As filed with the Securities and Exchange Commission on April 24, 1997
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. 8
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 7
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)
[X] on April 30, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
<PAGE>
Registrant has previously registered an indefinite number of its shares of
beneficial interest under the Securities Act of 1933 pursuant to Rule 24f-2
under the Investment Company Act of 1940. Registrant's Rule 24f-2 Notice with
respect to Series A, B, C, D and E for the fiscal year ending December 31,
1996 was filed on March 3, 1997.
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
Series A, B, C, D, E, F and G Representing Interests in the Pegasus Managed
Assets Balanced, Growth and Value, Mid-Cap Opportunity, Growth, Money Market,
Bond and Intrinsic Value 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
<PAGE>
PROSPECTUS April 30, 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 intends to file 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 seven 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.") As of May 1, 1997 the Trust will no longer accept
orders to purchase shares of the Managed Assets Balanced and 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
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 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.
<PAGE>
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>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
HIGHLIGHTS........................................................... 3
FINANCIAL HIGHLIGHTS................................................. 5
DESCRIPTION OF THE FUNDS............................................. 6
PURCHASE AND REDEMPTION OF TRUST SHARES.............................. 11
NET ASSET VALUE AND PRICING OF SHARES................................ 12
MANAGEMENT OF THE TRUST.............................................. 13
DIVIDENDS AND DISTRIBUTIONS.......................................... 16
TAXES................................................................ 16
PERFORMANCE INFORMATION.............................................. 17
GENERAL INFORMATION.................................................. 18
SUPPLEMENTAL INFORMATION............................................. A-1
</TABLE>
<PAGE>
HIGHLIGHTS
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.
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 (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.
3
<PAGE>
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."
4
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides supplementary information to the
Funds' financial statements incorporated by reference into 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 incorporated
by reference into 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
incorporated by reference into 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**
---------------
Year Ended Period* Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.27 $ 10.00
Income from investment operations:
Net investment income 0.37 0.25
Net realized and unrealized gains on investment 0.97 1.27
Total from investment operations 1.34 1.52
Less distributions:
From net investment income (0.37) (0.25)
From realized gains (0.26) ---
In excess of realized gains --- ---
Total distributions (0.63) (0.25)
Net asset value, end of period $ 11.98 $ 11.27
TOTAL RETURN 12.05% 20.15%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 22,275,238 $ 11,210,876
Ratio of expenses to average net assets 0.85% 0.85%(a)
Ratio of net investment income to average net assets 3.32% 3.61%(a)
Ratios of expenses to average net assets without fee
waivers/reimbursed expenses 1.52% 2.34%(a)
Ratio of net investment income (loss) to average net
assets without fee waivers/reimbursed expenses 2.65% 2.12%(a)
Portfolio turnover rate 35.29% 14.05%
Average Commission Rate $ 0.04 $ 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>
<PAGE>
<TABLE>
<CAPTION>
Growth and Value Fund**
-----------------------
Year Ended Period* Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.63 $ 10.00
Income from investment operations:
Net investment income 0.15 0.13
Net realized and unrealized gains on investment 2.02 1.63
Total from investment operations 2.17 1.76
Less distributions:
From net investment income (0.14) (0.13)
From realized gains (0.47)
In excess of realized gains --- ---
Total distributions (0.61) (0.13)
Net asset value, end of period $ 13.19 $ 11.63
TOTAL RETURN 18.75% 22.75%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 8,602,557 $ 3,753,691
Ratio of expenses to average net assets 0.85% 0.85%(a)
Ratio of net investment income to average net assets 1.35% 1.78%(a)
Ratios of expenses to average net assets without fee
waivers/reimbursed expenses 2.27% 4.93%(a)
Ratio of net investment income (loss) to average net
assets without fee waivers/reimbursed expenses (0.07)% (2.30)%(a)
Portfolio turnover rate 46.82% 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>
<PAGE>
<TABLE>
<CAPTION>
Mid-Cap Opportunity Fund**
--------------------------
Year Ended Period* Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.02 $ 10.00
Income from investment operations:
Net investment income 0.03 0.05
Net realized and unrealized gains on investment 2.67 1.02
Total from investment operations 2.70 1.07
Less distributions:
From net investment income (0.03) (0.05)
From realized gains (0.23) ---
In excess of realized gains ---
Total distributions (0.26) (0.05)
Net asset value, end of period $ 13.46 $ 11.02
TOTAL RETURN 24.53% 14.20%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 9,215,660 $ 4,972,365
Ratio of expenses to average net assets 0.85% 0.85%(a)
Ratio of net investment income to average net assets 0.28% 0.67%(a)
Ratios of expenses to average net assets without fee
waivers/reimbursed expenses 2.11% 4.64%(a)
Ratio of net investment income (loss) to average net
assets without fee waivers/reimbursed expenses (0.98)% (3.12)%(a)
Portfolio turnover rate 37.44% 32.11%
Average Commission Rate $ 0.08 $ 0.11
<FN>
* Each Fund commenced investment operations on March 30, 1995.
** Prior to October 7, 1996, the names of the Funds were the Woodward
Balanced, Woodward Growth/Value, Woodward Opportunity, Woodward
Capital Growth and Woodward Money Market Funds.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Growth Fund**
-------------
Year Ended Period* Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.37 $ 10.00
Income from investment operations:
Net investment income 0.05 0.05
Net realized and unrealized gains on investment 1.94 1.38
Total from investment operations 1.99 1.43
Less distributions:
From net investment income (0.05) (0.05)
From realized gains (0.01) (0.01)
In excess of realized gains (0.02) ---
Total distributions (0.08) (0.06)
Net asset value, end of period $ 13.28 $ 11.37
TOTAL RETURN 17.52% 18.82%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 11,542,021 $ 6,434,936
Ratio of expenses to average net assets 0.85% 0.85%(a)
Ratio of net investment income to average net assets 0.49% 0.81%(a)
Ratios of expenses to average net assets without fee
waivers/reimbursed expenses 1.65% 3.15%(a)
Ratio of net investment income (loss) to average net
assets without fee waivers/reimbursed expenses (0.31)% (1.49)%(a)
Portfolio turnover rate 23.11% 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>
<PAGE>
<TABLE>
<CAPTION>
Money Market Fund**
-------------------
Year Ended Period* Ended
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.05 0.03
Net realized and unrealized gains on investment --- ---
Total from investment operations 0.05 0.03
Less distributions:
From net investment income (0.05) (0.03)
From realized gains --- ---
In excess of realized gains --- ---
Total distributions (0.05) (0.03)
Net asset value, end of period $ 1.00 $ 1.00
TOTAL RETURN 5.12% 5.41%(a)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 1,889,506 $1,175,892
Ratio of expenses to average net assets 0.50% 0.50%(a)
Ratio of net investment income to average net assets 4.91% 5.27%(a)
Ratios of expenses to average net assets without fee
waivers/reimbursed expenses 5.15% 10.48%(a)
Ratio of net investment income (loss) to average net
assets without fee waivers/reimbursed expenses 0.26% (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.
5
</TABLE>
<PAGE>
DESCRIPTION OF THE FUNDS
General
The Trust is an open-end management investment company
registered under the 1940 Act. The Trust currently consists of seven
investment portfolios, each of which consists of a separate pool of assets
with separate investment objectives and policies. Under the 1940 Act, each
Fund is classified as a diversified investment portfolio.
Investment Objectives and Policies
The investment objective of a Fund may not be changed without
approval of the holders of a majority (as defined in the 1940 Act) of 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 "Risk
Factors" below and 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.
