Exeter Fund, Inc.
Annual Report
December 31, 2005
Technology Series
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Management Discussion and Analysis (unaudited)
Dear Shareholders:
Building off of its strong relative performance in 2004, the Technology Series again outperformed its primary benchmark, the Standard & Poor’s (S&P) 500 Information Technology Index, in 2005. For the year, the Series posted a return of 2.20% as compared to the 0.99% return experienced by the S&P 500 Information Technology Index. The result marked the fifth consecutive year the Technology Series outperformed its benchmark.
Technology stocks started the year off weak, underperforming most other market sectors and declining over 10% before bottoming in April. This weak start was attributable to broader macroeconomic concerns in response to decelerating Gross Domestic Product (GDP) growth, rising energy prices, higher interest rates, and the growing U.S. trade deficit. By April, we felt the correction in the technology markets had become overdone and somewhat disconnected to underlying sector and company demand fundamentals, and our analysis showed technology stocks trading at attractive valuations relative to our expectations for future revenue and earnings growth. As a result, we began to invest more aggressively, and from that point, the sector climbed the “wall of worry”, managing to end the year in positive territory.
In our view, 2005 was a stock-picker’s market. While we were cognizant of the macroeconomic factors discussed above, our analysis demonstrated that the conditions for a severe economic slowdown were not present and technology stocks were at worst fairly valued. Moreover, this environment played to our strengths of focusing on 1) industry sectors enjoying secular (i.e., non-cyclical) tailwinds and 2) high quality companies that fit our investment strategies, operate with sound business models, and are building sustainable competitive advantages. As such, we used the environment as an opportunity to transition the Technology Series into our strongest ideas.
To that end, the Technology Series decreased its holdings in a variety of sectors, including Electronic Equipment & Instruments, Telecommunications Services, Internet Services, IT Services, Electronic Equipment & Instruments, and Media. In turn, we significantly increased holdings in the Communications Equipment, Semiconductor & Semiconductor Equipment, and Software sectors.
Communications Equipment started 2005 as the Series’ largest weighting, and during the year we increased our position such that this sector accounted for a larger position in the Series than in the benchmark. Data suggests that we are in the early stages of a secular migration from networks based on legacy systems to networks based on Internet Protocol, or IP. Due to increased competition and severe under-spending since the bubble years, telecommunications carriers are both increasing their capital spending and devoting a significantly larger share of their spending to IP. On the enterprise side, there is also increasing evidence of a networking upgrade cycle with the current equipment of enterprises now, on average, beyond its typical replacement age. Richer forms of content soaking up bandwidth, combined with compelling new technologies like Voice-Over-IP, wireless local area networks, mobile data access, and intelligent switches, are serving as catalysts to spend for both carriers and enterprises. Despite these favorable trends, the Communications Equipment sector registered only mixed performance in 2005 overall. As we enter 2006, the broader Communications Equipment sector remains an important area of focus for us given the positive trends noted above occurring in both the telecommunications and enterprise end markets.
During 2005, the Series increased its weighting in Semiconductor & Semiconductor Equipment stocks, but this industry continued to be a smaller portion of the portfolio than of the benchmark. While the cycles associated with each may not have reached their bottoms, supply/demand fundamentals for both chips and chip making equipment remained very healthy over the course of the year. Strong PC, cellular phone, and consumer electronics demand buoyed unit demand trends, and semiconductor prices remained surprisingly resilient as chip manufacturers showed excellent discipline in their capital spending plans. We saw a continued migration toward advanced technology nodes and a number of important manufacturing innovations, which kept semiconductor manufacturing equipment demand stable. Such solid fundamentals allowed the Semiconductor and, to a lesser extent, the Semiconductor Capital Equipment industries to be among the best performing technology sectors in 2005. The Series was able to capitalize on this performance as we opportunistically increased the Series’ positions in what we believe are some of the strongest chip and chip equipment companies operating in segments where growth appears to be more secular (i.e., less cyclical) in nature.
1
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Management Discussion and Analysis (unaudited)
The past year also saw the Series’ position in the Software sector more than double and become heavier than that of the benchmark. Our investments in this area focused on Business Intelligence (BI), Security, Telecom Billing, Software Testing, and Product Life-Cycle Management (PLM), areas of software that have meaningful secular growth drivers. This focused approach to investing in the software sector helped the Series’ performance relative to the benchmark in 2005, despite the Software sector actually underperforming the broader technology universe during the year. Security and BI, for example, remain at the top of enterprises’ spending lists as security threats become more pervasive, corporate data grows exponentially, and compliance regulation becomes more complex. We also invested in software companies enabling the secular shift towards Services Oriented Architectures (SOA), or the idea of breaking large software platforms into various parts so as to enable application customization and lower total cost of ownership. Evidence suggests SOA will be highly disruptive and holds the potential to create a new spending cycle given it will make software more modular and flexible for enterprise users.
Two important areas (in terms of their weighting within the S&P 500 Information Technology Index) in which the Series had relatively small holdings during 2005 were Computers & Peripherals and Internet Services. We have limited our holdings in Computers & Peripherals as we are witnessing heightened price competition in certain product segments, which in turn is pressuring profitability and returns on invested capital. Our relatively small position in this area helped the Series’ performance during 2005 as the sector underperformed the broader technology universe. By contrast, our relatively small holdings in the Internet Services sector hurt the Series relative to its benchmark as this was one of the strongest performing areas in technology during the year. Valuations coupled with highly optimistic expectations of the future kept us cautious on this sector in 2005.
Finally, we continue to complement our investments in the areas mentioned above with select investments in other traditional technology based industries as well as companies operating in non-traditional technology sectors that are benefiting from technological innovation. These stocks were picked in strict conformity with our strategies and processes. Key winners for the Series in 2005 operated in such diverse sectors as Office Retail, Financial Processing, and Recycling Technology. The Series will continue to look for beneficiaries of secular technology trends in both traditional technology sectors and non-traditional industries being transformed by a more or better use of technology.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
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Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | |
| | One | Five | Since |
| | Year | Year | Inception1 |
Exeter Fund, Inc. - Technology Series2 | 2.20% | 3.17% | -3.24% |
| | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 4.91% | 0.54% | -1.55% |
| | | | |
Standard & Poor's (S&P) 500 Information Technology Index3 | 0.99% | -6.68% | -14.99% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Technology Series from its current activation1 (8/8/00) to present (12/31/05) to the S&P 500 Total Return Index and the S&P 500 Information Technology Index.
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Data for line graph to follow:
| | Exeter Fund, Inc. | S&P 500 | S&P 500 Information |
| Date | Technology Series | Total Return Index | Technology Index |
| | | | |
| 8/8/00 | $10,000 | $10,000 | $10,000 |
| 12/31/00 | 7,160 | 8,945 | 5,972 |
| 12/31/01 | 5,910 | 7,883 | 4,552 |
| 12/31/02 | 3,730 | 6,142 | 2,728 |
| 12/31/03 | 7,440 | 7,902 | 4,017 |
| 12/31/04 | 8,190 | 8,761 | 4,120 |
| 12/31/05 | 8,370 | 9,191 | 4,161 |
1Performance numbers for the Series and Indices are calculated from August 8, 2000, the Series' current activation date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results. If a shareholder had made an original investment of $10,000 on the previous activation date of August 29, 1994 and held the investment through the liquidation date on April 16, 1997, the average annual return would have been 28.23% versus 22.62% for the S&P 500 Total Return Index for the same time period.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The S&P 500 Information Technology Index is a capitalization-weighted sub-index of the S&P 500 Total Return Index, including only stocks of companies involved in the business of technology related products and services. Both Indices' returns assume daily reinvestment of dividends and, unlike Series returns, do not reflect any fees or expenses.
3
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Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,084.20 | $6.30 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.16 | $6.11 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.20%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data. The Series’ total return would have been lower had certain expenses not been waived during the period.
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Portfolio Composition as of December 31, 2005 (unaudited)
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Sector Allocation*
| Consumer Discretionary | 6.9% |
| Health Care | 3.9% |
| Information Technology (Communications Equipment) | 21.1% |
| Information Technology (Computers & Peripherals) | 6.6% |
| Information Technology (Electronic Equipment & Instruments) | 2.5% |
| Information Technology (Semiconductors & Semiconductor Equipment) | 16.7% |
| Information Technology (Software) | 26.1% |
| Telecommunication Services | 8.3% |
| Cash, short-term investments, and liabilities, less other assets | 7.9% |
*As a percentage of net assets.
Top Ten Stock Holdings*
| Cisco Systems, Inc. | 5.0% |
| Singapore Telecommunications Ltd. (Singapore) | 4.4% |
| International Game Technology | 4.3% |
| Synopsys, Inc. | 4.2% |
| International Business Machines (IBM) Corp. | 4.1% |
| Symantec Corp. | 4.1% |
| Amdocs Ltd. (Guernsey) | 4.0% |
| Juniper Networks, Inc. | 4.0% |
| Vodafone Group plc - ADR (United Kingdom) | 4.0% |
| Packeteer, Inc. | 3.7% |
*As a percentage of total investments.
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Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 92.1% | | |
| | | |
Consumer Discretionary - 6.9% | | |
Hotels, Restaurants & Leisure - 4.3% | | |
| International Game Technology | 155,000 | $4,770,900 |
| | | |
Specialty Retail - 2.6% | | |
| RadioShack Corp. | 135,000 | 2,839,050 |
| | | |
Total Consumer Discretionary | | 7,609,950 |
| | | |
Health Care - 3.9% | | |
Health Care Providers & Services - 3.9% | | |
| AMICAS, Inc.* | 218,000 | 1,081,280 |
| Emdeon Corp.* | 378,000 | 3,197,880 |
Total Health Care | | 4,279,160 |
| | | |
Information Technology - 73.0% | | |
Communications Equipment - 21.1% | | |
| Cisco Systems, Inc.* | 323,150 | 5,532,328 |
| Inter-Tel, Inc. | 166,500 | 3,258,405 |
| Juniper Networks, Inc.* | 201,000 | 4,482,300 |
| Packeteer, Inc.* | 534,000 | 4,149,180 |
| Polycom, Inc.* | 208,000 | 3,182,400 |
| Research In Motion Ltd. (RIM)* (Canada) (Note 7) | 42,300 | 2,792,223 |
| | | 23,396,836 |
| | | |
Computers & Peripherals - 6.6% | | |
| EMC Corp.* | 206,000 | 2,805,720 |
| International Business Machines (IBM) Corp. | 55,000 | 4,521,000 |
| | | 7,326,720 |
| | | |
Electronic Equipment & Instruments - 2.5% | | |
| DTS, Inc.* | 187,000 | 2,767,600 |
| | | |
Semiconductors & Semiconductor Equipment - 16.7% | | |
| ATI Technologies, Inc.* (Canada) (Note 7) | 114,000 | 1,936,860 |
| Cabot Microelectronics Corp.* | 115,000 | 3,372,950 |
| Cymer, Inc.* | 100,000 | 3,551,000 |
| Exar Corp.* | 251,000 | 3,142,520 |
| Taiwan Semiconductor Manufacturing Co. Ltd. - ADR (Taiwan) (Note 7) | 327,599 | 3,246,506 |
| Zoran Corp.* | 197,000 | 3,193,370 |
| | | 18,443,206 |
The accompanying notes are an integral part of the financial statements.
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Investment Portfolio - December 31, 2005
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Information Technology (continued) | | |
Software - 26.1% | | |
| Agile Software Corp.* | 536,000 | $3,205,280 |
| Amdocs Ltd.* (Guernsey) (Note 7) | 163,000 | 4,482,500 |
| Catapult Communications Corp. | 187,000 | 2,765,730 |
| F-Secure Oyj* (Finland) (Note 7) | 267,000 | 644,737 |
| Mercury Interactive Corp.* | 117,000 | 3,251,430 |
| RADWARE Ltd.* (Israel) (Note 7) | 186,000 | 3,377,760 |
| SAP AG - ADR (Germany) (Note 7) | 45,000 | 2,028,150 |
| Symantec Corp.* | 258,000 | 4,515,000 |
| Synopsys, Inc.* | 230,000 | 4,613,800 |
| | | 28,884,387 |
| | | |
Total Information Technology | | 80,818,749 |
| | | |
Telecommunication Services - 8.3% | | |
Diversified Telecommunication Services - 4.3% | | |
| Singapore Telecommunications Ltd. (Singapore) (Note 7) | 3,080,000 | 4,836,823 |
| | | |
Wireless Telecommunication Services - 4.0% | | |
| Vodafone Group plc - ADR (United Kingdom) (Note 7) | 205,000 | 4,401,350 |
| | | |
Total Telecommunication Services | | 9,238,173 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $100,212,055) | | 101,946,032 |
| | | |
SHORT-TERM INVESTMENTS - 8.3% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 4,120,737 | 4,120,737 |
| Fannie Mae Discount Note, 1/11/2006 | $4,000,000 | 3,995,367 |
| Federal Home Loan Bank Discount Note, 1/11/2006 | 1,000,000 | 998,883 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $9,114,987) | | 9,114,987 |
| | | |
TOTAL INVESTMENTS - 100.4% | | |
| (Identified Cost $109,327,042) | | 111,061,019 |
| | | |
LIABILITIES, LESS OTHER ASSETS - (0.4%) | | (405,414) |
| | | |
NET ASSETS - 100% | | $110,655,605 |
*Non-income producing security
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
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Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $109,327,042) (Note 2) | $111,061,019 |
| Receivable for fund shares sold | 106,630 |
| Dividends receivable | 103,203 |
| Foreign tax reclaims receivable | 953 |
| | |
| TOTAL ASSETS | 111,271,805 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 109,863 |
| Accrued fund accounting and transfer agent fees (Note 3) | 12,904 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Payable for securities purchased | 438,113 |
| Audit fees payable | 26,921 |
| Payable for fund shares repurchased | 16,808 |
| Other payables and accrued expenses | 11,459 |
| | |
| TOTAL LIABILITIES | 616,200 |
| | |
TOTAL NET ASSETS | $110,655,605 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $132,130 |
| Additional paid-in-capital | 135,528,442 |
| Accumulated net realized loss on investments, foreign currency, and | |
| other assets and liabilities | (26,738,944) |
| Net unrealized appreciation on investments | 1,733,977 |
| | |
TOTAL NET ASSETS | $110,655,605 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($110,655,605/13,212,999 shares) | $8.37 |
The accompanying notes are an integral part of the financial statements.
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Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $50,323) | $547,919 |
| Interest | 103,427 |
| | |
| Total Investment Income | 651,346 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 902,166 |
| Fund accounting and transfer agent fees (Note 3) | 112,785 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 20,700 |
| Miscellaneous | 61,150 |
| | |
| Total Expenses | 1,109,789 |
| Less reduction of expenses (Note 3) | (25,636) |
| | |
| Net Expenses | 1,084,153 |
| | |
| NET INVESTMENT LOSS | (432,807) |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON | |
INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 17,452,898 |
| Foreign currency and other assets and liabilities | (1,184) |
| | 17,451,714 |
| | |
| Net change in unrealized appreciation on investments | (9,195,898) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | 8,255,816 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $7,823,009 |
The accompanying notes are an integral part of the financial statements.
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Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment loss | $(432,807) | $(177,506) |
| Net realized gain on investments | 17,451,714 | 4,562,135 |
| Net change in unrealized appreciation on investments | (9,195,898) | 4,698,784 |
| | | |
| Net increase from operations | 7,823,009 | 9,083,413 |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 39,511,796 | 34,205,184 |
| | | |
| Net increase in net assets | 47,334,805 | 43,288,597 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 63,320,800 | 20,032,203 |
| | | |
End of year (including undistributed net investment | | |
| loss of $0 and $0, respectively) | $110,655,605 | $63,320,800 |
The accompanying notes are an integral part of the financial statements.
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Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $8.19 | $7.44 | $3.73 | $5.91 | $7.16 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment loss | (0.03) | (0.04)1 | (0.03) | (0.03)1 | (0.03) |
| Net realized and unrealized gain (loss) on | | | | | |
| investments | 0.21 | 0.79 | 3.74 | (2.15) | (1.22) |
| | | | | | |
| Total from investment operations | 0.18 | 0.75 | 3.71 | (2.18) | (1.25) |
| | | | | | |
Net asset value - End of year | $8.37 | $8.19 | $7.44 | $3.73 | $5.91 |
| | | | | | |
Total return2 | 2.20% | 10.08% | 99.46% | (36.89%) | (17.46%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 1.20% | 1.20% | 1.20% | 1.20% | 1.20% |
| Net investment loss | (0.48%) | (0.52%) | (0.58%) | (0.71%) | (0.49%) |
| | | | | | |
| Portfolio turnover | 116% | 50% | 83% | 137% | 63% |
| | | | | | |
Net assets - End of year (000's omitted) | $110,656 | $63,321 | $20,032 | $10,178 | $53,071 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
| | 0.03% | 0.16% | 0.81% | 0.41% | 0.11% |
1Calculated based on average shares outstanding during the year.
2Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year.
The accompanying notes are an integral part of the financial statements.
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Notes to Financial Statements
1. ORGANIZATION
Technology Series (the "Series") is a no-load non-diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies in technology-based industries.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. On August 8, 2000, the Series resumed sales of shares to advisory clients and employees of the Advisor and its affiliates. The Series resumed offering shares directly to investors on May 18, 2004, as it had done previously from time to time.
The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Technology Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.20% of average daily net assets each year. Accordingly, the Advisor waived fees of $25,636 for the year ended December 31, 2005, which is reflected as a reduction of expenses on the Statement of Operations.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $131,815,099 and $99,114,151, respectively. There were no purchases or sales of United States Government securities.
14
<page>
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Technology Series were:
| | | |
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 6,199,719 | $45,218,344 | 5,819,094 | $40,253,707 |
| Repurchased | (716,929) | (5,706,548) | (782,440) | (6,048,523) |
| Total | 5,482,790 | $39,511,796 | 5,036,654 | $34,205,184 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve,
to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic
companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities
of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United
States Government.
8. TECHNOLOGY SECURITIES
The Series may focus its investments in certain related technology industries; hence, the Series may subject itself to a greater degree of risk than a series that is more
diversified.
9. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from
accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition
of net investment income or gains and losses, including net operating losses and losses deferred due to wash sales. The Series may periodically make reclassifications among
its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net
asset value. Any such reclassifications are not reflected in the financial highlights.
15
<page>
Notes to Financial Statements
9. FEDERAL INCOME TAX INFORMATION (continued)
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $109,327,059 |
| | |
| Unrealized appreciation | $6,139,074 |
| Unrealized depreciation | (4,405,114) |
| | |
| Net unrealized appreciation | $1,733,960 |
| Capital loss carryover | 26,738,927 |
The capital loss carryover, disclosed above, available to the extent allowed by tax law to offset future net capital gain, if any, will expire on December 31, 2010.
16
<page>
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Technology Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Technology Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
17
<page>
Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
18
<page>
Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
19
<page>
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
20
<page>
Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
21
<page>
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
22
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
Financial Services Series
<page>
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
On July 1, 2005, we launched our newest addition to the Exeter Fund family. The Financial Services Series experienced strong absolute performance over its first six months, outperforming the Standard & Poor’s (S&P) 500 Total Return Index by posting an overall return of 7.39% since its inception, while trailing the S&P 500 Financials Index over the period.
The Financials sector’s performance over this time period was aided by a couple of developments concerning the Federal Reserve (the “Fed”). The first was the naming of Ben Bernanke to succeed Alan Greenspan as Chairman of the Federal Reserve Board. This appointment was well received by the market, as it is generally believed that Mr. Bernanke will stay the course set out by Mr. Greenspan to ensure the continued economic health of the country. Secondly, after the 13th consecutive hike in interest rates, it has become widely anticipated by the financial community that the Fed’s monetary tightening policy is coming to an end.
The two main factors causing our underperformance relative to the S&P 500 Financials Index were our positions in the insurance industry and the capital markets industry. These two segments experienced strong returns in the second half of the year, and although we did participate to some extent, both our performance and weightings in these industries came in below that of the index.
We launched the Financial Services Series because we feel the Financials sector exhibits many characteristics that make it an attractive area for long term investment. Over the past two decades the Financials sector has provided sustained and stable earnings growth which has been stronger than the market as a whole. Strong secular (i.e., non-cyclical) trends are playing out in the banking, money management and financial technology industries. The recent concerns over a flat yield curve as a result of increases in short-term rates by the Fed provided us with an opportunity to buy solid companies at attractive valuations.
We have established a large position in the banking sector. A significant recovery in commercial and industrial lending has begun, although loan activity is still lower than historical levels. Another important trend in this sector is the increased focus on services for the high net worth marketplace. The confluence of banking, investments, insurance, tax and estate planning has been evolving for some time, and technology is aiding this confluence. Finally, the high level of bank consolidations is an important trend in this sector.
We have also established significant positions in the capital market industry. Corporations have record levels of cash on hand and equity multiples are at relatively inexpensive levels, leading to an increased level of merger and acquisition volume. Accordingly, we continue to add companies in this segment.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
1
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Total Returns |
| | Since Inception1 |
| | As of December 31, 2005 |
| | |
Exeter Fund, Inc. - Financial Services Series2 | 7.39% |
| | |
Standard & Poor's (S&P) 500 Total Return Index3 | 5.76% |
| | |
Standard & Poor's (S&P) 500 Financials Index3 | 9.01% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Financial Services Series from its inception1 (7/1/05) to present (12/31/05) to the S&P 500 Total Return Index and the S&P 500 Financials Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. - | S&P 500 | S&P 500 |
| Date | Financial Services Series | Total Return Index | Financials Index |
| | | | |
| 7/1/05 | $10,000 | $10,000 | $10,000 |
| 7/31/05 | 10,150 | 10,372 | 10,158 |
| 8/31/05 | 10,030 | 10,277 | 9,980 |
| 9/30/05 | 10,060 | 10,360 | 10,072 |
| 10/31/05 | 10,330 | 10,187 | 10,390 |
| 11/30/05 | 10,790 | 10,572 | 10,876 |
| 12/31/05 | 10,739 | 10,576 | 10,901 |
1Performance numbers for the Series and Indices are calculated from July 1, 2005, the Series' inception date. Periods less than one year are not annualized.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The S&P 500 Financials Index is a capitalization-weighted sub-index of the S&P 500 Total Return Index, including only stocks of companies involved in the business of financial related products and services. Both Indices' returns assume daily reinvestment of dividends and, unlike Series returns, do not reflect any fees or expenses.
2
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,073.90 | $6.27 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.16 | $6.11 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.20%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year. The Series’ total return would have been lower had certain expenses not been waived during the period.
3
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Financials (Capital Markets) | 22.6% |
| Financials (Commercial Banks) | 32.8% |
| Financials (Consumer Finance) | 1.9% |
| Financials (Diversified Financial Services) | 9.6% |
| Financials (Insurance) | 11.3% |
| Financials (Real Estate) | 0.8% |
| Financials (Thrifts & Mortgage Finance) | 2.4% |
| Industrials | 5.8% |
| Information Technology | 9.9% |
| Cash, short-term investments, and other assets, less liabilities | 2.9% |
*As a percentage of net assets.
Top Ten Stock Holdings*
| | |
| American International Group, Inc. | 5.0% |
| Citigroup, Inc. | 4.7% |
| PNC Financial Services Group, Inc. | 3.9% |
| The Bank of New York Co., Inc. | 3.9% |
| The Dun & Bradstreet Corp. | 3.8% |
| First Data Corp. | 3.8% |
| Wachovia Corp. | 3.7% |
| Bank of America Corp. | 3.6% |
| U.S. Bancorp | 3.5% |
| SEI Investments Co. | 3.4% |
*As a percentage of total investments.
4
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 97.1% | | |
| | | |
Financials - 81.4% | | |
Capital Markets - 22.6% | | |
| The Bank of New York Co., Inc. | 60,500 | $1,926,925 |
| The Charles Schwab Corp. | 71,000 | 1,041,570 |
| Franklin Resources, Inc. | 10,300 | 968,303 |
| Janus Capital Group, Inc. | 84,100 | 1,566,783 |
Mellon Financial Corp.1 | 14,800 | 506,900 |
| Merrill Lynch & Co., Inc. | 23,000 | 1,557,790 |
| Morgan Stanley | 8,600 | 487,964 |
| Piper Jaffray Companies, Inc.* | 13,300 | 537,320 |
| SEI Investments Co. | 46,000 | 1,702,000 |
| T. Rowe Price Group, Inc. | 12,700 | 914,781 |
| | | 11,210,336 |
| | | |
Commercial Banks - 32.8% | | |
| Bank of America Corp. | 38,700 | 1,786,005 |
| Barclays plc (United Kingdom) (Note 7) | 47,000 | 493,962 |
| Fifth Third Bancorp | 12,300 | 463,956 |
| KeyCorp. | 24,200 | 796,906 |
| M&T Bank Corp. | 7,600 | 828,780 |
| Marshall & Ilsley Corp. | 28,300 | 1,218,032 |
| National City Corp. | 14,400 | 483,408 |
| North Fork Bancorporation, Inc. | 42,200 | 1,154,592 |
| PNC Financial Services Group, Inc. | 31,700 | 1,960,011 |
| Royal Bank of Scotland Group plc (United Kingdom) (Note 7) | 25,400 | 766,771 |
| TCF Financial Corp. | 35,000 | 949,900 |
| U.S. Bancorp | 58,500 | 1,748,565 |
| Wachovia Corp. | 34,500 | 1,823,670 |
| Wells Fargo & Co. | 6,600 | 414,678 |
| Zions Bancorporation | 18,800 | 1,420,528 |
| | | 16,309,764 |
| | | |
Consumer Finance - 1.9% | | |
| Capital One Financial Corp. | 10,800 | 933,120 |
| | | |
Diversified Financial Services - 9.6% | | |
| Citigroup, Inc. | 47,700 | 2,314,881 |
| JPMorgan Chase & Co. | 37,200 | 1,476,468 |
| Moody's Corp. | 8,800 | 540,496 |
| Principal Financial Group, Inc. | 9,400 | 445,842 |
| | | 4,777,687 |
The accompanying notes are an integral part of the financial statements.
5
<page>
Investment Portfolio - December 31, 2005
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Financials (continued) | | |
Insurance - 11.3% | | |
| Ambac Financial Group, Inc. | 5,700 | $439,242 |
| American International Group, Inc. | 36,600 | 2,497,218 |
| Marsh & McLennan Companies, Inc. | 14,700 | 466,872 |
| MBIA, Inc. | 13,500 | 812,160 |
| Torchmark Corp. | 7,650 | 425,340 |
| Willis Group Holdings Ltd. (United Kingdom) (Note 7) | 25,800 | 953,052 |
| | | 5,593,884 |
| | | |
Real Estate - 0.8% | | |
| Friedman, Billings, Ramsey Group, Inc. - Class A | 39,600 | 392,040 |
| | | |
Thrifts & Mortgage Finance - 2.4% | | |
| BankAtlantic Bancorp, Inc. - Class A | 33,000 | 462,000 |
| Flagstar Bancorp, Inc. | 25,900 | 372,960 |
| New York Community Bancorp, Inc. | 21,800 | 360,136 |
| | | 1,195,096 |
| | | |
Total Financials | | 40,411,927 |
| | | |
Industrials - 5.8% | | |
Commercial Services & Supplies - 5.8% | | |
| ChoicePoint, Inc.* | 22,200 | 988,122 |
| The Dun & Bradstreet Corp.* | 28,500 | 1,908,360 |
Total Industrials | | 2,896,482 |
| | | |
Information Technology - 9.9% | | |
IT Services - 9.9% | | |
| Automatic Data Processing, Inc. | 10,500 | 481,845 |
The BISYS Group, Inc.*2 | 77,300 | 1,082,973 |
| CheckFree Corp.* | 13,300 | 610,470 |
| First Data Corp. | 43,300 | 1,862,333 |
| Fiserv, Inc.* | 20,500 | 887,035 |
Total Information Technology | | 4,924,656 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $45,290,533) | | 48,233,065 |
| | | |
SHORT-TERM INVESTMENTS - 2.8% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 402,166 | 402,166 |
| Fannie Mae Discount Note, 1/11/2006 | $1,000,000 | 998,842 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $1,401,008) | | 1,401,008 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | | (Note 2) |
| | | |
TOTAL INVESTMENTS - 99.9% | | |
| (Identified Cost $46,691,541) | | $49,634,073 |
| | | |
OTHER ASSETS, LESS LIABILITIES - 0.1% | | 39,961 |
| | | |
NET ASSETS - 100% | | $49,674,034 |
*Non-income producing security
1Mellon Financial Corp. is the parent company of Mellon Trust of New England N.A., the Fund's custodian.
2A subsidiary of the company serves as the Fund's sub-accounting services and sub-transfer agent. An employee of the company serves as an officer of the Fund (See Note 4 to Financial Statements).
The accompanying notes are an integral part of the financial statements.
