<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1998
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. 9
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
--
AMENDMENT NO. 8
PEGASUS VARIABLE FUNDS
(Exact Name of Registrant as Specified in Charter)
c/o NBD Bank
900 Tower Drive
P.O. Box 7058
Troy, Michigan 48007-7058
(Address of Principal Executive Offices)
Registrant's Telephone Number:
(800) 688-3350
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.
Title of Securities Being Registered . . . Shares of beneficial interest.
- -------------------------------------------------
<PAGE>
PROSPECTUS
CROSS REFERENCE SHEET
---------------------
Series B, C, D, F and G Representing Interests in the Pegasus Growth and Value,
Mid-Cap Opportunity, Growth, Bond and Intrinsic Value Funds, respectively.
<TABLE>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C>
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
Funds; Miscel-
laneous
5. Management of Registrant................... Management of the Trust
6. Capital Stock and Other
Securities................................. Purchase and
Redemption of
Trust Shares; Net
Asset Value and
Pricing of Shares;
Dividends and
Distributions;
Taxes; Management
of the Trust;
Description of the
Funds; Miscel-
laneous
7. Purchase of Securities
Being Offered............................... Purchase and Redemption
of Trust Shares; Net
Asset Value and Pricing
of Shares; Management
of the Trust
8. Redemption or Repurchase.................... Purchase and Redemption
of Trust Shares; Net
Asset Value and Pricing
of Shares
9. Pending Legal Proceedings................... Inapplicable
</TABLE>
<PAGE>
PEGASUS
APRIL 30, 1998
PROSPECTUS
VARIABLE FUNDS
C/O NBD BANK
900 TOWER DRIVE
TROY, MICHIGAN 48098
The Pegasus Variable Funds (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") and variable life insurance policies ("Variable Life Insurance
Policies") issued by Hartford Life Insurance Company and 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 the holders of Variable Annuity Contracts and Variable Life
Insurance Policies, 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
and Variable Life Insurance Policies. Shares of the Trust are not offered to
the general public.
The Trust has filed an application for an exemptive order with the Securities
and Exchange Commission ("SEC") which, if granted, would permit shares of the
Trust to be sold to and held by Separate Accounts funding Variable Annuity
Contracts and Variable Life Insurance Policies 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 and Variable Life Insurance Policies 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 five
investment portfolios (the "Funds"), divided into two general fund types:
Equity and Bond.
EQUITY FUNDS BOND FUND
The Growth and Value Fund The Bond Fund
The Mid-Cap Opportunity Fund
The Growth Fund
The Intrinsic Value 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.
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.
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>
<C> <S>
Table of Contents
3 Highlights
4 Financial Highlights
5 Description of the Funds
8 Purchase and Redemption of Trust Shares
8 Net Asset Value and Pricing of Shares
9 Management of the Trust
11 Dividends and Distributions
11 Taxes
12 Performance Information
13 General Information
A-1 Supplemental Information
</TABLE>
<PAGE>
Highlights
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.
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.
3
Pegasus Variable
Funds
<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 Growth and Value,
Mid-Cap Opportunity, Growth, Intrinsic Value and Bond 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>
MID-CAP
GROWTH AND OPPORTUNITY
VALUE FUND FUND
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
INTRINSIC
GROWTH VALUE
FUND FUND BOND FUND
- --------------------------------------------------------------------------------------------------------------
PERIOD PERIOD
YEAR YEAR ENDED YEAR YEAR ENDED
ENDED ENDED DEC. 31, ENDED ENDED DEC. 31,
DEC. 31, 1997 DEC. 31, 1996 1995** DEC. 31, 1997 DEC. 31, 1996 1995**
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 13.19 $ 11.63 $ 10.00 $ 13.46 $ 11.02 $ 10.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income 0.13 0.15 0.13 0.01 0.03 0.05
Net realized
and unrealized
gains on
investment 3.38 2.02 1.63 3.55 2.67 1.02
- --------------------------------------------------------------------------------------------------------------
TOTAL FROM
INVESTMENT
OPERATIONS 3.51 2.17 1.76 3.56 2.70 1.07
- --------------------------------------------------------------------------------------------------------------
Less
distributions:
From net
investment
income (0.13) (0.14) (0.13) (0.01) (0.03) (0.05)
From realized
gains (0.35) (0.47) -- (2.63) (0.23) --
In excess of
realized gains -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------
TOTAL
DISTRIBUTIONS (0.48) (0.61) (0.13) (2.64) (0.26) (0.05)
- --------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 16.22 $ 13.19 $ 11.63 $ 14.38 $ 13.46 $ 11.02
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN 26.80% 18.75% 22.75%(a) 26.65% 24.53% 14.20%(a)
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
- --------------------------------------------------------------------------------------------------------------
Net assets, end
of period $38,705,197 $8,602,557 $3,753,691 $11,668,230 $9,215,660 $4,972,365
- --------------------------------------------------------------------------------------------------------------
Ratio of
expenses to
average net
assets 0.93% 0.85% 0.85%(a) 0.91% 0.85% 0.85%(a)
- --------------------------------------------------------------------------------------------------------------
Ratio of net
investment
income to
average net
assets 0.93% 1.35% 1.78%(a) 0.04% 0.28% 0.67%(a)
- --------------------------------------------------------------------------------------------------------------
Ratios of
expenses to
average net
assets without
fee
waivers/reimbursed
expenses 1.10% 2.27% 4.93%(a) 1.49% 2.11% 4.64%(a)
- --------------------------------------------------------------------------------------------------------------
Portfolio
turnover rate 31.11% 46.82% 17.47% 80.65% 37.44% 32.11%
- --------------------------------------------------------------------------------------------------------------
Average
Commission Rate $ 0.06 $ 0.11 $ 0.14 $ 0.06 $ 0.08 $ 0.11
- --------------------------------------------------------------------------------------------------------------
PERIOD PERIOD PERIOD
YEAR YEAR ENDED ENDED ENDED
ENDED ENDED DEC. 31, DEC. 31, DEC. 31,
DEC. 31, 1997 DEC. 31, 1996 1995** 1997* 1997*
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 13.28 $ 11.37 $ 10.00 $ 10.00 $ 10.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income 0.03 0.05 0.05 0.12 0.37
Net realized
and unrealized
gains on
investment 3.36 1.94 1.38 1.57 0.45
- --------------------------------------------------------------------------------------------------------------
TOTAL FROM
INVESTMENT
OPERATIONS 3.39 1.99 1.43 1.69 0.82
- --------------------------------------------------------------------------------------------------------------
Less
distributions:
From net
investment
income (0.03) (0.05) (0.05) (0.12) (0.37)
From realized
gains (1.25) (0.01) (0.01) (0.04) (0.01)
In excess of
realized gains -- (0.02) -- -- --
- --------------------------------------------------------------------------------------------------------------
TOTAL
DISTRIBUTIONS (1.28) (0.08) (0.06) (0.16) (0.38)
- --------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 15.39 $ 13.28 $ 11.37 $ 11.53 $ 10.44
- --------------------------------------------------------------------------------------------------------------
TOTAL RETURN 25.48% 17.52% 18.82%(a) 25.26%(a) 12.29%(a)
- --------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
- --------------------------------------------------------------------------------------------------------------
Net assets, end
of period $15,839,911 $11,542,021 $6,434,936 $13,925,558 $34,229,870
- --------------------------------------------------------------------------------------------------------------
Ratio of
expenses to
average net
assets 0.91% 0.85% 0.85%(a) 0.95%(a) 0.75%(a)
- --------------------------------------------------------------------------------------------------------------
Ratio of net
investment
income to
average net
assets 0.21% 0.49% 0.81%(a) 1.83%(a) 5.97%(a)
- --------------------------------------------------------------------------------------------------------------
Ratios of
expenses to
average net
assets without
fee
waivers/reimbursed
expenses 1.26% 1.65% 3.15%(a) 1.22%(a) 0.77%(a)
- --------------------------------------------------------------------------------------------------------------
Portfolio
turnover rate 51.00% 23.11% 4.46% 19.64% 14.77%
- --------------------------------------------------------------------------------------------------------------
Average
Commission Rate $ 0.06 $ 0.05 $ 0.11 $ 0.06 N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Commenced operations on May 1, 1997.
** Commenced operations on March 30, 1995.
(a) Annualized for periods less than one year for comparability purposes.
Actual annual values may be less than or greater than those shown.
Pegasus Variable Funds
4
<PAGE>
Description of the Funds
GENERAL
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940 (the "1940 Act"). The Trust currently consists
of five investment portfolios, each of which consists of a separate pool of
assets with separate investment objectives and policies. Under the 1940 Act,
each Fund is classified as a diversified investment portfolio.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of a Fund may not be changed without approval of the
holders of a majority (as defined in the 1940 Act) of 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."
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 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") and
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 IBCA, Inc. ("Fitch") or Duff and
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.
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.
5
Pegasus Variable
Funds
<PAGE>
BOND FUND
The BOND FUND will invest at least 65% of the value of its total assets under
normal market conditions in Debt Securities. The Fund invests in a portfolio of
U.S. dollar denominated Debt Securities of domestic and foreign issuers. The
Fund's average weighted portfolio maturity is expected to be between 6 and 12
years. When the Investment Adviser believes it advisable for temporary
defensive purposes or in anticipation of otherwise investing cash positions,
the Bond Fund may invest in Cash Equivalent Securities. Most obligations
acquired by the Fund will be issued by companies or governmental entities
located within the United States. Up to 15% of the total assets of the Bond
Fund may be invested in dollar denominated debt obligations (including Cash
Equivalent Securities) of foreign issuers. The Debt Securities in which the
Bond Fund may invest will be rated investment grade at the time of purchase, or
if unrated, will be deemed by the Investment Adviser to be comparable in
quality at the time of purchase to instruments that are so rated. By so
restricting its investments, the Fund's ability to maximize total rate of
return will be limited. 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.
INVESTMENT LIMITATIONS
Each Fund is subject to a number of investment limitations. Except as noted,
the following investment limitations are matters of fundamental policy and may
not be changed with respect to a particular Fund without the affirmative vote
of the holders of a majority of the Fund's outstanding shares. Other investment
limitations that cannot be changed without a vote of shareholders are contained
in the Statement of Additional Information under "Investment Objectives,
Policies and Risk Factors."
Each Fund may not:
1. Purchase any securities which would cause 25% or more of the value of the
Fund's total assets at the time of purchase to be invested in the securities of
one or more issuers conducting their principal business activities in the same
industry, provided that (a) there is no limitation with respect to obligations
issued or guaranteed by the U.S. Government, any state, territory or possession
of the United States, the District of Columbia or any of their authorities,
agencies, instrumentalities or political subdivisions and repurchase agreements
secured by such instruments, (b) wholly-owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of the parents, (c) utilities
will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered
a separate industry, and (d) personal credit and business credit businesses
will be considered separate industries.
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
(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.
6
Pegasus Variable Funds
<PAGE>
LOWER RATED SECURITIES
(Equity Funds only) Investors should carefully consider the relative risks of
investing in the higher yielding (and, therefore, higher risk) debt securities
rated below investment grade by Moody's, S&P, Fitch or Duff (commonly known as
junk bonds). The Equity Funds are permitted to invest up to 5% of their
respective net assets in lower rated convertible securities.
The market values of certain lower rated debt securities tend to reflect
specific developments with respect to the issuer to a greater extent than do
higher rated securities, which react primarily to fluctuations in the general
level of interest rates, and tend to be more sensitive to economic conditions
than are higher rated securities. Issuers of such debt securities often are
highly leveraged and may not have available to them more traditional methods of
financing.
Securities rated below investment grade generally are not meant for short-term
investing and may be subject to certain risks with respect to the issuing
entity and to greater market fluctuations than certain lower yielding, higher
rated Debt Securities. Securities rated BBB or Baa by a Rating Agency are
judged to have speculative elements; their future cannot be considered as well
assured and often the protection of interest and principal payments may be very
moderate and may face major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. Factors adversely
affecting the market price and yield of these securities, including a Fund's
ability to sell 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.
MORTGAGE RELATED SECURITIES
(Bond Fund only) No assurance can be given as to the liquidity of the market
for certain mortgage backed securities, such as collateralized mortgage
obligations and stripped mortgage backed securities. Determination as to the
liquidity of interest-only and principal-only fixed mortgage backed securities
issued by the U.S. Government or its agencies and instrumentalities will be
made in accordance with guidelines established by the Board. Mortgage-related
securities may be considered a derivative instrument.
DERIVATIVE INSTRUMENTS
(All 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.
7
Pegasus Variable
Funds
<PAGE>
Purchase and Redemption of Trust Shares
DISTRIBUTOR
The shares of each Fund are sold on a continuous basis by the Trust's
Distributor. The Distributor does not receive any distribution fees from the
Trust for its services.
PURCHASE AND REDEMPTION OF SHARES
Investors may not purchase or redeem shares of the Funds directly, but only
through Variable Annuity Contracts or Variable Life Insurance Policies offered
through Separate Accounts of the Hartford Companies or other Participating
Insurance Companies. Investors should refer to the Prospectus of the Variable
Annuity Contracts or Variable Life Insurance Policies for information on how to
purchase such contracts or policies, how to select specific Funds of the Trust
as investment options for the contracts or policies and how to redeem monies
from the Trust.
The Separate Accounts of the Hartford Companies and other Participating
Insurance Companies place orders to purchase and redeem shares of the Funds
based on, among other things, the amount of premium payments to be invested and
the amount of surrender and transfer requests (as defined in the Prospectus
describing the Variable Annuity Contracts or Variable Life Insurance Policies
issued by the Hartford Companies or other Participating Insurance Companies) to
be effected on that day pursuant to the contracts or policies. Orders received
by the Trust are effected on days on which the New York Stock Exchange and the
Adviser are open for trading. Orders for the purchase of Fund shares are
effected at the net asset value per share next calculated after an order is
received in good order by the Trust. Redemptions are effected at the net asset
value per share next calculated after a redemption request is received in good
order by the Trust. Payment for redemptions will be made by the Trust within
seven days after the request is received. The Trust may suspend the right of
redemption under certain extraordinary circumstances in accordance with SEC
rules.
The Funds do not assess any fees upon purchase or redemption. However,
surrender charges, mortality and expense risk fees and other charges may be
assessed by the Hartford Companies or other Participating Insurance Companies
under the Variable Annuity Contracts or Variable Life Insurance Policies. Such
fees should be described in the Prospectus of such contracts or policies.
As of the date of this Prospectus, shares of the Trust are offered only to
Separate Accounts funding Variable Annuity Contracts or Variable Life Insurance
Policies 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 Contracts and Variable Life Insurance Policies 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. Material conflicts could result from such things as:
(1) changes in state insurance law; (2) changes in federal income tax law; (3)
changes in the investment management of any Fund; or (4) differences between
voting instructions given by the holders of the Variable Annuity Contracts and
Variable Life Insurance Policies. 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.
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, Dr. Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
8
Pegasus Variable Funds
<PAGE>
Christmas Day); and (ii) those Business Days on which the Exchange closes prior
to the close of its regular trading hours ("Early Closing Time") in which event
the net asset value of each Fund will be determined and its shares will be
priced as of such Early Closing Time.
Securities held by the Funds which are traded on a recognized U.S. stock
exchange are valued at the last sale price on the national securities market.
Securities which are primarily traded on foreign securities exchanges are
generally valued at the latest closing price on their respective exchanges,
except when an occurrence subsequent to the time a value was established is
likely to have changed such value, in which case the fair value of those
securities will be determined through consideration of other factors by the
Investment Adviser under the supervision of the Board of Trustees. Securities,
whether U.S. or foreign, traded on only over-the-counter markets and securities
for which there were no transactions are valued at the average of the current
bid and asked prices. Debt Securities held by the Funds are valued according to
the broadest and most representative market, which ordinarily will be the over-
the-counter markets, whether in the United States or in foreign countries. Such
securities are valued at the average of the current bid and asked prices.
Securities for which accurate market quotations are not readily available, and
other assets are valued at fair value by the Investment Adviser under the
supervision of the Board of Trustees. Securities may be valued on the basis of
prices provided by independent pricing services when the Investment Adviser
believes such prices reflect the fair market value of such securities. The
prices provided by pricing services take into account institutional size
trading in similar groups of securities and any developments related to
specific securities. For valuation purposes, the value of assets and
liabilities expressed in foreign currencies will be converted to U.S. dollars
equivalent at the prevailing market rate on the day of valuation. The Funds'
open futures contracts will be "marked-to-market."
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.
9
Pegasus Variable
Funds
<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 effective
advisory fee rates for the fiscal year or period ended December 31, 1997 (if
applicable), are set forth below.
<TABLE>
<CAPTION>
EFFECTIVE RATE FOR
CURRENT ADVISORY SERVICES
CONTRACTUAL FOR YEAR OR
ADVISORY PERIOD ENDED
FEE RATE DECEMBER 31, 1997
- --------------------------------------------------------
<S> <C> <C>
EQUITY FUNDS:
Growth and Value Fund 0.60% 0.43%
Mid-Cap Opportunity Fund 0.60% 0.02%
Growth Fund 0.60% 0.25%
Intrinsic Value Fund 0.60% 0.23%
- --------------------------------------------------------
BOND FUND:
Bond Fund 0.40% 0.38%
</TABLE>
- --------------------------------------------------------------------------------
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, Senior 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, First Vice President, and F. RICHARD NEUMANN, First 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, First 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 that the Investment
Adviser and its affiliates 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 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. For the fiscal year ended December 31, 1997,
the Trust paid administration fees at the effective annual rate of .15% of each
Fund's average daily net assets.
DISTRIBUTOR
BISYS Fund Services, located at 3435 Stelzer Road, Columbus, Ohio 43219-3035,
serves as the Trust's principal underwriter and distributor of the Funds'
shares.
10
Pegasus Variable Funds
<PAGE>
TRANSFER AND DIVIDEND DISBURSING AGENT AND CUSTODIAN
First Data Investor Services Group, Inc., 4400 Computer Drive, Westborough,
Massachusetts 01581-5120 serves as the Trust's Transfer and Dividend Disbursing
Agent (the "Transfer Agent"). NBD Bank, which is a wholly-owned subsidiary of
First Chicago NBD Corporation, serves as the Trust's custodian (the
"Custodian"). NBD conducts its custody services on behalf of the Trust at 900
Tower Drive, Troy, Michigan 48098.
EXPENSES
All expenses incurred in the operation of the Trust are borne by 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 Investment Adviser has
voluntarily agreed to limit the total operating expenses of the Growth and
Value, Mid-Cap Opportunity, Growth, Intrinsic Value and Bond Funds to 0.95%,
0.95%, 0.95%, 0.95% and 0.75%, respectively. These waivers and/or
reimbursements may be discontinued or modified at any time without notice. The
Fund will not pay the Investment Adviser at a later time for any amounts which
may be waived, nor will the Fund reimburse the Investment Adviser for any
amounts which may be assumed.
Dividends and Distributions
The 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.
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
11
Pegasus Variable
Funds
<PAGE>
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.
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 Composite Stock Index, an index of
unmanaged groups of common stocks, the Consumer Price Index, or the Dow Jones
Industrial Average, a recognized unmanaged index of common stocks of thirty
industrial companies listed on the New York Stock Exchange. Performance data as
reported in national financial publications such as Money Magazine, Forbes,
Barron's, The Wall Street Journal and The New York Times, or in publications of
a local or regional nature, may also be used in comparing the performance of a
Fund.
In the case of the Bond Fund, "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.
The Funds calculate their total returns on an "average annual total return"
basis for various periods from the date they commenced investment operations
and for other periods as permitted under the rules of the SEC. Average annual
total return reflects the average annual percentage change in value of an
investment in 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 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.
12
Pegasus Variable Funds
<PAGE>
The average annual total returns and aggregate total returns for the Growth
and Value, Mid-Cap Opportu-
nity, Growth, Intrinsic Value and Bond Funds for various periods ended December
31, 1997 are shown below:
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN AGGREGATE TOTAL RETURN
---------------------------- ----------------------
1 YEAR SINCE INCEPTION 1 YEAR SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GROWTH AND VALUE FUND
Inception: March 30, 1995 26.80% 23.08% 26.80% 77.26%
- ------------------------------------------------------------------------------
MID-CAP OPPORTUNITY FUND
Inception: March 30, 1995 26.65% 22.42% 26.65% 74.68%
- ------------------------------------------------------------------------------
GROWTH FUND
Inception: March 30, 1995 25.48% 20.85% 25.48% 68.55%
- ------------------------------------------------------------------------------
INTRINSIC VALUE FUND
Inception: May 1, 1997 0.00% 16.96% 0.00% 16.96%
- ------------------------------------------------------------------------------
BOND FUND
Inception: May 1, 1997 0.00% 8.25% 0.00% 8.25%
</TABLE>
- --------------------------------------------------------------------------------
General Information
The Trust was organized as a Delaware business trust as of November 7, 1994
under a Trust Instrument. The Trust is a series fund having five series of
shares of beneficial interest, each of which evidences an interest in a
separate investment portfolio. The Trust Instrument permits the Board of
Trustees to issue an unlimited number of full and fractional shares and to
create an unlimited number of series of shares ("Series") each representing
interests in a portfolio and an unlimited number of classes of shares within a
Series. Series B, Series C, Series D, Series F and Series G shares of the Trust
represent interests in the Growth and Value Fund, Mid-Cap Opportunity Fund,
Growth 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
other Participating Insurance Companies. However, to the extent required by
law, the Hartford Companies and other 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 other 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.
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 Funds, 900 Tower Drive, Troy,
Pegasus Variable Funds 13
<PAGE>
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.
14
Pegasus Variable Funds
<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 or Duff) 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 -- Equity Funds" 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.
Obligations of foreign issuers may involve risks that are different than
those of obligations of domestic issuers. These risks include unfavorable
political and economic developments, possible imposition of withholding taxes
of interest income, possible seizure or nationalization of foreign deposits,
possible establishment of exchange controls, or adoption of other foreign
governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. In addition, foreign branches of
U.S. Banks and foreign banks may be subject to less stringent reserve
requirements and to different accounting, auditing, reporting, and
recordkeeping standards than those applicable to domestic branches of U.S.
banks and, generally, there may be less publicly available information
regarding such issuers. The Trust could also encounter difficulties in
obtaining or enforcing a judgment against a foreign issuer (including a
foreign branch of a U.S. bank).
Certificates of deposit are negotiable certificates evidencing the obligation
of a bank to repay funds deposited with it for a specified period of time.
Time deposits are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. Time deposits which
may be held by each Fund will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
FDIC.