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. 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.
<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
Securities: 60% 45% to 75%
Debt Securities &
Cash Equivalent
Securities: 40% 25% to 55%
</TABLE>
Compliance with these percentage requirements may limit the
ability of the Fund to maximize total return. The actual percentage of assets
invested in Equity Securities, Debt Securities and Cash Equivalent Securities
will vary from time to time and may be outside the strategy range, depending
on the judgment of the Investment Adviser as to general market and economic
conditions, trends in yields, interest rates and changes in fiscal and
monetary developments.
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. 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.
6
<PAGE>
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. In addition, each
Equity Fund may: (1) invest in securities convertible into common stock,
such as certain bonds and preferred stocks; (2) 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); (3) invest up to 5%
of its net assets in lower rated convertible securities; (4) enter into
futures contracts and related options; (5) utilize options and other
derivative instruments such as equity index swaps; and (6) lend its
portfolio securities. Under normal market conditions, each Fund expects to
invest at least 65% of the value of its total assets in Equity Securities.
Each Equity Fund may hold up to 35% of its total assets in Cash Equivalents
and Debt Securities rated investment grade or higher at the time of purchase
(i.e., no lower than Baa by Moody's or BBB by S&P, Fitch or Duff), or unrated
investments deemed by the Investment Adviser to be comparable in quality at
the time of purchase to instruments that are so rated.
The Growth and Value Fund invests primarily in Equity
Securities of companies believed by the Investment Adviser to represent a
value or potential worth which is not fully recognized by prevailing market
prices. The Fund invests in companies which the Investment Adviser believes
have earnings growth expectations that exceed those implied by the market's
current valuation. In addition, the Fund seeks to maintain a portfolio of
companies whose earnings will increase at a faster rate than those 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.
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. In addition, the
Bond Fund may lend its portfolio securities and engage in futures and
options transactions and other derivative instruments, such as interest rate
swaps and forward contracts.
7
<PAGE>
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 fully 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."
8
<PAGE>
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.
In addition, none of the 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 a Fund as a supplement to an overall
investment program and should invest only if they are willing to accept
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.
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, because they typically are traded in
lower volume and their 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, the Fund will be subject to the
particular risks relating to such securities (including legal and economic
conditions) to a greater extent than if its assets were not so concentrated.
9
<PAGE>
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 proceeds from a foreclosure may be
delayed and the amount of the proceeds received may not be enough to pay the
principal or accrued interest on the defaulted Municipal Obligations.
Lower Rated Securities
(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 such securities
in a market that may be less liquid than the market for higher rated
securities, will adversely affect the Fund's net asset value. In addition,
the retail secondary market for these securities may be less liquid than that
for 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 its net asset value. The Investment Adviser
will continually evaluate these securities and the ability of their issuers
to pay interest and principal. A Fund's ability to achieve its investment
objective 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, 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. In addition, 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 economies.
Foreign Currency and Foreign Commodity Transactions
(Asset Allocation Fund only) Currency exchange rates may
fluctuate significantly over short periods of time. They generally are
determined by the forces of supply and demand in the foreign exchange markets
and the relative merits of investments in different countries, actual or
perceived changes in interest rates and other complex factors, as seen from
an international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central
banks, or the failure to intervene, or by currency controls or political
developments in the United States or abroad.
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<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.
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 should note that as of May 1, 1997, the Trust will
no longer accept orders to purchase shares of the Managed Assets Balanced and
Money Market Funds.
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.
11
<PAGE>
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 foresee 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 possibly 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 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
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<PAGE>
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 TRUST
Trustees and Officers of the Trust
The Board of Trustees of the Trust is responsible for the
management of the business and affairs of the Trust. Information about the
Trustees and officers of the Trust is contained in the Statement of
Additional Information.
Investment Adviser and Administrators
First Chicago NBD Investment Management Company, located at
Three First National Plaza, Chicago, Illinois 60670, is each Fund's
Investment Adviser. FCNIMCO is a registered investment adviser and a
wholly-owned subsidiary of The First National Bank of Chicago ("FNBC"), which
in turn is a wholly-owned subsidiary of First Chicago NBD Corporation
("FCN"), a registered bank holding company. FCNIMCO also acts as investment
adviser for other registered investment company portfolios.
FCNIMCO serves as Investment Adviser for the Trust pursuant to
an Investment Advisory Agreement dated 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.
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<PAGE>
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, 1996 (if applicable), are set forth below.
<TABLE>
<CAPTION>
Current Contractual Fee Rate Effective Rate for Advisory
Contractual for Advisory Services and Administrative Services
Advisory for Period Ended for Year Ended
Fee Rate October 6, 1996* December 31, 1996
----------- --------------------- ---------------------------
<S> <C> <C> <C>
ASSET ALLOCATION FUNDS:
Managed Assets Balanced Fund 0.65% 0.75% 0.00%
EQUITY FUNDS:
Growth and Value Fund 0.60% 0.75% 0.00%
Mid-Cap Opportunity Fund 0.60% 0.75% 0.00%
Growth Fund 0.60% 0.75% 0.00%
Intrinsic Value Fund 0.60% N/A N/A
BOND FUNDS:
Bond Fund 0.40% N/A N/A
MONEY MARKET FUNDS:
Money Market Fund 0.30% 0.45% 0.00%
of first of first $1 billion,
$1 billion, .425% of next $1
.275% of next billion,.40% of
$1 billion, amount in excess of
.25% of $2 billion
amount in
excess of
$2 billion
<FN>
* For the fiscal period ended October 6, 1996, 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. The current contractual advisory fee rate took
effect October 7, 1996.
</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).
Claude B. Erb, First Vice President and Director of Investment
Planning, is primarily responsible for the day-to-day management of the
Managed Assets Balanced Fund. Mr. Erb served as Deputy Chief Investment
Officer and Senior Vice President of Trust Services of America and TSA
Capital Management from 1986 through 1992. Mr. Erb joined FCN in 1993.
Gary L. Konsler, First Vice President, and Jeffrey C. Beard, First
Vice President, are primarily responsible for the day-to-day management of
the Growth and Value, and Growth Funds. Mr. Beard joined FCN in 1982 and Mr.
Konsler joined FCN in 1973.
Ronald L. Doyle, First Vice President, and Joseph R. Gatz, Vice
President, are primarily responsible for the day-to-day management of the
Mid-Cap Opportunity Fund. Mr. Doyle joined FCN in 1982 and Mr. Gatz joined
FCN in 1986.
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.
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. Subject to such banking laws and
regulations, the Investment Adviser believes that it and its affiliated banks
may perform the advisory, administrative and custodial services for the Trust
and 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 its affiliated banks
from continuing to
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<PAGE>
perform investment advisory or custodial services for the Trust or require
them to alter or discontinue the services they provide to shareholders.
If the Investment Adviser and its affiliated banks 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 jointly 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, the Trust pays FCNIMCO
as agent for the Co-Administrators a monthly administration fee at the annual
rate of .15% of each Fund's average daily net assets. The Co-Administrators
reimbursed expenses in excess of their fee for the year ended December 31,
1996.
Distributor
BISYS Fund Services, located at 3435 Stelzer Road, Columbus, Ohio
43219-3035, serves as the Trust's principal underwriter and distributor of
the Funds' shares.
Transfer and Dividend Disbursing Agent and Custodian
First Data Investor Services Group, Inc., 4400 Computer Drive,
Westborough, Massachusetts 01581-5120 serves as the Trust's Transfer and
Dividend Disbursing Agent (the "Transfer Agent"). NBD Bank, 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 it
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.