7
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $46,691,541) (Note 2) | $49,634,073 |
| Receivable for fund shares sold | 76,866 |
| Dividends receivable | 59,467 |
| | |
| TOTAL ASSETS | 49,770,406 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 53,161 |
| Accrued fund accounting and transfer agent fees (Note 3) | 7,252 |
| Accrued Chief Compliance Officer service fees (Note 3) | 386 |
| Audit fees payable | 22,500 |
| Payable for fund shares repurchased | 1,618 |
| Other payables and accrued expenses | 11,455 |
| | |
| TOTAL LIABILITIES | 96,372 |
| | |
TOTAL NET ASSETS | $49,674,034 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $46,424 |
| Additional paid-in-capital | 46,443,866 |
| Undistributed net investment income | 36,565 |
| Accumulated net realized gain on investments | 204,647 |
| Net unrealized appreciation on investments | 2,942,532 |
| | |
TOTAL NET ASSETS | $49,674,034 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($49,674,034/4,642,396 shares) | $10.70 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Statement of Operations
For the Period July 1, 2005 (commencement of operations) to December 31, 2005
INVESTMENT INCOME: | |
| | |
| Dividends | $445,567 |
| Interest | 45,800 |
| | |
| Total Investment Income | 491,367 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 228,760 |
| Fund accounting and transfer agent fees (Note 3) | 30,590 |
| Directors' fees (Note 3) | 4,000 |
| Chief Compliance Officer service fees (Note 3) | 2,500 |
| Audit fees | 22,500 |
| Custodian fees | 5,800 |
| Miscellaneous | 16,068 |
| | |
| Total Expenses | 310,218 |
| Less reduction of expenses (Note 3) | (35,598) |
| | |
| Net Expenses | 274,620 |
| | |
| NET INVESTMENT INCOME | 216,747 |
| | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS: | |
| | |
| Net realized gain on investments | 204,647 |
| Net change in unrealized appreciation on investments | 2,942,532 |
| | |
| NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS | 3,147,179 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $3,363,926 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Statement of Changes in Net Assets
| | For the Period |
| | 7/1/051 to |
| | 12/31/05 |
| | |
INCREASE (DECREASE) IN NET ASSETS: | |
| | |
OPERATIONS: | |
| | |
| Net investment income | $216,747 |
| Net realized gain on investments | 204,647 |
| Net change in unrealized appreciation on investments | 2,942,532 |
| | |
| Net increase from operations | 3,363,926 |
| | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 9): | |
| | |
| From net investment income | (180,182) |
| | |
CAPITAL STOCK ISSUED AND REPURCHASED: | |
| | |
| Net increase from capital share transactions (Note 5) | 46,490,290 |
| | |
| Net increase in net assets | 49,674,034 |
| | |
NET ASSETS: | |
| | |
| Beginning of period | - |
| | |
End of period (including undistributed net investment | |
| income of $36,565) | $49,674,034 |
1Commencement of operations.
The accompanying notes are an integral part of the financial statements.
10
<page>
Financial Highlights
| | For the Period |
| | 7/1/051 to |
| | 12/31/05 |
| | |
Per share data (for a share outstanding throughout | |
the period): | |
| | |
Net asset value - Beginning of period | $10.00 |
| | |
| Income from investment operations: | |
| Net investment income | 0.05 |
| Net realized and unrealized gain on investments | 0.69 |
| | |
| Total from investment operations | 0.74 |
| | |
| Less distributions to shareholders: | |
| From net investment income | (0.04) |
| | |
Net asset value - End of period | $10.70 |
| | |
Total return2 | 7.39% |
| | |
Ratios (to average net assets)/Supplemental Data: | |
| Expenses* | 1.20%3 |
| Net investment income | 0.95%3 |
| | |
| Portfolio turnover | 6% |
| | |
Net assets - End of period (000's omitted) | $49,674 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased by 0.16%3.
1Commencement of operations.
2Represents aggregate total return for the period indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the period. Periods less than one year are not annualized.
3Annualized.
The accompanying notes are an integral part of the financial statements.
11
<page>
Notes to Financial Statements
1. ORGANIZATION
Financial Services Series (the "Series") is a no-load non-diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies in the financial services industry.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Financial Services Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
12
<page>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and
13
<page>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.20% of average daily net assets each year. Accordingly, the Advisor waived fees of $35,598 for the period July 1, 2005 (commencement of operations) to December 31, 2005, which is reflected as a reduction of expenses on the Statement of Operations.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the period July 1, 2005 (commencement of operations) to December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $47,318,508 and $2,232,869, respectively. There were no purchases or sales of United States Government securities.
An employee of The BISYS Group, Inc. serves as an officer of the Fund. Therefore, The BISYS Group, Inc. is considered an “affiliated company”, as defined in the 1940 Act. The following transactions were effected in shares of The BISYS Group, Inc. for the period July 1, 2005 (commencement of operations) to December 31, 2005:
Purchases | Sales | |
Shares | Cost | Shares | Cost | Realized Gain | Income |
| | | | | | |
| 77,300 | $1,103,487 | - | $- | $- | $- |
14
<page>
Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Financial Services Series were:
| | For the Period July 1, 2005 |
| | (commencement of |
| | operations) to 12/31/05 |
| | | |
| | Shares | Amount |
| | | |
| Sold | 4,696,385 | $47,040,740 |
| Reinvested | 16,137 | 174,282 |
| Repurchased | (70,126) | (724,732) |
| Total | 4,642,396 | $46,490,290 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks.
These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
8. FINANCIAL SERVICES SECURITIES
The Series may focus its investments in certain related financial services industries; hence, the Series may subject itself to a greater degree of risk than a series that is more diversified.
9. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
15
<page>
Notes to Financial Statements
9. FEDERAL INCOME TAX INFORMATION (continued)
The tax character of distributions paid for the period July 1, 2005 (commencement of operations) to December 31, 2005 were as follows:
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $46,691,541 |
| | |
| Unrealized appreciation | $3,409,350 |
| Unrealized depreciation | (466,818) |
| | |
| Net unrealized appreciation | $2,942,532 |
| Undistributed ordinary income | 241,212 |
FEDERAL INCOME TAX INFORMATION (unaudited)
For federal income tax purposes, the Series designates $175,815 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
For corporate shareholders, the percentage of investment income (dividend income plus short-term gains, if any) that qualifies for the dividends received deduction is 51.44%.
16
<page>
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Financial Services Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Financial Services Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for the period July 1, 2005 (commencement of operations) through December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2005 by correspondence with the custodian, provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
17
<page>
Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
18
<page>
Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
19
<page>
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
20
<page>
Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
21
<page>
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
22
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
Life Sciences Series
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Market conditions in 2005 remained challenging; however, the Life Sciences Series achieved a return that exceeded the return of the S&P 500 Health Care Index for the sixth year in a row. The Life Sciences Series’ return also exceeded the return of the S&P 500 Total Return Index for the fifth time in six years. Over the calendar year 2005, the Life Sciences Series generated a total return of 14.16%, versus the 6.46% return of the S&P 500 Health Care Index and the 4.91% return of the S&P 500 Total Return Index. Performance over the full market cycle (since 4/1/00) is even stronger, both on an absolute basis and as compared to the benchmarks.
The relative performance versus the S&P 500 Health Care Index in 2005 was due in large part to the Series’ sector weightings. The main contributors to our performance among sectors were our relatively low weighting in Pharmaceuticals relative to the benchmark and our relatively heavy weighting in Health Care Providers & Services, particularly the Health Care Information Technology (HCIT) sub-sector. We maintain our cautious outlook of the U.S. Pharmaceutical industry. The low weighting in this industry relative to the S&P 500 Health Care Index has benefited the Series as the difficulties within the Pharmaceutical industry continue to mount. Product withdrawals, generic competition and litigation continue to dominate the news headlines and have driven the stocks to historically low valuations.
The other sector that drove the Series’ outperformance relative to the S&P 500 Health Care Index was Health Care Providers & Services, especially our holdings in HCIT. We increased the Series’ already large position in HCIT, which had a stellar year in 2005, over the course of the year, and we continue to add to these holdings. Significant investment is being made to improve the efficiency and effectiveness of the health care system. We continue our diligent pursuit to find best-in-class technologies that improve the overall efficiency and reliability of health care information.
The Series’ holdings in Health Care Equipment & Supplies also contributed to its performance in 2005. In this sector, the Series’ weighting was similar to that of the benchmark, but the stocks owned by the Series outperformed those in the benchmark. We have focused these holdings in the fields of personalized medicine and orthopedics. Personalized medicine uses a diagnostic test as a predictive tool to measure a drug’s benefit for a specific patient. We identified orthopedics because aging baby boomers are seeking a more active lifestyle later in life and orthopedic equipment can aid in this pursuit. Short-term issues, which the Advisor believes are overblown, have reduced valuations to attractive levels.
Lastly, we maintained the Series’ weighting in the Biotechnology industry. The Biotechnology industry performed well in 2005, driven by new product approvals and expanded labels for many of the most popular biotechnology drugs. The valuations within the industry remain high, so investors must be selective when it comes to stock selection. We believe that the long-term fundamentals for the industry remain favorable, and we are watching several companies for addition to the portfolio when valuations become attractive.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
1
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | |
| | One | Five | Since |
| | Year | Year | Inception1 |
Exeter Fund, Inc. - Life Sciences Series2 | 14.16% | 6.89% | 18.36% |
| | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 4.91% | 0.54% | 0.05% |
| | | | |
Standard & Poor's (S&P) 500 Health Care Index3 | 6.46% | -2.30% | 1.50% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. Life Sciences Series from its current activation1 (11/5/99) to present (12/31/05) to the S&P 500 Total Return Index and the S&P 500 Health Care Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | S&P 500 | S&P 500 Health |
| Date | Life Sciences Series | Total Return Index | Care Index |
| | | | |
| 11/5/99 | $10,000 | $10,000 | $10,000 |
| 12/31/99 | 10,800 | 10,745 | 8,933 |
| 12/31/00 | 20,229 | 9,766 | 12,138 |
| 12/31/01 | 22,596 | 8,606 | 10,662 |
| 12/31/02 | 18,544 | 6,705 | 8,800 |
| 12/31/03 | 23,994 | 8,627 | 10,125 |
| 12/31/04 | 24,721 | 9,565 | 10,290 |
| 12/31/05 | 28,222 | 10,034 | 10,959 |
1Performance numbers for the Series and Indices are calculated from November 5, 1999, the Series' current activation date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The S&P 500 Health Care Index is a capitalization-weighted sub-index of the S&P 500 Total Return Index, including only stocks of companies involved in the business of health care related products and services. Both Indices' returns assume daily reinvestment of dividends and, unlike Series returns, do not reflect any fees or expenses.
2
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,109.00 | $6.22 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.31 | $5.96 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.17%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one year data.
3
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Health Care (Biotechnology) | 12.48% |
| Health Care (Health Care Equipment & Supplies) | 19.23% |
| Health Care (Health Care Providers & Services) | 38.79% |
| Health Care (Pharmaceuticals) | 15.14% |
| Information Technology | 1.35% |
| Materials | 2.54% |
| Cash, short-term investments, warrants, and other assets, less liabilities | 10.47% |
*As a percentage of net assets.
Top Ten Stock Holdings*
| | |
| Emdeon Corp. | 5.57% |
| Wright Medical Group, Inc. | 5.01% |
| Schering AG (Germany) | 4.20% |
| Valeant Pharmaceuticals International | 4.02% |
| AMICAS, Inc. | 3.79% |
| Millennium Pharmaceuticals, Inc. | 3.44% |
| Biomet, Inc. | 3.04% |
| Novartis AG - ADR (Switzerland) | 3.01% |
| AMN Healthcare Services, Inc. | 2.88% |
| Charles River Laboratories International, Inc. | 2.72% |
*As a percentage of total investments.
4
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 89.53% | | |
| | | |
Health Care - 85.64% | | |
Biotechnology - 12.48% | | |
| Affymetrix, Inc.* | 48,000 | $2,292,000 |
| Caliper Life Sciences, Inc.* | 814,050 | 4,786,614 |
| Charles River Laboratories International, Inc.* | 142,000 | 6,016,540 |
| Millennium Pharmaceuticals, Inc.* | 785,000 | 7,614,500 |
| Solexa, Inc.* | 96,300 | 969,741 |
| Xenogen Corp.* | 1,883,500 | 5,933,025 |
| | | 27,612,420 |
| | | |
Health Care Equipment & Supplies - 19.23% | | |
| Align Technology, Inc.* | 618,350 | 4,000,724 |
| Biomet, Inc. | 184,000 | 6,728,880 |
| DENTSPLY International, Inc. | 100,000 | 5,369,000 |
| Orthovita, Inc.* | 616,000 | 2,390,080 |
| PerkinElmer, Inc. | 209,000 | 4,924,040 |
| Thermo Electron Corp.* | 142,000 | 4,278,460 |
| Wright Medical Group, Inc.* | 544,000 | 11,097,600 |
| Zoll Medical Corp.* | 150,000 | 3,778,500 |
| | | 42,567,284 |
| | | |
Health Care Providers & Services - 38.79% | | |
| American Healthways, Inc.* | 46,000 | 2,081,500 |
| AMERIGROUP Corp.* | 297,000 | 5,779,620 |
| AmerisourceBergen Corp. | 94,000 | 3,891,600 |
| AMICAS, Inc.* | 1,689,000 | 8,377,440 |
| AMN Healthcare Services, Inc.* | 322,000 | 6,369,160 |
| Cardinal Health, Inc. | 67,000 | 4,606,250 |
| Cross Country Healthcare, Inc.* | 225,000 | 4,000,500 |
| Eclipsys Corp.* | 239,850 | 4,540,360 |
| Emdeon Corp.* | 1,457,000 | 12,326,220 |
| HCA, Inc. | 106,000 | 5,353,000 |
| McKesson Corp. | 89,000 | 4,591,510 |
| Medical Staffing Network Holdings, Inc.* | 207,000 | 1,111,590 |
| Omnicell, Inc.* | 437,000 | 5,222,150 |
| Patterson Companies, Inc.* | 155,000 | 5,177,000 |
| Tenet Healthcare Corp.* | 404,000 | 3,094,640 |
| Triad Hospitals, Inc.* | 134,000 | 5,256,820 |
| WebMD Health Corp. - Class A* | 140,000 | 4,067,000 |
| | | 85,846,360 |
| | | |
Pharmaceuticals - 15.14% | | |
| Novartis AG - ADR (Switzerland) (Note 8) | 127,000 | 6,664,960 |
| Pfizer, Inc. | 103,000 | 2,401,960 |
| Sanofi-Aventis - ADR (France) (Note 8) | 95,000 | 4,170,500 |
| Schering AG (Germany) (Note 8) | 139,000 | 9,304,400 |
The accompanying notes are an integral part of the financial statements.
5
<page>
Investment Portfolio - December 31, 2005
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Health Care (continued) | | |
Pharmaceuticals (continued) | | |
| Schering-Plough Corp. | 99,000 | $2,064,150 |
| Valeant Pharmaceuticals International | 492,000 | 8,895,360 |
| | | 33,501,330 |
Total Health Care | | 189,527,394 |
| | | |
Information Technology - 1.35% | | |
Electronic Equipment & Instruments - 1.35% | | |
| Mettler-Toledo International, Inc.* (Switzerland) (Note 8) | 54,000 | 2,980,800 |
| | | |
Materials - 2.54% | | |
Chemicals - 2.54% | | |
| Lonza Group AG (Switzerland) (Note 8) | 91,921 | 5,626,103 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $181,443,527) | | 198,134,297 |
| | | |
WARRANTS - 0.20% | | |
Xenogen Corp., 8/15/20101 | | |
| (Identified Cost $365,484) | 285,000 | 426,365 |
| | | |
SHORT-TERM INVESTMENTS - 10.27% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 1,276,798 | 1,276,798 |
| Fannie Mae Discount Note, 1/11/2006 | $11,000,000 | 10,987,411 |
| Federal Home Loan Bank Discount Note, 1/11/2006 | 5,000,000 | 4,994,361 |
U.S. Treasury Bill, 2/23/20062 | 5,500,000 | 5,471,941 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $22,729,947) | | 22,730,511 |
| | | |
TOTAL INVESTMENTS - 100.00% | | |
| (Identified Cost $204,538,958) | | 221,291,173 |
| | | |
OTHER ASSETS, LESS LIABILITIES - 0.00%** | | 10,842 |
| | | |
NET ASSETS - 100% | | $221,302,015 |
1Security has been valued at fair value (See Note 2 to Financial Statements).
2Security pledged as collateral for put options written.
*Non-income producing security
**Less than 0.01%
ADR - American Depository Receipt
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
Written Put Options Outstanding | | |
| | Shares Subject | Market |
Common Stock/Expiration Date/Exercise Price | to Put | Value |
| Boston Scientific Corp./February 2006/$22.5 | | |
| (premiums received $155,093) | 220,000 | $ 121,000 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $204,538,958) (Note 2) | $221,291,173 |
| Foreign currency, at value (identified cost $4) | 4 |
| Receivable for fund shares sold | 285,847 |
| Foreign tax reclaims receivable | 77,728 |
| Dividends receivable | 65,736 |
| | |
| TOTAL ASSETS | 221,720,488 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 201,617 |
| Accrued fund accounting and transfer agent fees (Note 3) | 21,181 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Written options outstanding, at value (premiums received $155,093) (Note 5) | 121,000 |
| Payable for fund shares repurchased | 37,072 |
| Audit fees payable | 27,821 |
| Other payables and accrued expenses | 9,650 |
| | |
| TOTAL LIABILITIES | 418,473 |
| | |
TOTAL NET ASSETS | $221,302,015 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $182,876 |
| Additional paid-in-capital | 197,083,677 |
| Accumulated net realized gain on investments, foreign currency, | |
| and other assets and liabilities | 7,253,885 |
| Net unrealized appreciation on investments, written options, foreign currency, | |
| and other assets and liabilities | 16,781,577 |
| | |
TOTAL NET ASSETS | $221,302,015 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($221,302,015/18,287,612 shares) | $12.10 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $93,509) | $1,328,197 |
| Interest | 341,426 |
| | |
| Total Investment Income | 1,669,623 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,964,680 |
| Fund accounting and transfer agent fees (Note 3) | 228,178 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 31,900 |
| Miscellaneous | 69,516 |
| | |
| Total Expenses | 2,307,262 |
| | |
| NET INVESTMENT LOSS | (637,639) |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 30,574,648 |
| Foreign currency and other assets and liabilities | (1,229) |
| | 30,573,419 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | (2,961,928) |
| Written options | 34,093 |
| Foreign currency and other assets and liabilities | (11,993) |
| | (2,939,828) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | 27,633,591 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $26,995,952 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment loss | $(637,639) | $(1,061,324) |
| Net realized gain on investments | 30,573,419 | 6,475,588 |
| Net change in unrealized appreciation on | | |
| investments | (2,939,828) | 129,524 |
| | | |
| Net increase from operations | 26,995,952 | 5,543,788 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS | | |
(Note 10): | | |
| | | |
| From net realized gain on investments | (23,934,912) | (6,350,085) |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 6) | 32,753,986 | 21,303,459 |
| | | |
| Net increase in net assets | 35,815,026 | 20,497,162 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 185,486,989 | 164,989,827 |
| | | |
End of year (including undistributed net investment | | |
| loss of $0 and $0, respectively) | $221,302,015 | $185,486,989 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding throughout | | | | | |
each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $11.89 | $11.96 | $9.35 | $12.52 | $12.69 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment loss | (0.04) | (0.07) | (0.02) | (0.02) | (0.04) |
| Net realized and unrealized gain (loss) on | | | | | |
| investments | 1.71 | 0.43 | 2.76 | (2.23) | 1.47 |
| | | | | | |
| Total from investment operations | 1.67 | 0.36 | 2.74 | (2.25) | 1.43 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | - | - | - | -2 | (0.05) |
| From net realized gain on investments | (1.46) | (0.43) | (0.13) | (0.92) | (1.55) |
| | | | | | |
| Total distributions to shareholders | (1.46) | (0.43) | (0.13) | (0.92) | (1.60) |
| | | | | | |
Net asset value - End of year | $12.10 | $11.89 | $11.96 | $9.35 | $12.52 |
| | | | | | |
Total return1 | 14.16% | 3.03% | 29.39% | (17.93%) | 11.70% |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 1.17% | 1.18% | 1.18% | 1.20% | 1.14% |
| Net investment loss | (0.32%) | (0.62%) | (0.19%) | (0.25%) | (0.36%) |
| | | | | | |
| Portfolio turnover | 110% | 109% | 86% | 76% | 120% |
| | | | | | |
Net assets - End of year (000's omitted) | $221,302 | $185,487 | $164,990 | $120,245 | $141,039 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during certain years.
2Less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
11
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Notes to Financial Statements
1. ORGANIZATION
Life Sciences Series (the "Series") is a no-load non-diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies in the life sciences industry.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. On November 5, 1999, the Series resumed sales of shares to advisory clients and employees of the Advisor and its affiliates. On May 1, 2001, the Series began offering shares directly to investors. Previously, the Series was available from time to time to advisory clients and employees of the Advisor.
The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Life Sciences Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
12
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Option Contracts
The Series may write (sell) or buy call or put options on securities and other financial instruments. When the Series writes a call, the Series gives the purchaser the right to buy the underlying security from the Series at the price specified in the option contract (the “exercise price”) at any time during the option period. When the Series writes a put option, the Series gives the purchaser the right to sell to the Series the underlying security at the exercise price at any time during the option period. The Series will only write options on a “covered basis.” This means that the Series will own the underlying security when the Series writes a call or the Series will put aside cash, U.S. Government securities, or other liquid assets in an amount not less than the exercise price at all times the put option is outstanding.
When the Series writes an option, an amount equal to the premium received is reflected as a liability and is subsequently marked-to-market to reflect the current market value of the option. The Series, as a writer of an option, has no control over whether the underlying security or financial instrument may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the security or financial instrument underlying the written option. There is a risk that the Series may not be able to enter into a closing transaction because of an illiquid market.
The Series may also purchase options in an attempt to hedge against fluctuations in the value of its portfolio and to protect against declines in the value of the securities. The premium paid by the Series for the purchase of an option is reflected as an investment and subsequently marked-to-market to reflect the current market value of the option. The risk associated with purchasing options is limited to the premium paid.
When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Series enters into a closing transaction), the Series realizes a gain or loss on the option to the extent of the premium received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received).
The measurement of the risks associated with option contracts is meaningful only when all related and offsetting transactions are considered.
13
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, until at least December 31, 2006, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.18% of average daily net assets each year. For the year ended
14
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Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $204,589,059 and $199,593,679, respectively. There were no purchases or sales of United States Government securities.
5. OPTIONS WRITTEN
A summary of obligations for written option contracts for the year ended December 31, 2005 is as follows:
| | Put Options | Call Options |
| | Number of Contracts | Premiums Received | Number of Contracts | Premiums Received |
| Balance at December 31, 2004 | - | $- | - | $- |
| Options entered into during 2005 | 2,200 | 155,093 | - | - |
| Balance at December 31, 2005 | 2,200 | $155,093 | - | $- |
15
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Notes to Financial Statements
6. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Life Sciences Series were:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 2,163,358 | $26,126,313 | 2,466,963 | $29,405,513 |
| Reinvested | 1,930,896 | 23,371,581 | 524,650 | 6,204,989 |
| Repurchased | (1,400,560) | (16,743,908) | (1,193,444) | (14,307,043) |
| | | | | |
| Total | 2,693,694 | $32,753,986 | 1,798,169 | $21,303,459 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
7. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks.
These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk
in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005 other than those referred to in Note 5.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic
companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of
foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United
States Government.
9. LIFE SCIENCES SECURITIES
The Series may focus its investments in certain related life sciences industries; hence, the Series may subject itself to a greater degree of risk than a series that is more diversified.
10. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including net operating losses and foreign currency gains and losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
16
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Notes to Financial Statements
10. FEDERAL INCOME TAX INFORMATION (continued)
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $8,210,403 | $1,420,127 |
| Long-term capital gains | 15,724,509 | 4,929,958 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $204,383,865 |
| | |
| Unrealized appreciation | $22,525,806 |
| Unrealized depreciation | (5,739,498) |
| | |
| Net unrealized appreciation | $16,786,308 |
| Undistributed ordinary income | 3,834,154 |
| Undistributed long-term capital gains | 3,419,731 |
FEDERAL INCOME TAX INFORMATION (unaudited)
For federal income tax purposes, the Series designates $815,166 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
17
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Life Sciences Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Life Sciences Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
18
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Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
19
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Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
20
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Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
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Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
22
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
23
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
Small Cap Series
<page>
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
The Small Cap Series generated a return of 14.11% during 2005, which outperformed both the Russell® 2000 Index and the Standard & Poor’s (S&P) 500 Total Return Index. More importantly, the Series significantly outperformed both indices over the current market cycle, which began on April 1, 2000. Because a market cycle includes periods of both rising and falling markets, measuring performance over a full cycle provides more perspective than over other time periods.
Energy remained a core investment theme in 2005 and was a key contributor to the Series’ performance yet again this year. The Series continued to have relatively large holdings in the Energy sector relative to the Russell® 2000 Index but did sell some holdings and take some profits during the year. Global oil demand remains robust, but we are particularly focused on the attractiveness of Energy suppliers due to the industry's continued underinvestment in exploration and production.
Our Hurdle Rate Strategy looks for strong companies within industries in which we expect to see favorable supply and demand dynamics, as low profitability forces capacity reductions, which in turn leads to pricing power for the remaining participants. We began building positions in the Airline sector using this strategy in 2004, and our investment proved successful in 2005 as our holdings performed well while the sector as a whole was down for the year.
The Series’ relatively large position in Consumer Staples also contributed to its strong performance in 2005. A number of individual securities in this sector performed well as the market began to appreciate the consistent earnings stream that many Consumer Staples companies offer. Although we reduced some position sizes in order to capitalize on gains, the Series continues to have a large position in the sector.
We increased our weighting in Information Technology stocks in 2005 as we acted to capitalize on select investment opportunities in Software and Communications Equipment. The current weighting of Information Technology in the Series is just slightly below that of the benchmark. The Series will continue to look for investments in the Information Technology sector that meet both our investment strategies and disciplined valuation approach.
Health Care was another sector where the Series increased its allocation relative to 2004. The Series’ weighting is now relatively in line with that of the index. During the year the Advisor added to new holdings in the Health Care Information Technology (HCIT) sector (a sub-sector of Health Care Providers & Services), which performed well. Investments in service providers also added to the solid performance of our health care holdings. We invested in the sector in order to benefit from the aging of the population.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
1
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Exeter Fund, Inc. - Small Cap Series2 | 14.11% | 13.76% | 9.35% | 10.73% |
| | | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 4.91% | 0.54% | 9.07% | 10.51% |
| | | | | |
Russell® 2000 Index3 | 4.55% | 8.22% | 9.26% | 10.97% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Small Cap Series from its current activation1 (4/30/92) to present (12/31/05) to the S&P 500 Total Return Index and the RussellR 2000 Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | S&P 500 | |
| Date | Small Cap Series | Total Return Index | Russell® 2000 Index |
| | | | |
| 4/30/92 | $10,000 | $10,000 | $10,000 |
| 12/92 | 11,610 | 10,725 | 11,415 |
| 12/93 | 13,317 | 11,799 | 13,574 |
| 12/94 | 14,383 | 11,959 | 13,327 |
| 12/95 | 16,497 | 16,437 | 17,117 |
| 12/96 | 18,156 | 20,206 | 19,940 |
| 12/97 | 20,388 | 26,944 | 24,399 |
| 12/98 | 17,603 | 34,666 | 23,778 |
| 12/99 | 19,341 | 41,958 | 28,833 |
| 12/00 | 21,165 | 38,139 | 27,963 |
| 12/01 | 25,831 | 33,610 | 28,658 |
| 12/02 | 21,402 | 26,185 | 22,788 |
| 12/03 | 29,495 | 33,691 | 33,559 |
| 12/04 | 35,338 | 37,353 | 39,707 |
| 12/31/05 | 40,322 | 39,185 | 41,514 |
1Performance numbers for the Series and Indices are calculated from April 30, 1992, the Series' current activation date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The Index returns assume daily reinvestment of dividends. The RussellR 2000 Index is an unmanaged index that consists of 2,000 small-capitalization stocks. Members of the Index represent only U.S. common stocks that are invested in the U.S. equity markets. The Index returns are based on a market capitalization-weighted average of relative price changes of the component stocks plus dividends whose reinvestments are compounded daily. Both Indices' returns, unlike Series returns, do not reflect any fees or expenses.
2
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,116.50 | $6.24 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.31 | $5.96 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.17%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
3
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Consumer Discretionary | 14.2% |
| Consumer Staples | 6.0% |
| Energy | 13.3% |
| Financials | 5.5% |
| Health Care | 12.2% |
| Industrials | 17.4% |
| Information Technology | 13.1% |
| Materials | 7.6% |
| Utilities | 7.5% |
| Cash, short-term investments, and liabilities, less other assets | 3.2% |
*As a percentage of net assets.
Market Capitalization
| | |
| Average | $1,232 Million |
| Median | 781 Million |
| Weighted Average | 1,846 Million |
Top Ten Stock Holdings*
| | |
| Pride International, Inc. | 4.8% |
| Allegheny Energy, Inc. | 4.4% |
| National-Oilwell Varco, Inc. | 3.6% |
| Helmerich & Payne, Inc. | 3.2% |
| Minerals Technologies, Inc. | 2.8% |
| The Hain Celestial Group, Inc. | 2.7% |
| AirTran Holdings, Inc. | 2.6% |
| Interface, Inc. - Class A | 2.6% |
| Sappi Ltd. - ADR (South Africa) | 2.4% |
| Aquila, Inc. | 2.1% |
*As a percentage of total investments.
4
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
COMMON STOCKS - 96.8% | | |
| | | |
Consumer Discretionary - 14.2.% | | |
Auto Components - 1.2% | | |
| Azure Dynamics Corp.* (Canada) (Note 8) | 1,938,000 | $1,784,254 |
| | | |
Diversified Consumer Services - 1.8% | | |
| Corinthian Colleges, Inc.* | 237,000 | 2,791,860 |
| | | |
Household Durables - 2.6% | | |
| Interface, Inc. - Class A* | 491,000 | 4,036,020 |
| | | |
Leisure Equipment & Products - 2.1% | | |
| K2, Inc.* | 48,000 | 485,280 |
| Marvel Entertainment, Inc.* | 171,600 | 2,810,808 |
| | | 3,296,088 |
| | | |
Media - 3.1% | | |
| Acme Communications, Inc.* | 396,000 | 1,405,800 |
| DreamWorks Animation SKG, Inc. - Class A* | 68,000 | 1,670,080 |
| GCap Media plc (United Kingdom) (Note 8) | 350,000 | 1,751,926 |
| | | 4,827,806 |
| | | |
Specialty Retail - 3.4% | | |
| Build-A-Bear Workshop, Inc.* | 87,000 | 2,578,680 |
| Douglas Holding AG (Germany) (Note 8) | 29,000 | 1,117,352 |
| Pier 1 Imports, Inc. | 176,000 | 1,536,480 |
| | | 5,232,512 |
Total Consumer Discretionary | | 21,968,540 |
| | | |
Consumer Staples - 6.0% | | |
Beverages - 0.4% | | |
| National Beverage Corp.* | 62,000 | 605,740 |
| | | |
Food & Staples Retailing - 1.5% | | |
| Pathmark Stores, Inc.* | 230,000 | 2,297,700 |
| | | |
Food Products - 4.1% | | |
| The Hain Celestial Group, Inc.* | 200,000 | 4,232,000 |
| J&J Snack Foods Corp. | 13,300 | 790,153 |
| Lancaster Colony Corp. | 12,200 | 452,010 |
| Tootsie Roll Industries, Inc. | 28,800 | 833,184 |
| | | 6,307,347 |
Total Consumer Staples | | 9,210,787 |
| | | |
Energy - 13.3% | | |
Energy Equipment & Services - 11.7% | | |
| Helmerich & Payne, Inc. | 80,000 | 4,952,800 |
National-Oilwell Varco, Inc.*1 | 89,000 | 5,580,300 |
Pride International, Inc.*1 | 246,000 | 7,564,500 |
| | | 18,097,600 |
The accompanying notes are an integral part of the financial statements.