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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 Fund may invest in variable and floating instruments, including without
limitation, inverse floating rate debt instruments ("inverse floaters") some of
which may be leveraged. The interest rate of an inverse floater resets in the
opposite direction from the market rate of interest to which it is indexed. An
inverse floater may be considered to be leveraged to the extent that its
interest rate varies by a magnitude that exceeds the magnitude of the change in
the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
The absence of an active secondary market with respect to particular variable
and floating rate instruments could make it difficult for a Fund to dispose of
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, 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
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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.
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 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
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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 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)
investment companies which principally invest in securities in which the Fund
invests. Under the 1940 Act, a Fund's investment in such securities, subject to
certain exceptions, currently is limited to (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Fund's net assets with respect to
any one investment company and (iii) 10% of the Fund's net assets in the
aggregate. Such purchases will be made in the open market where no commission
or profit to a sponsor or dealer results from the purchase other than the
customary brokers' commissions. As a shareholder of another investment company,
a Fund would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that the Fund bears
directly in connection with its own operations.
ASSET BACKED SECURITIES
Asset Backed Securities acquired by the 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
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with a specified fixed or floating interest rate and a final distribution date.
The relative payment rights of the various CMO classes may be structured in a
variety of ways. The multiple class securities may be issued or guaranteed by
U.S. Government agencies or instrumentalities, including the Government
National Mortgage Association ("GNMA"), Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC"), or issued by
trusts formed by private originators of, or investors in, mortgage loans.
Classes in CMOs which the Funds may hold are known as "regular" interests. CMOs
also issue "residual" interests, which in general are junior to and more
volatile than regular interests. The Funds do not intend to purchase residual
interests.
Mortgage pass-through certificates provide the holder with a pro rata interest
in the underlying mortgages. One type of such certificate in which the Funds
may invest is a GNMA Certificate which is backed as to the timely payment of
principal and interest by the full faith and credit of the U.S. Government.
Another type is a FNMA Certificate, the principal and interest of which are
guaranteed only by FNMA itself, not by the full faith and credit of the U.S.
Government. Another type is a FHLMC Participation Certificate which is
guaranteed by FHLMC as to timely payment of principal and interest. However,
like a FNMA security, it is not guaranteed by the full faith and credit of the
U.S. Government. Privately issued mortgage backed securities will carry a
rating at the time of purchase of at least A by S&P or by Moody's or, if
unrated, will be in the Investment Advisers' opinion equivalent in credit
quality to such rating. Mortgage backed securities issued by private issuers,
whether or not such obligations are subject to guarantees by the private
issuer, may entail greater risk than obligations directly or indirectly
guaranteed by the U.S. Government.
The 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 Bond Fund may purchase Treasury receipts and other "stripped" securities
that evidence ownership in either the future interest payments or the future
principal payments on U.S. Government obligations. These participations, which
may be issued by the U.S. Government (or a U.S. Government agency or
instrumentality) or by private issuers such as banks and other institutions,
are issued at a discount to their "face value," and may include stripped
mortgage backed securities ("SMBS"), which are derivative multi-class mortgage
securities. Stripped securities, particularly SMBS, may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
backed obligations. A common type of SMBS will have one class receiving all of
the interest, while the other class will receive all of the principal. However,
in some instances, one class will receive some of the interest and 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 Bond Fund may include general
obligations, revenue
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obligations, notes and moral obligations. This Fund currently intends to invest
no more than 25% of its total assets in Municipal Obligations. General
obligations are secured by the issuer's pledge of its full faith, credit and
taxing power for the payment of principal and interest. Revenue obligations are
payable only from the revenues derived from a particular facility, class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source such as the user of the facility being financed.
Private activity bonds (i.e. bonds issued by industrial development
authorities) are in most cases revenue securities and are not payable from the
unrestricted revenues of the issuer. Consequently, the credit quality of a
private activity bond is usually directly related to the credit standing of the
private user of the facility involved. See "Description of the Funds--Risk
Factors--Municipal Obligations."
Notes are short-term instruments which are obligations of the issuing
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. Moral obligation bonds are
normally issued by a special purpose public authority. If the issuer of a moral
obligation bond is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer. Municipal Obligations also include municipal lease/purchase
agreements which are similar to installment purchase contracts for property or
equipment issued by municipalities. The Investment Adviser will only invest in
rated municipal lease/purchase agreements.
There are, of course, variations in the quality of Municipal Obligations both
within a particular classification and between classifications, and the yields
on Municipal Obligations depend upon a variety of factors, including general
money market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue.
STAND-BY COMMITMENTS
The Bond Fund may acquire "stand-by commitments" with respect to Municipal
Obligations held in its portfolio. Under a stand-by commitment, the Fund
obligates a broker, dealer or bank to repurchase, at the Fund's option,
specified securities at a specified price and, in this respect, stand-by
commitments are comparable to put options. The exercise of a stand-by
commitment therefore is subject to the ability of the seller to make payment on
demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The Fund may pay for stand-by commitments if such action is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing such securities yield to
investors.
CUSTODIAL RECEIPTS AND CERTIFICATES OF PARTICIPATION
The Bond Fund may purchase participations in trusts that hold U.S. Treasury
securities (such as TIGRs and CATS) where the trust participations evidence
ownership in either the future interest payments or the future principal
payments on the U.S. Treasury obligations. These participations are normally
issued at a discount to their "face value," and may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.
OPTIONS TRANSACTIONS
Each 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 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 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.
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Each Fund also may purchase cash-settled options on interest rate swaps,
interest rate swaps denominated in foreign currency and equity index swaps. See
"Interest Rate and Equity Index Swaps" below. A cash-settled option on a swap
gives the purchaser the right, but not the obligation, in return for the
premium paid, to receive an amount of cash equal to the value of the underlying
swap as of the exercise date. These options typically are purchased in
privately negotiated transactions from financial institutions, including
securities brokerage firms.
Each Fund may purchase and sell call and put options on stock 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 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.
RISKS ASSOCIATED WITH FUTURES, OPTIONS AND CURRENCY AND OPTIONS
To the extent a Fund is engaging in a futures transaction as a hedging device,
due to the risk of an imperfect correlation between securities in its portfolio
that are the subject of a hedging transaction and the futures contract 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 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 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
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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 Fund may enter into interest rate swaps and equity index swaps, to the
extent described under "Description of the Funds-Management Policies," in
pursuit of its investment objective. Interest rate swaps involve the exchange
by a Fund with another party of their respective commitments to pay or receive
interest (for example, an exchange of floating-rate payments for fixed-rate
payments). Equity index swaps involve the exchange by a Fund with another party
of cash flows based upon the performance of an index or a portion of an index
which usually includes dividends. In each case, the exchange commitments can
involve payments to be made in the same currency or in different currencies.
Swaps are a form of derivative security.
Each 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 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 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
A-
8 Pegasus Variable Funds
<PAGE>
Board of Trustees will carefully monitor any investments by a Fund in these
securities.
PORTFOLIO TURNOVER
Generally, the Funds will purchase securities for capital appreciation or
investment income, or both, and not for short-term trading profits. However, a
Fund may sell a portfolio investment soon after its acquisition if the
Investment 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-
Pegasus Variable Funds9
<PAGE>
CROSS REFERENCE SHEET
--------------------
Series B, C, D, F and G Representing Interests in the Pegasus Growth and
Value, Mid-Cap Opportunity, Growth, Bond and Intrinsic Value Funds,
respectively.
<TABLE>
<CAPTION>
Statement of Additional Information
Form N-1A Part B Item Caption
- --------------------- -------
<S> <C>
10. Cover Page............................................ Cover Page
11. Table of Contents..................................... Table of Contents
12. General Information and History....................... Description of Shares
13. Investment Objectives and Policies.................... Investment Objectives,
Policies and Risk
Factors
14. Management of Registrant.............................. Management
15. Control Persons and Principal......................... Description of Shares
Holders of Securities
16. Investment Advisory and Other Services................ Management
17. Brokerage Allocation and Other Practices.............. Investment Objectives,
Policies and Risk
Factors
18. Capital Stock and Other Securities.................... Net Asset Value;
Additional Purchase
and Redemption
Information;
Description of Shares
19. Purchase, Redemption and Pricing...................... Net Asset Value;
of Securities Being Offered Additional Purchase
and Redemption
Information
20. Tax Status............................................ Additional Information
Concerning Taxes
21. Underwriters.......................................... Not Applicable
22. Calculation of Performance Data....................... Additional Information
on Performance
</TABLE>
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
for the
GROWTH AND VALUE FUND
MID-CAP OPPORTUNITY FUND
GROWTH FUND
INTRINSIC VALUE FUND
BOND FUND
of
PEGASUS VARIABLE FUNDS
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 Funds' Prospectus (the
"Prospectus") dated April 30, 1998 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. Because this
Additional Statement is not itself a prospectus, no investment in shares of the
Funds should be made solely upon the information contained herein. Copies of the
Funds' Prospectus may be obtained from any office of the Distributor by writing
or calling the Distributor, the Trust or the Hartford Companies. Capitalized
terms used but not defined herein have the same meanings as in the
Prospectus.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
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.......................................... 28
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 Funds may vary greatly from year to year
as well as within a particular year, and may be affected by cash requirements
for redemption of shares and by requirements which enable the Funds to receive
favorable tax treatment. Portfolio turnover will not be a limiting factor in
making portfolio decisions, and the Funds may engage in short term trading to
achieve their respective investment objectives.
Purchases of money market instruments by the Funds are made from
dealers, underwriters and issuers. The Funds currently do not expect to incur
any brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis 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, 1997, the Growth and Value, Mid-Cap
Opportunity, Growth and Intrinsic Value Funds paid brokerage commissions of
$46,091, $19,787, $15,413 and $16,891, respectively. For the year ended December
31, 1996, the Growth and Value, Mid-Cap Opportunity, and Growth Funds paid
brokerage commissions of $21,983, $19,819 and $9,401, respectively. 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,
1997, the amounts of such transactions and related commissions on behalf of the
Funds were: (1)
-2-
<PAGE>
$38,732,961 and $46,371 for the Growth and Value Fund; (2) $15,777,654 and
$19,859 for the Mid-Cap Opportunity Fund; (3) $11,562,843 and $16,911 for the
Intrinsic Value Fund and (4) $13,778,648 and $15,413 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.
-3-
<PAGE>
Equity Securities
- -----------------
Equity Securities are generally selected by the Equity Funds in a
"bottom-up" manner. "Bottom-up" refers to an analytical approach to securities
selection which first focuses on the company and company-related matters as
contrasted to a "top-down" analysis which first focuses on the industry or the
economy. In the Investment Adviser's opinion, this procedure may generally be
expected to result in a portfolio characterized by lower price/earnings ratios,
above average growth prospects and average market risk.
Debt Securities
- ---------------
The Investment Adviser selects Debt Securities based on anticipated
interest rate changes and the use of active management strategies which may
include sector rotation, intra-sector adjustments and yield curve and convexity
considerations. Sector rotation involves the Investment Adviser selecting among
different economic or industry sectors based upon apparent or relative
attractiveness. Thus at times a sector offers yield advantages relative to
other sectors. An intra-sector adjustment occurs when the Investment Adviser
determines to select a particular issue within a sector. Yield curve
considerations involve the Investment Adviser attempting to compare the
relationship between time to maturity and yield to maturity in order to identify
the relative value in the relationship. Convexity considerations consist of the
Investment Adviser seeking securities that rise in price more quickly, or
decline in price less quickly, than the typical security of that price risk
level and therefore enable the Investment Adviser to obtain an additional return
when interest rates change dramatically.
In acquiring particular Debt Securities, the Investment Adviser may
consider, among other things, historical yield relationships between private and
governmental debt securities, intermarket yield relationships among various
industry sectors, current economic cycles and the attractiveness and
creditworthiness of particular issuers. Depending upon the Investment Adviser's
analysis of these and other factors, a Fund's holdings of issues in particular
industry sectors may be overweighted or underweighted when compared to the
relative industry weightings in recognized indices. The value of the Funds can
be expected to vary inversely with changes in prevailing interest rates.
Stripped U.S. Government Obligations
- ------------------------------------
Within the past several years, the Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments on
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department
is known as "STRIPS" or "Separate Trading of Registered Interest and
-4-
<PAGE>
Principal of Securities." To the extent consistent with its investment
objectives, the Bond Fund may purchase securities registered in the STRIPS
program. Under the STRIPS program, the Fund will be able to have its beneficial
ownership of zero coupon securities recorded directly in the book-entry record-
keeping system in lieu of having to hold certificates or other evidences of
ownership of the underlying U.S. Treasury securities.
In addition, the Bond Fund may acquire U.S. Government obligations and
their unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury 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 Bond Fund will have the
right to demand payment, on not more than 30 days' notice, for all or any part
of its participation interests, plus accrued interest. As to these instruments,
the Fund intends to exercise its right to demand payment as needed to provide
liquidity, to maintain or improve the quality of its investment portfolio or
upon a default (if permitted under the terms of the instrument).
Bank Obligations
- ----------------
In accordance with its investment objective, each Fund may purchase
bank obligations, which include bankers' acceptances, negotiable certificates of
deposit and non-
-5-
<PAGE>
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, 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
-6-
<PAGE>
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 Funds represent an ownership interest in a pool of residential
mortgage
-7-
<PAGE>
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.
-8-
<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.
-9-
<PAGE>
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.
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<PAGE>
Futures Contracts and Related Options
- -------------------------------------
See Appendix B to this Additional Statement for a discussion of
futures contracts and related options.
Options Trading
- ---------------
As stated in the Prospectus, each Fund 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
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period. A Fund will write an option on a particular security only if the
Investment Adviser believes that a liquid secondary market will exist on an
exchange for options of the same series which will permit the Fund to make a
closing purchase transaction in order to close out its position.
When a Fund writes a covered call option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit will be subsequently marked-
to-market to reflect the current value of the option written. The current value
of the traded option is the last sale price or, in the absence of a sale, the
average of the closing bid and asked prices. If an option expires on the
stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. Any gain on a
covered call option may be offset by a decline in the market price of the
underlying security during the option period. If a covered call option is
exercised, the Fund may deliver the underlying security held by it or purchase
the underlying security in the open market. In either event, the proceeds of
the sale will be increased by the net premium originally received and the Fund
will realize a gain or loss. If a secured put option is exercised, the amount
paid by the Fund involved for the underlying security will be partially offset
by the amount of the premium previously paid to the Fund. Premiums from expired
options written by a Fund and net gains from closing purchase transactions are
treated as short-term capital gains for federal income tax purposes, and losses
on closing purchase transactions are short-term capital losses.
Stock Index Options
- -------------------
Each 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
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position in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
Convertible Securities
- ----------------------
The 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 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, the 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 the Fund, a Municipal Obligation may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Investment Adviser may consider such an event in
determining whether the Fund should continue to hold the obligation.
The payment of principal and interest on most Municipal Obligations
purchased by the Fund will depend upon the ability of the issuers to meet their
obligations. For the purpose of diversification under the 1940 Act, the
identification of the issuer of Municipal
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Obligations depends on the terms and conditions of the security. When the assets
and revenues of an agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the subdivision
and the security is backed only by the assets and revenues of the subdivision,
such subdivision would be deemed to be the sole issuer. Similarly, in the case
of an industrial development bond, if that bond is backed only by the assets and
revenues of the non-governmental user, then such non-governmental user would be
deemed to be the sole issuer. If, however, in either case, the creating
government or some other entity guarantees a security, such a guaranty would be
considered a separate security and will be treated as an issue of such
government or other entity.
An issuer's obligations under its Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights or
remedies of creditors, such as the Federal Bankruptcy Code, and any laws, that
may be enacted by federal or state legislatures extending the time for payment
of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest or principal of its Municipal Obligations may be materially
adversely affected by litigation or other conditions.
Certain Municipal Obligations are subject to redemption at a date
earlier than their stated maturity pursuant to call options, which may be
separated from the related Municipal Obligation and purchased and sold
separately.
Certain of the Municipal Obligations held by the Fund may be insured
at the time of issuance as to the timely payment of principal and interest. The
insurance policies will usually be obtained by the issuer of the Municipal
Obligations at the time of original issuance. There is, however, no guarantee
that the insurer will meet its obligations. In addition, such insurance will
not protect against market fluctuations caused by changes in interest rates and
other factors.
Stand-By Commitments
- --------------------
The Bond Fund may acquire "stand-by commitments" with respect to
Municipal Obligations it holds. Under a stand-by commitment, a dealer agrees to
purchase at the Fund's option specified Municipal Obligations at a specified
price. Stand-by commitments may be exercisable by the Fund at any time before
the maturity of the underlying Municipal Obligations and may be sold,
transferred or assigned only with the instruments involved.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for Municipal Obligations which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The Fund may acquire a stand-
by
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<PAGE>
commitment unless immediately after the acquisition, with respect to 75% of its
assets not more than 5% of its total assets will be invested in instruments
subject to a demand feature, including stand-by commitments, with the same
institution.
The Fund intends to enter into stand-by commitments only with dealers,
banks and broker-dealers which, in the Investment Adviser's opinion, present
minimal credit risks. The Fund's reliance upon the credit of these dealers,
banks and broker-dealers will be secured by the value of the underlying
Municipal Obligations that are subject to the commitment. Thus, the risk of loss
to the Fund in connection with a "stand-by commitment" will not be qualitatively
different from the risk of loss faced by a person that is holding securities
pending settlement after having agreed to sell the securities in the ordinary
course of business.
The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The acquisition of a stand-by commitment will not affect the
valuation or assumed maturity of the underlying Municipal Obligations which will
continue to be valued in accordance with the amortized cost method. The actual
stand-by commitment will be valued at zero in determining net asset value. Where
the Fund pays directly or indirectly for a stand-by commitment, its cost will be
reflected as an unrealized loss for the period during which the commitment is
held by the Fund and will be reflected in realized gain or loss when the
commitment is exercised or expires.
Derivative Securities
- ---------------------
The Investment Adviser will evaluate the risks presented by the
derivative instruments purchased by the Funds, and will determine, in connection
with its day-to-day management of the Funds, how they will be used in
furtherance of the Funds' investment objectives. It is possible, however, that
the Investment Adviser's evaluations will prove to be inaccurate or incomplete
and, even when accurate and complete, it is possible that the Funds will,
because of the risks discussed above, incur loss as a result of their
investments in derivative instruments.
Additional Investment Limitations
- ---------------------------------
In addition to the investment limitations disclosed in the Prospectus,
the Funds are subject to the following investment limitations which may not be
changed without approval of the holders of the majority of the outstanding
shares of the affected Fund (as defined under "Description of Shares" below).
None of the Funds may:
1. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
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<PAGE>
2. Invest in commodities, except that as consistent with a Fund's
investment objective and policies (a) each Fund may purchase and sell options,
forward contracts, futures contracts, including without limitation those
relating to indices, and options on futures contracts or indices; and (b) each
Fund may purchase publicly traded securities of companies engaging in whole or
in part in such activities.
3. Act as an underwriter of securities within the meaning of the
Securities Act of 1933 except insofar as a Fund might be deemed to be an
underwriter upon the disposition of portfolio securities acquired within the
limitation on purchases of restricted securities and except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies and limitations may be deemed to be
underwriting.
In addition to the above fundamental limitations, the Funds are
subject to the following non-fundamental limitations, which may be changed
without a shareholder vote:
None of the Funds may:
1. Acquire any other investment company or investment company
security except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted under the 1940 Act.
2. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except, as consistent with a Fund's investment
objective and policies, for transactions in options on securities or indices of
securities, futures contracts and options on futures contracts and in similar
investments.
3. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to a Fund's transactions in futures contracts and related options and in
options on securities or indices of securities and similar instruments, and (b)
each Fund may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
4. Purchase securities of companies for the purpose of exercising
control.
5. Invest more than 15% 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.
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<PAGE>
NET ASSET VALUE
The net asset value per share of each 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.
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<PAGE>
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.
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
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or postpone the recordation of the transfer of shares upon the occurrence of any
of the foregoing conditions.)
In addition to the situations described in the Prospectus under
"Redemption of Shares," the Trust may redeem shares involuntarily to reimburse
the Funds for any loss sustained by reason of the failure of a shareholder to
make full payment for shares purchased by the shareholder or to collect any
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to Fund shares as provided in the Prospectus from time to time.
The Trust normally redeems shares for cash. However, the Trustees can
determine that conditions exist making cash payments undesirable. If they should
so determine, redemption payments could be made in securities valued at the
value used in determining net asset value. There may be brokerage and other
costs incurred by the redeeming shareholder in selling such securities. The
Trust has elected to be covered by Rule 18f-1 under the 1940 Act, pursuant to
which the Trust is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of net asset value during any 90-day period for any one
shareholder.
DESCRIPTION OF SHARES
The Trust is an unincorporated business trust organized under Delaware
law as of November 7, 1994. The Trust's Declaration of Trust authorizes the
Board of Trustees to divide shares into two or more series, each series relating
to a separate portfolio of investments, and divide the shares of any series into
two or more classes. The number of shares of each series and/or of a class
within each series shall be unlimited. The Trust does not intend to issue share
certificates.
In the event of a liquidation or dissolution of the Trust or an
individual Fund, shareholders of a particular Fund would be entitled to receive
the assets available for distribution belonging to such Fund. If there are any
assets, income, earnings, proceeds, funds or payments, which are not readily
identifiable as belonging to any particular Fund, the Trustees shall allocate
them among any one or more of the Funds as they, in their sole discretion, deem
fair and equitable.
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
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Trustees may be effectively acted upon by shareholders of the Trust voting
together in the aggregate without regard to particular Funds.
When used in the Prospectus or this Additional Statement, a "majority"
of shareholders means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the vote of the lesser of (1) 67% of the shares of the Trust or the applicable
Fund, present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy, or (2) more than 50% of the
outstanding shares of the Trust or the applicable Fund.
When issued for payment as described in the Trust's Prospectus and
this Additional Statement, shares of the Funds will be fully paid and non-
assessable by the Trust.
The Trust Instrument provides that the Trustees, when acting in their
capacity as such, will not be personally liable to any person other than the
Trust or a beneficial owner for any act, omission or obligation of the Trust or
any Trustee. A Trustee shall not be liable for any act or omission in his or her
capacity as Trustee, or for any act or omission of any officer or employee of
the Trust or of any other person or party, provided that nothing contained in
the Trust Instrument or in the Delaware Business Trust law shall protect any
Trustee against any liability to the Trust or to shareholders of record to which
he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee.
