21,250 $ 21,250(2)+
Donald G. Sutherland, ++
Trustee $ 21,250 $ 21,250(2)+
Donald L. Tuttle, Trustee ++
$ 21,250 $ 21,250(2)+
Eugene C. Yehle, Trustee
and Treasurer $ 21,250 $ 21,250(2)+
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* Amount does not include reimbursed expenses for attending Board meeting,
which are estimated to be approximately $350 for all Trustees as a group.
** The Fund Complex consists of the Trust, the Pegasus 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 investment companies in 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 Pegasus Funds' fiscal year ended December 31, 1995
for Earl I. Heenan, Jr., Julius L. Pallone, Donald G. Sutherland and Donald L.
Tuttle, respectively.
- --------------------------------
Investment Adviser
Information about the Investment Adviser and its duties and
compensation as investment adviser is contained in the Prospectus.
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The Investment Adviser's own investment portfolios may
include bank certificates of deposit, bankers' acceptances, corporate debt
obligations, equity securities and other investments any of which may also be
purchased by the Trust. Joint purchase of investments for the Trust and for
the Investment Adviser's own investment portfolios will not be made unless
permitted under the 1940 Act. The Investment Adviser's and its affiliates
respective commercial banking departments may have deposit, loan and other
commercial banking relationships with issuers of securities purchased by the
Trust, including outstanding loans to such issuers which may be repaid in
whole or in part with the proceeds of securities purchased by the Trust.
For the period from January 1, 1996 through June 30, 1996, the
Trust paid NBD fees for advisory services on behalf of each Fund, and
reimbursed such Funds for certain other expenses as follows:
Advisory Fees Expense
Paid Reimbursements
------------- --------------
Managed Assets Balanced Fund $47,917 $38,110
Mid-Cap Opportunity Fund $20,865 $34,605
Growth and Value Fund $17,304 $32,928
Growth Fund $27,183 $13,720
Money Market Fund $ 2,820 $22,778
For the period from March 30, 1995 (commencement of operations)
through December 31, 1995, the Trust paid NBD fees for advisory services on
behalf of each Fund, and reimbursed such Funds for certain other expenses as
follows:
Advisory Fees Expense
Paid Reimbursements
------------- --------------
Managed Assets Balanced Fund $ 40,501 $ 80,459
Mid-Cap Opportunity Fund $ 16,064 $ 80,078
Growth and Value Fund $ 12,510 $ 67,776
Growth Fund $ 20,847 $ 63,458
Money Market Fund $ 2,731 $ 60,828
Investment decisions for the Trust and other fiduciary accounts are made by
FCNIMCO solely from the standpoint of the independent interest of the Trust
and such other fiduciary accounts. FCNIMCO performs independent analyses of
publicly available information, the results of which are not made publicly
available. In making investment decisions for the Trust, FCNIMCO does not
obtain information from any other division or department of the Investment
Adviser or otherwise, which is not publicly available. FCNIMCO executes
transactions for the Trust only with unaffiliated dealers but such dealers may
be customers of the Investment Adviser's affiliates. The Investment
Adviser may make bulk purchases of securities for the Trust and for other
customer accounts (but not for its
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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.
FCNIMCO has agreed as Investment Adviser that it will
reimburse the Trust such portions of its fees as may be required to satisfy
any expense limitations imposed by state securities laws or other applicable
laws. Restrictive limitations may be imposed on the Trust as a result of
changes in current state laws and regulations in those states where the Trust
has qualified its shares, or by a decision of the Trustees to qualify the
shares in other states having restrictive expense limitations. To the Trust's
knowledge, of the expense limitations in effect on the date of this Additional
Statement none is more restrictive than two and one-half percent (2-1/2%) of
the first $30 million of a Fund's average annual net assets, two percent (2%)
of the next $70 million of the average annual net assets and one and one-half
percent (1-1/2%) of the remaining average annual net assets.
Under the terms of the Advisory Agreement, the Investment
Adviser is obligated to manage the investment of each Fund's assets in
accordance with applicable laws and regulations, including, to the extent
applicable, the regulations and rulings of the various regulatory governmental
bank agencies.
The Investment Adviser will not accept Trust shares as
collateral for a loan which is for the purpose of purchasing Trust shares, and
will not make loans to the Trust. Inadvertent overdrafts of the Trust's
account with the Custodian occasioned by clerical error or by failure of a
shareholder to provide available funds in connection with the purchase of
shares will not be deemed to be the making of a loan to the Trust by the
Investment Adviser.
Under the Advisory Agreement, the Investment Adviser 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 the Investment Adviser in the
performance of its duties or from their reckless disregard of their duties
and obligations under the Agreement.
Administrators
Pursuant to an Administration Agreement dated as of October 7
with the Trust, FCNIMCO and BISYS assist in all aspects of the Trust's
operations, other than providing investment advice, subject to the overall
authority of the Trust's Board in accordance with Delaware law. Under the
terms of the Administration Agreement, FCNIMCO and BISYS are entitled
jointly to a monthly administration fee at the annual rate of .15% of each
Fund's average daily net assets.
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The Trust has agreed that neither FCNIMCO nor BISYS will 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 the agreement with FCNIMCO or BISYS
relates, except for a loss resulting from wilful misfeasance, bad faith or
gross negligence on the part of FCNIMCO or BISYS in the performance of their
obligations or from reckless disregard by any of them of their obligations and
duties under the Administration Agreement.
In addition, the Administration Agreement provides that if, in any
fiscal year, the aggregate expenses of a Fund, exceed the expense limitation
of any state having jurisdiction over the Fund, FCNIMCO and BISYS will bear,
such excess expense to the extent required by state law.
The aggregate of the fees payable to FCNIMCO and BISYS is not subject
to reduction as the value of the Fund's net assets increases.
Custodian and Transfer Agent
As Custodian for the Trust, NBD (i) maintains a separate account
or accounts in the name of each Fund, (ii) collects and makes disbursements of
money on behalf of each Fund, (iii) collects and receives all income and other
payments and distributions on account of the Portfolio securities of each
Fund, (iv) makes periodic reports to the Trust's Board of Trustees concerning
the Trust's operations, and (v) maintains on-line computer capability for
determining the status of shareholder accounts.
For its services as Custodian, NBD is entitled to receive from
the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity and Growth
Funds fees at the following annual rates based on the aggregate market value
of such Funds' portfolio securities, held as Custodian: [.03% of the first $20
million; .025% of the next $20 million; .02% of the next $20 million; .015% of
the next $40 million; .0125% of the next $200 million; and .01% of the balance
over $300,000,000. NBD will receive an annual account fee of $1,000 and $1.54
per month per security held in each of these Funds. In addition, NBD, as
Custodian, is entitled to receive $50 for each cash statement and inventory
statement and $13 for each pass-through certificate payment, $35 for each
option transaction requiring escrow receipts and $20 for all other security
transactions.]
For its services as Custodian, NBD is entitled to receive from
the Money Market Fund [$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.]
First Data Investor Services Group, Inc. serves as the Trust's
transfer agent pursuant to the Transfer Agency Agreement.
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<PAGE>
Distributor
The Trust's shares are offered on a continuous basis through
BISYS, which acts under the Distribution Agreement as Distributor for the
Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 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.
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each Fund and the yield of
the Managed Assets Balanced and Money Market Funds for various periods may be
quoted in advertisements, shareholder reports or other communications to
shareholders. Performance information is generally available by calling
1-800-688-3350.
Non-Money Market Funds
Total Return Calculations. Each Non-Money Market Fund 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
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<PAGE>
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made
at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of years.
The Funds compute their aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate
the initial amount invested to the ending redeemable value of such investment.
The formula for calculating aggregate total return is as follows:
ERV
T = (-------) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees changed to all shareholders accounts, assuming an account size
equal to a Fund's mean (or median) account size for any fees that vary with
size of the account. The ending redeemable value (variable "ERV" in each
formula) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the end of the
period covered by the computations.
The average annual total returns and aggregate annual total
returns for the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity
and Growth Funds for the period from March 30, 1995 (commencement of
operations) through June 30, 1996 are shown below:
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<PAGE>
Average Annual Aggregate
Total Return Total Return
From Inception From Inception
Through 6/30/96 Through 6/30/96
--------------- ---------------
Managed Assets Balanced Fund 15.540% 19.872%
Inception: March 30, 1995
Growth and Value Fund 21.251% 27.353%
Inception: March 30, 1995
Mid-Cap Opportunity Fund 17.404% 22.303%
Inception: March 30, 1995
Growth Fund 17.500% 22.429%
Inception: March 30, 1995
The average annual total returns and aggregate total returns for
the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity and Growth
Funds for the period from March 30, 1995 (commencement of operations) through
December 31, 1995 are shown below:
Average Annual Aggregate
Total Return Total Return
From Inception From Inception
Through 6/30/96 Through 6/30/96
--------------- ---------------
Managed Assets Balanced Fund 20.15% 20.15%
Inception: March 30, 1995
Growth and Value Fund 22.75% 22.75%
Inception: March 30, 1995
Mid-Cap Opportunity Fund 14.20% 14.20%
Inception: March 30, 1995
Growth Fund 18.82% 18.82%
Inception: March 30, 1995
Money Market and Managed Assets Balanced Funds
The "yield" and "effective yield" of the Money Market Fund
described in the Prospectus are calculated according to formulas prescribed by
the SEC. The standardized seven-day yield for the Money Market Fund is
computed separately by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account in the Fund
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 Fund
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 Fund'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 Fund is computed by compounding the
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<PAGE>
Fund'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
financial intermediaries on their customers for cash management and other
services are not reflected in the Fund's calculations of yields.
The Managed Assets Balanced Fund's yield is calculated by
dividing the Portfolio's net investment income per share (as described below)
earned during a 30-day period by the maximum offering price per share on the
last day of the period and annualizing the result on a semi-annual basis by
adding one to the quotient, raising the sum to the power of six, subtracting
one from the result and then doubling the difference. The Fund's net
investment income per share earned during the period is based on the average
daily number of shares outstanding during the period entitled to receive
dividends and includes dividends and interest earned during the period minus
expenses accrued for the period, net of reimbursements.
Because the Money Market Fund 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 periods and thirty-day periods ended June 30,
1996, the annualized yields and effective yields for the Money Market Fund
were 4.768% and 4.882%, respectively. For the thirty-day period ended June 30,
1996, the yield for the Managed Assets Balanced Fund was 1.539%.
For the seven-day periods and thirty-day periods ended December
31, 1995, the annualized yields and effective yields for the Money Market Fund
were 5.091% and 5.220%, respectively. For the thirty-day period ended December
31, 1995, the yield for the Managed Assets Balanced Fund was 1.756%.
Other Performance Information
The Funds may also from time to time include in advertisements,
sales literature, communications to shareholders and other materials
("Literature") total return figures that are not calculated according to the
formulas set forth above in order to compare more accurately a Fund's
performance with other measures of investment return. For example, in
comparing the Funds' total returns with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of an index, the Funds may calculate
their returns for the period of time specified in the advertisement or
communication by assuming the investment of $10,000 in shares and assuming the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.
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<PAGE>
The Funds may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid
in cash.
The Funds may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
techniques, policies or investment suitability of a Fund, (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable instruments), economic
conditions, the effects of inflation and historical performance of various
asset classes, including but not limited to, stocks, bonds and Treasury bills.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the view of the
Trust as to current market, economy, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund. The Funds may also
include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of a
Fund. In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in
a Fund [and/or other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and investment alternatives to certificates of deposit and
other financial instruments.] Such advertisements or communicators may include
symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein.
MISCELLANEOUS
As of September 30, 1996, all of the issued and outstanding shares
of each Fund 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.