5
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
Energy (continued) | | |
Oil, Gas & Consumable Fuels - 1.6% | | |
| Forest Oil Corp.* | 55,000 | $2,506,350 |
Total Energy | | 20,603,950 |
| | | |
Financials - 5.5% | | |
Commercial Banks - 3.5% | | |
| Chemical Financial Corp. | 16,485 | 523,564 |
| Citizens & Northern Corp. | 24,176 | 619,640 |
| Croghan Bancshares, Inc. | 11,500 | 427,225 |
| F&M Bank Corp. | 6,300 | 160,650 |
| First Community Bancorp | 9,600 | 521,952 |
| First Financial Corp. | 18,300 | 494,100 |
| Juniata Valley Financial Corp. | 3,600 | 86,400 |
| National Bankshares, Inc. | 13,000 | 611,000 |
| Northrim BanCorp, Inc. | 17,300 | 405,685 |
| Omega Financial Corp. | 18,400 | 512,808 |
| Potomac Bancshares, Inc. | 29,600 | 510,600 |
| Tower Bancorp, Inc. | 8,825 | 421,394 |
| | | 5,295,018 |
| | | |
Consumer Finance - 1.0% | | |
| MoneyGram International, Inc. | 60,000 | 1,564,800 |
| | | |
Real Estate - 0.5% | | |
| Equity Inns, Inc. | 56,000 | 758,800 |
| | | |
Thrifts & Mortgage Finance - 0.5% | | |
| Flagstar Bancorp, Inc. | 55,000 | 792,000 |
Total Financials | | 6,845,818 |
| | | |
Health Care - 12.2% | | |
Health Care Equipment & Supplies - 1.7% | | |
| Wright Medical Group, Inc.* | 125,000 | 2,550,000 |
| | | |
Health Care Providers & Services - 10.5% | | |
| AMICAS, Inc.* | 390,000 | 1,934,400 |
| AMN Healthcare Services, Inc.* | 162,000 | 3,204,360 |
| Cross Country Healthcare, Inc.* | 152,000 | 2,702,560 |
| Eclipsys Corp.* | 105,000 | 1,987,650 |
| Emdeon Corp.* | 303,800 | 2,570,148 |
| Omnicell, Inc.* | 175,000 | 2,091,250 |
| WebMD Health Corp. - Class A* | 60,000 | 1,743,000 |
| | | 16,233,368 |
Total Health Care | | 18,783,368 |
| | | |
Industrials - 17.4% | | |
Airlines - 6.4% | | |
| AirTran Holdings, Inc.* | 255,000 | 4,087,650 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
Industrials (continued) | | |
Airlines (continued) | | |
| AMR Corp.* | 103,000 | $2,289,690 |
| Continental Airlines, Inc. - Class B* | 88,500 | 1,885,050 |
| JetBlue Airways Corp.* | 106,500 | 1,637,970 |
| | | 9,900,360 |
| | | |
Commercial Services & Supplies - 0.8% | | |
| Herman Miller, Inc. | 47,000 | 1,324,930 |
| | | |
Construction & Engineering - 1.0% | | |
| Infrasource Services, Inc.* | 115,000 | 1,504,200 |
| | | |
Electrical Equipment - 3.7% | | |
| General Cable Corp.* | 117,000 | 2,304,900 |
| Global Power Equipment Group, Inc.* | 322,000 | 1,455,440 |
| Hydrogenics Corp.* (Canada) (Note 8) | 163,400 | 509,808 |
| Plug Power, Inc.* | 269,000 | 1,379,970 |
| | | 5,650,118 |
| | | |
Machinery - 5.5% | | |
| AGCO Corp.* | 138,000 | 2,286,660 |
| Gardner Denver, Inc.* | 54,000 | 2,662,200 |
| The Greenbrier Companies, Inc. | 57,000 | 1,618,800 |
| Wabtec Corp. | 71,225 | 1,915,952 |
| | | 8,483,612 |
Total Industrials | | 26,863,220 |
| | | |
Information Technology - 13.1% | | |
Communications Equipment - 2.6% | | |
| Inter-Tel, Inc. | 76,000 | 1,487,320 |
| Packeteer, Inc.* | 322,000 | 2,501,940 |
| | | 3,989,260 |
| | | |
Electronic Equipment & Instruments - 1.1% | | |
| DTS, Inc.* | 61,000 | 902,800 |
| Mechanical Technology, Inc.* | 274,000 | 767,200 |
| | | 1,670,000 |
| | | |
IT Services - 0.9% | | |
The BISYS Group, Inc.*2 | 99,000 | 1,386,990 |
| | | |
Semiconductors & Semiconductor Equipment - 5.0% | | |
| Cabot Microelectronics Corp.* | 95,000 | 2,786,350 |
| Cymer, Inc.* | 71,000 | 2,521,210 |
| Zoran Corp.* | 153,000 | 2,480,130 |
| | | 7,787,690 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Information Technology (continued) | | |
Software - 3.5% | | |
| Borland Software Corp.* | 173,134 | $1,130,565 |
| Kronos, Inc.* | 21,000 | 879,060 |
| RADWARE Ltd.* (Israel) (Note 8) | 107,000 | 1,943,120 |
| Take-Two Interactive Software, Inc.* | 79,000 | 1,398,300 |
| | | 5,351,045 |
Total Information Technology | | 20,184,985 |
| | | |
Materials - 7.6% | | |
Chemicals - 4.0% | | |
| Minerals Technologies, Inc. | 79,000 | 4,415,310 |
| Nalco Holding Co.* | 98,000 | 1,735,580 |
| | | 6,150,890 |
| | | |
Paper & Forest Products - 3.6% | | |
| Aracruz Celulose S.A. - ADR (Brazil) (Note 8) | 43,500 | 1,740,435 |
| Sappi Ltd. - ADR (South Africa) (Note 8) | 337,000 | 3,818,210 |
| | | 5,558,645 |
Total Materials | | 11,709,535 |
| | | |
Utilities - 7.5% | | |
Electric Utilities - 5.4% | | |
| Allegheny Energy, Inc.* | 219,000 | 6,931,350 |
| Westar Energy, Inc. | 67,400 | 1,449,100 |
| | | 8,380,450 |
| | | |
Multi-Utilities - 2.1% | | |
| Aquila, Inc.* | 902,100 | 3,247,560 |
Total Utilities | | 11,628,010 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $122,654,912) | | 147,798,213 |
| | | |
SHORT-TERM INVESTMENTS - 4.9% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 4,623,406 | 4,623,406 |
| U.S. Treasury Bill, 2/23/2006 | $3,000,000 | 2,984,115 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $7,607,815) | | 7,607,521 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | | (Note 2) |
| | | |
TOTAL INVESTMENTS - 101.7% | | |
| (Identified Cost $130,262,727) | | $155,405,734 |
| | | |
LIABILITIES, LESS OTHER ASSETS - (1.7%) | | (2,554,507) |
| | | |
NET ASSETS - 100% | | $152,851,227 |
*Non-income producing security
1Securities pledged as collateral for call options written.
2A subsidiary of the company serves as the Fund's sub-accounting services and sub-transfer agent. An employee of the company serves as an officer of the Fund (See Note 4 to Financial Statements).
ADR - American Depository Receipt
Written Call Options Outstanding | | |
| | Shares Subject | Market |
Common Stock/Expiration Date/Exercise Price | to Call | Value |
| | | |
| National-Oilwell Varco, Inc./February 2006/$60 | 40,000 | $196,000 |
| Pride International, Inc./January 2006/$25 | 130,000 | 702,000 |
| (premiums received $575,688) | | $898,000 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $130,262,727) (Note 2) | $156,970,534 |
| Foreign currency, at value (identified cost $1) | 1 |
| Receivable for fund shares sold | 180,265 |
| Dividends receivable | 125,173 |
| | |
| TOTAL ASSETS | 157,275,973 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 142,677 |
| Accrued fund accounting and transfer agent fees (Note 3) | 16,175 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Payable for securities purchased | 1,696,934 |
| Written options outstanding, at value (premiums received $575,688) (Note 5) | 898,000 |
| Payable for fund shares repurchased | 69,472 |
| Audit fees payable | 27,619 |
| Other payables and accrued expenses | 8,937 |
| �� | |
| TOTAL LIABILITIES | 2,859,946 |
| | |
TOTAL NET ASSETS | $154,416,027 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $113,055 |
| Additional paid-in-capital | 127,434,247 |
| Accumulated net realized gain on investments, foreign currency, | |
| and other assets and liabilities | 483,327 |
| Net unrealized appreciation on investments, written options, foreign currency, | |
| and other assets and liabilities | 26,385,398 |
| | |
TOTAL NET ASSETS | $154,416,027 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE - CLASS A ($154,416,027/11,305,543 shares) | $13.66 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $46,152) | $1,046,362 |
| Interest | 67,958 |
| | |
| Total Investment Income | 1,114,320 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,635,129 |
| Fund accounting and transfer agent fees (Note 3) | 194,435 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 31,401 |
| Miscellaneous | 68,186 |
| | |
| Total Expenses | 1,942,139 |
| | |
| NET INVESTMENT LOSS | (827,819) |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 29,196,483 |
| Foreign currency and other assets and liabilities | (3,080) |
| | 29,193,403 |
| | |
| Net change in unrealized appreciation (depreciation) on - | |
| Investments | (6,915,019) |
| Written options | (322,312) |
| Foreign currency and other assets and liabilities | (249) |
| | (7,237,580) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | 21,955,823 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $21,128,004 |
The accompanying notes are an integral part of the financial statements.
11
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment loss | $(827,819) | $(787,002) |
| Net realized gain on investments | 29,193,403 | 17,028,436 |
| Net change in unrealized appreciation (depreciation) on | | |
| investments | (7,237,580) | 11,923,212 |
| | | |
| Net increase from operations | 21,128,004 | 28,164,646 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 9): | | |
| | | |
| From net realized gain on investments | (33,255,433) | (7,406,958) |
| | | |
CAPITAL STOCK ISSUED AND REPURCHASED: | | |
| | | |
| Net increase (decrease) from capital share transactions | | |
| (Note 6) | (2,894,053) | 8,770,332 |
| | | |
| Net increase (decrease) in net assets | (15,021,482) | 29,528,020 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 169,437,509 | 139,909,489 |
| | | |
End of year (including undistributed net | | |
| investment loss of $0 and $0, respectively) | $154,416,027 | $169,437,509 |
The accompanying notes are an integral part of the financial statements.
12
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $15.01 | $13.12 | $9.52 | $11.49 | $10.57 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income (loss) | (0.07) | (0.07) | (0.04) | (0.03) | -2 |
| Net realized and unrealized gain (loss) on investments | 2.20 | 2.66 | 3.64 | (1.94) | 2.26 |
| | | | | | |
| Total from investment operations | 2.13 | 2.59 | 3.60 | (1.97) | 2.26 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | - | - | - | - | -2 |
| From net realized gain on investments | (3.48) | (0.70) | - | - | (1.34) |
| | | | | | |
| Total distributions to shareholders | (3.48) | (0.70) | - | - | (1.34) |
| | | | | | |
Net asset value - End of year | $13.66 | $15.01 | $13.12 | $9.52 | $11.49 |
| | | | | | |
Total return1 | 14.11% | 19.81% | 37.82% | (17.15%) | 22.05% |
| | | | | | |
Ratios (to average net assets)/Supplemental | | | | | |
Data: | | | | | |
| Expenses* | 1.19% | 1.22% | 1.22% | 1.24% | 1.19% |
| Net investment income (loss) | (0.51%) | (0.54%) | (0.39%) | (0.28%) | 0.01% |
| | | | | | |
| Portfolio turnover | 55% | 61% | 42% | 70% | 88% |
| | | | | | |
Net assets - End of year (000's omitted) | $154,416 | $169,438 | $139,909 | $95,772 | $108,525 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during certain years.
2Less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
13
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Notes to Financial Statements
1. ORGANIZATION
Small Cap Series (the "Series") is a no-load diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies with small market capitalizations.
The Series is authorized to issue five classes of shares (Class A, B, C, D and E). Currently, only Class A shares have been issued. Each class of shares is substantially the same, except that class-specific distribution and shareholder servicing expenses are borne by the specific class of shares to which they relate.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 37.5 million have been designated as Small Cap Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund's pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
14
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Option Contracts
The Series may write (sell) or buy call or put options on securities and other financial instruments. When the Series writes a call, the Series gives the purchaser the right to buy the underlying security from the Series at the price specified in the option contract (the “exercise price”) at any time during the option period. When the Series writes a put option, the Series gives the purchaser the right to sell to the Series the underlying security at the exercise price at any time during the option period. The Series will only write options on a “covered basis.” This means that the Series will own the underlying security when the Series writes a call or the Series will put aside cash, U.S. Government securities, or other liquid assets in an amount not less than the exercise price at all times the put option is outstanding.
When the Series writes an option, an amount equal to the premium received is reflected as a liability and is subsequently marked-to-market to reflect the current market value of the option. The Series, as a writer of an option, has no control over whether the underlying security or financial instrument may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the security or financial instrument underlying the written option. There is a risk that the Series may not be able to enter into a closing transaction because of an illiquid market.
The Series may also purchase options in an attempt to hedge against fluctuations in the value of its portfolio and to protect against declines in the value of the securities. The premium paid by the Series for the purchase of an option is reflected as an investment and subsequently marked-to-market to reflect the current market value of the option. The risk associated with purchasing options is limited to the premium paid.
When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Series enters into a closing transaction), the Series realizes a gain or loss on the option to the extent of the premium received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premium paid or received).
The measurement of the risks associated with option contracts is meaningful only when all related and offsetting transactions are considered.
15
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, until at least December 31, 2006, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.22% of average daily net assets each year. For the year ended December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
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Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $86,943,647 and $119,637,265, respectively. There were no purchases or sales of United States Government securities.
An employee of The BISYS Group, Inc. serves as an officer of the Fund. Therefore, The BISYS Group, Inc. is considered an “affiliated company”, as defined in the 1940 Act. There were no purchases, sales, or income transactions in shares of The BISYS Group, Inc. for the year ended December 31, 2005.
5. OPTIONS WRITTEN
A summary of obligations for written option contracts for the year ended December 31, 2005 is as follows:
| | Put Options | Call Options |
| | Number of Contracts | Premiums Received | Number of Contracts | Premiums Received |
| Balance at December 31, 2004 | - | $- | - | $- |
| Options entered into during 2005 | - | - | 1,700 | 575,688 |
| Balance at December 31, 2005 | - | $ | 1,700 | $575,688 |
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Notes to Financial Statements
6. CAPITAL STOCK TRANSACTIONS
Transactions in Class A shares of Small Cap Series were:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 1,301,583 | $19,749,527 | 1,498,249 | $20,578,866 |
| Reinvested | 2,297,202 | 32,506,715 | 491,034 | 7,247,666 |
| Repurchased | (3,581,248) | (55,150,295) | (1,365,637) | (19,056,200) |
| | | | | |
| Total | 17,537 | $(2,894,053) | 623,646 | $8,770,332 |
Approximately 87% of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
7. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005 other than those referred to in Note 5.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
9. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including losses deferred due to wash sales, net operating losses, the tax practice known as equalization and foreign currency gains and losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $6,173,310 | $- |
| Long-term capital gains | 27,272,123 | 7,406,958 |
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Notes to Financial Statements
9. FEDERAL INCOME TAX INFORMATION (continued)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed previously as capital gains for its taxable year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| | |
| Cost for federal income tax purposes | $129,985,536 |
| | |
| Unrealized appreciation | $34,271,353 |
| Unrealized depreciation | (8,184,355) |
| | |
| Net unrealized appreciation | $26,086,998 |
| Undistributed ordinary income | 95,233 |
| Undistributed long-term capital gains | 686,591 |
FEDERAL INCOME TAX INFORMATION (unaudited)
For federal income tax purposes, the Series designates $894,666 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
19
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Small Cap Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Small Cap Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
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Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
21
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Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
22
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Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
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Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
World Opportunities
<page>
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
The World Opportunities Series produced a strong absolute return for the twelve-month period ended December 31, 2005; this return exceeded that of the Morgan Stanley Capital International (“MSCI”) World Index but lagged that of the Series' other benchmark, the MSCI All Country World Index ex U.S. To put this performance in context, it is characteristic of a style which has earned a substantial portion of the gain in international benchmarks during the upward phase of this market cycle, after having provided a considerable amount of protection during the downward phase. The result of this highly-favorable up-market/down-market capture trade-off is that the Series substantially outperformed the MSCI All Country World Index ex U.S. during the current market cycle (which includes both rising and falling markets), which began on January 1, 2000.
Our team of analysts uses time-tested investment strategies to choose stocks for the portfolio. These strategies include the Profile Strategy, Hurdle Rate Strategy and the Bankable Deal Strategy. Our investment approach also considers valuation measures, and we avoid stocks whose valuations do not appear justified according to our analysis.
The Series had significantly larger positions in both Consumer Discretionary and Consumer Staples sectors than its benchmark. A majority of these stocks are owned under our Profile Strategy, with which we seek to identify companies that can grow their earnings at a faster rate than others in their industries. Generally, this is accomplished through some competitive advantage a company has that we believe is sustainable. Many of the companies we own under this strategy offer world-class products distributed globally. Although Consumer Discretionary stocks were not among the strongest performing in 2005, we believe the stocks we have identified offer attractive valuations relative to the more cyclical sectors of the global economy.
The Series also had a large position in the Industrials sector relative to its benchmark. These holdings include a range of companies, from an airplane manufacturer to a dredging company. Most of these companies were purchased under the Hurdle Rate Strategy. This strategy seeks to identify industries in which profits are depressed, capacity is leaving the industry, and overall expectations are low. As capacity leaves these industries, pricing power eventually returns to those participants that can withstand the hard times, which generally creates a more profitable environment. Stocks held under this strategy, especially those in the Energy Equipment & Services industry, performed very well last year.
The Bankable Deal Strategy seeks out companies selling at extremely discounted prices, such that we expect market forces will seek to realize the true value. The Series did not hold many stocks under this strategy. One of the stocks held under this strategy was a German conglomerate focused primarily on consumer staples products. A weak consumer demand story in Germany and a lack of clear corporate focus contributed to a depressed stock price at the time of our purchase. However, the stock performed well through stronger sales to emerging market countries and better product vision.
Japan, whose market has languished for most of the past fifteen years, contributed strong performance to the benchmark. Though we are becoming cautiously optimistic about Japan, the Series did not fully participate in this rally due to its relatively light holdings in the country. Japan’s market got a major boost from parliamentary elections, producing a more reform-minded government. Although we believe the country is moving in the right direction and there are areas, such as the financial sector, seeing real improvement, we believe valuations continue to be less attractive than in other parts of the world.
Although economic activity has been good in many regions, fears of inflation have caused several central banks to raise interest rates, which may hamper future growth. As always, we intend to remain vigilant to global economic conditions, while looking for solid companies trading at attractive prices.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
1
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | |
| | One | Five | Since |
| | Year | Year | Inception1 |
Exeter Fund, Inc. - World Opportunities Series2 | 11.33% | 10.19% | 11.24% |
| | | | |
Morgan Stanley Capital International (MSCI) World Index3 | 9.49% | 2.18% | 6.68% |
| | | | |
Morgan Stanley Capital International (MSCI) All Country World Index ex U.S.3 | 17.12% | 6.66% | 6.70% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - World Opportunities Series from its inception1 (9/6/96) to present (12/31/05) to the MSCI World Index and the MSCI All Country World Index ex U.S.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | MSCI | MSCI |
| Date | World Opportunities Series | World Index | All Country World Index ex U.S. |
| | | | |
| 9/6/1996 | $10,000 | $10,000 | $10,000 |
| 12/31/1996 | 10,482 | 10,865 | 10,163 |
| 12/31/1997 | 11,301 | 12,578 | 10,370 |
| 12/31/1998 | 10,806 | 15,639 | 11,870 |
| 12/31/1999 | 15,385 | 19,539 | 15,538 |
| 12/31/2000 | 16,609 | 16,964 | 13,194 |
| 12/31/2001 | 16,559 | 14,110 | 10,622 |
| 12/31/2002 | 14,774 | 10,880 | 9,064 |
| 12/31/2003 | 19,324 | 14,482 | 12,817 |
| 12/31/2004 | 24,237 | 16,614 | 15,554 |
| 12/31/2005 | 26,983 | 18,190 | 18,216 |
1Performance numbers for the Series are calculated from September 6, 1996, the Series' inception date. Prior to 2001, the MSCI World Index and the MSCI All Country World Index ex U.S. only published month-end numbers; therefore, performance numbers for the Indices are calculated from September 30, 1996.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance and consists of 23 developed market country indices. The Index returns assume daily reinvestment of net dividends (which do account for foreign dividend taxation). The MSCI All Country World Index ex U.S. is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets and consists of 48 developed and emerging market country indices outside the United States. The Index returns assume daily reinvestment of gross dividends (which do not account for foreign dividend taxation). Both Indices are denominated in U.S. Dollars and, unlike Series returns, do not reflect any fees or expenses.
2
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,108.00 | $6.32 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.21 | $6.06 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.19%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
3
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Country Allocation*
| | |
| Brazil | 6.4% |
| Canada | 3.6% |
| France | 13.5% |
| Germany | 5.5% |
| Japan | 2.3% |
| Netherlands | 5.6% |
| Singapore | 2.1% |
| South Africa | 2.3% |
| Switzerland | 14.0% |
| Taiwan | 2.3% |
| United Kingdom | 19.3% |
| Miscellaneous** | 12.5% |
| Cash, short-term investments, and other assets, less liabilities | 10.6% |
*As a percentage of net assets.
**Miscellaneous
Finland (2.0%)
Guernsey (2.0%)
Mexico (1.6%)
Norway (1.3%)
Spain (2.0%)
Sweden (2.0%)
United States (1.6%)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Consumer Discretionary | 16.3% |
| Consumer Staples | 14.8% |
| Energy | 11.1% |
| Financials | 3.6% |
| Health Care | 8.4% |
| Industrials | 14.2% |
| Information Technology | 8.2% |
| Materials | 8.1% |
| Telecommunication Services | 4.7% |
| Cash, short-term investments, and other assets, less liabilities | 10.6% |
*As a percentage of net assets.
4
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 89.4% | | |
| | | |
Consumer Discretionary - 16.3% | | |
Auto Components - 2.0% | | |
| Autoliv, Inc. (Sweden) | 93,175 | $4,232,008 |
| | | |
Hotels, Restaurants & Leisure - 3.4% | | |
| Club Mediterranee S.A.* (France) | 151,500 | 7,051,266.00 |
| | | |
Household Durables - 2.4% | | |
| Sony Corp. - ADR (Japan) | 119,000 | 4,855,200 |
| | | |
Media - 4.6% | | |
| GCap Media plc (United Kingdom) | 415,150 | 2,078,035 |
| News Corp. - Class A (United States) | 212,000 | 3,296,600 |
| Pearson plc (United Kingdom) | 355,000 | 4,198,130 |
| | | 9,572,765 |
| | | |
Specialty Retail - 3.9% | | |
| Douglas Holding AG (Germany) | 92,400 | 3,560,114 |
| Kingfisher plc (United Kingdom) | 1,096,000 | 4,472,719 |
| | | 8,032,833 |
Total Consumer Discretionary | | 33,744,072 |
| | | |
Consumer Staples - 14.8% | | |
Food & Staples Retailing - 3.2% | | |
| Carrefour S.A. (France) | 142,600 | 6,680,920 |
| | | |
Food Products - 6.9% | | |
| Cadbury Schweppes plc (United Kingdom) | 400,000 | 3,780,790 |
| Nestle S.A. (Switzerland) | 13,650 | 4,083,777 |
| Unilever plc - ADR (United Kingdom) | 158,249 | 6,348,950 |
| | | 14,213,517 |
| | | |
Household Products - 1.6% | | |
| Kimberly-Clark de Mexico S.A. de C.V. - ADR (Mexico) | 182,500 | 3,259,651 |
| | | |
Personal Products - 3.1% | | |
| Clarins S.A. (France) | 116,119 | 6,439,525 |
Total Consumer Staples | | 30,593,613 |
| | | |
Energy - 11.1% | | |
Energy Equipment & Services - 8.0% | | |
| Abbot Group plc (United Kingdom) | 1,425,550 | 6,265,103 |
| Compagnie Generale de Geophysique S.A. (CGG)* (France) | 86,800 | 7,680,188 |
| Smedvig ASA - Class A (Norway) | 89,250 | 2,606,941 |
| | | 16,552,232 |
The accompanying notes are an integral part of the financial statements.
5
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
Energy (continued) | | |
Oil, Gas & Consumable Fuels - 3.1% | | |
| Petroleo Brasileiro S.A. (Petrobras) - ADR (Brazil) | 98,000 | $6,308,260 |
Total Energy | | 22,860,492 |
| | | |
Financials - 3.6% | | |
Commercial Banks - 3.6% | | |
| Barclays plc (United Kingdom) | 409,750 | 4,306,407 |
| Royal Bank of Scotland Group plc (United Kingdom) | 106,875 | 3,226,325 |
Total Financials | | 7,532,732 |
| | | |
Health Care - 8.4% | | |
Pharmaceuticals - 8.4% | | |
| Novartis AG - ADR (Switzerland) | 184,000 | 9,656,320 |
| Schering AG (Germany) | 116,000 | 7,764,823 |
Total Health Care | | 17,421,143 |
| | | |
Industrials - 14.2% | | |
Aerospace & Defense - 2.3% | | |
| Empresa Brasileira de Aeronautica S.A. (Embraer) - ADR (Brazil) | 120,000 | 4,692,000 |
| | | |
Air Freight & Logistics - 3.5% | | |
| TNT N.V. (Netherlands) | 232,800 | 7,274,914 |
| | | |
Commercial Services & Supplies - 1.7% | | |
| Quebecor World, Inc. (Canada) | 261,000 | 3,546,990 |
| | | |
Construction & Engineering - 2.1% | | |
| Koninklijke Boskalis Westminster N.V. (Netherlands) | 65,252 | 4,344,675 |
| | | |
Electrical Equipment - 4.6% | | |
| ABB (Asea Brown Boveri) Ltd. - ADR* (Switzerland) | 553,325 | 5,378,319 |
| Gamesa Corporacion Tecnologica S.A. (Spain) | 279,925 | 4,095,445 |
| | | 9,473,764 |
Total Industrials | | 29,332,343 |
| | | |
Information Technology - 8.2% | | |
Communications Equipment - 3.9% | | |
| Nokia Oyj - ADR (Finland) | 223,000 | 4,080,900 |
| Research In Motion Ltd. (RIM)* (Canada) | 60,575 | 3,998,556 |
| | | 8,079,456 |
Semiconductors & Semiconductor Equipment - 2.3% | | |
| Taiwan Semiconductor Manufacturing Co. Ltd. - ADR (Taiwan) | 477,648 | 4,733,492 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Information Technology (continued) | | |
Software - 2.0% | | |
| Amdocs Ltd.* (Guernsey) | 153,000 | $4,207,500 |
Total Information Technology | | 17,020,448 |
| | | |
Materials - 8.1% | | |
Chemicals - 4.8% | | |
| Lonza Group AG (Switzerland) | 160,925 | 9,849,551 |
| | | |
Paper & Forest Products - 3.3% | | |
| Aracruz Celulose S.A. - ADR (Brazil) | 54,000 | 2,160,540 |
| Sappi Ltd. - ADR (South Africa) | 411,700 | 4,664,561 |
| | | 6,825,101 |
Total Materials | | 16,674,652 |
| | | |
Telecommunication Services - 4.7% | | |
Diversified Telecommunication Services - 2.2% | | |
| Singapore Telecommunications Ltd. (Singapore) | 2,798,000 | 4,393,971 |
| | | |
Wireless Telecommunication Services - 2.5% | | |
| Vodafone Group plc - ADR (United Kingdom) | 242,450 | 5,205,401 |
Total Telecommunication Services | | 9,599,372 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $153,264,992) | | 184,778,867 |
| | | |
SHORT-TERM INVESTMENTS - 9.2% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 5,018,725 | 5,018,725 |
| Fannie Mae Discount Note, 1/11/2006 | $11,000,000 | 10,987,692 |
| Federal Home Loan Bank Discount Note, 1/11/2006 | 3,000,000 | 2,996,650 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $19,003,067) | | 19,003,067 |
| | | |
TOTAL INVESTMENTS - 98.6% | | |
| (Identified Cost $172,268,059) | | 203,781,934 |
| | | |
OTHER ASSETS, LESS LIABILITIES - 1.4% | | 2,853,622 |
| | | |
NET ASSETS - 100% | | $206,635,556 |
*Non-income producing security
ADR - American Depository Receipt
The Series' portfolio holds, as a percentage of net assets, greater than 10% in the following countries: United Kingdom - 19.3%; Switzerland - 14.0%; France - 13.5%.
The accompanying notes are an integral part of the financial statements.