ADDITIONAL INFORMATION CONCERNING TAXES
Shares of the Funds are offered only to Separate Accounts that fund
Variable Annuity Contracts and Variable Life Insurance Policies issued by the
Hartford Companies. See the Prospectus for such contracts and policies for a
discussion of the special taxation of insurance companies with respect to the
Separate Accounts and the Variable Annuity Contracts and Variable Life Insurance
Policies, 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
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distributes to shareholders, provided that it distributes an amount equal to at
least the sum of (a) 90% of its investment company taxable income (net
investment income and the excess of net short-term capital gain over net long-
term capital loss, if any, for the year) and (b) 90% of its net tax-exempt
interest income, if any, for the year (the "Distribution Requirement") and
satisfies certain other requirements of the Code, 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.
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.
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A 4% nondeductible excise tax is imposed on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and any
capital gain net income prior to the end of each calendar year to avoid
liability for this excise tax.
If for any taxable year a Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
(without any deduction for distributions to its shareholders). In such event,
dividend distributions would be taxable as ordinary income to shareholders to
the extent of the Fund's current and accumulated earnings and profits and would
be eligible for the dividends received deduction for corporations.
Each Fund may be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund when
required to do so that they are not subject to backup withholding or that they
are "exempt recipients."
Depending upon the extent of the Funds' activities in states and
localities in which their offices are maintained, in which their agents or
independent contractors are located or in which they are otherwise deemed to be
conducting business, the Funds may be subject to the tax laws of such states or
localities. In addition, in those states and localities which have income tax
laws, the treatment of the Funds and their shareholders under such laws may
differ from their treatment under federal income tax laws.
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 Funds, 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.
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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 55 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
Economic Club of Chicago and Commercial Club of Chicago; Director of Harbor
Capital Advisors and Dimensional Fund Advisors; Trustee, Pegasus Funds. He is 59
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 50 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 67 years old.
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*Donald G. Sutherland, Trustee, President
Partner of the law firm Ice, Miller, Donadio & Ryan, Indianapolis, Indiana;
Trustee, Pegasus Funds. He is 69 years old.
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 63 years old.
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 31 years old and her address is 3435 Stelzer Road, Columbus, Ohio
43219-3035.
D'Ray Moore, Treasurer
An employee of the Distributor. She is 39 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 LLP, Philadelphia, Pennsylvania.
He is 55 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 LLP, of which Mr. McConnel
is a partner, receives legal fees as counsel to the Trust.
-24-
<PAGE>
The following table summarizes the compensation for each of the
Trustees for the Trust's fiscal year ending December 31, 1997:
<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 $27,000
Nicholas J. DeGrazia, Trustee $ 0 $27,000
John P. Gould, Trustee and $ 0 $31,250
Chairman of the Board
Marilyn McCoy, Trustee++ $ 0 $27,000
Julius L. Pallone, Trustee++ $ 0 $27,000
Donald G. Sutherland, $ 0 $27,000
Trustee and President
Donald L. Tuttle, Trustee++ $ 0 $27,000
</TABLE>
- -------------
+ Amount does not include reimbursed expenses for attending Board meetings.
* Mr. Caldwell retired as Trustee of the Trust and Pegasus Funds as of December
31, 1997.
** The Fund Complex for the fiscal year ended December 31, 1997 consisted of the
Trust and Pegasus Funds.
++ Deferred compensation in the amounts of $27,000, $13,500 and $27,000 accrued
during the fiscal year ended December 31, 1997 for Messrs, Pallone and
Tuttle, and Ms. McCoy, respectively.
- -------------
Investment Adviser
Information about the Investment Adviser and its duties and
compensation as investment adviser is contained in the Prospectus. In addition,
the Investment Adviser is entitled to 4/10ths of the gross income earned by a
Fund on each loan of securities (excluding capital gains and losses, if any).
The Investment Adviser has informed the Trust's Board of Trustees that since the
inception of the Trust neither it nor any of its affiliates has engaged in and
received compensation for any transactions involving lending of portfolio
securities. Furthermore, neither the Investment Adviser nor any of its
affiliates will do so unless permitted by the SEC or SEC staff.
The Investment Adviser's own investment portfolios may include bank
certificates of deposit, bankers' acceptances, corporate debt obligations,
equity securities and other investments any of which may also be purchased by
the Trust. Joint purchase of investments for the Trust and for the Investment
Adviser's own investment portfolios will not
-25-
<PAGE>
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, 1997, the Trust paid fees for
advisory services on behalf of the Funds, and was reimbursed for certain other
expenses as follows (the Intrinsic Value and Bond Funds did not commence
operations until May 1, 1997):
<TABLE>
<CAPTION>
Advisory Fees Expense
Paid Reimbursements
------------- --------------
<S> <C> <C>
Mid-Cap Opportunity Fund $ 60,752 $58,356
Growth and Value Fund $134,329 $37,901
Growth Fund $ 80,804 $46,798
Intrinsic Value Fund $ 38,176 $17,342
Bond Fund $ 62,212 $ 2,899
</TABLE>
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>
Mid-Cap Opportunity Fund $ 48,992 $ 82,608
Growth and Value Fund $ 42,701 $ 80,795
Growth Fund $ 63,261 $ 67,679
</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>
Mid-Cap Opportunity Fund $16,064 $80,078
Growth and Value Fund $12,510 $67,776
Growth Fund $20,847 $63,458
</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 the Trust as a result of changes in
current state laws and regulations in those states where the
-26-
<PAGE>
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.
The aggregate of the fees payable to FCNIMCO and BISYS is not subject
to reduction as the value of the Funds' net assets increases.
-27-
<PAGE>
The effective rate of administrative fees for the years ended December
31, 1997 and December 31, 1996 was 0.15% and 0.00%, respectively, of each Fund's
average daily net assets. The 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
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.
First Data Investor Services Group, Inc. serves as the Trust's
transfer agent pursuant to the Transfer Agency Agreement.
Distributor
- -----------
The Trust's shares are offered on a continuous basis through BISYS,
which acts under the Distribution Agreement as Distributor for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, 500 Woodward
Avenue, Detroit, Michigan 48226-3424, serve as auditors for the Trust. The
financial statements
-28-
<PAGE>
incorporated by reference into this Statement of Additional Information and the
financial highlights included in the Prospectus, with respect to the Growth and
Value, Mid-Cap Opportunity, Growth, Intrinsic Value and Bond 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 LLP (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 yield of the
Bond Fund 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.
Total Return Calculations. Each 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:
1/n
ERV
T = [(-------) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the beginning of
the period.
P = hypothetical initial payment of $1,000.
-29-
<PAGE>
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 1
T = (-------) --- - 1
P N
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
Growth and Value, Mid-Cap Opportunity, Growth, Intrinsic Value and Bond Funds
for the fiscal year ending December 31, 1997 and the period from March 30, 1995
(commencement of operations) through December 31, 1997 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>
Growth and Value Fund 26.80% N/A N/A 23.08% 26.80% N/A N/A 77.26%
- ---------------------
Inception: March 30, 1995
Mid-Cap Opportunity Fund 26.65% N/A N/A 22.42% 26.65% N/A N/A 74.68%
- ------------------------
Inception: March 30, 1995
Growth Fund 25.48% N/A N/A 20.85% 25.48% N/A N/A 68.55%
- -----------
Inception: March 30, 1995
Intrinsic Value Fund 0.00% N/A N/A 16.96% 0.00% N/A N/A 16.96%
- --------------------
Inception: May 1, 1997
Bond Fund 0.00% N/A N/A 8.25% 0.00% N/A N/A 8.25%
- ---------
Inception: May 1, 1997
</TABLE>
Bond Fund
- ---------
The "yield" and "effective yield" of the Bond Fund described in the
Prospectus are calculated according to formulas prescribed by the SEC.
-30-
<PAGE>
The Bond Fund's 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.
d = maximum offering price per share on the last day of the
period.
-31-
<PAGE>
For the thirty-day period ended December 31, 1997, the yield for the
Bond Fund was 5.83%.
Other Performance Information
- -----------------------------
The Funds may from time to time include in advertisements, sales
literature, communications to shareholders and other materials ("Literature")
total return figures that are not calculated according to the formulas set forth
above in order to compare more accurately a Fund's performance with other
measures of investment return. For example, in comparing the Funds' total
returns with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Weisenberger Investment Company Service, or with the
performance of an index, the Funds may calculate their returns for the period of
time specified in the advertisement or communication by assuming the investment
of $10,000 in shares and assuming the reinvestment date. Percentage increases
are determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the beginning value.
The Funds may from time to time include discussions or illustrations
of the effects of compounding in advertisements. "Compounding" refers to the
fact that, if dividends or other distributions on a Fund investment are
reinvested by being paid in additional Fund shares, any future income or capital
appreciation of a Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
The Funds may also include discussions or illustrations of the
potential investment goals of a prospective investor, investment management
techniques, policies or investment suitability of a Fund (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic accounting rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable instruments), economic
conditions, risk and volatility assessments, the effects of inflation and
historical performance of various asset classes, including but not limited to,
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the view of the Trust as to current market, economy, trade and
interest rate trends, legislative, regulatory and monetary developments,
investment strategies and related matters believed to be of relevance to a Fund.
The Funds may also include in advertisements charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, stocks, bonds, treasury bills and shares
of a Fund. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in a Fund and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely
-32-
<PAGE>
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 and Variable Life Insurance Policies.
-33-
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an original
maturity of no more than 365 days. The following summarizes the rating
categories used by Standard and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that
the obligor's capacity to meet its financial commitment is strong. Within this
category, certain obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations
rated "A-1". However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
"A-3" - Obligations exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lend to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
"B" - Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
"C" - Obligations are currently vulnerable to nonpayment and are
dependent on favorable business, financial, and economic conditions for the
obligor to meet its financial obligation.
"D" - Obligations are in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations not having an original
maturity in excess of one year, unless explicitly noted. The following
summarizes the rating categories used by Moody's for commercial paper:
"Prime-1" - Issuers (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
"Prime-2" - Issuers (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of
A-1
<PAGE>
the characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
"Prime-3" - Issuers (or supporting institutions) have an acceptable
ability for repayment of Senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require 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 the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues 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 insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
A-2
<PAGE>
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payments of financial commitments
and may have an added "+" to denote any exceptionally strong credit
feature.
"F2" - Securities possess good credit quality. This designation
indicates a satisfactory capacity for timely payment of financial commitments,
but the margin of safety is not as great as in the case of securities rated
"F1."
"F-3" - Securities possess fair credit quality. This designation
indicates that the capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to non-
investment grade.
"B" - Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic
conditions.
"C" - Securities posses high default risk. This designation indicates
that the capacity for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
"D" - Securities are in actual or imminent payment default.
Thomson BankWatch short-term ratings assess the likelihood of an
untimely payment of principal and interest of debt instruments with original
maturities of one year or less. The following summarizes the ratings used by
Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest
category and indicates a very high likelihood that principal and interest will
be paid on a timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-
highest category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson BankWatch's lowest
investment-grade category and indicates that while the obligation is more
susceptible to adverse developments (both internal and external) than those with
higher ratings, the capacity to service principal and interest in a timely
fashion is considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest
rating category and indicates that the obligation is regarded as non-investment
grade and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rate "AA" differ from the highest rated
obligations only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A-4
<PAGE>
"A" - An obligation rate "A" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection
parameters. However adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded as having
significantly speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - Debt is less vulnerable to non-payment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
"B" - Debt is more vulnerable to non-payment than obligations rated
"BB," but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
"CCC" - Debt is currently vulnerable to non-payment, and is dependent
upon favorable business, financial and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
non-payment.
"C" - The "C" rating may be used to cover a situation where a
bankruptcy petition has been filed, or similar action has been taken, but
payments on this obligation are being continued.
A-5
<PAGE>
"D" - An obligation rate "D" is in payment default. This rating is
used when payments on an obligation 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 or the taking of similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and
certain other obligations that S & P believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds are considered as 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.
A-6
<PAGE>
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" are of 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.
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, Baa1, 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.
"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.
A-7
<PAGE>
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 ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of investment risk
and are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is very unlikely to be affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of investment risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of investment risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to adverse changes in circumstances or in
economic conditions than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
investment risk. The capacity for timely payment of financial commitments is
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate
that significant credit risk is present, but a limited margin of safely remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC," "CC," "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
"DDD," "DD," "D" - Bonds are in default. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery on these securities, and "D" represents the lowest
potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "B" may be modified by the addition of a plus
(+) or minus (-) sign to show relative standing within these major rating
categories.
A-8
<PAGE>
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay
principal and interest on a timely basis with limited incremental risk compared
to issues rated in the highest category.
A-9
<PAGE>
"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 a strong
capacity to pay principal and interest. Those issues determined to possess very
strong characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
A-10
<PAGE>
"MIG-1"/"VMIG-1" - This designation denotes 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" - This designation denotes high quality, with margins
of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes 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" - This designation denotes adequate quality, carrying
specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - This designation denotes speculative quality and lack of
margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
A-11
<PAGE>
APPENDIX B
----------
As stated in the Prospectus, each of the Funds may enter into futures
contracts and related options for hedging purposes.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the 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 Fund, as seller, to
deliver the specific type of financial instrument called for in the contract at
a specific future time for a specified price. A futures contract purchase would
create an obligation by a Fund, as purchaser, to take delivery of the specific
type of financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until at or near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery
of securities. Closing out a futures contract sale is effected by a Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment
on the floors of several exchanges - principally, the Chicago Board of Trade,
the Chicago Mercantile Exchange and the New York Futures Exchange. The Fund
would deal only in standardized
B-1
<PAGE>
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. 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 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 Funds might engage in an
interest rate futures contract purchase when it is not fully invested in long-
term bonds but wishes to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter-
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
B-2
<PAGE>
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 & 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
B-3
<PAGE>
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
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-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
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
B-4
<PAGE>
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
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
Equity Portfolio Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Portfolio-Own Buy 16 Index Futures at 120
Stock with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
</TABLE>
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 Future at 125
Equity Portfolio Value of Futures = $62,500/
Contract
-Day Hedge is Lifted-
Buy Equity Portfolio with Sell 1 Index Future at 120
Actual Cost - $60,000 Value of Futures = $60,000/
Decrease in Purchase Price = $2,500 Contract
Loss on Futures = $2,500
B-5
<PAGE>
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
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-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
</TABLE>
III. Margin Payments
---------------
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's Custodian an amount of cash or cash equivalents, the value of
which may vary but is generally equal to 10% or less of the value of the
contract. This amount is known as initial margin. The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin is
in the nature of a performance bond or good faith deposit on the contract which
is returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying security or index fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a Fund has purchased a futures contract
and the price of the contract has risen in response to a rise in the underlying
instruments, that position will have increased in value and the Fund will be
entitled to receive from the broker a variation margin payment equal to that
increase in value. Conversely, where a Fund has purchased a futures contract and
the price of the future contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund would
be required to make a
B-6
<PAGE>
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 account
B-7
<PAGE>
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
B-8
<PAGE>
in its portfolio and securities prices increase instead, the Fund will lose part
or all of the benefit to the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market. A Fund may have to sell securities at a time when it
may be disadvantageous to do so.
V. Options on Futures Contracts
----------------------------
Each Fund may purchase options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time 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
B-9
<PAGE>
loss and 60% of such gain or loss will be treated as long-term capital gain or
loss without regard to the length of time the Fund holds the futures contract
("the 40%-60% rule"). The amount of any capital gain or loss actually realized
by a Fund in a subsequent sale or other disposition of those futures contracts
will be adjusted to reflect any capital gain or loss taken into account by the
Fund in a prior year as a result of the constructive sale of the contracts. With
respect to futures contracts to sell, which will be regarded as parts of a
"mixed straddle" because their values fluctuate inversely to the values of
specific securities held by the Fund, losses as to such contracts to sell will
be subject to certain loss deferral rules which limit the amount of loss
currently deductible on either part of the straddle to the amount thereof which
exceeds the unrecognized gain (if any) with respect to the other part of the
straddle, and to certain wash sales regulations. Under short sales rules, which
will also be applicable, the holding period of the securities forming part of
the straddle will (if they have not been held for the long-term holding period)
be deemed not to begin prior to termination of the straddle. With respect to
certain futures contracts, 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, or settlement by reference to the value of, a foreign currency of a
type in which regulated futures contracts are traded; (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. Foreign currency contracts entered into by a Fund may result in the
creation of one or more straddles for federal income tax purposes, in which case
certain loss deferral, short sales, and wash sales rules and the requirement to
capitalize interest and carrying charges may apply.
B-10
<PAGE>
Some of the Funds' investments may be subject to special rules which
govern the federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S. dollar. The types of
transactions covered by the special rules include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option or similar
financial instrument. The disposition of a currency other than the U.S. dollar
by a U.S. taxpayer is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules, unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not a
part of a straddle. In accordance with Treasury regulations, certain
transactions that are part of a "section 988 hedging transaction" (as defined in
the Code and the Treasury regulations) may be integrated and treated as a single
transaction or otherwise treated consistently for purposes of the Code. "Section
988 hedging transactions" are not subject to the mark-to-market or loss deferral
rules under the Code. Gain or loss attributable to the foreign currency
component of transactions engaged in by a Fund which are not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
B-11
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements:
(1) Included in Part A hereof:
Financial Highlights for:
- Growth and Value Fund
- Mid-Cap Opportunity Fund
- Growth Fund
- Intrinsic Value Fund
- Bond Fund
(2) Incorporated by reference in Part B hereof:
The audited financial statements and related notes thereto as
well as the auditor's reports thereon included as part of the
Annual Report to Shareholders for the year or period ended
December 31, 1997 with respect to each of the Growth and Value
Fund, Mid-Cap Opportunity Fund, Growth Fund, Intrinsic Value Fund
and Bond Fund are incorporated herein by reference to such Annual
Report as filed with the Securities and Exchange Commission
("SEC") on February 26, 1998 pursuant to Rule 30b2-1 of the
Investment Company Act of 1940 (Nos. 33-86186/811-8854).
(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").
<PAGE>
(c) Certificate of Amendment No. 2 dated December 5, 1997 to
Certificate of Trust.
(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) Addendum No. 1 to Advisory Agreement dated April 30, 1997
between Registrant and FCNIMCO.
(6)(a) Distribution Agreement dated October 7, 1996 between
Registrant and BISYS Fund Services Limited Partnership
("BISYS") is incorporated herein by reference to exhibit
(6)(a) of Amendment No. 6.
(b) Addendum No. 1 to Distribution Agreement dated April 30,
1997 between Registrant and BISYS.
(7) Not Applicable.
(8)(a) Custodian Agreement dated March 30, 1995 between Registrant
and NBD Bank is incorporated herein by reference to exhibit
(8) of the Registrant's Registration Statement on Form N-1A
filed with the Commission on August 30, 1995.
(b) Addendum No. 1 to Custodian Agreement dated April 30, 1997
between Registrant and NBD Bank.
(9)(a) Transfer Agency and Services Agreement dated August 12, 1996
between Registrant and First Data Investor Services Group,
Inc. ("FDISG").
-2-
<PAGE>
(b) Addendum No. 1 to Transfer Agency Agreement dated April 30,
1997 between Registrant and FDISG.
(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) Participation Agreement dated December 31, 1997 between
Registrant and Hartford Life Insurance Company.
(e) 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.
(f) Addendum No. 1 to Co-Administration Agreement dated April
30, 1997 among Registrant, FCNIMCO and BISYS.
(10) Opinion of Drinker Biddle & Reath, LLP, counsel for the
Registrant.
(11)(a) Consent of Arthur Andersen LLP.
(b) Consent of Drinker Biddle & Reath LLP.
(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) Purchase Agreement between Registrant and ITT Hartford Life
and Annuity Insurance
-3-
<PAGE>
Company is incorporated herein by reference to exhibit
(13)(c) of Amendment No. 6.
(14) Not Applicable.
(15) Not Applicable.
(16)(a) Schedules of Performance Computations with respect to
Registrant's Growth and Value, Mid-Cap Opportunity and
Growth 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.
(b) Schedules of Performance Computations with respect to
Registrant's Bond and Intrinsic Value Funds.
(27) Financial Data Schedules with respect to Registrant's
Intrinsic Value, Growth and Value, Mid-Cap Opportunity,
Growth, and Bond 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 separate investment accounts
("Separate Accounts") established by participating life insurance companies.
The assets in such Separate Accounts are, under state law, assets of the life
insurance companies which have established such Separate Accounts. Thus, at any
time such life insurance companies will own Registrant's outstanding shares that
are purchased with Separate Account assets; however, where required to do so,
such life insurance companies will vote such shares only in accordance with
instructions received from owners of the contracts pursuant to which monies are
invested in such Separate Accounts.
-4-
<PAGE>
<TABLE>
<CAPTION>
Number
of
Record
Title of Class Holders
-------------- -------
<S> <C>
Growth and Value Fund 2
Mid-Cap Opportunity Fund 2
Growth Fund 2
Intrinsic Value Fund 2
Bond Fund 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 10 of the Custodian Agreement incorporated
herein by reference as Exhibit (8). Indemnification of Registrant's Transfer
Agent is provided for in Article 10 of the Transfer Agency and Services
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 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
-5-
<PAGE>
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
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
-6-
<PAGE>
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, The Coventry Group, The Empire Builder
Tax Free Bond Fund, ESC Strategic Funds, The Eureka Funds, Fountain
Square Funds, Hirtle Callaghan Trust, HSBC Family of Funds, The
Infinity Mutual Funds, Inc., INTRUST Funds, The Kent Funds, Magna
Funds, Meyers Investment Trust, MMA Praxis Mutual Funds, The M.S.D & T
Funds, Inc., Pacific Capital Funds, The Parkstone Advantage Fund, The
Parkstone Group of 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, Variable Insurance Funds, The Victory Portfolios, The Victory
Variable Funds and Vintage Mutual Funds, Inc., each of which is an
open-end management investment company.
(b) The information required by this Item 29 with respect to each
director, officer or partner of BISYS Fund Services is incorporated by
reference to their Form BD (File No. 8-32480) filed by BISYS Fund
Services with the SEC pursuant to the Securities Exchange Act of
1934.
(c) None.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
(a) NBD Bank, 900 Tower Drive, Troy, Michigan 48098 (records relating to
its function as custodian and as former adviser and transfer and
dividend disbursing agent).
-7-
<PAGE>
(b) First Chicago NBD Investment Management Company, Three First National
Plaza, 70 West Madison, Chicago, Illinois 60670 (records relating to
its function as adviser and co-administrator).
(c) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as distributor and co-administrator).
