As filed with the Securities and Exchange Commission on December 18, 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. 6
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 5
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):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
-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, E, F, G, and H Representing Interests in the Pegasus
Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity, Growth, Money
Market, Bond, Intrinsic Value and International Equity 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;
Miscellaneous
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; Miscellaneous
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 _________, 1997
- ------------------------------------------------------------------------------
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").
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 has filed an application for an exemptive order with
the Securities and Exchange Commission ("SEC") which, if granted, would permit
shares of the Trust to be sold to and held by Separate Accounts funding
Variable Annuity Contracts and variable life insurance policies ("Variable
Life Insurance Policies") issued by both affiliated and unaffiliated life
insurance companies including the Hartford Companies ("Participating Insurance
Companies"). Until such time as the requested order is granted, shares of the
Trust will be offered only to Separate Accounts funding Variable Annuity
Contracts issued by the Hartford Companies. There is no assurance that the
order will be granted.
The Trust is offering in this Prospectus shares in the
following eight investment portfolios (the "Funds"), divided into four
general fund types: Asset Allocation, Equity, Bond and Money Market. (The
Asset Allocation, Equity and Bond Funds are sometimes referred to as the
"Non-Money Market Funds.")
ASSET ALLOCATION FUND EQUITY FUNDS
The Managed Assets Balanced Fund The Growth and Value Fund
The Mid-Cap Opportunity Fund
BOND FUND The Growth Fund
The Intrinsic Value Fund
The Bond Fund The International Equity Fund
MONEY MARKET FUND
The Money Market Fund
First Chicago NBD Investment Management Company ("FCNIMCO")
serves as each Fund's investment adviser (the "Investment Adviser").
BISYS Fund Services (the "Distributor" or "BISYS") serves as
each Fund's distributor.
NBD Bank (the "Custodian" or "NBD") serves as each Fund's
custodian.
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 SEC and is available upon request and without charge by writing
<PAGE>
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.
Shares of the Funds may only be purchased by the Separate
Accounts of Participating Insurance Companies for the purpose of funding
Variable Annuity Contracts and Variable Life Insurance Policies. A particular
Fund may not be available under the Variable Annuity Contract or Variable Life
Insurance Policy chosen by an investor. The Prospectus of the specific
insurance product selected will indicate which Funds are available and should
be read in conjunction with this Prospectus. Inclusion in this Prospectus of a
Fund which is not available under an investor's contract or policy is not to
be considered a solicitation.
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
DESCRIPTION OF THE FUNDS................................................. 1
PURCHASE AND REDEMPTION OF TRUST SHARES.................................. 9
NET ASSET VALUE AND PRICING OF SHARES.................................... 9
MANAGEMENT OF THE FUNDS.................................................. 10
DIVIDENDS AND DISTRIBUTIONS.............................................. 13
TAXES ................................................................. 14
PERFORMANCE INFORMATION.................................................. 15
GENERAL INFORMATION...................................................... 17
SUPPLEMENTAL INFORMATION................................................. A-1
<PAGE>
PEGASUS VARIABLE ANNUITY FUND
Asset Allocation Fund
The Managed Assets 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 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 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 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.
The Intrinsic Value Fund seeks to provide long-term capital
appreciation. In seeking to achieve its objective, this Fund will invest
primarily in Equity Securities believed by the Investment Adviser to represent
a value or potential worth which is not fully recognized by prevailing market
prices.
The International Equity Fund seeks to achieve long-term
capital appreciation. In seeking to achieve its objective, this Fund will
invest primarily in Equity Securities of foreign issuers.
Bond Fund
This Fund will invest principally in a broad range of debt
securities ("Debt Securities"). Debt Securities in which the Bond Fund
normally invests include: (i) obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities; (ii) corporate, bank and
commercial obligations; (iii) securities issued or guaranteed by foreign
governments, their agencies or instrumentalities; (iv) securities issued by
supranational banks; (v) mortgage backed securities; (vi) securities
representing interests in pools of assets; and
i
<PAGE>
(vii) variable-rate bonds, zero coupon bonds, debentures, and various types of
demand instruments. Obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities may include mortgage backed securities, as
well as "stripped securities" (both interest-only and principal-only) and
custodial receipts for Treasury securities.
The Bond Fund seeks to maximize total rate of return by
investing predominantly in intermediate and long-term Debt Securities. During
normal market conditions, the Fund's average weighted portfolio maturity is
expected to be between 6 and 12 years.
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 under
the section "Money Market Fund".
ii
<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 or another Participating
Insurance Company.
<TABLE>
<CAPTION>
Managed Assets
Balanced Fund**
---------------------------------------
Six Months
Ended Period*
June 30, 1996 Ended
(Unaudited) Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.27 $ 10.00
Income from investment operations:
Net investment income 0.19 0.25
Net realized and unrealized gains on investment 0.26 1.27
Total from investment operations 0.45 1.52
Less distributions:
From net investment income (0.20) (0.25)
From realized gains -- --
In excess of realized gains -- --
Total distributions (0.20) (0.25)
Net asset value, end of period $ 11.52 $ 11.27
TOTAL RETURN 8.03%(a) 20.15%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $14,309,326 $11,210,876
Ratio of expenses to average net assets 0.85%(a) 0.85%(a)
Ratio of net investment
income to average net assets 3.39%(a) 3.61%(a)
Ratios of expenses to average
net assets without fee
waivers/reimbursed expenses 1.45%(a) 2.34%(a)
Ratio of net investment income (loss)
to average net assets without fee
waivers/reimbursed expenses 2.79%(a) 2.12%(a)
Portfolio turnover rate 15.97% 14.05%
Average Commission Rate $ 0.08 $ 0.10
<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>
iii
<PAGE>
<TABLE>
<CAPTION>
Growth and Value Fund**
---------------------------------------
Six Months
Ended Period*
June 30, 1996 Ended
(Unaudited) Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.63 $ 10.00
Income from investment operations:
Net investment income 0.08 0.13
Net realized and unrealized gains on investment 0.88 1.63
Total from investment operations 0.96 1.76
Less distributions:
From net investment income (0.07) (0.13)
From realized gains -- (0.00)
In excess of realized gains -- --
Total distributions (0.07) (0.13)
Net asset value, end of period $ 12.52 $ 11.63
TOTAL RETURN 16.55%(a) 22.75%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $5,355,162 $3,753,691
Ratio of expenses to average net assets 0.85%(a) 0.85%(a)
Ratio of net investment income
to average net assets 1.30%(a) 1.78%(a)
Ratios of expenses to average
net assets without fee
waivers/reimbursed expenses 2.28%(a) 4.93%(a)
Ratio of net investment income (loss)
to average net assets without fee
waivers/reimbursed expenses (0.13)%(a) (2.30)%(a)
Portfolio turnover rate 20.76% 17.47%
Average Commission Rate $ 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>
iv
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap Opportunity Fund**
---------------------------------------
Six Months
Ended Period*
June 30, 1996 Ended
(Unaudited) Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.02 $ 10.00
Income from investment operations:
Net investment income 0.01 0.05
Net realized and unrealized gains on investment 1.14 1.02
Total from investment operations 1.15 1.07
Less distributions:
From net investment income (0.01) (0.05)
From realized gains -- --
In excess of realized gains -- (0.00)
Total distributions (0.01) (0.05)
Net asset value, end of period $ 12.16 $ 11.02
TOTAL RETURN 20.91%(a) 14.20%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $6,175,997 $4,972,365
Ratio of expenses to average net assets 0.85%(a) 0.85%(a)
Ratio of net investment income
to average net assets 0.23%(a) 0.67%(a)
Ratios of expenses to average
net assets without fee
waivers/reimbursed expenses 2.08%(a) 4.64%(a)
Ratio of net investment income (loss)
to average net assets without
fee waivers/reimbursed expenses (1.00)%(a) (3.12)%(a)
Portfolio turnover rate 25.87% 32.11%
Average Commission Rate $ 0.07 $ 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>
v
<PAGE>
<TABLE>
<CAPTION>
Growth Fund**
---------------------------------------
Six Months
Ended Period*
June 30, 1996 Ended
(Unaudited) Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.37 $ 10.00
Income from investment operations:
Net investment income 0.01 0.05
Net realized and unrealized gains on investment 0.80 1.38
Total from investment operations 0.81 1.43
Less distributions:
From net investment income (0.01) (0.05)
From realized gains -- (0.01)
In excess of realized gains -- --
Total distributions (0.01) (0.06)
Net asset value, end of period $ 12.17 $ 11.37
TOTAL RETURN 14.21%(a) 18.82%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $7,930,670 $6,434,936
Ratio of expenses to average net assets 0.85%(a) 0.85%(a)
Ratio of net investment income
to average net assets 0.17%(a) 0.81%(a)
Ratios of expenses to average
net assets without fee
waivers/reimbursed expenses 1.23%(a) 3.15%(a)
Ratio of net investment income (loss)
to average net assets without fee
waivers/reimbursed expenses (0.21)%(a) (1.49)%(a)
Portfolio turnover rate 14.19% 4.46%
Average Commission Rate $ 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>
vi
<PAGE>
<TABLE>
<CAPTION>
Money Market Fund**
---------------------------------------
Six Months
Ended Period*
June 30, 1996 Ended
(Unaudited) Dec. 31, 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)
Ratios 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>
vii
<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 eight
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 (the "Diversified
Funds") except for the International Equity Fund (the "Non-Diversified Fund"),
which is classified as a non-diversified 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 the
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.
-1-
<PAGE>
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 45% to
Securities: 60% 75%
Debt
Securities &
Cash
Equivalent 25% to
Securities: 40% 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.
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, Growth and Intrinsic
Value Funds invest primarily in publicly traded common stocks of companies
incorporated in the United States, although each of these Funds may also
invest up to 25% of its total assets in the Equity Securities of foreign
issuers, either directly or through Depository Receipts. The International
Equity Fund invests primarily in Equity Securities of foreign issuers, either
directly or through Depository Receipts and similar securities which may be
sponsored or unsponsored. See "Risk Factors-Foreign Securities" below. In
addition, each Equity Fund may invest in securities convertible into common
stock, such as certain bonds and preferred stocks, and may invest up to 5% of
its 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 portfolio securities. In addition, the
International Equity Fund may invest in foreign currency and options on
foreign currency transactions. Under normal market conditions, each Fund
expects to invest at least 65% of the value of its total assets in Equity
Securities. Each Equity Fund may hold up to 35% of its total assets in
investment grade Debt Securities and Cash Equivalent Securities.
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
-2-
<PAGE>
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.
The Intrinsic 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. In
selecting investments for the Fund, screening techniques are employed to
isolate issues believed to be attractively priced. The Investment Adviser then
evaluates the underlying earning power and dividend paying ability of these
potential investments. The Fund's holdings are usually characterized by lower
price/earnings, price/cash flow and price/book value ratios and by above
average current dividend yields relative to the equity market.
The International Equity Fund will invest primarily in Equity
Securities of foreign issuers located in but not limited to the United Kingdom
and European continent, Japan, other Far East areas and Latin America. The
Fund may also invest in other regions seeking to capitalize on investment
opportunities in other parts of the world.
The Investment Adviser's investment approach to managing the
Fund's assets emphasizes active country selection involving global economic
and political assessments together with valuation analysis of selected
countries' securities markets. In situations where an investment's
attractiveness outweighs prospects for currency weakness, the Investment
Adviser may take suitable hedging measures. An index approach is typically
used at the stock selection level.
The Investment Adviser employs quantitative techniques in
conjunction with its judgment and experience to determine the foreign equity
markets that the Fund will be invested in and the percentage of total assets
the Fund will hold by country. Securities of a country are selected using a
quantitatively-oriented sampling technique intending to generally replicate
the performance of an individual country's stock market index. The Morgan
Stanley Capital International Country Indexes have, for some time, been the
accepted benchmarks in the U.S. for international equity fund country
comparisons. The Fund may also invest in individual Equity Securities which
the Investment Adviser believes offer opportunities for capital appreciation.
The Fund's assets will be invested at all times in the
securities of issuers located in at least three different foreign countries.
Investments in a particular country may exceed 25% of the Fund's total assets,
thus making its performance more dependent upon the political and economic
circumstances of a particular country than a more widely diversified
portfolio.
-3-
<PAGE>
Bond Fund
The Bond Fund will invest at least 65% of the value of its
total assets under normal market conditions in Debt Securities. The Fund
invests in a portfolio of U.S. dollar denominated Debt Securities of
domestic and foreign issuers. The Fund's average weighted portfolio maturity
is expected to be between 6 and 12 years. When the Investment Adviser believes
it advisable for temporary defensive purposes or in anticipation of otherwise
investing cash positions, the Bond Fund may invest in Cash Equivalent
Securities. Most obligations 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 Bond Fund may be invested in dollar denominated debt
obligations (including Cash Equivalent Securities) of foreign issuers. The
Debt Securities in which the Bond Fund may invest will be rated investment
grade at the time of purchase, or if unrated, will be deemed by the Investment
Adviser to be comparable in quality at the time of purchase to instruments
that are so rated. By so restricting its investments, the Fund's ability to
maximize total rate of return will be limited. The Bond Fund also may lend its
portfolio securities and engage in futures and options transactions and other
derivative instruments, such as interest rate swaps and forward contracts,
each of which involves risk. See "Risk Factors" below and "Supplemental
Information."
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 denominated obligations issued or guaranteed by the
government of Canada, a Province of Canada, or an instrumentality or political
subdivision thereof; (3) certificates of deposit, bankers' acceptances and
time deposits of U.S. banks or other U.S. financial institutions (including
foreign branches of such banks and institutions) having total assets in excess
of $1 billion and which are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation ("FDIC"); (4) certificates of deposit,
bankers' acceptances and time deposits of foreign banks and U.S. branches of
foreign banks having assets in excess of the equivalent of $1 billion; (5)
commercial paper, other short-term obligations and variable rate master demand
notes, bonds, debentures and notes; and (6) repurchase agreements relating to
the above instruments.
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.
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
-4-
<PAGE>
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, and (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.
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.
-5-
<PAGE>
In addition, none of the Diversified Funds may 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
(Asset Allocation 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 in the Statement of Additional
Information.
Municipal Obligations
(Asset Allocation and Bond Funds only) Investors should be
aware that when a Fund's assets are concentrated in obligations payable from
revenues of similar projects or issued by issuers located in the same state,
or in industrial development bonds, it will be subject to the particular risks
(including legal and economic conditions) relating to such securities to a
greater extent than if its assets were not so concentrated.
Payment on Municipal Obligations held by the Funds relating to
certain projects may be secured by mortgages or deeds of trust. In the event
of a default, enforcement of a mortgage or deed of trust will be subject to
statutory enforcement procedures and limitations on obtaining deficiency
judgments. Moreover, collection of the proceeds from that foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Obligations.
-6-
<PAGE>
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.
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 Funds) 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. Foreign securities may also 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
economics.
Foreign Currency and Foreign Commodity Transactions
(Asset Allocation and International Equity Funds only) Currency
exchange rates may fluctuate significantly over short periods of time. They
generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks, or the failure to intervene, or by currency
controls or political developments in the United States or abroad.
-7-
<PAGE>
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
Funds of unrealized profits or force a 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 a
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.
Mortgage Related Securities
(Asset Allocation and Bond Funds only) No assurance can be
given as to the liquidity of the market for certain mortgage backed
securities, such as collateralized mortgage obligations and stripped mortgage
backed securities. Determination as to the liquidity of interest-only and
principal-only fixed mortgage backed securities issued by the U.S. Government
or its agencies and instrumentalities will be made in accordance with
guidelines established by the Board. Mortgage-related securities may be
considered a derivative instrument.
Derivative Instruments
(All Funds) Each Fund may purchase certain "derivative
instruments" in accordance with its investment objective and policies.
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.
Other Investment Considerations
The classification of the International Equity Fund as a
"non-diversified" investment portfolio means that the proportion of the Fund's
assets that may be invested in the securities of a single issuer is not
limited by the 1940 Act. A "diversified" investment portfolio is required by
the 1940 Act generally, with respect to 75% of its total assets, to invest not
more than 5% of such assets in the securities of a single issuer and to hold
not more than 10% of the voting securities of any single issuer. The
Non-Diversified Fund, however, intends to conduct its operations so as to
qualify as a "regulated investment company" for purposes of the Internal
Revenue Code of 1986, as amended (the "Code"), which requires that, at the end
of each quarter of its taxable year, (i) at least 50% of the market value of
its total assets be invested in cash, U.S. Government securities, the
securities of other regulated investment companies and other securities, with
such other securities
-8-
<PAGE>
of any one issuer limited for the purposes of this calculation to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets be invested in the securities of any one issuer
(other than U.S. Government securities or the securities of other regulated
investment companies). Since a relatively high percentage of the Fund's assets
may be invested in the securities of a limited number of issuers, some of
which may be within the same industry or economic sector, its portfolio
securities may be more susceptible to any single economic, political or
regulatory occurrence than the portfolio securities of a diversified
investment company.
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 or Variable Life
Insurance Policies offered through Separate Accounts of the Hartford Companies
or other Participating Insurance Companies. Investors should refer to the
Prospectus of the Variable Annuity Contracts or Variable Life Insurance
Policies for information on how to purchase such contracts or policies, how to
select specific Funds of the Trust as investment options for the contracts or
policies and how to redeem monies from the Trust.
The Separate Accounts of the Hartford Companies and other
Participating Insurance 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 or Variable Life
Insurance Policies issued by the Hartford Companies or other Participating
Insurance Companies) to be effected on that day pursuant to the contracts or
policies. 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 or other Participating Insurance
Companies under the Variable Annuity Contracts or Variable Life Insurance
Policies. Such fees should be described in the Prospectus of such contracts or
policies.