7
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $172,268,059) (Note 2) | $203,781,934 |
| Receivable for securities sold | 2,584,090 |
| Dividends receivable | 281,531 |
| Receivable for fund shares sold | 268,146 |
| Foreign tax reclaims receivable | 108,462 |
| | |
| TOTAL ASSETS | 207,024,163 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 186,711 |
| Accrued fund accounting and transfer agent fees (Note 3) | 21,176 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Payable for fund shares repurchased | 133,833 |
| Audit fees payable | 32,019 |
| Other payables and accrued expenses | 14,736 |
| | |
| TOTAL LIABILITIES | 388,607 |
| | |
TOTAL NET ASSETS | $206,635,556 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $244,197 |
| Additional paid-in-capital | 167,361,202 |
| Undistributed net investment income | 583,013 |
| Accumulated net realized gain on investments, foreign currency, | |
| and other assets and liabilities | 6,941,388 |
| Net unrealized appreciation on investments, foreign currency, | |
| and other assets and liabilities | 31,505,756 |
| | |
TOTAL NET ASSETS | $206,635,556 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE - CLASS A ($206,635,556/24,419,651 shares) | $8.46 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $337,919) | $3,396,998 |
| Interest | 313,175 |
| | |
| Total Investment Income | 3,710,173 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,720,127 |
| Fund accounting and transfer agent fees (Note 3) | 208,401 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 53,721 |
| Miscellaneous | 77,520 |
| | |
| Total Expenses | 2,072,757 |
| | |
| NET INVESTMENT INCOME | 1,637,416 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON | |
INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 20,248,283 |
| Foreign currency and other assets and liabilities | (30,904) |
| | 20,217,379 |
| | |
| Net change in unrealized appreciation on - | |
| Investments | (2,255,521) |
| Foreign currency and other assets and liabilities | (14,296) |
| | (2,269,817) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | 17,947,562 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $19,584,978 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $1,637,416 | $1,013,053 |
| Net realized gain on investments | 20,217,379 | 15,138,378 |
| Net change in unrealized appreciation on investments | (2,269,817) | 15,968,837 |
| | | |
| Net increase from operations | 19,584,978 | 32,120,268 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS | | |
(Note 8): | | |
| | | |
| From net investment income | (1,515,746) | (1,129,987) |
| From net realized gain on investments | (16,559,187) | (3,309,862) |
| | | |
| Total distributions to shareholders | (18,074,933) | (4,439,849) |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions | | |
| (Note 5) | 44,230,903 | 13,368,907 |
| | | |
| Net increase in net assets | 45,740,948 | 41,049,326 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 160,894,608 | 119,845,282 |
| | | |
End of year (including undistributed net investment | | |
| income of $583,013 and $492,247, respectively) | $206,635,556 | $160,894,608 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $8.33 | $6.84 | $5.28 | $5.98 | $6.18 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.07 | 0.05 | 0.06 | 0.06 | 0.06 |
| Net realized and unrealized gain (loss) on | | | | | |
| investments | 0.87 | 1.68 | 1.56 | (0.71) | (0.09) |
| | | | | | |
| Total from investment operations | 0.94 | 1.73 | 1.62 | (0.65) | (0.03) |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.07) | (0.06) | (0.06) | - | (0.17) |
| From net realized gain on investments | (0.74) | (0.18) | --2 | (0.05) | - |
| | | | | | |
| Total distributions to shareholders | (0.81) | (0.24) | (0.06) | (0.05) | (0.17) |
| | | | | | |
Net asset value - End of year | $8.46 | $8.33 | $6.84 | $5.28 | $5.98 |
| | | | | | |
Total return1 | 11.33% | 25.42% | 30.80% | (10.78%) | (0.30%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 1.21% | 1.26% | 1.27%* | 1.30% | 1.21% |
| Net investment income | 0.95% | 0.75% | 1.25% | 1.10% | 0.95% |
| | | | | | |
| Portfolio turnover | 46% | 42% | 31% | 41% | 42% |
| | | | | | |
Net assets - End of year (000's omitted) | $206,636 | $160,895 | $119,845 | $78,772 | $83,196 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) for the year ended 12/31/03 would have been increased by 0.01%.
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year ended 12/31/03.
2Less than $0.01 per share.
The accompanying notes are an integral part of the financial statements.
11
<page>
Notes to Financial Statements
1. ORGANIZATION
World Opportunities Series (the "Series") is a no-load diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies located around the world.
The Series is authorized to issue five classes of shares (Class A, B, C, D and E). Currently, only Class A shares have been issued. Each class of shares is substantially the same, except that class-specific distribution and shareholder servicing expenses are borne by the specific class of shares to which they relate.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 37.5 million have been designated as World Opportunities Series Class A common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund’s pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Security Transactions, Investment Income and Expenses (continued)
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid for by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, until at least December 31, 2006, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.27% of average daily net assets each year. For the year ended December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $88,032,655 and $73,871,259, respectively. There were no purchases or sales of United States Government securities.
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Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in Class A shares of World Opportunities Series were:
| | | |
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 6,486,338 | $55,109,926 | 3,334,982 | $24,736,131 |
| Reinvested | 2,067,948 | 17,622,272 | 544,382 | 4,361,918 |
| Repurchased | (3,443,511) | (28,501,295) | (2,088,851) | (15,729,142) |
| | | | | |
| Total | 5,110,775 | $44,230,903 | 1,790,513 | $13,368,907 |
Approximately 75% of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
| 8. | FEDERAL INCOME TAX INFORMATION |
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including foreign currency gains and losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $3,790,576 | $1,129,987 |
| Long-term capital gains | 14,284,357 | 3,309,862 |
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Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION (continued)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed previously as capital gains for its taxable year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| | |
| Cost for federal income tax purposes | $172,268,059 |
| | |
| Unrealized appreciation | $33,677,988 |
| Unrealized depreciation | (2,164,113) |
| | |
| Net unrealized appreciation | $31,513,875 |
| Undistributed ordinary income | 1,896,510 |
| Undistributed long-term capital gains | 5,627,891 |
FEDERAL INCOME TAX INFORMATION (unaudited)
For federal income tax purposes, the Series designates $718,770 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
For corporate shareholders, the percentage of investment income (dividend income plus short-term gains, if any) that qualifies for the dividends received deduction is 0.42%.
16
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of World Opportunities Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the World Opportunities Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
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Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
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Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
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Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
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Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
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Exeter Fund, Inc.
Annual Report
December 31, 2005
International Series
<page>
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
The International Series returned 13.99% for the 2005 calendar year. The Series outperformed the Standard & Poor’s (S&P) 500 Total Return Index, a measure of the performance of U.S. Stocks, but the performance was below that of the Morgan Stanley Capital International (“MSCI”) All Country World Index ex U.S., which had a very strong year. Over the entire market cycle (since 1/1/00), the Series has beaten both indexes. Global markets remained strong in 2005 after an even stronger 2004. However, 2005 did not have the benefit of a depreciating dollar that 2004 benefited from; the dollar actually appreciated during 2005.
The Series’ underperformance relative to the international benchmark for the year can be attributed to a number of factors, including strong performance from oil and commodity rich countries such as Canada, Australia, Russia, and Latin America. In addition, emerging market countries in Asia and Eastern Europe contributed more to the benchmark than to our holdings. We had only limited holdings in these countries because of headwinds for global growth including a rising Fed Funds rate and expectations for a slowdown in China. In addition, these markets looked expensive after the rapid appreciation of commodities over the last few years. Finally, the spread between emerging market bonds and U.S. bonds are at an all time low, which implies investors see little risk in these markets.
The International Series remains predominantly invested in Western Europe; although additional work remains to be done, Western European countries have been removing burdens on the corporate sector, such as strict labor laws and high taxes, to regain competitiveness lost to countries with lower labor costs such as Eastern Europe and Asia. Western Europe (Germany in particular) has initiated a fair amount of reform over the last few years, but much more needs to be done. Politicians realize that certain current policies are unsustainable over the long-term. Despite the expectation that these reforms may disadvantage the consumer in the short-term, consumption and consumer confidence have improved in Germany and around most of Western Europe.
In 2005, we added to our holdings in Germany including extra capital directed towards German banks and insurance companies. These purchases were largely driven by industry-specific “watershed” events that accelerated revenue growth. The private banking sector benefits from the elimination of state guarantees that were afforded to public banks, which allowed them to undercut risk-based rates. The life insurance industry provides substitute products for state pensions. The aging population has created a quandary for state finances, and Germany has begun cutting state pension guarantees, which in turn is creating demand for private pension products.
The Series sold a large portion of its Italian holdings in the 3rd quarter of 2005, as we became disappointed in the macroeconomic environment and the lack of reform progress. We held onto stocks in the financial sector because it remains highly fragmented, and it has been benefiting from the consolidation of Europe’s banking sector.
The Series added positions in Poland towards the end of the year based on our analysis that Eastern Europe is experiencing convergence with Western Europe. Labor cost differentials, its proximity to Western Europe, and its inclusion in the European Union have increased ease of cross-border business activity in the region. These advantages have led to strong foreign direct investment inflows and burgeoning growth. We believed Poland had the greatest potential for convergence and appeared the most attractive.
We increased our position in Japan in the 3rd quarter. The Japanese recovery has become more sustainable as the strong export growth Japan is experiencing is spreading to the domestic economy. Consumer confidence, employment, wages, and lending have all been accelerating. The Series added positions mostly in the banking and capital markets sectors. The banks have done an impressive job of cleaning up non-performing loans off their balance sheet. Banks are also experiencing a shift in demand away from demand deposits and towards products that charge higher fees, boosting banks’ revenues. Brokerage houses are also reaping benefits from rising domestic demand for equity. Both of these sectors have been among the stronger performers for the Japanese market.
1
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Management Discussion and Analysis (unaudited)
The main risk regarding investing in the Philippines is its high level of public debt. President Arroyo won a mandate in the 2004 election to bring forward reforms that would increase government revenue through increased taxes and more efficient tax collection, but after some positive progress her support became seriously weakened due to a number of political scandals. The uncertainty regarding the outcome of the political crisis, combined with strong performance since our initial investment in 2004, convinced us to sell our small position in the Philippines during the 2nd quarter.
Like China, India has attracted a large share of foreign direct investment due to its abundant cheap labor for production of goods and services. Exporting remains the dominant growth driver but there is also a growing middle class willing to spend its discretionary income. We were able to identify a few companies that are attractively valued and fit our domestic demand theme, and we added them to our holdings in the 4th quarter.
Towards the end of 2005 we also purchased positions in Indonesia’s banking sector. Indonesia faced a near crisis as the government had difficulty reducing oil subsidies that were putting pressure on the country’s fiscal balance. This led to a sharp depreciation of the Indonesian peso, and forced the government to increase interest rates and remove oil subsidies in a less than optimal fashion, leading to soaring inflation. The banking sector was greatly effected by these developments, and the lower valuations created a buying opportunity.
We sold part of our Mexican position in the 2nd quarter, and sold the remaining portion in the 4th quarter. We originally purchased these stocks on the expectation that Mexico would experience accelerating growth in conjunction with improving U.S. growth. In addition, we believed that investors were overly concerned that China was going to steal Mexico’s exporting competitiveness. This did not occur, as Mexico’s proximity to the U.S. and its supply of skilled workers attracted U.S. investment. However, after strong performance from Mexican equities, the market no longer looks attractive from a valuation perspective. Federal Reserve interest rate hikes in the U.S. and the uncertainty surrounding the upcoming Mexican presidential election have also tempered our enthusiasm.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
2
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Exeter Fund, Inc. - International Series2 | 13.99% | 5.37% | 11.98% | 10.27% |
| | | | | |
Standard & Poor's (S&P) 500 Total Return Index3 | 4.91% | 0.54% | 9.07% | 10.71% |
| | | | | |
Morgan Stanley Capital International (MSCI) All Country World Index ex U.S.3 | 17.12% | 6.66% | 6.70% | 8.23% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - International Series from its inception1 (8/27/92) to present (12/31/05) to the S&P 500 Total Return Index and the MSCI All Country World Index ex U.S.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | S&P 500 | MSCI All Country |
| Date | International Series | Total Return Index | World Index ex U.S. |
| | | | |
| 8/27/92 | $10,000 | $10,000 | 10,000 |
| 12/92 | 10,598 | 10,643 | 9,495 |
| 12/93 | 13,359 | 11,709 | 12,809 |
| 12/94 | 11,425 | 11,868 | 13,659 |
| 12/95 | 11,898 | 16,312 | 15,016 |
| 12/96 | 14,557 | 20,052 | 16,019 |
| 12/97 | 18,589 | 26,959 | 16,346 |
| 12/98 | 22,983 | 34,398 | 18,710 |
| 12/99 | 29,289 | 41,634 | 24,492 |
| 12/00 | 28,403 | 37,845 | 20,797 |
| 12/01 | 22,585 | 33,350 | 16,743 |
| 12/02 | 19,356 | 25,982 | 14,287 |
| 12/03 | 27,504 | 33,431 | 20,203 |
| 12/04 | 32,363 | 37,065 | 24,518 |
| 12/31/05 | 36,891 | 38,883 | 28,714 |
1Performance numbers for the Series and the S&P 500 Total Return Index are calculated from August 27, 1992, the Series' inception date. Prior to 2001, the MSCI All Country World Index ex U.S. only published month-end numbers; therefore, performance numbers for the Index are calculated from August 31, 1992.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The S&P 500 Total Return Index is an unmanaged capitalization-weighted measure of 500 widely held common stocks listed on the New York Stock Exchange, American Stock Exchange and the Over-the-Counter market. The Index returns assume daily reinvestment of dividends. The MSCI All Country World Index ex U.S. is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets and consists of 48 developed and emerging market country indices outside the United States. The Index is denominated in U.S Dollars. The Index returns assume daily reinvestment of gross dividends (which do not account for foreign dividend taxation). Both Indices' returns, unlike Series returns, do not reflect any fees or expenses.
3
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,143.50 | $6.59 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,019.06 | $6.21 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 1.22%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Country Allocation*
| | |
| France | 12.96% |
| Germany | 32.57% |
| India | 1.27% |
| Indonesia | 1.00% |
| Italy | 7.30% |
| Japan | 15.94% |
| Malaysia | 2.03% |
| Netherlands | 4.12% |
| Portugal | 3.39% |
| South Korea | 2.41% |
| Taiwan | 1.98% |
| United Kingdom | 8.22% |
| Miscellaneous** | 2.96% |
| Cash, short-term investments, and liabilities, less other assets | 3.85% |
*As a percentage of net assets.
**Miscellaneous
Denmark (0.65%)
Norway (0.55%)
Poland (0.89%)
Spain (0.43%)
Switzerland (0.44%)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Consumer Discretionary | 12.78% |
| Consumer Staples | 13.04% |
| Energy | 7.00% |
| Financials | 29.93% |
| Health Care | 3.69% |
| Industrials | 9.79% |
| Information Technology | 4.59% |
| Materials | 5.81% |
| Telecommunication Services | 4.91% |
| Utilities | 4.61% |
| Cash, short-term investments, and liabilities, less other assets | 3.85% |
*As a percentage of net assets.
5
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
COMMON STOCKS - 96.15% | | |
| | | |
Consumer Discretionary - 12.78% | | |
Auto Components - 0.73% | | |
| Halla Climate Control Corp. (South Korea) | 76,300 | $929,198 |
| Michelin (CGDE) - B (France) | 8,413 | 472,827 |
| | | 1,402,025 |
| | | |
Automobiles - 0.87% | | |
| Bayerische Motoren Werke AG (BMW) (Germany) | 38,200 | 1,673,039 |
| | | |
Household Durables - 0.90% | | |
| Cersanit-Krasnystaw S.A.* (Poland) | 177,915 | 767,418 |
| LG Electronics, Inc. (South Korea) | 11,100 | 981,416 |
| | | 1,748,834 |
| | | |
Leisure Equipment & Products - 1.44% | | |
| Sega Sammy Holdings, Inc. (Japan) | 83,100 | 2,783,625 |
| | | |
Media - 4.14% | | |
| Impresa S.A. (SGPS)* (Portugal) | 264,000 | 1,562,482 |
| Reed Elsevier plc - ADR (United Kingdom) | 33,600 | 1,260,336 |
| VNU N.V. (Netherlands) | 78,000 | 2,586,120 |
| Wolters Kluwer N.V. (Netherlands) | 128,000 | 2,587,848 |
| | | 7,996,786 |
| | | |
Multiline Retail - 0.80% | | |
| Don Quijote Co. Ltd. (Japan) | 18,600 | 1,555,258 |
| | | |
Specialty Retail - 2.41% | | |
| Douglas Holding AG (Germany) | 45,900 | 1,768,498 |
| KOMERI Co. Ltd. (Japan) | 67,000 | 2,880,682 |
| | | 4,649,180 |
| | | |
Textiles, Apparel & Luxury Goods - 1.49% | | |
| LVMH S.A. (Louis Vuitton Moet Hennessy) (France) | 32,320 | 2,871,197 |
| | | |
Total Consumer Discretionary | | 24,679,944 |
| | | |
Consumer Staples - 13.04% | | |
Beverages - 2.20% | | |
| Diageo plc (United Kingdom) | 76,000 | 1,101,383 |
| Kirin Brewery Co. Ltd. (Japan) | 173,000 | 2,017,257 |
| Scottish & Newcastle plc (United Kingdom) | 135,000 | 1,129,722 |
| | | 4,248,362 |
| | | |
Food & Staples Retailing - 3.59% | | |
| Carrefour S.A. (France) | 38,832 | 1,819,309 |
| FamilyMart Co. Ltd. (Japan) | 55,000 | 1,861,007 |
| Metro AG (Germany) | 41,700 | 2,013,403 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
Consumer Staples (continued) | | |
Food & Staples Retailing (continued) | | |
| Tesco plc (United Kingdom) | 220,000 | $1,254,472 |
| | | 6,948,191 |
| | | |
Food Products - 4.13% | | |
| Cadbury Schweppes plc (United Kingdom) | 120,000 | 1,134,237 |
| CJ Corp. (South Korea) | 10,300 | 1,065,693 |
| Groupe Danone (France) | 15,976 | 1,668,875 |
| Suedzucker AG (Germany) | 72,400 | 1,696,855 |
| Unilever plc - ADR (United Kingdom) | 60,000 | 2,407,200 |
| | | 7,972,860 |
| | | |
Household Products - 2.09% | | |
| Hindustan Lever Ltd. (India) | 344,000 | 1,508,873 |
| Kao Corp. (Japan) | 47,000 | 1,259,498 |
| Reckitt Benckiser plc (United Kingdom) | 38,500 | 1,271,501 |
| | | 4,039,872 |
| | | |
Personal Products - 1.03% | | |
| Clarins S.A. (France) | 35,777 | 1,984,059 |
| | | |
Total Consumer Staples | | 25,193,344 |
| | | |
Energy - 7.00% | | |
Energy Equipment & Services - 1.06% | | |
| SapuraCrest Petroleum Berhad (Malaysia) | 3,416,000 | 542,366 |
| Scomi Group Berhad (Malaysia) | 5,742,000 | 1,519,450 |
| | | 2,061,816 |
| | | |
Oil, Gas & Consumable Fuels - 5.94% | | |
| BP plc (United Kingdom) | 114,000 | 1,213,809 |
| Eni S.p.A. (Italy) | 219,554 | 6,089,121 |
| Royal Dutch Shell plc - Class B (United Kingdom) | 41,663 | 1,331,530 |
| Total S.A. (France) | 11,290 | 2,835,831 |
| | | 11,470,291 |
| | | |
Total Energy | | 13,532,107 |
| | | |
Financials - 29.93% | | |
Capital Markets - 5.02% | | |
| Daiwa Securities Group, Inc. (Japan) | 194,000 | 2,199,610 |
| Deutsche Bank AG (Germany) | 64,800 | 6,288,164 |
| Nomura Holdings, Inc. (Japan) | 63,000 | 1,207,429 |
| | | 9,695,203 |
| | | |
Commercial Banks - 14.69% | | |
| Banca Monte dei Paschi di Siena S.p.A. (Italy) | 181,000 | 845,749 |
| Banco BPI S.A. (Portugal) | 383,000 | 1,749,956 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
Financials (continued) | | |
Commercial Banks (continued) | | |
| Bank Handlowy w Warszawie S.A. (Poland) | 24,000 | $491,728 |
| BNP Paribas S.A. (France) | 26,000 | 2,103,550 |
| The Chugoku Bank Ltd. (Japan) | 137,000 | 1,969,259 |
| Commerzbank AG (Germany) | 169,000 | 5,245,179 |
| The Hachijuni Bank Ltd. (Japan) | 244,000 | 1,843,657 |
| Hana Financial Group, Inc. (South Korea) | 22,624 | 1,034,880 |
| Hong Leong Bank Berhad (Malaysia) | 560,000 | 755,755 |
| Mitsubishi UFJ Financial Group, Inc. (Japan) | 170 | 2,306,649 |
| PT Bank Central Asia Tbk (Indonesia) | 2,717,000 | 941,192 |
| PT Bank Mandiri (Indonesia) | 5,943,000 | 993,023 |
| SanPaolo IMI S.p.A. (Italy) | 51,300 | 802,160 |
| Societe Generale (France) | 11,312 | 1,391,220 |
| The Sumitomo Trust and Banking Co. Ltd. (Japan) | 247,000 | 2,524,042 |
| UniCredito Italiano S.p.A. (Italy) | 489,000 | 3,368,781 |
| | | 28,366,780 |
| | | |
Consumer Finance - 0.56% | | |
| Takefuji Corp. (Japan) | 16,050 | 1,090,235 |
| | | |
Diversified Financial Services - 1.44% | | |
| ING Groep N.V. (Netherlands) | 80,000 | 2,774,588 |
| | | |
Insurance - 8.22% | | |
| Allianz AG (Germany) | 32,620 | 4,940,435 |
| Assicurazioni Generali S.p.A. (Italy) | 85,804 | 2,998,229 |
| Axa (France) | 110,292 | 3,558,859 |
| Muenchener Rueckver AG (Germany) | 32,400 | 4,386,298 |
| | | 15,883,821 |
| | | |
Total Financials | | 57,810,627 |
| | | |
Health Care - 3.69% | | |
Pharmaceuticals - 3.69% | | |
| AstraZeneca plc (United Kingdom) | 22,300 | 1,085,157 |
| GlaxoSmithKline plc (United Kingdom) | 48,000 | 1,212,880 |
| Sanofi-Aventis (France) | 21,083 | 1,846,737 |
| Shire plc (United Kingdom) | 115,000 | 1,471,721 |
| Takeda Pharmaceutical Co. Ltd. (Japan) | 28,000 | 1,514,925 |
Total Health Care | | 7,131,420 |
| | | |
Industrials - 9.79% | | |
Airlines - 1.26% | | |
| Deutsche Lufthansa AG (Germany) | 164,800 | 2,438,418 |
| | | |
Commercial Services & Supplies - 0.50% | | |
| Taiwan Secom (Taiwan) | 621,000 | 957,280 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Investment Portfolio - December 31, 2005
| | | Value |
| | Shares | (Note 2) |
| | | |
Industrials (continued) | | |
Construction & Engineering - 1.03% | | |
| Hochtief AG (Germany) | 44,500 | $1,994,786 |
| | | |
Industrial Conglomerates - 4.14% | | |
| Siemens AG (Germany) | 66,525 | 5,698,813 |
| Sonae S.A. (SGPS) (Portugal) | 1,200,000 | 1,676,117 |
Sonae S.A. (SGPS) - Rights (Portugal)1 | 1,200,000 | 616,328 |
| | | 7,991,258 |
| | | |
Machinery - 2.86% | | |
| FANUC Ltd. (Japan) | 15,500 | 1,315,765 |
| MAN AG (Germany) | 79,000 | 4,215,528 |
| | | 5,531,293 |
| | | |
Total Industrials | | 18,913,035 |
| | | |
Information Technology - 4.59% | | |
Communications Equipment - 0.94% | | |
| D-Link Corp. (Taiwan) | 860,000 | 987,057 |
| Zyxel Communications Corp. (Taiwan) | 434,340 | 825,988 |
| | | 1,813,045 |
| | | |
Electronic Equipment & Instruments - 0.66% | | |
| KEYENCE Corp. (Japan) | 4,500 | 1,280,317 |
| | | |
Office Electronics - 0.61% | | |
| Canon, Inc. (Japan) | 20,000 | 1,170,285 |
| | | |
Software - 2.38% | | |
| SAP AG (Germany) | 25,350 | 4,596,434 |
| | | |
Total Information Technology | | 8,860,081 |
| | | |
Materials - 5.81% | | |
Chemicals - 5.26% | | |
| Air Liquide S.A. (France) | 12,258 | 2,357,838 |
| Bayer AG (Germany) | 107,350 | 4,476,676 |
| Degussa AG (Germany) | 38,200 | 1,937,560 |
| Lanxess* (Germany) | 43,875 | 1,392,890 |
| | | 10,164,964 |
| | | |
Construction Materials - 0.55% | | |
| Taiwan Cement Corp. (Taiwan) | 1,466,000 | 1,049,380 |
| | | |
Total Materials | | 11,214,344 |
| | | |
Telecommunication Services - 4.91% | | |
Diversified Telecommunication Services - 4.00% | | |
| Deutsche Telekom AG (Germany) | 93,100 | 1,549,444 |
| France Telecom S.A. - ADR (France) | 31,000 | 770,040 |
| Portugal Telecom S.A. (SGPS) - ADR (Portugal) | 94,250 | 949,098 |
| Swisscom AG - ADR (Switzerland) | 26,900 | 847,619 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Investment Portfolio - December 31, 2005
| | Shares/ | Value |
| | Principal Amount | (Note 2) |
| | | |
Telecommunication Services (continued) | | |
Diversified Telecommunication Services (continued) | | |
| TDC A/S - ADR (Denmark) | 42,150 | $1,259,442 |
| Telefonica S.A. - ADR (Spain) | 18,250 | 821,615 |
| Telekomunikacja Polska S.A. (Poland) | 64,000 | 461,410 |
| Telenor ASA - ADR (Norway) | 36,250 | 1,065,750 |
| | | 7,724,418 |
| | | |
Wireless Telecommunication Services - 0.91% | | |
| Maxis Communications Berhad (Malaysia) | 500,000 | 1,111,405 |
| SK Telecom Co. Ltd. (South Korea) | 3,600 | 645,149 |
| | | 1,756,554 |
| | | |
Total Telecommunication Services | | 9,480,972 |
| | | |
Utilities - 4.61% | | |
Electric Utilities - 3.42% | | |
| E.ON AG (Germany) | 63,837 | 6,608,804 |
| | | |
Gas Utilities - 0.49% | | |
| Gail India Ltd. (India) | 160,000 | 945,697 |
| | | |
Multi-Utilities - 0.70% | | |
| Suez S.A. (France) | 43,340 | 1,349,229 |
| | | |
Total Utilities | | 8,903,730 |
| | | |
TOTAL COMMON STOCKS | | |
| (Identified Cost $124,648,689) | | 185,719,604 |
| | | |
SHORT-TERM INVESTMENTS - 3.88% | | |
| Dreyfus Treasury Cash Management - Institutional Shares | 4,499,944 | 4,499,944 |
| Fannie Mae Discount Note, 1/11/2006 | $3,000,000 | 2,996,542 |
| | | |
TOTAL SHORT-TERM INVESTMENTS | | |
| (Identified Cost $7,496,486) | | 7,496,486 |
| | | |
TOTAL INVESTMENTS - 100.03% | | |
| (Identified Cost $132,145,175) | | 193,216,090 |
| | | |
LIABILITIES, LESS OTHER ASSETS - (0.03%) | | (48,586) |
| | | |
NET ASSETS - 100% | | $193,167,504 |
1Security has been valued at fair value (See Note 2 to Financial Statements).
*Non-income producing security
ADR - American Depository Receipt
The Series' portfolio holds, as a percentage of net assets, greater than 10% in the following countries: Germany - 32.57%; Japan - 15.94%; France - 12.96%.
The accompanying notes are an integral part of the financial statements.
10
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $132,145,175) (Note 2) | $193,216,090 |
| Foreign currency, at value (cost $67,798) | 67,746 |
| Receivable for fund shares sold | 240,576 |
| Foreign tax reclaims receivable | 104,054 |
| Dividends receivable | 59,731 |
| | |
| TOTAL ASSETS | 193,688,197 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 173,718 |
| Accrued fund accounting and transfer agent fees (Note 3) | 18,733 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Payable for securities purchased | 201,925 |
| Payable for fund shares repurchased | 64,012 |
| Audit fees payable | 31,801 |
| Accrued capital gains tax payable (Note 2) | 9,450 |
| Other payables and accrued expenses | 20,922 |
| | |
| TOTAL LIABILITIES | 520,693 |
| | |
TOTAL NET ASSETS | $193,167,504 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $195,197 |
| Additional paid-in-capital | 130,330,193 |
| Distributions in excess of net investment income | (6,428) |
| Accumulated net realized gain on investments, foreign currency, | |
| and other assets and liabilities | 1,593,710 |
| Net unrealized appreciation on investments, foreign currency, | |
| and other assets and liabilities | 61,054,832 |
| | |
TOTAL NET ASSETS | $193,167,504 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($193,167,504/19,519,660 shares) | $9.90 |
The accompanying notes are an integral part of the financial statements.
11
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Dividends (net of foreign tax withheld, $539,484) | $3,751,974 |
| Interest | 178,391 |
| | |
| Total Investment Income | 3,930,365 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 1,680,942 |
| Fund accounting and transfer agent fees (Note 3) | 197,890 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 112,050 |
| Miscellaneous | 72,764 |
| | |
| Total Expenses | 2,076,634 |
| | |
| NET INVESTMENT INCOME | 1,853,731 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: | |
| | |
| Net realized gain (loss) on - | |
| Investments | 16,513,529 |
| Foreign currency and other assets and liabilities | (57,640) |
| | 16,455,889 |
| | |
| Net change in unrealized appreciation on - | |
| Investments (net of foreign capital gains tax accrual of $9,450) (Note 2) | 4,595,682 |
| Foreign currency and other assets and liabilities | (13,027) |
| | 4,582,655 |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | 21,038,544 |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $22,892,275 |
The accompanying notes are an integral part of the financial statements.
12
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $1,853,731 | $1,223,724 |
| Net realized gain on investments | 16,455,889 | 8,965,946 |
| Net change in unrealized appreciation on investments | 4,582,655 | 14,295,027 |
| | | |
| Net increase from operations | 22,892,275 | 24,484,697 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS | | |
(Note 8): | | |
| | | |
| From net investment income | (1,903,150) | (1,267,156) |
| From net realized gain on investments | (14,732,499) | (11,878,815) |
| | | |
| Total distributions to shareholders | (16,635,649) | (13,145,971) |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 20,994,192 | 25,099,237 |
| | | |
| Net increase in net assets | 27,250,818 | 36,437,963 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 165,916,686 | 129,478,723 |
| | | |
End of year (including distributions in excess of net investment | | |
| income and undistributed net investment income of $(6,428) | | |
| and $101,264, respectively) | $193,167,504 | $165,916,686 |
The accompanying notes are an integral part of the financial statements.