(d) Drinker Biddle & Reath LLP, 1345 Chestnut Street, Philadelphia,
Pennsylvania 19107-3496 (Registrant's Trust Instrument, Bylaws and
Minute Books).
(e) First Data Investor Services Group, Inc., 4400 Computer Drive,
Westborough, Massachusetts 01581-5120 (records relating to its
function as transfer agent and dividend disbursing agent).
ITEM 31. MANAGEMENT SERVICES
-------------------
Not Applicable.
ITEM 32. UNDERTAKINGS
------------
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a trustee or
trustees if requested to do so by the holders of at least 10% of
Registrant's outstanding shares. Registrant will stand ready to
assist shareholder communications in connection with any meeting of
shareholders as prescribed in Section 16(c) of the Investment Company
Act of 1940.
(b) Registrant undertakes to furnish each person to whom a Prospectus is
delivered a copy of the Registrant's most recent annual report to
shareholders, upon request without charge.
-8-
<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
15th day of April, 1998.
PEGASUS VARIABLE FUNDS
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.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Donald G. Sutherland President
- ------------------------- and Trustee April 15, 1998
Donald G. Sutherland
/s/ John P. Gould Chairman
- ------------------------- and Trustee April 15, 1998
John P. Gould
Treasurer
/s/ D'Ray Moore (Chief Financial
- ------------------------- Officer) April 15, 1998
D'Ray Moore
/s/ Nicholas J. De Grazia
- -------------------------
Nicholas J. De Grazia Trustee April 15, 1998
/s/ Marilyn McCoy
- -------------------------
Marilyn McCoy Trustee April 15, 1998
/s/ Julius L. Pallone
- -------------------------
Julius L. Pallone Trustee April 15, 1998
/s/ Donald L. Tuttle
- -------------------------
Donald L. Tuttle Trustee April 15, 1998
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
(1) (c) Certificate of Amendment No. 2 dated December 5, 1997 to
Certificate of Trust.
(5) (b) Addendum No. 1 to Advisory Agreement dated April 30, 1997.
(6) (b) Addendum No. 1 to Distribution Agreement dated April 30, 1997.
(8) (b) Addendum No. 1 to Custodian Agreement dated April 30, 1997.
(9) (a) Transfer Agency and Services Agreement dated August 12, 1996.
(9) (b) Addendum No. 1 to Transfer Agency and Services Agreement.
(9) (d) Participation Agreement dated December 31, 1997 between
Registrant and Hartford Life Insurance Company.
(9) (f) Addendum No. 1 to Co-Administration Agreement dated April 30,
1997.
(10) Opinion of Drinker Biddle & Reath LLP.
(11)(a) Consent of Arthur Andersen LLP.
(11)(b) Consent of Drinker Biddle & Reath LLP.
(16)(b) Schedules of Performance Calculations for the Bond and Intrinsic
Value Funds.
(27) Financial Data Schedules with respect to the Registrant's
Intrinsic Value, Growth and Value, Mid-Cap Opportunity, Growth
and Bond Funds.
</TABLE>
<PAGE>
Exhibit (1)(c)
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT NO. 2 TO
CERTIFICATE OF TRUST
Pegasus Variable Annuity Fund hereby certifies that pursuant to Title
12, Section 3810(b) of the Delaware Business Trust Act, the undersigned business
trust executed the following Certificate of Amendment:
1. Name of the Trust: Pegasus Variable Annuity Fund;
2. Section 1.1 of the Certificate of Trust is hereby amended in the
entirety to read as follows:
Name. The name of the Trust created hereby is the "Pegasus
----
Variable Funds";
3. The Certificate of Trust is hereby further amended to change all
other appropriate references in the Trust Instrument to reflect
the fact that the name of the Trust is "Pegasus Variable Funds";
4. This Certificate of Amendment shall be effective on: December 31,
1997.
IN WITNESS WHEREOF, the undersigned has executed this Certificate on
the 5th day of December, 1997.
/s/ Donald G. Sutherland
------------------------
Donald G. Sutherland
President and
Trustee of the Trust
<PAGE>
Exhibit (5)(b)
ADDENDUM NO. 1 TO ADVISORY AGREEMENT
------------------------------------
This Addendum, dated as of the 30th day of April, 1997, is entered
into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a Delaware business
trust, and FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY ("FCNIMCO"), a
registered investment adviser.
WHEREAS, the Trust, and FCNIMCO have entered into an Advisory
Agreement dated October 7, 1996 ("Advisory Agreement"), pursuant to which the
Trust appointed FCNIMCO to act as investment adviser ("Adviser") to the Trust's
Managed Assets Balanced Fund, Growth and Value Fund, Mid-Cap Opportunity Fund,
Growth Fund and Money Market Fund (each a "Fund");
WHEREAS, Article 1(b) of the Advisory Agreement provides that in the
event the Trust establishes one or more additional portfolios with respect to
which it desires to retain FCNIMCO to act as the Adviser under the Advisory
Agreement, the Trust shall so notify FCNIMCO in writing and if FCNIMCO is
willing to render such services it shall notify the Trust in writing, and the
compensation to be paid to FCNIMCO pursuant to Article 5 of the Advisory
Agreement;
WHEREAS, pursuant to Article 1(b) of the Advisory Agreement, the Trust
has notified FCNIMCO that it has established the Bond Fund and Intrinsic Value
Fund and that it desires to retain FCNIMCO to act as the Adviser therefor, and
FCNIMCO has notified the Trust that it is willing to serve as Adviser for such
Funds.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO to act as Adviser
-----------
to the Trust for the Bond Fund and Intrinsic Value Fund for the period and on
the terms set forth in the Advisory Agreement. FCNIMCO hereby accepts such
appointment and agrees to render the services set forth in the Advisory
Agreement for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
------------
pursuant to the Advisory Agreement, the Trust will pay the Adviser, and the
Adviser will accept as full compensation therefor, a fee, computed daily and
payable monthly, at the annual rate of .40% and .60% of the Bond and Intrinsic
Value Funds' average daily net assets, respectively.
<PAGE>
3. Capitalized Terms. From and after the date hereof, the term
-----------------
"Fund" as used in the Advisory Agreement shall be deemed to include the Bond
Fund and Intrinsic Value Fund. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Advisory Agreement.
4. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Advisory Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
BY: /s/ Donald G. Sutherland
-------------------------
Donald G. Sutherland
President and Trustee
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
By: /s/ Marco Hanig
--------------------------
Name: Marco Hanig
Title: Managing Director
<PAGE>
Exhibit (6)(b)
ADDENDUM NO. 1 TO DISTRIBUTION AGREEMENT
----------------------------------------
This Addendum, dated as of the 30th day of April, 1997, is entered
into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a Delaware business
trust, and BISYS FUND SERVICES LIMITED PARTNERSHIP, d/b/a/ BISYS FUND SERVICES
("BISYS").
WHEREAS, BISYS and the Trust have entered into the Distribution
Agreement (the "Distribution Agreement") dated October 7, 1996 with respect to
shares of beneficial interest in the Trust's Managed Assets Balanced Fund,
Growth and Value Fund, Mid-Cap Opportunity, Growth Fund and Money Market Fund
(each a "Series");
WHEREAS, Section 1(d) of the Distribution Agreement provides that in
the event the Trust establishes one or more additional portfolios with respect
to which it desires to retain BISYS to act as the exclusive distributor and
representative under the Distribution Agreement, the Trust shall so notify BISYS
in writing and if BISYS is willing to render such services it shall notify the
Trust in writing, subject to such approval as may be required pursuant to
Section 12 of the Distribution Agreement and any necessary regulatory and
shareholder approvals, and the compensation to be paid to BISYS shall be that
which is agreed to in writing by the Trust and BISYS;
WHEREAS, pursuant to Section 1(d) of the Distribution Agreement, the
Trust has notified BISYS that it has established the Bond Fund and Intrinsic
Value Fund and that it desires to retain BISYS to act as the exclusive
distributor and representative therefor, and BISYS has notified the Trust that
it is willing to serve as exclusive distributor and representative for such
Funds.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints BISYS to act as exclusive
-----------
distributor and representative to the Trust for the Bond Fund and Intrinsic
Value Fund for the period and on the terms set forth in the Distribution
Agreement. BISYS hereby accepts such appointment and agrees to render the
services set forth in the Distribution Agreement for the compensation herein
provided.
2. Capitalized Terms. From and after the date hereof, the term
-----------------
"Series" as used in the Distribution Agreement shall be deemed to include the
Bond Fund and Intrinsic Value Fund. Capitalized terms used herein and not
otherwise defined
<PAGE>
shall have the meanings ascribed to them in the Distribution Agreement.
3. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Distribution Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
By: /s/ Donald G. Sutherland
-----------------------------
Donald G. Sutherland
President and Trustee
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
By: /s/ J. David Huber
------------------------
Name: J. David Huber
Title: President
<PAGE>
Exhibit (8)(b)
ADDENDUM NO. 1 TO CUSTODIAN AGREEMENT
-------------------------------------
This Addendum, dated as of the 30th day of April, 1997, is entered
into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a Delaware business
trust, and NBD BANK ("NBD" or the "Custodian"), a state-chartered bank
incorporated under the laws of Michigan.
WHEREAS, the Trust and NBD have entered into a Custodian Agreement
dated March 30, 1995 (the "Custodian Agreement"), pursuant to which the Trust
appointed NBD to act as Custodian to the Trust's Money Market Fund, Growth and
Value Fund, Mid-Cap Opportunity Fund, Managed Assets Balanced Fund and Growth
Fund.
WHEREAS, Article XIV, Paragraph 9 of the Custodian Agreement provides
that in the event the Trust establishes one or more additional portfolios with
respect to which it desires to retain NBD to act as the custodian under the
Custodian Agreement, the Trust shall so notify NBD in writing and if NBD is
willing to render such services it shall notify the Trust in writing, and the
compensation to be paid to NBD shall be that which is agreed to in writing by
the Trust and NBD pursuant to Article XII, Paragraph 6 of the Custodian
Agreement;
WHEREAS, pursuant to Article XIV, Paragraph 9 of the Custodian
Agreement, the Trust has notified NBD that it intends to establish the Bond Fund
and Intrinsic Value Fund and that it desires to retain NBD to act as the
custodian therefor, and NBD has notified the Trust that it is willing to serve
as custodian for such Funds.
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints NBD to act as Custodian to
-----------
the Trust for the Bond Fund and Intrinsic Value Fund for the period and on the
terms set forth in the Custodian Agreement. NBD hereby accepts such appointment
and agrees to render the services set forth in the Custodian Agreement, for the
compensation provided in Appendix A hereto.
2. Capitalized Terms. From and after the date hereof, the terms
-----------------
"Fund" and "Series" as used in the Custodian Agreement shall be deemed to
include the Bond Fund and Intrinsic Value Fund. Capitalized terms used herein
and not otherwise defined shall have the meanings ascribed to them in the
Custodian Agreement.
<PAGE>
3. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Custodian Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
By: /s/ Donald G. Sutherland
------------------------
Donald G. Sutherland
President and Trustee
NBD BANK
By: /s/ Frank J. Simonds
------------------------
Frank J. Simonds
Vice President
<PAGE>
APPENDIX A
----------
Fee schedule for the services provided by NBD Bank as Custodian to the
Bond Fund and Intrinsic Value Fund.
Basic Annual Account Charge $ 1,000
Annual Security Fee
First $20,000,000 = .0003
Next $20,000,000 = .00025
Next $20,000,000 = .0002
Next $40,000,000 = .00015
Next $200,000,000 = .000125
Balance over $300,000,000 = .0001
Asset Fee $1.541 per security held at end of month.
Security Transactions:
$13.00 for each Pass-Through Certificate Payment
$35.00 for Option Transactions requiring Escrow Receipts
$20.00 for all other security transactions
Accounting Statements:
Cash Statement - $50 per statement
Inventories - $50 per inventory
A-1
<PAGE>
Exhibit (9)(a)
TRANSFER AGENCY AND SERVICES AGREEMENT
THIS AGREEMENT, dated as of this 12th day of August, 1996 between The
Woodward Variable Annuity Fund (the "Fund"), a Delaware business trust having
its principal place of business at First Chicago/NBD Investment Management
Company, 900 Tower Drive, 8th Floor, Troy Michigan 48098 and FIRST DATA
INVESTOR SERVICES GROUP, INC. ("FDISG"), a Massachusetts corporation with
principal offices at 4400 Computer Drive, Westboro, Massachusetts 01581.
WITNESSETH
----------
WHEREAS, the Fund is authorized to issue Shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets;
WHEREAS, the Fund initially intends to offer shares in those Portfolios
identified in the attached Schedule of Portfolios, each such Portfolio, together
with all other Portfolios subsequently established by the Fund shall be subject
to this Agreement in accordance with Article 14;
WHEREAS, the Fund on behalf of the Portfolios, desires to appoint FDISG as
its transfer agent, dividend disbursing agent and agent in connection with
certain other activities and FDISG desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and FDISG agree as follows:
Article 1 Definitions.
-----------
1.1 Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, or other similar organizational
document as the case may be, of the Fund as the same may be amended from
time to time.
(b) "Authorized Person" shall be deemed to include (i) any authorized
officer of the Fund; or (ii) any person, whether or not such person is an
officer or employee of the Fund, duly authorized to give Oral Instructions
or Written Instructions on behalf of the Fund as indicated in writing to
FDISG from time to time.
(c) "Board of Directors" shall mean the Board of Directors or Board of
Trustees of the Fund, as the case may be.
<PAGE>
(d) "Commission" shall mean the Securities and Exchange Commission.
(e) "Custodian" refers to any custodian or subcustodian of securities
and other property which the Fund may from time to time deposit, or cause
to be deposited or held under the name or account of such a custodian
pursuant to a Custodian Agreement.
(f) "1934 Act" shall mean the Securities Exchange Act of 1934 and the
rules and regulations promulgated thereunder, all as amended from time to time.
(g) "1940 Act" shall mean the Investment Company Act of 1940 and the
rules and regulations promulgated thereunder, all as amended from time to
time.
(h) "Oral Instructions" shall mean instructions, other than Written
Instructions, actually received by FDISG from a person reasonably believed
by FDISG to be an Authorized Person;
(i) "Portfolio" shall mean each separate series of shares offered by
the Fund representing interest in a separate portfolio of securities and
other assets;
(j) "Prospectus" shall mean the most recently dated Fund Prospectus
and Statement of Additional Information, including any supplements thereto
if any, which has become effective under the Securities Act of 1933 and the
1940 Act.
(k) "Shares" refers collectively to such shares of capital stock or
beneficial interest, as the case may be, or class thereof, of each
respective Portfolio of the Fund as may be issued from time to time.
(l) "Shareholder" shall mean a record owner of Shares of each
respective Portfolio of the Fund.
(m) "Written Instructions" shall mean a written communication signed
by a person reasonably believed by FDISG to be an Authorized Person and
actually received by FDISG. Written Instructions shall include manually
executed originals and authorized electronic transmissions, including
telefacsimile of a manually executed original or other process.
Article 2 Appointment of FDISG.
--------------------
The Fund, on behalf of the Portfolios, hereby appoints and constitutes
FDISG as transfer agent and dividend disbursing agent for Shares of each
respective Portfolio of the Fund and as shareholder servicing agent for the Fund
and FDISG hereby accepts such appointments and agrees to perform the duties
hereinafter set forth.
<PAGE>
Article 3 Duties of FDISG.
---------------
3.1 FDISG shall be responsible for:
(a) Administering and/or performing the customary services of a
transfer agent; acting as service agent in connection with dividend and
distribution functions; and for performing shareholder account and
administrative agent functions in connection with the issuance, transfer
and redemption or repurchase (including coordination with the Custodian) of
Shares of each Portfolio, as more fully described in the written schedule
of Duties of FDISG annexed hereto as Schedule A and incorporated herein,
and in accordance with the terms of the Prospectus of the Fund on behalf of
the applicable Portfolio, applicable law and the procedures established
from time to time between FDISG and the Fund.
(b) Recording the issuance of Shares and maintaining pursuant to Rule
17Ad-10(e) of the 1934 Act a record of the total number of Shares of each
Portfolio which are authorized, based upon data provided to it by the Fund,
and issued and outstanding. FDISG shall provide the Fund on a regular
basis with the total number of Shares of each Portfolio which are
authorized and issued and outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the issuance of such Shares or
to take cognizance of any laws relating to the issue or sale of such
Shares, which functions shall be the sole responsibility of the Fund.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, FDISG shall be under no duty or obligation to inquire into, and
shall not be liable for: (i) the legality of the issuance or sale of any
Shares or the sufficiency of the amount to be received therefor; (ii) the
legality of the redemption of any Shares, or the propriety of the amount to
be paid therefor; (iii) the legality of the declaration of any dividend by
the Board of Directors, or the legality of the issuance of any Shares in
payment of any dividend; or (iv) the legality of any recapitalization or
readjustment of the Shares.
3.2 In addition, the Fund shall (i) identify to FDISG in writing those
transactions and assets to be treated as exempt from blue sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of FDISG for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions subject to
blue sky compliance by the Fund and the reporting of such transactions to the
Fund as provided above.
3.3 FDISG shall provide those print/mail services more fully described in
Schedule B for the fees also set forth in Schedule B.
3
<PAGE>
3.4 In addition to the duties set forth herein, FDISG shall perform such
other duties and functions, and shall be paid such amounts therefor, as may from
time to time be agreed upon in writing between the Fund and FDISG.
3.5 FDISG agrees to provide the services described herein in accordance
with the Performance Standards annexed hereto as Exhibit 1 of Schedule A and
incorporated herein. Such Performance Standards may be amended from time to
time upon written agreement by the parties.
Article 4 Recordkeeping and Other Information.
-----------------------------------
4.1 FDISG shall create and maintain all records required of it pursuant
to its duties hereunder and as set forth in Schedule A in accordance with all
applicable laws, rules and regulations, including records required by Section
31(a) of the 1940 Act. Where applicable, such records shall be maintained by
FDISG for the periods and in the places required by Rule 31a-2 under the 1940
Act.
4.2 To the extent required by Section 31 of the 1940 Act, FDISG agrees
that all such records prepared or maintained by FDISG relating to the services
to be performed by FDISG hereunder are the property of the Fund and will be
preserved, maintained and made available in accordance with such section, and
will be surrendered promptly to the Fund on and in accordance with the Fund's
request.
4.3 In case of any requests or demands for the inspection of Shareholder
records of the Fund, FDISG will endeavor to notify the Fund of such request and
secure Written Instructions as to the handling of such request. FDISG reserves
the right, however, to exhibit the Shareholder records to any person whenever it
is advised by its counsel that it may be held liable for the failure to comply
with such request.
Article 5 Fund Instructions.
-----------------
5.1 Subject to FDISG meeting its standard of care herein, FDISG will have
no liability when acting upon Written or Oral Instructions believed to have been
executed or orally communicated by an Authorized Person and will not be held to
have any notice of any change of authority of any person until receipt of a
Written Instruction thereof from the Fund.
5.2 At any time, FDISG may request Written Instructions from the Fund and
may seek advice from legal counsel for the Fund, or its own legal counsel, with
respect to any matter arising in connection with this Agreement, and subject to
FDISG meeting its standard of care herein, it shall not be liable for any action
taken or not taken or suffered by it in good faith in accordance with such
Written Instructions or in accordance with the opinion of counsel for the Fund
or for FDISG. Written Instructions requested by FDISG will be provided by the
Fund within a reasonable period of time.
4
<PAGE>
5.3 FDISG, its officers, agents or employees, shall accept Oral
Instructions or Written Instructions given to them by any person representing or
acting on behalf of the Fund only if said representative is an Authorized
Person. The Fund agrees that all Oral Instructions shall be followed within one
business day by confirming Written Instructions, and that the Fund's failure to
so confirm shall not impair in any respect FDISG's right to rely on Oral
Instructions.
Article 6 Compensation.
------------
6.1 The Fund on behalf of each of the Portfolios will compensate FDISG
for the performance of its obligations hereunder in accordance with the fees set
forth in the written Fee Schedule annexed hereto as Schedule B and incorporated
herein.
6.2 In addition to those fees set forth in Section 6.1 above, the Fund on
behalf of each of the Portfolios agrees to pay, and will be billed separately
for, out-of-pocket expenses incurred by FDISG in the performance of its duties
hereunder. Out-of-pocket expenses shall include, but shall not be limited to,
the items specified in the written schedule of out-of-pocket charges annexed
hereto as Schedule C and incorporated herein. Schedule C may be modified by
written agreement between the parties. Unspecified out-of-pocket expenses shall
be limited to those out-of-pocket expenses reasonably incurred by FDISG in the
performance of its obligations hereunder. In the event that the cost of
unspecified out-of-pocket expenses exceed one-thousand dollars ($1,000) in any
given monthly period, FDISG shall receive prior approval from the Fund before
incurring such expenses.
6.3 The Fund on behalf of each of the Portfolios agrees to pay all fees
and out-of-pocket expenses within thirty (30) days following the receipt of the
respective invoice.
6.4 Any compensation agreed to hereunder may be adjusted from time to
time by attaching to Schedule B, a revised Fee Schedule executed and dated by
the parties hereto.
6.5 The Fund acknowledges that the fees that FDISG charges the Fund under
this Agreement reflect the allocation of risk between the parties, including the
disclaimer of warranties in Section 9.3 and the limitations on liability and
exclusion of remedies in Article 12. Modifying the allocation of risk from
what is stated here would affect the fees that FDISG charges, and in
consideration of those fees, the Fund agrees to the stated allocation of risk.
Article 7 Documents.
---------
In connection with the appointment of FDISG, the Fund shall, on or before
the date this Agreement goes into effect, but in any case within a reasonable
period of time for FDISG to prepare to perform its duties hereunder, deliver or
caused to be delivered to FDISG the documents set forth in the written schedule
of Fund Documents annexed hereto as Schedule D.
5
<PAGE>
Article 8 Transfer Agent System.
---------------------
8.1 FDISG shall retain title to and ownership of any and all data bases,
computer programs, screen formats, report formats, interactive design
techniques, derivative works, inventions, discoveries, patentable or
copyrightable matters, concepts, expertise, patents, copyrights, trade secrets,
and other related legal rights utilized by FDISG in connection with the services
provided by FDISG to the Fund herein (the "FDISG System").
8.2 FDISG hereby grants to the Fund a limited license to the FDISG System
for the sole and limited purpose of having FDISG provide the services
contemplated hereunder and nothing contained in this Agreement shall be
construed or interpreted otherwise and such license shall immediately terminate
with the termination of this Agreement.
Article 9 Representations and Warranties.