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity,
Growth, and Intrinsic Value Funds declare and pay dividends from net
investment income on a quarterly basis. The Bond Fund declares and pays
dividends from net investment income monthly.
The Money Market Fund declares dividends from net investment income
on each of its Business Days and pays dividends on a monthly basis. The
earnings for Saturday, Sunday and holidays are declared as dividends on the
preceding Business Day.
Each Fund will make distributions from net realized securities gains,
if any, once a year, but may make distributions on a more frequent basis to
comply with the distribution requirements of the Code, in all events in a
manner consistent with the provisions of the 1940 Act. Dividends are
automatically reinvested in additional shares of the same Fund from which
they were paid at net asset value, unless payment in cash is requested.
TAXES
Federal
Each Fund intends to qualify as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"). Such
qualification generally will relieve the Funds of liability for federal
income taxes to the extent their earnings are distributed in accordance with
the Code. In order to so qualify, a Fund must comply with certain
distribution, diversification, source of income and other applicable
requirements. If for any taxable year a Fund does not qualify for the special
federal tax treatment afforded regulated investment companies, all of the
Fund's taxable income would be subject to tax at regular corporate rates
without any deduction for distributions to shareholders. In such event, a
Fund's distributions to segregated asset accounts holding shares of the Fund
would be taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits. A failure of a Fund to qualify as a
regulated investment company also could result in the loss of the tax favored
status of variable annuity contracts based on a segregated asset account
which invests in the Fund.
Under Code Section 817(h), a segregated asset account upon which a
variable annuity contract 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.
16
<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 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.
17
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The average annual total returns and aggregate total returns for the
Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity and Growth
Funds for various periods ended December 31, 1996 are shown below:
<TABLE>
<CAPTION>
Average Annual Total Aggregate Total
Return Return
-------------------- --------------------
1 Since 1 Since
Year Inception Year Inception
---- --------- ---- ---------
<S> <C> <C> <C> <C>
Managed Assets Balanced Fund 12.15 15.70 12.15 29.25
Inception: March 30, 1995
Growth and Value Fund 18.85 20.98 18.85 39.79
Inception: March 30, 1995
Mid-Cap Opportunity Fund 24.56 20.06 24.56 37.92
Inception: March 30, 1995
Growth Fund 17.51 18.26 17.51 34.32
Inception: March 30, 1995
</TABLE>
GENERAL INFORMATION
The Trust was organized as a Delaware business trust as of November
7, 1994 under a Trust Instrument. The Trust is a series fund having seven
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 and
Series G 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 and Intrinsic Value 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 Policies.
Because NBD serves the Trust as Custodian, the Board of Trustees has
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.
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<PAGE>
The Trust Instrument provides that the obligations of the Trust
entered into in the name or on behalf thereof by any of the Trustees,
representatives or agents are made not individually, but in such capacities,
and are not binding upon any of the Trustees, shareholders or representatives
of the Trust personally, but bind only the property of the Trust or any Fund
thereof, and all persons dealing with any Fund of the Trust must look solely
to the Trust property belonging to such Fund for the enforcement of any
claims against the Trust.
Inquiries regarding the Trust should be made in writing to the
Trust's office c/o NBD Bank, for the Pegasus Variable Annuity Fund, 900 Tower
Drive, Troy, Michigan 48098. Holders of Variable Annuity Contracts 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 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.
19
<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.
Obligations rated in the lowest of the top four investment grade rating
categories (Baa by Moody's or BBB by S&P, Fitch, Duff or IBCA) are
considered to have less capacity to pay interest and repay principal and
have certain speculative characteristics.
Short-Term Investments
Each Fund may hold the types of Cash Equivalent Securities described
under "Description of the Funds -- 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.
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
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<PAGE>
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.
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 them 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,
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<PAGE>
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 its investment limitations. Agreements will
require that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned plus
accrued interest. Collateral for such loans could include cash or securities
of the U.S. Government, its agencies or instrumentalities, some of which may
bear maturities exceeding 13 months. Such loans will not be made if, as a
result, the aggregate of all outstanding loans of a particular Fund exceeds
one-third of the value of its total assets. Loans of securities involve risk
of delay in receiving additional collateral or in recovering the securities
loaned or possible loss of rights in the collateral should the borrower of
the securities become insolvent. Loans will be made only to borrowers that
provide the requisite collateral comprised of liquid assets and when, in the
Investment Adviser's judgment, the income to be earned from the loan
justifies the attendant risks.
Zero Coupon Obligations
Each 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.
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<PAGE>
Foreign Securities
Investments by the Funds in foreign securities, with respect to
certain foreign countries, exposes them 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 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"),
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-end (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
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where no commission or profit to a sponsor or dealer results from the
purchase other than the customary brokers' commissions. As a shareholder of
another investment company, a Fund would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Asset Backed Securities
Asset Backed Securities 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 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
A-5<PAGE>
directly or indirectly guaranteed by the U.S. Government.
The Non-Money Market Funds may also invest in non-mortgage backed
securities including interests in pools of receivables, such as motor vehicle
installment purchase obligations and credit card receivables. Such securities
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities may also be debt instruments, which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Non-mortgage backed securities are not issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Non-mortgage backed securities involve certain risks that are not
presented by mortgage backed securities. Primarily, these securities do not
have the benefit of the same security interest in the underlying collateral.
Credit card receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit laws. Most
issuers of motor vehicle receivables permit the servicers to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related motor
vehicle receivables. In addition, because of the large number of vehicles
involved in a typical issuance and technical requirements under state laws,
the trustee for the holders of the motor vehicle receivables may not have an
effective security interest in all of the obligations backing such
receivables. Therefore, there is a possibility that recoveries on repossessed
collateral may not, in some cases, be able to support payments on these
securities.
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.
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. 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
A-6
<PAGE>
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.
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. The Funds also may write covered put option contracts
to the extent of 25% of the value of their 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
it 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.
A-7
<PAGE>
Each Non-Money Market Fund may purchase and sell call and put options
on stock indices listed on U.S. securities exchanges or traded in the
over-the-counter market. A stock index fluctuates with changes in the market
values of the stocks included in the index. Because the value of an index
option depends upon movements in the level of the index rather than the price
of a particular stock, whether a Fund will realize a gain or loss from the
purchase or writing of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in the case of
certain indices, in an industry or market segment, rather than movements in
the price of a particular stock.
Futures Contracts and Options on Futures Contracts
Each Non-Money Market Fund may enter into futures contracts and
options on future contracts. They may enter into stock index futures
contracts and may enter into interest rate futures contracts and currency
futures contracts, and options with respect thereto. See "Options
Transactions" above. These transactions will be entered into as a substitute
for comparable market positions in the underlying securities or for hedging
purposes. A Fund may not engage in such transactions if the sum of the amount
of initial margin deposits and premiums paid for unexpired commodity options,
other than for bona fide hedging transactions, would exceed 5% of the
liquidation value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on such contracts it has entered into;
provided, however, that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the
5%. To the extent a Fund engages in the use of futures and options on futures
for other than bona fide hedging purposes, the Fund may be subject to
additional risk. Although none of these Funds would be a commodity pool, each
would be subject to rules of the CFTC limiting the extent to which it could
engage in these transactions. Futures and options transactions are a form of
derivative security. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. A Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Foreign Currency Transactions
The Asset Allocation Fund may engage in currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in
the currency exchange market, or through entering into forward contracts to
purchase or sell currencies. A forward currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which
must be more than two days from the date of the contract, at a price set at
the time of the contract. These contracts are entered into in the interbank
market conducted directly between currency traders (typically commercial
banks or other financial institutions) and their customers. They may be used
to reduce the level of volatility caused by changes in foreign currency
exchange rates or when such transactions are economically appropriate for the
reduction of risks in the ongoing management of the 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 Fund also may combine forward currency exchange
contracts with investments in securities denominated in other currencies.