13
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $9.52 | $8.83 | $6.67 | $7.89 | $10.40 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.11 | 0.08 | 0.07 | 0.07 | 0.05 |
| Net realized and unrealized gain (loss) on investments | 1.21 | 1.44 | 2.72 | (1.20) | (2.18) |
| | | | | | |
| Total from investment operations | 1.32 | 1.52 | 2.79 | (1.13) | (2.13) |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.11) | (0.08) | (0.06) | (0.07) | (0.05) |
| From net realized gain on investments | (0.83) | (0.75) | (0.57) | (0.02) | (0.33) |
| | | | | | |
| Total distributions to shareholders | (0.94) | (0.83) | (0.63) | (0.09) | (0.38) |
| | | | | | |
Net asset value - End of year | $9.90 | $9.52 | $8.83 | $6.67 | $7.89 |
| | | | | | |
Total return1 | 13.99% | 17.67% | 42.10% | (14.30%) | (20.48%) |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 1.24% | 1.29% | 1.30%* | 1.32% | 1.28% |
| Net investment income | 1.10% | 0.86% | 0.94% | 0.96% | 0.54% |
| | | | | | |
| Portfolio turnover | 35% | 19% | 46% | 5% | 6% |
| | | | | | |
Net assets - End of year (000's omitted) | $193,168 | $165,917 | $129,479 | $80,945 | $84,124 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) for the year ended 12/31/03 would have been increased by 0.02%.
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year ended 12/31/03.
The accompanying notes are an integral part of the financial statements.
14
<page>
Notes to Financial Statements
1. ORGANIZATION
International Series (the "Series") is a no-load diversified series of Exeter Fund, Inc. (the “Fund”). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term growth by investing principally in the common stocks of companies located outside the United States.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The Series resumed offering shares directly to investors on May 18, 2004, as it had done previously from time to time. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as International Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Portfolio securities, including domestic equities, foreign equities, exchange-traded funds and options, listed on an exchange other than the NASDAQ National Market System are valued at the latest quoted sales price of the exchange on which the security is primarily traded. Securities not traded on valuation date or securities not listed on an exchange are valued at the latest quoted bid price provided by the Fund's pricing service. Securities listed on the NASDAQ National Market System are valued in accordance with the NASDAQ Official Closing Price.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value. If trading or events occurring after the close of the principal market in which securities are traded are expected to materially affect the value of those securities, then they may be valued at their fair value, taking this trading or these events into account. Fair value is determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date, with the exception of exchange-traded funds as noted above.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Dividend income is recorded on the ex-dividend date, except that if the ex-dividend date has passed, certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
15
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Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Additionally, based on the Fund’s understanding of the tax rules and rates related to income, gains and transactions for foreign jurisdictions in which it invests, the Series will provide for foreign taxes, and where appropriate, deferred foreign taxes.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 1.00% of the Series’ average daily net assets.
16
<page>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has voluntarily agreed, until at least December 31, 2006, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 1.30% of average daily net assets each year. For the year ended December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $62,214,408 and $55,551,345, respectively. There were no purchases or sales of United States Government securities.
The Series held shares of iShares MSCI Malaysia Index Fund and iShares MSCI Singapore Index Fund in 2003 and 2004; such investments were not consistent with the investment restrictions of the Series. The securities were subsequently sold at a gain of $541,572 during 2004. For 2004, 0.37% of the Series’ total return consisted of the realized gain on these investments.
17
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Notes to Financial Statements
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of International Series were:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 2,448,832 | $23,946,331 | 2,658,744 | $24,222,900 |
| Reinvested | 1,670,321 | 16,343,037 | 1,409,860 | 12,949,803 |
| Repurchased | (2,023,371) | (19,295,176) | (1,309,069) | (12,073,466) |
| | | | | |
| Total | 2,095,782 | $20,994,192 | 2,759,535 | $25,099,237 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks.
These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
7. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
| 8. | FEDERAL INCOME TAX INFORMATION |
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including foreign currency gains and losses and investments in passive foreign investment companies. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $3,284,321 | $4,558,474 |
| Long-term capital gains | 13,351,328 | 8,587,497 |
18
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Notes to Financial Statements
| 8. | FEDERAL INCOME TAX INFORMATION (continued) |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed previously as capital gains for its taxable year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| | |
| Cost for federal income tax purposes | $132,396,104 |
| | |
| Unrealized appreciation | $61,799,416 |
| Unrealized depreciation | (979,430) |
| | |
| Net unrealized appreciation | $60,819,986 |
| Undistributed ordinary income | 96,611 |
| Undistributed long-term capital gains | 1,741,600 |
FEDERAL INCOME TAX INFORMATION (unaudited)
For federal income tax purposes, the Series designates $3,225,230 or, if different, the maximum amount allowable under the tax law as qualified dividend income.
19
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of International Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the International Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
20
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Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
21
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Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
22
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Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
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Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
24
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25
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
Core Bond Series
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Over the long term the vast majority of a fixed income security’s total return is determined by its coupon, or more specifically, the yield of the security, since very few fixed income securities are actually traded at par. Given the added risk associated with corporate and mortgage-backed bonds, they traditionally carry higher yields than U.S. Treasury securities with similar maturities and, therefore, over the long-term have provided higher returns than U.S. Treasuries. With that tendency in mind, and given the incremental yield offered by corporate and mortgage-backed securities in an exceptionally low interest rate environment, the Core Bond Series was activated in April of 2005.
How the Series performs will depend not only on what happens to the level of interest rates, but also on the change in yield differentials, or “spreads” between corporate or mortgage-backed bonds and U.S. Treasury securities. The relative impact of each will vary from month to month, quarter to quarter, and year to year. Since the Series was activated, changes in the level of interest rates more so than changes in spreads have dictated performance.
With the exception of the longest dated maturities, interest rates have risen across the entire yield curve, albeit in a decidedly uneven fashion. The magnitudes of the rate increases decreased the further out on the yield curve one looked. Very short-term interest rates, three to six months, experienced the largest increases since April, in excess of 125 basis points (1.25%); two-year yields were up about 70 basis points (0.70%), 5-year yields rose by about half that, and 10-year yields were up a mere 10-15 basis points (0.10% - 0.15%), while yields on securities with maturities of more than 20 years were essentially unchanged.
The increase in short-term interest rates reflected the tighter monetary policies that the Federal Reserve (the “Fed”) started to put in place in June of 2004 and which the Fed continued to implement throughout all of 2005. The Fed “tightens” monetary policy by pulling reserves out of the banking system, thereby causing the overnight lending rate that banks charge each other to rise. This overnight rate is referred to as the Fed Funds rate. Increasing or decreasing reserves is the mechanism that the Fed uses to target the Fed Funds rate. Since April of 2005, the Fed withdrew reserves, thereby increasing the “targeted” Fed Funds rate, on six separate occasions. Each time the target was increased by 25 basis points (0.25%). Short-term rates across all market sectors rose in tandem.
Given the improvements in the economic environment, the Fed began its tightening policy in an effort to unwind what were universally considered to be “accommodative” monetary policies. As the economy continued to grow over the next 18 months (the second half of 2004 and all of 2005), the Fed continued to tighten. During the second half of 2005, although the core rate of inflation remained relatively stable, the sizable increases in energy prices pushed up the overall rate of inflation, which gave the Fed an additional reason to push up short-term interest rates.
Longer-term interest rates are driven to a greater degree by investors’ expectations about the future course of inflation. The fact that the core rate of inflation (i.e. inflation less the volatile effects of food and energy prices) barely budged in 2005 in conjunction with the Fed acting in a proactive (i.e. before inflation accelerated) rather than reactive fashion, allowed long-term fixed income investors to remain relatively sanguine about the risk of inflation. That, along with a limited number of higher yielding investment alternatives, made longer-term fixed income securities relatively attractive, which caused long-term yields to remain steady.
As for spreads, they moved out modestly from April through the end of 2005. In the corporate bond marketplace, that was a reflection of some very high-profile credit downgrades, specifically Ford and GM, as well as a realization that corporate bond investors had to be much more alert for event risk (corporate actions that help equity holders but often times hurt debt holders). Mortgage spreads widened due to supply and demand considerations, concerns about possible extension risks, as well as a moderate rise in market volatility.
As for the actual performance of the Core Bond Series, it was up 0.98% since inception (April 21, 2005) through December 31, 2005. The Merrill Lynch U.S. Domestic Master Index (which includes all U.S. Treasury, U.S. Agency, investment grade corporate bonds, and plain vanilla mortgage-backed securities with maturities of more than 1-year) posted a total return of 2.01%. One-quarter of the benchmark’s total return occurred during the last 10 days of April, a time period when the Core Bond Series was being positioned. Over the last six months of 2005, the Series and benchmark posted similar returns.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
1
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Total Returns |
| | Since Inception1 |
| | As of December 31, 2005 |
| | |
Exeter Fund, Inc. - Core Bond Series2 | 0.98% |
| | |
Merrill Lynch U.S. Domestic Master Index3 | 2.01% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Core Bond Series from its inception1 (4/21/05) to present (12/31/05) to the Merrill Lynch U.S. Domestic Master Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | Merrill Lynch |
| Date | Core Bond Series | U.S. Domestic Master Index |
| | | |
| 4/21/05 | $10,000 | $10,000 |
| 6/30/05 | 10,130 | 10,212 |
| 9/30/05 | 10,060 | 10,142 |
| 12/31/05 | 10,098 | 10,201 |
1Performance numbers for the Series and Index are calculated from April 21, 2005, the Series' inception date. Periods less than one year are not annualized.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch U.S. Domestic Master Index is a market value weighted measure comprised of over 4,000 U.S. government, corporate, and pass-through securities issued by entities within the United States, by supranational entities, or by entities headquartered outside of the United States but who have issued dollar-denominated securities within the United States. The Index only includes investment grade securities with maturities of greater than one year. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees of expenses.
2
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $996.80 | $4.03 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.17 | $4.08 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.80%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data. The Series’ total return would have been lower had certain expenses not been waived during the period.
3
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Consumer Discretionary | 7.3% |
| Consumer Staples | 1.3% |
| Energy | 1.0% |
| Financials | 10.6% |
| Health Care | 1.4% |
| Industrials | 7.7% |
| Information Technology | 2.4% |
| Materials | 0.9% |
| Telecommunication Services | 1.5% |
| Utilities | 4.5% |
| U.S. Government Agencies | 55.4% |
| Cash, short-term investments, and liabilities, less other assets | 6.0% |
*As a percentage of net assets.
<graphic>
<pie chart>
Credit Quality Ratings1,2
| | |
| Aaa | 5.3% |
| Aa | 15.8% |
| A | 36.2% |
| Baa | 42.7% |
1As a percentage of total corporate bonds.
2Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
4
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | | Value |
| | (unaudited) | Principal Amount | (Note 2) |
| | | | |
CORPORATE BONDS - 38.6% | | | |
Consumer Discretionary - 7.3% | | | |
Media - 4.1% | | | |
| AOL Time Warner (now known as Time Warner, Inc.), 6.75%, 4/15/2011 | Baa1 | $400,000 | $420,036 |
| Comcast Cable Communications, Inc., 6.75%, 1/30/2011 | Baa2 | 400,000 | 423,522 |
| Tribune Co., 4.875%, 8/15/2010 | A3 | 110,000 | 107,271 |
| The Walt Disney Co., 6.375%, 3/1/2012 | Baa1 | 200,000 | 211,544 |
| | | | 1,162,373 |
| | | | |
Multiline Retail - 1.5% | | | |
| Target Corp., 5.875%, 3/1/2012 | A2 | 415,000 | 435,947 |
| | | | |
Specialty Retail - 1.7% | | | |
The Gap, Inc.2, 9.55%, 12/15/2008 | Baa3 | 175,000 | 194,479 |
| Lowe's Companies, Inc., 8.25%, 6/1/2010 | A2 | 270,000 | 305,528 |
| | | | 500,007 |
| | | | |
Total Consumer Discretionary | | | 2,098,327 |
| | | | |
Consumer Staples - 1.3% | | | |
Food & Staples Retailing - 0.5% | | | |
| The Kroger Co., 7.25%, 6/1/2009 | Baa2 | 135,000 | 142,886 |
| | | | |
Food Products - 0.4% | | | |
| General Mills, Inc., 6.00%, 2/15/2012 | Baa2 | 95,000 | 99,422 |
| | | | |
Household Products - 0.4% | | | |
| The Procter & Gamble Co., 4.85%, 12/15/2015 | Aa3 | 125,000 | 123,545 |
| | | | |
Total Consumer Staples | | | 365,853 |
| | | | |
Energy - 1.0% | | | |
Oil, Gas & Consumable Fuels - 1.0% | | | |
| Anadarko Finance Co., 6.75%, 5/1/2011 (Canada) (Note 7) | Baa1 | 265,000 | 286,712 |
| | | | |
Financials - 10.6% | | | |
Capital Markets - 1.9% | | | |
| The Goldman Sachs Group, Inc., 6.875%, 1/15/2011 | Aa3 | 170,000 | 183,136 |
| Lehman Brothers Holdings, Inc., 6.625%, 1/18/2012 | A1 | 170,000 | 183,544 |
| Merrill Lynch & Co., Inc., 6.00%, 2/17/2009 | Aa3 | 180,000 | 185,623 |
| | | | 552,303 |
| | | | |
Commercial Banks - 6.0% | | | |
| Bank of America Corp., 7.40%, 1/15/2011 | Aa3 | 440,000 | 484,671 |
| PNC Funding Corp., 7.50%, 11/1/2009 | A3 | 260,000 | 282,642 |
U.S. Bancorp3, 2.69%, 8/21/2035 | A4 | 455,000 | 449,881 |
| Wachovia Corp., 5.25%, 8/1/2014 | A1 | 495,000 | 495,656 |
| | | | 1,712,850 |
The accompanying notes are an integral part of the financial statements.
5
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | | Value |
| | (unaudited) | Principal Amount | (Note 2) |
| | | | |
Financials (continued) | | | |
Diversified Financial Services - 0.7% | | | |
| Citigroup, Inc., 5.00%, 9/15/2014 | Aa2 | $190,000 | $187,027 |
| | | | |
Insurance - 2.0% | | | |
| American International Group, Inc., 4.25%, 5/15/2013 | Aa2 | 605,000 | 575,433 |
| | | | |
Total Financials | | | 3,027,613 |
| | | | |
Health Care - 1.4% | | | |
Pharmaceuticals - 1.4% | | | |
| Abbott Laboratories, 3.50%, 2/17/2009 | A1 | 195,000 | 187,960 |
Wyeth2, 5.25%, 3/15/2013 | Baa1 | 210,000 | 212,891 |
Total Health Care | | | 400,851 |
| | | | |
Industrials - 7.7% | | | |
Aerospace & Defense - 1.5% | | | |
| Boeing Capital Corp., 6.50%, 2/15/2012 | A3 | 230,000 | 248,267 |
| Honeywell International, Inc., 7.50%, 3/1/2010 | A2 | 170,000 | 186,823 |
| | | | 435,090 |
| | | | |
Air Freight & Logistics - 0.7% | | | |
| FedEx Corp., 3.50%, 4/1/2009 | Baa2 | 195,000 | 186,705 |
| | | | |
Airlines - 1.5% | | | |
| Southwest Airlines Co., 5.25%, 10/1/2014 | Baa1 | 445,000 | 431,539 |
| | | | |
Industrial Conglomerates - 2.0% | | | |
| General Electric Capital Corp., 6.75%, 3/15/2032 | Aaa | 495,000 | 581,056 |
| | | | |
Machinery - 0.7% | | | |
| John Deere Capital Corp., 7.00%, 3/15/2012 | A3 | 165,000 | 182,244 |
| | | | |
Road & Rail - 1.3% | | | |
| CSX Corp., 6.75%, 3/15/2011 | Baa2 | 230,000 | 246,477 |
| Union Pacific Corp., 6.65%, 1/15/2011 | Baa2 | 115,000 | 122,497 |
| | | | 368,974 |
| | | | |
Total Industrials | | | 2,185,608 |
| | | | |
Information Technology - 2.4% | | | |
Communications Equipment - 1.5% | | | |
| Corning, Inc., 5.90%, 3/15/2014 | Baa3 | 430,000 | 434,125 |
| | | | |
IT Services - 0.9% | | | |
| First Data Corp., 3.90%, 10/1/2009 | A1 | 260,000 | 247,399 |
| | | | |
Total Information Technology | | | 681,524 |
| | | | |
Materials - 0.9% | | | |
Metals & Mining - 0.9% | | | |
| Alcoa, Inc., 7.375%, 8/1/2010 | A2 | 225,000 | 246,589 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | | Value |
| | (unaudited) | Principal Amount | (Note 2) |
| | | | |
Telecommunication Services - 1.5% | | | |
Diversified Telecommunication Services - 1.5% | | | |
| Verizon Wireless Capital LLC, 5.375%, 12/15/2006 | A3 | $430,000 | $431,416 |
| | | | |
Utilities - 4.5% | | | |
Electric Utilities - 2.9% | | | |
| American Electric Power Co., Inc., 5.375%, 3/15/2010 | Baa2 | 280,000 | 282,253 |
| CenterPoint Energy Resources Corp., 7.875%, 4/1/2013 | Baa3 | 325,000 | 371,667 |
| TXU Energy Co., 7.00%, 3/15/2013 | Baa2 | 170,000 | 181,163 |
| | | | 835,083 |
| | | | |
Multi-Utilities - 1.6% | | | |
| Duke Energy Field Services Corp., 7.875%, 8/16/2010 | Baa2 | 255,000 | 282,015 |
| Sempra Energy, 7.95%, 3/1/2010 | Baa1 | 165,000 | 181,248 |
| | | | 463,263 |
| | | | |
Total Utilities | | | 1,298,346 |
| | | | |
TOTAL CORPORATE BONDS | | | |
| (Identified Cost $11,227,625) | | | 11,022,839 |
| | | | |
U.S. GOVERNMENT AGENCIES - 55.4% | | | |
| Fannie Mae, Pool #795855, 5.50%, 9/1/2019 | | 480,827 | 483,976 |
| Fannie Mae, Pool #786281, 6.50%, 7/1/2034 | | 501,116 | 514,101 |
| Fannie Mae, Pool #815409, 4.50%, 2/1/2035 | | 257,654 | 242,651 |
Fannie Mae, TBA5, 5.00%, 1/15/2021 | | 763,000 | 754,654 |
Fannie Mae, TBA5, 4.50%, 2/15/2021 | | 950,000 | 923,875 |
Fannie Mae, TBA5, 5.50%, 1/15/2036 | | 2,586,000 | 2,560,140 |
Fannie Mae, TBA5, 6.00%, 1/15/2036 | | 1,124,000 | 1,134,186 |
Fannie Mae, TBA5, 5.00%, 2/15/2036 | | 1,697,000 | 1,642,908 |
| Federal Home Loan Mortgage Corp., Pool #M90974, 4.50%, 3/1/2010 | | 99,528 | 97,952 |
| Federal Home Loan Mortgage Corp., Pool #B16835, 5.50%, 10/1/2019 | | 417,270 | 419,864 |
| Federal Home Loan Mortgage Corp., Pool #A27705, 6.50%, 10/1/2034 | | 217,285 | 222,694 |
| Federal Home Loan Mortgage Corp., Pool #G01782, 6.50%, 2/1/2035 | | 112,459 | 115,275 |
Federal Home Loan Mortgage Corp., TBA5, 5.00%, 1/15/2021 | | 640,000 | 633,400 |
Federal Home Loan Mortgage Corp., TBA5, 4.50%, 2/15/2021 | | 985,000 | 957,912 |
Federal Home Loan Mortgage Corp., TBA5, 5.00%, 1/15/2036 | | 1,177,000 | 1,139,115 |
Federal Home Loan Mortgage Corp., TBA5, 6.00%, 2/15/2036 | | 561,000 | 565,734 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | | | |
| | | Principal Amount/ | Value |
| | | Shares | (Note 2) |
| | | | |
U.S. GOVERNMENT AGENCIES (continued) | | | |
Federal Home Loan Mortgage Corp., TBA5, 5.50%, 3/15/2036 | | $1,512,000 | $1,494,990 |
| GNMA, Pool #487193, 5.00%, 4/15/2020 | | 118,706 | 118,405 |
| GNMA, Pool #563559, 6.50%, 4/15/2032 | | 94,691 | 98,945 |
| GNMA, Pool #631703, 6.50%, 9/15/2034 | | 228,885 | 238,935 |
GNMA, TBA5, 6.00%, 1/15/2036 | | 429,000 | 438,921 |
GNMA, TBA5, 5.50%, 2/15/2036 | | 685,000 | 688,425 |
GNMA, TBA5, 5.00%, 3/15/2036 | | 360,000 | 354,488 |
| | | | |
TOTAL U.S. GOVERNMENT AGENCIES | | | |
| (Identified Cost $15,786,545) | | | 15,841,546 |
| | | | |
SHORT-TERM INVESTMENTS - 51.8% | | | |
| Dreyfus Treasury Cash Management - Institutional Shares | | 1,495,780 | 1,495,780 |
| Fannie Mae Discount Note, 1/11/2006 | | $5,500,000 | 5,493,611 |
| Fannie Mae Discount Note, 1/17/2006 | | 1,000,000 | 998,156 |
| Fannie Mae Discount Note, 2/8/2006 | | 1,100,000 | 1,095,230 |
| Fannie Mae Discount Note, 2/15/2006 | | 500,000 | 497,412 |
| Fannie Mae Discount Note, 3/8/2006 | | 1,750,000 | 1,736,747 |
| Fannie Mae Discount Note, 3/15/2006 | | 400,000 | 396,639 |
| Freddie Mac Discount Note, 2/27/2006 | | 1,100,000 | 1,092,574 |
| Freddie Mac Discount Note, 3/7/2006 | | 2,000,000 | 1,985,090 |
| | | | |
TOTAL SHORT-TERM INVESTMENTS | | | |
| (Identified Cost $14,791,688) | | | 14,791,239 |
| | | | |
TOTAL INVESTMENTS - 145.8% | | | |
| (Identified Cost $41,805,858) | | | 41,655,624 |
| | | | |
LIABILITIES, LESS OTHER ASSETS - (45.8%) | | | (13,077,946) |
| | | | |
NET ASSETS - 100% | | | $28,577,678 |
1Credit ratings from Moody's (unaudited).
2The coupon rate will increase with every ratings downgrade and decrease with every ratings upgrade. The coupon rate stated is the rate as of December 31, 2005.
3The coupon rate is a floating rate and is subject to change quarterly. The coupon rate stated is the rate as of December 31, 2005.
4Credit ratings from S&P (unaudited).
5Security purchased on a forward commitment or when-issued basis. TBA - to be announced.
The accompanying notes are an integral part of the financial statements.
8
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost, $41,805,858) (Note 2) | $41,655,624 |
| Interest receivable | 218,933 |
| Dividends receivable | 4,454 |
| | |
| TOTAL ASSETS | 41,879,011 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 44,433 |
| Accrued fund accounting and transfer agent fees (Note 3) | 2,937 |
| Accrued Chief Compliance Officer service fees (Note 3) | 286 |
| Payable for purchases of delayed delivery securities (Note 2) | 13,221,931 |
| Audit fees payable | 26,200 |
| Other payables and accrued expenses | 5,546 |
| | |
| TOTAL LIABILITIES | 13,301,333 |
| | |
TOTAL NET ASSETS | $28,577,678 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $28,905 |
| Additional paid-in-capital | 28,893,962 |
| Undistributed net investment income | 5,099 |
| Accumulated net realized loss on investments | (200,054) |
| Net unrealized depreciation on investments | (150,234) |
| | |
TOTAL NET ASSETS | $28,577,678 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($28,577,678/2,890,485 shares) | $9.89 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Statement of Operations
For the Period April 21, 2005 (commencement of operations) to December 31, 2005
INVESTMENT INCOME: | |
| | |
| Interest | $717,283 |
| Dividends | 26,331 |
| | |
| Total Investment Income | 743,614 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 114,909 |
| Fund accounting and transfer agent fees (Note 3) | 23,346 |
| Directors' fees (Note 3) | 5,977 |
| Chief Compliance Officer service fees (Note 3) | 3,335 |
| Audit fees | 26,200 |
| Custodian fees | 7,450 |
| Miscellaneous | 10,414 |
| | |
| Total Expenses | 191,631 |
| Less reduction of expenses (Note 3) | (38,282) |
| | |
| Net Expenses | 153,349 |
| | |
| NET INVESTMENT INCOME | 590,265 |
| | |
REALIZED AND UNREALIZED LOSS ON INVESTMENTS: | |
| | |
| Net realized loss on investments | (200,054) |
| Net change in unrealized depreciation on investments | (150,234) |
| | |
| NET REALIZED AND UNREALIZED LOSS ON | |
| INVESTMENTS | (350,288) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $239,977 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Statement of Changes in Net Assets
| | For the Period |
| | 4/21/051 to 12/31/05 |
| | |
INCREASE IN NET ASSETS: | |
| | |
OPERATIONS: | |
| | |
| Net investment income | $590,265 |
| Net realized loss on investments | (200,054) |
| Net change in unrealized depreciation on investments | (150,234) |
| | |
| Net increase from operations | 239,977 |
| | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | |
| | |
| From net investment income | (585,166) |
| | |
CAPITAL STOCK ISSUED AND REPURCHASED: | |
| | |
| Net increase from capital share transactions (Note 5) | 28,922,867 |
| | |
| Net increase in net assets | 28,577,678 |
| | |
NET ASSETS: | |
| | |
| Beginning of period | - |
| | |
End of period (including undistributed net investment income of | |
| $5,099) | $28,577,678 |
1Commencement of operations.
The accompanying notes are an integral part of the financial statements.
11
<page>
Financial Highlights
| | For the Period |
| | 4/21/051to 12/31/05 |
| | |
Per share data (for a share outstanding throughout | |
the period): | |
| | |
Net asset value - Beginning of period | $10.00 |
| | |
| Income (loss) from investment operations: | |
| Net investment income | 0.21 |
| Net realized and unrealized loss on investments | (0.11) |
| | |
| Total from investment operations | 0.10 |
| | |
| Less distributions to shareholders: | |
| From net investment income | (0.21) |
| | |
Net asset value - End of period | $9.89 |
| | |
Total return2 | 0.98% |
| | |
Ratios (to average net assets)/Supplemental Data: | |
| Expenses* | 0.80%3 |
| Net investment income | 3.08%3 |
| | |
| Portfolio turnover | 293% |
| | |
Net assets - End of period (000's omitted) | $28,578 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased by 0.20%3.
1Commencement of operations.
2Represents aggregate total return for the period indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the period. Periods less than one year are not annualized.
3Annualized.
The accompanying notes are an integral part of the financial statements.
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Notes to Financial Statements
Core Bond Series (the "Series") is a no-load non-diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term total returns by investing primarily in corporate fixed income securities and pass-through securities.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 75 million have been designated as Core Bond Series common stock.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Security Valuation
Debt securities, including government bonds, sovereign bonds, corporate bonds and mortgage-backed securities, will normally be valued on the basis of evaluated bid prices provided by the Fund’s pricing service.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Securities Purchased on a When-Issued Basis or Forward Commitment
The Series may purchase securities on a when-issued basis or forward commitment. These transactions involve a commitment by the Series to purchase securities for a predetermined price with payment and delivery taking place beyond the customary settlement period. When such purchases are outstanding, the Series will designate liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed delivery basis, the Series assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. The Series may sell the when-issued securities before they are delivered, which may result in a capital gain or loss.
13
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Notes to Financial Statements
| 2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
Securities Purchased on a When-Issued Basis or Forward Commitment (continued)
In connection with its ability to purchase or sell securities on a forward commitment basis, the Series may enter into forward roll transactions principally using To Be Announced (TBA) securities. Forward roll transactions require the sale of securities for delivery in the current month, and a simultaneous agreement to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. Risks of entering into forward roll transactions include the potential inability of the counterparty to meet the terms of the agreement; the potential of the Series to receive inferior securities at redelivery as compared to the securities sold to the counterparty; counterparty credit risk; and the potential pay down speed variance between the mortgage-backed pools. During the roll period, the Series forgoes principal and interest paid on the securities.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 3. | TRANSACTIONS WITH AFFILIATES |
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.60% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions,
and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of
the Fund (except a percentage of
14
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Notes to Financial Statements
| 3. | TRANSACTIONS WITH AFFILIATES (continued) |
the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.80% of average daily net assets each year. Accordingly, the Advisor waived fees of $38,282 for the period April 21, 2005 (commencement of operations) to December 31, 2005, which is reflected as a reduction of expenses on the Statement of Operations.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
| 4. | PURCHASES AND SALES OF SECURITIES |
For the period April 21, 2005 (commencement of operations) to December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $12,977,034 and $1,657,364, respectively. Purchases and sales of United States Government securities, other than short-term securities, were $80,881,240 and $64,888,820, respectively.
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Notes to Financial Statements
| 5. | CAPITAL STOCK TRANSACTIONS |
Transactions in shares of Core Bond Series were:
| | For the period 4/21/05 (commencement |
| | of operations) to 12/31/05 |
| | | |
| | Shares | Amount |
| | | |
| Sold | 2,995,471 | $29,993,823 |
| Reinvested | 58,124 | 571,940 |
| Repurchased | (163,110) | (1,642,896) |
| | | |
| Total | 2,890,485 | $28,922,867 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including Post-October losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
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Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION (continued)
The tax character of distributions paid were as follows:
| | For the Period 4/21/05 |
| | (commencement of |
| | operations) to 12/31/05 |
| | |
| Ordinary income | $585,166 |
| | |
For the period April 21, 2005 (commencement of operations) to December 31, 2005, the Series elected to defer $134,190 of capital losses attributable to Post-October losses.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized depreciation based on identified cost for federal income tax purposes were as follows:
| | |
| Cost for federal income tax purposes | $41,805,858 |
| | |
| Unrealized appreciation | $96,393 |
| Unrealized depreciation | (246,627) |
| | |
| Net unrealized depreciation | $(150,234) |
| Undistributed ordinary income | 5,099 |
| Capital loss carryover | 65,864 |
The capital loss carryover, disclosed above, available to the extent allowed by tax law to offset future net capital gain, if any, will expire on December 31, 2013.