As of the date of this Prospectus, shares of the Trust are
offered only to Separate Accounts funding Variable Annuity Contracts issued by
the Hartford Companies. If the requested exemptive relief is granted, shares
of the Funds may be sold to and held by Separate Accounts that fund Variable
Annuity and Variable Life insurance Contracts issued by both affiliated and
unaffiliated Participating Insurance Companies. The Trust currently does not
forsee any disadvantages to the holders of Variable Annuity Contracts and
Variable Life Insurance Policies of affiliated and unaffiliated Participating
Insurance Companies arising from the fact that interests of the holders of
such contracts and policies may differ due to differences of tax treatment or
other considerations or due to conflicts between the affiliated or
unaffiliated Participating Insurance Companies. Nevertheless, the Board of
Trustees will monitor events to seek to identify any material irreconcilable
conflicts which may possible arise and to determine what action, if any, should
be taken in response to such conflicts. Should a material unreconcilable
conflict arise between the holders of Variable Annuity Contracts and Variable
Life Insurance Policies of affiliated or unaffiliated Participating Insurance
Companies, the Participating Insurance Companies may be required to withdraw
the assets allocable to some or all of the Separate Accounts from the Funds.
Any such withdrawal could disrupt orderly portfolio management to the
potential detriment of such holders. The Variable Annuity Contracts and
Variable Life Insurance Policies are described in the separate Prospectuses
issued by the Participating Insurance Companies. The Trust assumes no
responsibility for such Prospectuses.
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.
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
-9-
<PAGE>
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 Noon, 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 (observed), Independence Day, Labor Day, Columbus Day (observed),
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.
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.
-10-
<PAGE>
FCNIMCO serves as Investment Adviser for the Trust pursuant to
an Investment Advisory Agreement dated 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
(if applicable), are set forth below.
<TABLE>
<CAPTION>
Contractual Effective Rate
Fee Rate for Advisory and
for Advisory Administrative
Current Services for Services for
Contractual Year Ended Year Ended
Advisory December 31, December 31,
Fee Rate 1995* 1995
----------- ------------ ----------------
<S> <C> <C> <C>
ASSET ALLOCATION FUNDS:
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% 0.75% 0.68%
Intrinsic Value Fund 0.60% N/A N/A
International Equity Fund 0.80% N/A N/A
BOND FUNDS:
Bond Fund 0.40% N/A N/A
MONEY MARKET FUNDS:
Money Market Fund 0.30% 0.45% 0.44%
of first of first
$1 billion, $1 billion,
.275% of .425% of
next $1 next $1
billion, .25% billion, .40%
of amount in of amount in
excess of excess of
$2 billion $2 billion
- ---------
<FN>
* For the fiscal year ended December 31, 1995, the Funds incurred no
separate administration fee in addition to the advisory fee for
administrative services rendered by NBD under the prior investment
advisory agreement.
</TABLE>
In addition, FCNIMCO is entitled to 4/10s of the gross income earned by a Fund
on each loan of securities (excluding capital gains and losses, if any).
Although the fee payable by the International Equity Fund is higher than the
fee payable by other funds, the Investment Adviser believes that it is within
the range of fees payable by funds with comparable investment objectives and
policies.
Claude B. Erb, First Vice President and Director of Investment
Planning, is primarily responsible for the day-to-day management of the
Managed Assets 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.
-11-
<PAGE>
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.
Chris M. Gassen, Vice President, and F. Richard Neumann, Vice
President, are primarily responsible for the day-to-day management of the
Intrinsic Value Fund. Mr. Gassen joined FCN in 1985 and Mr. Neumann joined FCN
in 1981.
Richard P. Kost, First Vice President, and Clyde L. Carter, Jr.,
Assistant Vice President, are primarily responsible for the day-to-day
portfolio management of the International Equity Fund. Mr. Kost joined FCN in
1964 and Mr. Carter joined FCN in 1987.
Douglas S. Swanson, First Vice President, and Ricardo F. Cipicchio,
Vice President, are primarily responsible for the day-to-day management of the
Bond Fund. Mr. Swanson joined FCN in 1983 and Mr. Cipicchio joined FCN in
1989.
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 dated October 7, 1996. 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 daily 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.
-12-
<PAGE>
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, which is a
wholly-owned subsidiary of First Chicago NBD Corporation, 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, SEC 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.
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,
Growth, Intrinsic Value and International Equity Funds declare and pay
dividends from net investment income quarterly, usually on the last Business
Day of the quarter. The Bond Fund declares and pays dividends from net
investment income monthly, usually on the last Business Day of the month. 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.
-13-
<PAGE>
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 or variable life insurance policy 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 and Variable Life Insurance Policies based on such account
to recognize ordinary income each year in the amount of any net appreciation
of such contract or policy 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 or Variable Life
Insurance Policy.
Persons investing in a Variable Annuity Contract or Variable Life
Insurance Policy offered by a segregated asset account investing in a Fund
should refer to the Prospectus with respect to such contract or policy 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.
-14-
<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 Asset Allocation and Bond 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 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.
-15-
<PAGE>
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
June 30, 1996 are shown below:
<TABLE>
<CAPTION>
Average Annualized Aggregate Total
Total Return Return From
From Inception Inception
Through 12/31/95 Through 12/31/95
------------------ ----------------
<S> <C> <C>
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
</TABLE>
-16-
<PAGE>
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 eight 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, Series E, Series F, Series G
and Series H shares of the Trust represent interests in the Managed Assets
Balanced Fund, Growth and Value Fund, Mid-Cap Opportunity Fund, Growth Fund,
Money Market Fund, Bond Fund, Intrinsic Value Fund and International Equity
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
and Participating Insurance Companies. However, to the extent required by law,
the Hartford Companies and Participating Insurance 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 and
Variable Life Insurance Policies. To the extent required by law, the
Hartford Companies and Participating Insurance Companies will vote Fund
shares held in the Separate Accounts for which no timely instructions are
received from the holders of Variable Annuity Contracts and Variable Life
Insurance Policies, 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 and Participating Insurance
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.
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 and Variable Life
Insurance Policies issued by the Hartford Companies and Participating
Insurance Companies for which shares of the Funds are the investment vehicle
will
-17-
<PAGE>
receive from the Hartford Companies and Participating Insurance 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.
-18-
<PAGE>
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 Fund may hold the types of Cash Equivalent Securities described
under Asset Allocation Fund above.
U.S. Government Obligations
U.S. Government obligations include all types of U.S. Government
securities, including U.S. Treasury bonds, notes and bills, and obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, Federal National Mortgage Association, General Services
Administration, Student Loan Marketing Association, Central Bank for
Cooperatives, Federal Home Loan Mortgage Corporation, Federal Intermediate
Credit Banks, Tennessee Valley Authority, Resolution Funding Corporation and
Maritime Administration. U.S. Government obligations also include interests in
the foregoing securities, including collateralized mortgage obligations
guaranteed by a U.S. Government agency or instrumentality, and in
Government-backed trusts which hold obligations of foreign governments that
are guaranteed or backed by the full faith and credit of the United States.
Obligations of certain U.S. agencies and instrumentalities, such as
those of the Government National Mortgage Association, are supported by the
full faith and credit of the U.S. Treasury; others, such as the Export-Import
Bank of the United States, are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those
of the Student Loan Marketing Association, are supported only by the credit of
the instrumentality.
Bank Obligations
Bank obligations 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.
A-1
<PAGE>
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.
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.
A-2
<PAGE>
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.
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
A-3
<PAGE>
requisite collateral comprised of liquid assets and when, in the Investment
Advisers' judgment, the income to be earned from the loan justifies the
attendant risks.
Zero Coupon Obligations
Each Fund may invest in zero coupon obligations which are discount
debt obligations that do not make periodic interest payments although income
is generally imputed to the holder on a current basis. Such obligations may
have higher price volatility than those which require the payment of interest
periodically. The Investment 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 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.
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
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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
The Asset Allocation and Equity Funds may invest in securities of
foreign issuers in the forms of American Depository Receipts ("ADRs") and
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. Certain such institutions issuing ADRs may not be
sponsored by the issuer. A non-sponsored depository may not provide the same
shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer.
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 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 Fund may invest in securities issued by open (and closed-end for
the Non-Money Market Funds) investment companies which principally invest in
securities in which the Fund invests. Under the 1940 Act, a Fund's investment
in such securities, subject to certain exceptions, currently is limited to (i)
3% of the total voting stock of any one investment company, (ii) 5% of the
Fund's net assets with respect to any one investment company and (iii) 10% of
the 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.
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Asset Backed Securities
Asset Backed Securities acquired by the Non-Money Market Funds consist
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
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not guaranteed by the full faith and credit of the U.S. Government. Privately
issued mortgage backed securities will carry a rating at the time of purchase
of at least A by S&P or by Moody's or, if unrated, will be in the Investment
Advisers' opinion equivalent in credit quality to such rating. Mortgage backed
securities issued by private issuers, whether or not such obligations are
subject to guarantees by the private issuer, may entail greater risk than
obligations directly or indirectly guaranteed by the U.S. Government.
The Non-Money Market Funds may also invest in non-mortgage backed
securities including interest in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage backed securities are not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain possession
of the underlying obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related motor vehicle receivables. In
addition, because of the large number of vehicles involved in a typical
issuance and technical requirements under state laws, the trustee for the
holders of the motor vehicle receivables may not have an effective security
interest in all of the obligations backing such receivables. Therefore, there
is a possibility that recoveries on repossessed collateral may not, in some
cases, be able to support payments on these securities.
Stripped Government Obligations
The Asset Allocation, Bond and Money Market Funds 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.
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Municipal and Related Obligations
Municipal Obligations that may be acquired by the Asset Allocation and
Bond Funds may include general obligations, revenue obligations, notes and
moral obligations bonds. Each of these Funds 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. See "Description of the Funds --
Risk Factors -- Municipal Obligations."
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 and Bond Funds may acquire "stand-by commitments"
with respect to Municipal Obligations held in their portfolios. Under a
stand-by commitment, a Fund obligates a broker, dealer or bank to repurchase,
at the Fund's option, specified securities at a specified price and, in this
respect, stand-by commitments are comparable to put options. The exercise of a
stand-by commitment therefore is subject to the ability of the seller to make
payment on demand. A Fund will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. A Fund may pay for stand-by commitments if
such action is deemed necessary, thus increasing to a degree the cost of the
underlying Municipal Obligation and similarly decreasing such securities yield
to investors.
Custodial Receipts and Certificates of Participation
The Asset Allocation, Bond and Money Market Funds 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.
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<PAGE>
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. A 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. A Fund also may purchase call options to enter into closing
purchase transactions. A 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.
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 transaction 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.
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Foreign Currency Transactions
The Asset Allocation and International Equity Funds may engage in
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, or through entering into forward
contracts to purchase or sell currencies. A forward currency exchange contract
involves an obligation to purchase or sell a specific currency at a future
date, which must be more than two days from the date of the contract, at a
price set at the time of the contract. These contracts are entered into in the
interbank market conducted directly between currency traders (typically
commercial banks or other financial institutions) and their customers. They
may be used to reduce the level of volatility caused by changes in foreign
currency exchange rates or when such transactions are economically appropriate
for the reduction of risks in the ongoing management of the Funds. Although
forward currency exchange contracts may be used to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized should the value of
such currency increase. The Funds also may combine forward currency exchange
contracts with investments in securities denominated in other currencies.
Each of these Funds also may maintain short positions in forward
currency exchange transactions, which would involve it agreeing to exchange an
amount of a currency it did not currently own for another currency at a future
date in anticipation of a decline in the value of the currency sold relative
to the currency the Fund contracted to receive in the exchange.
Options on Foreign Currency
The Asset Allocation and International Equity Funds may purchase and
sell call and put options on foreign currency for the purpose of hedging
against changes in future currency exchange rates. Call options convey the
right to buy the underlying currency at a price which is expected to be lower
than the spot price of the currency at the time the option expires. Put
options convey the right to sell the underlying currency at a price which is
anticipated to be higher than the spot price of the currency at the time the
option expires. The Funds may use foreign 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 Advisers' 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.
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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.
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.
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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 investments
(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.
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.)
A-12
<PAGE>
CROSS REFERENCE SHEET
Series A, B, C, D, E, F, G, and H Representing Interests in the Pegasus
Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity, Growth and
Money Market, Bond, Intrinsic Value and International Equity Funds,
respectively.
Statement of Additional
Information
Form N-1A Part B Item Caption
- --------------------- -------
10. Cover Page................................ Cover Page
11. Table of Contents......................... Table of Contents
12. General Information and History........... Description of Shares
13. Investment Objectives and Policies........ Investment Objectives,
Policies and Risk Factors
14. Management of Registrant.................. Management
15. Control Persons and Principal............. Description of Shares
Holders of Securities
16. Investment Advisory and Other Services.... Management
17. Brokerage Allocation and other Practices.. Investment Objectives,
Policies and Risk Factors
18. Capital Stock and Other Securities........ Net Asset Value; Additional
Purchase and Redemption
Information; Description of
Shares
19. Purchase, Redemption and Pricing.......... Net Asset Value;
of Securities Being Offered............... Additional Purchase and
Redemption Information
20. Tax Status................................ Additional Information
Concerning Taxes
21. Underwriters.............................. Not Applicable
22. Calculation of Performance Data........... Additional Information on
Performance
23. Financial Statements...................... Financial Statements
-6-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
____________ ___, 1997
for the
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID-CAP OPPORTUNITY FUND
GROWTH FUND
INTRINSIC VALUE FUND
INTERNATIONAL EQUITY FUND
BOND 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 ____________, 1997 for the
Funds listed above (each, a "Fund" and collectively, the "Funds"), as it may
be revised from time to time, and is incorporated by reference in its entirety
into the Prospectus. The Managed Assets Balanced, Growth and Value, Mid-Cap
Opportunity , Growth, Intrinsic Value, International Equity and Bond 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
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or the Hartford Companies. Capitalized terms used but not defined herein have
the same meanings as in the Prospectus.
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TABLE OF CONTENTS
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Page
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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..................................... 29
COUNSEL............................................................ 29
ADDITIONAL INFORMATION ON PERFORMANCE.............................. 30
MISCELLANEOUS...................................................... 34
APPENDIX A.........................................................A-1
APPENDIX B.........................................................B-1
FINANCIAL STATEMENTS............................................. FS-1
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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.
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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 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 periods,
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.
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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.
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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
Within the past several years, the Treasury Department has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve
book-entry record-keeping system. The Federal Reserve program as established
by the Treasury Department is known as "STRIPS" or "Separate Trading of
Registered Interest and Principal of Securities." To the extent consistent
with their respective investment objectives, the Asset Allocation, Bond and
Money Market Funds may purchase securities
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registered in the STRIPS program. Under the STRIPS program, each 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 Asset Allocation and Bond Funds 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, such Funds may also purchase
stripped mortgage-backed securities ("SMBS"). SMBS that are interest only or
principal only and not issued by the U.S. Government may be considered
illiquid securities if they can not be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of net asset value per share. See "Mortgage Backed Securities."
Custodial Receipts and Certificates of Participation
For certain certificates of participation, the Asset
Allocation, Bond and Money Market Funds will have the right to demand payment,
on not more than 30 days' notice, for all or any part of their participation
interests, plus accrued interest. As to these instruments, such Funds intend
to exercise their rights to demand payment as needed to provide liquidity, to
maintain or improve the quality of their investment portfolios or upon a
default (if permitted under the terms of the instrument).
Bank Obligations
In accordance with its investment objective, 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
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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.
Certain Corporate Obligations
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
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.
Other Investment Companies
The Funds intend to limit their investments in securities
issued by other investment companies so that, as determined immediately after
a securities purchase is made: (a) not more than 5% of the value of a Fund's
total assets will be invested in the securities of any one investment company;
(b) not more than 10% of the value of a Fund's total assets will be invested
in the aggregate in securities of investment companies as a group; and (c) not
more than 3% of the outstanding voting stock of any one investment company
will be owned by the Fund or the Trust as a whole.
Lending Portfolio 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.
Depository Receipts
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.
Mortgage Backed Securities
Mortgage Backed Securities Generally. Mortgage backed
securities held by the Non-Money Market Funds represent an ownership interest
in a pool of residential mortgage loans. These securities are designed to
provide monthly payments of interest and
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principal to the investor. The mortgagor's monthly payments to his lending
institution are "passed-through" to an investor such as the Funds. Most
issuers or poolers provide guarantees of payments, regardless of whether or
not the mortgagor actually makes the payment. The guarantees made by issuers
or poolers are supported by various forms of credit, collateral, guarantees or
insurance, including individual loan, title, pool and hazard insurance
purchased by the issuers or poolers so that they can meet their obligations
under the policies. Mortgage backed securities issued by private issuers or
poolers, whether or not such securities are subject to guarantees, may entail
greater risk than securities directly or indirectly guaranteed by the U.S.
Government.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid. Additional payments
are caused by repayments resulting from the sale of the underlying residential
property, refinancing or foreclosure net of fees or costs which may be
incurred. Some mortgage backed securities are described as "modified
pass-through". These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain fees,
regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home
Loan Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of
the U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("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.
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.
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Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of conventional residential mortgage
loans. Pools created by such non-governmental issuers generally offer a higher
rate of interest than government and government-related pools because there
are no direct or indirect government guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance purchased by the issuer. The insurance
and guarantees are issued by governmental entities, private insurers and the
mortgage poolers. There can be no assurance that the private insurers or
mortgage poolers can meet their obligations under the policies.