-35-
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used by
Standard and Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted "A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of 9 months. The following summarizes the rating categories
used by Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are
considered to have a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced by the
following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample asset
protection; broad margins in earning coverage of fixed financial charges and
high internal cash generation; and well established access to a range of
financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends
A-1
<PAGE>
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternative liquidity is maintained.
"Prime-3" - Issuer or related supporting institutions have an
acceptable capacity for repayment of short-term promissory obligations. The
effects of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest
rating category. The following summarizes the rating categories used by Duff &
Phelps for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below
risk-free U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment.
Liquidity factors are strong and supported by good fundamental protection
factors. Risk factors are very small.
"D-2" - Debt possesses good certainty of timely payment.
Liquidity factors and company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
"D-3" - Debt possesses satisfactory liquidity, and other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation.
Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
A-2
<PAGE>
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit quality.
Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly less
in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned
this rating have a satisfactory degree of assurance for timely payment, but
the margin of safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned
this rating have characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned
this rating have characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings
to indicate that the rating is based upon a letter of credit issued by a
commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
rating category and indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
A-3
<PAGE>
"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 which posses a particularly strong credit
feature are 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.
"A3" - Obligations are supported by a satisfactory capacity for
timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
A-4
<PAGE>
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard & Poor's
for corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned
by Standard & Poor's to a debt obligation and indicates an extremely strong
capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay
interest and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely
A-5
<PAGE>
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 absence
of an "r" symbol should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
A-6
<PAGE>
"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 occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated by
the symbols, Aa1, A1, Ba1 and B1.
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.
To provide more detailed indications of credit quality, the Fitch
ratings from and including "AA" to "BBB" 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, such that adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
"BBB" - Obligations for which there is currently a low
expectation of investment risk. Capacity for timely repayment of principal and
interest is adequate, although adverse changes in business, economic or
financial conditions are more likely to lead to increased investment risk than
for obligations in other categories.
A-9
<PAGE>
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of
these ratings where it is considered that speculative characteristics are
present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to
denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category assigned
by Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by
Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having 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.
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Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns and
market access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong
or strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best
quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"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.
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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 Funds
may enter into futures contracts and related options for hedging purposes.
I. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are
established in both the cash market and the futures market. In the cash
market, bonds are purchased and sold with payment for the full purchase price
of the bond being made in cash, generally within five business days after the
trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained
fairly predictable relationships. Accordingly, the Managed Assets Balanced
Fund may use interest rate futures as a defense, or hedge, against anticipated
interest rate changes and not for speculation. As described below, this would
include the use of futures contract sales to protect against expected
increases in interest rates and futures contract purchases to offset the
impact of interest rate declines.
The Managed Assets Balanced Fund 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 Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
futures contract sale would create an obligation by the Managed Assets
Balanced Fund, as seller, to deliver the specific type of financial instrument
called for in the contract at a specific future time for a specified price. A
futures contract purchase would create an obligation by the Fund, as
purchaser, to take delivery of the specific type of financial instrument at a
specific future time at a specific price. The specific securities delivered or
taken, respectively, at settlement date, would not be determined until at or
near that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate
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amount of the specific type of financial instrument and the same delivery
date. If the price in the sale exceeds the price in the offsetting purchase,
the Fund is paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Fund pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Fund's entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Fund realizes a gain,
and if the purchase price exceeds the offsetting sale price, the 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 Fund 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. Non-Money Market Funds 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 Managed Assets Balanced
Fund would engage in an interest rate futures contract sale to maintain the
income advantage from continued holding of a long-term bond while endeavoring
to avoid part or all of the loss in market value that would otherwise
accompany a decline in long-term securities prices. Assume that the market
value of a certain security in the Fund tends to move in concert with the
futures market prices of long-term United States Treasury bonds ("Treasury
bonds"). The Investment Adviser wish 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 Investment Adviser believes
that, because of an anticipated rise in interest rates, the value will decline
to 95. The Fund might enter into futures contract sales of Treasury bonds for
an equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five-point loss in the market value of the
portfolio security would be offset by the five-point gain realized by closing
out the futures contract sale. Of course, the futures market price of Treasury
bonds might well decline to more than 93 or to less than 93 because of the
imperfect correlation between cash and futures prices mentioned below.
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The Investment Adviser could be wrong in their forecast of
interest rates and the equivalent futures market price could rise above 98. In
this case, the market value of the portfolio securities, including the
portfolio security being 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 Fund in the above
example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
Examples of Futures Contract Purchase. The Managed Assets
Balanced Fund 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 Fund's basic motivation would be
to maintain for a time the income advantage from investing in the short-term
securities; the Fund would be 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 Fund may purchase.
For example, assume that the market price of a long-term bond
that the Fund may purchase, currently yielding 10%, tends to move in concert
with futures market prices of Treasury bonds. The Investment Adviser wish 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 Investment
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 Fund might enter into futures contracts purchases of
Treasury bonds for an equivalent price of 98. At the same time, the Fund would
assign a pool of investments in short-term securities that are either maturing
in four months or earmarked for sale in four months, for purchase of the
long-term bond at an assumed market price of 100. Assume these short-term
securities are yielding 15%. If the market price of the long-term bond does
indeed rise from 100 to 105, the equivalent futures market price for Treasury
bonds might also rise from 98 to 103. In that case, the 5-point increase in
the price that the Fund pays for the long-term bond would be offset by the
5-point gain realized by closing out the futures contract purchase.
The Investment Adviser could be wrong in their forecast of
interest rates; long-term interest rates might rise to above 10%; and the
equivalent futures market price could fall below 98. If short-term rates at
the same time fall to 10% or below, it is possible that the Fund would
continue with its purchase program for long-term bonds. The market price of
available long-term bonds would have decreased. The benefit of this price
decrease,
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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 Fund would discontinue its purchase program for
long-term bonds. The yield on short-term securities in the portfolio,
including those originally in the pool assigned to the particular long-term
bond, would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing
out the futures contract purchase.
In each transaction, expenses would also be incurred.
II. Index Futures Contracts
A stock or bond index assigns relative values to the stocks or
bonds included in the index and the index fluctuates with changes in the
market values of the stocks or bonds included. Some stock index futures
contracts are based on broad market indexes, such as the Standard & Poor's 500
or the New York Stock Exchange Composite Index. In contrast, certain exchanges
offer futures contracts on narrower market indexes, such as the Standard &
Poor's 100 or indexes based on an industry or market segment, such as oil and
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 Managed Assets Balanced, Growth and Value, Mid-Cap
Opportunity and Growth Funds 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 Fund 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 Funds may purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Funds may purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Funds may utilize index futures contracts in
anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Fund may also sell futures contracts in connection with
this strategy, in order to 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.
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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 Fund had entered into an anticipatory purchase
hedge, or market value increased and the Fund had hedged its stock portfolio,
the results of the Fund's transactions in stock index futures would be as set
forth below.
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ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
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III. Margin Payments
Unlike when a Fund purchases or sells a security, no price is
paid or received by the Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Fund's Custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the 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 Fund has purchased a futures contract and the price of the
contract has risen in response to a rise in the underlying instruments, that
position will have increased in value and the Fund will be entitled to receive
from the broker a variation margin payment equal to that increase in value.
Conversely, where a Fund has purchased a futures contract and the price of the
future contract has declined in response to a decrease in the underlying
instruments, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, the Investment 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 Fund's position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the
Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by
a Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the 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
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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 Investment Adviser. Conversely, a Fund may buy or sell
fewer futures contracts if the volatility over a particular time period of the
prices of the securities being hedged is less than the volatility over such
time period of the futures contract being used, or if otherwise deemed to be
appropriate by the Investment Adviser. It is also possible that, where a
Fund has sold futures to hedge its portfolio against a decline in the market,
the market may advance and the value of securities held by the Fund may
decline. If this occurred, the Fund would lose money on the future and also
experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase
in the price of securities before a Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead; if the 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 Fund will realize a loss on
the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by a
Fund, an amount of cash and cash equivalents, equal to the market value of the
futures contracts (or options), will be deposited in a segregated account with
the Fund's Custodian and/or in a margin account with a broker to collateralize
the position and thereby 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,
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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
Fund intends to purchase or sell futures only on exchanges or boards of trade
where there appear to be active secondary markets, there is no assurance that
a liquid secondary market on any exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures investment position, and in the event of adverse
price movements, a Fund would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have
been used to hedge portfolio securities, such securities will not be sold
until the futures contract can be terminated. In such circumstances, an
increase in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is
no guarantee that the price of the securities will in fact correlate with the
price movements in the futures contract and thus provide an offset on a
futures contract.
Further, it should be noted that the liquidity of a secondary
market in a futures contract may be adversely affected by "daily price
fluctuation limits" established by commodity exchanges which limit the amount
of fluctuation in a futures contract price during a single trading day. Once
the daily limit has been reached in the contract, no trades may be entered
into at a price beyond the limit, thus preventing the liquidation of open
futures positions.
Successful use of futures by a Fund is also subject to the
Investment Adviser's ability to predict correctly movements in the direction
of the market. For example, if a Fund has hedged against the possibility of a
decline in the market adversely affecting securities held in its portfolio and
securities prices increase instead, the Fund will lose part or all of the
benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
V. Options on Futures Contracts
The Managed Assets Balanced, Growth and Value, Mid-Cap
Opportunity and Growth Funds 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
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difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer,
of an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing, an option of the same
series, at which time the person entering into the closing transaction will
realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of
the securities being hedged, an option may or may not be less risky than
ownership of the futures contract or such securities. In general, the market
prices of options can be expected to be more volatile than the market prices
on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). Although permitted by their fundamental investment policies, the Funds
do not currently intend to write futures options, and will not do so in the
future absent any necessary regulatory approvals.
VI. Accounting and Tax Treatment
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by a Fund at the close of the
Fund's taxable year will be treated for federal income tax purposes as sold
for their fair market value on the last business day of such year, a process
known as "mark-to-market." Forty percent of any gain or loss resulting from
such constructive sale will be treated as short-term capital gain or loss and
60% of such gain or loss will be treated as long-term capital gain or loss
without regard to the length of time the Fund holds the futures contract ("the
40%-60% rule"). The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale or other disposition of those futures contracts will
be adjusted to reflect any capital gain or loss taken into account by the Fund
in a prior year as a result of the constructive sale of the contracts. With
respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund, losses as to such contracts to sell will
be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof
which exceeds the unrecognized gain (if any) with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which will also be applicable, the holding period of the securities forming
part of the straddle will (if they
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have not been held for the long-term holding period) be deemed not to begin
prior to termination of the straddle. With respect to certain futures
contracts, deductions for interest and carrying charges will not be allowed.
Notwithstanding the rules described above, with respect to futures contracts
to sell which are properly identified as such, a Fund may make an election
which will exempt (in whole or in part) those identified futures contracts
from being treated for federal income tax purposes as sold on the last
business day of the Fund's taxable year, but gains and losses will be subject
to such short sales, wash sales, loss deferral rules and the requirement to
capitalize interest and carrying charges. Under temporary regulations, a Fund
would be allowed (in lieu of the foregoing) to elect either (1) to offset
gains or losses from portions which are part of a mixed straddle by separately
identifying each mixed straddle to which such treatment applies, or (2) to
establish a mixed straddle account for which gains and losses would be
recognized and offset on a periodic basis during the taxable year. Under
either election, the 40%-60% rule will apply to the net gain or loss
attributable to the futures contracts, but in the case of a mixed straddle
account election, not more than 50% of any net gain may be treated as
long-term and no more than 40% of any net loss may be treated as short-term.
Options on futures generally receive federal tax treatment similar to that
described above.
Certain foreign currency contracts entered into by a Fund may be
subject to the "mark-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.