17
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Core Bond Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Core Bond Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for the period April 21, 2005 (commencement of operations) through December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
18
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Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
19
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Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
20
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Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
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Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
22
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
23
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Exeter Fund, Inc.
Annual Report
December 31, 2005
Core Plus Bond Series
<page>
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
Over the long term the vast majority of a fixed income security’s total return is determined by its coupon, or more specifically, the yield of the security, since very few fixed income securities are actually traded at par. Given the added risk associated with corporate and mortgage-backed bonds, they traditionally carry higher yields than U.S. Treasury securities with similar maturities and, therefore, over the long-term have provided higher returns than U.S. Treasuries. With that tendency in mind, and given the incremental yield offered by corporate and mortgage-backed securities in an exceptionally low interest rate environment, the Core Plus Bond Series was activated in April of 2005.
How the Series performs will depend not only on what happens to the level of interest rates, but also on the change in yield differentials, or “spreads” between corporate or mortgage-backed bonds and U.S. Treasury securities. The relative impact of each will vary from month to month, quarter to quarter, and year to year. Since the Series was activated, changes in the level of interest rates more so than changes in spreads have dictated performance.
With the exception of the longest dated maturities, interest rates have risen across the entire yield curve, albeit in a decidedly uneven fashion. The magnitudes of the rate increases decreased the further out on the yield curve one looked. Very short-term interest rates, three to six months, experienced the largest increases since April, in excess of 125 basis points (1.25%); two-year yields were up about 70 basis points (0.70%), 5-year yields rose by about half that, and 10-year yields were up a mere 10-15 basis points (0.10% - 0.15%), while yields on securities with maturities of more than 20 years were essentially unchanged.
The increase in short-term interest rates reflected the tighter monetary policies that the Federal Reserve (the “Fed”) started to put in place in June of 2004 and which the Fed continued to implement throughout all of 2005. The Fed “tightens” monetary policy by pulling reserves out of the banking system, thereby causing the overnight lending rate that banks charge each other to rise. This overnight rate is referred to as the Fed Funds rate. Increasing or decreasing reserves is the mechanism that the Fed uses to target the Fed Funds rate. Since April of 2005, the Fed withdrew reserves, thereby increasing the “targeted” Fed Funds rate, on six separate occasions. Each time the target was increased by 25 basis points (0.25%). Short-term rates across all market sectors rose in tandem.
Given the improvements in the economic environment, the Fed began its tightening policy in an effort to unwind what were universally considered to be “accommodative” monetary policies. As the economy continued to grow over the next 18 months (the second half of 2004 and all of 2005), the Fed continued to tighten. During the second half of 2005, although the core rate of inflation remained relatively stable, the sizable increases in energy prices pushed up the overall rate of inflation, which gave the Fed an additional reason to push up short-term interest rates.
Longer-term interest rates are driven to a greater degree by investors’ expectations about the future course of inflation. The fact that the core rate of inflation (i.e. inflation less the volatile effects of food and energy prices) barely budged in 2005 in conjunction with the Fed acting in a proactive (i.e. before inflation accelerated) rather than reactive fashion, allowed long-term fixed income investors to remain relatively sanguine about the risk of inflation. That, along with a limited number of higher yielding investment alternatives, made longer-term fixed income securities relatively attractive, which caused long-term yields to remain steady.
As for spreads, they moved out modestly from April through the end of 2005. In the corporate bond marketplace, that was a reflection of some very high-profile credit downgrades, specifically Ford and GM, as well as a realization that corporate bond investors had to be much more alert for event risk (corporate actions that help equity holders but often times hurt debt holders). Mortgage spreads widened due to supply and demand considerations, concerns about possible extension risks, as well as a moderate rise in market volatility.
1
<page>
Management Discussion and Analysis (unaudited)
As for the actual performance of the Core Plus Bond Series, it was up 1.04% since inception (April 21, 2005) through December 31, 2005. The Merrill Lynch U.S. Domestic Master Index (which includes all U.S. Treasury, U.S. Agency, investment grade corporate bonds, and plain vanilla mortgage-backed securities with maturities of more than 1-year) posted a total return of 2.01%. One-quarter of the benchmark’s total return occurred during the last 10 days of April, a time period when the Core Plus Bond Series was being positioned. Over the last six months of 2005, the Series and benchmark posted similar returns.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
2
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Total Returns |
| | Since Inception1 |
| | As of December 31, 2005 |
| | |
Exeter Fund, Inc. - Core Plus Bond Series2 | 1.04% |
| | |
Merrill Lynch U.S. Domestic Master Index3 | 2.01% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Core Plus Bond Series from its inception1 (4/21/05) to present (12/31/05) to the Merrill Lynch U.S. Domestic Master Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | Merrill Lynch |
| Date | Core Plus Bond Series | U.S. Domestic Master Index |
| | | |
| 4/21/05 | $10,000 | $10,000 |
| 6/30/05 | 10,140 | 10,212 |
| 9/30/05 | 10,080 | 10,142 |
| 12/31/05 | 10,104 | 10,201 |
1Performance numbers for the Series and Index are calculated from April 21, 2005, the Series' inception date. Periods less than one year are not annualized.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch U.S. Domestic Master Index is a market value weighted measure comprised of over 4,000 U.S. government, corporate, and pass-through securities issued by entities within the United States, by supranational entities, or by entities headquartered outside of the United States but who have issued dollar-denominated securities within the United States. The Index only includes investment grade securities with maturities of greater than one year. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $996.50 | $4.48 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,020.72 | $4.53 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.89%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Sector Allocation*
| | |
| Consumer Discretionary | 12.2% |
| Consumer Staples | 0.7% |
| Energy | 1.0% |
| Financials | 10.0% |
| Health Care | 1.4% |
| Industrials | 7.7% |
| Information Technology | 1.5% |
| Materials | 0.9% |
| Telecommunication Services | 0.9% |
| Utilities | 3.0% |
| U.S. Government Agencies | 55.5% |
| Cash, short-term investments, and liabilities, less other assets | 5.2% |
*As a percentage of net assets.
<graphic>
<pie chart>
Credit Quality Ratings1,2
| | |
| Aaa | 4.9% |
| Aa | 12.3% |
| A | 29.6% |
| Baa | 33.1% |
| Ba | 17.3% |
| B | 2.8% |
1As a percentage of total corporate bonds.
2Based on ratings from Moody's, or the S&P equivalent . The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | | Value |
| | (unaudited) | Principal Amount | (Note 2) |
| | | | |
CORPORATE BONDS - 39.3% | | | |
Consumer Discretionary - 12.2% | | | |
Automobiles - 3.8% | | | |
| General Motors Acceptance Corp., 6.75%, 1/15/2006 | Ba1 | $1,705,000 | $1,705,465 |
| General Motors Acceptance Corp., 6.125%, 9/15/2006 | Ba1 | 5,060,000 | 4,915,056 |
| | | | 6,620,521 |
| | | | |
Leisure Equipment & Products - 1.1% | | | |
| Eastman Kodak Co., 6.375%, 6/15/2006 | B1 | 1,895,000 | 1,896,963 |
| | | | |
Media - 3.6% | | | |
| AOL Time Warner (now known as Time Warner, Inc.), 6.75%, 4/15/2011 | Baa1 | 2,655,000 | 2,787,986 |
| Comcast Cable Communications, Inc., 6.75%, 1/30/2011 | Baa2 | 2,285,000 | 2,419,372 |
| The Walt Disney Co., 6.375%, 3/1/2012 | Baa1 | 1,150,000 | 1,216,376 |
| | | | 6,423,734 |
| | | | |
Multiline Retail - 2.1% | | | |
| JC Penney Co., Inc., 8.00%, 3/1/2010 | Ba1 | 1,465,000 | 1,604,537 |
| Target Corp., 5.875%, 3/1/2012 | A2 | 1,945,000 | 2,043,172 |
| | | | 3,647,709 |
| | | | |
Specialty Retail - 1.6% | | | |
The Gap, Inc.2, 9.55%, 12/15/2008 | Baa3 | 1,090,000 | 1,211,325 |
| Lowe's Companies, Inc., 8.25%, 6/1/2010 | A2 | 1,420,000 | 1,606,852 |
| | | | 2,818,177 |
| | | | |
Total Consumer Discretionary | | | 21,407,104 |
| | | | |
Consumer Staples - 0.7% | | | |
Food & Staples Retailing - 0.5% | | | |
| The Kroger Co., 7.25%, 6/1/2009 | Baa2 | 750,000 | 793,808 |
| | | | |
Food Products - 0.2% | | | |
| General Mills, Inc., 6.00%, 2/15/2012 | Baa2 | 385,000 | 402,921 |
| | | | |
Total Consumer Staples | | | 1,196,729 |
| | | | |
Energy - 1.0% | | | |
Oil, Gas & Consumable Fuels - 1.0% | | | |
| Amerada Hess Corp., 6.65%, 8/15/2011 | Ba1 | 1,560,000 | 1,676,301 |
| | | | |
Financials - 10.0% | | | |
Capital Markets - 2.1% | | | |
| The Goldman Sachs Group, Inc., 6.875%, 1/15/2011 | Aa3 | 1,125,000 | 1,211,931 |
| Lehman Brothers Holdings, Inc., 6.625%, 1/18/2012 | A1 | 1,125,000 | 1,214,626 |
| Merrill Lynch & Co., Inc., 6.00%, 2/17/2009 | Aa3 | 1,180,000 | 1,216,858 |
| | | | 3,643,415 |
| | | | |
Commercial Banks - 6.3% | | | |
| Bank of America Corp., 7.40%, 1/15/2011 | Aa3 | 2,895,000 | 3,188,912 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | | Value |
| | (unaudited) | Principal Amount | (Note 2) |
| | | | |
Financials (continued) | | | |
Commercial Banks (continued) | | | |
| PNC Funding Corp., 7.50%, 11/1/2009 | A3 | $1,490,000 | $1,619,754 |
U.S. Bancorp3, 2.69%, 8/21/2035 | A4 | 3,045,000 | 3,010,744 |
| Wachovia Corp., 5.25%, 8/1/2014 | A1 | 3,250,000 | 3,254,310 |
| | | | 11,073,720 |
| | | | |
Diversified Financial Services - 0.7% | | | |
| Citigroup, Inc., 5.00%, 9/15/2014 | Aa2 | 1,245,000 | 1,225,522 |
| | | | |
Insurance - 0.9% | | | |
| American International Group, Inc., 4.25%, 5/15/2013 | Aa2 | 1,745,000 | 1,659,720 |
| | | | |
Total Financials | | | 17,602,377 |
| | | | |
Health Care - 1.4% | | | |
Pharmaceuticals - 1.4% | | | |
| Abbott Laboratories, 3.50%, 2/17/2009 | A1 | 1,270,000 | 1,224,148 |
Wyeth2, 5.25%, 3/15/2013 | Baa1 | 1,205,000 | 1,221,590 |
Total Health Care | | | 2,445,738 |
| | | | |
Industrials - 7.7% | | | |
Aerospace & Defense - 1.1% | | | |
| Boeing Capital Corp., 6.50%, 2/15/2012 | A3 | 1,135,000 | 1,225,145 |
| Honeywell International, Inc., 7.50%, 3/1/2010 | A2 | 735,000 | 807,733 |
| | | | 2,032,878 |
| | | | |
Air Freight & Logistics - 0.7% | | | |
| FedEx Corp., 3.50%, 4/1/2009 | Baa2 | 1,275,000 | 1,220,767 |
| | | | |
Airlines - 1.4% | | | |
| Southwest Airlines Co., 5.25%, 10/1/2014 | Baa1 | 2,560,000 | 2,482,560 |
| | | | |
Industrial Conglomerates - 2.4% | | | |
| General Electric Capital Corp., 6.75%, 3/15/2032 | Aaa | 2,845,000 | 3,339,606 |
| Tyco International Group S.A., 6.375%, 10/15/2011 (Luxembourg) (Note 7) | Baa3 | 775,000 | 804,911 |
| | | | 4,144,517 |
| | | | |
Machinery - 0.7% | | | |
| John Deere Capital Corp., 7.00%, 3/15/2012 | A3 | 1,095,000 | 1,209,435 |
| | | | |
Road & Rail - 1.4% | | | |
| CSX Corp., 6.75%, 3/15/2011 | Baa2 | 1,555,000 | 1,666,400 |
| Union Pacific Corp., 6.65%, 1/15/2011 | Baa2 | 760,000 | 809,544 |
| | | | 2,475,944 |
| | | | |
Total Industrials | | | 13,566,101 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | | Value |
| | (unaudited) | Principal Amount | (Note 2) |
| | | | |
Information Technology - 1.5% | | | |
Communications Equipment - 1.5% | | | |
| Corning, Inc., 5.90%, 3/15/2014 | Baa3 | $2,545,000 | $2,569,417 |
| | | | |
Materials - 0.9% | | | |
Metals & Mining - 0.9% | | | |
| Alcoa, Inc., 7.375%, 8/1/2010 | A2 | 1,465,000 | 1,605,570 |
| | | | |
Telecommunication Services - 0.9% | | | |
Diversified Telecommunication Services - 0.9% | | | |
| Verizon Wireless Capital LLC, 5.375%, 12/15/2006 | A3 | 1,620,000 | 1,625,336 |
| | | | |
Utilities - 3.0% | | | |
Electric Utilities - 2.6% | | | |
Allegheny Energy Supply Co. LLC5, 8.25%, 4/15/2012 | Ba3 | 1,180,000 | 1,330,450 |
| American Electric Power Co., Inc., 5.375%, 3/15/2010 | Baa2 | 1,230,000 | 1,239,899 |
| CenterPoint Energy Resources Corp., 7.875%, 4/1/2013 | Baa3 | 710,000 | 811,950 |
| TXU Energy Co., 7.00%, 3/15/2013 | Baa2 | 1,125,000 | 1,198,872 |
| | | | 4,581,171 |
| | | | |
Independent Power Producers & Energy Traders - 0.4% | | | |
| NRG Energy, Inc., 8.00%, 12/15/2013 | Ba3 | 653,000 | 728,095 |
| | | | |
Total Utilities | | | 5,309,266 |
| | | | |
TOTAL CORPORATE BONDS | | | |
| (Identified Cost $69,990,677) | | | 69,003,939 |
| | | | |
U.S. GOVERNMENT AGENCIES - 55.5% | | | |
| Fannie Mae, Pool #244510, 5.50%, 12/1/2008 | | 14,771 | 14,896 |
| Fannie Mae, Pool #190549, 5.50%, 1/1/2009 | | 16,675 | 16,818 |
| Fannie Mae, Pool #50972, 5.50%, 1/1/2009 | | 14,908 | 15,034 |
| Fannie Mae, Pool #663794, 5.50%, 9/1/2017 | | 171,364 | 172,548 |
| Fannie Mae, Pool #555389, 5.50%, 4/1/2018 | | 681,683 | 686,394 |
| Fannie Mae, Pool #697020, 5.50%, 5/1/2018 | | 54,970 | 55,335 |
| Fannie Mae, Pool #741610, 5.50%, 9/1/2018 | | 630,871 | 635,059 |
| Fannie Mae, Pool #761280, 5.50%, 2/1/2019 | | 147,482 | 148,448 |
| Fannie Mae, Pool #725793, 5.50%, 9/1/2019 | | 776,834 | 781,991 |
| Fannie Mae, Pool #741552, 6.50%, 9/1/2033 | | 763,579 | 783,463 |
| Fannie Mae, Pool #747607, 6.50%, 11/1/2033 | | 111,293 | 114,191 |
| Fannie Mae, Pool #776452, 6.50%, 1/1/2034 | | 89,334 | 91,660 |
| Fannie Mae, Pool #765848, 6.50%, 2/1/2034 | | 101,269 | 103,893 |
| Fannie Mae, Pool #766304, 6.50%, 3/1/2034 | | 96,649 | 99,153 |
| Fannie Mae, Pool #725686, 6.50%, 7/1/2034 | | 215,733 | 221,715 |
| Fannie Mae, Pool #782769, 6.50%, 7/1/2034 | | 949,535 | 974,139 |
| Fannie Mae, Pool #786281, 6.50%, 7/1/2034 | | 84,932 | 87,133 |
| Fannie Mae, Pool #786692, 6.50%, 8/1/2034 | | 97,712 | 100,244 |
| Fannie Mae, Pool #799657, 6.50%, 11/1/2034 | | 859,265 | 881,530 |
| Fannie Mae, Pool #812185, 4.50%, 2/1/2035 | | 461,022 | 434,177 |
| Fannie Mae, Pool #815409, 4.50%, 2/1/2035 | | 236,761 | 222,974 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Investment Portfolio - December 31, 2005
| | | | Value |
| | | Principal Amount | (Note 2) |
| | | | |
U.S. Government Agencies (continued) | | | |
| Fannie Mae, Pool #815926, 4.50%, 4/1/2035 | | $989,337 | $931,728 |
Fannie Mae, TBA6, 5.00%, 1/15/2021 | | 4,660,000 | 4,609,029 |
Fannie Mae, TBA6, 4.50%, 2/15/2021 | | 5,805,000 | 5,645,362 |
Fannie Mae, TBA6, 5.50%, 1/15/2036 | | 15,770,000 | 15,612,300 |
Fannie Mae, TBA6, 6.00%, 1/15/2036 | | 6,856,000 | 6,918,129 |
Fannie Mae, TBA6, 5.00%, 2/15/2036 | | 10,354,000 | 10,023,966 |
| Federal Home Loan Mortgage Corp., Pool #M90974, 4.50%, 3/1/2010 | | 660,502 | 650,044 |
| Federal Home Loan Mortgage Corp., Pool #E00593, 5.50%, 11/1/2013 | | 22,819 | 22,997 |
| Federal Home Loan Mortgage Corp., Pool #E91213, 5.50%, 9/1/2017 | | 97,807 | 98,452 |
| Federal Home Loan Mortgage Corp., Pool #B11112, 5.50%, 11/1/2018 | | 577,863 | 581,524 |
| Federal Home Loan Mortgage Corp., Pool #B11862, 5.50%, 1/1/2019 | | 273,782 | 275,516 |
| Federal Home Loan Mortgage Corp., Pool #B16144, 5.50%, 8/1/2019 | | 174,935 | 176,022 |
| Federal Home Loan Mortgage Corp., Pool #B16835, 5.50%, 10/1/2019 | | 1,463,240 | 1,472,335 |
| Federal Home Loan Mortgage Corp., Pool #815122, 5.50%, 4/1/2020 | | 217,932 | 219,322 |
| Federal Home Loan Mortgage Corp., Pool #A22067, 6.50%, 5/1/2034 | | 17,270 | 17,700 |
| Federal Home Loan Mortgage Corp., Pool #A25775, 6.50%, 8/1/2034 | | 817,440 | 837,788 |
| Federal Home Loan Mortgage Corp., Pool #G01741, 6.50%, 10/1/2034 | | 765,434 | 785,816 |
| Federal Home Loan Mortgage Corp., Pool #G01782, 6.50%, 2/1/2035 | | 637,270 | 653,225 |
Federal Home Loan Mortgage Corp., TBA6, 5.00%, 1/15/2021 | | 3,895,000 | 3,854,835 |
Federal Home Loan Mortgage Corp., TBA6, 4.50%, 2/15/2021 | | 6,015,000 | 5,849,588 |
Federal Home Loan Mortgage Corp., TBA6, 5.00%, 1/15/2036 | | 7,181,000 | 6,949,858 |
Federal Home Loan Mortgage Corp., TBA6, 6.00%, 2/15/2036 | | 3,422,000 | 3,450,875 |
Federal Home Loan Mortgage Corp., TBA6, 5.50%, 3/15/2036 | | 9,220,000 | 9,116,275 |
| GNMA, Pool #487193, 5.00%, 4/15/2020 | | 773,818 | 771,855 |
| GNMA, Pool #563559, 6.50%, 4/15/2032 | | 981,610 | 1,025,707 |
| GNMA, Pool #552765, 6.50%, 9/15/2032 | | 1,148,421 | 1,200,012 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Investment Portfolio - December 31, 2005
| | | Principal Amount/ | Value |
| | | Shares | (Note 2) |
| | | | |
U.S. Government Agencies (continued) | | | |
GNMA, TBA6, 6.00%, 1/15/2036 | | $2,627,000 | $2,687,749 |
GNMA, TBA6, 5.50%, 2/15/2036 | | 4,180,000 | 4,200,900 |
GNMA, TBA6, 5.00%, 3/15/2036 | | 2,200,000 | 2,166,314 |
| | | | |
TOTAL U.S. GOVERNMENT AGENCIES | | | |
| (Identified Cost $97,116,314) | | | 97,446,018 |
| | | | |
SHORT-TERM INVESTMENTS - 50.4% | | | |
| Dreyfus Treasury Cash Management - Institutional Shares | | 3,934,560 | 3,934,560 |
| Fannie Mae Discount Note, 1/11/2006 | | $33,700,000 | 33,660,849 |
| Fannie Mae Discount Note, 1/17/2006 | | 2,000,000 | 1,996,311 |
| Fannie Mae Discount Note, 1/18/2006 | | 5,000,000 | 4,990,154 |
| Fannie Mae Discount Note, 2/8/2006 | | 14,500,000 | 14,437,119 |
| Fannie Mae Discount Note, 2/15/2006 | | 16,000,000 | 15,917,195 |
| Fannie Mae Discount Note, 3/15/2006 | | 2,800,000 | 2,776,475 |
| Freddie Mac Discount Note, 3/7/2006 | | 10,800,000 | 10,719,486 |
| | | | |
TOTAL SHORT-TERM INVESTMENTS | | | |
| (Identified Cost $88,429,087) | | | 88,432,149 |
| | | | |
TOTAL INVESTMENTS - 145.2% | | | |
| (Identified Cost $255,536,078) | | | 254,882,106 |
| | | | |
LIABILITIES, LESS OTHER ASSETS - (45.2%) | | | (79,288,015) |
| | | | |
NET ASSETS - 100% | | | $175,594,091 |
1Credit ratings from Moody's (unaudited).
2The coupon rate will increase with every ratings downgrade and decrease with every ratings upgrade. The coupon rate stated is the rate as of December 31, 2005.
3The coupon rate is a floating rate and is subject to change quarterly. The coupon rate stated is the rate as of December 31, 2005.
4Credit ratings from S&P (unaudited).
5Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Board of Directors. This security amounts to $1,330,450, or 0.8%, of the Series' net assets as of December 31, 2005.
6Security purchased on a forward commitment or when-issued basis. TBA - to be announced.
The accompanying notes are an integral part of the financial statements.
10
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost, $255,536,078) (Note 2) | $254,882,106 |
| Interest receivable | 1,425,571 |
| Receivable for fund shares sold | 141,649 |
| Dividends receivable | 12,604 |
| | |
| TOTAL ASSETS | 256,461,930 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 116,837 |
| Accrued fund accounting and transfer agent fees (Note 3) | 15,851 |
| Accrued Chief Compliance Officer service fees (Note 3) | 286 |
| Payable for purchases of delayed delivery securities (Note 2) | 80,677,317 |
| Audit fees payable | 27,400 |
| Registration and filing fees | 18,202 |
| Payable for fund shares repurchased | 5,484 |
| Other payables and accrued expenses | 6,462 |
| | |
| TOTAL LIABILITIES | 80,867,839 |
| | |
TOTAL NET ASSETS | $175,594,091 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $177,520 |
| Additional paid-in-capital | 177,321,396 |
| Undistributed net investment income | 30,076 |
| Accumulated net realized loss on investments | (1,280,929) |
| Net unrealized depreciation on investments | (653,972) |
| | |
TOTAL NET ASSETS | $175,594,091 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($175,594,091/17,751,966 shares) | $9.89 |
The accompanying notes are an integral part of the financial statements.
11
<page>
Statement of Operations
For the Period April 21, 2005 (commencement of operations) to December 31, 2005
INVESTMENT INCOME: | |
| | |
| Interest | $4,694,213 |
| Dividends | 93,142 |
| | |
| Total Investment Income | 4,787,355 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 835,800 |
| Fund accounting and transfer agent fees (Note 3) | 130,787 |
| Directors' fees (Note 3) | 5,977 |
| Chief Compliance Officer service fees (Note 3) | 3,335 |
| Custodian fees | 20,300 |
| Miscellaneous | 60,227 |
| | |
| Total Expenses | 1,056,426 |
| | |
| NET INVESTMENT INCOME | 3,730,929 |
| | |
REALIZED AND UNREALIZED LOSS ON INVESTMENTS: | |
| | |
| Net realized loss on investments | (1,280,929) |
| Net change in unrealized depreciation on investments | (653,972) |
| | |
| NET REALIZED AND UNREALIZED LOSS ON | |
| INVESTMENTS | (1,934,901) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $1,796,028 |
The accompanying notes are an integral part of the financial statements.
12
<page>
Statement of Changes in Net Assets
| | For the Period |
| | 4/21/051 to 12/31/05 |
| | |
INCREASE (DECREASE) IN NET ASSETS: | |
| | |
OPERATIONS: | |
| | |
| Net investment income | $3,730,929 |
| Net realized loss on investments | (1,280,929) |
| Net change in unrealized depreciation on investments | (653,972) |
| | |
| Net increase from operations | 1,796,028 |
| | |
DISTRIBUTIONS TO SHAREHOLDERS (Note 8): | |
| | |
| From net investment income | (3,700,853) |
| | |
CAPITAL STOCK ISSUED AND REPURCHASED: | |
| | |
| Net increase from capital share transactions (Note 5) | 177,498,916 |
| | |
| Net increase in net assets | 175,594,091 |
| | |
NET ASSETS: | |
| | |
| Beginning of period | - |
| | |
End of period (including undistributed net investment income of | |
| $30,076) | $175,594,091 |
1Commencement of operations.
The accompanying notes are an integral part of the financial statements.
13
<page>
Financial Highlights
| | For the Period |
| | 4/21/051 to 12/31/05 |
| | |
Per share data (for a share outstanding throughout | |
the period): | |
| | |
Net asset value - Beginning of period | $10.00 |
| | |
| Income(loss) from investment operations: | |
| Net investment income | 0.22 |
| Net realized and unrealized loss on investments | (0.12) |
| | |
| Total from investment operations | 0.10 |
| | |
| Less distributions to shareholders: | |
| From net investment income | (0.21) |
| | |
Net asset value - End of period | $9.89 |
| | |
Total return2 | 1.04% |
| | |
Ratios (to average net assets)/Supplemental Data: | |
| Expenses | 0.88%3 |
| Net investment income | 3.12%3 |
| | |
| Portfolio turnover | 290% |
| | |
Net assets - End of period (000's omitted) | $ 175,594 |
1Commencement of operations.
2Represents aggregate total return for the period indicated, and assumes reinvestment of all distributions. Periods less than one year are not annualized.
3Annualized.
The accompanying notes are an integral part of the financial statements.
14
<page>
Notes to Financial Statements
Core Plus Bond Series (the "Series") is a no-load non-diversified series of Exeter Fund, Inc. (the "Fund"). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide long-term total returns by investing primarily in corporate fixed income securities and pass-through securities.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 75 million have been designated as Core Plus Bond Series common stock.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Security Valuation
Debt securities, including government bonds, sovereign bonds, corporate bonds and mortgage-backed securities, will normally be valued on the basis of evaluated bid prices provided by the Fund’s pricing service.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Foreign Currency Translation
The books and records of the Series are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the current exchange rates. Purchases and sales of investment securities and income and expenses are translated on the respective dates of such transactions. The Series does not isolate realized and unrealized gains and losses attributable to changes in the exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized foreign currency gains and losses
15
<page>
Notes to Financial Statements
| 2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
Foreign Currency Translation (continued)
represent foreign currency gains and losses between trade date and settlement date on securities transactions, gains and losses on disposition of foreign currencies and the difference between the amount of income and foreign withholding taxes recorded on the books of the Series and the amounts actually received or paid.
Securities Purchased on a When-Issued Basis or Forward Commitment
The Series may purchase securities on a when-issued basis or forward commitment. These transactions involve a commitment by the Series to purchase securities for a predetermined price with payment and delivery taking place beyond the customary settlement period. When such purchases are outstanding, the Series will designate liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed delivery basis, the Series assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. The Series may sell the when-issued securities before they are delivered, which may result in a capital gain or loss.
In connection with its ability to purchase or sell securities on a forward commitment basis, the Series may enter into forward roll transactions principally using To Be Announced (TBA) securities. Forward roll transactions require the sale of securities for delivery in the current month, and a simultaneous agreement to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. Risks of entering into forward roll transactions include the potential inability of the counterparty to meet the terms of the agreement; the potential of the Series to receive inferior securities at redelivery as compared to the securities sold to the counterparty; counterparty credit risk; and the potential pay down speed variance between the mortgage-backed pools. During the roll period, the Series forgoes principal and interest paid on the securities.
Restricted Securities
Restricted securities are purchased in private placement transactions, are not registered under the Securities Act of 1933, as amended, and may have contractual restrictions on resale. Information regarding restricted securities is included at the end of the Series’ Investment Portfolio.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
Distributions of Income and Gains
Distributions to shareholders of net investment income and net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts
16
<page>
Notes to Financial Statements
| 2. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
Indemnifications (continued)
that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 3. | TRANSACTIONS WITH AFFILIATES |
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.70% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series�� organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.90% of average daily net assets each year. For the period April 21, 2005 (commencement of operations) to December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the
17
<page>
Notes to Financial Statements
| 3. | TRANSACTIONS WITH AFFILIATES (continued) |
Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
| 4. | PURCHASES AND SALES OF SECURITIES |
For the period April 21, 2005 (commencement of operations) to December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $84,694,791 and $14,090,496, respectively. Purchases and sales of United States Government securities, other than short-term securities, were $509,705,153 and $411,333,458, respectively.
| 5. | CAPITAL STOCK TRANSACTIONS |
Transactions in shares of Core Plus Bond Series were:
| | For the period 4/21/05 (commencement |
| | of operations) to 12/31/05 |
| | | |
| | Shares | Amount |
| | | |
| Sold | 18,018,997 | $180,249,999 |
| Reinvested | 366,846 | 3,613,437 |
| Repurchased | (633,877) | (6,364,520) |
| Total | 17,751,966 | $177,498,916 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options, forward foreign currency exchange contracts and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
Investing in securities of foreign companies and foreign governments involves special risks and considerations not typically associated with investing in securities of domestic companies and the United States Government. These risks include revaluation of currencies and future adverse political and economic developments. Moreover, securities of foreign companies and foreign governments and their markets may be less liquid and their prices more volatile than those of comparable domestic companies and the United States Government.