The Trust expects that governmental or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payment may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage backed securities
are developed and offered in the market, the Trust may consider making
investments in such new types of securities.
Underlying Mortgages. Pools consist of whole mortgage loans
or participations in loans. The majority of these loans are made to purchasers
of one to four family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools. For
example, in addition to fixed-rate, fixed-term mortgages, the Asset Allocation
and Bond Funds may purchase pools of variable rate mortgages ("VRM"), growing
equity mortgages ("GEM"), graduated payment mortgages ("GPM") and other types
where the principal and interest payment procedures vary. VRMs are mortgages
which reset their interest rate periodically with changes in open market
interest rates. To the extent that a Fund is actually invested in 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.
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.
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Returns on Mortgage Backed Securities. Yields on mortgage
backed pass-through securities are typically quoted based on the maturity of
the underlying instruments and the associated average life assumption.
Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yields of a
Fund. The compounding effect from reinvestments of monthly payments received
by a Fund will increase its yield to shareholders, compared to bonds that pay
interest semi-annually.
Foreign Currency Transactions
When the Asset Allocation or International Equity Fund
enters into a currency transaction, the Fund 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 Asset
Allocation or International Equity Fund either may sell a security and make
delivery of the currency, or retain the security and offset as 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 an Asset Allocation or the
International Equity Fund retains the security and engages in an offsetting
transaction, at the time of execution of the offsetting transaction, it
will incur a gain or loss to the extent movement has occurred in forward
contract prices. Should forward prices decline during the period between the
Fund's entering into a forward contract for the sale of a currency and the
date it enters into an offsetting contract for the purchase of the currency,
it will realize a gain to the extent the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price
of the currency it has agreed to purchase exceeds the price of the currency it
has agreed to sell.
The cost of currency transactions varies with factors such
as the currency involved, the length of the contract period and the market
conditions then prevailing. Because transactions in currency exchange usually
are conducted on a principal basis, no fees or commissions are involved. The
use of forward currency exchange contracts does not eliminate fluctuations in
the underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. If a devaluation generally is
anticipated, a Fund may not be able to contract to sell the currency at a
price above the devaluation level it anticipates. The requirements for
qualification as a regulated investment company under the Code, may cause the
Funds to restrict the degree to which it engages in currency transactions. See
"Additional Information Concerning Taxes."
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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 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
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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.
Stock Index Options
Each Asset Allocation and Equity Fund may purchase and write
put and call 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.
Options on stock indices 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.
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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 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 Asset Allocation and Equity Fund may invest up to 5% of
its assets at the time of purchase in warrants and similar rights (other than
those that have been acquired in units or attached to other securities).
Warrants represent rights to purchase securities at a specified price valid
for a specified period of time. The prices of warrants do not necessarily
correlate with the prices of underlying securities.
Municipal and Related Obligations
To the extent consistent with its investment objective, each
Asset Allocation and Bond Fund may invest in Municipal Obligations. There
are, of course, variations in the quality of Municipal Obligations, both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend in part on a variety of factors, including
general market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. The ratings of
Municipal Obligations by Rating Agencies represent their opinions as to the
quality of Municipal Obligations. It should be emphasized, however, that
ratings are general and are not absolute standards of quality, and Municipal
Obligations with the same maturity, interest rate and rating may have
different yields while Municipal Obligations with the same maturity and
interest rate with different ratings may have the same yield. Subsequent to
its purchase by a Fund, a Municipal Obligation may cease to be rated or its
rating may be reduced below the minimum rating required for purchase by the
Fund. The Investment Adviser may consider such an event in determining whether
a Fund should continue to hold the obligation.
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The payment of principal and interest on most Municipal
Obligations purchased by these Funds 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.
Certain of the Municipal Obligations held by the Funds may
be insured at the time of issuance as to the timely payment of principal and
interest. The insurance policies will usually be obtained by the issuer of the
Municipal Obligations at the time of original issuance. There is, however, no
guarantee that the insurer will meet its obligations. In addition, such
insurance will not protect against market fluctuations caused by changes in
interest rates and other factors.
Stand-By Commitments
The Asset Allocation and Bond Funds may acquire "stand-by
commitments" with respect to Municipal Obligations they hold. Under a stand-by
commitment, a dealer agrees to purchase at a Fund's option specified Municipal
Obligations at a specified price. Stand-by commitments may be exercisable by
the Funds at any time before the maturity of the underlying Municipal
Obligations and may be sold, transferred or assigned only with the instruments
involved.
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The Funds expect that stand-by commitments will generally be
available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Funds may pay for a stand-by
commitment either separately in cash or by paying a higher price for Municipal
Obligations which are acquired subject to the commitment (thus reducing the
yield to maturity otherwise available for the same securities). A 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 Funds intend to enter into stand-by commitments only
with dealers, banks and broker-dealers which, in the Investment Adviser's
opinion, present minimal credit risks. A Fund's reliance upon the credit of
these dealers, banks and broker-dealers will be secured by the value of the
underlying Municipal Obligations that are subject to the commitment. Thus, the
risk of loss to the Funds in connection with a "stand-by commitment" will not
be qualitatively different from the risk of loss faced by a person that is
holding securities pending settlement after having agreed to sell the
securities in the ordinary course of business.
The Funds will acquire stand-by commitments solely to
facilitate portfolio liquidity and do not intend to exercise their rights
thereunder for trading purposes. The acquisition of a stand-by commitment will
not affect the valuation or assumed maturity of the underlying Municipal
Obligations which will continue to be valued in accordance with the amortized
cost method. The actual stand-by commitment will be valued at zero in
determining net asset value. Where a Fund pays directly or indirectly for a
stand-by commitment, its cost will be reflected as an unrealized loss for the
period during which the commitment is held by the Fund and will be reflected
in realized gain or loss when the commitment is exercised or expires.
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
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approval of the holders of the majority of the outstanding shares of the
affected Fund (as defined under "Description of Shares" below).
None of the Funds may:
1. Purchase or sell real estate, except that each Fund may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
2. Invest in commodities, except that as consistent with a
Fund's investment objective and policies (a) each Fund may purchase and sell
options, forward contracts, futures contracts, including without limitation
those relating to indices, and options on futures contracts or indices; and
(b) each Fund may purchase publicly traded securities of companies engaging
in whole or in part in such activities.
3. Act as an underwriter of securities within the meaning of
the Securities Act of 1933 except insofar as a Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance
with the Fund's investment objective, policies and limitations may be deemed
to be underwriting.
In addition to the above fundamental limitations, the Funds
are subject to the following non-fundamental limitations, which may be changed
without a shareholder vote:
None of the Funds may:
1. Acquire any other investment company or investment
company security except in connection with a merger, consolidation,
reorganization or acquisition of assets or where otherwise permitted 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 (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 outstanding
borrowings (including reverse repurchase agreements) are in excess of 5% of
its assets. Securities held in escrow or separate accounts in connection with
its investment practices are not deemed to be pledging for purposes of this
limitation.
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
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receive if it 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, present at a meeting if the holders of
more than 50% of the outstanding shares are present in person or by proxy, or
(2) more than 50% of the outstanding shares of the Trust or the applicable
Fund.
When issued for payment as described in the Trust's
Prospectus and this Additional Statement, shares of the Funds will be fully
paid and non-assessable by the Trust.
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 or her 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 or she 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.
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.
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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. As a
regulated investment company, each Fund is exempt from federal income tax on
its net investment income and realized capital gains which it distributes to
shareholders, provided that it distributes an amount equal to at least the sum
of (a) 90% of its investment company taxable income (net investment income and
the excess of net short-term capital gain over net long-term capital loss, if
any, for the year) and (b) 90% of its net tax-exempt interest income, if any,
for the year (the "Distribution Requirement") and satisfies certain other
requirements of the Code that are described below. Distributions of investment
company taxable income and net tax-exempt interest income made during taxable
year or, under specified circumstances, within twelve months after the close
of the taxable year will satisfy the Distribution Requirement.
In addition to the Distribution Requirement, 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; and (3) foreign currencies (and options, futures and forward
contracts on foreign currencies) that are
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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.
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 would be taxable as ordinary income to
shareholders to the extent of the Fund's current and accumulated earnings and
profits and would be eligible for the dividends received deduction for
corporations.
Each Fund may be required in certain cases to withhold and
remit to the U.S. Treasury 31% of taxable dividends or gross proceeds realized
upon sale paid to shareholders who have failed to provide a correct tax
identification number in the manner required, who are subject to withholding
by the Internal Revenue Service for failure properly to include on their
return payments of taxable interest or dividends, or who have failed to
certify to the 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.
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MANAGEMENT
Trustees and Officers of the Trust
The names of the Trustees and executive officers of the
Trust, their ages and their principal occupations for the last five years are
set forth below. Each Trustee has an address at the Pegasus Variable Annuity
Fund, c/o NBD Bank, 900 Tower Drive, Troy, Michigan 48098. 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.
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 (1992-
1995), 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, Chairman of the Board
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,
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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.
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. Dillon, Vice President
An employee of the Distributor. He is 33 years old and his address is 3435
Stelzer 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 Stelzer Road, Columbus,
Ohio 43219-3035.
D'Ray Moore, Treasurer
An employee of the Distributor. She is 37 years old and her address is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
-24-
<PAGE>
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia, Pennsylvania. He
is 53 years old, and his address is 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107.
* Denotes Interested Trustee.
- ---------
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.
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., ++ $24,437.50 $24,437.50(2)+
Chairman and President
Marilyn McCoy, Trustee *** $30,000(4)+
Julius L. Pallone, Trustee ++ $21,250 $21,250(2)+
Donald G. Sutherland, ++ $21,250 $21,250(2)+
Trustee
Donald L. Tuttle, Trustee ++ $21,250 $21,250(2)+
Eugene C. Yehle, Trustee $21,250 $21,250(2)+
and Treasurer
- ----------------------
-25-
<PAGE>
* Amount does not include reimbursed expenses for attending Board meetings.
** 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, $21,250, $21,250,
and $21,250 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. In
addition, the Investment Adviser is entitled to 4/10ths of the gross income
earned by a Fund on each loan of securities (excluding capital gains and
losses, if any). The Investment Adviser has informed the Trust's Board of
Trustees that since the inception of the Trust neither it nor any of its
affiliates has engaged in and received compensation for any transactions
involving lending of portfolio securities. Furthermore, neither the Investment
Adviser nor any of its affiliates will do so unless permitted by the SEC or
SEC staff.
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 and administrative services on behalf of the
Funds, and reimbursed the 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
-26-
<PAGE>
For the period from March 30, 1995 (commencement of
operations) through December 31, 1995, the Trust paid NBD fees for advisory
and administrative services on behalf of the Funds, and reimbursed the 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 divisions or departments of
its or its affiliates' 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 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.
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.
-27-
<PAGE>
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 the reckless disregard of its duties and
obligations under the Agreement.
Administrators
Pursuant to an Administration Agreement dated as of October 7,
1996 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.
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 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 Funds' 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 and (iv) makes periodic reports to the Trust's Board
of Trustees concerning the Trust's operations.
For its services as Custodian, NBD is entitled to receive from
the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity, Growth,
Intrinsic Value, International Equity and Bond Funds fees at the following
annual rates based on the
-28-
<PAGE>
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.
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. The financial statements included in this Statement of Additional
Information and the financial highlights included in the Prospectus, with
respect to the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity,
Growth and Money Market Funds, have been derived from such Funds' financial
statements which have been audited by Arthur Andersen LLP, as indicated in
its reports with respect thereto, and are included herein in reliance upon
the authority of said firm as an expert in giving said reports.
COUNSEL
Drinker Biddle & Reath (of which Mr. McConnel, Secretary of the
Trust, is a partner), 1345 Chestnut Street, Philadelphia, Pennsylvania
19107-3496, is counsel to the Trust.
-29-
<PAGE>
ADDITIONAL INFORMATION ON PERFORMANCE
From time to time, the total return of each Fund and the
yields of the Managed Assets Balanced, Bond 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
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,
-30-
<PAGE>
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 periods from March 30, 1995 (commencement of
operations) through December 31, 1995 and March 30, 1995 (commencement of
operations) through June 30, 1996 are shown below:
<TABLE>
<CAPTION>
Average Annual Average Annual Aggregate Annual Aggregate
Total Return Total Return Total Return Total Return
From Inception From Inception From Inception From Inception
Through 12/31/95 Through 6/30/96 Through 12/31/95 Through 6/30/96
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Asset Allocatios Balanced Fund 20.15% 15.540% 20.15% 19.872%
- ------------------------------
Inception: March 30, 1995
Growth and Value Fund 22.75% 21.251% 22.75% 27.353%
- ---------------------
Inception: March 30, 1995
Mid-Cap Opportunity Fund 14.20% 17.404% 14.20% 22.303%
- ------------------------
Inception: March 30, 1995
Growth Fund 18.82% 17.500% 18.82% 22.429%
- -----------
Inception: March 30, 1995
</TABLE>
Asset Allocation, Bond and Money Market Funds
The "yield" and "effective yield" of the Asset Allocation,
Bond and Money Market Funds 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 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
-31-
<PAGE>
their customers for cash management and other services are not reflected in
the Fund's calculations of yields.
The Asset Allocation and Bond Funds' yield is calculated by
dividing the Fund'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. This calculation can
be expressed as follows:
a-b
Yield = 2 [(----- + 1)6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
Because the Money Market Fund values its portfolio on an
amortized cost basis, it is expected that there is likely to be no
material difference between net income for dividend and for standardized
yield quotation purposes.
For the seven-day period ended June 30, 1996, the annualized
yield and effective yield 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 period ended December 31, 1995, the
annualized yield and effective yield 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%.
-32-
<PAGE>
Other Performance Information
The Funds may from time to time include in advertisements,
sales literature, communications to shareholders and other materials
("Literature") total return figures that are not calculated according to the
formulas set forth above in order to compare more accurately a Fund's
performance with other measures of investment return. For example, in
comparing the Funds' total returns with data published by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. or Weisenberger Investment
Company Service, or with the performance of an index, the Funds may calculate
their returns for the period of time specified in the advertisement or
communication by assuming the investment of $10,000 in shares and assuming the
reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.
The Funds may 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, risk and volatility assessments, 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.
-33-
<PAGE>
MISCELLANEOUS
As of the date hereof, 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.
-34-
<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.
Corporate and Municipal Long-Term Debt Ratings
The following summarizes the ratings used by Standard &
Poor's for corporate and municipal debt:
"AAA" - This designation represents the highest rating
assigned by Standard & Poor's to a debt obligation and indicates an extremely
strong capacity to pay interest and repay principal.
"AA" - Debt is considered to have a very strong capacity
to pay interest and repay principal and differs from AAA issues only in small
degree.
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"A" - Debt is considered to have a strong capacity to
pay interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to
pay interest and repay principal. Whereas such issues normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher- rated
categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"BB" - Debt has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"CC" - This rating is typically applied to debt
subordinated to senior debt that is assigned an actual or implied "CCC"
rating.
"C" - This rating is typically applied to debt
subordinated to senior debt which is assigned an actual or implied "CCC-" debt
rating. The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
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"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.
"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
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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.
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.
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"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one
of these ratings is considered to be below investment grade. Although below
investment grade, debt rated "BB" is deemed likely to meet obligations when
due. Debt rated "B" possesses the risk that obligations will not be met when
due. Debt rated "CCC" is well below investment grade and has considerable
uncertainty as to timely payment of principal, interest or preferred
dividends. Debt rated "DD" is a defaulted debt obligation, and the rating "DP"
represents preferred stock with dividend arrearages.
To provide more detailed indications of credit quality, the
"AA," "A," "BBB," "BB" and "B" ratings may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within these major
categories.
The following summarizes the highest four ratings used by
Fitch for corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
"AA" - Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
generally rated "F-1+."
"A" - Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds, and therefore, impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
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.
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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.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned
one of these ratings where it is considered that speculative characteristics
are present. "BB" represents the lowest degree of speculation and indicates a
possibility of investment risk developing. "C" represents the highest degree
of speculation and indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a
rating to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the ability
to repay principal and interest on a timely basis is extremely high.
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<PAGE>
"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BBB" - This designation represents Thomson BankWatch's
lowest investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings.
"BB," "B," "CCC," and "CC," - These designations are
assigned by Thomson BankWatch to non-investment grade long-term debt. Such
issues are regarded as having speculative characteristics regarding the
likelihood of timely payment of principal and interest. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt
is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1"- The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus (+)
designation.
"SP-2"- The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3"- The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
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<PAGE>
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade ("MIG") and variable
rate demand obligations are designated Variable Moody's Investment Grade
("VMIG"). Such ratings recognize the differences between short-term credit
risk and long-term risk. The following summarizes the ratings by Moody's
Investors Service, Inc. for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of
high quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
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As stated in the 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 Non-Money Market Funds 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.
Description of Interest Rate Futures Contracts. An interest
rate futures contract sale would create an obligation by a Non-Money Market
Fund, as seller, to deliver the specific type of financial instrument called
for in the contract at a specific future time for a specified price. A futures
contract purchase would create an obligation by a Fund, as purchaser, to take
delivery of the specific type of financial instrument at a specific future
time at a specific price. The specific securities delivered or taken,
respectively, at settlement date, would not be determined until at or near
that date. The determination would be in accordance with the rules of the
exchange on which the futures contract sale or purchase was made.
Although interest rate futures contracts by their terms call
for actual delivery or acceptance of securities, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery of securities. Closing out a futures contract sale is effected by a
Fund's entering into a futures contract purchase for the same aggregate amount
of the specific type of financial instrument and the same delivery date. If
the price in the sale exceeds the price in the offsetting purchase, the Fund
is paid the difference and thus realizes a gain. If the offsetting purchase
price exceeds the sale price, the Fund pays the difference and realizes a
loss. Similarly, the closing out of a futures contract purchase is effected by
the Fund's entering into a futures contract sale. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the purchase
price exceeds the offsetting sale price, the Fund realizes a loss.