Some of the Funds' investments may be subject to special rules
which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar.
The types of transactions covered by the special rules include the following:
(1) the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations,
preferred stock); (2) the accruing of certain trade receivables and payables;
and (3) the entering into or acquisition of any forward contract, futures
contract, option or similar financial instrument. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
B-12
<PAGE>
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their fair market value at year-end under the
mark-to-market rules, unless an election is made to have such currency rules
apply. With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
a part of a straddle. In accordance with Treasury regulations, certain
transactions that are part of a "section 988 hedging transaction" (as defined
in the Code and the Treasury regulations) may be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
"Section 988 hedging transactions" are not subject to the mark-to-market or
loss deferral rules under the Code. Gain or loss attributable to the foreign
currency component of transactions engaged in by a Fund which are not subject
to the special currency rules (such as foreign equity investments other than
certain preferred stocks) will be treated as capital gain or loss and will not
be segregated from the gain or loss on the underlying transaction.
As described more fully in "Additional Information Concerning
Taxes", a regulated investment company must derive less than 30% of its gross
income from gains realized on the sale or other disposition of securities and
certain other investments held for less than three months. With respect to
futures contracts and other financial instruments subject to the
mark-to-market rules, the Internal Revenue Service has ruled in private letter
rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale
under the mark-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
mark-to-market) and less than three months have elapsed between the date the
contract or instrument is acquired and the termination date. In determining
whether the 30% test is met for a taxable year, increases and decreases in the
value of each Fund's futures contracts and other investments that qualify as
part of a "designated hedge," as defined in the Code, may be netted.
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>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1996
(Unaudited)
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 ......................................... $13,478,266 $4,812,908 $5,462,219 $6,922,938 $1,272,856
=========== ========== ========== ========== ==========
At value (Note 2) ....................... ...... $14,281,433 $5,291,452 $6,150,440 $7,879,928 $1,279,748
Cash ................................................ -- -- -- -- --
Receivable for securities sold ...................... 12,109 12,109 -- -- --
Receivable for shares purchased ..................... 8,683 15,764 8,923 13,353 --
Income receivable ................................... 74,490 8,486 5,928 7,717 5,668
Deferred organization costs, net (Note 2) ........... 22,196 22,196 22,196 22,196 22,196
Prepaids and other assets ........................... 24,372 11,508 12,247 13,892 10,264
----------- ---------- ---------- ---------- ----------
TOTAL ASSETS .................................. 14,423,283 5,361,515 6,199,734 7,937,086 1,317,876
----------- ---------- ---------- ---------- ----------
LIABILITIES:
Payable for securities purchased .................... 101,755 -- 17,535 -- --
Accrued investment advisory fees .................... 8,599 3,238 3,773 4,839 483
Accrued custodial fees .............................. 3,114 2,743 2,054 1,202 437
Dividends payable ................................... -- -- -- -- 521
Other payables and accrued expenses ................. 489 372 375 375 374
TOTAL LIABILITIES ............................. 113,957 6,353 23,737 6,416 1,815
----------- ---------- ---------- ---------- ----------
NET ASSETS .................................... $14,309,326 $5,355,162 $6,175,997 $7,930,670 $1,316,061
=========== ========== ========== ========== ==========
Net assets consist of:
Capital shares (unlimited number of shares
authorized, par value $.10 per share) ........... $ 124,257 $ 42,772 $ 50,792 $ 65,158 $ 131,606
Additional paid-in capital .......................... 13,115,191 4,644,208 5,387,488 6,878,351 1,184,455
Accumulated undistributed net investment income ..... (17,817) 2,235 (173) 509 --
Accumulated undistributed net realized gains ........ 284,528 187,403 49,669 29,662 --
Net unrealized appreciation on investments .......... 803,167 478,544 688,221 956,990 --
----------- ---------- ---------- ---------- ----------
TOTAL NET ASSETS .............................. $14,309,326 $5,355,162 $6,175,997 $7,930,670 $1,316,061
=========== ========== ========== ========== ==========
Shares of capital stock outstanding ................. 1,242,567 427,723 507,923 651,570 1,316,061
=========== ========== ========== ========== ==========
Net asset value and redemption price per share ...... $ 11.52 $ 12.52 $ 12.16 $ 12.17 $ 1.00
=========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-24
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1996
(Unaudited)
BALANCED GROWTH/VALUE OPPORTUNITY CAPITAL GROWTH MONEY MARKET
FUND FUND FUND FUND FUND
--------- ------------ ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (Note 2)
Interest .......................................... $210,899 $ 5,864 $ 5,928 $ 7,462 $ 33,301
Dividends ......................................... 60,670 43,714 24,408 39,545 --
-------- -------- -------- -------- --------
TOTAL INVESTMENT INCOME ....................... 271,569 49,578 30,336 47,007 33,301
EXPENSES (Notes 2, 3 and 5):
Investment advisory fee ........................... 47,917 17,304 20,865 27,183 2,820
Professional fees ................................. 11,742 11,742 11,742 11,742 11,704
Custodial fee ..................................... 23,107 13,775 15,827 6,799 2,907
Transfer and dividend disbursing agent fees ....... 2,224 2,208 2,227 2,224 2,194
Amortization of deferred organization costs ....... 2,959 2,959 2,959 2,959 2,959
Marketing expense ................................. 2,660 2,661 2,660 2,660 2,660
Registration, filing fees and other expenses ...... 1,715 1,845 1,935 985 666
Less: Expense reimbursement ....................... (38,110) (32,928) (34,605) (13,720) (22,778)
-------- -------- -------- -------- --------
NET EXPENSES .................................... 54,214 19,566 23,610 40,832 3,132
-------- -------- -------- -------- --------
NET INVESTMENT INCOME ............................... 217,355 30,012 6,726 6,175 30,169
-------- -------- -------- -------- --------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gains ................................ 232,512 155,006 86,963 25,723 --
Net change in unrealized appreciation on
investments ..................................... 49,847 168,379 452,716 445,672 --
-------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 282,359 323,385 539,679 471,395 --
-------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS FROM OPERATIONS .......... $499,714 $353,397 $546,405 $477,570 $ 30,169
======== ======== ======== ======== ========
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-25
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
BALANCED FUND GROWTH/VALUE FUND OPPORTUNITY FUND
------------------------------ ------------------------------ ------------------------------
Six Months Six Months Six Months
Ended Ended Ended
June 30, 1996 Year Ended June 30, 1996 Year Ended June 30, 1996 Year Ended
(Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995
------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment
income ........... $ 217,355 $ 194,591 $ 30,012 $ 29,537 $ 6,726 $ 14,190
Net realized gains
(losses) ......... 232,512 52,016 155,006 35,828 86,963 (36,276)
Net change in
unrealized
appreciation on
investments ...... 49,847 753,320 168,379 310,165 452,716 235,505
----------- ----------- ---------- ---------- ---------- ----------
Net increase in
net assets from
operations ..... 499,714 999,927 353,397 375,530 546,405 213,419
----------- ----------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO
SHAREHOLDERS (Note 2):
From net investment
income ........... (236,800) (192,963) (27,799) (29,515) (6,942) (14,147)
From realized gains -- -- -- (3,431) -- --
In excess of
realized gains ... -- -- -- -- -- (1,018)
----------- ----------- ---------- ---------- ---------- ----------
Total
distributions .. (236,800) (192,963) (27,799) (32,946) (6,942) (15,165)
----------- ----------- ---------- ---------- ---------- ----------
FROM CAPITAL SHARE
TRANSACTIONS:
Proceeds from shares
sold ............. 2,809,356 10,294,774 1,463,753 3,508,134 861,170 4,792,328
Net asset value of
shares issued in
reinvestment of
distributions to
shareholders ..... 236,800 192,963 27,799 32,946 6,942 15,165
----------- ----------- ---------- ---------- ---------- ----------
3,046,156 10,487,737 1,491,552 3,541,080 868,112 4,807,493
Less: payments for
shares redeemed .. (210,620) (83,825) (215,679) (129,973) (203,943) (33,382)
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net
assets from
capital share
transactions ..... 2,835,536 10,403,912 1,275,873 3,411,107 664,169 4,774,111
----------- ----------- ---------- ---------- ---------- ----------
NET INCREASE IN NET
ASSETS .............. 3,098,450 11,210,876 1,601,471 3,753,691 1,203,632 4,972,365
NET ASSETS:
Beginning of period 11,210,876 -- 3,753,691 -- 4,972,365 --
----------- ----------- ---------- ---------- ---------- ----------
End of period ...... $14,309,326 $11,210,876 $5,355,162 $3,753,691 $6,175,997 $4,972,365
=========== =========== ========== ========== ========== ==========
CAPITAL SHARE
TRANSACTIONS:
Shares sold ........ 245,363 985,257 120,598 331,700 73,831 452,879
Shares issued in
reinvestment of
distributions to
shareholders ..... 20,617 17,604 2,251 2,942 577 1,398
----------- ----------- ---------- ---------- ---------- ----------
265,980 1,002,861 122,849 334,642 74,408 454,277
Less: shares
redeemed ......... (18,549) (7,725) (17,928) (11,840) (17,610) (3,152)
----------- ----------- ---------- ---------- ---------- ----------
NET INCREASE IN SHARES
OUTSTANDING ........ 247,431 995,136 104,921 322,802 56,798 451,125
CAPITAL SHARES:
Beginning of period 995,136 -- 322,802 ---- 451,125 --
----------- ----------- ---------- ---------- ---------- ----------
End of period ...... 1,242,567 995,136 427,723 322,802 507,923 451,125
=========== =========== ========== ========== ========== ==========
<PAGE>
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-26
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
CAPITAL GROWTH FUND MONEY MARKET FUND
----------------------------- -----------------------------
Six Months Six Months
Ended Ended
June 30, 1996 Year Ended June 30, 1996 Year Ended
(Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income ............................. $ 6,175 $ 22,283 $ 30,169 $ 32,000
Net realized gains (losses) ....................... 25,723 8,122 -- --
Net change in unrealized appreciation on
investments ...................................... 445,672 511,318 -- --
---------- ---------- ---------- ----------
Net increase in net assets from operations ...... 477,570 541,723 30,169 32,000
---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS (Note 2):
From net investment income ........................ (5,716) (22,233) (30,169) (32,000)
From realized gains ............................... -- (4,183) -- --
In excess of realized gains ....................... -- -- -- --
---------- ---------- ---------- ----------
Total distributions ............................. (5,716) (26,416) (30,169) (32,000)
---------- ---------- ---------- ----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ......................... 1,163,203 6,001,443 202,058 1,168,068