The Fund also may maintain short positions in forward currency
exchange transactions, which would involve it agreeing to exchange an amount
of a currency it did not currently own for another currency at a future date
in anticipation of a decline in the value of the currency sold relative to
the currency the Fund contracted to receive in the exchange.
Options on Foreign Currency
The Asset Allocation Fund may purchase and sell call and put
options on foreign currency for the purpose of hedging against changes in
future currency exchange rates. Call options convey the right to buy the
underlying currency at a price which is expected to be lower than the spot
price of the currency at the time the option expires. Put options convey the
right to sell the underlying currency at a price which is anticipated to be
higher than the spot price of the currency at the time the option expires.
The Fund may use foreign currency options for the same purposes as forward
currency exchange and futures transactions, as described herein. See also
"Options" and "Currency Futures and Options on Currency Futures."
A-8
<PAGE>
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 options in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than
that of the securities. Such "over hedging" or "under hedging" may adversely
affect the Fund's net investment results if market movements are not as
anticipated when the hedge is established.
Successful use of futures by a Non-Money Market Fund also is subject
to the Investment Adviser's ability to predict correctly movements in the
direction of securities prices, interest rates, currency exchange
rates and other economic factors. In addition, in such situations, if the
Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it may be disadvantageous to do
so.
Although a Non-Money Market Fund intends to enter into futures
contracts and options transactions only if there is an active market for such
contracts, no assurance can be given that a liquid market will exist for any
particular contract at any particular time. See "Illiquid Securities" above.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit or trading may be suspended for
specified periods during the trading day. Futures contracts prices could move
to the limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and potentially
subjecting the Fund to substantial losses. If it is not possible, or the Fund
determines not, to close a futures position in anticipation of adverse price
movements, the Fund will be required to make daily cash payments of variation
margin. In such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may offset partially or completely losses on
the futures contract.
Currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or perceived changes in interest rates and
other complex factors as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by intervention by U.S. or
foreign governments or central banks, or the failure to intervene, or by
currency controls or political developments in the United States or abroad.
The foreign currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in currencies
occurs on an exchange. Since a forward currency contract is not guaranteed by
an exchange or clearinghouse, a default on the contract would deprive the
Fund of unrealized profits or force the Fund to cover its commitments for
purchase or resale, if any, at the current market price.
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
A-9
<PAGE>
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. The Funds will enter into swap transactions with
counterparties only if: (i) for transactions with maturities under one year,
such counterparty has outstanding short-term paper rated at least A-1 by S&P,
Prime-1 by Moody's, F-1 by Fitch or Duff-1 by Duff, or (ii) for transactions
with maturities greater than one year, the counterparty has outstanding debt
securities rated at least Aa by Moody's or AA by S&P, Fitch or Duff.
The use of swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. There is no limit on the amount of swap
transactions that may be entered into by a Non-Money Market Fund. These
transactions do not involve the delivery of securities or other underlying
assets or principal. Accordingly, the risk of loss with respect to swaps is
limited to the net amount of payments that a Fund is contractually obligated
to make. If the other party to a swap defaults, the relevant Fund's risk of
loss consists of the net amount of payments that it 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-10
<PAGE>
CROSS REFERENCE SHEET
Series A, B, C, D, E, F and G Representing Interests in the Pegasus Managed
Assets Balanced, Growth and Value, Mid-Cap Opportunity, Growth, Money Market,
Bond and Intrinsic Value 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
Holders of Securities........................ Description of Shares
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
Net Asset Value;
19. Purchase, Redemption and Pricing
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
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1997
for the
MANAGED ASSETS BALANCED FUND
GROWTH AND VALUE FUND
MID-CAP OPPORTUNITY FUND
GROWTH FUND
INTRINSIC VALUE 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 April 30, 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 Valueand 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 or the Hartford Companies.
Capitalized terms used but not defined herein have the same meanings as in
the Prospectus.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C>
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........................................................ 22
INDEPENDENT PUBLIC ACCOUNTANTS.................................... 29
COUNSEL........................................................... 29
ADDITIONAL INFORMATION ON PERFORMANCE............................. 29
MISCELLANEOUS..................................................... 33
APPENDIX A........................................................ A-1
APPENDIX B........................................................ B-1
</TABLE>
-i-
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RISK FACTORS
The following policies supplement the Funds' respective
investment objectives and policies as set forth in the Prospectus.
Additional Information on Portfolio Instruments
Attached to this Additional Statement is Appendix A which
contains descriptions of the rating symbols used by Rating Agencies for
securities in which the Funds may invest.
Portfolio Transactions
Subject to the general supervision of the Trust's Board of
Trustees, the Investment Adviser is responsible for making decisions with
respect to and placing orders for all purchases and sales of portfolio
securities for each Fund.
The annualized portfolio turnover rate for each Fund is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the
portfolio securities owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration
dates at the time of acquisition are one year or less. Portfolio turnover of
the Non-Money Market Funds may vary greatly from year to year as well as
within a particular year, and may be affected by cash requirements for
redemption of shares and by requirements which enable the Funds to receive
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions, and the Non-Money Market Funds may engage in
short term trading to achieve their respective investment objectives.
Purchases of money market instruments by the Funds are made
from dealers, underwriters and issuers. The Funds currently do not expect to
incur any brokerage commission expense on such transactions because money
market instruments are generally traded on a "net" basis by dealers acting as
principal for their own accounts without a stated commission. The price of
the security, however, usually includes a profit to the dealer. Securities
purchased in underwritten offerings include a fixed amount of compensation to
the underwriter, generally referred to as the underwriter's concession or
discount. When securities are purchased directly from or sold directly to an
issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers.
Transactions in the over-the-counter market are generally on a net basis
(i.e., without commission) through dealers, or otherwise involve transactions
directly with the issuer of an instrument.
-1-
<PAGE>
The Funds may participate, if and when practicable, in bidding
for the purchase of portfolio securities directly from an issuer in order to
take advantage of the lower purchase price available to members of a bidding
group. A Fund will engage in this practice, however, only when the Investment
Adviser, in its sole discretion, believes such practice to be otherwise in the
Fund's interests.
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.
For the year ended December 31, 1996, the Managed Assets
Balanced, Growth and Value, Mid-Cap Opportunity and Growth Funds paid
brokerage commissions of $21,900, $21,983, $19,819 and $9,401, respectively.
For the period ended December 31, 1995, these Funds paid brokerage
commissions of $22,655, $13,21, $24,871 and $16,570, respectively. For the
same periods, the Money Market Fund incurred no brokerage commissions. In
addition, the Investment Adviser, on behalf of the Equity Funds, may direct
brokerage transactions to broker-dealers in return for the provision of
investment information as stated above. For the fiscal year ended December
31, 1996,
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the amounts of such transactions and related commissions on behalf of the
Funds were: (1) $4,726,545 and $15,207 for the Managed Assets Balanced
Fund; (2) $4,882,295 and $17,611 for the Growth and Value Fund;
(3) $12,857,027 and $14,885 for the Mid-Cap Opportunity Fund; and
(4) $2,791,704 and $4,338 for the Growth Fund.