------------------------------
9.1 FDISG represents and warrants to the Fund that:
(a) it is a corporation duly organized, existing and in good standing
under the laws of the Commonwealth of Massachusetts;
(b) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
(c) all requisite corporate proceedings have been taken to authorize
it to enter into this Agreement;
(d) it is duly registered with its appropriate regulatory agency as a
transfer agent and such registration will remain in effect for the duration
of this Agreement; and
(e) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations
under this Agreement.
9.2 The Fund represents and warrants to FDISG that:
(a) it is duly organized, existing and in good standing under the
laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Article of
Incorporation and By-Laws to enter into this Agreement;
(c) all corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to authorize it
to enter into this Agreement;
6
<PAGE>
(d) a registration statement under the Securities Act of 1933, as
amended, and the 1940 Act on behalf of each of the Portfolios is currently
effective and will remain effective, and all appropriate state securities
law filings have been made and will continue to be made, with respect to
all Shares of the Fund being offered for sale; and
(e) all outstanding Shares are validly issued, fully paid and non-
assessable and when Shares are hereafter issued in accordance with the
terms of the Fund's Articles of Incorporation and its Prospectus with
respect to each Portfolio, such Shares shall be validly issued, fully paid
and non-assessable.
9.3 THIS IS A SERVICE AGREEMENT. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, FDISG DISCLAIMS ALL OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED, MADE TO THE FUND OR ANY OTHER PERSON.
Article 10 Indemnification.
---------------
10.1 FDISG shall not be responsible for and the Fund on behalf of each
Portfolio shall indemnify and hold FDISG harmless from and against any and all
claims, costs, expenses (including reasonable attorneys' fees), losses, damages,
charges, payments and liabilities of any sort or kind which may be asserted
against FDISG or for which FDISG may be held to be liable (a "Claim") arising
out of or attributable to any of the following, unless such Claim resulted from
a negligent act or omission to act or bad faith by FDISG in the performance of
its duties hereunder:
(a) any actions of FDISG required to be taken pursuant to this
Agreement;
(b) FDISG's reasonable reliance on, or reasonable use of information,
data, records and documents (including but not limited to magnetic tapes,
computer printouts, hard copies and microfilm copies) received by FDISG
from the Fund, or any authorized third party acting on behalf of the Fund,
including but not limited to the prior transfer agent for the Fund, in the
performance of FDISG's duties and obligations hereunder;
(c) the reliance on, or the implementation of, any Written or Oral
Instructions or any other instructions or requests of the Fund on behalf of
the applicable Portfolio;
(d) the offer or sales of Shares in violation of any requirement
under the securities laws or regulations of any state that such Shares be
registered in such state or in violation of any stop order or other
determination or ruling by any state with respect to the offer or sale of
such Shares in such state; and
7
<PAGE>
(e) the Fund's refusal or failure to comply with the terms of this
Agreement, or any Claim which arises out of the Fund's negligence or
misconduct or the breach of any representation or warranty of the Fund made
herein.
10.2 In any case in which the Fund may be asked to indemnify or hold FDISG
harmless, FDISG will notify the Fund promptly after identifying any situation
which it believes presents or appears likely to present a claim for
indemnification against the Fund although the failure to do so shall not prevent
recovery by FDISG and shall keep the Fund advised with respect to all
developments concerning such situation. The Fund shall have the option to
defend FDISG against any Claim which may be the subject of this indemnification,
and, in the event that the Fund so elects, such defense shall be conducted by
counsel chosen by the Fund and reasonably satisfactory to FDISG, and thereupon
the Fund shall take over complete defense of the Claim and FDISG shall sustain
no further legal or other expenses in respect of such Claim. FDISG will not
confess any Claim or make any compromise in any case in which the Fund will be
asked to provide indemnification, except with the Fund's prior written consent.
The obligations of the parties hereto under this Article 10 shall survive the
termination of this Agreement.
10.3 Any claim for indemnification under this Agreement must be made prior
to the earlier of:
(a) one year after the Fund becomes aware of the event for which
indemnification is claimed; or
(b) one year after the earlier of the termination of this Agreement
or the expiration of the term of this Agreement.
10.4 Except for remedies that cannot be waived as a matter of law (and
injunctive or provisional relief), the provisions of this Article 10 shall be
FDISG's sole and exclusive remedy for claims or other actions or proceedings to
which the Fund's indemnification obligations pursuant to this Article 10 may
apply.
Article 11 Standard of Care.
----------------
11.1 FDISG shall at all times act in good faith and agrees to use its best
efforts within commercially reasonable limits to ensure the accuracy of all
services performed under this Agreement, but assumes no responsibility for loss
or damage to the Fund unless said errors are caused by FDISG's own negligence,
bad faith or willful misconduct or that of its employees, agents or
representatives.
11.2 Each party shall have the duty to use commercially reasonable
efforts to mitigate damages for which the other party may become responsible.
Article 12 Consequential Damages.
---------------------
8
<PAGE>
NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, IN NO EVENT
SHALL EITHER PARTY, ITS AFFILIATES OR ANY OF ITS OR THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL
DAMAGES.
Article 13 Term and Termination.
--------------------
13.1 This Agreement shall be effective on the date first written above
and shall continue for a period of three (3) years (the "Initial Term").
13.2 Upon the expiration of the Initial Term, this Agreement shall
automatically renew for successive terms of three (3) years ("Renewal Terms")
each, unless the Fund or FDISG provides written notice to the other of its
intent not to renew. Such notice must be received not less than ninety (90)
days prior to the expiration of the Initial Term or the then current Renewal
Term.
13.3 In the event that any of the Performance Standards listed in Exhibit
1 of Schedule A are not met by FDISG for two consecutive months the Fund may
provide FDISG with written notice of its intent to terminate this Agreement.
Such termination shall become effective unless FDISG corrects such failure to
meet the identified standards within thirty (30) days of receipt of such notice.
Unless the Fund provides FDISG with written notice of the Fund's intent to
exercise this option under this Section 13.3 within 30 days after the Fund
becomes aware of the occurrence, the Fund shall have waived its option to
terminate under this provision. Notwithstanding the foregoing, the Fund's right
to terminate the Agreement under this Section 13.3, shall not be effective until
after the expiration of two months from the time FDISG begins providing services
hereunder.
13.4 The Fund may terminate this Agreement in the event that the negligent
action or negligent omission to act on the part of FDISG causes damages to the
Fund in excess of one-hundred thousand dollars ($100,000). "Damages to the
Fund" are defined as damages caused by a single event, or cummulative series of
events related to the same matter which generates a monetary loss. The Fund's
right to terminate under this Section 13.4 shall remain effective in the event
FDISG has made the Fund whole with respect to the damages caused. Unless the
Fund provides FDISG with written notice of the Fund's intent to exercise this
option under this Section 13.4 within 30 days after the Fund becomes aware of
the occurrence, the Fund shall have waived its option to terminate under this
provision.
13.5 If a party hereto is guilty of a material failure to perform its
duties and obligations hereunder (a "Defaulting Party") the other party (the
"Non-Defaulting Party") may give written notice thereof to the Defaulting Party,
and if such material breach shall not have been remedied within thirty (30) days
after such written notice is given, then the Non-Defaulting Party may terminate
this Agreement by giving thirty (30) days written notice of such termination to
the
9
<PAGE>
Defaulting Party. If FDISG is the Non-Defaulting Party, its termination of this
Agreement shall not constitute a waiver of any other rights or remedies of FDISG
with respect to services performed prior to such termination or rights of FDISG
to be reimbursed for out-of-pocket expenses. In all cases, termination by the
Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting Party
of any other rights it might have under this Agreement or otherwise against the
Defaulting Party.
13.6 In the event this Agreement is terminated by the Fund pursuant to
Section 13.3, 13.4 or 13.5, all reasonable expenses associated with the movement
of records and materials to a successor transfer agent will be borne by FDISG
and the Fund shall not be responsible for the Unamortized Costs as defined in
Section 13.7 or FDISG's costs associated with such termination. In the event of
a termination pursuant to any other sections, all expenses associated with
conversion will be borne by the Fund.
13.7 The Fund shall have the right to terminate this Agreement at any
time if the Fund reorganizes into another entity, liquidates or otherwise ceases
to exist. In the event the Fund terminates the Agreement pursuant to this
Section 13.7, the Fund shall reimburse FDISG (a) for all unamortized costs
incurred by FDISG associated with the conversion of the Fund to FDISG as
transfer agent (the "Unamortized Costs") and (b) all reasonable costs associated
with such termination. In order to facilitate the calculation of the payment
described in Section 13.7(a), FDISG shall document the total cost of the Fund's
conversion to FDISG (the "Conversion Cost") within sixty (60) days of
conversion. The "Unamortized Costs" shall be defined as the Conversion Cost
minus any reimbursements made by the Fund, or any other entity, to FDISG to off-
set such Conversion Costs. Such amortization shall be straight-line over three
years.
13.8 In the event that the Fund's Co-advisors, First Chicago Investment
Management Company and NBD Bank, or any affiliate of either of them, acquire a
mutual fund complex which includes an in-house-transfer agent, the Fund shall
have the option of terminating this Agreement upon the following conditions:
(a) such option may only be exercised after expiration of the first
twelve months of this Agreement; and
(b) the Fund must provide FDISG with one-hundred twenty (120) days
prior written notice of its intent to terminate this Agreement under this
Section 13.8; and
(c) prior to such termination, the Fund shall pay to FDISG an
amount equal to twenty-five percent (25%) of FDISG's anticipated "lost
revenue" on the remainder of this Agreement resulting from such
termination. "Lost Revenue" shall mean the total FDISG fee run-rate
(excluding out-of-pocket expenses) representing the average of the last
three months prior to termination times the number of months then remaining
in the Initial Term or the then current Renewal Term; and
10
<PAGE>
(d) prior to such termination, the Fund shall pay to FDISG the
payment described in Section 13.7 of this Agreement.
Article 14 Additional Portfolios.
---------------------
In the event that the Fund establishes one or more Portfolios in addition
to those identified in Exhibit 1, with respect to which the Fund desires to have
FDISG render services as transfer agent under the terms hereof, the Fund shall
so notify FDISG in writing. Upon such notification the parties shall amend
Exhibit 1 to include such additional Portfolios and FDISG shall provide the
services to such Portfolios under the same terms as set forth herein.
Article 15 Confidentiality.
---------------
15.1 The parties agree that the Proprietary Information (defined below)
and the contents of this Agreement (collectively "Confidential Information") are
confidential information of the parties and their respective licensors. The
Fund and FDISG shall exercise at least the same degree of care, but not less
than reasonable care, to safeguard the confidentiality of the Confidential
Information of the other as it would exercise to protect its own confidential
information of a similar nature. The Fund and FDISG may use the Confidential
Information only to exercise its rights under this Agreement. Except as
required by law and except as disclosed in the Fund's registration statement or
filed as an exhibit thereto, the Fund and FDISG shall not duplicate, sell or
disclose to others the Confidential Information of the other, in whole or in
part, without the prior written permission of the other party. The Fund and
FDISG may, however, disclose Confidential Information to its employees who have
a need to know the Confidential Information to perform work for the other,
provided that each shall use reasonable efforts to ensure that the Confidential
Information is not duplicated or disclosed by its employees in breach of this
Agreement. The Fund and FDISG may also disclose the Confidential Information to
independent contractors, auditors, and professional advisors, provided they
first agree in writing to be bound by the confidentiality obligations
substantially similar to this Section 15.1. Notwithstanding the previous
sentence, in no event shall either the Fund or FDISG disclose the Confidential
Information to any competitor of the other without specific, prior written
consent.
15.2 Proprietary Information means:
(a) any data or information that is competitively sensitive
material, and not generally known to the public, including, but not limited
to, information about product plans, marketing strategies, finance,
operations, customer relationships, customer profiles, sales estimates,
business plans, and internal performance results relating to the past,
present or future business activities of the Fund or FDISG, their
respective subsidiaries and affiliated companies and the customers, clients
and suppliers of any of them;
11
<PAGE>
(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and secret
in the sense that its confidentiality affords the Fund or FDISG a
competitive advantage over its competitors; and
(c) all confidential or proprietary concepts, documentation,
reports, data, specifications, computer software, source code, object code,
flow charts, databases, inventions, know-how, show-how and trade secrets,
whether or not patentable or copyrightable.
15.3 Confidential Information includes, without limitation, all documents,
inventions, substances, engineering and laboratory notebooks, drawings,
diagrams, specifications, bills of material, equipment, prototypes and models,
and any other tangible manifestation of the foregoing of either party which now
exist or come into the control or possession of the other.
Article 16 Force Majeure.
-------------
16.1 No party shall be liable for any default or delay in the performance
of its obligations under this Agreement if and to the extent such default or
delay is caused, directly or indirectly, by (i) fire, flood, elements of nature
or other acts of God; (ii) any outbreak or escalation of hostilities, war, riots
or civil disorders in any country, (iii) any act or omission of the other party
or any governmental authority; (iv) any labor disputes (whether or not the
employees' demands are reasonable or within the party's power to satisfy); or
(v) nonperformance by a third party or any similar cause beyond the reasonable
control of such party, including without limitation, failures or fluctuations in
telecommunications or other equipment. In any such event, the non-performing
party shall be excused from any further performance and observance of the
obligations so affected only for as long as such circumstances prevail and such
party continues to use commercially reasonable efforts to recommence performance
or observance as soon as practicable.
16.2 During the term of this Agreement, at no additional cost to the Fund,
FDISG shall provide a facility capable of being utilized by FDISG to provide the
services covered by this Agreement in case of damage to the primary facility
providing those services (the "Back-Up Facility"). Utilization of the Back-Up
Facility by FDISG, including without limitation, transferring of transfer agency
and dividend records of the Fund, shall commence as soon as practically possible
after damage to the primary facility results in an inability to provide the
services described in this Agreement. Any additional costs in connection with
utilizing the Back-Up Facility shall be at FDISG's expense. After the primary
facility has recovered, FDISG shall again utilize it to provide the services
discussed in this Agreement to the Fund at no additional cost to the Fund.
16.3 In the case of damage to the Fund's primary facility providing
telephone service for the Fund's Shareholders, the Fund, at its own expense,
shall re-route Shareholder telephone calls
12
<PAGE>
to FDISG and FDISG agrees to handle such calls on behalf of the Fund. FDISG
shall provide this service for a period of three (3) days at no charge to the
Fund, however, the Fund shall assume responsibility for and pay FDISG for any
direct expenses incurred by FDISG. In the event that the Fund desires to
continue such service for a period in excess thereof, the Fund and FDISG shall
mutually agree on the fees to be paid by the Fund to FDISG for such service.
Article 17 Assignment and Subcontracting.
-----------------------------
This Agreement, its benefits and obligations shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned or otherwise transferred
by either party hereto, without the prior written consent of the other party,
which consent shall not be unreasonably withheld; provided, however, that FDISG
may assign all its right, title and interest in this Agreement to an affiliate,
parent or subsidiary, provided that in the reasonable judgment of the Board of
Directors of the Fund, acting in its sole discretion, (i) the financial capacity
of such assignee is not materially less than FDISG's; (ii) the nature and
quality of the services to be provided hereunder, including the Performance
Standards set forth in Exhibit 1 of Schedule A, are not materially adversely
affected by such assignment ; and (iii) the quality and capabilities of the
personnel and facilities of the assignee are not materially less than FDISG's.
FDISG may, in its sole discretion, engage subcontractors to perform any non-
material or non-subtanative obligations contained in this Agreement that it is
otherwise required to perform hereunder, provided however, that FDISG shall
remain responsible for the acts and omissions of such sub-contractors to the
same extent as it is hereunder.
Article 18 Notice.
------
Any notice or other instrument authorized or required by this Agreement to
be given in writing to the Fund or FDISG, shall be sufficiently given if
addressed to that party and received by it at its office set forth below or at
such other place as it may from time to time designate in writing.
To the Fund:
c/o NBD Bank
900 Tower Drive
P.O. Box 7058
Troy, Michigan 48007-7058
(800) 688-3350
ATTN: President
With a copy to:
Mr. Marco Hanig
13
<PAGE>
Managing Director
First Chicago Investment Management Company
Three First National Plaza, Mail Stop 0334
Chicago, IL 60670
and to
W. Bruce McConnel, III
Drinker Biddle & Reath
1345 Chestnut Street
Suite 1100
Philadelphia, PA 19107-3496
To FDISG:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
with a copy to FDISG's General Counsel
Article 19 Governing Law/Venue.
-------------------
The laws of the Commonwealth of Massachusetts, excluding the laws on
conflicts of laws, shall govern the interpretation, validity, and enforcement of
this agreement. All actions arising from or related to this Agreement shall be
brought in the state and federal courts sitting in the City of Boston, and FDISG
and Client hereby submit themselves to the exclusive jurisdiction of those
courts.
Article 20 Counterparts.
------------
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 21 Captions.
--------
The captions of this Agreement are included for convenience of reference
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Article 22 Publicity.
---------
Neither FDISG nor the Fund shall release or publish news releases, public
announcements, advertising or other publicity relating to this Agreement or to
the transactions
14
<PAGE>
contemplated by it without the prior review and written approval of the other
party; provided, however, that either party may make such disclosures as are
required by legal, accounting or regulatory requirements after making reasonable
efforts in the circumstances to consult in advance with the other party.
Article 23 Relationship of Parties/Non-Solicitation.
----------------------------------------
The parties agree that they are independent contractors and not partners or
co-venturers and nothing contained herein shall be interpreted or construed
otherwise.
Article 24 Entire Agreement; Severability.
------------------------------
24.1 This Agreement, including Schedules, Addenda, and Exhibits hereto,
constitutes the entire Agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof. No change,
termination, modification, or waiver of any term or condition of the Agreement
shall be valid unless in writing signed by each party. No such writing shall be
effective as against FDISG unless said writing is executed by an Executive Vice
President, or President of FDISG. A party's waiver of a breach of any term or
condition in the Agreement shall not be deemed a waiver of any subsequent breach
of the same or another term or condition.
24.2 The parties intend every provision of this Agreement to be
severable. If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or invalidity
shall not affect the validity of the remainder of this Agreement. In such case,
the parties shall in good faith modify or substitute such provision consistent
with the original intent of the parties. Without limiting the generality of this
paragraph, if a court determines that any remedy stated in this Agreement has
failed of its essential purpose, then all other provisions of this Agreement,
including the limitations on liability and exclusion of damages, shall remain
fully effective.
24.3 The names "The Woodward Variable Annuity Fund" and "Trustees of the
Fund" refer, respectively, to the trust created and the trustees, as trustees
but not individually or personally, acting from time to time under a Declaration
of Trust dated November 7, 1994, which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the State of Delaware and at
the principal office of the Fund. The obligations of the Fund entered into in
the name or on behalf thereof by any of the trustees, representatives or agents
are made not individually, but in such capacities, and are not binding upon any
of the trustees, shareholders or representatives of the Fund personally, but
bind only the trust property, and all persons dealing with any portfolio of the
Fund must look solely to the trust property belonging to such portfolio for the
enforcement of any claims against the Fund.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
THE WOODWARD VARIABLE ANNUITY FUND
By: [SIGNATURE APPEARS HERE]
-----------------------------------
Title: Its Chairman
--------------------------------
FIRST DATA INVESTOR SERVICES GROUP, INC.
By: [SIGNATURE APPEARS HERE]
-----------------------------------
Title: Executive VP
--------------------------------
16
<PAGE>
SCHEDULE OF PORTFOLIOS
The Woodward Variable Annuity Fund
Transfer Agency and Services Agreement
Managed Assets Balanced Fund (Balanced Fund*)
Growth and Value Fund (Growth/Value Fund*)
Mid-Cap Opportunity Fund (Opportunity Fund*)
Growth Fund (Capital Growth Fund*)
Money Market Fund
- ------------------------
* This is the pre-reorganization name of the Fund.
17
<PAGE>
Schedule A
DUTIES OF FDISG
---------------
1. Shareholder Information. FDISG shall maintain a record of the number
-----------------------
of Shares held by each Shareholder of record which shall include name, address,
taxpayer identification and which shall indicate whether such Shares are held in
certificates or uncertificated form and shall include historical information
regarding the account of each Shareholder, including dividends and distributions
paid and the date and price for all transactions on a Shareholder's account; any
stop or restraining order placed against a Shareholder's account; information
with respect to withholdings; any information required in order for FDISG to
perform any calculations contemplated or required by the Agreement to which this
is a Schedule (the "Agreement"); FDISG shall keep a record of all redemption
checks and dividend checks returned by the postal authorities, and shall
maintain such records as are required by the Fund.
2. Shareholder Services. FDISG shall respond as appropriate to all
--------------------
inquiries and communications from Shareholders relating to Shareholder accounts
with respect to its duties hereunder and as may be from time to time mutually
agreed upon between FDISG and the Fund. Shareholder communication services
shall include a voice response unit ("VRU") capability providing inquiry based
options. Effective on or before January 1, 1997, the VRU capabilities shall be
enhanced to allow for selected transaction processing.
3. Mailing Communications to Shareholders. At the expense of the Fund, as
--------------------------------------
set forth in Schedule C, FDISG will address and mail to Shareholders of the
Fund, all reports to Shareholders, dividend and distribution notices.
Shareholder communication services shall include a voice response unit ("VRU")
capability providing inquiry based options. Effective on or before January 1,
1997, the VRU capabilities shall be enhanced to allow for selected transaction
processing.
4. Sales of Shares
---------------
(a) FDISG shall not be required to issue any Shares of the Fund where it
has received a Written Instruction from the Fund or official notice from any
appropriate authority that the sale of the Shares of the Fund has been suspended
or discontinued. The existence of such Written Instructions or such official
notice shall be conclusive evidence of the right of FDISG to rely on such
Written Instructions or official notice.
(b) In the event that any check or other order for the payment of money is
returned unpaid for any reason, FDISG will endeavor to: (i) give prompt notice
of such return to the Fund or its designee; (ii) place a stop transfer order
against all Shares issued as a result of such check or order; and (iii) take
such actions as FDISG may from time to time deem appropriate.
5. Transfer and Repurchase
-----------------------
18
<PAGE>
(a) FDISG shall process all requests to transfer or redeem Shares in
accordance with the transfer or repurchase procedures set forth in the Fund's
Prospectus.
(b) FDISG will transfer or repurchase Shares upon receipt of Oral or
Written Instructions or otherwise pursuant to the Prospectus and Share
certificates, if any, properly endorsed for transfer or redemption, accompanied
by such documents as FDISG reasonably may deem necessary.