Net asset value of shares issued in reinvestment of
distributions to shareholders ................... 5,716 26,416 29,648 31,505
---------- ---------- ---------- ----------
1,168,919 6,027,859 231,706 1,199,573
Less: payments for shares redeemed ................ (145,039) (108,230) (91,537) (23,681)
---------- ---------- ---------- ----------
Net increase in net assets from capital share
transactions ................................ 1,023,880 5,919,629 140,169 1,175,892
---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS .......................... 1,495,734 6,434,936 140,169 1,175,892
NET ASSETS:
Beginning of period ............................... 6,434,936 -- 1,175,892 --
---------- ---------- ---------- ----------
End of period ..................................... $7,930,670 $6,434,936 $1,316,061 $1,175,892
========== ========== ========== ==========
CAPITAL SHARE TRANSACTIONS:
Shares sold ....................................... 97,374 573,282 202,058 1,168,068
Shares issued in reinvestment of distributions to
shareholders .................................... 471 2,411 29,648 31,505
---------- ---------- ---------- ----------
97,845 575,693 231,706 1,199,573
Less: shares redeemed ............................. (12,112) (9,856) (91,537) (23,681)
---------- ---------- ---------- ----------
NET INCREASE IN SHARES OUTSTANDING .................. 85,733 565,837 140,169 1,175,892
CAPITAL SHARES:
Beginning of period ............................... 565,837 ---- 1,175,892 --
---------- ---------- ---------- ----------
End of period ..................................... 651,570 565,837 1,316,061 1,175,892
========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</TABLE>
FS-27
<PAGE>
THE WOODWARD VARIABLE ANNUITY
BALANCED FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 7.52%
Salomon Brothers, Revolving Repurchase Agreement,
5.53%, 7/1/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/99
through 8/15/00, all held at Chemical Bank) ..... $1,073,427 $1,073,427
----------
(Cost $1,073,427)
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 37.82%
U.S. Treasury Securities -- 19.94%
Principal Strip from U.S. Treasury Securities
due:
8/15/99 ..................................... 200,000 164,373
5/15/17 ..................................... 90,000 20,479
8/15/17 ..................................... 320,000 71,453
11/15/18 .................................... 100,000 20,436
Strip from U.S. Treasury Securities due:
5/15/13 ..................................... 250,000 76,228
2/15/14 ..................................... 200,000 57,742
U.S. Treasury Bonds:
12.750%, 11/15/10 ........................... 450,000 631,899
10.375%, 11/15/12 ........................... 150,000 190,429
8.750%, 5/15/17 ............................. 50,000 59,344
U.S. Treasury Notes:
6.125%, 7/31/96 ............................. 325,000 325,253
7.875%, 1/15/98 ............................. 120,000 123,224
5.250%, 7/31/98 ............................. 350,000 343,931
7.750%, 11/30/99 ............................ 200,000 208,250
6.375%, 8/15/02 ............................. 100,000 99,094
6.250%, 2/15/03 ............................. 200,000 196,437
7.250%, 5/15/04 ............................. 250,000 258,906
----------
(Cost $2,834,477) 2,847,478
----------
Agency Obligations -- 17.88%
Federal Home Loan Mortgage Corp. Gtd. Multi-Class
Mortgage Participation Ctfs.:
Series 11 Class D, 9.500%, 7/15/19 .......... 50,000 54,311
Series 22 Class C, 9.500%, 4/15/20 .......... 13,811 15,074
Series 47 Class F, 10.000%, 6/15/20 ......... 100,000 110,127
Series 84 Class F, 9.200%, 10/15/20 ......... 50,000 53,132
Series 109 Class I, 9.100%, 1/15/21 ......... 132,000 141,154
Series 1084 Class F, AR, 5/15/21 ............ 100,000 101,929
Series 1084 Class S, IF, 5/15/21 ............ 70,000 80,500
Series 1297 Class H, 7.500%, 1/15/20 ........ 40,711 39,595
Series 1360 Class PK, 10.000%, 12/15/20 ..... 25,000 28,018
Series 1378 Class H, 10.000%, 1/15/21 ....... 50,000 55,861
Series 1378 Class JZ, 7.500%, 11/15/21 ...... 65,770 60,592
Series 1483 Class E, 6.500%, 2/15/20 ........ 40,000 38,350
Series 1489 Class L, 5.500%, 4/15/08 ........ 77,825 73,857
Series 1491 Class MA, 6.750%, 11/15/22 ...... 119,740 109,765
</TABLE>
FS-28
<PAGE>
<TABLE>
<S> <C> <C>
Series 1531 Class K, 6.000%, 4/15/08 ........ 86,704 81,073
Series 1585 Class NB, IF, 9/15/23 ........... 24,166 16,523
Series 1586 Class A, 6.000%, 9/15/08 ........ 33,523 31,068
Series 1604 Class SE, IF, 11/15/08 .......... 46,758 33,783
Series 1606 Class LD, IF, 5/15/08 ........... 30,763 17,323
Series 1686 Class A, 5.000%, 2/15/24 ........ 46,224 37,207
Series 1686 Class SL, IF, 2/15/24 ........... 46,224 33,628
Series 1757 Class A, 9.500%, 5/15/23 ........ 80,478 84,905
Series 1796 Class A, IF, 2/15/09 ............ 25,000 16,500
Series 1825 Class C, 5.799%, 12/15/23 ....... 50,000 42,641
Series 1854 Class C, IF, 4/15/08 ............ 75,000 42,070
Federal Housing Administration Greystone 1996-2
Putable Pool, 7.430%, 11/1/22 ................. 99,824 99,923
Federal National Mortgage Assn. Pass Thru
Securities:
Guaranteed Remic Trust:
1989 Class 69-G, 7.600%, 10/25/19 ........... 50,000 48,578
1990 Class 1-D, 8.800%, 1/25/20 ............. 50,000 52,088
1990 Class 120-H, 9.000%, 10/25/20 .......... 100,000 106,821
1990 Class 143-J, 8.750%, 12/25/20 .......... 75,000 78,011
1991 Class 144-PZ, 8.500%, 6/25/21 .......... 74,239 76,757
1993 Class 32-K, 6.000%, 3/25/23 ............ 35,852 30,555
1993 Class 139-S, IF, 8/25/23 ............... 86,582 45,239
1993 Class 155-LA, 6.500%, 5/25/23 .......... 43,397 42,012
1993 Class 190-SE, IF, 10/25/08 ............. 49,847 34,503
1993 Class 214-L, 6.000%, 12/25/08 .......... 78,750 74,198
1993 Class 223-FB, IF, 12/25/23 ............. 37,914 36,587
1993 Class 223-SB, IF, 12/25/23 ............. 14,582 10,098
1994 Class 19-C, 5.000%, 1/25/24 ............ 41,644 36,329
1995 Class 13-B, 6.500%, 3/25/09 ............ 93,986 88,679
1996 Class 20-L, Zero Coupon, 9/25/08 ....... 30,000 16,003
1992-G Class 42-Z, 7.000%, 7/25/22 .......... 65,719 59,239
1992-G Class 59-C, 6.000%, 12/25/21 ......... 50,000 46,042
1994-G Class 13-ZB, 7.000%, 11/17/24 ........ 55,842 48,152
Government National Mortgage Assn. Pass Thru
Ctfs.
Guaranteed Remic Series 1994, Class SA, IF,
10/16/22 .................................... 302,600 17,536
Government National Mortgage Assn. Pass Thru
Pool:
#297628, 8.000%, 9/15/22 .................... 35,646 36,175
#313110, 7.500%, 11/15/22 ................... 72,152 71,697
---------
(Cost $2,599,208) 2,554,208
---------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS ........ 5,401,686
---------
(Cost $5,433,685)
</TABLE>
FS-29
<PAGE>
<TABLE>
<S> <C> <C>
CORPORATE BONDS AND NOTES -- 2.12%
Finance -- 2.12%
Ford Credit Grantor Trust Asset Backed Ctf.
Series 1994-A, Class A, 6.350%, 5/15/99 ....... 36,884 37,068
Merrill Lynch MBS Inc. Project Pass Thru Ctf.
Series 144-S FHA Insured, 7.430%, 7/25/24 ..... 91,353 87,698
Nationsbank Auto Grantor Trust Asset Backed Ctf.
Series 1995-A, Class A, 5.85%, 6/15/02 ........ 37,373 37,320
Navistar Financial Corp. Owner Trust Series
1995-1, Class A2, 6.550%, 11/20/01 ............ 40,005 40,631
World Omni Automobile Lease Trust Asset Backed
Pass Thru Ctf., Series 1995-A, Class A, 6.050%,
11/25/01 ...................................... 100,000 100,163
--------
TOTAL CORPORATE BONDS AND NOTES ..................... 302,880
--------
(COST $302,245)
Shares
------
COMMON STOCKS -- 52.54%
Aerospace -- 1.16% ................................
Boeing Co. ...................................... 1,900 165,537
--------
Air Transport -- 0.10%
Air Express International Corp. ................. 500 14,125
--------
Apparel -- 1.07%
Nine West Group, Inc. * ......................... 450 23,006
Russell Corp. ................................... 4,700 129,838
--------
152,844
--------
Banks -- 3.35%
Barnett Banks, Inc. ............................. 2,100 128,100
Charter One Financial, Inc. ..................... 950 33,131
First Tennessee National Corp. .................. 700 21,438
Fleet Financial Group, Inc. ..................... 4,100 178,350
Norwest Corp. ................................... 2,700 94,162
TCF Financial Corp. ............................. 700 23,275
--------
478,456
--------
Business Machines -- 1.18%
Autodesk, Inc. .................................. 2,300 68,712
Compaq Computer Corp. * ......................... 1,100 54,175
Diebold, Inc. ................................... 450 21,713
InterVoice, Inc. * .............................. 300 5,963
Xilinx, Inc. * .................................. 550 17,462
--------
168,025
--------
Business Services -- 5.48%
American Management System, Inc. * .............. 675 19,744
CDI Corp. * ..................................... 500 16,875
Deluxe Corp. .................................... 3,800 134,900
DST Systems, Inc. * ............................. 300 9,600
</TABLE>
FS-30
<PAGE>
<TABLE>
<S> <C> <C>
Dun & Bradstreet Corp. .......................... 2,400 150,000
Electronic Date Systems Corp. ................... 3,400 182,750
G & K Services, Inc. Class A .................... 600 17,100
Interpublic Group of Companies, Inc. ............ 1,300 60,938
Omnicom Group, Inc. ............................. 400 18,600
SunGard Data Systems, Inc. * .................... 700 28,087
WMX Technologies, Inc. .......................... 3,900 127,725
Zilog, Inc. * ................................... 700 16,800
--------
783,119
--------
Chemicals -- 2.44%
Dow Chemical Co. ................................ 1,000 76,000
Great Lakes Chemical Corp. ...................... 1,700 105,825
RPM, Inc. ....................................... 700 10,937
Sigma-Aldrich Corp. ............................. 2,900 155,150
--------
347,912
--------
Construction -- 2.51%
Crane Co. ....................................... 800 32,800
Masco Corp. ..................................... 4,100 124,025
York International Corp. ........................ 3,900 201,825
--------
358,650
--------
Consumer Durables -- 1.26%
Durakon Industries, Inc. * ...................... 400 5,850
Invacare Corp. .................................. 200 4,700
Leggett & Platt, Inc. ........................... 900 24,975
Rubbermaid, Inc. ................................ 5,300 144,425
--------
179,950
--------
Containers -- 1.08%
AptarGroup, Inc. ................................ 500 15,125
Crown Cork & Seal Co., Inc. * ................... 3,100 139,500
--------
154,625
--------
Drugs and Medicine -- 3.83%
Abbott Laboratories Corp. ....................... 2,800 121,800
Bristol-Myers Squibb Co. ........................ 1,700 153,000
Community Health System, Inc. ................... 200 10,350
Health Care & Retirement Corp. * ................ 600 14,250
Scherer (R.P.) Corp. * .......................... 150 6,806
Schering-Plough Corp. ........................... 3,200 200,800
Sybron International Corp. * .................... 900 22,500
Vivra, Inc. * ................................... 550 18,081
--------
547,587
--------
Electronics -- 2.03%
Belden, Inc. .................................... 1,050 31,500
Dynatech Corp. * ................................ 800 26,000
</TABLE>
FS-31
<PAGE>
<TABLE>
<S> <C> <C>
Hewlett Packard Co. ............................. 500 49,812
Intel Corp. ..................................... 800 58,750
Lucent Technology, Inc. ......................... 900 34,087
Microchip Technology, Inc. ...................... 800 19,800
Molex, Inc. Class A Non-Voting .................. 450 13,219
Motorola, Inc. .................................. 900 56,588
--------
289,756
--------
Energy and Utilities -- 3.12%
Enron Corp. ..................................... 3,300 134,888
MCN Corp. ....................................... 6,900 168,187
Pinnacle West Capital Corp. ..................... 4,700 142,762
--------
445,837
--------
Energy Raw Materials -- 1.87%
Apache Corp. .................................... 900 29,588
Noble Affiliates, Inc. .......................... 700 26,425