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 and the issuer does not have Comparable Obligations
rated by a Rating Agency but are determined to be of comparable quality to a
security satisfying (1) or (2) above; 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
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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.
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
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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 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
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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
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
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the borrower, such loans will be called so that the securities may be voted
by a Fund if a material event affecting the investment is to occur.
Repurchase Agreements and Reverse Repurchase Agreements
The repurchase price under the repurchase agreements described
in the Prospectus generally equals the price paid by a Fund plus interest
negotiated on the basis of current short term rates (which may be more or
less than the rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements are held by the Trust's
Custodian, in the Federal Reserve/Treasury book-entry system or by another
authorized securities depository. Repurchase agreements are considered to be
loans under the 1940 Act.
Reverse repurchase agreements are considered to be borrowings
by a Fund under the 1940 Act. At the time a Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account liquid
assets such as U.S. Government securities or other liquid high-grade debt
securities having a value equal to or greater than the repurchase price
(including accrued interest) and will subsequently monitor the account to
ensure that such value is maintained.
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
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loans. These securities are designed to provide monthly payments of interest
and principal to the investor. The mortgagor's monthly payments to his
lending institution are "passed- through" to an investor such as the Funds.
Most issuers or poolers provide guarantees of payments, regardless of whether
or not the mortgagor actually makes the payment. The guarantees made by
issuers or poolers are supported by various forms of credit, collateral,
guarantees or insurance, including individual loan, title, pool and hazard
insurance purchased by the issuers or poolers so that they can meet their
obligations under the policies. Mortgage backed securities issued by private
issuers or poolers, whether or not such securities are subject to guarantees,
may entail greater risk than securities directly or indirectly guaranteed by
the U.S. Government.
Interests in pools of mortgage backed securities differ from
other forms of debt securities, which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these payments
are a "pass-through" of the monthly payments made by the individual borrowers
on their residential mortgage loans, net of any fees paid. Additional
payments are caused by repayments resulting from the sale of the underlying
residential property, refinancing or foreclosure net of fees or costs which
may be incurred. Some mortgage backed securities are described as "modified
pass-through." These securities entitle the holders to receive all interest
and principal payments owed on the mortgages in the pool, net of certain
fees, regardless of whether or not the mortgagors actually make the payments.
Residential mortgage loans are pooled by the Federal Home Loan
Mortgage Corporation ("FHLMC"). FHLMC is a corporate instrumentality of the
U.S. Government and was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential housing. Its
stock is owned by the twelve Federal Home Loan Banks. FHLMC issues
Participation Certificates ("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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<PAGE>
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 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 Fund either may sell a security and make delivery of the
currency, or retain the security and offset contractual obligation to deliver
the currency by purchasing a second contract pursuant to which the Fund will
obtain, on the same maturity date, the same amount of the currency which it
is obligated to deliver. If the Asset Allocation 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, the Fund may not be able to contract to sell the currency at a
price above the devaluation level it anticipates. The requirements for
qualification as a regulated investment company under the Code, may cause the
Fund to restrict the degree to which it engages in currency transactions.
See "Additional Information Concerning Taxes."
Futures Contracts and Related Options
See Appendix B to this Additional Statement for a discussion
of futures contracts and related options.
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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 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.
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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.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in stock
index options prior to expiration by entering into a closing transaction on
an exchange or it may let the option expire unexercised.
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Convertible Securities
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.
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
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<PAGE>
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.
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.
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<PAGE>
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 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
-15-
<PAGE>
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.
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
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<PAGE>
the commitment by terminating sales of the Fund's shares in the state
involved and, in the case of investors in Texas, give notice of such action.
NET ASSET VALUE
Non-Money Market Funds
The net asset value per share of each Non-Money Market Fund is
calculated by adding the value of all portfolio securities and other assets
belonging to the Fund, subtracting the liabilities charged to the Fund, and
dividing the result by the number of shares of the Fund outstanding. "Assets
which belong to" a Fund consist of the consideration received upon the
issuance of shares of the Fund together with all income, earnings, profits
and proceeds derived from the investment thereof, including any proceeds from
the sale of such investments, any funds or payments derived from any
reinvestment of such proceeds, and a portion of any general assets of the
Trust not belonging to a particular investment portfolio. Assets belonging to
a Fund are charged with the direct liabilities of the Fund and with a share
of the general liabilities of the Trust which are normally allocated in
proportion to the relative net asset values of all of the Trust's Funds at
the time of allocation. Subject to the provisions of the Trust Instrument,
determinations by the Board of Trustees as to the direct and allocable
liabilities, and the allocable portion of any general assets, with respect to
a Fund are conclusive.
Money Market Fund
The Money Market Fund intends to value its portfolio
securities based upon their amortized cost in accordance with Rule 2a-7 under
the 1940 Act. Where it is not appropriate to value a security by the
amortized cost method, the security will be valued either by market
quotations, or by fair value as determined by the Board of Trustees. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it 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
-17-
<PAGE>
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 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.
Investors should note that as of May 1, 1997, the Trust will
no longer accept orders to purchase shares of the Managed Assets Balanced and
Money Market Funds.
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.)
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<PAGE>
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.
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.
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<PAGE>
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.
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
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(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, some of which 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 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 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
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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.
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. (1985-1996); 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, Pegasus Funds. He is 71 years old.
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Nicholas J. De Grazia, Trustee
Business Consultant (since 1997); Consultant, Lionel L.L.C. (1995-1996);
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 54 years old.
John P. Gould, Trustee, Chairman of the Board
Executive Vice President of Lexecon Inc. (since 1995); 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 Economics Club of Chicago and Commercial Club of Chicago; Director of
Harbor Capital Advisors and Dimensional Fund Advisors; Trustee, Pegasus
Funds. He is 58 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, Mather Foundation and Metropolitan Family Services; member of
the Economic Club of Chicago and Chicago Network; Trustee, Pegasus Funds.
She is 49 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 Technological University (since
1982); Director, Oakland Commerce Bank (since 1984) and Michigan Opera
Theater (since 1981); Trustee, Pegasus Funds. He is 66 years old.
*Donald G. Sutherland, Trustee, President
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis, Indiana;
Trustee, Pegasus Funds. He is 68 years old.
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Donald L. Tuttle, Trustee
Vice President (since 1995), Senior Vice President (1992-1995), Association
for Investment Management and Research; 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 62 years old.
Mark A. Dillon, Vice President
An employee of the Distributor. He is 34 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 30 years old and her address is 3435 Stelzer Road, Columbus,
Ohio 43219-3035.
D'Ray Moore, Treasurer
An employee of the Distributor. She is 38 years old and her address is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
W. Bruce McConnel, III, Secretary
Partner of the law firm Drinker Biddle & Reath, Philadelphia, Pennsylvania.
He is 54 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.
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The following table summarizes the compensation for each of
the Trustees for the Trust's fiscal year ending December 31, 1996:
<TABLE>
<CAPTION>
(3)
(2) Total Compensation From Fund
(1) Aggregate Compensation and Fund Complex** Paid to
Name of Board Member from Fund+ Board Member
-------------------- ---------------------- ----------------------------
<S> <C> <C>
Will M. Caldwell, Trustee $ 0 $ 31,000 (2)+
Nicholas J. DeGrazia, Trustee $ 0 $ 24,750 (2)+
John P. Gould, Trustee $ 0 $ 41,313 (4)+
Earl I. Heenan, Jr., *++ $ 0 $ 26,625 (2)+
Chairman and President
Marilyn McCoy, Trustee $ 0 $ 37,250 (4)+
Julius L. Pallone, Trustee ++ $ 0 $ 24,750 (2)+
Donald G. Sutherland, ++ $ 0 $ 28,750 (2)+
Trustee
Donald L. Tuttle, Trustee ++ $ 0 $ 29,000 (2)+
Eugene C. Yehle, Trustee* $ 0 $ 18,500 (2)+
and Treasurer
<FN>
- ---------
+ Amount does not include reimbursed expenses for attending Board meetings.