18
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Notes to Financial Statements
8. FEDERAL INCOME TAX INFORMATION
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including Post-October losses. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Period 4/21/05 |
| | (commencement of |
| | operations) to 12/31/05 |
| | |
| Ordinary income | $3,700,853 |
For the period April 21, 2005 (commencement of operations) to December 31, 2005, the Series elected to defer $891,846 of capital losses attributable to Post-October losses.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized depreciation based on identified cost for federal income tax purposes were as follows:
| | |
| Cost for federal income tax purposes | $255,536,078 |
| | |
| Unrealized appreciation | $761,550 |
| Unrealized depreciation | (1,415,522) |
| | |
| Net unrealized depreciation | $(653,972) |
| Undistributed ordinary income | 30,076 |
| Capital loss carryover | 389,083 |
The capital loss carryover, disclosed above, available to the extent allowed by tax law to offset future net capital gain, if any, will expire on December 31, 2013.
19
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Core Plus Bond Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Core Plus Bond Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for the period April 21, 2005 (commencement of operations) through December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
20
<page>
Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
21
<page>
Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
22
<page>
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
23
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Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
24
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25
<page>
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
26
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
Ohio Tax Exempt Series
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
While investing is definitely not child’s play, it is sometimes useful to draw upon one’s childhood experiences when looking for analogies that best describe what has occurred in the financial markets. In 2005, the most appropriate analogy as far as the fixed income markets, including the municipal market, were concerned, would have been the “teeter-totter”. Its movements, one side rising while the other side falls, aptly describe what happened to the change in the shape of the municipal yield curve, and that change was the key determinant of the various investment performances within the municipal market.
At the start of the year, short-term municipal yields were relatively low (medium quality general obligation bonds were yielding about 2.20%), while long-term yields were substantially higher (medium quality government obligation bonds were yielding about 4.85%). At the end of the year, short-term interest rates had moved up quite dramatically (up to about 3.35%) but long-term interest rates had actually drifted lower (down to about 4.60%). It was as if a fulcrum had been placed somewhere between the 10 and 15 year maturities and the yields on those securities with shorter maturities had “teetered” up, while the yields of securities with longer maturities had actually “tottered” down.
The increase in short-term rates reflected the tighter monetary policies that the Federal Reserve (the “Fed”) started to put in place in June of 2004 and which the Fed continued to implement throughout all of 2005. The Fed “tightens” monetary policy by pulling reserves out of the banking system, thereby causing the overnight lending rate that banks charge each other to rise. The overnight rate is referred to as the Fed Funds rate. Increasing or decreasing reserves is the mechanism that the Fed uses to target the Fed Funds rate. In 2005, the Fed withdrew reserves, thereby increasing the “targeted” Fed Funds rate, on eight separate occasions. Each time the target was increased by 25 basis points (0.25%). Short-term interest rates across all market sectors, including the municipal market, rose in tandem.
Given the improvements in the economic environment, the Fed began its tightening policy in an effort to unwind what were universally considered to be “accommodative” monetary policies. As the economy continued to grow over the next 18 months (the second half of 2004 and all of 2005) the Fed continued to tighten. During the second half of 2005, although the core rate of inflation remained relatively stable, the sizable increases in energy prices pushed up the overall rate of inflation, which gave the Fed an additional reason to push up short-term interest rates.
Longer-term interest rates are driven to a greater degree by investors’ expectations about the future course of inflation. The fact that the core rate of inflation (i.e. inflation less the volatile effects of food and energy prices) barely budged in 2005 in conjunction with the Fed acting in a proactive (i.e. before inflation accelerated) rather than reactive fashion, allowed long-term fixed income investors to remain relatively sanguine about the risk of inflation. That, along with a limited number of higher yielding investment alternatives, made longer-term fixed income securities relatively attractive, which caused long-term yields to remain steady. Yields on long-term municipal bonds were also aided by the fact that federal income tax rates remained unchanged in 2005, allowing municipal bonds to remain the best tax-shielding game in town.
The teeter-totter action of the yield curve caused the various municipal market indices to behave differently. The shortest index, which measures municipal bonds with maturities of 1-3 years, posted a total return of 1.41%; intermediate municipal bonds, the benchmark for our Series, returned 1.87%, while longer-term muni bonds did more than twice as well, posting a return of 3.94%.
1
<page>
Management Discussion and Analysis (unaudited)
The Ohio Tax Exempt Series outperformed its benchmark in 2005 with a return of 2.85%. The relative outperformance reflected the slightly “barbelled” nature of the series; a “barbelled” portfolio focuses its positions in very short-term securities and longer-term securities. Those securities did well in 2005 compared to intermediate-term securities, hence the strong relative comparison. The performance is even more encouraging when taking into account that the Series invests almost exclusively in the highest quality municipal securities, which carry lower yields.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
2
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Exeter Fund, Inc. - Ohio Tax Exempt Series2 | 2.85% | 4.53% | 4.54% | 4.63% |
| | | | | |
Merrill Lynch Intermediate Municipal Bond Index3 | 1.87% | 5.11% | 5.35% | 5.34% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Ohio Tax Exempt Series from its inception1 (2/14/94) to present (12/31/05) to the Merrill Lynch Intermediate Municipal Bond Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | Merrill Lynch |
| Date | Ohio Tax Exempt Series | Intermediate Municipal Bond Index |
| | | |
| 2/14/94 | $10,000 | $10,000 |
| 12/94 | 9,377 | 9,709 |
| 12/95 | 10,985 | 11,009 |
| 12/96 | 11,331 | 11,520 |
| 12/97 | 12,228 | 12,406 |
| 12/98 | 12,882 | 13,183 |
| 12/99 | 12,229 | 13,182 |
| 12/00 | 13,721 | 14,453 |
| 12/01 | 14,294 | 15,197 |
| 12/02 | 15,470 | 16,789 |
| 12/03 | 16,124 | 17,597 |
| 12/04 | 16,652 | 18,203 |
| 12/31/05 | 17,127 | 18,543 |
1Performance numbers for the Series and Index are calculated from February 14, 1994, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch Intermediate Municipal Bond Index is a market value weighted measure of over 6,000 municipal bonds issued across the United States. The Index is comprised of investment grade securities. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,005.00 | $4.30 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,020.92 | $4.33 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.85%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data. The Series’ total return would have been lower had certain expenses not been waived during the period.
4
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Bond Types1
| | |
| General Obligation Bonds | 89.7% |
| Revenue Bonds | 8.6% |
| Cash, short-term investments, and other assets, less liabilities | 1.7% |
1As a percentage of net assets.
<graphic>
<pie chart>
Credit Quality Ratings2,3
| | |
| Aaa | 88.0% |
| Aa | 10.3% |
| Unrated investments, such as cash, short-term investments, and other assets, less liabilities | 1.7% |
2As a percentage of net assets.
3Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
OHIO MUNICIPAL SECURITIES - 98.3% | | | |
| | | | |
| Amherst Exempt Village School District, G.O. Bond, FGIC, 4.75%, 12/1/2010 | Aaa | $200,000 | $211,620 |
| Bedford Heights, G.O. Bond, Series A, AMBAC, 5.65%, 12/1/2014 | Aaa | 50,000 | 54,098 |
| Big Walnut Local School District, Delaware County, School Facilities Construction & Impt., | | | |
| G.O. Bond, FSA, 4.50%, 12/1/2029 | Aaa | 200,000 | 200,576 |
| Canal Winchester Local School District, G.O. Bond, MBIA, 5.00%, 12/1/2025 | Aaa | 355,000 | 375,760 |
| Chagrin Falls Exempt Village School District, Prerefunded Balance, G.O. Bond, | | | |
| 5.55%, 12/1/2022 | Aa3 | 100,000 | 105,164 |
| Chillicothe Water System, Revenue Bond, MBIA, 4.00%, 12/1/2009 | Aaa | 125,000 | 127,741 |
| Cincinnati, Various Purposes, G.O. Bond, Series A, 5.00%, 12/1/2011 | Aa1 | 200,000 | 215,300 |
| Cleveland Heights & University Heights County School District, | | | |
| Library Impt., G.O. Bond, 5.125%, 12/1/2026 | Aa3 | 200,000 | 212,854 |
| Cleveland Waterworks, Prerefunded Balance, Revenue Bond, Series I, | | | |
| FSA, 5.00%, 1/1/2028 | Aaa | 110,000 | 114,712 |
| Cleveland Waterworks, Unrefunded Balance, Revenue Bond, Series I, | | | |
| FSA, 5.00%, 1/1/2028 | Aaa | 155,000 | 159,628 |
| Delaware City School District, Prerefunded Balance, G.O. Bond, FSA, 5.00%, 12/1/2025 | Aaa | 200,000 | 211,162 |
| Delaware City School District, Unrefunded Balance, G.O. Bond, FSA, 5.00%, 12/1/2025 | Aaa | 100,000 | 103,842 |
| Dublin City School District, School Facilities Construction & Impt., | | | |
| G.O. Bond, 5.375%, 12/1/2017 | Aa1 | 350,000 | 381,031 |
| Eaton City School District, G.O. Bond, FGIC, 5.00%, 12/1/2029 | Aaa | 200,000 | 209,032 |
| Erie County, G.O. Bond, FGIC, 4.75%, 10/1/2019 | Aaa | 175,000 | 180,082 |
| Euclid, G.O. Bond, MBIA, 4.25%, 12/1/2023 | Aaa | 465,000 | 458,099 |
| Fairfield County, Building Impt., G.O. Bond, 5.00%, 12/1/2018 | Aa3 | 250,000 | 265,625 |
| Field Local School District, School Facilities Construction & Impt., G.O. Bond, | | | |
| AMBAC, 5.00%, 12/1/2026 | Aaa | 200,000 | 211,378 |
| Garfield Heights City School District, School Impt., G.O. Bond, MBIA, 5.00%, 12/15/2026 | Aaa | 250,000 | 259,640 |
| Genoa Area Local School District, G.O. Bond, FGIC, 5.40%, 12/1/2027 | Aaa | 150,000 | 161,652 |
| Greene County Sewer System, Governmental Enterprise, Prerefunded Balance, Revenue | | | |
| Bond, AMBAC, 5.625%, 12/1/2025 | Aaa | 235,000 | 259,734 |
| Hancock County, Various Purposes, G.O. Bond, MBIA, 4.00%, 12/1/2016 | Aaa | 200,000 | 200,842 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
OHIO MUNICIPAL SECURITIES (continued) | | | |
| Highland Local School District, School Impt., G.O. Bond, FSA, 5.00%, 12/1/2009 | Aaa | $190,000 | $200,940 |
| Hilliard School District, Prerefunded Balance, G.O. Bond, Series A, FGIC, | | | |
| 5.00%, 12/1/2020 | Aaa | 225,000 | 230,724 |
| Jackson Local School District, Stark & Summit Counties, G.O. Bond, FGIC, | | | |
| 3.50%, 12/1/2011 | Aaa | 210,000 | 209,385 |
| Jackson Local School District, Stark & Summit Counties, Construction & Impt., | | | |
| G.O. Bond, FGIC, 5.00%, 12/1/2030 | Aaa | 200,000 | 209,508 |
| Licking County Joint Vocational School District, School Facilities Construction & Impt., | | | |
| G.O. Bond, MBIA, 5.00%, 12/1/2007 | Aaa | 500,000 | 515,885 |
| Licking Heights Local School District, School Facilities Construction & Impt., G.O. Bond, | | | |
| Series A, MBIA, 5.00%, 12/1/2022 | Aaa | 250,000 | 265,817 |
| Lorain City School District, Classroom Facilities Impt., G.O. Bond, MBIA, 4.75%, 12/1/2025 | Aaa | 400,000 | 411,712 |
| Loveland City School District, Prerefunded Balance, G.O. Bond, Series A, MBIA, | | | |
| 5.00%, 12/1/2024 | Aaa | 200,000 | 213,396 |
| Mansfield City School District, Various Purposes, Prerefunded Balance, G.O. Bond, | | | |
| MBIA, 5.75%, 12/1/2022 | Aaa | 250,000 | 273,450 |
| Marysville Exempt Village School District, G.O. Bond, FSA, 5.00%, 12/1/2023 | Aaa | 500,000 | 531,745 |
| Maumee, G.O. Bond, MBIA, 4.125%, 12/1/2018 | Aaa | 375,000 | 375,353 |
| Maumee City School District, School Facilities Construction & Impt., G.O. Bond, | | | |
| FSA, 4.60%, 12/1/2031 | Aaa | 260,000 | 261,123 |
| Medina City School District, G.O. Bond, FGIC, 5.00%, 12/1/2018 | Aaa | 150,000 | 155,978 |
| Mentor, Prerefunded Balance, G.O. Bond, 5.25%, 12/1/2017 | Aa2 | 100,000 | 103,578 |
| Minster Local School District, G.O. Bond, FSA, 4.25%, 12/1/2018 | AAA2 | 250,000 | 251,575 |
| Mississinawa Valley Local School District, Classroom Facilities, G.O. Bond, FSA, | | | |
| 5.75%, 12/1/2022 | Aaa | 205,000 | 229,348 |
| North Olmsted, G.O. Bond, AMBAC, 5.00%, 12/1/2016 | Aaa | 125,000 | 129,670 |
| Northwood Local School District, G.O. Bond, AMBAC, 5.55%, 12/1/2006 | Aaa | 65,000 | 66,385 |
| Ohio State, Common Schools Capital Facilities, Prerefunded Balance, G.O. Bond, | | | |
| Series A, 4.75%, 6/15/2020 | Aa1 | 250,000 | 263,363 |
| Ohio State, Infrastructure Impt., Prerefunded Balance, G.O. Bond, 5.20%, 8/1/2010 | Aa1 | 50,000 | 51,961 |
| Ohio State Turnpike Commission, Prerefunded Balance, Revenue Bond, Series A, | | | |
| MBIA, 5.70%, 2/15/2017 | Aaa | 125,000 | 127,858 |
| Ohio State Water Development Authority, Fresh Water, Prerefunded Balance, Revenue | | | |
| Bond, FSA, 5.125%, 12/1/2023 | Aaa | 300,000 | 315,489 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
OHIO MUNICIPAL SECURITIES (continued) | | | |
| Ohio State Water Development Authority, Pollution Control, | | | |
| Revenue Bond, 5.25%, 12/1/2015 | Aaa | $200,000 | $223,126 |
| Ohio State Water Development Authority, Pure Water, | | | |
| Revenue Bond, Series I, AMBAC, 6.00%, 12/1/2016 | Aaa | 40,000 | 45,127 |
| Ontario Local School District, Prerefunded Balance, G.O. Bond, FSA, 5.00%, 12/1/2023 | Aaa | 350,000 | 369,534 |
| Orange City School District, G.O. Bond, 5.00%, 12/1/2023 | Aaa | 305,000 | 319,472 |
| Painesville City School District, School Impt., G.O. Bond, FGIC, 4.50%, 12/1/2025 | Aaa | 170,000 | 171,238 |
| Plain Local School District, G.O. Bond, FGIC, 5.00%, 12/1/2025 | Aaa | 315,000 | 329,761 |
| Plain Local School District, G.O. Bond, FGIC, 5.00%, 12/1/2029 | Aaa | 225,000 | 233,489 |
| Plain Local School District, G.O. Bond, FGIC, 5.00%, 12/1/2030 | Aaa | 140,000 | 145,984 |
| Sidney City School District, School Impt., G.O. Bond, | | | |
| Series B, FGIC, 5.10%, 12/1/2019 | Aaa | 150,000 | 160,800 |
| South-Western City School District, Franklin & Pickway County, G.O. Bond, | | | |
| AMBAC, 4.75%, 12/1/2026 | Aaa | 175,000 | 177,303 |
| Tallmadge City School District, School Facilities, G.O. Bond, FSA, 5.00%, 12/1/2031 | AAA2 | 200,000 | 209,480 |
| Tecumseh Local School District, School Impt., G.O. Bond, FGIC, 4.75%, 12/1/2027 | Aaa | 195,000 | 199,984 |
| Troy City School District, School Impt., G.O. Bond, FSA, 4.00%, 12/1/2014 | Aaa | 250,000 | 253,500 |
| Twinsburg Local School District, Prerefunded Balance, G.O. Bond, FGIC, 5.90%, 12/1/2021 | Aaa | 325,000 | 339,050 |
| Upper Arlington City School District, Capital Appreciation, Prerefunded Balance, G.O. | | | |
| Bond, MBIA, 5.25%, 12/1/2022 | Aaa | 255,000 | 262,058 |
| Van Buren Local School District, School Facilities Construction & Impt., G.O. Bond, | | | |
| FSA, 5.25%, 12/1/2016 | Aaa | 300,000 | 323,184 |
| Van Wert City School District, School Impt., G.O. Bond, FGIC, 5.00%, 12/1/2020 | Aaa | 500,000 | 529,325 |
| Vandalia, G.O. Bond, AMBAC, 5.00%, 12/1/2015 | Aaa | 235,000 | 255,102 |
| Washington Court House City School District, School Impt., G.O. Bond, | | | |
| FGIC, 5.00%, 12/1/2029 | Aaa | 500,000 | 526,765 |
| Westerville City School District, G.O. Bond, MBIA, 5.00%, 12/1/2027 | Aaa | 200,000 | 206,794 |
| Wood County, G.O. Bond, 5.40%, 12/1/2013 | Aa3 | 50,000 | 50,059 |
| Wyoming City School District, Prerefunded Balance, G.O. Bond, Series B, FGIC, | | | |
| 5.15%, 12/1/2027 | Aaa | 300,000 | 317,985 |
| | | | |
TOTAL OHIO MUNICIPAL SECURITIES | | | |
| (Identified Cost $15,239,506) | | | 15,722,935 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Investment Portfolio - December 31, 2005
| | | | |
| | | | Value |
| | | Shares | (Note 2) |
| | | | |
SHORT-TERM INVESTMENTS - 1.6% | | | |
| Dreyfus Municipal Reserves - Class R | | | |
| (Identified Cost $250,254) | | 250,254 | $250,254 |
| | | | |
TOTAL INVESTMENTS - 99.9% | | | |
| (Identified Cost $15,489,760) | | | 15,973,189 |
| | | | |
OTHER ASSETS, LESS LIABILITIES - 0.1% | | | 15,249 |
| | | | |
NET ASSETS - 100% | | | $15,988,438 |
KEY:
G.O. Bond - General Obligation Bond
Impt. - Improvement
Scheduled principal and interest payments are guaranteed by:
AMBAC (AMBAC Assurance Corp.)
FGIC (Financial Guaranty Insurance Co.)
FSA (Financial Security Assurance)
MBIA (MBIA, Inc.)
The insurance does not guarantee the market value of the municipal bonds.
1Credit ratings from Moody’s (unaudited)
2Credit ratings from S&P (unaudited)
The Series' portfolio holds, as a percentage of net assets, greater than 10% in bonds insured by the following companies: FGIC - 28.3%; MBIA - 25.5%; FSA - 23.3%.
The accompanying notes are an integral part of the financial statements.
9
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $15,489,760) (Note 2) | $15,973,189 |
| Interest receivable | 75,045 |
| Dividends receivable | 807 |
| | |
| TOTAL ASSETS | 16,049,041 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 31,957 |
| Accrued fund accounting and transfer agent fees (Note 3) | 2,406 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Audit fees payable | 24,571 |
| Other payables and accrued expenses | 1,537 |
| | |
| TOTAL LIABILITIES | 60,603 |
| | |
TOTAL NET ASSETS | $15,988,438 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $15,196 |
| Additional paid-in-capital | 15,378,754 |
| Undistributed net investment income | 100,444 |
| Accumulated net realized gain on investments | 10,615 |
| Net unrealized appreciation on investments | 483,429 |
| | |
TOTAL NET ASSETS | $15,988,438 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($15,988,438/1,519,599 shares) | $10.52 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Interest | $676,180 |
| Dividends | 8,091 |
| | |
| Total Investment Income | 684,271 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 75,966 |
| Fund accounting and transfer agent fees (Note 3) | 28,665 |
| Directors' fees (Note 3) | 7,661 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Audit fees | 24,550 |
| Custodian fees | 3,190 |
| Miscellaneous | 7,149 |
| | |
| Total Expenses | 152,507 |
| Less reduction of expenses (Note 3) | (23,322) |
| | |
| Net Expenses | 129,185 |
| | |
| NET INVESTMENT INCOME | 555,086 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON | |
INVESTMENTS: | |
| | |
| Net realized gain on investments | 15,686 |
| Net change in unrealized appreciation on investments | (145,892) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | (130,206) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $424,880 |
The accompanying notes are an integral part of the financial statements.
11
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $555,086 | $467,775 |
| Net realized gain on investments | 15,686 | 36,500 |
| Net change in unrealized appreciation on | | |
| investments | (145,892) | (59,316) |
| | | |
| Net increase from operations | 424,880 | 444,959 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS | | |
(Note 8): | | |
| | | |
| From net investment income | (519,425) | (591,068) |
| From net realized gain on investments | (10,188) | (17,784) |
| | | |
| Total distributions to shareholders | (529,613) | (608,852) |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions | | |
| (Note 5) | 1,973,214 | 2,191,949 |
| | | |
| Net increase in net assets | 1,868,481 | 2,028,056 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 14,119,957 | 12,091,901 |
| | | |
End of year (including undistributed net investment | | |
| income of $100,444 and $59,729, respectively) | $15,988,438 | $14,119,957 |
The accompanying notes are an integral part of the financial statements.
12
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $10.59 | $10.75 | $10.74 | $10.31 | $10.29 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.38 | 0.38 | 0.42 | 0.41 | 0.46 |
| Net realized and unrealized gain (loss) on | | | | | |
| investments | (0.08) | (0.04) | 0.03 | 0.43 | (0.03) |
| | | | | | |
| Total from investment operations | 0.30 | 0.34 | 0.45 | 0.84 | 0.43 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.36) | (0.49) | (0.39) | (0.40) | (0.41) |
| From net realized gain on investments | (0.01) | (0.01) | (0.05) | (0.01) | - |
| | | | | | |
| Total distributions to shareholders | (0.37) | (0.50) | (0.44) | (0.41) | (0.41) |
| | | | | | |
Net asset value - End of year | $10.52 | $10.59 | $10.75 | $10.74 | $10.31 |
| | | | | | |
Total return1 | 2.85% | 3.28% | 4.23% | 8.22% | 4.18% |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses* | 0.85% | 0.85% | 0.85% | 0.85% | 0.85% |
| Net investment income | 3.65% | 3.64% | 3.91% | 4.09% | 4.27% |
| | | | | | |
| Portfolio turnover | 9% | 7% | 14% | 8% | 9% |
| | | | | | |
Net assets - End of year (000's omitted) | $15,988 | $14,120 | $12,092 | $11,785 | $9,833 |
*The investment advisor did not impose all or a portion of its management fee and in some periods paid a portion of the Series' expenses. Ifvthese expenses had been incurred by the Series, the expense ratio (to average net assets) would have been increased as follows:
| | 0.15% | 0.20% | 0.59% | 0.68% | 0.74% |
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived or reimbursed during the year.
The accompanying notes are an integral part of the financial statements.
13
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Notes to Financial Statements
1. ORGANIZATION
Ohio Tax Exempt Series (the "Series") is a no-load diversified series of Exeter Fund, Inc. (the “Fund”). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide as high a level of current income exempt from federal income tax and Ohio State personal income tax as the Advisor believes is consistent with the preservation of capital.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Ohio Tax Exempt Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Municipal securities will normally be valued on the basis of market valuations provided by an independent pricing service (the “Service”). The Service utilizes the latest price quotations and a matrix system (which considers such factors as security prices of similar securities, yields, maturities and ratings). The Service has been approved by the Fund’s Board of Directors.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
14
<page>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Distributions of Income and Gains
Distributions to shareholders of net investment income are made quarterly. Distributions of net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.85% of average daily net assets each year. Accordingly, the Advisor waived fees of $23,322 for the year ended December 31, 2005, which is reflected as a reduction of expenses on the Statement of Operations.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
15
<page>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $3,444,935 and $1,378,609, respectively. There were no purchases or sales of United States Government securities.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Ohio Tax Exempt Series were:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| Sold | 338,241 | $3,578,039 | 272,911 | $2,874,653 |
| Reinvested | 49,592 | 521,757 | 57,048 | 605,147 |
| Repurchased | (201,117) | (2,126,582) | (122,075) | (1,287,851) |
| Total | 186,716 | $1,973,214 | 207,884 | $2,191,949 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
16
<page>
Notes to Financial Statements
7. | CONCENTRATION OF CREDIT |
The Series primarily invests in debt obligations issued by the State of Ohio and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Series is more susceptible to factors adversely affecting issues of Ohio municipal securities than is a municipal bond fund that is not concentrated in these issues to the same extent.
| 8. | FEDERAL INCOME TAX INFORMATION |
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including market discount. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $- | $25,550 |
| Tax exempt income | 519,425 | 565,518 |
| Long-term capital gains | 10,188 | 17,784 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2005. In addition, the Series hereby designates the tax exempt income disclosed above as tax exempt dividends for the year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $15,465,795 |
| | |
| Unrealized appreciation | $546,515 |
| Unrealized depreciation | (39,121) |
| | |
| Net unrealized appreciation | $507,394 |
| Undistributed tax exempt income | 71,625 |
| Undistributed ordinary income | 4,854 |
| Undistributed long-term capital gains | 10,615 |
17
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Ohio Tax Exempt Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Ohio Tax Exempt Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
18
<page>
Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
19
<page>
Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
20
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Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
21
<page>
Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
22
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
23
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Exeter Fund, Inc.
Annual Report
December 31, 2005
New York Tax Exempt Series
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
While investing is definitely not child’s play, it is sometimes useful to draw upon one’s childhood experiences when looking for analogies that best describe what has occurred in the financial markets. In 2005, the most appropriate analogy as far as the fixed income markets, including the municipal market, were concerned, would have been the “teeter- totter”. Its movements, one side rising while the other side falls, aptly describe what happened to the change in the shape of the municipal yield curve, and that change was the key determinant of the various investment performances within the municipal market.
At the start of the year, short-term municipal yields were relatively low (medium quality general obligation bonds were yielding about 2.20%), while long-term yields were substantially higher (medium quality government obligation bonds were yielding about 4.85%). At the end of the year, short-term interest rates had moved up quite dramatically (up to about 3.35%) but long-term interest rates had actually drifted lower (down to about 4.60%). It was as if a fulcrum had been placed somewhere between the 10 and 15 year maturities and the yields on those securities with shorter maturities that had “teetered” up, while the yields of securities with longer maturities had actually “tottered” down.
The increase in short-term rates reflected the tighter monetary policies that the Federal Reserve (the “Fed”) started to put in place in June of 2004 and which the Fed continued to implement throughout all of 2005. The Fed “tightens” monetary policy by pulling reserves out of the banking system, thereby causing the overnight lending rate that banks charge each other to rise. The overnight rate is referred to as the Fed Funds rate. Increasing or decreasing reserves is the mechanism that the Fed uses to target the Fed Funds rate. In 2005, the Fed withdrew reserves, thereby increasing the “targeted” Fed Funds rate, on eight separate occasions. Each time the target was increased by 25 basis points (0.25%). Short-term interest rates across all market sectors, including the municipal market, rose in tandem.
Given the improvements in the economic environment, the Fed began its tightening policy in an effort to unwind what were universally considered to be “accommodative” monetary policies. As the economy continued to grow over the next 18 months (the second half of 2004 and all of 2005) the Fed continued to tighten. During the second half of 2005, although the core rate of inflation remained relatively stable, the sizable increases in energy prices pushed up the overall rate of inflation, which gave the Fed an additional reason to push up short-term interest rates.
Longer-term interest rates are driven to a greater degree by investors’ expectations about the future course of inflation. The fact that the core rate of inflation (i.e. inflation less the volatile effects of food and energy prices) barely budged in 2005 in conjunction with the Fed acting in a proactive (i.e. before inflation accelerated) rather than reactive fashion, allowed long-term fixed income investors to remain relatively sanguine about the risk of inflation. That, along with a limited number of higher yielding investment alternatives, made longer-term fixed income securities relatively attractive, which caused long-term yields to remain steady. Yields on long-term municipal bonds were also aided by the fact that federal income tax rates remained unchanged in 2005, allowing municipal bonds to remain the best tax-shielding game in town.
The teeter-totter action of the yield curve caused the various municipal market indices to behave differently. The shortest index, which measures municipal bonds with maturities of 1-3 years, posted a total return of 1.41%; intermediate municipal bonds, the benchmark for our Series, returned 1.87%, while longer-term muni bonds did more than twice as well, posting a return of 3.94%.