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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. A Non-Money Market Fund
would engage in an interest rate futures contract sale to maintain the income
advantage from continued holding of a long-term bond while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany a
decline in long-term securities prices. Assume that the market value of a
certain security in a Fund tends to move in concert with the futures market
prices of long-term United States Treasury bonds ("Treasury bonds"). The
Investment Adviser wishes to hedge the current market value of this portfolio
security until some point in the future. Assume the portfolio security has a
market value of 100, and the Investment 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.
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 hedged, would increase. The benefit of this increase
would be reduced by the loss realized on closing out the futures contract
sale.
If interest rate levels did not change, the Fund in the
above example might incur a loss of 2 points (which might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
transaction expenses would also be incurred.
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Examples of Futures Contract Purchase. The Non-Money Market
Funds might engage in an interest rate futures contract purchase when it is
not fully invested in long-term bonds but wishes to defer for a time the
purchase of long-term bonds in light of the availability of advantageous
interim investments, e.g., shorter-term securities whose yields are greater
than those available on long-term bonds. A Fund's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Fund would be 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
wishes to hedge the current market price (and thus 10% yield) of the long-term
bond until the time (four months away in this example) when it may purchase
the bond. Assume the long-term bond has a market price of 100, and the
Investment 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. A Fund might enter into futures contracts
purchases of Treasury bonds for an equivalent price of 98. At the same time,
the Fund could, for example, assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in
four months, for purchase of the long-term bond at an assumed market price of
100. Assume these short-term securities are yielding 15%. If the market price
of the long-term bond does indeed rise from 100 to 105, the equivalent futures
market price for Treasury bonds might also rise from 98 to 103. In that case,
the 5-point increase in the price that the Fund pays for the long-term bond
would be offset by the 5-point gain realized by closing out the futures
contract purchase.
The Investment 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 a Fund would continue
with its purchase program for long-term bonds. The market price of available
long-term bonds would have decreased. The benefit of this price decrease, and
thus yield increase, will be reduced by the loss realized on closing out the
futures contract purchase.
If, however, short-term rates remained above available
long-term rates, it is possible that a Fund would discontinue its purchase
program for long-term bonds. The yield on short-term securities in the
portfolio, including those originally in the pool assigned to the particular
long-term bond, would remain higher than yields on long-term bonds. The
benefit of this continued incremental income will be reduced by the loss
realized on closing out the futures contract purchase.
In each transaction, expenses would also be incurred.
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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 indices, 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 indices, such as the Standard &
Poor's 100 or indices 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 Equity Funds may sell index futures contracts in order
to hedge against a decrease in market value of its portfolio securities that
might otherwise result from a market decline. A Fund may do so either to hedge
the value of its portfolio as a whole, or to hedge against declines, occurring
prior to sales of securities, in the value of the securities to be sold.
Conversely, the Funds may purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, the
Funds may purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a
corresponding purchase of securities.
In addition, the Funds may utilize index futures contracts
in anticipation of changes in the composition of their portfolio holdings. For
example, in the event that a Fund expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more
restricted index, such as an index comprised of securities of a particular
industry group. The Fund may also sell futures contracts in connection with
this strategy, in order to hedge against the possibility that the value of the
securities to be sold as part of the restructuring of the portfolio will
decline prior to the time of sale.
The following are examples of transactions in stock index
futures (net of commissions and premiums, if any).
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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 Future at 125
Equity Portfolio Value of Futures =
$62,500/Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Future at 130
Actual Cost = $65,000 Value of Futures = $65,000/
Increase in Purchase Price = Contract
$2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 =$62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Future at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Future 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
B-5
<PAGE>
increased and the Fund had hedged its stock portfolio, the results of the
Fund's transactions in stock index futures would be as set forth below.
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate Buying $62,500 Buying 1 Index Futures at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Futures at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
B-6
<PAGE>
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
Unlike when a Fund purchases or sells a security, no price
is paid or received by the Fund upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with the broker or
in a segregated account with the Fund's Custodian an amount of cash or cash
equivalents, the value of which may vary but is generally equal to 10% or less
of the value of the contract. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in security transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good
faith deposit on the contract which is returned to the Fund upon termination
of the futures contract assuming all contractual obligations have been
satisfied. Subsequent payments, called variation margin, to and from the
broker, will be made on a daily basis as the price of the underlying security
or index fluctuates making the long and short positions in the futures
contract more or less valuable, a process known as marking to the market. For
example, when a Fund has purchased a futures contract and the price of the
contract has risen in response to a rise in the underlying instruments, that
position will have increased in value and the Fund will be entitled to receive
from the broker a variation margin payment equal to that increase in value.
Conversely, where a Fund has purchased a futures contract and the price of the
future contract has declined in response to a decrease in the underlying
instruments, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker. At any time prior
to expiration of the futures contract, the Investment 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.
B-7
<PAGE>
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 Fund involved will experience either a loss or gain
on the future which will not be completely offset by movements in the price of
the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged and
movements in the price of futures contracts, a Fund may buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities
being hedged if the volatility over a particular time period of the prices of
such securities has been greater than the volatility over such time period of
the future, 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 Fund then concludes not
to invest in securities or options at that time because of concern as to
possible further market decline or for other reasons, the Fund will realize a
loss on the futures contract that is not offset by a reduction in the price of
securities purchased.
In instances involving the purchase of futures contracts by
a Fund, an amount of cash and cash equivalents, equal to the market value of
the futures contracts (or options), will be deposited in a segregated account
with the Fund's Custodian and/or in a margin account with a broker to
collateralize the position and thereby ensure that the use of such futures is
unleveraged.
In addition to the possibility that there may be an
imperfect correlation, or no correlation at all, between movements in the
futures and the securities being hedged, the
B-8
<PAGE>
price of futures may not correlate perfectly with movement in the cash market
due to certain market distortions. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through
off-setting transactions which could distort the normal relationship between
the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants
entering into off-setting transactions rather than making or taking delivery.
To the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced thus producing distortions. Third, from the
point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market, and because of the imperfect correlation between the movements
in the cash market and movements in the price of futures, a correct forecast
of general market trends or interest rate movements by the Investment 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.
B-9
<PAGE>
Such sales of securities may be, but will not necessarily be, at increased
prices which reflect the rising market. A Fund may have to sell securities at
a time when it may be disadvantageous to do so.
V. Options on Futures Contracts
Each Non-Money Market Fund may purchase options on the
futures contracts described above. A futures option gives the holder, in
return for the premium paid, the right to buy (call) from or sell (put) to the
writer of the option a futures contract at a specified price at any time
during the period of the option. Upon exercise, the writer of the option is
obligated to pay the difference between the cash value of the futures contract
and the exercise price. Like the buyer or seller of a futures contract, the
holder, or writer, of an option has the right to terminate its position prior
to the scheduled expiration of the option by selling, or purchasing, an option
of the same series, at which time the person entering into the closing
transaction will realize a gain or loss.
Investments in futures options involve some of the same
considerations that are involved in connection with investments in futures
contracts (for example, the existence of a liquid secondary market). In
addition, the purchase of an option also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased. Depending on the pricing of the option compared
to either the futures contract upon which it is based, or upon the price of
the securities being hedged, an option may or may not be less risky than
ownership of the futures contract or such securities. In general, the market
prices of options can be expected to be more volatile than the market prices
on the underlying futures contract. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). Although permitted by their investment policies, the Funds do not
currently intend to write futures options, and will not do so in the future
absent any necessary regulatory approvals.
VI. Accounting and Tax Treatment
Accounting for futures contracts and options will be in
accordance with generally accepted accounting principles.
Generally, futures contracts held by a Fund at the close of
the Fund's taxable year will be treated for federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sale will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the length of time the Fund holds the futures
contract ("the 40%-60% rule"). The amount of any capital gain or loss actually
realized by a Fund in a subsequent
B-10
<PAGE>
sale or other disposition of those futures contracts will be adjusted to
reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale of the contracts. With respect to
futures contracts to sell, which will be regarded as parts of a "mixed
straddle" because their values fluctuate inversely to the values of specific
securities held by the Fund, losses as to such contracts to sell will be
subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof
which exceeds the unrecognized gain (if any) with respect to the other part of
the straddle, and to certain wash sales regulations. Under short sales rules,
which will also be applicable, the holding period of the securities forming
part of the straddle will (if they have not been held for the long-term
holding period) be deemed not to begin prior to termination of the straddle.
With respect to certain futures contracts, 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 Fund may result in the creation of one or more straddles for federal income
tax purposes, in which case certain loss deferral, short sales, and wash sales
rules and the requirement to capitalize interest and carrying charges may
apply.
B-11
<PAGE>
Some of the Funds' investments may be subject to special
rules which govern the federal income tax treatment of certain transactions
denominated in terms of a currency other than the U.S. dollar or determined by
reference to the value of one or more currencies other than the U.S. dollar.
The types of transactions covered by the special rules include the following:
(1) the acquisition of, or becoming the obligor under, a bond or other debt
instrument (including, to the extent provided in Treasury regulations,
preferred stock); (2) the accruing of certain trade receivables and payables;
and (3) the entering into or acquisition of any forward contract, futures
contract, option or similar financial instrument. The disposition of a
currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their fair market value at year-end under the
marking-to-market rules, unless an election is made to have such currency
rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss
on the underlying transaction and is normally taxable as ordinary gain or
loss. A taxpayer may elect to treat as capital gain or loss foreign currency
gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not a part of a straddle. In accordance with Treasury regulations,
certain transactions that are part of a "section 988 hedging transaction" (as
defined in the Code and the Treasury regulations) may be integrated and
treated as a single transaction or otherwise treated consistently for purposes
of the Code. "Section 988 hedging transactions" are not subject to the
mark-to-market or loss deferral rules under the Code. Gain or loss
attributable to the foreign currency component of transactions engaged in by a
Fund which are not subject to the special currency rules (such as foreign
equity investments other than certain preferred stocks) will be treated as
capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction.
As described more fully in "Additional Information
Concerning Taxes," a regulated investment company must derive less than 30% of
its gross income from gains realized on the sale or other disposition of
securities and certain other investments held for less than three months. With
respect to futures contracts and other financial instruments subject to the
marking-to-market rules, the Internal Revenue Service has ruled in private
letter rulings that a gain realized from such a futures contract or financial
instrument will be treated as being derived from a security held for three
months or more (regardless of the actual period for which the contract or
instrument is held) if the gain arises as a result of a constructive sale
under the marking-to-market rules, and will be treated as being derived from a
security held for less than three months only if the contract or instrument is
terminated (or transferred) during the taxable year (other than by reason of
marking-to-market) and less than three months have elapsed between the date
the contract or instrument is acquired and the termination date. In
determining whether the 30% test is met for a taxable year, increases and
decreases in the value of each Fund's futures contracts and other
B-12
<PAGE>
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 and unaudited 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 (audited) and for the period
ended June 30, 1996 (unaudited);
Statements of Assets and Liabilities - December 31,
1995 (audited) and June 30, 1996 (unaudited);
Statements of Operations for the period ended
December 31, 1995 (audited) and for the period ended
June 30, 1996 (unaudited);
Statements of Changes in Net Assets for the period
ended December 31, 1995 (audited) and for the period
ended June 30, 1996 (unaudited);
Portfolio of Investments - December 31, 1995
(audited) and June 30, 1996 (unaudited);
Notes to Financial Statements.
(b) Exhibits:
(1)(a) 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.
(b) Certificate of Amendment No. 1 to Certificate of Trust
is filed herein.
<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) Co-Advisory Agreement dated October 7, 1996 among
Registrant, NBD Bank ("NBD") and First Chicago NBD
Investment Management Company ("FCNIMCO") is filed herein.
(b) Form of Addendum No. 1 to Advisory Agreement is filed
herein.
(6)(a) Distribution Agreement dated October 7, 1996 between
Registrant and BISYS is filed herein.
(b) Form of Addendum No. 1 to Distribution Agreement is filed
herein.
(7) Not Applicable.
(8)(a) 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.
(b) Form of Addendum No. 1 to Custodian Agreement is filed
herein.
(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) Form of Addendum No. 1 to Transfer Agency Agreement is
filed herein.
(c) 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.
(d) Co-Administration Agreement dated October 7, 1996 among
Registrant, NBD, FCNIMCO and BISYS is filed herein.
-2-
<PAGE>
(e) Form of Addendum No. 1 to Co-Administration Agreement
is filed herein.
*(10) Opinion of Drinker Biddle & Reath, counsel for the
Registrant.
(11)(a) Consent of Arthur Andersen LLP.
(b) Consent of Drinker Biddle & Reath.
(12) Not Applicable.
(13)(a) Purchase Agreement dated March 29, 1995 between Registrant
and Christina T. Simmons is incorporated herein by
reference to exhibit (13)(a) of the Registrant's
Registration Statement on Form N-1A filed with the
Commission on August 30, 1995.
(b) Purchase Agreement dated March 30, 1995 between Registrant
and Hartford Life Insurance Company is incorporated herein
by reference to exhibit (13)(b) of the Registrant's
Registration Statement on Form N-1A filed with the
Commission on August 30, 1995.
(c) Form of Purchase Agreement between Registrant and ITT
Hartford Life and Annuity Insurance Company is filed
herein.
(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.
- -----------
* Registrant's Rule 24f-2 Notice and related Opinion of Counsel will be filed
under Rule 24f-2.
-3-
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
Registrant is controlled by its Board of Trustees, the members of
which also serve as members of the Board of Trustees of 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.
<TABLE>
<CAPTION>
Number
of
Record
Title of Class Holders
-------------- -------
<S> <C>
Series A Shares of beneficial interest ($.10 par value) 2
Series B Shares of beneficial interest ($.10 par value) 2
Series C Shares of beneficial interest ($.10 par value) 2
Series D Shares of beneficial interest ($.10 par value) 2
Series E Shares of beneficial interest ($.10 par value) 2
Series F Shares of beneficial interest ($.10 par value) 2
Series G Shares of beneficial interest ($.10 par value) 2
Series H Shares of beneficial Interest ($.10 par value) 2
</TABLE>
ITEM 27. INDEMNIFICATION
Indemnification of Registrant's principal underwriter against
certain losses is provided for in Section 10 of the Distribution Agreement
incorporated herein by reference as Exhibit (6)(a). 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 has obtained
from a major insurance carrier a trustees' and officers' liability policy
covering certain types of errors and omissions. In addition, Article X of the
-4-
<PAGE>
Registrant's Trust Instrument incorporated herein by reference as
Exhibit (1)(a), provides as follows:
Section 10.1 Limitation of Liability. A Trustee, when acting in
such capacity, shall 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 herein or in the Delaware Business
Trust Act shall protect any Trustee against any liability to the Trust
or to Shareholders 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
hereunder.
Section 10.2 Indemnification. The Trust shall indemnify each of
its Trustees against all liabilities and expenses (including amounts
paid in satisfaction of judgments, in compromise, as fines and
penalties, and as counsel fees) reasonably incurred by him in
connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which he may be
involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee
except with respect to any matter as to which he shall have been
adjudicated to have acted in bad faith, willful misfeasance, gross
negligence or reckless disregard of his duties, provided that as to
any matter disposed of by a compromise payment by such person,
pursuant to a consent decree or otherwise, no indemnification either
for said payment or for any other expenses shall be provided unless
the Trust shall have received a written opinion from independent legal
counsel approved by the Trustees to the effect that if either the
matter or willful misfeasance, gross negligence or reckless disregard
of duty, or the matter of bad faith had been adjudicated, it would in
the opinion of such counsel have been adjudicated in favor of such
person. The rights accruing to any person under these provisions shall
not exclude any other right to which he may be lawfully entitled,
provided that no person may satisfy any right of indemnity or
reimbursement hereunder except out of the property of the Trust. The
Trustees may make advance payments in connection with the
indemnification under this Section 10.2, provided that the indemnified
person shall have given a written undertaking to reimburse the Trust
in the event it is subsequently determined that he is not entitled to
such indemnification.
-5-
<PAGE>
The Trust shall indemnify officers, and shall have the power to
indemnify representatives and employees of the Trust, to the same
extent that Trustees are entitled to indemnification pursuant to this
Section 10.2.
Section 10.3 Shareholders. In case any Shareholder or former
Shareholder of any Series shall be held to be personally liable solely
by reason of his being or having been a Shareholder of such Series and
not because of his acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his heirs, executors,
administrators or other legal representatives, or, in the case of a
corporation or other entity, its corporate or other general successor)
shall be entitled out of the assets belonging to the applicable Series
to be held harmless from and indemnified against all loss and expense
arising from such liability. The Trust, on behalf of the affected
Series, shall, upon request by the Shareholder, assume the defense of
any claim made against the Shareholder for any act or obligation of
the Series and satisfy any judgment thereon from the assets of the
Series.
-6-
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) The Registrant's investment adviser, First Chicago NBD
Investment Management Company ("FCNIMCO"), is a registered investment adviser
and wholly-
-7-
<PAGE>
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).
ITEM 29. PRINCIPAL UNDERWRITER
(a) BISYS Fund Services will act as distributor and
co-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:
<TABLE>
<CAPTION>
Name and
Principal Positions and Positions and
Business Offices with Offices with
Address BISYS Fund Services Registrant
- --------- ------------------- -------------
<S> <C> <C>
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
</TABLE>
(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
function as adviser, co-administrator, custodian, and transfer
and dividend disbursing agent).