* Messrs. Heenan and Yehle retired as trustees of the Trust during the 1996
fiscal year.
** The Fund Complex for the fiscal year ended December 31, 1996 consisted of
the Trust, the Pegasus Funds, Prairie Funds, Prairie Institutional Funds,
Prairie Intermediate Bond Fund and Prairie Municipal Bond Fund, Inc.
+ 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 $24,750, $26,625, $24,750 and
$28,750 accrued during the Pegasus Funds' fiscal year ended December 31, 1996
for Nicholas J. DeGrazia, Earl I. Heenan, Jr., Julius L. Pallone, and Donald
G. Sutherland, respectively.
</TABLE>
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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 it 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
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<PAGE>
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 fiscal year ended December 31, 1996, the Trust paid
fees for advisory and administrative services on behalf of the Funds, and was
reimbursed for certain other expenses as follows:
<TABLE>
<CAPTION>
Advisory Fees Expense
Paid Reimbursements
------------- --------------
<S> <C> <C>
Managed Assets Balanced Fund $114,254 $102,154
Mid-Cap Opportunity Fund $ 48,992 $ 82,608
Growth and Value Fund $ 42,701 $ 80,795
Growth Fund $ 63,261 $ 67,679
Money Market Fund $ 6,212 $ 63,365
</TABLE>
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 was reimbursed for
certain other expenses as follows:
<TABLE>
<CAPTION>
Advisory Fees Expense
Paid Reimbursements
------------- --------------
<S> <C> <C>
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
</TABLE>
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
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<PAGE>
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.
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.
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 a Co-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, the Trust pays FCNIMCO as agent for
the Co-Administrators 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.
-27-
<PAGE>
The aggregate of the fees payable to FCNIMCO and BISYS is not
subject to reduction as the value of the Funds' net assets increases.
The effective rate of advisory and administrative fees for the
year ended December 31, 1996 was 0.00% of each Fund's average daily net
assets. The Investment Adviser and Co-Administrators reimbursed expenses in
excess of their fees for the year ended December 31, 1996.
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 and Bond Funds fees at the following annual rates based on
the aggregate market value of such Funds' portfolio securities, held as
Custodian: .03% of the first $20 million; .025% of the next $20 million; .02%
of the next $20 million; .015% of the next $40 million; .0125% of the next
$200 million; and .01% of the balance over $300,000,000. NBD will receive an
annual account fee of $1,000 and $1.54 per month per security held in each of
these Funds. In addition, NBD, as Custodian, is entitled to receive $50 for
each cash statement and inventory statement and $13 for each pass-through
certificate payment, $35 for each option transaction requiring escrow
receipts and $20 for all other security transactions.
For its services as Custodian, NBD is entitled to receive from
the Money Market Fund $11.00 for each clearing and settlement transaction and
$23.00 for each accounting and safekeeping service with respect to
investments, in addition to activity charges for master control and master
settlement accounts.
First Data Investor Services Group, Inc. serves as the Trust's
transfer agent pursuant to the Transfer Agency Agreement.
Distributor
The Trust's shares are offered on a continuous basis through
BISYS, which acts under the Distribution Agreement as Distributor for the
Trust.
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<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500
Woodward Avenue, Detroit, Michigan 48226-3424, serve as auditors for the
Trust. The financial statements incorporated by reference into 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
incorporated by reference 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.
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
-29-
<PAGE>
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Funds compute their aggregate total returns by determining
the aggregate rates of return during specified periods that likewise equate
the initial amount invested to the ending redeemable value of such
investment. The formula for calculating aggregate total return is as follows:
ERV
T = (-------) - 1
P
The calculations of average annual total return and aggregate
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment dates during the period and include all
recurring fees changed to all shareholders accounts, assuming an account size
equal to a Fund's mean (or median) account size for any fees that vary with
size of the account. The ending redeemable value (variable "ERV" in each
formula) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the end of the
period covered by the computations.
The average annual total returns and aggregate total returns
for the Managed Assets Balanced, Growth and Value, Mid-Cap Opportunity and
Growth Funds for the fiscal year ending December 31, 1996 and the period
from March 30, 1995 (commencement of operations) through December 31, 1996
are shown below:
<TABLE>
<CAPTION>
Average Annual Total Return Aggregate Annual Total Return
--------------------------- -----------------------------
Since Since
1 year 5 years 10 years Inception 1 year 5 years 10 years Inception
------ ------- -------- --------- ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed Assets Balanced 12.15% N/A N/A 15.70% 12.15% N/A N/A 29.95%
Fund
Inception: March 30, 1995
Growth and Value Fund 18.85% N/A N/A 20.98% 18.85% N/A N/A 39.79%
Inception: March 30, 1995
Mid-Cap Opportunity Fund 24.56% N/A N/A 20.06% 24.56% N/A N/A 37.92%
Inception: March 30, 1995
Growth Fund 17.51% N/A N/A 18.26% 17.51% N/A N/A 34.32%
Inception: March 30, 1995
</TABLE>
-30-
<PAGE>
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 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
6
Yield = 2 [(----- + 1) - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period
(net of reimbursements).
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends.
-31-
<PAGE>
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 December 31, 1996, the
annualized yield and effective yield for the Money Market Fund were 5.10%
and 5.23%, respectively. For the thirty-day period ended December 31,
1996, the yield for the Managed Assets Balanced Fund was 1.61%.
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,
-32-
<PAGE>
investment strategies and related matters believed to be of relevance to a
Fund. The Funds may also include in advertisements charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, stocks, bonds, treasury
bills and shares of a Fund. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to
be derived by an investment in a Fund and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning and investment alternatives to
certificates of deposit and other financial instruments. Such advertisements
or communicators may include symbols, headlines or other material which
highlight or summarize the information discussed in more detail therein.
MISCELLANEOUS
As of 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.
-33-
<PAGE>
APPENDIX A
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt considered short-term
in the relevant market. The following summarizes the rating categories used
by Standard and Poor's for commercial paper:
"A-1" - The highest category indicates that the degree of
safety regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
"A-2" - Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
"A-3" - Issues carrying this designation have adequate
capacity for timely payment. They are, however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations carrying
the higher designations.
"B" - Issues are regarded as having only a speculative
capacity for timely payment.
"C" - This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
"D" - Issues are 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" - Issuers or related supporting institutions
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries;
high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earning coverage of fixed financial charges and high internal cash
generation; and well established access to a range of financial markets and
assured sources of alternate liquidity.
A-1
<PAGE>
"Prime-2" - Issuers or related supporting institutions
have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
"Prime-3" - Issuers 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" - Issuers do 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 liquidityand other
protection factors qualify issue as investment grade. Risk factors are larger
and subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
A-2
<PAGE>
"D-5" - Issuer has failed to meet scheduled principal and/or
interest payments.
Fitch short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years.
The following summarizes the rating categories used by Fitch for short-term
obligations:
"F-1+" - Securities possess exceptionally strong credit
quality. Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
"F-1" - Securities possess very strong credit quality. Issues
assigned this rating reflect an assurance of timely payment only slightly
less in degree than issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues
assigned this rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as the "F-1+" and "F-1"
ratings.