Schlumberger Ltd. ............................... 2,300 193,775
Southwestern Energy Co. ......................... 1,200 16,950
--------
266,738
--------
Food and Agriculture -- 2.83%
ConAgra, Inc. ................................... 2,200 99,825
CPC International, Inc. ......................... 1,800 129,600
Sysco Corp. ..................................... 4,800 164,400
Universal Foods Corp. ........................... 300 11,063
--------
404,888
--------
Insurance -- 2.30%
American International Group, Inc. .............. 900 88,763
Capital Re Corp. ................................ 600 22,050
Chubb Corp. ..................................... 3,800 189,525
Transatlantic Holdings, Inc. .................... 400 28,050
--------
328,388
--------
International Oil -- 0.75%
Royal Dutch Petroleum Co., N.Y. Registry ........ 700 107,625
--------
Liquor -- 1.10%
Anheuser Busch Companies, Inc. .................. 2,100 157,500
--------
Media -- 2.37%
Banta Corp. ..................................... 850 21,462
Gannett Co., Inc. ............................... 2,200 155,650
Washington Post Co. Class B ..................... 500 162,000
--------
339,112
--------
Miscellaneous and Conglomerates -- 1.95%
ABC Rail Products Corp. * ....................... 400 8,650
Culligan Water Technologies, Inc. * ............. 400 15,200
DENTSPLY International, Inc. .................... 450 19,125
</TABLE>
FS-32
<PAGE>
<TABLE>
<S> <C> <C>
Greenfield Industries, Inc. ..................... 750 24,750
Health Management Associates, Inc. Class A * .... 675 13,669
Duracell International, Inc. .................... 3,600 155,250
Littlefuse, Inc. * .............................. 500 18,750
Wolverine Tube, Inc. * .......................... 650 22,750
--------
278,144
--------
Miscellaneous Finance -- 1.27%
CMAC Investment Corp. ........................... 350 20,125
Edwards (A.G.), Inc. ............................ 800 21,700
Everest Reinsurance Holdings, Inc. .............. 1,000 25,875
Executive Risk, Inc. ............................ 600 22,950
FINOVA Group, Inc. .............................. 750 36,562
Idex Corp. ...................................... 600 22,800
PMI Group, Inc. ................................. 450 19,125
Scotsman Industries, Inc. ....................... 600 12,075
--------
181,212
--------
Motor Vehicles -- 1.17%
Borg Warner Automotive, Inc. .................... 400 15,800
Excel Industries, Inc. .......................... 300 3,750
General Motors Corp. ............................ 2,100 109,988
Harley-Davidson, Inc. ........................... 450 18,506
Myers Industries, Inc. .......................... 630 11,734
Superior Industries International ............... 250 6,625
--------
166,403
--------
Non-Durables and Entertainment -- 0.77%
Cracker Barrel Old Country Store, Inc. .......... 3,900 94,575
Lancaster Colony Corp. .......................... 400 14,950
---------
109,525
---------
Non-Ferrous Metals -- 0.09%
DT Industries, Inc. ............................. 700 12,775
---------
Producer Goods -- 2.11%
General Electric Co. ............................ 1,200 103,800
Hubbell, Inc., Class B .......................... 350 23,187
Juno Lighting, Inc. ............................. 1,200 20,400
Stewart & Stevenson Services, Inc. .............. 5,100 116,025
Teleflex, Inc. .................................. 400 19,100
Trimas Corp. .................................... 800 18,700
---------
301,212
---------
Retail -- 0.98%
Cato Corp. Class A .............................. 1,800 10,800
Kohls Corp. * ................................... 200 7,325
Proffitts, Inc. * ............................... 600 21,300
Talbots, Inc. *.................................. 450 14,569
Toys R Us *...................................... 3,000 85,500
---------
139,494
---------
</TABLE>
FS-33
<PAGE>
<TABLE>
<S> <C> <C>
Telephone -- 3.55%
AT&T Corp. ...................................... 3,100 192,200
Century Telephone Enterprises, Inc. ............. 4,000 127,500
MCI Communications Corp. ........................ 7,300 187,063
-----------
506,763
-----------
Travel and Recreation -- 0.15%
Callaway Golf Co. ............................... 650 21,613
-----------
Trucking and Freight -- 0.67%
Ryder System, Inc. .............................. 3,400 95,625
-----------
TOTAL COMMON STOCKS ................................. 7,503,440
-----------
(Cost $6,668,909)
TOTAL INVESTMENTS ................................... $14,281,433
===========
(Cost $13,478,266)
<FN>
* Non-income producing security.
</TABLE>
FS-34
<PAGE>
THE WOODWARD VARIABLE ANNUITY
BALANCED FUND
PORTFOLIO OF INVESTMENTS (Continued)
June 30, 1996
(Unaudited)
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 (IF) represent securities that pay interest at a rate that
increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these
securities are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. These securities are subject to accelerated principal paydowns as a
result of prepayments or refinancing of the underlying pool of mortgage
instruments. As a result, interest income may be reduced considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as
those associated with IO securities. Unlike IO's the owner also has a right to
receive a very small portion of principal. The high interest rate results from
taking interest payments from other classes in the REMIC Trust and allocating
them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion only
on an underlying pool of mortgage loans. The market value of these securities
is extremely volatile in response to changes in market interest rates. As
prepayments on the underlying mortgages of these securities increase, the
yield on these securities increases.
FS-35
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY
GROWTH/VALUE FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
(Unaudited)
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 1.45%
Salomon Brothers, Revolving Repurchase Agreement,
5.53%, 7/1/96 (secured by various U.S. Treasury
Strips with maturities ranging from 2/15/99
through 8/15/00, all held at Chemical Bank) ..... $76,646 $ 76,646
--------
(Cost $76,646)
Shares
------
COMMON STOCKS -- 98.55%
Aerospace -- 2.47%
Boeing Co. ...................................... 1,500 130,688
--------
Apparel -- 2.04%
Russell Corp. ................................... 3,900 107,738
--------
Banks -- 6.39%
Barnett Banks, Inc. ............................. 1,800 109,800
Fleet Financial Group, Inc. ..................... 3,400 147,900
Norwest Corp. ................................... 2,300 80,212
--------
337,912
--------
Business Machines -- 1.83%
Autodesk, Inc. .................................. 1,600 47,800
Compaq Computer Corp. ........................... 1,000 49,250
--------
97,050
--------
Business Services -- 10.30%
Deluxe Corp. .................................... 3,100 110,050
Dun & Bradstreet Corp. .......................... 2,000 125,000
Electronic Date Systems Corp. ................... 2,800 150,500
Interpublic Group of Companies, Inc. ............ 1,100 51,562
WMX Technologies, Inc. .......................... 3,300 108,075
--------
545,187
--------
Chemicals -- 5.37%
Dow Chemical Co. ................................ 900 68,400
Great Lakes Chemical Corp. ...................... 1,400 87,150
Sigma-Aldrich Corp. ............................. 2,400 128,400
--------
283,950
--------
Construction -- 5.17%
Masco Corp. ..................................... 3,400 102,850
York International Corp. ........................ 3,300 170,775
--------
273,625
--------
Consumer Durables -- 2.26%
Rubbermaid, Inc. ................................ 4,400 119,900
--------
Containers -- 2.21%
Crown Cork & Seal Co. Inc. * .................... 2,600 117,000
--------
</TABLE>
FS-36
<PAGE>
<TABLE>
<S> <C> <C>
Drugs and Medicine -- 7.64%
Abbott Laboratories Corp. ....................... 2,300 100,050
Bristol-Myers Squibb Co. ........................ 1,500 135,000
Schering-Plough Corp. ........................... 2,700 169,425
--------
404,475
--------
Electronics -- 3.06%
Hewlett Packard Co. ............................. 400 39,850
Intel Corp. ..................................... 700 51,406
Lucent Technology, Inc. ......................... 700 26,513
Motorola, Inc. .................................. 700 44,012
--------
161,781
--------
Energy and Utilities -- 7.03%
Enron Corp. ..................................... 2,800 114,450
MCN Corp. ....................................... 5,700 138,937
Pinnacle West Capital Corp. ..................... 3,900 118,463
--------
371,850
--------
Energy Raw Materials -- 3.02%
Schlumberger Ltd. ............................... 1,900 160,075
Food and Agriculture -- 6.17%
ConAgra, Inc. ................................... 1,800 81,675
CPC International, Inc. ......................... 1,500 108,000
Sysco Corp. ..................................... 4,000 137,000
--------
326,675
--------
Insurance -- 4.51%
American International Group, Inc. .............. 800 78,900
Chubb Corp. ..................................... 3,200 159,600
--------
238,500
--------
International Oil -- 1.74%
Royal Dutch Petroleum Co., N.Y. Registry ........ 600 92,250
--------
Liquor -- 2.55%
Anheuser-Busch Companies, Inc. .................. 1,800 135,000
--------
Media -- 4.86%
Gannett Co., Inc. ............................... 1,800 127,350
Washington Post Co. Class B ..................... 400 129,600
--------
256,950
--------
Miscellaneous & Conglomerates -- 2.45%
Duracell International, Inc. .................... 3,000 129,375
--------
Motor Vehicles -- 1.78%
General Motors Corp. ............................ 1,800 94,275
--------
Non-Durables and Entertainment -- 1.42%
Cracker Barrel Old Country Store, Inc. .......... 3,100 75,175
--------
</TABLE>
FS-37
<PAGE>
<TABLE>
<S> <C> <C>
Producer Goods -- 3.44% ...........................
General Electric Co. ............................ 1,000 86,500
Stewart & Stevenson Services, Inc. .............. 4,200 95,550
----------
182,050
----------
Retail -- 1.35%
Toys R Us Inc.* ................................. 2,500 71,250
----------
Telephone -- 8.00%
A T & T Corp. ................................... 2,600 161,200
Century Telephone Enterprises, Inc. ............. 3,400 108,375
MCI Communications Corp. ........................ 6,000 153,750
----------
423,325
----------
Trucking and Freight -- 1.49%
Ryder System, Inc. .............................. 2,800 78,750
----------
TOTAL COMMON STOCKS ................................. 5,214,806
----------
(Cost $4,736,262)
TOTAL INVESTMENTS ................................... $5,291,452
==========
(Cost $4,812,908)
<FN>
* Non-income producing security.
</TABLE>
FS-38
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY
OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
(Unaudited)
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 2.84%
Salomon Brothers, Revolving Repurchase
Agreement, 5.53%, 7/1/96 (secured by various
U.S. Treasury Strips with maturities ranging
from 2/15/99 through 8/15/00,
all held by Chemical Bank) ........................ $174,775 $174,775
--------
(Cost $174,775)
Shares
------
COMMON STOCKS -- 97.16%
Air Transport -- 1.15% ............................
Air Express International Corp. ................. 2,500 70,625
--------
Apparel -- 1.50% ................................
Nine West Group, Inc. * ......................... 1,800 92,025
--------
Banks -- 5.79% ....................................
Charter One Financial, Inc. ..................... 4,150 144,731
First Tennessee National Corp. .................. 3,200 98,000
TCF Financial Corp. ............................. 3,400 113,050
--------
355,781
--------
Business Machines -- 4.20%
Autodesk, Inc. .................................. 1,500 44,812
Diebold, Inc. ................................... 2,300 110,975
InterVoice, Inc. * .............................. 1,100 21,863
Xilinx, Inc. * .................................. 2,550 80,962
--------
258,612
--------
Business Services -- 9.72% ........................