-8-
<PAGE>
(b) First Chicago NBD Investment Management Company, Three First
National Plaza, 70 West Madison, Chicago, Illinois 60670
(records relating to its function as adviser and co-
administrator).
(c) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as distributor and
co-administrator).
(d) 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.
(c) Registrant hereby undertakes to file a post-effective amendment
with respect to the Bond, Intrinsic Value and International
Equity Funds containing financial statements that need not be
certified within four to six months from the effective date of
this Post-Effective Amendment.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Detroit, State of
Michigan, on the 16th day of December, 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
/s/ Julius L. Pallone
- ------------------------
Julius L. Pallone Trustee December 16, 1996
- ------------------------
Nicholas J. De Grazia Trustee
/s/ Donald G. Sutherland
- ------------------------ President
Donald G. Sutherland and Trustee December 16, 1996
- ------------------------
Donald L. Tuttle Trustee
/s/ John P. Gould
- ------------------------ Chairman
John P. Gould and Trustee December 16, 1996
/s/ Marilyn McCoy
- ------------------------
Marilyn McCoy Trustee December 16, 1996
/s/ D'Ray Brewer Treasurer
- ------------------------ (Chief Financial
D'Ray Brewer Officer) December 16, 1996
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
(1)(b) Certificate of Amendment No. 1 to Certificate of Trust
(5)(a) Co-Advisory Agreement dated October 7, 1996
(5)(b) Form of Addendum No. 1 to Advisory Agreement
(6)(a) Distribution Agreement dated October 7, 1996
(6)(b) Form of Addendum No. 1 to Distribution Agreement.
(8)(b) Form of Addendum No. 1 to Custodian Agreement
(9)(b) Form of Addendum No. 1 to Transfer Agency Agreement.
(9)(d) Co-Administration Agreement dated October 7, 1996
(9)(e) Form of Addendum No. 1 to Co-Administration Agreement
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath.
(13)(c) Form of Purchase Agreement
(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 (1)(b)
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT NO. 1 TO
CERTIFICATE OF TRUST
The Woodward Variable Annuity Fund hereby certifies that
pursuant to Title 12, Section 3810(b) of the Delaware Business Trust Act, the
undersigned business trust executed the following Certificate of Amendment:
1. Name of the Trust: The Woodward Variable Annuity
Fund;
2. Section 1.1 of the Certificate of Trust is hereby
amended in the entirety to read as follows:
Name. The name of the trust created hereby is the
"Pegasus Variable Annuity Fund";
3. The Certificate of Trust is hereby further amended
to change all other appropriate references in the
Trust Instrument to reflect the fact that the name
of the Trust is "Pegasus Variable Annuity Fund";
4. This Certificate of Amendment shall be effective
on: October 7, 1996.
IN WITNESS WHEREOF, the undersigned has executed this
Certificate on the 3rd day of October, 1996.
/s/ Donald G. Sutherland
------------------------
Donald G. Sutherland
President and
Trustee of the Trust
Exhibit (5)(a)
CO-ADVISORY AGREEMENT
This Agreement, dated as of the 7th day of October, 1996,
is entered into by and among NBD Bank ("NBD"), First Chicago Investment
Management Company ("FCIMCO") and The Woodward Variable Annuity Fund (the
"Trust"), a Delaware business trust registered as an investment company under
the Investment Company Act of 1940 (the "1940 Act");
WHEREAS, the Trust desires to appoint NBD and FCIMCO to act as
co-advisers to the Trust's investment portfolios listed on Schedule 1 attached
hereto (each a "Fund" and collectively the "Funds").
WHEREAS, NBD and FCIMCO (each an "Adviser" and collectively the
"Advisers") desire to perform investment advisory services on behalf of the
Trust's Funds;
NOW, THEREFORE, the parties hereto intending to be legally bound,
hereby agree as follows:
1. Appointment. (a) The Trust hereby appoints the Advisers to act as
investment co- advisers for each of the Funds of the Trust for the period and
on the terms set forth in this Agreement. The Advisers accept such appointment
and agree to render the services herein set forth, for the compensation herein
provided. The Advisers may, in their discretion, provide such services through
their own employees or the employees of one or more affiliated companies that
are qualified to act as investment adviser to the Trust under applicable law
and are under the common control of First Chicago NBD Corporation provided (i)
that all persons, when providing services hereunder, are functioning as part
of an organized group of persons, and (ii) that such organized group of
persons is managed at all times by persons who are authorized officers of one
or both of the Advisers.
(b) In the event that the Trust establishes one or more
investment portfolios other than the Funds with respect to which it desires to
retain the Advisers to act as investment co-advisers hereunder, the Trust
shall notify the Advisers in writing. If the Advisers are willing to render
such services they shall notify the Trust in writing whereupon, subject to
such shareholder approval as may be required pursuant to Paragraph 8 hereof,
such portfolio shall become a Fund hereunder and the compensation payable by
such new Fund to the Advisers will be as agreed in writing at the time.
2. Management. Subject to the supervision of the Board of Trustees of
the Trust (the "Board"), the Advisers will provide
<PAGE>
a continuous investment program for each of the Funds, including investment
research and management with respect to all securities, investments, cash and
cash equivalents in each Fund. The Advisers will determine from time to time
what securities and other investments will be purchased, retained or sold by
the Trust for each of its Funds. The Advisers will provide the services
rendered by them hereunder in accordance with the investment objective and
policies of each of the Funds as stated in their respective prospectuses
("Prospectuses" or a "Prospectus"), statements of additional information
("SAIs") and all amendments and supplements thereto, Bylaws, Amended and
Restated Declaration of Trust and resolutions adopted from time to time by the
Trust's Board. The Advisers further agree that they:
(a) will conform with all applicable Rules and Regulations
(hereinafter called the "Rules") of the Securities and
Exchange Commission ("SEC"), and will in addition
conduct their activities under this Agreement in
accordance with other applicable laws;
(b) will place all orders for the purchase and sale of
portfolio securities for the account of each Fund with
brokers or dealers selected by the Advisers. In
executing portfolio transactions and selecting brokers
or dealers, the Advisers will use their best efforts to
seek on behalf of the Trust and each Fund thereof the
best overall terms available. In assessing the best
overall terms available for any transaction, the
Advisers shall consider all factors they deem relevant,
including the breadth of the market in the security, the
price of the security, the financial condition and
execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In
evaluating the best overall terms available, and in
selecting the broker or dealer to execute a particular
transaction, the Advisers may also consider the
brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act
of 1934) provided to any Fund and/or other accounts over
which the Advisers or an affiliate of the Advisers
exercises investment discretion. The Advisers are
authorized, subject to the prior approval of such policy
by the Trust's Board, to pay to a broker or dealer who
provides such brokerage and research services a
commission for executing a portfolio transaction for any
Fund which is in excess of the amount of commission
another broker or dealer
-2-
<PAGE>
would have charged for effecting that transaction if, but
only if, such is consistent with applicable law and the
Advisers determine in good faith that such commission was
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer --
viewed in terms of that particular transaction or in
terms of the overall responsibilities of the Advisers
to the particular Fund and to the Trust.
In no instance will portfolio securities be purchased
from or sold to the Advisers or the Trust's principal
underwriter for the Funds or an affiliated person of
either, acting as principal or as broker, except as
permitted by law. In executing portfolio transactions
for any Fund, the Advisers, to the extent permitted by
applicable laws and regulations, may but shall not be
obligated to, aggregate the securities to be sold or
purchased with those of other Funds and their other
clients where such aggregation is not inconsistent with
applicable law and the policies set forth in the Funds'
registration statement. In such event, the Advisers will
allocate the securities so purchased or sold, and the
expenses incurred in the transaction, in the manner they
consider to be the most equitable and consistent with
their fiduciary obligations to the Funds and such other
clients;
(c) will maintain a policy and practice of conducting their
investment advisory operations independently of their
commercial banking operations. When the Advisers make
investment recommendations for a Fund, their investment
advisory personnel will not inquire or take into
consideration whether the issuer of securities proposed
for purchase or sale for the Fund's account are
customers of their commercial departments. In dealing
with commercial customers, the Advisers' commercial
departments will not inquire or take into consideration
whether securities or those customers are held by the
Funds;
(d) will maintain all books and records with respect to the
securities transactions of the Funds; and furnish the
Trust's Board such periodic and special reports as the
Board may request;
(e) will treat confidentially and as proprietary information
of the Trust all records and other
-3-
<PAGE>
information relative to the Trust and prior or present
shareholders of the Funds or those persons or entities
who respond to inquiries of the Trust's principal
underwriter concerning investment in the Funds and will
not use such records and information for any purpose
other than performance of their responsibilities and
duties hereunder, except after prior notification to
and approval in writing by the Trust, which approval
shall not be unreasonably withheld and may not be
withheld where the Advisers may be exposed to civil or
criminal contempt proceedings for failure to comply,
when requested to divulge such information by duly
constituted authorities, or when so requested by the
Trust. Nothing contained herein or in any other
agreement executed with the Trust, however, shall
prohibit NBD, FCIMCO and any of their affiliates from
advertising to or soliciting the public generally with
respect to other products or services, including, but
not limited to, any advertising or marketing via radio,
television, newspapers, magazines or direct mail
solicitation, regardless of whether such advertisement
or solicitation may coincidentally include prior or
present Fund shareholders or those persons or entities
who have responded to inquiries of the Trust's
principal underwriter.
3. Services Not Exclusive. The services rendered by the Advisers
hereunder are not to be deemed exclusive, and the Advisers shall be free to
render similar services to others so long as their services under this
Agreement are not impaired thereby.
4. Expenses. During the term of this Agreement, the Advisers will pay
all expenses incurred by them in connection with their activities under this
Agreement other than the cost of securities purchased for the Funds (including
brokerage commissions, if any).
In addition, if the expenses borne by any Fund in any fiscal year
exceed the applicable expense limitations imposed by the securities
regulations of any state in which the shares are registered or qualified for
sale to the public, the Advisers jointly and severally agree to reimburse such
Fund for a portion of any excess expense in an amount equal to the portion
that the advisory fees otherwise payable by the Fund to the Advisers bear to
the total amount of investment advisory and administration fees otherwise
payable by the Fund. The expense reimbursement obligation of the Advisers is
limited to the amount of their fees hereunder for such fiscal year; provided,
however, that notwithstanding the foregoing, the Advisers shall reimburse such
-4-
<PAGE>
Fund for a portion of any such excess expenses in an amount equal to the
proportion that the fees otherwise payable to the Advisers bear to the total
investment advisory and administration fees otherwise payable by the Fund
regardless of the amount of such fees payable to the Advisers during such
fiscal year to the extent that the securities regulations of any state in
which the Trust's shares are registered or qualified for sale so require. Such
expense reimbursement, if any, will be estimated, reconciled and paid on a
monthly basis.
5. Compensation. For the services provided and the expense assumed
pursuant to this Agreement, the Trust will pay the Advisers and the Advisers
will accept as full compensation therefor the fees set forth on Schedule 2
hereof.
6. Sub-Adviser. It is understood that, subject to the prior approval
of the Board of the Trust, the Advisers may employ a sub-adviser(s) to assist
them in the performance of this Agreement, and it is agreed that the Advisers
shall be as fully responsible to the Trust for the acts and omissions of the
sub-adviser(s) as they are for their own acts and omissions. Any compensation
to be paid to such sub-adviser will be paid by the Advisers and the activities
of such subadviser will be subject to the provisions of this Agreement. The
Advisers will use their best effort to cause the sub-adviser(s) to comply with
all of the Advisers' policies, including without limitation, their codes of
ethics and their policies relating to personal trading, brokerage and
securities allocation, soft and hard dollars and compliance.
7. Limitation of Liability of the Advisers. The Advisers shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the matters to which this Agreement relates,
except a loss resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Advisers in the
performance of their duties or from reckless disregard by their obligations
and duties under this Agreement. The Advisers agree that their liability,
including the liability of any sub-adviser, under this Agreement as set forth
herein, shall be joint and several. Any person, even though also an officer,
Board member, partner, director, employee or agent of an Adviser, who may be
or become an officer, Board member, partner, employee or agent of the Trust,
shall be deemed, when rendering services to the Trust or acting on any
business of the Trust (other than services or business in connection with the
Advisers' duties as co-advisers hereunder) to be rendering such services to or
acting solely for the Trust and not as an officer, Board member, partner,
director, employee or agent or one under the control or direction of the
Advisers even though paid by either of them.
-5-
<PAGE>
8. Duration and Termination. This Agreement shall become effective as
to each Fund upon the date first above written. Unless sooner terminated as
provided herein, it shall continue with respect to each Fund until June 30,
1998. Thereafter, if not terminated, this Agreement shall continue with
respect to a Fund for successive annual periods, provided such continuance is
specifically approved at least annually (a) by the vote of a majority of those
members of the Board of the Trust who are not parties to this Agreement or
"interested persons" of any such party, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the Board of the Trust or
by vote of a majority of the outstanding voting securities of such Fund;
provided, however, that this Agreement may be terminated with respect to a
Fund, without the payment of any penalty, by the Board of the Trust or by vote
of a majority of the outstanding voting securities of such Fund on sixty (60)
days' written notice, or by the Advisers, on ninety (90) days' written notice
to the Trust. This Agreement will immediately terminate in the event of its
assignment. (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested person" and "assignment" shall have the same
meaning as such terms have in the 1940 Act.)
9. Amendment of this Agreement. No provisions in this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party or parties against which enforcement of the change,
discharge or termination is sought, and no amendment to this Agreement
affecting a Fund shall be effective until approved by vote of the holders of a
majority of the outstanding voting securities of such Fund.
10. Names. The obligations of the Fund entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders or representatives of the Trust personally, but bind
only the Trust property, and all persons dealing with any series of shares in
the Trust must look solely to the Trust property belonging to such series for
the enforcement of any claims against the Trust.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and shall be
governed by Michigan law.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
THE WOODWARD VARIABLE ANNUITY FUND
By: ______________________
NBD BANK
By: ______________________
FIRST CHICAGO INVESTMENT MANAGEMENT
COMPANY
By: _______________________
-7-
<PAGE>
SCHEDULE 1
LIST OF PORTFOLIOS
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
-8-
<PAGE>
SCHEDULE 2
As compensation for their services hereunder, the Trust will pay an
advisory fee, computed daily and payable monthly, at the following annual
rates for the respective Funds:
<TABLE>
<CAPTION>
Fund Fee Rate
---- --------
<S> <C>
Money Market Fund .30% of the
first $1.0 billion, .275% of
the next $1 billion and .25%
of each such Fund's average
daily net assets in excess
of $2 billion
Managed Assets Balanced Fund .65% of the average net assets of the Fund
Growth Fund .60% of the average net assets of the Fund
Mid Cap Opportunity Fund
Growth and Value Fund
</TABLE>
Net asset value shall be computed in accordance with the Funds'
Prospectuses and resolutions of the Trust's Board of Trustees. The fee for the
period from the day of the month this Agreement is entered into until the end
of that month shall be pro-rated according to the proportion which such period
bears to the full monthly period. Upon any termination of this Agreement
before the end of any month, the fee for such part of a month shall be
pro-rated according to the proportion which such period bears to the full
monthly period and shall be payable upon the date of termination of this
Agreement. Such fee as is attributable to each Fund shall be a separate charge
to such Fund and shall be the several (and not joint or joint and several)
obligation of each such Fund.
In addition, the Advisers will receive as compensation under
this Agreement 4/10ths of the gross income earned by each Fund on each loan of
its securities (including capital gains and loss, if any).
-9-
Exhibit (5)(b)
ADDENDUM NO. 1 TO ADVISORY AGREEMENT
This Addendum, dated as of the ____ day of ____________, 199__,
is entered into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a
Delaware business trust, and FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
("FCNIMCO"), a registered investment adviser.
WHEREAS, the Trust, and FCNIMCO have entered into an Advisory
Agreement dated October 7, 1996 ("Advisory Agreement"), pursuant to which the
Trust appointed FCNIMCO to act as investment adviser ("Adviser") to the
Trust's Managed Assets Balanced Fund, Growth and Value Fund, Mid-Cap
Opportunity Fund, Growth Fund and Money Market Fund (each a "Fund");
WHEREAS, Article 1(b) of the Advisory Agreement provides that
in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain FCNIMCO to act as the Adviser under the
Advisory Agreement, the Trust shall so notify FCNIMCO in writing and if
FCNIMCO is willing to render such services it shall notify the Trust in
writing, and the compensation to be paid to FCNIMCO pursuant to Article 5 of
the Advisory Agreement;
WHEREAS, pursuant to Article 1(b) of the Advisory Agreement,
the Trust has notified FCNIMCO that it has established the Bond Fund,
Intrinsic Value Fund and International Equity Fund and that it desires to
retain FCNIMCO to act as the Adviser therefor, and FCNIMCO has notified the
Trust that it is willing to serve as Adviser for such Funds.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO to act as
Adviser to the Trust for the Bond Fund, Intrinsic Value Fund and International
Equity Fund for the period and on the terms set forth in the Advisory
Agreement. FCNIMCO hereby accepts such appointment and agrees to render the
services set forth in the Advisory Agreement for the compensation herein
provided.
2. Compensation. For the services provided and the expenses
assumed pursuant to the Advisory Agreement, the Trust will pay the Adviser,
and the Adviser will accept as full compensation therefor, a fee, computed
daily and payable monthly, at the annual rate of .40%, .60% and .80% of the
Bond, Intrinsic Value and International Equity Funds' average daily net
assets, respectively.