"F-3" - Securities possess fair credit quality. Issues
assigned this rating have characteristics suggesting that the degree of
assurance for timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues
assigned this rating have characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to near-term adverse changes
in financial and economic conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term
ratings to indicate that the rating is based upon a letter of credit issued
by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of
an untimely or incomplete payment of principal or interest of unsubordinated
instruments having a maturity of one year or less which are issued by United
States commercial banks, thrifts and non-bank banks; non-United States banks;
and broker-dealers. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's
highest rating category and indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
A-3
<PAGE>
"TBW-2" - This designation indicates that while the degree of
safety regarding timely payment of principal and interest is strong, the
relative degree of safety is not as high as for issues rated "TBW-1."
"TBW-3" - This designation represents the lowest investment
grade category and indicates that while the debt is more susceptible to
adverse developments (both internal and external) than obligations with
higher ratings, capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded
as non-investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an
original maturity of less than one year which is issued by bank holding
companies and their principal bank subsidiaries. The following summarizes the
rating categories used by IBCA for short-term debt ratings:
"A1+" - Obligations 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 good capacity for
timely repayment.
"A3" - Obligations are supported by a satisfactory capacity
for timely repayment.
"B" - Obligations for which there is an uncertainty as to the
capacity to ensure timely repayment.
"C" - Obligations for which there is a high risk of default or
which are currently in default.
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.
A-4
<PAGE>
"AA" - Debt is considered to have a very strong capacity to
pay interest and repay principal and differs from AAA issues only in small
degree.
"A" - Debt is considered to have a strong capacity to pay
interest and repay principal although such issues are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay
interest and repay principal. Whereas such issues normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "C" the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
"BB" - Debt has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB-" rating.
"B" - Debt has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
"CCC" - Debt has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
"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
A-5
<PAGE>
situation where a bankruptcy petition has been filed, but debt service
payments are continued.
"CI" - This rating is reserved for income bonds on which no
interest is being paid.
"D" - Debt is in payment default. This rating is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC"
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid,
and certain other obligations that S & P believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or interest
return is indexed to equities, commodities, or currencies; certain swaps and
options; and interest only and principal only mortgage securities. The
absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate
and municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"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.
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"Baa" - Bonds considered medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of
these ratings provide questionable protection of interest and principal ("Ba"
indicates some speculative elements; "B" indicates a general lack of
characteristics of desirable investment; "Caa" represents a poor standing;
"Ca" represents obligations which are speculative in a high degree; and "C"
represents the lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be
in default.
Con. (---) - Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
(P)... - When applied to forward delivery bonds, indicates
that the rating is provisional pending delivery of the bonds. The rating may
be revised prior to delivery if changes occur in the legal documents or the
underlying credit quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which
Moody's believes possess the strongest investment attributes are designated
by the symbols, Aa1, A1, Ba1 and B1.
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
below "AAA" to denote relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term
debt and preferred stock which are issued by United States commercial banks,
thrifts and non-bank banks; non-United States banks; and broker-dealers. The
following summarizes the rating categories used by Thomson BankWatch for
long-term debt ratings:
"AAA" - This designation represents the highest category
assigned by Thomson BankWatch to long-term debt and indicates that the
ability to repay principal and interest on a timely basis is extremely high.
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"AA" - This designation indicates a very strong ability to
repay principal and interest on a timely basis with limited incremental risk
compared to issues rated in the highest category.
"A" - This designation indicates that the ability to repay
principal and interest is strong. Issues rated "A" could be more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest
investment grade category and indicates an acceptable capacity to repay
principal and interest. Issues rated "BBB" are, however, more vulnerable to
adverse developments (both internal and external) than obligations with
higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned
by Thomson BankWatch to non-investment grade long-term debt. Such issues are
regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC"
may include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
A Standard and Poor's rating reflects the liquidity concerns
and market access risks unique to notes due in three years or less. The
following summarizes the ratings used by Standard & Poor's Ratings Group for
municipal notes:
"SP-1" - The issuers of these municipal notes exhibit very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given a plus
(+) designation.
"SP-2" - The issuers of these municipal notes exhibit
satisfactory capacity to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit
speculative capacity to pay principal and interest.
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
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designated Variable Moody's Investment Grade ("VMIG"). Such ratings recognize
the differences between short-term credit risk and long-term risk. The
following summarizes the ratings by Moody's Investors Service, Inc. for
short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the
best quality, enjoying strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high
quality, with margins of protection ample although not so large as in the
preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of
favorable quality, with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is likely to be
less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of
adequate quality, carrying specific risk but having protection commonly
regarded as required of an investment security and not distinctly or
predominantly speculative.
"SG" - Loans bearing this designation are of speculative
quality and lack margins of protection.
Fitch and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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APPENDIX B
As stated in 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.
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
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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.
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
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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.
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 &
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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).
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
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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 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
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HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract = 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 130
Stock with Value = $1,040,000 Value of Futures = $1,040,000
Gain in Portfolio = $40,000 Loss of Futures = $40,000
III. Margin Payments
Unlike when a 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
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to make a variation margin payment to the broker. At any time prior to
expiration of the futures contract, the Investment Adviser may elect to close
the position by taking an opposite position, subject to the availability of a
secondary market, which will operate to terminate the Fund's position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Fund, and the
Fund realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures
by a Fund as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the future and movements in the
price of the securities which are the subject of the hedge. The price of the
future may move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of the
securities, which are the subject of the hedge, the hedge will not be fully
effective but, if the price of the securities being hedged has moved in an
unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved
in a favorable direction, this advantage will be partially offset by the loss
on the future. If the price of the future moves more than the price of the
hedged securities, the Fund involved will experience either a loss or gain on
the future which will not be completely offset by movements in the price of
the securities which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of securities being hedged
and movements in the price of futures contracts, a Fund may buy or sell
futures contracts in a greater dollar amount than the dollar amount of
securities being hedged if the volatility over a particular time period of
the prices of such securities has been greater than the volatility over such
time period of the future, or if otherwise deemed to be appropriate by the
Investment 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
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account with a broker to collateralize the position and thereby ensure that
the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and
the securities being hedged, the price of futures may not correlate perfectly
with movement in the cash market due to certain market distortions. Rather
than meeting additional margin deposit requirements, investors may close
futures contracts through off-setting transactions which could distort the
normal relationship between the cash and futures markets. 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
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benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements. Such sales of securities may be,
but will not necessarily be, at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
V. Options on Futures Contracts
Each 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%
B-9
<PAGE>
rule"). The amount of any capital gain or loss actually realized by a Fund in
a subsequent sale or other disposition of those futures contracts will be
adjusted to reflect any capital gain or loss taken into account by the Fund
in a prior year as a result of the constructive sale of the contracts. With
respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund, losses as to such contracts to sell
will be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof
which exceeds the unrecognized gain (if any) with respect to the other part
of the straddle, and to certain wash sales regulations. Under short sales
rules, which will also be applicable, the holding period of the securities
forming part of the straddle will (if they have not been held for the
long-term holding period) be deemed not to begin prior to termination of the
straddle. With respect to certain futures contracts, 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.
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
B-10
<PAGE>
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 investments
that qualify as part of a "designated hedge," as defined in the Code, may be
netted.
B-11
<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 fiscal year
ended December 31, 1996 and the fiscal period
ended December 31, 1995 with respect to the
Registrant's Managed Assets Balanced, Growth and
Value, Mid-Cap Opportunity, Growth and Money
Market Funds.