American Management Systems, Inc. * ............. 3,500 102,375
CDI Corp. * ..................................... 2,500 84,375
DST Systems, Inc. * ............................. 1,000 32,000
G & K Services, Inc. Class A .................... 2,300 65,550
Omnicom Group, Inc. ............................. 2,100 97,650
SunGard Data Systems, Inc. * .................... 3,250 130,406
Zilog, Inc. * ................................... 3,550 85,200
--------
597,556
--------
Chemicals -- 0.87%
RPM, Inc. ....................................... 3,425 53,516
--------
Construction -- 2.63%
Crane Co. ....................................... 3,950 161,950
--------
Consumer Durables -- 2.82%
Durakon Industries, Inc. * ...................... 2,700 39,487
Invacare Corp. .................................. 1,100 25,850
Leggett & Platt, Inc. ........................... 3,900 108,225
--------
173,562
--------
Containers -- 1.48%
AptarGroup, Inc. ................................ 3,000 90,750
--------
</TABLE>
FS-39
<PAGE>
<TABLE>
<S> <C> <C>
Drugs and Medicine -- 5.80%
Community Health System, Inc. ................... 1,200 62,100
Health Care & Retirement Corp. * ................ 2,500 59,375
Scherer (R.P.) Corp. * .......................... 800 36,300
Sybron International Corp.* ..................... 4,200 105,000
Vivra, Inc. * ................................... 2,850 93,694
--------
356,469
--------
Electronics -- 6.75%
Belden, Inc. .................................... 5,000 150,000
Dynatech Corp. * ................................ 3,500 113,750
Microchip Technology, Inc. ...................... 3,600 89,100
Molex, Inc. Class A Non-Voting .................. 2,125 62,422
--------
415,272
--------
Energy Raw Materials -- 5.51%
Apache Corp. .................................... 4,300 141,363
Noble Affiliates, Inc. .......................... 3,100 117,025
Southwestern Energy Co. ......................... 5,700 80,512
--------
338,900
--------
Food and Agriculture -- 1.08%
Universal Foods Corp. ........................... 1,800 66,375
--------
Insurance -- 3.50%
Capital RE Corp. ................................ 2,700 99,225
Transatlantic Holdings, Inc. .................... 1,650 115,706
--------
214,931
--------
Media -- 1.68%
Banta Corp. ..................................... 4,100 103,525
--------
Miscellaneous and Conglomerates -- 9.90%
ABC Rail Products Corp. ......................... 2,100 45,412
Culligan Water Technologies, Inc. * ............. 1,800 68,400
DENTSPLY International, Inc. .................... 2,350 99,875
Greenfield Industries, Inc. ..................... 4,150 136,950
Health Management Associates, Inc. Class A * .... 2,775 56,194
Littlefuse, Inc. * .............................. 2,400 90,000
Wolverine Tube, Inc. * .......................... 3,200 112,000
--------
608,831
--------
Miscellaneous Finance -- 14.47%
CMAC Investment Corp. ........................... 1,900 109,250
Edwards (A.G.), Inc. ............................ 4,200 113,925
Everest Reinsurance Holdings, Inc. .............. 4,600 119,025
Executive Risk, Inc. ............................ 3,100 118,575
FINOVA Group, Inc. .............................. 3,350 163,313
Idex Corp. ...................................... 2,950 112,100
</TABLE>
FS-40
<PAGE>
<TABLE>
<S> <C> <C>
PMI Group, Inc. ................................. 2,250 95,625
Scotsman Industries, Inc. ....................... 2,900 58,362
----------
890,175
----------
Motor Vehicles -- 4.03%
Borg Warner Automotive .......................... 1,100 43,450
Excel Industries, Inc. .......................... 1,900 23,750
Harley-Davidson, Inc. ........................... 2,200 90,475
Myers Industries, Inc. .......................... 3,130 58,296
Superior Industries International ............... 1,200 31,800
----------
247,771
----------
Non-Durables and Entertainment -- 1.15%
Lancaster Colony Corp. .......................... 1,900 71,013
----------
Non-Ferrous Metals -- 1.07%
DT Industries, Inc. ............................. 3,600 65,700
----------
Producer Goods -- 6.11%
Hubbell, Inc. Class B ........................... 1,550 102,688
Juno Lighting, Inc. ............................. 5,800 98,600
Teleflex, Inc. .................................. 1,800 85,950
Trimas Corp. .................................... 3,800 88,825
----------
376,063
----------
Retail -- 4.33%
Cato Corp. Class A .............................. 8,500 51,000
Kohls Corp. * ................................... 1,200 43,950
Proffitts, Inc. ................................. 3,100 110,050
Talbots, Inc. ................................... 1,900 61,513
----------
266,513
----------
Travel and Recreation -- 1.62%
Callaway Golf Co. ............................... 3,000 99,750
----------
TOTAL COMMON STOCKS ................................. 5,975,665
----------
(Cost $5,287,444)
TOTAL INVESTMENTS ................................... $6,150,440
==========
(Cost $5,462,219)
<FN>
* Non-income producing security.
</TABLE>
FS-41
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY
CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
(Unaudited)
Description Face Amount Market Value
----------- ----------- ------------
<S> <C> <C>
TEMPORARY CASH INVESTMENT -- 3.48%
Salomon Brothers, Revolving Repurchase
Agreement, 5.53%, 7/1/96, (secured by various
U.S. Treasury Strips with maturities ranging
from 2/15/99 through 8/15/00,
all held at Chemical Bank) ...................... $274,081 $274,081
--------
(Cost $274,081)
Shares
------
COMMON STOCKS -- 96.52%
Banks -- 2.78%
Banc One Corp. .................................. 1,320 44,880
Norwest Corp. ................................... 5,000 174,375
--------
219,255
--------
Business Machines -- 7.26%
Electronic Data Systems Corp. ................... 3,500 188,125
Microsoft Corp. * ............................... 2,000 240,250
Silicon Graphics ................................ 6,000 144,000
-------
572,375
--------
Business Services -- 5.25%
Automatic Data Processing, Inc. ................. 2,800 108,150
Interpublic Group of Companies, Inc. ............ 4,000 187,500
WMX Technologies, Inc. .......................... 3,600 117,900
--------
413,550
--------
Chemicals -- 3.88%
Great Lakes Chemical Corp. ...................... 2,500 155,625
Sigma-Aldrich Corp. ............................. 2,800 149,800
--------
305,425
--------
Construction -- 5.12%
Fluor Corp. ..................................... 3,000 196,125
York International Corp. ........................ 4,000 207,000
--------
403,125
--------
Consumer Durables -- 1.94%
Newell Co. ...................................... 5,000 153,125
--------
Containers -- 1.71%
Crown Cork & Seal Co., Inc. * ................... 3,000 135,000
--------
Drugs and Medicine -- 16.78%
Columbia HCA Healthcare Corp. ................... 4,000 213,500
Johnson & Johnson ............................... 4,400 217,800
Medtronic, Inc. ................................. 2,000 112,000
Mylan Laboratories, Inc. ........................ 6,000 103,500
Pall Corp. ...................................... 6,000 144,750
Smithkline Beecham PLC ADR ...................... 4,000 217,500
</TABLE>
FS-42
<PAGE>
<TABLE>
<S> <C> <C>
Stryker Corp. ................................... 6,000 136,500
United Healthcare Corp. ......................... 3,500 176,750
----------
1,322,300
----------
Electronics -- 7.54%
AMP, Inc. ....................................... 2,000 80,250
Hewlett Packard Co. ............................. 2,000 199,250
Intel Corp. ..................................... 3,300 242,344
Lucent Technology, Inc. ......................... 1,900 71,962
----------
593,806
----------
Energy and Utilities -- 2.33%
Enron Corp. ..................................... 4,500 183,937
----------
Energy Raw Materials -- 3.66%
Schlumberger Ltd. ............................... 1,900 160,075
Western Atlas, Inc. * ........................... 2,200 128,150
----------
288,225
----------
Food and Agriculture -- 2.47%
PepsiCo, Inc. ................................... 5,500 194,563
----------
Insurance -- 8.65%
AFLAC, Inc. ..................................... 6,000 179,250
American International Group, Inc. .............. 2,300 226,838
Chubb Corp. ..................................... 2,400 119,700
UNUM Corp. ...................................... 2,500 155,625
----------
681,413
----------
Non-Durables and Entertainment -- 5.07%
Cracker Barrel Old Country Store, Inc. .......... 7,000 169,750
Service Corp International ...................... 4,000 230,000
----------
399,750
----------
Producer Goods -- 3.28%
Illinois Tool Works, Inc. ....................... 1,600 108,200
Ivax Corp. ...................................... 3,000 47,625
Stewart & Stevenson Services, Inc. .............. 4,500 102,375
----------
258,200
----------
Retail -- 5.66%
Albertsons, Inc. ................................ 2,000 82,750
Home Depot, Inc. ................................ 4,000 216,000
Walgreen Co. .................................... 4,400 147,400
----------
446,150
----------
Telephone -- 3.43%
AirTouch Communications, Inc. * ................. 5,500 155,375
MCI Communications Corp. ........................ 4,500 115,312
----------
270,687
----------
</TABLE>
FS-43
<PAGE>
<TABLE>
<S> <C> <C>
Tobacco -- 3.07%
Philip Morris Companies, Inc. ................... 1,500 156,000
UST, Inc. ....................................... 2,500 85,625
----------
241,625
----------
Travel and Recreation -- 6.64%
Carnival Corp. Class A .......................... 5,500 158,812
Disney (Walt) Co. ............................... 3,000 188,625
Gaylord Entertainment Co., Class A .............. 6,227 175,899
----------
523,336
----------
TOTAL COMMON STOCKS ................................. 7,605,847
----------
(Cost $6,648,857)
TOTAL INVESTMENTS ................................... $7,879,928
==========
(Cost $6,922,938)
<FN>
* Non-income producing security
</TABLE>
FS-44
<PAGE>
<TABLE>
<CAPTION>
THE WOODWARD VARIABLE ANNUITY
MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
(Unaudited)
Amortized
Cost
Description Face Amount (Note 2)
----------- ----------- --------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- 33.41%
American General Finance, Inc. Master Note, 5.60%,
7/1/96 ............................................ $ 25,000 $ 25,000
Paccar Leasing Corp. Master Note, 5.60%, 7/1/96 ..... 25,000 25,000
Pitney Bowes Credit Corp. Master Note, 5.55%,
7/1/96 ............................................ 25,000 25,000
Transamerica Finance Group, Inc., 5.60%, 7/1/96 ..... 25,000 25,000
H.S.B.C Securities Inc., Revolving Repurchase
Agreement, 5.40%, 7/1/96 (secured by U.S.