(c) FDISG reserves the right to refuse to transfer or repurchase Shares
until it is satisfied that the endorsement on the instructions is valid and
genuine. FDISG also reserves the right to refuse to transfer or repurchase
Shares until it is satisfied that the requested transfer or repurchase is
legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or repurchases which FDISG, in its good judgement,
deems improper or unauthorized, or until it is reasonably satisfied that there
is no basis to any claims adverse to such transfer or repurchase.
(d) When Shares are redeemed, FDISG shall, upon receipt of the
instructions and documents in proper form, deliver to the Custodian and the Fund
or its designee a notification setting forth the number of Shares to be
repurchased. Such repurchased shares shall be reflected on appropriate accounts
maintained by FDISG reflecting outstanding Shares of the Fund and Shares
attributed to individual accounts.
(e) FDISG, upon receipt of the monies paid to it by the Custodian for the
repurchase of Shares, pay such monies as are received from the Custodian, all in
accordance with the procedures described in the written instruction received by
FDISG from the Fund.
(f) FDISG shall not process or effect any repurchase with respect to
Shares of the Fund after receipt by FDISG or its agent of notification of the
suspension of the determination of the net asset value of the Fund.
6. Dividends
---------
(a) Upon the declaration of each dividend and each capital gains
distribution by the Board of Directors of the Fund with respect to Shares of the
Fund, the Fund shall furnish or cause to be furnished to FDISG Written
Instructions setting forth the date of the declaration of such dividend or
distribution, the ex-dividend date, the date of payment thereof, the record date
as of which Shareholders entitled to payment shall be determined, the amount
payable per Share to the Shareholders of record as of that date, the total
amount payable on the payment date and whether such dividend or distribution is
to be paid in Shares at net asset value.
(b) On or before the payment date specified in such resolution of the
Board of Directors, the Fund will pay to the disbursement account sufficient
cash to make payment to the Shareholders of record as of such payment date.
19
<PAGE>
(c) If the disbursement account does not receive sufficient cash from the
Fund to make total dividend and/or distribution payments to all Shareholders of
the Fund as of the payable date, FDISG will notify the Fund. The Fund hereby
instructs FDISG to process dividend and/or distribution payments to all
Shareholders of record as of the payable date regardless of whether sufficient
cash is available in the disbursement accounts. Subject to FDISG meeting its
standard of care herein, the Fund shall be responsible for and shall indemnify
and hold FDISG harmless from all costs asserted by others with respect to the
actions of FDISG in complying with the instruction of the Fund under the
foregoing sentence.
7. Reports.
-------
(a) FDISG shall furnish daily reports of transactions in Shares; furnish
monthly reports of transactions in Shares by type (custodial, trust, Keogh, IRA,
other) including number of accounts; furnish sales data for blue sky reporting
to the Fund via daily transmission; calculate sales load or compensation
payment, if applicable, and provide such information to the Fund; calculate
dealer commissions for the Fund; mail duplicate confirmations to dealers of
their clients' activity, whether executed through the dealer or directly with
FDISG; provide detail for underwriter or broker confirmations and other
participating dealer shareholder accounting, in accordance with such procedures
as may be agreed upon between the Fund and FDISG; provide Shareholder lists and
statistical information concerning accounts to the Fund; provide to the Fund or
the custodian with timely notification of Fund activity and such other
information as may be agreed upon from time to time between FDISG and custodian;
and at the expense of the Fund in accordance with Schedule C, provide toll free
lines for direct shareholder use, plus customer liaison staff with on-line
inquiry capacity.
(b) In connection with FDISG's obligation to provide detail for
underwriter or broker confirmations and other participating dealer shareholder
accounting, FDISG shall modify and enhance the FDISG System to allow for the
timely transmission of such detail to the Pershing Division of Donaldson, Lufkin
& Jenrette Securities Corporation ("Pershing"). Such transmission capability
shall be available on or before September 13, 1996, subject to successful
testing with Pershing.
8. Independent Public Accountants. FDISG shall cooperate with the Fund's
------------------------------
independent public accountants and shall take all reasonable action in the
performance of its obligations under the Agreement to assure that the necessary
information is made available to such accountants for the expression of their
opinion as such may be required by the Fund from time to time.
9. In addition to and neither in lieu nor in contravention of the
services set forth above, FDISG shall: (i) perform all the customary services of
a transfer agent, registrar, dividend disbursing agent and agent of the dividend
reinvestment and cash purchase plan as described herein consistent with those
requirements in effect as at the date of this Agreement. The detailed
20
<PAGE>
definition, frequency, limitations and associated costs (if any) set out in the
attached fee schedule, include but are not limited to: maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
tabulating proxies, mailing Shareholder reports to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts where
applicable, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders.
21
<PAGE>
Exhibit 1 of Schedule A
PERFORMANCE STANDARDS
FDISG will use a statistical sampling defined below as a percentage of
transactions processed through the Transaction Processing and Quality Control
units of FDISG providing services to the Fund and will track and report to the
Fund on the accuracy of the transactions processed. Examining the sample
against predetermined FDISG criteria for accuracy, FDISG will provide an
accuracy rate as represented by a "percent", measured to the last Friday of each
month from the last Friday of the previous month. The Fund reserves the right
to inspect, or have a third party inspect, the Quality Assurance Procedures and
documentation and all documents reviewed and considered in determining the
accuracy of processing.
Turnaround QC% QA% Accuracy
R = receipt date Standard
I. Transaction Processing
----------------------
New Accounts
Purchases R 100% 15% 98%
Exchanges R 100% 15% 98%
Transfers R+3 100% 15% 98%
Purchases
Directs R 100% 10% 98%
Wire Orders R 100% 10% 98%
Redemptions
Directs R 100% 10% 98%
Wire Orders R 100% 10% 98%
Exchanges R 100% 10% 98%
Transfers R+3 100% 10% 98%
Adjustments
Priority R+1 100% 10% 98%
Non-Priority R+4 100% 10% 98%
OCF Cancel/Rebill R+1 100% 15% 98%
II. Shareholder Services
--------------------
Research
Priority R+1 100% 95%
Non-Priority R+4 100% 95%
Transcripts R+9 100% 95%
Correspondence
Priority (Financial) R+3 100% 10% 98%
Non-Priority (Other) R+5 100% 10% 98%
III. Control Deadlines
-----------------
22
<PAGE>
Fund Accounting Times
Variable Funds Supersheets 10:00am daily
Tax Exempt Money Market Funds Supersheets 12:30pm daily
Taxable Money Market Funds Supersheets 3:30pm daily
Custody Settlements
Net Settlement for Variable Funds 11:00am daily
Net Settlement for Money Market Funds 4:00pm daily
Outgoing Wires 4:30pm daily
Commissions
12B-1 Data to Bisys R+1
Funding to FDISG TBD (to be discussed with Bisys)
Checks Mailed TBD+3
Front End Load Checks R+3
IV. Administration
--------------
Duplicate Confirmation R+2 2% 98%
Mailed
Daily Checks Mailed R+1 2% 98%
Periodic Checks Mailed R+2 2% 98%
Daily Confirmations R+2 2% 98%
Mailed
Periodic Statements
Mailed Pre-sort
50% minimum R+3 2% 98%
Remaining R+4 2% 98%
V. Systems
-------
Availability
Monday - Friday 8:00am to 9:00pm* EST 98%
Saturday 11:00am to 10:00pm EST 98%
Sunday 8:00am to 5:00pm EST 98%
* At month-end and periodically for predetermined business reasons, FSR
will come down at 8:00pm.
Transmissions
ACH for NBD Bank DDA cycle - 11:00pm EST 98%
List out remaining transmissions and determine client standards 98%
FDISG will use a statistical sampling defined categorically in Section I - III
of transactions processed through the Transaction Processing and Quality Control
units of FDISG providing services to the Fund and will track and report to the
Fund on the accuracy of the transaction processed. Examining the sampling
against predetermined FDISG criteria for accuracy, FDISG
23
<PAGE>
will provide a 98% accuracy rate, measured monthly by their independent Quality
Assurance Department and reported to the Fund by the 20th of the following
month.
This document will be modified by the business areas if conditions are such that
changes are deemed necessary by the Fund and by FDISG.
24
<PAGE>
Schedule B
Fee Schedule
I. TRANSFER AGENT FEES:
Open Account Sliding Fee Scale
Accounts Annual Fee
-------- ----------
0 - 80,000 $18.00 per account
80,001 - 100,000 $16.00 per account
100,001 - 150,000 $14.00 per account
150,001+ $13.00 per account
Closed Account Fee: $2.00 per account per annum
IMPRESS Software Fees: $3,200 per workstation per annum
Note: IMPRESS Software Fees will be included in IMPRESS License Software
Agreement
Variable Annuity Fees: A flat fee of $1,000 per month will be charged to
support up to 5 variable annuity funds. The monthly fee
will increase by $500 for each additional fund.
IRA Maintenance Fees: Retirement account shareholders will be assessed an
annual fee of $10.00 per fund/account position with a
cap of $25 per account number.
New Portfolio Fees: $25,000 per annum minimum for all new portfolios
introduced over the 3 year contract period. (Initial 6
have no minimums.)
II. VALUE ADDED SERVICES
Remote Trade Entry: $10,000 per annum for up to 10 workstations
III. SET UP CHARGES
Voice Response Unit, Cost Basis Accounting, and Remote Trade Entry
25
<PAGE>
$50,000 set up charge
IV. CONVERSION EXPENSE
First Data and First Chicago/NBD Bank have agreed to split the conversion cost
with First Chicago/NBD paying a maximum of $250,000.
V. PRINT/MAIL CHARGES
1. Daily Output
------------
(a) Shareholder Statements:
Base stock, laser printing, folding, inserting and mailing, (excluding
postage and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
Set up Fee: $15.00 per work order
(b) Combined Statements (Householding multiple statements in one envelope):
Base stock, laser printing, folding, inserting and mailing, (excluding
postage and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
Set up Fee: $15.00 per work order
(c) Combined Exchange Statements (To and from exchange on one confirm):
Base stock, laser printing, folding, inserting and mailing (excluding
postage and envelopes)
26
<PAGE>
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
2. Dividend Output
---------------
(a) Shareholder Statements:
Base stock, laser printing, folding, inserting and mailing, (excluding
postage and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
(b) Dividend Checks:
Base stock, laser printing, folding, inserting and mailing, (excluding
postage and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.179 per image
3,500 - 10,000 $.169 per image
10,001 and above $.16 per image
Minimum Charge $25.00 per work order
3. Consolidated Statements
-----------------------
Shareholder & Dealer Statements:
Base stock, laser printing, folding, inserting and mailing (excluding postage
and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
27
<PAGE>
Selective Inserting Charges $.03 per envelope
(minimum $250)
4. On-Request `Super Select* Statements
------------------------------------
Shareholder Statements:
Base stock, laser printing, folding inserting and mailing, (excluding postage
and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
Set up Fee: $15.00 per work order
5. New Account Letters
-------------------
Base stock, laser printing, folding, inserting and mailing, (excluding postage
and envelopes)
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
Set up Fee: $15.00 per work order
6. T.I.N. Solicitations
--------------------
Daily Statements, Educational TIN, B-Notice, Second B-notice:
Base stock, laser printing, folding, inserting and mailing
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
28
<PAGE>
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
(excluding postage and envelopes) $15.00 per work order
7. Wire Order Invoice Statements
-----------------------------
Base stock, laser printing, folding, inserting and mailing
Number of Items Per Fund Price
1 - 3,500 $.135 per image
3,501 - 10,000 $.125 per image
10,001 - and above $.12 per image
Minimum Charge $25.00 per work order
(excluding postage and envelopes) $15.00 per work order
8. Label List Mailings
-------------------
Cheshire labeling and mail first class $29.00/thousand
Labeling, inserting and mailing $50.00 set up charge
(excludes postage and envelopes)
9. Miscellaneous Services Charge Per Unit
---------------------- ------ --------
1 Additional Insert $20 1,000
2 Additional Inserts $40 1,000
3 Additional Inserts $60 1,000
4 Additional Inserts $80 1,000
5 Additional Inserts $100 1,000
6 Additional Inserts $120 1,000
7 Additional Inserts $140 1,000
8 Additional Inserts $160 1,000
Folding $20 1,000
Manual Processing $25 Per Hour
NOTE: Costs of all materials used are in addition to all prices. Postage is in
addition, (50-50 split of postal savings).
29
<PAGE>
Schedule C
OUT-OF-POCKET EXPENSES
----------------------
The Fund shall reimburse FDISG monthly for the following applicable out-of-
pocket expenses:
- Microfiche/microfilm production
- Magnetic media tapes and freight
- Printing costs, including envelopes, checks and stationery
- Postage (bulk, pre-sort, ZIP+4, barcoding, first class) direct pass
through to the Fund
- Due diligence mailings
- Telephone and telecommunication costs, including all lease, maintenance
and line costs
- Daily & Distribution advice mailings
- Shipping, Certified and Overnight mail and insurance
- Year-end forms and mailings
- Terminals, communication lines, printers and other equipment and any
expenses incurred in connection with such terminals and lines
- Duplicating services
- Courier services
- Incoming and outgoing wire charges
- Federal Reserve charges for check clearance
- Overtime, as approved by the Fund
- Temporary staff, as approved by the Fund
- Travel and entertainment, as approved by the Fund
- Record retention as required by the Fund, retrieval and destruction costs,
including, but not limited to exit fees charged by third party record
keeping vendors
- All Systems enhancements after the conversion at the rate of $100.00 per
hour
The Fund agrees that postage and mailing expenses will be paid on the day of
or prior to mailing as agreed with FDISG. In addition, the Fund will promptly
reimburse FDISG for any other unscheduled expenses incurred by FDISG whenever
the Fund and FDISG mutually agree that such expenses are not otherwise properly
borne by FDISG as part of its duties and obligations under the Agreement.
30
<PAGE>
Schedule D
Fund Documents
- Certified copy of the Articles of Incorporation of the Fund, as amended
- Certified copy of the By-laws of the Fund, as amended,
- Copy of the resolution of the Board of Directors authorizing the execution
and delivery of this Agreement
- All account application forms and other documents relating to Shareholder
accounts or to any plan, program or service offered by the Fund
- Certified list of Shareholders of the Fund with the name, address and
taxpayer identification number of each Shareholder, and the number of
Shares of the Fund held by each, certificate numbers and denominations (if
any certificates have been issued), lists of any accounts against which
stop transfer orders have been placed, together with the reasons
therefore, and the number of Shares redeemed by the Fund
- All notices issued by the Fund with respect to the Shares in accordance
with and pursuant to the Articles of Incorporation or By-laws of the Fund
or as required by law and shall perform such other specific duties as are
set forth in the Articles of Incorporation including the giving of notice
of any special or annual meetings of shareholders and any other notices
required thereby.
31
<PAGE>
Exhibit (9)(b)
ADDENDUM NO. 1 TO TRANSFER AGENCY AND SERVICES AGREEMENT
--------------------------------------------------------
This Addendum, dated as of the 30th day of April, 1997, is entered
into between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a Delaware business
trust, and FIRST DATA INVESTOR SERVICES GROUP, INC. ("FDISG"), a Massachusetts
Corporation.
WHEREAS, the Trust and FDISG have entered into a Transfer Agency and
Services Agreement dated August 12, 1996 (the "Transfer Agency Agreement"),
pursuant to which the Trust appointed FDISG to act as transfer agent (the
"Transfer Agent") to the Trust's Managed Assets Balanced Fund, Growth and Value
Fund, Mid-Cap Opportunity Fund, Growth Fund and Money Market Fund (each, a
"Fund");
WHEREAS, Article 14 of the Transfer Agency Agreement provides that in
the event the Trust establishes one or more additional portfolios with respect
to which it desires to retain FDISG to act as the Transfer Agent under the
Transfer Agency Agreement, the Trust shall so notify FDISG in writing, and if
FDISG is willing to render such services in accordance with the fees set forth
in Schedule B of the Transfer Agency Agreement, the parties shall amend the
Schedule of Portfolios to include such additional portfolios;
WHEREAS, pursuant to Article 14 of the Transfer Agency Agreement, the
Trust has notified FDISG that it has established the Bond Fund and Intrinsic
Value Fund (each, a "Fund") and that it desires to retain FDISG to act as the
Transfer Agent therefor, and FDISG has notified the Trust that it is willing to
serve as Transfer Agent for such Funds.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Trust hereby appoints FDISG to act as Transfer
-----------
Agent to the Trust for the Bond Fund and Intrinsic Value Fund for the period and
on the terms set forth in the Transfer Agency Agreement. FDISG hereby accepts
such appointment and agrees to render the services set forth in the Transfer
Agency Agreement, for the compensation set forth in Schedule B of the Transfer
Agency Agreement.
2. Capitalized Terms. From and after the date hereof, the terms
-----------------
"Fund" and "Funds" as used in the Transfer Agency Agreement, as amended shall be
deemed to include the Bond Fund and Intrinsic Value Fund. Capitalized terms
used herein and not otherwise defined shall have the meanings ascribed to them
in the Transfer Agency Agreement.
<PAGE>
3. Miscellaneous. Except to the extent supplemented hereby, the
-------------
Transfer Agency Agreement shall remain unchanged and in full force and effect
and is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
By: /s/ Donald G. Sutherland
------------------------------
Donald G. Sutherland
President and Trustee
FIRST DATA INVESTOR SERVICES GROUP, INC.
By: /s/ Gerald G. Kokos
------------------------------
Name: Gerald G. Kokos
Title: Executive Vice President
<PAGE>
Exhibit (9)(d)
PARTICIPATION AGREEMENT
Among
PEGASUS VARIABLE FUNDS
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
HARTFORD LIFE INSURANCE COMPANY
and
HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
THIS AGREEMENT, made and entered into as of the 5th day of January, 1998,
by and among PEGASUS VARIABLE FUNDS (the "Investment Company"), a Delaware
business trust, FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY (the "Advisor")
a Delaware corporation, and HARTFORD LIFE INSURANCE COMPANY and HARTFORD LIFE
AND ANNUITY INSURANCE COMPANY (collectively, the "Insurance Companies") each a
Connecticut corporation, on their own behalf and on behalf of each of their
segregated asset accounts set forth on Schedule A, as may be amended from time
to time (each such account hereinafter referred to as the "Account").
WHEREAS; the Investment Company engages in business as an open-end
management investment company and is available to act as the investment vehicle
for variable annuity and life insurance contracts to be offered by separate
accounts of insurance companies which have entered into participation agreements
substantially identical this Agreement ("Participating Insurance Companies");
and
WHEREAS, the beneficial interest in the Investment Company is divided into
several series of shares, each designated a "Fund" and representing the interest
in a particular managed portfolio of securities and other assets; and
WHEREAS, the Investment Company is registered as an open-end management
investment company under the Investment Company Act of 1940 Act, as amended (the
"1940 Act"), and the offering of its shares is registered under the Securities
Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940 and any applicable state securities law; and
WHEREAS, the Insurance Companies have registered under the 1933 Act,
or will register under the 1933 Act, certain variable annuity or variable life
insurance contracts identified
<PAGE>
by the form number(s) listed on Schedule B to this Agreement, as amended from
time to time hereafter by mutual written agreement of all the parties hereto
(the "Contracts"); and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the board of directors of the
relevant Insurance Company on the date shown for that Account on Schedule A, to
set aside and invest assets attributable to the Contracts; and
WHEREAS, the Insurance Companies have registered or will register each
Account as a unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Insurance Companies intend to purchase shares in the Funds at
net asset value on behalf of each Account to fund the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Insurance
Companies, the Investment Company and the Adviser agree as follows:
ARTICLE I. Sale of Fund Shares
1.1 The Investment Company agrees to sell to the Insurance Companies
those shares of the fund which each Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Investment
Company or its designee of the order for the shares of the Investment Company.
For purposes of this Section 1.1, each of the Insurance Companies shall be the
designee of the Investment Company for receipt of such orders from the Accounts
and receipt by such designee shall constitute receipt by the Investment Company;
provided that the Investment Company receives notice of such order by 9:00 a.m.,
- -------------
Eastern Time on the next following Business Day. In this Agreement, "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Investment Company calculates it net asset value pursuant to
the rules of the Commission.
1.2 The Investment Company agrees to make its shares available for
purchase at the applicable net asset value per share by the Insurance Companies
and their Accounts on those days on which the Investment Company calculates its
Funds' net asset values pursuant to rules of the Commission. The Investment
Company shall use reasonable efforts to calculate its Funds' net asset values on
each day on which the New York Stock Exchange is open for trading.
Notwithstanding the foregoing, the trustees of the Investment Company may refuse
to sell shares of any Fund to any person, or suspend or terminate the offering
of shares of any Fund if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the trustees of
the Investment Company acting in good faith and in light of their fiduciary
duties under federal and any applicable state laws, necessary in the best
interests of the shareholders of that Fund.
1.3 The Investment Company agrees that shares of the Investment Company
will be sold
<PAGE>
only to Account of Participating Insurance Companies. No shares of any Fund will
be sold to the general public.
1.4. The Investment Company will not sell its shares to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Sections 2.4, 3.4, 3.5 and Sections 7.1 - 7.6 of this
Agreement is in effect to govern such sales.
1.5. The Investment Company agrees to redeem, on the Insurance
Companies' request, any full or fractional shares of the Investment Company
held by the Account, executing such requests on a daily basis at the net asset
value next computed after receipt by the Investment Company or its designee of
the request for redemption. However, if one or more Funds has determined to
settle redemption transactions for all of its shareholders on a delayed basis
(more than one business day, but in no event more than three Business Days,
after the date on which the redemption order is received, unless otherwise
permitted by an order of the Commission under Section 22(e) of the 1940 Act),
the Investment Company shall be permitted to delay sending redemption proceeds
to the Insurance Companies by the same number of days that the Investment
Company is delaying sending redemption proceeds to the other shareholders of the
Fund. The Investment Company shall not bear any responsibility whatsoever for
the proper disbursement to Contract owners or crediting of redemption proceeds
to Contract owner accounts; each of the Insurance Companies alone shall be
responsible for such action. For purposes of this Section 1.5, each of the
Insurance Companies shall be the designee of the Investment Company for receipt
of requests for redemption from the Accounts and receipt by that designee shall
constitute receipt by the Investment Company; provided that the Investment
-------- ----
Company receives notice of the request for redemption by 9:00 a.m., Eastern
Time, on the next following Business Day.
1.6. The Insurance Companies agree to purchase and redeem the shares of
each Fund offered by the then-current prospectus of the Investment Company in
accordance with the provisions of that prospectus. The Insurance Companies agree
that all net amount available under the Contracts shall be invested in the
Insurance Companies' general account or the Investment Company or other open-end
management investment companies registered under the 1940 Act.