(2) Incorporated by reference in Part B of the
Registration Statement are the following audited
financial statements:
(i) With respect to Registrant's Managed Assets
Balanced, Growth and Value, Mid-Cap
Opportunity, Growth and Money Market Funds:
Report of Independent Accountants for the fiscal
year ended December 31, 1996 and the fiscal
period ended December 31, 1995;
Statements of Assets and Liabilities -
December 31, 1996 and 1995;
Statements of Operations for the fiscal year
ended December 31, 1996 and the fiscal period
ended December 31, 1995;
Statements of Changes in Net Assets for the
fiscal year ended December 31, 1996 and the
fiscal period ended December 31, 1995;
Portfolio of Investments - December 31,
1996;
Notes to Financial Statements.
<PAGE>
(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 incorporated herein by reference to
exhibit (1)(b) of Post-Effective Amendment No. 6 to
the Registrant's Registration Statement on Form N-1A
filed with the Commission on December 18, 1996
("Amendment No. 6").
(2) Bylaws of Registrant are 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 and First Chicago NBD Investment
Management Company ("FCNIMCO") is incorporated herein
by reference to exhibit (5)(a) of Amendment No. 6.
(b) Form of Addendum No. 1 to Advisory Agreement is
incorporated herein by reference to exhibit (5)(b) of
Amendment No. 6.
(6)(a) Distribution Agreement dated October 7, 1996 between
Registrant and BISYS is incorporated herein by
reference to exhibit (6)(a) of Amendment No. 6.
(b) Form of Addendum No.1 to Distribution Agreement is
incorporated herein by reference to exhibit (6)(b) of
Amendment No. 6.
(7) Not Applicable.
(8)(a) Custodian Agreement dated March 30, 1995 between
Registrant and NBD Bank is incorporated herein by
reference to exhibit
-2-
<PAGE>
(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
incorporated herein by reference to exhibit (8)(b) of
Amendment No. 6.
(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 incorporated herein by reference to
exhibit (9)(b) of Amendment No. 6.
(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 incorporated
herein by reference to exhibit (9)(d) of Amendment No.
6.
(e) Form of Addendum No. 1 to Co-Administration Agreement
is incorporated herein by reference to exhibit (9)(e)
of Amendment No. 6.
*(10) Opinion of Drinker Biddle & Reath, counsel for the
Registrant.
(11)(a) Consent of Arthur Andersen LLP.
(b) Consent of Drinker Biddle & Reath.
- --------
* Registrant's most recent Rule 24f-2 Notice and related Opinion of
Counsel was filed under Rule 24f-2 on March 3, 1997.
-3-
<PAGE>
(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
incorporated herein by reference to exhibit (13)(c) of
Amendment No. 6.
(14) Not Applicable.
(15) Not Applicable.
(16) Schedules of Performance Computations with respect to
Registrant's Managed Assets Balanced, Growth and
Value, Mid-Cap Opportunity, Growth and Money Market
Funds are incorporated herein by reference to exhibit
(16) of the Registrant's Registration Statement on
Form N-1A filed with the Commission on August 30,
1995.
(27) Financial Data Schedules with respect to Registrant's
Managed Assets Balanced, Growth and Value, Mid-Cap
Opportunity, Growth and Money Market Funds.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
Registrant is controlled by its Board of Trustees, the members
of which also serve as members of the Board of Trustees of 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
-4-
<PAGE>
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
</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
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
-5-
<PAGE>
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.
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
-6-
<PAGE>
made against the Shareholder for any act or obligation of the Series and
satisfy any judgment thereon from the assets of the Series.
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-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 American
Performance Funds, AmSouth Mutual Funds, The ARCH
Fund, Inc., BB&T Mutual Funds Group, Centura Funds, The
Coventry Group, Empire Builder Tax Free Bond Fund,
ESC Strategic Funds, First Choice Funds Trust, Fountain
Square Funds, Hirtle Callaghan Trust, HSBC Funds Trust,
HSBC Mutual Funds Trust, The Infinity Mutual Funds,
Inc., Intrust Funds, The Kent Funds, MarketWatch Funds,
Meyers Sheppard Investment Trust, Minerva Funds, MMA
Praxis Mutual Funds, The M.S.D & T Funds, Inc., Pacific
Capital Funds, The Parkstone Advantage Funds, The
Parkstone Group of Funds, Qualivest Funds, The Republic
Advisors Funds Trust, The Republic Funds Trust, The
Riverfront Funds, Inc., SBSF Funds, Inc. dba Key
Mutual Funds, Sefton Funds, The Sessions Group Summit
Investment Trust, The Time Horizon Funds 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:
-7-
<PAGE>
<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 custodian and as former adviser and transfer and
dividend disbursing agent).
(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.
-8-
<PAGE>
(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 and Intrinsic Value
Funds, containing financial statements that need not be
certified within four to six months from the effective date of
this Post-Effective Amendment.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
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 this 21st day of April, 1997.
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 the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Donald G. Sutherland
- ------------------------- President April 21, 1997
Donald G. Sutherland and Trustee
/s/ John P. Gould
- ------------------------- Chairman April 21, 1997
John P. Gould and Trustee
/s/ D'Ray Moore Treasurer April 21, 1997
- ------------------------- (Chief Financial
D'Ray Moore Officer)
/s/ Will M. Caldwell
- -------------------------
Will M. Caldwell Trustee April 21, 1997
/s/ Nicholas J. De Grazia
- -------------------------
Nicholas J. De Grazia Trustee April 21, 1997
/s/ Marilyn McCoy
- -------------------------
Marilyn McCoy Trustee April 21, 1997
/s/ Julius L. Pallone
- -------------------------
Julius L. Pallone Trustee April 21, 1997
/s/ Donald L. Tuttle
- -------------------------
Donald L. Tuttle Trustee April 21, 1997
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath.
(27) Financial Data Schedules with respect to the
Registrant's Managed Assets Balanced, Growth and
Value, Mid-Cap Opportunity, Growth and Money
Market Funds.
Exhibit (11) (a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 21, 1997 included in the Pegasus Variable Annuity Fund Report
to Shareholders for the year ended December 31, 1996 (and to all references
to our Firm) included in or made a part of this registration statement on
Form N-1A (Post-Effective Amendment No. 8 to the Pegasus Variable Annuity
Fund's registration statement under the Securities Act of 1933).
ARTHUR ANDERSEN LLP
Detroit, Michigan,
April 22, 1997
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. 8 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 LLP
------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, PA
April 22, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
<RESTATED>
<CIK> 0000932736
<NAME> THE PEGASUS PATHMAKER VARIABLE ANNUITY FUND
<SERIES>
<NUMBER> 1
<NAME> PEGASUS MANAGED ASSETS BALANCED FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 20,605
<INVESTMENTS-AT-VALUE> 22,102
<RECEIVABLES> 166
<ASSETS-OTHER> 24
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 22,292
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17
<TOTAL-LIABILITIES> 17
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20,582
<SHARES-COMMON-STOCK> 1,859
<SHARES-COMMON-PRIOR> 995
<ACCUMULATED-NII-CURRENT> 9
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 187
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1497
<NET-ASSETS> 22,275
<DIVIDEND-INCOME> 144
<INTEREST-INCOME> 506
<OTHER-INCOME> 0
<EXPENSES-NET> 129
<NET-INVESTMENT-INCOME> 521
<REALIZED-GAINS-CURRENT> 569
<APPREC-INCREASE-CURRENT> 744
<NET-CHANGE-FROM-OPS> 1834
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (512)
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