<PAGE>
3. Capitalized Terms. From and after the date hereof, the term
"Fund" as used in the Advisory Agreement shall be deemed to include the Bond
Fund, Intrinsic Value Fund and International Equity Fund. Capitalized terms
used herein and not otherwise defined shall have the meanings ascribed to them
in the Advisory Agreement.
4. Miscellaneous. Except to the extent supplemented hereby, the
Advisory Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum
as of the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
BY:________________________________________
Donald G. Sutherland
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
By:_______________________________________
Exhibit (6)(a)
DISTRIBUTION AGREEMENT
This Agreement is made as of this 7th day of October, 1996 by and
between The Woodward Variable Annuity Fund, a Delaware business trust (the
"Trust") and BISYS Fund Services Limited Partnership, d/b/a BISYS Fund
Services ("BISYS").
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Investment Company Act"), as an open-end management
investment company;
WHEREAS, the Trust is currently offering shares of beneficial interest
(the "Shares") representing interests in the investment portfolios ("Series")
listed on Schedule 1 attached hereto;
WHEREAS, BISYS is a securities firm engaged inter alia in the business
of selling shares of investment companies either directly to investors or
through other securities dealers;
WHEREAS, the Trust desires to retain BISYS as the distributor
("Distributor") for its Series to provide for the sale and distribution of the
Shares, and BISYS is prepared to provide such services.
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein and intending to be legally bound hereby the parties hereto
agree as follows:
Section 1. Appointment as Distributor.
(a) The Trust hereby appoints BISYS as the exclusive
Distributor and representative of the Trust to act as agent for the sale and
distribution of Shares of each Series described in the currently effective
prospectuses (hereinafter referred to as "Prospectuses" or a "Prospectus") and
registration statement ("Registration Statement") of the Trust. The Trust
during the term of this Agreement shall sell its Shares through BISYS upon the
terms and conditions set forth below.
(b) BISYS shall use its best efforts to solicit orders for the
sale of Shares. It is contemplated that BISYS will enter into sales or
servicing agreements with securities dealers, financial institutions and other
industry professionals, such as investment advisers, accountants and estate
planning firms, and in so doing will act only on its own behalf as principal.
No securities dealer or other person who enters into a servicing agreement
with BISYS shall be authorized to act as an agent for
<PAGE>
the Trust or its Series in connection with the offering or sale of Shares
to the public or otherwise.
(c) BISYS shall prepare or review, provide advice with respect
to, and file with the federal and state agencies or other organizations as
required by federal, state, and other applicable laws and regulations, all
sales literature (advertisements, brochures and shareholder communications)
for each of the Series and any classes of Shares thereof.
(d) In the event that the Trust establishes one or more
additional investment portfolios other than the Series with respect to which
it desires to retain BISYS to act as the exclusive Distributor and
representative hereunder, the Trust shall notify BISYS in writing. If BISYS is
willing to render such services it shall notify the Trust in writing
whereupon, subject to such approval as may be required pursuant to Section 13
hereof, or any necessary regulatory or shareholder approvals, such portfolio
shall become a Series hereunder and the compensation payable by such new
Series to BISYS will be as agreed in writing at the time.
Section 2. Exclusive Nature of Duties.
BISYS shall be the exclusive representative of the Trust to act
as sponsor and Distributor, except that:
(a) The Trust may, upon written notice to BISYS, from time to
time designate other principal underwriters and distributors of Shares of one
or more Series with respect to areas other than the United States as to which
BISYS may have expressly waived in writing its right to act as such. If such
designation is deemed exclusive, the right of BISYS under this Agreement to
act as agent for the distribution of Shares in the areas so designated shall
terminate, but this Agreement shall remain otherwise in full effect until
terminated in accordance with the other provisions hereof;
(b) The exclusive rights granted to BISYS to act as agent for
the distribution of Shares of the Trust shall not apply to Shares of any
Series issued in connection with the merger or consolidation of any other
investment company or personal holding company with the Trust or the
acquisition by purchase or otherwise of all (or substantially all) the assets
or the outstanding shares of any such company by the Trust;
(c) Such exclusive rights shall also not apply to Shares issued
by the Trust pursuant to reinvestment of dividends and capital gains
distributions; and
-2-
<PAGE>
(d) The Trust acknowledges that the persons employed by BISYS
to assist in the performance of its duties under this Agreement may not devote
their full time to such service and nothing contained in this Agreement shall
be deemed to limit or restrict BISYS or any of its affiliates' right to engage
in and devote time and attention to other businesses or to render services of
whatever kind or nature.
Section 3. Distribution of Shares of the Trust.
(a) BISYS shall have the right to solicit unconditional orders
for Shares of the Trust. The price which investors shall pay for the Shares so
purchased from the Trust shall be determined as set forth in Section
3(b) hereof.
(b) The public offering price of the Shares of any Series,
i.e., the price per share at which BISYS may offer Shares to the public, shall
be the public offering price as set forth in the Prospectus relating to such
Shares, which shall be the net asset value thereof, as determined in
accordance with the description thereof contained in the Prospectus relating
to such Shares, plus any sales charge as set forth in the Prospectus.
(c) The Trust, or any agent of the Trust designated in writing
by it, shall be promptly advised of all purchase and redemption orders for
Shares received by BISYS. Procedures may be established by the Trust and BISYS
whereby purchase orders for Shares of any Series are presented directly to the
Trust or an agent designated by the Trust upon the condition that in such
cases it shall be deemed that the sale of the Shares to be purchased is made
pursuant to Section 3 hereof. Any order may be rejected by the Trust in its
sole discretion or by BISYS, as the case may be, provided, however, that BISYS
will not arbitrarily or without reasonable cause refuse to transmit orders for
the purchase of Shares. The Trust (or its agent) will confirm orders in
accordance with the rules and regulations, or any exemptive order, of the
Securities and Exchange Commission, and will make appropriate book entries
pursuant to the instructions of BISYS. Purchase orders are effective when
Federal Funds become available to the Trust or as otherwise stated in the
Prospectus. BISYS agrees to cause such payment and such instructions received
by it to be delivered promptly to the Trust (or its agent).
Section 4. Redemption of Shares by the Trust.
(a) Any of the outstanding Shares may be tendered for
redemption at any time, and the Trust shall redeem the Shares so tendered in
accordance with its obligations and rights as set forth in its Amended and
Restated Declaration of Trust, as
-3-
<PAGE>
amended from time to time, and in accordance with the applicable provisions
contained in the Prospectus relating to such Shares. The Trust shall pay the
total amount of the redemption price pursuant to the instructions of BISYS
as the case may be, and in accordance with the terms set forth in the
Prospectus relating to the Shares being redeemed.
(b) If any Shares sold by the Trust are redeemed or repurchased
by the Trust or by BISYS as agent or are tendered for redemption within seven
business days after the date of confirmation of the original purchase of said
Shares, BISYS, as the case may be, shall forfeit any amount above the net
asset value which it may have received in respect of such Shares, provided
that the portion of such amount reallowed by BISYS to broker/dealers or other
persons shall be repayable to the Trust only to the extent recovered by BISYS
from the broker/dealer or other person concerned. BISYS shall include in the
form of agreement with such broker/dealers and other persons a corresponding
provision for the forfeiture by them of their concession with respect to
Shares sold by them or their principals and redeemed or repurchased by the
Trust or by BISYS, as the case may be, as agent (or tendered for redemption)
within seven business days after the date of confirmation of such initial
purchases.
(c) The right of a shareholder to redeem Shares of any Series,
or to receive payment with respect to any such redemption, upon the
presentation of properly submitted redemption requests in accordance with the
procedures set forth in the Prospectus relating to such Shares, may only be
suspended in accordance with the provisions of the Investment Company Act.
Section 5. Duties and Representations of the Trust.
(a) The Trust shall furnish BISYS from time to time, for use in
connection with the sale of Shares, such information with respect to the Trust
or any relevant Series and the Shares as BISYS may reasonably request.
(b) The Trust shall take, from time to time, all necessary
action to register Shares of each Series under the Securities Act of 1933, as
amended, ("Securities Act") to the end that there will be available for sale
such number of Shares as BISYS may reasonably be expected to sell.
(c) The Trust shall use its best efforts to qualify and
maintain the qualification of an appropriate number of Shares of each Series
for sale under the securities laws of such states as BISYS and the Trust may
approve. Any such qualification may
-4-
<PAGE>
be withheld, terminated or withdrawn by the Trust at any time in its
discretion. As provided in Section 9(c) hereof, the expense of qualification
and maintenance of qualification shall be borne by the Trust. BISYS shall
furnish such information and other material relating to its respective affairs
and activities as may be required by the Trust in connection with such
qualifications. The Trust will not confirm the sale of any Shares in any
jurisdiction in which the Shares are not qualified for offer and sale unless
the offer and sale by BISYS under the circumstances is exempt from
qualification.
(d) The Trust represents to BISYS that all Registration
Statements and Prospectuses filed by the Trust with the Securities and
Exchange Commission under the Securities Act with respect to the Shares have
been carefully prepared in conformity with the requirements of said Act and
rules and regulations of the Securities and Exchange Commission thereunder.
The Trust represents and warrants to BISYS that any Registration Statement and
Prospectus, when such Registration Statement becomes effective, will contain
all statements required to be stated therein in conformity with said Act and
the rules and regulations of said Commission; that all statements of fact
contained in any such Registration Statement and Prospectus will be true and
correct when such Registration Statement becomes effective; and that neither
any Registration Statement nor any Prospectus when such Registration Statement
becomes effective will include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading unless such statement or omission was
made in reliance upon, and in conformity with, written information furnished
to the Trust in connection therewith by or on behalf of BISYS, as the case may
be. The Trust shall not file any amendment to any Registration Statement or
supplement to any Prospectus without giving BISYS reasonable notice thereof in
advance; provided, however, that nothing contained in this Agreement shall in
any way limit the Trust's right to file at any time such amendments to any
Registration Statement or supplements to any Prospectus, of whatever
character, as the Trust may deem advisable, such right being in all respects
absolute and unconditional.
(e) The Trust agrees to advise BISYS promptly in writing:
(i) of any request by the Securities and Exchange
Commission for amendments to the Registration Statement or
Prospectuses then in effect or for additional information;
-5-
<PAGE>
(ii) in the event of the issuance by the Securities and
Exchange Commission of any stop order suspending the
effectiveness of the Registration Statement or Prospectuses
then in effect or the initiation of any proceeding for that
purpose;
(iii) of the happening of any event which makes untrue any
statement of a material fact made in the Registration Statement
or Prospectuses then in effect or which requires the making of
a change in such Registration Statement or Prospectus in order
to make the statements therein not misleading;
(iv) of all actions of the Securities and Exchange
Commission with respect to any amendments to any Registration
Statement or Prospectuses which may from time to time be filed
with the Securities and Exchange Commission;
(v) of the qualification or withdrawal or termination of
qualification for sale of Shares of any Series in any
jurisdiction; and
(vi) annually on the anniversary of the date of
qualification of Shares of any Series for sale in any
jurisdiction whether or not the Shares continue to be qualified
for sale in such jurisdiction and the number of Shares so
qualified for sale.
Section 6. Duties of BISYS as the Distributor.
(a) BISYS shall devote reasonable time and effort as determined
by it to effect sales of Shares of the Trust, but shall not be obligated to
sell any specific number of Shares. The services of BISYS hereunder are not to
be deemed exclusive and nothing herein contained shall prevent BISYS from
entering into distribution arrangements with other investment companies so
long as the performance of its obligations hereunder is not impaired thereby.
(b) In selling the Shares of the Trust, BISYS shall conform
with the requirements of all federal and state laws and regulations and the
regulations of the National Association of Securities Dealers, Inc. (the
"NASD") relating to the sale of such securities. Neither BISYS nor any other
person is authorized by the Trust to give any information or to make any
representations, other than those contained in the Prospectus for each Series
or any sales literature specifically approved by the Trust for use with
respect to a particular Series.
-6-
<PAGE>
(c) BISYS shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the NASD
and applicable law, as such requirements may from time to time exist.
Section 7. Selected Dealer Agreements.
(a) BISYS shall have the right, acting only on its own behalf
as principal, to enter into selected dealer agreements with securities dealers
and other persons of its choice ("Selected Dealers") for the sale of Shares;
provided, however, that the form of Selected Dealers agreement shall be
approved by the Trust and that no Selected Dealer entering into a Selected
Dealer agreement with BISYS shall be authorized to act as agent for the Trust
in connection with the offer or sale of its Shares to the public or otherwise.
Shares sold to Selected Dealers shall be for resale by such dealers only in
accordance with the provisions of the Prospectus relating to such Shares.
(b) Within the United States, BISYS shall offer and sell Shares
only to such Selected Dealers as are members in good standing of the NASD.
Section 8. Acceptance of Appointment.
BISYS accepts its appointment as Distributor and agrees during
such period to render such services and to assume the obligations herein set
forth for the compensation herein provided. Unless otherwise expressly
provided or authorized herein, BISYS shall not have any authority to act for
or represent the Trust in any way or otherwise be deemed an agent of the
Trust.
Section 9. Payment of Expenses.
(a) Except as provided in Section 9(d) hereof, BISYS shall pay
without reimbursement by the Trust the costs of its personnel used in
connection with the performance of its obligations hereunder, of providing
necessary office space for the performance of its obligations hereunder and of
all related overhead expenses, of maintaining its own qualification as a
broker under State or Federal laws, and of performing its duties hereunder;
and any fees or commissions pursuant to Selected Dealer agreements described
in Section 7 hereof.
(b) The Trust agrees to pay all costs and expenses in
connection with the registration of Shares under the Securities
-7-
<PAGE>
Act, as amended, and all expenses in connection with maintaining facilities
for the issue and transfer of Shares and for supplying information, prices and
other data to be furnished by the Trust hereunder, and all expenses in
connection with the preparation and printing of the Trust's Prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; provided, however, that except as
provided in Section 9(d) hereof, nothing contained herein shall be deemed to
require the Trust to pay any of the costs in connection with the sale of
Shares.
(c) Payments by the Trust relating to any distribution plan
within the meaning of Rule 12b-1 under the Investment Company Act (a "Plan")
adopted by the Trust's Board of Trustees (the "Board of Trustees") shall be
payable to the Distributor or its assignees, all in accordance with the terms
and conditions of such Plan. With respect to payments by the Trust relating to
the Distribution Plan relating to Class B shares: (i) payments to be made by
the Trust to the Distributor pursuant to such Plan as reimbursement of
expenses shall be for direct expenses of the Distributor authorized to be
incurred by the Trust pursuant to paragraph 1 of such Plan, (ii) upon
termination of such Plan, the benefits inuring to the Distributor shall
immediately cease, and (iii) expenses of the Distributor under such Plan in
any fiscal year of the Trust which cannot be paid by the Trust because payment
of such expenses would cause the Trust to exceed the limitation set forth in
paragraph 1 of such Plan during such fiscal year, shall not be payable to the
Distributor in any succeeding fiscal year of the Trust.
(d) Any contingent deferred sales charges and any charges
pursuant to a Plan which are payable in connection with purchases of Class B
Shares shall be payable to BISYS or its assignees, all in accordance with the
Trust's Registration Statement.
Section 10. Indemnification.
(a) The Trust shall indemnify and hold harmless BISYS, its
respective officers, directors, partners and employees and each person, if
any, who controls BISYS within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934 against
any loss, liability, claim, damage or expense (including the reasonable cost
of investigating or defending any alleged loss, liability, claim, damage or
expense and reasonable counsel fees incurred in connection therewith), arising
by reason of any person acquiring any Shares, which may be based upon the
Securities Act, or on any other statute or at common law, on the ground that
the
-8-
<PAGE>
Registration Statement or related Prospectus of any Series, as from time to
time amended and supplemented, or the annual or interim reports to
shareholders of any Series, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, unless such statement or
omission was made in reliance upon, and in conformity with, written
information furnished to the Trust in connection therewith by or on behalf of
BISYS, as the case may be; provided, however, that in no case (i) is the
indemnity by the Trust in favor of BISYS, its respective officers, directors,
partners and employees and any such controlling person to be deemed to protect
BISYS, its respective officers, directors, partners and employees or any such
controlling persons thereof against any liability to the Trust or its security
holders to which BISYS, its respective officers, directors, partners and
employees or any such controlling persons would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of
its duties or by reason of reckless disregard of its obligations and duties
under this Agreement, or (ii) is the Trust to be liable under its indemnity
agreement contained in this paragraph with respect to any claim made against
BISYS, its respective directors, or any such controlling persons, unless
BISYS, its respective officers, directors, partners and employees or such
controlling persons, as the case may be, shall have notified the Trust in
writing within ten (10) days after the summons or other first legal process
giving information of the nature of the claim shall have been served upon
BISYS, its respective officers, directors, partners or employees or such
controlling persons (or after BISYS, its respective officers, directors,
partners and employees or such controlling persons shall have received notice
of such service on any designated agent), but failure to notify the Trust of
any such claim shall not relieve the Trust from any liability which it may
have to the person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Trust will
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such
liability, but if the Trust elects to assume the defense, such defense shall
be conducted by counsel chosen by the Trust and satisfactory to BISYS, its
respective officers, directors, partners and employees or such controlling
person or persons, defendant or defendants in the suit. In the event the Trust
elects to assume the defense of any such suit and retain such counsel, BISYS,
its respective officers, directors, partners and employees or such controlling
person or persons, defendant or defendants in the suit, shall bear the fees
and expenses of any additional counsel retained by them. In the event the
Trust does not elect to assume the
-9-
<PAGE>
defense of any such suit, it will reimburse BISYS, its respective officers,
directors, partners and employees or such controlling person or persons,
defendant or defendants in the suit, for the reasonable fees and expenses of
any counsel retained by them. The Trust shall promptly notify BISYS of the
commencement of any litigation or proceedings against it or any of its
respective officers or trustees in connection with the issuance or sale of any
of the Shares. The Trust's indemnification agreement contained in this Section
10(a) and the Trust's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of BISYS, its respective officers, directors, partners
and employees or any controlling person, and shall survive the delivery of any
Shares. The indemnity provided for herein will be in addition to any liability
which the Trust may otherwise have.