1.7. The Insurance Companies shall pay for Investment Company shares by
3:00 p.m., Eastern Time, on the next Business Day after an order to purchase
Investment Company shares is made in accordance with the provisions of Section
1.1. hereof. Payment shall be in federal funds transmitted by wire. For purposes
of Section 2.9 and 2.10, upon receipt by the Investment Company of the federal
funds so wired, such funds shall cease to be the responsibility of the Insurance
Companies and shall become the responsibility of the Investment Company. Payment
of net redemption proceeds (aggregate redemptions of a Fund's shares by an
Account minus aggregate purchases of that Fund's shares by that Account) of less
than $1 million for a given Business Day will be made by wiring federal funds to
the Insurance Companies on the next Business Day after receipt of the redemption
request. Payment of net redemption proceeds of $1 million or more will be by
wiring federal funds within three Business Days after receipt of the redemption
request.
<PAGE>
1.8. Issuance and transfer of the Investment Company's shares will be by
book entry only. Stock certificates will not be issued to the Insurance
Companies or any Account. Shares ordered from the Investment Company will be
recorded in an appropriate title for each Account or the appropriate subaccount
of each Account.
1.9. The Investment Company shall use its best efforts to furnish same day
notice (by wire or telephone, followed by written confirmation) to the Insurance
Companies of any income, dividends or capital gain distributions payable on the
Funds' shares. The Insurance Companies hereby elect to receive all income
dividends and capital gain distributions payable on a Fund's shares in
additional shares of that Fund. The Insurance Companies reserve the right to
revoke this election and to receive all such income dividends and capital gain
distributions in cash. The Investment Company shall notify the Insurance
Companies of the number of shares issued as payment of dividends and
distributions.
1.10. The Investment Company shall make the net asset value per share for
each Fund available to the Insurance Companies on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make those per share net assets values available by 7:00
p.m., Eastern Time.
ARTICLE II. Representations, Warranties and Agreements
2.1. The Insurance Companies represent, warrant and agree that the
offerings of the Contracts are, or will be, registered under the 1933 Act; that
the Contracts will be issued and sold in compliance in all material respects
with all applicable federal and state laws and that the sale of the Contracts
shall comply in all material respects with applicable state insurance
suitability requirements. Each of the Insurance Companies further represents
that it is an insurance company duly organized and in good standing under
applicable law and that it has legally and validly established the Account
prior to any issuance or share thereof as a segregated asset account under the
Connecticut Insurance Code and has registered, or warrants and agrees that prior
to any issuance or sale of the Contracts it will register, the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts.
2.2. The Investment Company warrants and agrees that Investment Company
shares sold pursuant to this Agreement shall be registered under the 1933 Act,
duly organized for issuance and sale in compliance with the laws of the State of
Delaware and all applicable federal securities laws and that the Investment
Company is and shall remain registered under the 1940 Act. The Investment
Company warrants and agrees that it shall amend the registration statement for
its shares under the 1933 Act and the 1940 Act from time to time as required in
order to effect the continuous offering of its shares. The Investment Company
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Investment
Company or the Adviser.
2.3. The Investment Company represents that it is currently qualified as a
Regulated
<PAGE>
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and warrants and agrees that it will make all reasonable
efforts to maintain its qualification (under Subchapter M or any successor or
similar provision) and that it will notify the Insurance Companies immediately
upon having a reasonable basis for believing that it has ceased to so qualify or
that it might not so qualify in the future.
2.4. Each of the Insurance Companies represents that the Contracts are
currently treated as annuity or life insurance contracts under applicable
provisions of the Code and warrants and agrees that it will make every effort to
maintain such treatment and that it will notify the Investment Company and the
Adviser immediately upon having a reasonable basis for believing that the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
2.5. The Investment Company may elect to make payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act. To the extent
that it decides to finance distribution expenses pursuant to Rule 12b-1, the
Investment Company undertakes to have a board of trustees, a majority of whom
are not interested person of the Investment Company, formulate and approve any
plan under Rule 12b-1 to finance distribution expenses.
2.6. The Investment Company makes no representation warranties as to
whether any aspect of its operations (including, but not limited to, fees and
expenses and investment policies) complies or will comply with the insurance
laws or regulations of various states.
2.7. The Investment Company represents that it is lawfully organized and
validly existing under the laws of the State of Delaware and represents,
warrants and agrees that it does and will comply in all material respects with
the 1940 Act.
2.8. The Adviser represents that it is and warrants that it shall remain
duly registered as an investment adviser under all applicable federal and state
securities laws and agrees that it shall perform its obligations for the
Investment Company in compliance in all material respects with the laws of the
State of Delaware and any applicable state and federal securities laws.
2.9. The Investment Company and the Adviser represent and warrant that
all of their officers, employees, investment advisers, investment sub-advisers,
and other individuals or entities described in Rule 17g-1 under the 1940 Act
dealing with the money and/or securities of the Investment Company are, and
shall continue to be at all times, covered by a blanket fidelity bond or similar
coverage for the benefit of the Investment Company in an amount not less than
the minimum coverage required by Rule 17g-1 under the 1940 Act or related
provisions as may be promulgated from time to time. That fidelity bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.10. Each of the Insurance Companies represents and warrants that all
of its officers, employees, investment advisers, and other individuals or
entities described in Rule 17g-1 under the 1940 Act are and shall continue to be
at all times covered by a blanket fidelity bond or similar coverage for the
benefit of the Investment Company, in an amount not less than the
<PAGE>
minimum coverage required currently for entities subject to the requirements of
Rule 17g-1 of the 1940 Act or related provisions or may be promulgated from time
to time. The aforesaid bond shall include coverage for larceny and embezzlement
and shall be issued by a reputable bonding company.
2.11. Each of the Insurance Companies represents and warrants that it
will accurately report to the Investment Company the time of receipt of any
purchase, redemption or transfer order it receives as designee of the Investment
Company.
ARTICLE III. Disclosure Documents and Voting
3.1. The Adviser shall provide the Insurance Companies (at the Insurance
Companies' expense) with as many copies of the Investment Company's current
prospectus as the Insurance Companies may reasonably request. If requested by
the Insurance Companies in lieu thereof, the Investment Company shall provide
such documentation (including a final copy of the new prospectus as set in type
at the Investment Company's expense) and other assistance is reasonably
necessary in order for the Insurance Companies once each year (or more
frequently if the prospectus for the Investment Company is amended) to have the
prospectus for the Contracts and the Investment Company's prospectus printed
together in one document (at the Insurance Companies' expense).
3.2. The Investment Company's prospectus shall state at that the
Statement of Additional Information for the Investment Company (the "SAI") is
available from the Investment Company, and the Adviser (or the Investment
Company), at its expense, shall print and provide the SAI free of charge to the
Insurance Companies and to any owner of a Contract or prospective owner who
requests the SAI.
3.3. The Investment Company, at its expense, shall provide the Insurance
Companies with copies of its proxy material, reports to shareholders and other
communications to shareholders in such quantity as the Insurance Companies
shall reasonably require for distributing to Contract owners.
3.4. If and to the extent required by law, the Insurance Companies
shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Investment Company shares in accordance with
instructions received from Contract owners; and
(iii) vote Investment Company shares for which no instructions
have been received in the same proportion as Investment Company
shares of that Fund for which instructions have been received;
so long as and to the extent that the Commission continues to interpret the 1940
Act to require
<PAGE>
pass-through voting privileges for variable contract owners. Each of the
Insurance Companies reserves the right to vote Investment Company shares held in
any segregated asset account in its own right, to the extent permitted by law.
Participating Insurance Companies shall be responsible for assuring that each of
their separate accounts participating in the Investment Company calculates
voting privileges in a manner consistent with the provisions set forth above.
3.5. The Investment Company will comply with all provisions of the 1940
Act requiring voting by shareholders, and in particular the Investment Company
will either provide for annual meetings (except insofar as the Commission may
interpret Section 16 of the 1940 Act not to require such meetings) or, as the
Investment Company currently intends, comply with Section 16(c) of the 1940 Act
(although Investment Company is not one of the trusts described in Section 16(c)
of that Act) as well as the Sections 16(a) and, if and when applicable, 16(b).
Further, the Investment Company will act in accordance with the Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of trustees and with whatever rules the Commission may promulgate with
respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Insurance Companies shall furnish, or shall cause to be
furnished, to the Adviser or its designee, each piece of sales literature or
other promotional material in which the Investment Company, a sub-adviser of one
of the Funds, or the Adviser is named, at least fifteen calendar days prior to
its use. No such material shall be used if the Investment Company or its
designee objects to such use.
4.2. The Insurance Companies shall not give any information or make any
representations or statements on behalf of the Investment company or concerning
the Investment Company in connection with the sale of the Contracts other than
the information or representations contained in the Investment Company's
registration statement, prospectus or SAI, as that registration statement,
prospectus or SAI may be amended or supplemented from time to time, or in
reports or proxy statements for the Investment Company or its designee or by the
Adviser, except with the permission of the Investment Company or the Adviser.
4.3. The Investment Company, the Adviser, or its designee shall furnish,
or shall cause to be furnished, to each of the Insurance Companies or its
designee, each piece of sales literature or other promotional material in which
the Insurance Company or the Account is named at least fifteen calendar days
prior to its use. No such material shall be used if the Insurance Company or its
designee objects to such use within ten calendar days after receipt of that
material.
4.4. The Investment Company and the Adviser shall not give any
information or make any representations on behalf of the Insurance Companies or
concerning the Insurance Companies, any Account, or the Contracts other than the
information or representations contained in a registration statement, prospectus
or statement of additional information for the Contracts, as that registration
statement, prospectus or statement of additional information may be amended or
supplemented from time to time, or in published reports for any Account which
<PAGE>
are in the public domain or approved by the Insurance Companies for distribution
to Contract owners, or in sales literature or other promotional material
approved by the Insurance Companies or the appropriate designee, except with the
permission of the Insurance Companies.
4.5. The Investment Company will provide to the Insurance Companies at
least one complete copy of each registration statement, prospectus, statement of
additional information, report, proxy statement, piece of sales literature or
other promotional material, application for exemption, request for no-action
letter, and any amendment to any of the above, that relate to the Investment
Company or its shares, contemporaneously with the filing of the document with
the Commission, the National Association of Securities Dealers, Inc. ("NASD"),
or other regulatory authorities.
4.6. The Insurance Companies will provide to the Investment Company at
least one complete copy of each registration statement, prospectus, statement of
additional information, report, solicitation for voting instructions, piece of
sales literature and other promotional material, application for exemption,
request for no-action letter, and any amendment to any of the above, that
relates to the Contracts or the Account, contemporaneously with the filing of
the document with the Commission, the NASD, or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase Asales literature or
other promotional materials that includes, but is not limited to,
advertisements, newspaper, magazine, or other periodical, radio, television,
telephone or tape recording, videotape display, signs or billboards, motion
pictures, or other public media, sales literature (i.e., any written
communication distributed or made generally available to customers or the
public, including brochures, circulars research reports, market letters, form
letters, shareholders newsletters, seminar texts, reprints or excerpts of any
other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information shareholder reports, and
proxy materials.
4.8. At the request of any party to this Agreement, each other party
will make available to the other party's independent auditors and/or
representative of the appropriate regulatory agencies, all records, data and
access to operating procedures that may be reasonably requested.
ARTICLE V. Fees and Expenses
5.1. The Investment Company and the Adviser shall pay no fee or other
compensation to the Insurance Companies under this Agreement, except that if the
Investment Company or any Fund adopts and implements a plan pursuant to Rule
12b-1 to finance distribution expenses, the Adviser or the Investment Company
may make payments to the Insurance Companies in amounts consistent with that
12b-1 plan, subject to review by the trustees of the Investment Company. Nothing
in this Agreement precludes any payment pursuant to other agreements to or by
any party to this Agreement.
<PAGE>
5.2. All expenses incident to performance by the Investment Company
under this Agreement shall be paid by the Investment Company. The Investment
Company shall see to it that any offering of its shares is registered and that
all of its shares are authorized for issuance in accordance with the applicable
federal law and, if and to the extent deemed advisable by the Investment Company
or the Adviser, in accordance with applicable state laws prior to their sale.
The Investment Company shall bear the cost of registration and qualification of
the Investment Company's shares, preparation and filing of the Investment
Company's prospectus and registration statement, proxy materials and reports,
setting the prospectus in type, setting in type and printing the proxy materials
and reports to shareholders, the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or transfer
of the Investment Company's shares.
5.3. The Insurance Companies shall bear the expenses of registering the
Contracts, printing and distributing to Contract owners the Contract
prospectuses, and distributing to Contract owners the Investment Company's
prospectus, proxy materials and reports. The cost and expense of distributing
sales literature or other promotional material will be agreed to separately by
the parties hereto.
5.4. The Insurance Companies shall bear the responsibility and
correlative expense for administrative and support services for Contract owners.
The Adviser recognizes the Insurance Companies as the sole shareholders of
shares of the Investment Company issued under this Agreement.
ARTICLE VI. Diversification
6.1. The Investment Company will comply with Section 817(h) of the Code
and Treasury Regulation 1.817-5 relating to the diversification requirements for
variable annuity, endowment, modified endowment or life insurance contracts and
any amendments or other modifications to that Section or Regulation at all times
necessary to satisfy those requirements.
ARTICLE VII. Potential Conflicts
7.1. The trustees of the Investment Company will monitor the Investment
Company for the existence of any material irreconcilable conflict between the
interest of variable annuity contract owners and variable life insurance policy
owners of all separate accounts investing in the Investment Company. An
irreconcilable material conflict may arise for a variety of reasons, including:
(a) an action by any state insurance regulatory authority; (b) a change in
applicable federal or state insurance, tax, or securities laws or regulations,
or a public ruling, private letter ruling, no-action or interpretive letter, or
any similar action by insurance, tax, or securities regulatory authorities; (c)
an administrative or judicial decision in any relevant proceeding; (d) the
manner in which the investments of any Fund are being managed; (e) a difference
in voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by a Participating Insurance
Company to disregard the voting instructions of variable contract owners. The
trustees of the Investment Company shall promptly inform the Insurance Companies
if they determine that an irreconcilable material conflict exists and the
implications
<PAGE>
thereof. The trustees of the Investment Company shall have sole authority to
determine whether an irreconcilable material conflict exists and their
determination shall be binding upon the Insurance Companies.
7.2 The Insurance Companies and the Adviser each will report promptly any
potential or existing conflicts of which it is aware to the trustees of the
Investment Company. The Insurance Companies and the Adviser each will assist the
trustees of the Investment Company in carrying out their responsibilities under
this Article VII by providing the trustees of the Investment Company will all
information reasonably necessary for them to consider any issues raised. This
includes, but is not limited to, an obligation by the Insurance Companies to
inform the trustees of the Investment Company whenever Contract owner voting
instructions are to be disregarded. These responsibilities shall be carried out
by the Insurance Companies with a view only to the interests of the Contract
owners and by the Adviser with a view only to the interests of Contract owners.
7.3 If it is determined by a majority of the trustees of the Investment
Company, or a majority of the trustees who are not interested persons of the
Investment Company, any of its Funds, or the Adviser (the "Independent
Trustees"), that a material irreconcilable conflict exists, the Insurance
Companies and/or other Participating Insurance Companies that have executed
participation agreements shall, at their expense and to the extent reasonably
practicable (as determined by a majority of the Independent Trustees), take
whatever steps are necessary to remedy or eliminate the irreconcilable material
conflict, up to and including: (1) withdrawing the assets allocable to some or
all of the separate accounts from the Investment Company or any Fund and
reinvesting those assets in a different investment medium, including (but not
limited to) another Fund of the Investment Company, or submitting the question
whether such segregation should be implemented to a vote of all affected
variable contract owners and, as appropriate, segregating the assets of any
appropriate group (e.g., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
variable contract owners the option of making such a change; and (2)
establishing a new registered management investment company or managed separate
account and obtaining any necessary approvals or orders of the Commission in
connection therewith.
7.4 If a material irreconcilable conflict arises because of a decision by
the Insurance Companies to disregard Contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Insurance Companies may be required, at the Investment Company's election, to
withdraw the affected Account's investment in the Investment Company and
terminate this Agreement with respect to that Account; provided, however, that
-------- -------
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
Independent Trustees. Any such withdrawal and termination must take place within
six (6) months after the Investment Company gives written notice that this
provision is being implemented, and, until the end of that six month period, the
Investment Company shall continue to accept and implement orders by the
Insurance Companies for the purchase (and redemption) of shares of the
Investment
<PAGE>
Company.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Insurance Companies
conflicts with the majority of other state regulators, then the Insurance
Companies will withdraw the affected Account's investment in the Investment
Company and terminate this Agreement with respect to that Account within six
months after the trustees of the Investment Company inform the Insurance
Companies in writing that they have determined that the state insurance
regulator's decision has created an irreconcilable material conflict; provided,
--------
however, that such withdrawal and termination shall be limited to the extent
- -------
required by the foregoing material irreconcilable conflict as determined by a
majority of the Independent Trustees. Until the end of the foregoing six month
period, the Investment Company shall continue to accept and implement orders by
the Insurance companies for the purchase (and redemption) of shares of the
Investment Company.
7.6. For purposes of sections 7.3 through 7.6 of this Agreement, a majority
of the Independent Trustees shall determine whether any proposed action
adequately remedies any irreconcilable material conflict, but in no event will
the Investment Company be required to establish a new funding medium for the
Contracts. The Insurance Companies shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict. In the event that the trustees of the
Investment Company determine that any proposed action does not adequately remedy
any irreconcilable material conflict, then the Insurance Companies will withdraw
the Account's investment in the Investment Company and terminate this Agreement
within six (6) months after the trustees of the Investment Company inform the
Insurance Companies in writing of the foregoing determination, provided,
--------
however, that the withdrawal and termination shall be limited to the extent
- -------
required by material irreconcilable conflict, as determined by a majority of the
Independent Trustees.
ARTICLE VIII. Indemnification
8.1. Indemnification by the Insurance Companies
8.1(a). The Insurance Companies agree to indemnify and hold harmless the
Investment Company and the Adviser and each trustee, officer, employee or agent
of the Investment Company and the Adviser, and each person, if any, who controls
the Investment Company or the Adviser within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Insurance Companies) or
litigation (including legal and other expenses) to which the Indemnified Parties
may become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale, acquisition, or
redemption of the Investment Company's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue
<PAGE>
statements of any material fact contained in the registration statement
or prospectus for the Contracts or contained in the Contracts or sales
literature for the Contracts (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Insurance Companies by or on
behalf of the Investment Company for use in the registration statement
or prospectus for the Contracts or in the Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Contracts or shares of the Investment Company;
(ii) arise out of or as a result of statements or
representations (other than statements or representations contained in
the registration statement, prospectus or sales literature of the
Investment Company not supplied by the Insurance Companies, or persons
under its control) or wrongful conduct of the Insurance Companies or
persons under its control, with respect to the sale or distribution of
the Contracts or Investment Company shares;
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Investment Company or any
amendment thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading if such a
statement or omission was made in reliance upon information furnished in
writing to the Investment Company by or on behalf of the Insurance
Companies;
(iv) arise as a result of any failure by the Insurance Companies
to provide the services and furnish the materials under the terms of
this Agreement.
(v) arise out of or result from any material breach of any
representation, warranty or agreement made by the Insurance Companies in
this Agreement or arise out of or result from any other material breach
of this Agreement by the Insurance Companies; or
(vi) arise out of or result from negligence or wrongful conduct
in the Insurance Companies' administration or the Accounts or the
Contracts,
as limited by and in accordance with the provisions of Section 8.1(b) and 8.1(c)
hereof.
8.1(b). The Insurance Companies shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified Party that
may arise from that Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of that Indemnified Party's duties or by reason of
that Indemnified Party's reckless disregard of obligations or duties under this
Agreement or to the
<PAGE>
Investment Company, whichever is applicable.
8.1(c). The Insurance Companies shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless that Indemnified Party shall have notified the Insurance Companies
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon that Indemnified Party (or after the Indemnified Party shall have received
notice of such service on any designated agent). Notwithstanding the foregoing,
the failure of any Indemnified Party to give notice as provided herein shall not
relieve the Insurance Companies of their obligations hereunder except to the
extent that the Insurance Companies have been prejudiced by such failure to give
notice. In addition, any failure by the Indemnified Party to notify the
Insurance Companies of any such claim shall not relieve the Insurance Companies
from any liability which they may have to the Indemnified Party against whom the
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, the
Insurance Companies shall be entitled to participate, at their own expense, in
the defense of the action. The Insurance Companies also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action; provided, however, that if the Indemnified Party shall have reasonably
-------- -------
concluded that there may be defenses available to it which are different from or
additional to those available to the Insurance Companies, the Insurance
Companies shall not have the right to assume said defense, but shall pay the
costs and expenses thereof (except that in no event shall the Insurance
Companies be liable for the fees and expenses of more than one counsel for
Indemnified Parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances). After notice from the Insurance Companies to the
Indemnified Party of the Insurance Companies' election to assume the defense
thereof, and in the absence of such a reasonable conclusion that there may be
different or additional defenses available to the Indemnified Party, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Insurance Companies will not be liable to that party
under this Agreement for any legal or other expenses subsequently incurred by
the party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Insurance
Companies of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Investment Company's shares or the
Contracts or the operation of the Investment Company.