Treasury Bills with maturities ranging from
3/6/97 through 6/26/97, all held at Chemical
Bank) ............................................. 200,000 200,000
NationsBank Capital Markets, Inc., Revolving
Repurchase Agreement, 5.50%, 7/1/96 (secured by
various U.S. Treasury Obligations with maturities
ranging from 5/15/00 through 5/15/06 at various
interest rates ranging from 0.00% to 7.875%, all
held at Chemical Bank) ............................ 127,508 127,508
--------
427,508
--------
U.S. GOVERNMENT OBLIGATIONS -- 3.15%
U.S. Treasury Securities -- 3.15%
U.S. Treasury Notes:
6.875%, 10/31/96 ................................ 20,000 20,105
7.500%, 1/31/97 ................................. 20,000 20,269
----------
40,374
----------
COMMERCIAL PAPER -- 53.28%
Alcatel Alsthom, Inc., 5.19%, 7/5/96 ................ 50,000 49,971
American Greetings Corp., 5.42%, 7/24/96 ............ 40,000 39,862
Asset Securitization Coop Corp., 5.31%, 7/17/96 ..... 25,000 24,941
Banco Nacioncal De Comerico Exterior, 5.21%,
7/11/96 ........................................... 20,000 19,971
BCI Funding Corp., 5.32%, 7/10/96 ................... 25,000 24,967
Cargill Financial Services Corp., 4.98%, 8/19/96 .... 50,000 49,663
Clipper Receivable Corp., 5.45%, 7/16/96 ............ 45,000 44,898
Duracell. Inc., 5.36%, 7/9/96 ....................... 25,000 24,970
Engelhard Corp. 5.42%, 7/27/96 ...................... 35,000 34,890
English China Clays PLC, 5.34%, 8/15/96 ............. 40,000 39,735
Explorer Pipeline Co., 5.39%, 7/22/96 ............... 25,000 24,922
Ford Motor Credit Corp., 5.17%, 7/3/96 .............. 40,000 39,989
Great Lakes Chemical Corp., 5.42%, 8/7/96 ........... 40,000 39,778
Heinz Co., 5.39%, 7/23/96 ........................... 20,000 19,934
Hercules, Inc., 5.36%, 7/10/96 ...................... 20,000 19,973
National Cooperative Services Corp., 5.32%, 7/23/96.. 35,000 34,887
Pacific Dunlop Holdings, Inc., 5.33%, 8/21/96 ....... 30,000 29,775
Quebec (Province of), 5.33%, 9/23/96 ................ 25,000 24,693
Royal Bank of Canada, 5.48%, 1/17/97 ................ 20,000 19,409
Sunbelt-Dix Inc., 5.36%, 8/6/96 ..................... 25,000 24,867
</TABLE>
FS-45
<PAGE>
<TABLE>
<S> <C> <C>
Westpac Capital, 5.24%, 7/9/96 .................... 30,000 29,965
WMX Technologies, Inc., 5.36%, 9/9/96 ............. 20,000 19,794
----------
681,854
----------
NOTES -- 5.47%
General Electric Capital Corp. Medium Term Note,
5.24%, 1/17/97 .................................. 20,000 19,993
Household Bank, 5.40%, 7/30/96 .................... 30,000 30,000
J.P. Morgan, 5.75%, 8/7/96 ........................ 20,000 19,996
----------
69,989
----------
CERTIFICATES OF DEPOSIT -- 4.69%
Mellon Bank, 5.79%, 9/26/96 ....................... 20,000 20,024
Rabobank Nederland NV Euro, 5.93%, 6/4/97 ......... 20,000 20,002
Societe Generale, 5.78%, 4/11/97 .................. 20,000 19,997
----------
60,023
----------
TOTAL INVESTMENTS ................................... $1,279,748
==========
</TABLE>
FS-46
<PAGE>
THE WOODWARD VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENT
(Unaudited)
(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 June 30, 1996, 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
FS-47
<PAGE>
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.
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.
FS-48
<PAGE>
(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 June 30, 1996, 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 $38,110, $32,928, $34,605, $13,720 and $22,778,
respectively.
See Note 5 for a summary of fee rates and expenses pursuant to these
agreements.
(4) Investment Securities Transactions
Information with respect to investment securities and security
transactions based on the aggregate cost of investments for federal income tax
purposes, excluding short-term securities, is as follows:
<TABLE>
<CAPTION>
BALANCED GROWTH/VALUE OPPORTUNITY
FUND FUND FUND
-------- ------------ -----------
<S> <C> <C> <C>
Gross Unrealized Gains ......... $ 879,986 $ 559,887 $ 851,813
Gross Unrealized Losses ........ (76,819) (81,343) (163,592)
----------- ---------- ----------
$ 803,167 $ 478,544 $ 688,221
=========== ========== ==========
Federal Income Tax Cost ........ $13,479,108 $4,812,202 $5,479,097
Purchases ...................... $ 5,129,119 $2,399,884 $2,186,083
Sales & Maturities ............. $ 1,760,041 $ 911,337 $1,393,281
<CAPTION>
CAPITAL GROWTH MONEY MARKET
FUND FUND
-------------- ------------
<S> <C> <C>
Gross Unrealized Gains ......... $1,088,942 $ --
Gross Unrealized Losses ........ (131,952) --
---------- ----------
$ 956,990 $ --
========== ==========
Federal Income Tax Cost ........ $6,922,938 $1,276,948
Purchases ...................... $1,949,814 $6,140,864
Sales & Maturities ............. $ 991,736 $5,984,950
</TABLE>
FS-49
<PAGE>
(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 period ended June 30, 1996. The rates shown are
stated as a percentage of each fund's average net assets.
<TABLE>
<CAPTION>
BALANCED GROWTH/VALUE
Effective Date FUND FUND OPPORTUNITY
-------------- -------- ------------ -----------
<S> <C> <C> <C>
Expense Rates:
January 1 ............................ 0.85% 0.85% 0.85%
NBD Advisory Fee:
January 1 ............................ 0.75% 0.75% 0.75%
Amounts Paid:
Advisory Fee to NBD .................. $47,917 $17,304 $20,865
Other Fees & Out of Pocket
Expenses to NBD .................... $25,331 $15,983 $18,054
Expense
Reimbursements by NBD ................ $(38,110) $(32,928) $(34,605)
<CAPTION>
CAPITAL GROWTH MONEY MARKET
Effective Date FUND FUND
-------------- -------------- ------------
<S> <C> <C>
Expense Rates:
January 1 ............................ 0.85% 0.50%
NBD Advisory Fee:
January 1 ............................ 0.75% 0.45%
Amounts Paid:
Advisory Fee to NBD .................. $27,183 $ 2,820
Other Fees & Out of Pocket
Expenses to NBD .................... $ 9,023 $ 5,101
Expense
Reimbursements by NBD ................ $(13,720) $(22,778)
</TABLE>
(6) Equity of Affiliates:
As of June 30, 1996, Hartford Life Insurance Company held direct
interest in shares as follows:
<TABLE>
<CAPTION>
Percent
of Total
Shares Shares
------ -------
<S> <C> <C>
Woodward Balanced Fund ..................... 312,297 25.13%
Woodward Growth/Value Fund ................. 51,650 12.08%
Woodward Opportunity Fund .................. 50,293 9.90%
Woodward Capital Growth Fund ............... 50,586 7.76%
Woodward Money Market Fund ................. 533,063 40.50%
</TABLE>
FS-50
<PAGE>
THE WOODWARD VARIABLE ANNUITY FUND
(Unaudited)
The Financial Highlights present a per share analysis of how the
Variable Annuity Fund's net asset values have changed during the periods
presented. Additional quantitative measures expressed in ratio form analyze
important relationships between certain items presented in the financial
statements. These financial highlights have been derived from the financial
statements of the Funds and other information for the periods presented.
<TABLE>
<CAPTION>
Balanced Fund Growth/Value Fund Opportunity Fund
----------------------------- ---------------------------- ---------------------------
Six Months Six Months Six Months
Ended Ended Ended
June 30, 1996 Period Ended June 30, 1996 Period Ended June 30,1996 Period Ended
(Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995
------------ ------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period ........... $ 11.27 $ 10.00 $ 11.63 $ 10.00 $ 11.02 $ 10.00
----------- ----------- ---------- ---------- -------- ---------
Income from investment
operations:
Net investment income ....... 0.19 0.25 0.08 0.13 0.01 0.05
Net realized and unrealized
gains on investments ...... 0.26 1.27 0.88 1.63 1.14 1.02
----------- ----------- ---------- ---------- -------- ---------
Total from investment
operations .................... 0.45 1.52 0.96 1.76 1.15 1.07
Less distributions:
From net investment income .. (0.20) (0.25) (0.07) (0.13) (0.01) (0.05)
From realized gains ......... -- -- -- (0.00) -- --
In excess of realized gains.. -- -- -- -- -- (0.00)
----------- ----------- ---------- ---------- -------- ---------
Total distributions .......... (0.20) (0.25) (0.07) (0.13) (0.01) (0.05)
----------- ----------- ---------- ---------- -------- ---------
Net asset value, end of period... $ 11.52 $ 11.27 $ 12.52 $ 11.63 $ 12.16 $ 11.02
Total Return (b) ................ 8.03%(a) 20.15%(a) 16.55%(a) 22.75%(a) 20.91%(a) 14.20%(a)
=========== =========== ========== ========== ========== ==========
Ratios/Supplemental Data
Net assets, end of period ....... $14,309,326 $11,210,876 $5,355,162 $3,753,691 $6,175,997 $4,972,365
Ratio of expenses to average
net assets .................... 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a) 0.85%(a)
Ratio of net investment income
to average net assets.......... 3.39%(a) 3.61%(a) 1.30%(a) 1.78%(a) 0.23%(a) 0.67%(a)
Ratio of expenses to average
net assets without fee
waivers/reimbursed expenses.... 1.45%(a) 2.34%(a) 2.28%(a) 4.93%(a) 2.08%(a) 4.64%(a)
Ratio of net investment income
to average net assets
without fee waivers/
reimbursed expenses ........... 2.79%(a) 2.12%(a) (0.13)%(a) (2.30)%(a) (1.00)%(a) (3.12)%(a)
Portfolio turnover rate ......... 15.97% 14.05% 20.76% 17.47% 25.87% 32.11%
Average commission rate ......... $ 0.08 $ 0.10 $ 0.11 $ 0.14 $ 0.07 $ 0.11
<FN>
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
(b) Total returns as presented do not include any applicable sales load.
</TABLE>
FS-51
<PAGE>
<TABLE>
<CAPTION>
Capital Growth Fund Money Market Fund
----------------------------- -----------------------------
Six months Six months
Ended Ended
June 30, 1996 Period Ended June 30, 1996 Period Ended
(Unaudited) Dec. 31, 1995 (Unaudited) Dec. 31, 1995
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................ $ 11.37 $ 10.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income ............................. 0.01 0.05 0.02 0.03
Net realized and unrealized gains
on investments ................................. 0.80 1.38 -- --
---------- ---------- ---------- ----------
Total from investment operations .................... 0.81 1.43 0.02 0.03
---------- ---------- ---------- ----------
Less distributions:
From net investment income ........................ (0.01) (0.05) (0.02) (0.03)
From realized gains ............................... -- (0.01)
In excess of realized gains ....................... -- -- -- --
---------- ---------- ---------- ----------
Total distributions ................................. (0.01) (0.06) (0.02) (0.03)
---------- ---------- ---------- ----------
Net asset value, end of period ...................... $ 12.17 $ 11.37 $ 1.00 $ 1.00
========== ========== ========== ==========
Total Return (b) .................................... 14.21%(a) 18.82%(a) 4.84%(a) 5.41%(a)
Ratios/Supplemental Data
Net assets, end of period ........................... $7,930,670 $6,434,936 $1,316,061 $1,175,892
Ratio of expenses to average net assets ............. 0.85%(a) 0.85%(a) 0.50%(a) 0.50%(a)
Ratio of net investment income to average
net assets........................................ 0.17%(a) 0.81%(a) 4.79%(a) 5.27%(a)
Ratio of expenses to average net assets without fee
waivers/ reimbursed expenses ...................... 1.23%(a) 3.15%(a) 4.15%(a) 10.48%(a)
Ratio of net investment income to average net assets
without fee waivers/reimbursed expenses ........... (0.21)%(a) (1.49)%(a) 1.18%(a) (4.71)%(a)
Portfolio turnover rate ............................. 14.19% 4.46% N/A N/A
Average commission rate ............................. $ 0.05 $ 0.11 N/A N/A
</TABLE>
FS-52
<PAGE>
RESULTS OF SPECIAL SHAREHOLDER MEETING (Unaudited)
On July, 10,1996, a special meeting of the shareholders of The Woodward
Variable Annuity Funds was held to approve the following proposals.