(b) BISYS shall indemnify and hold harmless the Trust and each
of its trustees, officers, and employees and each person, if any, who controls
the Trust against any loss, liability, claim, damage, or expense described in
the foregoing indemnity contained in subsection (a) of this Section, but only
with respect to statements or omissions to state a material fact necessary to
make such statements not misleading, made in reliance upon, and in conformity
with, information furnished to the Trust in writing by BISYS or on BISYS's
behalf for use in connection with the Registration Statement or related
Prospectus of any Series, as from time to time amended, or the annual or
interim reports to shareholders of any Series. Additionally, BISYS shall
indemnify and hold harmless the Trust and each of its trustees, officers, and
employees and each person, if any, who controls the Trust against any loss,
liability, claim, damage, or expense resulting from willful misfeasance, bad
faith or gross negligence on the part of BISYS or reckless disregard by BISYS
of its duties under this Agreement. In the event any action shall be brought
against the Trust or any persons so indemnified, in respect of which indemnity
may be sought against BISYS, BISYS shall have the rights and duties given to
the Trust, and the Trust and each person so indemnified shall have the rights
and duties given to BISYS by the provisions of subsection (a) of this Section
10.
Section 11. Certain Administrative Duties of BISYS.
During normal business hours, BISYS shall provide personnel to
respond to questions with respect to the Trust or to refer such inquiries to
appropriate Trust officials.
-10-
<PAGE>
Section 12. Duration and Termination of this Agreement.
This Agreement shall become effective as to each Series upon
the date first above written. Unless sooner terminated as provided herein, it
shall continue with respect to each Series until June 30, 1998. Thereafter, if
not terminated, it shall remain in force with respect to any particular Series
from year to year, so long as such continuance is specifically approved at
least annually by (a) by the Board of Trustees of the Trust and (b) by a
majority of those trustees who are not "interested persons" of the Trust (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of this Agreement, or related Service and
Distribution Plan or "interested persons" of any person having such financial
interest, cast in person at a meeting called for the purpose of voting on such
approval.
This Agreement may be terminated with respect to any particular
Series at any time, without the payment of any penalty, by a majority of those
trustees of the Trust who are not "interested persons" of the Trust and have
no direct or indirect financial interest in the operation of any Plan adopted
by the Trust or any related agreement thereto, or by vote of a majority of the
outstanding voting securities of the Trust on 60 (sixty) days written notice,
or by BISYS on 90 (ninety) days' written notice to the Trust.
The provisions of Section 10 shall survive any termination of
this Agreement.
Section 13. Amendments.
This Agreement may be amended in writing by the parties hereto
only if such amendment is specifically approved (i) by the Board of Trustees
of the Trust, and (ii) by a majority of those trustees who are not parties to
this Agreement and have no direct or indirect financial interest in the
operation of this Agreement, or "interested persons" of any such party, which
vote must be cast in person at a meeting called for the purpose of voting on
such approval.
Section 14. Definitions of Certain Terms.
The terms "vote of a majority of the outstanding voting
securities", "assignment," and "interested person," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
-11-
<PAGE>
Section 15. Governing Law.
This Agreement shall be construed in accordance with the laws
of the State of Michigan, without reference to principles of conflicts of law,
and with the applicable provisions of the Investment Company Act. To the
extent the applicable law of the State of Michigan or any of the provisions
herein conflict with the applicable provisions of the Investment Company Act,
the latter shall control.
Section 16. Personal Liability.
The obligations of the Trust entered into in the name or on
behalf thereof by any of the trustees of the Trust, representatives or agents
are made not individually, but in such capacities, and are not binding upon
any of the trustees, shareholders or representatives of the Trust personally,
but bind only the Trust property, and all persons dealing with any series of
shares in the Trust must look solely to the Trust property belonging to such
series for the enforcement of any claims against the Trust.
THE WOODWARD VARIABLE ANNUITY FUND
By
-------------------------
Its
-------------------------
BISYS Fund Services Limited Partnership
By: BISYS Fund Services, Inc.,
its general partner
By:
-------------------------
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<PAGE>
SCHEDULE 1
LIST OF PORTFOLIOS
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
-13-
Exhibit (6)(b)
ADDENDUM NO. 1 TO DISTRIBUTION AGREEMENT
This Addendum, dated as of the ____ day of _________, 199__, is
entered into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a Delaware
business trust, and BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a/ BISYS FUND
SERVICES ("BISYS").
WHEREAS, BISYS and the Trust have entered into the Distribution
Agreement (the "Distribution Agreement") dated October 7, 1996 with respect to
shares of beneficial interest in the Trust's Managed Assets Balanced Fund,
Growth and Value Fund, Mid-Cap Opportunity, Growth Fund and Money Market Fund
(each a "Series");
WHEREAS, Section 1(d) of the Distribution Agreement provides
that in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain BISYS to act as the exclusive
distributor and representative under the Distribution Agreement, the Trust
shall so notify BISYS in writing and if BISYS is willing to render such
services it shall notify the Trust in writing, subject to such approval as may
be required pursuant to Section 12 of the Distribution Agreement and any
necessary regulatory and shareholder approvals, and the compensation to be
paid to BISYS shall be that which is agreed to in writing by the Trust and
BISYS;
WHEREAS, pursuant to Section 1(d) of the Distribution
Agreement, the Trust has notified BISYS that it has established the Bond Fund,
Intrinsic Value Fund and International Equity Fund and that it desires to
retain BISYS to act as the exclusive distributor and representative therefor,
and BISYS has notified the Trust that it is willing to serve as exclusive
distributor and representative for such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints BISYS to act as
exclusive distributor and representative to the Trust for the Bond Fund,
Intrinsic Value Fund and International Equity Fund for the period and on the
terms set forth in the Distribution Agreement. BISYS hereby accepts such
appointment and agrees to render the services set forth in the Distribution
Agreement for the compensation herein provided.
2. Capitalized Terms. From and after the date hereof, the term
"Series" as used in the Distribution Agreement shall be deemed to include the
Bond Fund, Intrinsic Value Fund and International Equity Fund. Capitalized
terms used herein and not otherwise defined shall have the meanings ascribed
to them in the Distribution Agreement.
<PAGE>
3. Miscellaneous. Except to the extent supplemented
hereby, the Distribution Agreement shall remain unchanged and in
full force and effect and is hereby ratified and confirmed in all
respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum
as of the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
By:___________________________________________
Donald G. Sutherland
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
By:_______________________________
- 2 -
Exhibit (8)(b)
ADDENDUM NO. 1 TO CUSTODIAN AGREEMENT
This Addendum, dated as of the ____ day of __________, 199__,
is entered into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a
Delaware business trust, and NBD BANK ("NBD" or the "Custodian"), a
state-chartered bank incorporated under the laws of Michigan.
WHEREAS, the Trust and NBD have entered into a Custodian
Agreement dated March 30, 1995 (the "Custodian Agreement"), pursuant to which
the Trust appointed NBD to act as Custodian to the Trust's Money Market Fund,
Growth and Value Fund, Mid-Cap Opportunity Fund, Managed Assets Balanced Fund
and Growth Fund.
WHEREAS, Article XIV, Paragraph 9 of the Custodian Agreement
provides that in the event the Trust establishes one or more additional
portfolios with respect to which it desires to retain NBD to act as the
custodian under the Custodian Agreement, the Trust shall so notify NBD in
writing and if NBD is willing to render such services it shall notify the
Trust in writing, and the compensation to be paid to NBD shall be that which
is agreed to in writing by the Trust and NBD pursuant to Article XII,
Paragraph 6 of the Custodian Agreement;
WHEREAS, pursuant to Article XIV, Paragraph 9 of the Custodian
Agreement, the Trust has notified NBD that it intends to establish the Bond
Fund, Intrinsic Value Fund and International Equity Fund and that it desires
to retain NBD to act as the custodian therefor, and NBD has notified the Trust
that it is willing to serve as custodian for such Funds.
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints NBD to act as
Custodian to the Trust for the Bond Fund, Intrinsic Value Fund and
International Equity Fund for the period and on the terms set forth in the
Custodian Agreement. NBD hereby accepts such appointment and agrees to render
the services set forth in the Custodian Agreement, for the compensation
provided in Appendix A hereto.
2. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Series" as used in the Custodian Agreement shall be deemed to
include the Bond Fund, Intrinsic Value Fund and International Equity Fund.
Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Custodian Agreement.
<PAGE>
3. Miscellaneous. Except to the extent supplemented
hereby, the Custodian Agreement shall remain unchanged and in
full force and effect and is hereby ratified and confirmed in all
respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum
as of the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
By: _______________________
Donald G. Sutherland
NBD BANK
By: ________________________
<PAGE>
APPENDIX A
Fee schedule for the services provided by NBD Bank as Custodian
to the Bond Fund, Intrinsic Value Fund and International Equity Fund.
Basic Annual Account Charge $1,000
Annual Security Fee
First $20,000,000 = .0003
Next $20,000,000 = .00025
Next $20,000,000 = .0002
Next $40,000,000 = .00015
Next $200,000,000 = .000125
Balance over $300,000,000 = .0001
Asset Fee $1.541 per security held at end of month.
Security Transactions:
$13.00 for each Pass-Through Certificate Payment
$35.00 for Option Transactions requiring Escrow Receipts
$20.00 for all other security transactions
Accounting Statements:
Cash Statement - $50 per statement
Inventories - $50 per inventory
A-1
Exhibit (9)(b)
ADDENDUM NO. 1 TO TRANSFER AGENCY AGREEMENT
This Addendum, dated as of the __ day of ____________, 199__,
is entered into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a
Delaware business trust, and FIRST DATA INVESTOR SERVICES GROUP, INC.
("FDISG"), a Massachusetts Corporation.
WHEREAS, the Trust and FDISG have entered into a Transfer
Agency Agreement dated August 12, 1996 (the "Transfer Agency Agreement"),
pursuant to which the Trust appointed FDISG to act as transfer agent (the
"Transfer Agent") to the Trust's Managed Assets Balanced Fund, Growth and
Value Fund, Mid-Cap Opportunity Fund, Growth Fund and Money Market Fund (each
a "Fund");
WHEREAS, Article 14 of the Transfer Agency Agreement provides
that in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain FDISG to act as the Transfer Agent under
the Transfer Agency Agreement, the Trust shall so notify FDISG in writing, and
if FDISG is willing to render such services in accordance with the fees set
forth in Schedule B of the Transfer Agency Agreement, the parties shall amend
Exhibit 1 to include such additional portfolios;
WHEREAS, pursuant to Article 14 of the Transfer Agency
Agreement, the Trust has notified FDISG that it has established the Bond Fund,
the Intrinsic Value Fund and the International Equity Fund (each, a "Fund")
and that it desires to retain FDISG to act as the Transfer Agent therefor, and
FDISG has notified the Trust that it is willing to serve as Transfer Agent for
such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints FDISG to act as
Transfer Agent to the Trust for the Bond Fund, Intrinsic Value Fund and
International Equity Fund for the period and on the terms set forth in the
Transfer Agency Agreement. FDISG hereby accepts such appointment and agrees to
render the services set forth in the Transfer Agency Agreement, for the
compensation set forth in Schedule B of the Transfer Agency Agreement.
2. Capitalized Terms. From and after the date hereof, the terms
"Fund" and "Funds" as used in the Transfer Agency Agreement, as amended shall
be deemed to include the Bond Fund, Intrinsic Value Fund and International
Equity Fund. Capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Transfer Agency Agreement.
<PAGE>
3. Miscellaneous. Except to the extent supplemented
hereby, the Transfer Agency Agreement shall remain unchanged and
in full force and effect and is hereby ratified and confirmed in
all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum
as of the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
By:____________________________________
Donald G. Sutherland
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:_____________________________________
- 2 -
Exhibit (9)(d)
CO-ADMINISTRATION AGREEMENT
AGREEMENT dated as of October 7, 1996 by and among THE WOODWARD
VARIABLE ANNUITY FUND, a Delaware business trust (the "Trust"), NBD BANK
("NBD"), a national banking association, and FIRST CHICAGO INVESTMENT
MANAGEMENT COMPANY ("FCIMCO"), a registered investment adviser, and BISYS
LIMITED PARTNERSHIP, d/b/a, BISYS FUND SERVICES (each an "Administrator" and
collectively, the "Administrators").
WHEREAS, the Trust is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Trust desires to retain the Administrators to
provide, as co-administrators, certain administration services for the
investment portfolios of the Trust set forth on Schedule 1 hereto (each a
"Fund" and collectively the "Funds") and the Administrators are willing to
furnish such administration services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained and intending to be legally bound, it is agreed
between the parties hereto as follows:
1. Appointment of Administrators. The Trust hereby appoints
each of the Administrators jointly to provide administration services for the
Funds on the terms and for the period set forth in this Agreement. The
Administrators each accept such respective appointments and agree to perform
the services and duties set forth in Section 3 below in return for the
compensation provided in Section 5 below.
2. Delivery of Documents. The Trust has furnished each of the
Administrators with copies, properly certified or authenticated, of each of
the following documents and will deliver to each Administrator all future
amendments and supplements, if any:
a. The Trust's Amended and Restated Declaration of Trust, as
filed with the Secretary of State of Delaware on May 1, 1992, as amended (the
"Declaration of Trust");
b. The Trust's By-Laws, as amended ("Bylaws");
c. Resolutions of the Trust's Board of Trustees ("Board of
Trustees") authorizing the execution and delivery of this Agreement;
<PAGE>
d. The Trust's most recent amendment to its registration
statement under the Securities Act of 1933, as amended, and under the 1940 Act
on Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") and supplements thereto, (such amendment as presently in effect
and as amended or supplemented from time to time, is herein called the
"Registration Statement"); and
e. The Trust's most recent prospectus(es) and statement(s)
of additional information and all amendments and supplements thereto (such
prospectus(es) and statement(s) of additional information and supplements
thereto, as presently in effect and as from time to time amended and
supplemented, are herein called the "Prospectus(es)" and the "Statement(s) of
Additional Information", respectively).
3. Services and Duties. The Administrators enter into the
following covenants jointly and severally with respect to their administration
and duties:
a. Subject to the supervision and control of the Trust's
Board of Trustees, the Administrators shall assist in supervising all aspects
of the Funds' operations, other than those investment advisory functions which
are to be performed by the Trust's investment advisers pursuant to the
Co-Advisory Agreement, those services to be performed by the custodian
pursuant to the Trust's Custodian Agreement, those services to be performed by
the distributor pursuant to the Trust's Distribution Agreement and those
services to be performed by the transfer agent pursuant to the Trust's
Transfer and Dividend Disbursing Agency Agreement. In this regard, the
Administrators' responsibilities include:
(1) Assisting in maintaining office facilities (which
may be in the offices of any of the Administrators or a corporate
affiliate but shall be in such location as the Trust shall reasonably
determine);
(2) Furnishing clerical services and stationary and
office supplies;
(3) Providing for the preparing, supervising and
mailing of confirmations for all purchase and redemption orders to
shareholders of record;
(4) Providing and supervising the operation of an
automated data processing system to process purchase and redemption
orders (the Administrators assume responsibility for the accuracy of
the data transmitted for processing or storage);
-2-
<PAGE>
(5) Maintaining a procedure external to the transfer
agent's system to reconstruct lost purchase and redemption data; and
(6) Providing information and distributing written
communications concerning the Funds to their shareholders of record;
handling shareholder problems and calls, including without limitation,
calls relating to shareholder purchases and redemptions and
shareholder inquiries, and maintaining a primary facility for such
telephone services.
b. The Administrators shall prepare or review all sales
literature (advertisements, brochures and shareholder communications) for the
Funds.
c. The Administrators shall participate to the extent
requested by the Trust and its counsel in the periodic updating of the Trust's
Registration Statement; compile data and accumulate information for and
prepare (i) reports to shareholders of record and the Commission (e.g., Annual
and SemiAnnual Reports on Form N-SAR) and (ii) notices pursuant to Rule 24f-2;
and timely file with the Commission and other federal and state agencies,
reports and documents including, without limitation, Annual and SemiAnnual
Reports on Form N-SAR, notices pursuant to Rule 24f-2 and federal and state
tax returns and required tax filings other than those required to be filed by
the Trust's custodian or transfer agent.
d. The Administrators, after consultation with the
distributor and counsel for the Trust, shall determine the jurisdictions in
which the Trust's shares shall be registered or qualified for sale. The
Administrators shall be responsible registering or qualifying shares for sale
under the securities laws of any state, maintaining such registrations or
qualifications, and for preparing compliance filings pursuant to state
securities laws with the advice of the Trust's counsel. Payment of share
registration fees and any fees for qualifying or continuing the qualification
of the Trust or the Funds as a dealer or broker shall be made by the Trust or
the Funds.
e. The Administrators shall monitor, and assist in
developing compliance procedures for the Funds, which will include without
limitation, procedures to monitor compliance with the Funds' investment
objectives, policies and limitations, tax matters, and applicable laws and
regulations.
f. The Administrators shall assist in monitoring the
regulatory and legislative developments which may affect the Trust; assist in
counseling the Trust with respect to regulatory examinations or investigations
of the Trust; and work with the Trust's counsel in connection with regulatory
matters or litigation.