8.2. Indemnification by the Adviser
8.2(a). The Adviser agrees to indemnify and hold harmless the Insurance
Companies and each of their directors, officers, employees or agents, and each
person, if any, who controls the Insurance Companies within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.2) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Adviser)
or litigation (including legal and other expenses) to which the Indemnified
Parties may
<PAGE>
become subject under any statute, at common law or otherwise, insofar a such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale, acquisition, or redemption of the
Investment Company's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of the
Investment Company (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if the statement or omission or alleged statement or
omission was made in reliance upon and in conformity with information
furnished in writing to the Adviser or the Investment Company by or on
behalf of the Insurance Companies for use in the registration statement
or prospectus for the Investment Company or in sales literature (or any
amendment or supplement) or otherwise for use in connection with the
sale of the Contracts or Investment Company shares;
(ii) arise out of or as a result of statement or representations
(other than statements or representations contained in the registration
statement, prospectus or sales literature for the Contracts not supplied
by the Adviser or persons under its control) or wrongful conduct of the
Investment Company, the Adviser or persons under their control, with
respect to the sale or distribution of the Contracts or shares of the
Investment Company;
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Contracts, or any amendment
thereof or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary
to make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished in
writing to the Insurance Companies by or on behalf of the Investment
Company;
(iv) arise as a result of any failure by the Investment Company
to provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation, warranty or agreement made by the Adviser in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Adviser;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, liabilities or litigation incurred
or assessed against an
<PAGE>
Indemnified Party that may arise from the Indemnified Party's willful
misfeasance, has faith, or gross negligence in the performance of the
Indemnified Party's duties or by reason of the Indemnified Party's reckless
disregard of obligations and duties under this Agreement or to the Insurance
Companies or the Account, whichever is applicable.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless the
Indemnified Party shall have notified the Adviser in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon the Indemnified Party (or after
the Indemnified Party shall have received notice of such service on any
designated agent). Notwithstanding the foregoing, the failure of any Indemnified
Party to give notice as provided herein shall not relieve the Adviser of its
obligations hereunder except to the extent that the Adviser has been prejudiced
by such failure to give notice. In addition, any failure by the Indemnified
Party to notify the Adviser of any such claim shall not relieve the Adviser from
any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Parties, the Adviser
will be entitled to participate, at its own expense, in the defense thereof. The
Adviser also shall be entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action, provided, however, that if the
-------- -------
Indemnified Party shall have reasonably concluded that there may be defenses
available to it which are different from or additional to those available to the
Adviser, the Adviser shall not have the right to assume said defense, but shall
pay the costs and expenses thereof (except that in no event shall the Adviser be
liable for the fees and expenses of more than one counsel for Indemnified
Parties in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances). After notice from the Adviser to the Indemnified Party of the
Adviser's election to assume the defense thereof, and in the absence of such a
reasonable conclusion that there may be different or additional defenses
available to the Indemnified Party, the Indemnified Party shall bear the fees
and expenses of any additional counsel retained by it, and the Adviser will not
be liable to that party under this Agreement for any legal or other expenses
subsequently incurred by that party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.2(d). The Insurance Companies agree to notify the Adviser promptly of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3 Indemnification by the Investment Company
8.3(a). The Investment Company agrees to indemnify and hold harmless the
Insurance Companies, and each of their directors, officers, employees and
agents, and each person, if any, who controls the Insurance Companies within the
meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including legal and other expenses) to which the Indemnified
Parties may become subject under any statute, at common law or otherwise,
insofar as those
<PAGE>
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements result from the gross negligence, bad faith or willful misconduct
of any trustee(s) of the Investment Company, are related to the operations of
the Investment Company and:
(i) arise as a result of any failure by the Investment Company to
provide the services and furnish the materials under the terms of this
Agreement (including a failure to comply with the diversification
requirements specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation, warranty or agreement made by the Investment Company in
this Agreement or arise out of or result from any other material breach of
this Agreement by the Investment Company;
as limited by, and in accordance with the provisions of, Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Investment Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation incurred or assessed against an Indemnified Party that
may arise from the Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of the Indemnified Party's duties or by reason of
the Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to the Insurance Companies, the Investment Company, the Adviser or
the Account, whichever is applicable.
8.3(c). The Investment Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless the Indemnified Party shall have notified the Investment Company in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon the
Indemnified Party (or after the Indemnified Party shall have received notice of
such service on any designated agent). Notwithstanding the foregoing, the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Investment Company of its obligations hereunder except to the extent
that the Investment Company has been prejudiced by such failure to give notice.
In addition, any failure by the Indemnified Party to notify the Investment
Company of any such claim shall not relieve the Investment Company from any
liability which it may have to the Indemnified Party against whom such action is
brought otherwise than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the Investment Company
will be entitled to participate, at its own expense, in the defense thereof.
The Investment Company also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action; provided, however,
-------- -------
that if the Indemnified Party shall have reasonably concluded that there may be
defenses available to it which are different from or additional to those
available to the Investment Company, the Investment Company shall not have the
right to assume said defense, but shall pay the costs and expenses thereof
(except that in no event shall the Investment Company be liable for the fees and
expenses of more than one counsel for Indemnified Parties in connection with any
one action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances). After notice from
the Investment Company to the Indemnified
<PAGE>
Party of the Investment Company's election to assume the defense thereof, and in
the absence of such a reasonable conclusion that there may be different or
additional defenses available to the Indemnified Party, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Investment Company will not be liable to that party under this Agreement for
any legal or other expenses subsequently incurred by that party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.3(d). The Insurance Companies and the Adviser agree promptly to notify the
Investment Company of the commencement of any litigation or proceedings against
it or any of its respective officers or directors in connection with this
Agreement, the issuance or sale of the Contracts, the operation of the Account,
or the sale or acquisition of shares of the Investment Company.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and provisions hereof interpreted
under and in accordance with the laws of State of Connecticut.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934,
and 1940 Acts, and the rules and regulations and rulings thereunder, including
any exemptions from those statutes, rules and regulations the Commission may
grant and the terms hereof shall be interpreted and construed in accordance
therewith.
ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon ninety (90) days prior written
notice to the other parties; provided, however, such notice shall not be
-------- -------
given earlier than ninety (90) days prior to the end of the initial two year
term of this Agreement; or
(b) at the option of the Insurance Companies to the extent that
shares of Fund(s) are not reasonably available to meet the requirements of
the Contracts as determined by the Insurance Companies, provided, however,
-------- -------
that such a termination shall apply only to the Fund(s) not reasonably
available and the Investment Company shall have forty-five (45) days from
initial notification by the Insurance Companies of the deficiency to correct
such deficiency. Thereafter, prompt written notice of the election to
terminate for such cause shall be furnished by the Insurance Companies to
the Investment Company and the Adviser; or
(c) at the option of the Investment Company or the Adviser, in the
event that formal administrative proceedings are instituted against the
Insurance Companies by the NASD, the Commission, an Insurance commissioner
or any other regulatory body regarding the Insurance Companies' duties under
this Agreement or related to the sale of the Contracts, the operation of any
Account or the purchase of the Investment
<PAGE>
Company's shares, provided, however, that the Investment Company determines in
its sole judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability of the
Insurance Companies to perform their obligations under this Agreement; or
(d) at the option of the Insurance Companies in the event that formal
administrative proceedings are instituted against the Investment Company or the
Adviser by the NASD, the Commission, or any state securities or insurance
department or any other regulatory body, provided, however, that the Insurance
-------- -------
Companies determine in their sole judgement exercised in good faith, that any
such administrative proceedings will have a material adverse effect upon the
ability of the Investment Company or the Adviser to perform its obligations
under this Agreement; or
(e) at the option of the Insurance Companies, in the event any of the
Investment Company's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or exemptions therefrom, or such law
precludes the use of those shares as the underlying investment media of the
Contracts issued by the Insurance Companies; or
(f) at the option of the Insurance Companies, if the Investment Company
ceases to qualify as a regulated investment company under Subchapter M of the
Code or under any successor or similar provision, or if the Insurance Companies
reasonably believe that the Investment Company may fail to so qualify; or
(g) at the option of the Investment Company if the Contracts are not
registered, issued or sold in accordance with applicable federal and/or state
law; or
(h) at the option of the Insurance Companies, if the Investment Company
fails to meet the diversification requirements specified in Article VI hereof;
or
(i) at the option of either the Investment Company or the Adviser, if (1)
the Investment Company or the Adviser, respectively, shall determine, in their
sole judgment reasonably exercised in good faith, that the Insurance Companies
have suffered a material adverse change in its business or financial condition
or is the subject of material adverse publicity and that material adverse change
or material adverse publicity will have a material adverse impact upon the
business and operations of either the Investment Company or the Adviser, (2) the
Investment Company or the Adviser shall notify the Insurance Companies in
writing of that determination and its intent to terminate this Agreement, and
(3) after considering the actions taken by the Insurance Companies and any other
changes in circumstances since the giving of such a notice, the determination of
the Investment Company or the Adviser shall continue to apply on the sixtieth
(60th) day following the giving of the notice, which sixtieth day shall be the
effective date of termination; or
(j) at the option of the Insurance Companies, if (1) the Insurance
Companies shall
<PAGE>
determine, in their sole judgment reasonably exercise in good faith,
that either the Investment Company or the Adviser has suffered a
material adverse change in its business or financial condition or is the
subject to material adverse publicity and that material adverse change
or material adverse publicity will have a material adverse impact upon
the business and operations of the Insurance Companies, (2) the
Insurance Companies shall notify the Investment Company and the adviser
in writing of the determination and their intent to terminate the
Agreement, and (3) after considering the actions taken by the Investment
Company and/or the Adviser and any other changes in circumstances since
the giving of such a notice, the determination shall continue to apply
on the sixtieth (60th) day following the giving of the notice, which
sixtieth day shall be the effective date of termination; or
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. No termination of this Agreement shall be effective unless and
until the party terminating this Agreement gives prior written notice to all
other parties to this Agreement of its intent to terminate, which notice shall
set forth the basis for the termination. Furthermore,
(a) in the event that any termination is based upon the
provisions of Article VII, or the provision of Section 10.1(a), 10.1(i),
or 10.1(j) of this Agreement, the prior written notice shall be given in
advance of the effective date of termination as required by those
provisions; and
(b) in the event that any termination is based upon the
provisions of Section 10.1(c), 10.1(d), 10.1(e), 10.1(f) or 10.1(h) of
this Agreement, the prior written notice shall be given at least ninety
(90) days before the effective date of termination.
10.4. Notwithstanding any termination of this Agreement, subject to
Section 1.2 of this Agreement and for so long as the Investment Company
continues to exist, the Investment Company and the Adviser shall at the option
of the Insurance Companies, continue to make available additional shares of the
Investment Company pursuant to the terms and conditions of this Agreement for a
period of up to one year, for all Contracts in effect on the effective date of
termination of this Agreement ("Existing Contracts"). Specifically, without
limitation, the owners of the Existing Contracts shall be permitted to
reallocate investments in Investment Company, redeem investments in the
Investment Company and/or invest in the Investment Company upon the making of
additional purchase payments under the Existing Contracts. The parties agree
that this Section 10.4 shall not apply to any terminations under Article VII and
the effect of Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The Insurance Companies shall not redeem Investment Company shares
attributable to the Contracts (as opposed to Investment Company shares
attributable to the Insurance Companies' assets held in the Account) except (i)
as necessary to implement Contract owner initiated transactions, or (ii) as
required by state and/or federal laws or regulations or
<PAGE>
judicial or other legal precedent of general application (a "Legally Required
Redemption"). Upon request, the Insurance Companies will promptly furnish to the
Investment Company and the Advisor the opinion of counsel for the Insurance
Companies (which counsel shall be reasonably satisfactory to the Investment
Company and the Adviser) to the effect that any redemption pursuant to clause
(ii) above is a Legally Required Redemption. Furthermore, the Insurance
Companies shall not prevent new Contract owners from allocating payments to a
Fund that formerly was available under the Contracts without first giving the
Investment Company the Adviser 90 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of that party set forth below or at such
other address as the other party may from time to time specify in writing.
If to the Investment Company: Pegasus Variable Funds
c/o First Chicago NBD
Investment Management Company
Three First National Plaza
70 West Madison
Mail Suite 0643
Chicago, Illinois 60670-0643
Attn: Marco Hanig
If to the Insurance Companies: Hartford Life Insurance Company
200 Hopmeadow Street
Simsbury, Connecticut 06089
Attn: General Counsel
Hartford Life and Annuity Insurance Company
200 hopmeadow Street
Simsbury, Connecticut 06089
Attn: General Counsel
If to the Adviser: First Chicago NBD Investment Management Company
Three First National Plaza
70 West Madison
Mail Suite 0643
Chicago, Illinois 60670-0643
Attn: David Kling
ARTICLE XII. Miscellaneous
12.1 Subject to the requirements of legal process and regulatory authority,
each party hereto shall treat as confidential the names and addresses of the
owners of the Contracts and all
<PAGE>
information reasonably identified as confidential in writing by any other party
hereto and, except as permitted by this Agreement, shall not disclose,
disseminate or utilize such names and addresses and other confidential
information without the express written consent of the affected party unless and
until that information may come into the public domain.
12.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.3. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.4. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.5. Each party hereto shall cooperate with each party and all appropriate
governmental authorities (including without limitation the Commission, the NASD
and state insurance regulators) and shall permit those authorities reasonable
access to its books and records in connection with any lawful investigation or
inquiry relating to this Agreement or the transactions contemplated hereby.
12.6. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.7. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns; provided that no party may
-------- ----
assign this Agreement without the prior written consent of the others.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
as of the date specified above.
Insurance Companies:
HARTFORD LIFE INSURANCE COMPANY
By: /s/ John P. Ginnetti
---------------------------
Name: John P. Ginnetti
-------------------------
Title: Executive Vice President
------------------------
HARTFORD LIFE AND ANNUITY INSURANCE COMPANY
<PAGE>
By: /s/ John P. Ginnetti
---------------------------
Name: John P. Ginnetti
-------------------------
Title: Executive Vice President
------------------------
Investment Company:
PEGASUS VARIABLE FUNDS
By: /s/ D' Ray Moore
----------------------------
Name: D' Ray Moore
--------------------------
Title: Treasurer
------------------------
Investment Adviser:
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
By: /s/ David R. Kling
----------------------------
Name: David R. Kling
--------------------------
Title: Managing Director
------------------------
<PAGE>
Schedule A
[Segregated Asset Accounts]
Name Date Established
- ---- ----------------
ICMG Registered Variable Life Separate Account One October 9,1995
<PAGE>
Schedule B
[Registered Variable Contracts]
Name Form No.
- ---- --------
Pegasus Provider GVL95(P)
Endeavour I GVL95(P)
<PAGE>
Exhibit (9)(f)
ADDENDUM NO. 1 TO CO-ADMINISTRATION AGREEMENT
---------------------------------------------
This Addendum, dated as of the 30th day of April, 1997, is entered into
between PEGASUS VARIABLE ANNUITY FUND (the "Trust"), a Delaware business trust,
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY ("FCNIMCO"), a registered
investment adviser, and BISYS LIMITED PARTNERSHIP, d/b/a, BISYS FUND SERVICES
("BISYS") (each an "Administrator" and collectively, the Administrators").
WHEREAS, the Trust, FCNIMCO and BISYS have entered into a Co-Administration
Agreement dated October 7, 1996 ("Co-Administration Agreement"), pursuant to
which the Trust appointed FCNIMCO and BISYS to act as Administrators to the
Trust's Managed Assets Balanced Fund, Growth and Value Fund, Mid-Cap Opportunity
Fund, Growth Fund, and Money Market Fund (each a "Fund");
NOW THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Appointment. The Trust hereby appoints FCNIMCO and BISYS to act as
-----------
Administrators to the Trust for the Bond Fund and Intrinsic Value Fund for the
period and on the terms set forth in the Co-Administration Agreement. FCNIMCO
and BISYS hereby accept such appointment and agree to render the services set
forth in the Co-Administration Agreement for the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
------------
pursuant to the Co-Administration Agreement, the Trust will pay the
Administrators, and the Administrators will accept as full compensation
therefor, a fee, computed daily and payable monthly, at the annual rate of .15%
of each of the Bond and Intrinsic Value Funds' average daily net assets,
respectively.
3. Capitalized Terms. From and after the date hereof, the term "Fund" as
-----------------
used in the Co-Administration Agreement shall be deemed to include the Bond Fund
and Intrinsic Value Fund. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed to them in the Co-Administration
Agreement.
<PAGE>
4. Miscellaneous. Except to the extent supplemented hereby, the Co-
-------------
Administration Agreement shall remain unchanged and in full force and effect and
is hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of the
date and year first above written.
PEGASUS VARIABLE ANNUITY FUND
BY: /s/ Donald G. Sutherland
----------------------------------
Donald G. Sutherland
President and Trustee
FIRST CHICAGO NBD INVESTMENT MANAGEMENT COMPANY
BY: /s/ Marco Hanig
----------------------------------
Name: Marco Hanig
Title: Managing Director
BISYS FUND SERVICES LIMITED PARTNERSHIP
By: BISYS FUND SERVICES, INC.,
its general partner
BY: /s/ J. David Huber
-----------------------------
Name: J. David Huber
Title: President
<PAGE>
April 30, 1998
Pegasus Variable Funds
c/o NBD Bank
900 Tower Drive
Troy, MI 48098
Re: Pegasus Variable Funds - Shares of Beneficial Interest
------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Pegasus Variable Funds, a Delaware business
trust (the "Trust"), in connection with the registration of its shares of
beneficial interest, par value $0.10 per share, under the Securities Act of
1933, as amended.
The Trust is authorized to issue an unlimited number of shares of
beneficial interest. The Board of Trustees of the Trust has the power to divide
the beneficial interest in the Trust into such transferable shares of one or
more separate and distinct series or classes of a series as the Board shall from
time to time create and establish. Pursuant to such authority, the Board of
Trustees has previously divided an unlimited number of the Trust's shares into
five series of shares (the "Series") and has further divided each Series into
one or more classes of certain matters relating to the Shares. The Board of
Trustees has previously authorized the issuance of Shares to the public.
In giving the opinion stated below, we have reviewed: the Certificate of
Trust as filed in the Office of the Secretary of State of the State of Delaware
(the "State Office") on November 7, 1994 (the "Certificate"); a Certificate of
Amendment to the Certificate of Trust of the Trust as filed in the State Office
on October 4, 1996 and effective as of October 7, 1996; the Trust Instrument of
the Trust dated November 7, 1994, as amended by Amendment No. 1 dated October 3,
1996 and effective as of October 7, 1996 (as amended, the "Governing
Instrument"); the Bylaws of the Trust; resolutions adopted by the Board of
Trustees and Shareholders, and such other legal and factual matters as we have
deemed appropriate. We have assumed for the purpose of this opinion: (i) the due
organization or formation of each entity that is a signatory to any of the
documents reviewed by us; (ii) the due authorization, execution and delivery by,
or on behalf of, each of the parties thereto of the above-referenced
instruments, certificates and other documents, and of all documents contemplated
by the Governing Instrument, the By-laws and applicable resolutions of the
Trustees to be executed by investors desiring to become shareholders; (iii) the
payment of consideration for Shares, and the application of such consideration,
as provided in the Governing Instrument, and compliance with the other terms,
conditions and restrictions set forth in the Governing Instrument, the Trust's
prospectuses and statements of additional information and all applicable
resolutions of the Trustees of the Trust in connection with the issuance of
Shares; (iv) that appropriate notation of the names and addresses of, the number
of Shares held by, and the consideration paid by, shareholders will be
maintained in the appropriate registers and other books and records of the Trust
in connection with the issuance, redemption or transfer of Shares; (v) that no
event has occurred that would cause a termination or reorganization of the Trust
or any Series under Section 11.4 or 11.5 of the Governing Instrument; (vi) that
the activities of the Trust have been and will be conducted in accordance with
the terms of the Governing Instrument and the Delaware Business Trust Act, 13
Del. C. (SS) 3801 et seq. (the "Delaware Act") (including, without limitation,
that the Trust became a registered investment company under the 1940 Act within
the time period required under Section 3807 (b) of the Delaware Act); and (vii)
that each of the documents examined by us is in full force and effect and has
not been modified, supplemented or otherwise amended.
This opinion is based exclusively on the Delaware Act and the federal Law
of the United States of America.
Based upon the foregoing, it is our opinion that the Shares constitute or,
when issued in accordance with the requirements and procedures set forth in the
Governing Instrument and By-Laws, will constitute validly issued, fully paid and
non-assessable Shares of beneficial interest in the Trust, and that under the
Delaware Act the holders of Shares, in such capacity, will be entitled to the
same limitation of personal liability as that organized under the General
Corporation Law of the State of Delaware (except that we express no opinion as
to such holders who are also trustees of the Trust).
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to Post-Effective Amendment No. 9 to the
Trust's Registration Statement on Form N1-A.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
Exhibit (11) (a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated February 24, 1998 included in the Pegasus Variable Funds Report to
Shareholders for the year ended December 31, 1997 (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. 9 to the Pegasus Variable Funds' registration
statement under the Securities Act of 1933).
ARTHUR ANDERSEN LLP
Detroit, Michigan,
April 24, 1998
<PAGE>
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. 9 to the Registration Statement of
Pegasus Variable Funds 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, 1998
<PAGE>
Exhibit (16)(b)
Fund: Pegasus Variable Intrinsic Value Fund
Formula: YIELD = 2[ (a-b +1)/b/ -1]
----
cd
Where: a= income for the period as defined by SEC rules (30 days)
b= expenses accrued for the period
c= the average daily numbers of shares outstanding during the
period that were entitled to receive dividends
d= the maximum offering price per share on the last day of
the period
For the period ended December 31, 1997. These factors were:
a= $ 40,522
b= $ 10,966
c= $1,186,820
d= $ 12
Yield= 2.6%
<PAGE>
Total Return Calculations
Fund: Pegasus Variable Intrinsic Value Fund
Aggregate Total Return
Formula: T = (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a hypothetical
$1,000 investment made at the beginning of the period.
p = initial investment of $1,000
Since inception: 5/1/97 through 12/31/97
(1,169/1000)-1 = 16.96%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a hypothetical
$1,000 investment made at the beginning of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of years
Since inception: 5/1/97 through 12/31/97
(1,169/1000) (365/240)-1 = 26.39%
<PAGE>
Fund: Pegasus Variable Bond Fund
Formula: YIELD = 2[ (a-b +1)/b/ -1]
----
cd
Where: a= income for the period as defined by SEC rules (30 days)
b= expenses accrued for the period
c= the average daily numbers of shares outstanding during the
period that were entitled to receive dividends
d= the maximum offering price per share on the last day of
the period
For the period ended December 31, 1997. These factors were:
a= $ 241,705
b= $ 21,588
c= $ 3,234,085
d= $ 10
Yield= 7.95%
<PAGE>
Total Return Calculations
Fund: Pegasus Variable Bond Fund
Aggregate Total Return
Formula: T= (ERV/P)-1
Where: T = aggregate total return
erv = redeemable value at the end of the period of a hypothetical
$1,000 investment made at the beginning of the period.
p = initial investment of $1,000
Since inception: 12/1/97 through 12/31/97
(1083/1000)-1 = 8.25%
Average Annual Total Return
Formula: ERV 1/n
T = [(---------) - 1]
P
Where: T = average annual total return
erv = redeemable value at the end of the period of a hypothetical
$1,000 investment made at the beginning of the period.
p = initial investment of $1,000
n = period covered by the computation, expresses in terms of years
Since inception: 5/1/97 through 12/31/97
(1086/1000) (365/240)-1 = 14.74%
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