The shareholders approved these proposals with respect to The Woodward
Variable Annuity Funds as follows:
1. To approve a new investment advisory agreement ("New Advisory Agreement")
between each Trust, NBD Bank
("NBD") and First Chicago Investment Management Company ("FCIMCO")
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,065,421 9,981 64,060
VA Growth/Value 363,264 9,935 9,079
VA Opportunity 430,828 2,537 41,784
VA Capital Growth 547,409 2,427 58,591
VA Money Market 1,230,799 16,191 7,211
</TABLE>
2. To approve a change to the fundamental investment limitations of each
Fund of the Trust with regard to the following:
a) investment in commodities
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,033,755 26,093 79,614
VA Growth/Value 365,814 4,338 12,125
VA Opportunity 407,840 16,497 50,812
VA Capital Growth 528,664 11,432 68,332
VA Money Market 1,230,799 16,191 7,211
</TABLE>
b) expanded power to borrow
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,003,138 57,827 78,497
VA Growth/Value 364,900 4,476 12,901
VA Opportunity 391,965 33,141 50,042
VA Capital Growth 511,311 28,620 68,496
VA Money Market 1,230,799 16,191 7,211
</TABLE>
c) issuing senior securities
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,042,108 27,404 69,951
VA Growth/Value 365,814 4,338 12,125
VA Opportunity 416,364 12,045 46,740
VA Capital Growth 530,452 11,657 66,318
VA Money Market 1,230,799 16,191 7,211
</TABLE>
FS-53
<PAGE>
3. To approve a change to the fundamental investment policies and
limitations of certain Funds of the Trusts, as follows:
c) to approve a change to the fundamental investment limitation
concerning concentration of investments in a
particular industry with respect to the Funds
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 999,822 50,398 89,242
VA Growth/Value 367,274 5,925 9,079
VA Opportunity 394,959 20,740 59,450
VA Capital Growth 516,629 22,158 69,640
VA Money Market 1,230,799 16,191 7,211
</TABLE>
4. To approve a change of the following fundamental policies and
limitations to non-fundamental policies and limitations:
b) limitation on investment in other investment companies
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,042,996 14,653 81,813
VA Growth/Value 364,174 3,417 14,687
VA Opportunity 412,130 8,315 54,704
VA Capital Growth 530,008 9,838 68,582
VA Money Market 1,230,799 16,191 7,211
</TABLE>
c) limitation on illiquid securities
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,036,980 21,285 81,198
VA Growth/Value 350,852 16,740 14,687
VA Opportunity 412,287 7,735 55,126
VA Capital Growth 530,032 9,905 68,490
VA Money Market 1,230,799 16,191 7,211
</TABLE>
d) limitation on purchasing securities on margin
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,015,820 35,688 87,955
VA Growth/Value 354,575 9,189 18,513
VA Opportunity 402,585 16,616 55,948
VA Capital Growth 522,774 17,163 68,490
VA Money Market 1,230,799 16,191 7,211
</TABLE>
e) limitation on purchasing securities of companies for the purpose
of exercising control
FS-54
<PAGE>
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,020,173 38,092 81,198
VA Growth/Value 354,579 13,012 14,687
VA Opportunity 405,711 14,734 54,704
VA Capital Growth 524,916 15,338 68,174
VA Money Market 1,230,799 16,191 7,211
</TABLE>
f) limitation on writing or selling put options, call options,
straddles, spreads, or any combinations thereof
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,012,425.017 33,295.133 93,743.690
VA Growth/Value 357,465.514 8,673.916 16,139.830
VA Opportunity 400,798.664 12,306.389 62,045.108
VA Capital Growth 518,570.165 13,470.619 76,388.267
</TABLE>
5. To approve certain changes to fundamental investment objectives of
VA Growth/Value, VA Opportunity Funds, and VA Capital Growth Funds
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Growth/Value 365,959 3,417 12,901
VA Opportunity 403,103 17,076 54,970
VA Capital Growth 519,677 18,709 70,042
</TABLE>
6. To ratify the appointment of two Trustees to the Board of Trustees
of each Trust.
Elected Trustees Current Trustees
Ms. Marilyn McCoy Mr. Will M. Caldwell Mr. Donald B. Sutherland
Mr. John P. Gould Dr. Nicholas J. DeGrazia Mr.Donald L. Tuttle
Mr.Julius L. Pallone
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,054,904 5,195 79,363
VA Growth/Value 373,200 0 9,079
VA Opportunity 420,203 5,136 49,809
VA Capital Growth 537,796 4,222 66,410
VA Money Market 1,230,799 16,191 7,211
</TABLE>
8. To transact such other business as may properly come before the
Meetings or any adjournment thereof.
<TABLE>
<CAPTION>
Fund Affirmative Against Abstain
<S> <C> <C> <C>
VA Balanced 1,050,437 4,523 84,502
VA Growth/Value 370,325 1,425 10,527
VA Opportunity 422,750 2,394 50,004
VA Capital 540,169 2,166 66,093
VA Money Market 1,246,991 0 7,211
</TABLE>
FS-55
<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:
(i) [Audited] Financial Highlights for the period
ended December 31, 1995 [and Unaudited Financial
Highlights for the six months ended June 30,
1996] with respect to the Registrant's Managed
Assets Balanced, Growth and Value, Mid-Cap
Opportunity, Growth and Money Market Funds.
(2) Included in Part B of the Registration Statement are the
following audited financial statements:
(i) With respect to Registrant's Managed Assets
Balanced, Growth and Value, Mid-Cap
Opportunity, 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.
<PAGE>
(2) Bylaws of Registrant is incorporated herein
by reference to exhibit (2) of the
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 between Registrant and NBD dated
November 28, 1995 is incorporated herein by reference to
exhibit (5)(b) of the Registrant's Registration
Statement on Form N-1A filed with the Commission on
April 29,
1996.
(c) Form of Co-Advisory Agreement among Registrant, NBD Bank
("NBD") and First Chicago Investment Management Company
("FCIMCO") is incorporated herein by reference to
exhibit (5)(c) of the Registrant's Registration
Statement on Form N-1A filed with the Commission on
April 29, 1996.
(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 between Registrant and
BISYS is incorporated herein by reference to exhibit
(6)(a) of the Registrant's Registration Statement on
Form N-1A filed with the Commission on April 29,
1996.
(7) Not Applicable.
-2-
<PAGE>
(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.
(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 is incorporated herein by
reference to exhibit 9(c) of the Registrant's
Registration Statement on Form N-1A filed with the
Commission on April 29, 1996.
*(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.
- --------
* Registrant's Rule 24f-2 Notice and related Opinion of Counsel will be
filed under Rule 24f-2.
-3-
<PAGE>
(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 Registrant's Managed Assets
Balanced, Growth and Value, Mid-Cap
Opportunity, Growth and Money Market Funds
are 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
Registrant's Managed Assets Balanced, Growth
and Value, Mid-Cap Opportunity, Growth and
Money Market Funds.
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
(to be renamed Pegasus 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.
-4-
<PAGE>
Number
of
Record
Title of Class Holders
-------------- -------
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
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:
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
-5-
<PAGE>
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:
(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
-6-
<PAGE>
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 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
-7-
<PAGE>
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 investment adviser, NBD, is a state chartered bank
incorporated under the laws of Michigan which is wholly-owned by NBD Bancorp,
Inc., a Delaware corporation. NBD conducts a general banking and trust
business.
(a) To the Registrant's knowledge, none of the directors or officers
of NBD, except as set forth below, is, or has been at any time during the
Registrant's past two fiscal years, engaged in any other business, profession,
vocation, or employment of a substantial nature, except that certain directors
and officers and certain executives of NBD also hold various positions with,
and are engaged in business for, [First Chicago NBD Corporation], 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.
-8-
<PAGE>
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.
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.
-9-
<PAGE>
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.
(b) The Registrant's co-investment adviser, [First Chicago NBD
Investment Management Company ("FCNIMCO")], 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 [FCNIMCO] , together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by [FCNIMCO] 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 [FCNIMCO] (SEC File No. 801- 47947).
-10-
<PAGE>
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 (to be renamed
Pegasus Funds) and Renaissance Assets Trust, a registered investment company.
Except for the foregoing, FoM does not act as principal underwriter, depositor
or investment adviser for any other registered investment company.
(b) The following information is submitted with respect to each
director and officer of FoM, the principal business address of which is 100
Renaissance Center, 26th Floor, Detroit, Michigan
48243:
Position with Position with
Name Underwriter Registrant
---- ------------- -------------
Steve Gasper, Jr. President, Chief None
Executive Officer,
Director
William H. Cuddy Chairman of the Board None
of Directors
Joseph M. Mengden Director None
Craig P. Baker Director None
Geoffrey B. Baker Director None
Gerard M. Lavin Director None
Thomas A. McDonnell Director None
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
-11-
<PAGE>
Position with Position with
Name Underwriter Registrant
---- ------------- -------------
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
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
-12-
<PAGE>
Elisa Lanthier Treasurer None
William O'Loughlin Treasurer, Vice None
President
Greg Zytkowicz Secretary, Vice None
President
Robert B. Twomey Vice President None
[(c)] None
[(a)] BISYS Fund Services will act as distributor and
administrator for the Registrant. BISYS Fund
Services also distributes the securities of the
American Performance Funds, The Highmark Group,
The Parkstone Group of Funds, The Sessions Group,
the AmSouth Mutual 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:
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 its
functions as co-adviser, co- administrator, custodian, and
transfer and dividend disbursing agent).
-13-
<PAGE>
(b) First Chicago [NBD] Investment Management Company, Three First
National Plaza, Chicago, Illinois 60670 (records relating to
its function as co-adviser 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
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.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 5 to
its Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused it to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Detroit, State of Michigan, on the
7th day of October, 1996.
PEGASUS VARIABLE ANNUITY FUND
Registrant
/s/ Donald G. Sutherland
------------------------
Donald G. Sutherland
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registrant's Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
- ----------------------
Will M. Caldwell Trustee October 7, 1996
/s/ Julius L. Pallone
- ----------------------
Julius L. Pallone Trustee October 7, 1996
- ----------------------
Nicholas J. De Grazia Trustee October 7, 1996
/s/ Donald G. Sutherland
- ------------------------ President
Donald G. Sutherland and Trustee October 7, 1996
- ----------------------
Donald L. Tuttle Trustee October 7, 1996
/s/ John P. Gould
- ---------------------- Chairman
John P. Gould and Trustee October 7, 1996
/s/ Marilyn McCoy
- ----------------------
Marilyn McCoy Trustee October 7, 1996
/s/ D'Ray Brewer Treasurer
- ---------------------- (Chief Financial
D'Ray Brewer Officer) October 7, 1996
-5-
<PAGE>
[EXHIBIT INDEX]
[Exhibit No. Exhibit Page No.]
------------ ------- ---------
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath.
(27) Financial Data Schedules with respect to the
Registrant's Managed Assets Balanced, Growth and
Value, Mid-Cap Opportunity, Growth and Money
Market Funds.
Exhibit 11(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement on Form N-1A of our report dated
February 19, 1996 included in the Pegasus Variable Annuity Fund Report to
Shareholders for the year ended December 31, 1995, and to all references to
our Firm included in this registration statement on form N-1A (Post-Effective
Amendment No. 5 to the Pegasus Variable Annuity Fund's registration statement
under the Securities Act of 1933).
ARTHUR ANDERSON LLP
Detroit, Michigan,
October 7, 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. 5 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
October 7, 1996
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<NET-INVESTMENT-INCOME> 30
<REALIZED-GAINS-CURRENT> 155
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<NET-CHANGE-FROM-OPS> 353
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<INVESTMENTS-AT-VALUE> 6,150
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<NAME> THE WOODWARD VARIABLE ANNUITY FUND
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