-3-
<PAGE>
g. The Administrators agree to maintain all financial
accounts, records, journals, ledgers and schedules for the Trust (other than
those maintained by the Trust's custodian and its transfer agent), and to
install and maintain a system of internal controls appropriate for entities of
the size and complexity of the Trust, and to provide reports, financial
statements and other statistical data as requested from time to time by the
Administrators or by the Trust. In addition, the Administrators shall compute
the Trust's net asset value, net income and net capital gain (loss) in
accordance with the Trust's Prospectus and resolutions of its Board of
Trustees. The Administrators shall act as liaison with the Trust's independent
public accountants and shall provide account analyses, fiscal year summaries
and other audit related schedules. The Administrators shall take all
reasonable action in the performance of its obligations under this Agreement
to assure that the necessary information is made available to such accountants
for the expression of their opinion, as such may be required by the Trust from
time to time.
h. The Administrators shall monitor each Fund's expenses,
including, but not limited to, fund accounting, and shall pay all expenses on
proper authorization from each Fund.
i. The Administrators shall monitor each Fund's status as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended from time to time.
j. The Administrators shall maintain each Fund's fidelity
bond as required by the 1940 Act.
In compliance with the requirements of Rule 31a-3 under the
1940 Act, the Administrators agree that all records which they maintain for
the Trust are the property of the Trust and further agree to surrender
promptly to the Trust any of such records upon the Trust's request. The
Administrators agree to maintain a back-up set of accounts and records of the
Trust (which back-up shall be updated on at least a weekly basis) at a
location other than that where the original accounts and records are stored.
The Administrators shall assist the Trust, the Trust's independent auditors,
or, upon approval of the Trust, any regulatory body, in any requested review
of the Trust's accounts and records, and reports by the Administrators or
their independent accountants concerning their accounting system and internal
auditing controls will be open to such entities for audit or inspection upon
reasonable request. There shall be no additional fee for these services.
The Administrators further agree to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act the records required to be maintained by
Rule 31a-1 under the 1940 Act.
-4-
<PAGE>
If the expenses borne by any Fund in any fiscal year exceed the
applicable expense limitations imposed by the securities regulations of any
state in which the Fund's shares are registered or qualified for sale to the
public, the Administrators agree to reimburse such Fund for a portion of any
such excess expense in an amount equal to the portion that the administration
fees otherwise payable by the Fund to the Administrators bear to the total
amount of the investment advisory and administration fees otherwise payable by
the Fund. The expense reimbursement obligation of the Administrators is
limited to the amount of their fees hereunder for such fiscal year, provided,
however, that notwithstanding the foregoing, the Administrators shall
reimburse such Fund for a portion of any such excess expenses in an amount
equal to the proportion that the fees otherwise payable to the Administrators
bear to the total amount of investment advisory and administration fees
otherwise payable by the Fund regardless of the amount of fees paid to the
Administrators during such fiscal year to the extent that the securities
regulations of any state having jurisdiction over the Fund so require. Such
expense reimbursement, if any, will be estimated, reconciled and paid on a
monthly basis.
In performing all of their services and duties as
co-administrators, the Administrators will act in conformity with the
Declaration of Trust, Bylaws, Prospectuses and resolutions and other
instructions of the Trust's Board of Trustees and will comply with the
requirements of the 1940 Act and other applicable federal or state laws.
4. Services Not Exclusive. The services rendered by the
Administrators hereunder are not to be deemed exclusive, and the
Administrators shall be free to render similar services to others so long as
their services under this Agreement are not impaired thereby.
5. Expenses Assumed as Administrators. The Administrators will
bear all expenses incurred by them in performing their services and duties as
co-administrators, except as otherwise expressly provided herein. Other
expenses to be incurred in the operation of the Funds, including taxes,
interest, brokerage fees and commissions, if any, salaries and fees of
officers and trustees who are not officers, directors, shareholders, or
employees of the Administrators, or the Trust's investment advisers or
distributor for the Funds, Commission fees and state blue sky qualification
fees, advisory, fund accounting and administration fees, charges of custodians
and transfer agents, certain insurance premiums, outside auditing and legal
expenses, costs of maintaining corporate existence, typesetting and printing
of Prospectuses for regulatory purposes and for distribution to current
shareholders of the Fund, costs of shareholders' reports and corporate
meetings, out-of-pocket expenses of obtaining price quotations from third
party pricing
-5-
<PAGE>
services, and any extraordinary expenses, will be borne by the Trust,
provided, however, that the Trust will not bear, directly or indirectly, the
cost of any activity which is primarily intended to result in the sale of
shares of the Funds, other than the costs associated with the sale of Class B
shares of the Fund pursuant to a distribution agreement and distribution plan.
6. Compensation.
In consideration of services rendered pursuant to this
Agreement, the Trust will pay to NBD and FCIMCO, as agent for the
Administrators, a fee, computed daily and payable monthly, at the annual rate
of 0.15% of the average daily net assets of each Fund. Net asset value shall
be computed in accordance with the Funds' Prospectuses and resolutions of the
Trust's Board of Trustees. The fee for the period from the day of the month
this Agreement is entered into until the end of that month shall be prorated
according to the proportion which such period bears to the full monthly
period. Upon any termination of this Agreement before the end of any month,
the fee for such part of a month shall be pro-rated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. Such fee as is
attributable to each Fund shall be a separate charge to such Fund and shall be
the several (and not joint or joint and several) obligation of each such Fund.
The Administrators may from time to time employ or associate
with themselves such person or persons as they may believe to be fitted to
assist them in the performance of this Agreement ("Subcontractors"). The
compensation of such Subcontractors shall be paid by the Administrators, and
no obligation shall be incurred on behalf of the Trust in such respect. The
Administrators shall provide oversight over any Subcontractor(s) who shall in
turn provide services pursuant to an agreement with the Administrators. Any
agreement entered into between the Administrators and a Subcontractor shall
acknowledge that the agreement is for the benefit of the Trust, that the
Subcontractor shall be directly liable and responsible to the Trust for the
performance of its obligations thereunder, and that the Trust may therefore
enforce its rights directly against the Subcontractor. Notwithstanding such
delegation, the Administrators shall continue to be directly liable to the
Trust for the performance of any subcontractor's obligations under such
agreement. In addition to employing Subcontractors, the Administrators may
compensate parties who provide shareholder services or other services pursuant
to contracts entered into directly between such parties and the Trust.
7. Proprietary and Confidential Information. The Administrators
will treat confidentially and as proprietary information of the Trust all
records and other information
-6-
<PAGE>
relative to the Trust and prior or present shareholders of the Funds or those
persons or entities who respond to inquiries of the Trust's principal
underwriter concerning investment in the Funds and will not use such records
and information for any purpose other than performance of their
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Trust, which approval shall not be unreasonably
withheld and may not be withheld where the Administrators may be exposed to
civil or criminal contempt proceedings for failure to comply, when requested
to divulge such information by duly constituted authorities, or when so
requested by the Trust.
8. Limitations of Liability. No Administrator shall be liable
for any error of judgment or mistake of law or for any loss suffered by the
Trust in connection with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, Board member, partner, director, employee or agent of an
Administrator, who may be or become an officer, Board member, partner,
employee or agent of the Trust, shall be deemed, when rendering services to
the Trust or acting on any business of the Trust (other than services or
business in connection with the Administrators' duties as co-administrators
hereunder) to be rendering such services to or acting solely for the Trust and
not as an officer, Board member, partner, director, employee or agent or one
under the control or direction of the Administrators even though paid by
either of them. The Administrators agree that their liability under this
Agreement, as set forth herein, shall be joint and several.
Whenever, in the course of performing their duties under this
Agreement, the Administrators determine, on the basis of information supplied
to the Administrators by the Trust or its authorized agents, that a violation
of applicable law has occurred or that, to their knowledge, a possible
violation of applicable law may have occurred or, with the passage of time,
would occur, the Administrators shall promptly notify the Trust and its
counsel. Liability arising pursuant to this section shall survive termination
of this agreement.
9. Duration and Termination. This Agreement shall become
effective as to each Fund upon the date first above written. Unless sooner
terminated as provided herein, it shall continue with respect to each Fund
until June 30, 1998 ("Initial Term"). Thereafter, if not terminated, this
Agreement shall continue automatically as to the Funds for successive terms of
one year (each a "Renewal Term"), provided such continuance is specifically
approved at least annually (i) by the Trust's Board of Trustees or (ii) by a
vote of a majority of the outstanding voting securities of the Funds, and
provided further that in
-7-
<PAGE>
either event such continuance is also approved by a majority of the Trust's
trustees who are not "interested persons" of any party to this Agreement, by
vote cast in person at a meeting called for the purpose of voting on such
approval. (As used in this Agreement, the terms "majority of the outstanding
voting securities," "interested person" and "assignment" shall have the same
meaning as such terms have in the 1940 Act.) On or after the Initial Term,
either party hereto may terminate this Agreement by sixty (60) days prior
written notice to the other party hereto.
The Trust shall have the right to terminate this Agreement
during the Initial Term or any Renewal Term upon forty-five (45) days written
notice if the Administrators materially breach this Agreement. A material
breach means the failure to perform the terms of this Agreement, whether in
one act or omission or a series of acts or omissions, whether or not related,
which (i) results or reasonably could be expected to result in loss or damage,
including expenses, to the Funds exceeding $50,000 in the aggregate, (ii)
results in the institution of civil or criminal proceedings by the Commission
or other regulator, other than a regular audit or examination, (iii)
constitutes gross negligence, bad faith or willful misconduct, (iv)
constitutes a violation of any law, rule or regulation applicable to the
Funds, or the Administrators or any of their affiliates as to which the
Administrators were required to comply under the terms of the Agreement where
the consequences of such violation could reasonably be expected to result in
the institution of civil or criminal proceedings by the Commission or other
governmental authorities against the Funds, or (v) evidences a quantifiable
and material decline in the overall quality of services, provided that the
Administrators shall have the right to cure the breach set forth in this
clause (v) within thirty (30) days after a written notice setting forth in
detail the nature of the breach, has been delivered to the Administrators;
provided the Administrators shall have the right to cure a breach set forth in
this clause (v) if and only if no more than two other quantifiable and
material breaches under this clause (v) have occurred within the twelve (12)
months prior to the delivery of such notice of the breach of this clause.
In the event of the termination of this Agreement, the
Administrators shall use their best efforts to assist in the transfer of their
responsibilities hereunder to any successor administrator and the
Administrators without additional compensation (it being understood that they
would be reimbursed for their reasonable out-of-pocket expenses) shall remain
responsible, which responsibility shall survive termination of this Agreement,
for all regulatory filings, tax returns and other reports which relate to
periods which concluded prior to the termination.
-8-
<PAGE>
10. Amendment of this Agreement. No provision of this Agreement
may be changed, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, discharge
or termination is sought. If a change or discharge is sought against the
Trust, the instrument must be signed by all three (3) Administrators.
11. Assignment. This Agreement will automatically and
immediately terminate in the event of its "assignment." As used in this
Agreement, the term "assignment" shall have the same meaning as such term has
in the 1940 Act.
12. Notices. All notices and other communications hereunder
shall be in writing, shall be deemed to have been given when received or when
sent by telex or facsimile, and shall be given to the following addresses (or
such other addresses as to which notice is given):
To the Administrators:
NBD Bank
611 Woodward Avenue
Detroit, Michigan
First Chicago Investment Management Company
Three First National Plaza
Chicago, Illinois 60670
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
To the Fund:
The Woodward Variable Annuity Fund
c/o W. Bruce McConnel, III, Esq.
Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
13. Governing Law.
This Agreement shall be construed in accordance with the laws
of the State of Michigan, without reference to principles of conflicts of law,
and with the applicable provisions of the Investment Company Act. To the
extent the applicable law of the State of Michigan or any of the provisions
herein conflict with the applicable provisions of the 1940 Act, the latter
shall control.
-9-
<PAGE>
14. Miscellaneous.
a. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
b. The obligations of the Trust entered into in the name or
on behalf thereof by any of the trustees, representatives or agents are made
not individually, but in such capacities, and are not binding upon any of the
trustees, shareholders or representatives of the Trust personally, but bind
only the Trust property, and all persons dealing with any series of shares in
the Trust must look solely to the Trust property belonging to such series for
the enforcement of any claims against the Trust.
15. Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute one and the same
instrument.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
THE WOODWARD VARIABLE ANNUITY FUND
By:
------------------------------------------
NBD BANK
By:
------------------------------------------
FIRST CHICAGO INVESTMENT MANAGEMENT COMPANY
By:
------------------------------------------
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS Fund Services, Inc., general partner
By:
------------------------------------------
-11-
<PAGE>
SCHEDULE 1
LIST OF PORTFOLIOS
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID CAP OPPORTUNITY FUND
GROWTH FUND
MONEY MARKET FUND
-12-
Exhibit (9)(e)
ADDENDUM NO. 1 TO CO-ADMINISTRATION AGREEMENT
This Addendum, dated as of the ____ day of ____________, 199__,
is entered into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a
Delaware business trust, FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
("FCNIMCO"), a registered investment adviser, and BISYS LIMITED PARTNERSHIP,
d/b/a, BISYS FUND SERVICES ("BISYS") (each an "Administrator" and
collectively, the Administrators").
WHEREAS, the Trust, FCNIMCO and BISYS have entered into a
Co-Administration Agreement dated October 7, 1996 ("Co-Administration
Agreement"), pursuant to which the Trust appointed FCNIMCO and BISYS to act as
Administrators to the Trust's Managed Assets Balanced Fund, Growth and Value
Fund, Mid-Cap Opportunity Fund, Growth Fund, and Money Market Fund (each a
"Fund");
NOW THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO and BISYS to
act as Administrators to the Trust for the Bond Fund, Intrinsic Value Fund and
International Equity Fund for the period and on the terms set forth in the
Co-Administration Agreement. FCNIMCO and BISYS hereby accept such appointment
and agree to render the services set forth in the Co-Administration Agreement
for the compensation herein provided.
2. Compensation. For the services provided and the expenses
assumed pursuant to the Co-Administration Agreement, the Trust will pay the
Administrators, and the Administrators will accept as full compensation
therefor, a fee, computed daily and payable monthly, at the annual rate of
.15% of each of the Bond, Intrinsic Value and International Equity Funds'
average daily net assets, respectively.
3. Capitalized Terms. From and after the date hereof, the term
"Fund" as used in the Co-Administration Agreement shall be deemed to include
the Bond Fund, Intrinsic Value Fund and International Equity Fund. Capitalized
terms used herein and not otherwise defined shall have the meanings ascribed
to them in the Co-Administration Agreement.
4. Miscellaneous. Except to the extent supplemented hereby, the
Co-Administration Agreement shall remain unchanged and in full force and
effect and is hereby ratified and confirmed in all respects as supplemented
hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum
as of the date and year first above written.
<PAGE>
PEGASUS VARIABLE ANNUITY FUND
BY:________________________________________
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
BY:_______________________________________
BISYS LIMITED PARTNERSHIP d/b/a, BISYS FUND
SERVICES
BY:_______________________________________
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 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. 6 to the Pegasus Variable Annuity Fund's registration statement
under the Securities Act of 1933).
ARTHUR ANDERSEN LLP
Detroit, Michigan,
December 16, 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. 6 to the Registration
Statement of Pegasus Variable Annuity Fund on Form N-1A under the
Securities Act of 1933, as amended. This consent does not constitute a consent
under section 7 of the Securities Act of 1933, and in consenting to the use of
our name and the references to our Firm under such caption we have not
certified any part of the Registration Statement and do not otherwise come
within the categories of persons whose consent is required under said section
7 or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ DRINKER BIDDLE & REATH
--------------------------
DRINKER BIDDLE & REATH
Philadelphia, PA
December 16, 1996
Exhibit (13)(c)
PURCHASE AGREEMENT
AGREEMENT dated this _____________________ day of ___________ , 199__,
by and between Pegasus Variable Annuity Fund (the "Trust"), a Delaware
business trust, and ITT Hartford Life and Annuity Insurance Company ("ITT"), a
Connecticut corporation.
1. The Trust hereby offers ITT and ITT hereby purchases, as of the
date first shown above, one (1) share of beneficial interest of Series F,
Series G and Series H, ($.10 par value per share) representing interests in
the Pegasus Bond Fund, Intrinsic Value Fund and International Equity Fund at a
price of $10.00 per share (collectively, "Shares"). ITT hereby acknowledges
purchase of the Shares and the Trust hereby acknowledges receipt from ITT of
funds in the amount of $30.00 in full payment for the Shares.
2. ITT represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. The names "Pegasus Variable Annuity Fund" and "Trustees of Pegasus
Variable Annuity Fund" refer respectively to the Trust created and the
Trustees, as trustees but not individually or personally, acting from time to
time under the Trust Instrument dated as of November 7, 1994 which is hereby
referred to and a copy of which is on file at the office of the State
Secretary of the Commonwealth of Delaware and at the principal office of the
Trust. The obligations of "Pegasus Variable Annuity Fund" entered into in the
name or on behalf thereof by any of the Trustees, representatives or agents
are made not by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders or representatives of the Trust personally, but bind
only the Trust Property, and all persons dealing with any class of shares of
the Trust must look solely to the Trust Property belonging to such class for
the enforcement of any claims against the Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the ____ day of _____________, 199__.
PEGASUS VARIABLE ANNUITY FUND
Attest:
_________________________________ By: ________________________________
Donald G. Sutherland
President
ITT Hartford Life and Annuity
Insurance Company
Attest:
_________________________________ By: ________________________________
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3
<AVERAGE-NET-ASSETS> 1,264
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