1
<page>
Management Discussion and Analysis (unaudited)
The New York Tax Exempt Series outperformed its benchmark in 2005 with a return of 2.33%. The relative outperformance reflected the slightly “barbelled” nature of the series; a “barbelled” portfolio focuses its positions in very short-term securities and longer-term securities. Those securities did well in 2005 compared to intermediate-term securities, hence the strong relative comparison. The performance is even more encouraging when taking into account that the Series invests almost exclusively in the highest quality municipal securities, which carry lower yields.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
2
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Exeter Fund, Inc. - New York Tax Exempt Series2 | 2.33% | 4.53% | 4.75% | 4.69% |
| | | | | |
Merrill Lynch Intermediate Municipal Bond Index3 | 1.87% | 5.11% | 5.35% | 5.31% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - New York Tax Exempt Series from its inception1 (1/17/94) to present (12/31/05) to the Merrill Lynch Intermediate Municipal Bond Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | Merrill Lynch |
| Date | New York Tax Exempt Series | Intermediate Municipal Bond Index |
| | | |
| 1/17/94 | $10,000 | $10,000 |
| 12/94 | 9,318 | 9,719 |
| 12/95 | 10,882 | 11,020 |
| 12/96 | 11,243 | 11,532 |
| 12/97 | 12,180 | 12,419 |
| 12/98 | 12,853 | 13,197 |
| 12/99 | 12,349 | 13,196 |
| 12/00 | 13,861 | 14,468 |
| 12/01 | 14,410 | 15,213 |
| 12/02 | 15,823 | 16,807 |
| 12/03 | 16,441 | 17,616 |
| 12/04 | 16,906 | 18,222 |
| 12/31/05 | 17,300 | 18,563 |
1Performance numbers for the Series and Index are calculated from January 17, 1994, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch Intermediate Municipal Bond Index is a market value weighted measure of over 6,000 municipal bonds issued across the United States. The Index is comprised of investment grade securities. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,003.60 | $3.59 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.63 | $3.62 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.71%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Bond Types1
| | |
| Certificate of Participation | 0.3% |
| General Obligation Bonds | 64.2% |
| Revenue Bonds | 31.1% |
| Cash, short-term investments, and other assets, less liabilities | 4.4% |
1As a percentage of net assets.
<graphic>
<pie chart>
Credit Quality Ratings2,3
| | |
| Aaa | 89.4% |
| Aa | 5.8% |
| Baa | 0.4% |
| Unrated investments, such as cash, short-term investments, and other assets, less liabilities | 4.4% |
2As a percentage of net assets.
3Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
5
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES - 95.6% | | | |
| | | | |
| Amherst, Public Impt., G.O. Bond, FGIC, 4.625%, 3/1/2007 | Aaa | $200,000 | $203,176 |
| Arlington Central School District, G.O. Bond, MBIA, 4.625%, 12/15/2024 | Aaa | 845,000 | 863,041 |
| Arlington Central School District, G.O. Bond, MBIA, 4.625%, 12/15/2025 | Aaa | 365,000 | 372,176 |
| Auburn City School District, G.O. Bond, FGIC, 4.55%, 12/1/2006 | Aaa | 385,000 | 389,535 |
| Bayport-Blue Point Union Free School District, G.O. Bond, FGIC, 5.60%, 6/15/2012 | Aaa | 250,000 | 257,605 |
| Beacon City School District, G.O. Bond, MBIA, 5.60%, 7/15/2019 | Aaa | 500,000 | 541,835 |
| Brighton Central School District, G.O. Bond, FSA, 5.40%, 6/1/2012 | Aaa | 250,000 | 257,132 |
| Brookhaven, Public Impt., G.O. Bond, FGIC, 4.00%, 5/1/2023 | Aaa | 900,000 | 854,514 |
| Brookhaven, Public Impt., G.O. Bond, FGIC, 4.00%, 5/1/2024 | Aaa | 815,000 | 768,341 |
| Broome County, Public Safety Facility, Certificate of Participation, MBIA, 5.00%, 4/1/2006 | Aaa | 250,000 | 251,027 |
| Buffalo, Prerefunded Balance, G.O. Bond, Series A, AMBAC, 5.20%, 2/1/2010 | Aaa | 250,000 | 259,662 |
| Buffalo Municipal Water Finance Authority, Water Systems, Prerefunded Balance, Revenue | | | |
| Bond, Series A, FGIC, 5.00%, 7/1/2028 | Aaa | 750,000 | 787,852 |
| Cattaraugus County, Public Impt., G.O. Bond, AMBAC, 5.00%, 8/1/2007 | Aaa | 300,000 | 308,076 |
| Chautauqua County, Public Impt., G.O. Bond, Series B, MBIA, 4.50%, 12/15/2018 | Aaa | 485,000 | 505,462 |
| Clyde-Savannah Central School District, G.O. Bond, FGIC, 5.00%, 6/1/2013 | Aaa | 500,000 | 541,420 |
| Colonie, G.O. Bond, MBIA, 5.20%, 8/15/2008 | Aaa | 100,000 | 102,233 |
| Dryden Central School District, G.O. Bond, FSA, 5.50%, 6/15/2011 | Aaa | 200,000 | 203,756 |
| Dutchess County New York, G.O. Bond, MBIA, 4.00%, 12/15/2016 | Aaa | 675,000 | 681,581 |
| East Aurora Union Free School District, G.O. Bond, FGIC, 5.20%, 6/15/2011 | Aaa | 300,000 | 305,637 |
| Eastchester, Public Impt., G.O. Bond, Series B, FSA, 4.90%, 10/15/2011 | Aaa | 385,000 | 394,406 |
| Ellenville Central School District, G.O. Bond, FSA, 5.375%, 5/1/2009 | Aaa | 210,000 | 215,647 |
| Ellenville Central School District, G.O. Bond, AMBAC, 5.70%, 5/1/2011 | Aaa | 700,000 | 734,307 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| Erie County, Prerefunded Balance, G.O. Bond, Series B, FGIC, 5.50%, 6/15/2009 | Aaa | $100,000 | $101,507 |
| Erie County, Prerefunded Balance, G.O. Bond, Series B, FGIC, 5.50%, 6/15/2025 | Aaa | 400,000 | 406,028 |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 4.00%, 3/15/2006 | Aaa | 1,500,000 | 1,502,520 |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 5.00%, 9/1/2014 | Aaa | 500,000 | 537,560 |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 4.75%, 10/1/2016 | Aaa | 550,000 | 572,698 |
| Fairport Central School District, G.O. Bond, FSA, 5.00%, 6/1/2019 | Aaa | 500,000 | 534,335 |
| Franklin Square Union Free School District, G.O. Bond, FGIC, 5.00%, 1/15/2021 | Aaa | 520,000 | 548,132 |
| Freeport, G.O. Bond, Series A, FGIC, 4.00%, 1/15/2014 | Aaa | 540,000 | 547,544 |
| Greece Central School District, G.O. Bond, FSA, 4.60%, 6/15/2018 | Aaa | 180,000 | 185,355 |
| Hamburg Central School District, G.O. Bond, FGIC, 5.375%, 6/1/2014 | Aaa | 600,000 | 629,082 |
| Hempstead Town, Prerefunded Balance, G.O. Bond, Series B, FGIC, 5.625%, 2/1/2010 | AAA2 | 35,000 | 35,767 |
| Hempstead Town, Unrefunded Balance, G.O. Bond, Series B, FGIC, 5.625%, 2/1/2010 | Aaa | 165,000 | 168,623 |
| Huntington, G.O. Bond, MBIA, 5.875%, 9/1/2009 | Aaa | 45,000 | 45,643 |
| Islip, Public Impt., G.O. Bond, FGIC, 5.375%, 6/15/2015 | Aaa | 1,555,000 | 1,683,256 |
| Jamesville-Dewitt Central School District, G.O. Bond, AMBAC, 5.75%, 6/15/2009 | Aaa | 420,000 | 452,852 |
| Johnson City Central School District, G.O. Bond, FGIC, 4.25%, 6/15/2024 | Aaa | 500,000 | 488,725 |
| Johnson City Central School District, G.O. Bond, FGIC, 4.375%, 6/15/2028 | Aaa | 1,000,000 | 982,570 |
| Johnson City Central School District, G.O. Bond, FGIC, 4.375%, 6/15/2030 | Aaa | 985,000 | 966,837 |
| Le Roy Central School District, G.O. Bond, FGIC, 0.10%, 6/15/2008 | Aaa | 350,000 | 321,993 |
| Longwood Central School District at Middle Island, G.O. Bond, FSA, 5.00%, 6/15/2017 | Aaa | 250,000 | 264,763 |
| Longwood Central School District at Middle Island, G.O. Bond, FSA, 5.00%, 6/15/2018 | Aaa | 250,000 | 264,763 |
| Metropolitan Transportation Authority, Service Contract, Revenue Bond, | | | |
| Series B, FGIC, 5.50%, 7/1/2011 | Aaa | 1,000,000 | 1,097,220 |
| Metropolitan Transportation Authority, Transportation Facilities, Prerefunded Balance, Revenue | | | |
| Bond, Series B, AMBAC, 5.00%, 7/1/2018 | Aaa | 1,500,000 | 1,617,495 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| Metropolitan Transportation Authority, Dedicated Tax Fund, Revenue Bond, Series A, | | | |
| MBIA, 5.00%, 11/15/2030 | Aaa | $750,000 | $779,520 |
| Monroe County, Water Impt., G.O. Bond, 5.25%, 2/1/2017 | Baa1 | 320,000 | 326,474 |
| Monroe County, Public Impt., G.O. Bond, AMBAC, 4.125%, 6/1/2020 | Aaa | 1,000,000 | 990,850 |
| Monroe County Water Authority, Revenue Bond, 5.00%, 8/1/2019 | Aa3 | 1,700,000 | 1,779,305 |
| Mount Morris Central School District, G.O. Bond, FGIC, 4.125%, 6/15/2013 | Aaa | 790,000 | 812,942 |
| Nassau County, Combined Sewer Districts, G.O. Bond, Series F, MBIA, | | | |
| 5.35%, 7/1/2008 | Aaa | 1,500,000 | 1,570,710 |
| Nassau County, General Impt., G.O. Bond, Series C, FSA, 5.125%, 1/1/2014 | Aaa | 500,000 | 536,925 |
| Nassau County, General Impt., G.O. Bond, Series U, AMBAC, 5.25%, 11/1/2014 | Aaa | 335,000 | 347,037 |
| Nassau County, General Impt., G.O. Bond, Series V, AMBAC, 5.25%, 3/1/2015 | Aaa | 385,000 | 401,224 |
| Nassau County Interim Financial Authority, Sales Tax Secured, Revenue Bond, | | | |
| Series A, AMBAC, 4.75%, 11/15/2023 | Aaa | 1,000,000 | 1,030,420 |
| New Hyde Park Garden City Park District, Union Free School District, G.O. Bond, | | | |
| FSA, 4.125%, 6/15/2023 | Aaa | 200,000 | 193,368 |
| New Hyde Park Garden City Park District, Union Free School District, G.O. Bond, | | | |
| FSA, 4.125%, 6/15/2024 | Aaa | 250,000 | 240,725 |
| New York, G.O. Bond, Series I, MBIA, 5.00%, 5/15/2028 | Aaa | 1,900,000 | 1,967,298 |
| New York, G.O. Bond, Series K, FSA, 5.375%, 8/1/2020 | Aaa | 1,000,000 | 1,068,330 |
| New York City Municipal Water Finance Authority, Revenue Bond, | | | |
| Series E, FGIC, 5.00%, 6/15/2026 | Aaa | 750,000 | 776,760 |
| New York City, G.O. Bond, Series A, CIFG, 5.00%, 8/1/2024 | Aaa | 1,000,000 | 1,051,270 |
| New York City Municipal Water Finance Authority, Water & Sewer Systems, | | | |
| Revenue Bond, Series B, FGIC, 5.125%, 6/15/2030 | Aaa | 2,000,000 | 2,062,100 |
| New York City Municipal Water Finance Authority, Water & Sewer Systems, | | | |
| Revenue Bond, Series A, AMBAC, 5.00%, 6/15/2035 | Aaa | 750,000 | 778,335 |
| New York City Transitional Finance Authority, Prerefunded Balance, Revenue Bond, | | | |
| Series A, 5.50%, 2/15/2011 | Aa1 | 1,000,000 | 1,089,660 |
| New York State, G.O. Bond, Series A, 4.60%, 3/15/2013 | Aa3 | 475,000 | 497,691 |
| New York State, Prerefunded Balance, G.O. Bond, Series B, 5.125%, 3/1/2018 | Aa3 | 1,000,000 | 1,048,190 |
| New York State, G.O. Bond, Series C, FSA, 5.00%, 4/15/2012 | AAA2 | 700,000 | 754,740 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| New York State, Prerefunded Balance, G.O. Bond, Series D, AMBAC, 5.00%, 7/15/2015 | Aaa | $500,000 | $525,505 |
| New York State Dormitory Authority, Columbia University, | | | |
| Revenue Bond, Series A, 5.00%, 7/1/2025 | Aaa | 500,000 | 524,585 |
| New York State Environmental Facilities Corp., Clean Water & Drinking, | | | |
| Revenue Bond, MBIA, 5.00%, 6/15/2021 | Aaa | 600,000 | 633,840 |
| New York State Environmental Facilities Corp., Clean Water & Drinking, | | | |
| Revenue Bond, Series B, 5.00%, 6/15/2027 | Aaa | 1,000,000 | 1,041,380 |
| New York State Environmental Facilities Corp., Pollution | | | |
| Control, Revenue Bond, Series B, 6.65%, 9/15/2013 | Aaa | 250,000 | 253,638 |
| New York State Environmental Facilities Corp., Pollution | | | |
| Control, Revenue Bond, Series E, MBIA, 5.00%, 6/15/2012 | Aaa | 200,000 | 206,422 |
| New York State Environmental Facilities Corp., Pollution Control, | | | |
| Prerefunded Balance, Revenue Bond, Series A, 4.65%, 6/15/2007 | Aaa | 135,000 | 138,513 |
| New York State Environmental Facilities Corp., Pollution Control, | | | |
| Unrefunded Balance, Revenue Bond, Series A, 4.65%, 6/15/2007 | Aaa | 115,000 | 117,211 |
| New York State Environmental Facilities Corp., Pollution Control, | | | |
| Unrefunded Balance, Revenue Bond, Series B, 5.20%, 5/15/2014 | Aaa | 440,000 | 482,390 |
| New York State Environmental Facilities Corp., Pollution Control, | | | |
| Prerefunded Balance, Revenue Bond, Series A, 5.20%, 6/15/2015 | Aaa | 225,000 | 231,413 |
| New York State Environmental Facilities Corp., Pollution Control, | | | |
| Unrefunded Balance, Revenue Bond, Series A, 5.20%, 6/15/2015 | Aaa | 25,000 | 25,717 |
| New York State Housing Finance Agency, State University | | | |
| Construction, Revenue Bond, Series A, 8.00%, 5/1/2011 | Aaa | 250,000 | 286,510 |
| New York State Thruway Authority, Highway & Bridge, Prerefunded Balance, | | | |
| Revenue Bond, Series A, FGIC, 5.50%, 4/1/2015 | Aaa | 320,000 | 353,763 |
| New York State Thruway Authority, Highway & Bridge, Prerefunded Balance, | | | |
| Revenue Bond, Series A, AMBAC, 5.25%, 4/1/2017 | Aaa | 555,000 | 579,220 |
| New York State Thruway Authority, Revenue Bond, | | | |
| Series F, AMBAC, 5.00%, 1/1/2026 | Aaa | 340,000 | 358,649 |
| New York State Thruway Authority, Highway & Bridge, Prerefunded Balance, | | | |
| Revenue Bond, Series B, MBIA, 5.25%, 4/1/2016 | Aaa | 300,000 | 327,126 |
| New York State Thruway Authority, Highway & Bridge, | | | |
| Revenue Bond, Series C, MBIA, 5.25%, 4/1/2011 | Aaa | 1,000,000 | 1,083,000 |
| New York State Thruway Authority, Highway & Bridge, | | | |
| Revenue Bond, Series C, AMBAC, 5.00%, 4/1/2020 | Aaa | 750,000 | 791,085 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| New York State Thruway Authority, Personal Income Tax, | | | |
| Revenue Bond, Series A, FSA, 5.00%, 3/15/2014 | Aaa | $500,000 | $537,635 |
| New York State Thruway Authority, Personal Income Tax, | | | |
| Revenue Bond, Series A, MBIA, 5.00%, 3/15/2016 | Aaa | 300,000 | 320,157 |
| New York State Urban Development Corp., Revenue Bond, 5.375%, 7/1/2022 | Aaa | 400,000 | 412,096 |
| New York State Urban Development Corp., Correctional Capital Facilities, Revenue Bond, | | | |
| Series A, FSA, 5.25%, 1/1/2014 | Aaa | 500,000 | 544,030 |
| Niagara Falls City School District, G.O. Bond, FSA, 4.375%, 9/15/2029 | AAA2 | 885,000 | 874,008 |
| Niagara County, G.O. Bond, Series B, MBIA, 5.20%, 1/15/2011 | Aaa | 400,000 | 404,216 |
| North Hempstead, G.O. Bond, Series A, FGIC, 4.75%, 1/15/2023 | Aaa | 1,000,000 | 1,038,890 |
| Norwich City School District, G.O. Bond, FSA, 5.00%, 6/15/2010 | Aaa | 250,000 | 266,020 |
| Panama Central School District, G.O. Bond, FGIC, 5.00%, 6/15/2019 | Aaa | 595,000 | 632,824 |
| Patchogue-Medford Union Free School District, G.O. Bond, Series A, FGIC, 3.50%, 7/1/2012 | Aaa | 805,000 | 800,371 |
| Pavilion Central School District, G.O. Bond, FSA, 5.625%, 6/15/2018 | Aaa | 880,000 | 949,995 |
| Phelps-Clifton Springs Central School District, G.O. Bond, Series B, MBIA, 5.00%, 6/15/2021 | Aaa | 850,000 | 908,956 |
| Phelps-Clifton Springs Central School District, G.O. Bond, Series B, MBIA, 5.00%, 6/15/2022 | Aaa | 450,000 | 480,312 |
| Ravena Coeymans Selkirk Central School District, G.O. Bond, FSA, 4.25%, 6/15/2014 | Aaa | 1,180,000 | 1,220,073 |
| Rochester, G.O. Bond, AMBAC, 4.70%, 8/15/2006 | Aaa | 10,000 | 10,090 |
| Rochester, Unrefunded Balance, G.O. Bond, AMBAC, 4.70%, 8/15/2006 | Aaa | 240,000 | 242,210 |
| Rochester, G.O. Bond, Series A, AMBAC, 5.00%, 8/15/2020 | Aaa | 250,000 | 275,715 |
| Rochester, G.O. Bond, Series A, AMBAC, 5.00%, 8/15/2022 | Aaa | 95,000 | 105,107 |
| Rondout Valley Central School District, G.O. Bond, FSA, 5.375%, 3/1/2020 | Aaa | 500,000 | 542,750 |
| Schenectady, G.O. Bond, MBIA, 5.30%, 2/1/2011 | Aaa | 250,000 | 259,938 |
| Scotia Glenville Central School District, G.O. Bond, FGIC, 5.50%, 6/15/2020 | Aaa | 1,025,000 | 1,106,006 |
| South Glens Falls Central School District, Prerefunded Balance, | | | |
| G.O. Bond, FGIC, 5.375%, 6/15/2018 | Aaa | 605,000 | 650,363 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| South Glens Falls Central School District, Unrefunded Balance, | | | |
| G.O. Bond, FGIC, 5.375%, 6/15/2018 | Aaa | $95,000 | $101,692 |
| South Huntington Union Free School District, G.O. Bond, FGIC, 5.00%, 9/15/2016 | Aaa | 325,000 | 344,611 |
| South Huntington Union Free School District, G.O. Bond, FGIC, 5.10%, 9/15/2017 | Aaa | 100,000 | 106,275 |
| Steuben County, Public Impt., G.O. Bond, AMBAC, 5.60%, 5/1/2006 | Aaa | 500,000 | 503,790 |
| Suffolk County, G.O. Bond, Series A, FGIC, 4.75%, 8/1/2019 | Aaa | 895,000 | 935,731 |
| Suffolk County Water Authority, Revenue Bond, MBIA, 5.10%, 6/1/2009 | Aaa | 250,000 | 263,828 |
| Suffolk County Water Authority, Prerefunded Balance, Revenue Bond, Series A, | | | |
| AMBAC, 5.00%, 6/1/2017 | Aaa | 400,000 | 416,912 |
| Sullivan County, Public Impt., G.O. Bond, MBIA, 5.125%, 3/15/2013 | Aaa | 330,000 | 330,508 |
| Syracuse, Public Impt., G.O. Bond, Series C, AMBAC, 5.40%, 8/1/2017 | Aaa | 700,000 | 764,554 |
| Syracuse, Public Impt., G.O. Bond, Series C, AMBAC, 5.50%, 8/1/2018 | Aaa | 850,000 | 931,974 |
| Three Village Central School District, G.O. Bond, FSA, 5.375%, 6/15/2007 | Aaa | 230,000 | 236,737 |
| Tompkins County, Public Impt., G.O. Bond, Series B, | | | |
| 5.10%, 4/1/2020 | Aa2 | 400,000 | 409,676 |
| Triborough Bridge & Tunnel Authority, General Purposes, Prerefunded Balance, Revenue Bond, | | | |
| Series A, MBIA, 4.75%, 1/1/2019 | Aaa | 300,000 | 319,365 |
| Triborough Bridge & Tunnel Authority, General Purposes, Prerefunded Balance, Revenue Bond, | Aaa | | |
| Series A, MBIA, 5.00%, 1/1/2032 | | 1,695,000 | 1,827,769 |
| Triborough Bridge & Tunnel Authority, General Purposes, Prerefunded Balance, Revenue Bond, | Aaa | | |
| Series A, MBIA, 5.00%, 1/1/2032 | | 305,000 | 315,050 |
| Triborough Bridge & Tunnel Authority, Subordinate Bonds, Revenue Bond, | | | |
| FGIC, 5.00%, 11/15/2032 | Aaa | 1,000,000 | 1,041,550 |
| Warwick Valley Central School District, G.O. Bond, FSA, 5.60%, 1/15/2018 | Aaa | 575,000 | 628,015 |
| Warwick Valley Central School District, G.O. Bond, FSA, 5.625%, 1/15/2022 | Aaa | 380,000 | 415,393 |
| Wayne County, Public Impt., G.O. Bond, MBIA, 4.125%, 6/1/2024 | Aaa | 500,000 | 482,935 |
| West Seneca Central School District, G.O. Bond, FSA, 5.00%, 5/1/2011 | Aaa | 300,000 | 321,522 |
The accompanying notes are an integral part of the financial statements.
11
<page>
Investment Portfolio - December 31, 2005
| | Credit | Principal | |
| | Rating1 | Amount/ | Value |
| | (unaudited) | Shares | (Note 2) |
NEW YORK MUNICIPAL SECURITIES (continued) | | | |
| Westchester County, G.O. Bond, Series A, 4.75%, 12/15/2008 | Aaa | $60,000 | $61,145 |
| Westchester County, Unrefunded Balance, G.O. Bond, Series A, 4.75%, 12/15/2008 | AAA2 | 5,000 | 5,083 |
| Westchester County, G.O. Bond, Series A, 4.75%, 12/15/2009 | Aaa | 65,000 | 66,240 |
| Westchester County, Unrefunded Balance, G.O. Bond, Series A, 4.75%, 12/15/2009 | AAA2 | 5,000 | 5,083 |
| Westchester County, G.O. Bond, Series B, 4.30%, 12/15/2011 | Aaa | 15,000 | 15,643 |
| Westchester County, G.O. Bond, Series B, 3.70%, 12/15/2015 | Aaa | 1,000,000 | 986,450 |
| Western Nassau County Water Authority, Water Systems, Prerefunded Balance, Revenue | | | |
| Bond, AMBAC, 5.65%, 5/1/2026 | Aaa | 350,000 | 359,636 |
| Westhampton Beach Union Free School District, G.O. Bond, MBIA, 4.00%, 7/15/2018 | Aaa | 726,000 | 720,330 |
| William Floyd Union Free School District of the Mastics-Moriches-Shirley, | | | |
| G.O. Bond, AMBAC, 5.70%, 6/15/2008 | Aaa | 405,000 | 426,801 |
| Williamsville Central School District, G.O. Bond, MBIA, 5.00%, 6/15/2012 | Aaa | 490,000 | 528,450 |
| Wyandanch Union Free School District, G.O. Bond, FSA, 5.60%, 4/1/2017 | Aaa | 500,000 | 519,150 |
| | | | |
TOTAL NEW YORK MUNICIPAL SECURITIES | | | |
| (Identified Cost $76,492,944) | | | 78,791,190 |
| | | | |
SHORT-TERM INVESTMENTS - 3.3% | | | |
| Dreyfus BASIC New York Municipal Money Market Fund | | | |
| (Identified Cost $2,686,326) | | 2,686,326 | 2,686,326 |
| | | | |
TOTAL INVESTMENTS - 98.9% | | | |
| (Identified Cost $79,179,270) | | | 81,477,516 |
| | | | |
OTHER ASSETS, LESS LIABILITIES - 1.1% | | | 927,908 |
| | | | |
NET ASSETS - 100% | | | $82,405,424 |
The accompanying notes are an integral part of the financial statements.
12
<page>
Investment Portfolio - December 31, 2005
KEY:
G.O. Bond - General Obligation Bond
Impt. - Improvement
Scheduled principal and interest payments are guaranteed by:
AMBAC (AMBAC Assurance Corp.)
CIFG (CIFG North America, Inc.)
FGIC (Financial Guaranty Insurance Co.)
FSA (Financial Security Assurance)
MBIA (MBIA, Inc.)
The insurance does not guarantee the market value of the municipal bonds.
1Credit ratings from Moody's (unaudited)
2Credit ratings from S&P (unaudited)
The Series' portfolio holds, as a percentage of net assets, greater than 10% in bonds insured by the following companies: FGIC - 30.9%; MBIA - 20.7%; AMBAC - 16.0%; FSA - 14.8%.
The accompanying notes are an integral part of the financial statements.
13
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $79,179,270) (Note 2) | $81,477,516 |
| Interest receivable | 926,926 |
| Receivable for fund shares sold | 165,790 |
| Dividends receivable | 5,107 |
| | |
| TOTAL ASSETS | 82,575,339 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 46,692 |
| Accrued fund accounting and transfer agent fees (Note 3) | 8,901 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Payable for fund shares repurchased | 76,216 |
| Audit fees payable | 25,184 |
| Due to custodian | 9,347 |
| Other payables and accrued expenses | 3,443 |
| | |
| TOTAL LIABILITIES | 169,915 |
| | |
TOTAL NET ASSETS | $82,405,424 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $78,894 |
| Additional paid-in-capital | 79,614,653 |
| Undistributed net investment income | 395,593 |
| Accumulated net realized gain on investments | 18,038 |
| Net unrealized appreciation on investments | 2,298,246 |
| | |
TOTAL NET ASSETS | $82,405,424 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($82,405,424/7,889,388 shares) | $10.45 |
The accompanying notes are an integral part of the financial statements.
14
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Interest | $3,335,401 |
| Dividends | 51,379 |
| | |
| Total Investment Income | 3,386,780 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 396,864 |
| Fund accounting and transfer agent fees (Note 3) | 108,911 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 12,801 |
| Miscellaneous | 38,816 |
| | |
| Total Expenses | 570,380 |
| | |
| NET INVESTMENT INCOME | 2,816,400 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON | |
INVESTMENTS: | |
| | |
| Net realized gain on investments | 91,450 |
| Net change in unrealized appreciation on investments | (1,163,352) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | (1,071,902) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $1,744,498 |
The accompanying notes are an integral part of the financial statements.
15
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $2,816,400 | $2,517,497 |
| Net realized gain on investments | 91,450 | 113,033 |
| Net change in unrealized appreciation on investments | (1,163,352) | (621,898) |
| | | |
| Net increase from operations | 1,744,498 | 2,008,632 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS | | |
(Note 8): | | |
| | | |
| From net investment income | (2,708,429) | (3,015,370) |
| From net realized gain on investments | (97,103) | (223,458) |
| | | |
| Total distributions to shareholders | (2,805,532) | (3,238,828) |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 7,646,554 | 12,857,412 |
| | | |
| Net increase in net assets | 6,585,520 | 11,627,216 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 75,819,904 | 64,192,688 |
| | | |
End of year (including undistributed net investment | | |
| income of $395,593 and $292,522, respectively) | $82,405,424 | $75,819,904 |
The accompanying notes are an integral part of the financial statements.
16
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $10.58 | $10.77 | $10.89 | $10.36 | $10.36 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.37 | 0.36 | 0.42 | 0.46 | 0.46 |
| Net realized and unrealized gain (loss) on | | | | | |
| investments | (0.13) | (0.07) | -2 | 0.54 | (0.05) |
| | | | | | |
| Total from investment operations | 0.24 | 0.29 | 0.42 | 1.00 | 0.41 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.36) | (0.45) | (0.41) | (0.42) | (0.41) |
| From net realized gain on investments | (0.01) | (0.03) | (0.13) | (0.05) | - |
| | | | | | |
| Total distributions to shareholders | (0.37) | (0.48) | (0.54) | (0.47) | (0.41) |
| | | | | | |
Net asset value - End of year | $10.45 | $10.58 | $10.77 | $10.89 | $10.36 |
| | | | | | |
Total return1 | 2.33% | 2.83% | 3.90% | 9.81% | 3.96% |
| | | | | | |
Ratios (to average net assets)/Supplemental Data: | | | | | |
| Expenses | 0.72% | 0.75% | 0.75%* | 0.73% | 0.72% |
| Net investment income | 3.55% | 3.57% | 3.80% | 4.20% | 4.23% |
| | | | | | |
| Portfolio turnover | 6% | 7% | 17% | 6% | 7% |
| | | | | | |
Net assets - End of year (000's omitted) | $82,405 | $75,820 | $64,193 | $63,961 | $66,295 |
*The investment advisor did not impose all of its management fee. If these expenses had been incurred by the Series, the expense ratio (to average net assets) for the year ended 12/31/03 would have been increased by 0.00%3.
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions. Total return would have been lower had certain expenses not been waived during the year ended 12/31/03.
2Less than $0.01 per share.
3Less than 0.01%.
The accompanying notes are an integral part of the financial statements.
17
<page>
Notes to Financial Statements
1. ORGANIZATION
New York Tax Exempt Series (the "Series") is a no-load diversified series of Exeter Fund, Inc. (the “Fund”). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide as high a level of current income exempt from federal income tax and New York State personal income tax as the Advisor believes is consistent with the preservation of capital.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as New York Tax Exempt Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Municipal securities will normally be valued on the basis of market valuations provided by an independent pricing service (the “Service”). The Service utilizes the latest price quotations and a matrix system (which considers such factors as security prices of similar securities, yields, maturities and ratings). The Service has been approved by the Fund’s Board of Directors.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund's Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
18
<page>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Distributions of Income and Gains
Distributions to shareholders of net investment income are made quarterly. Distributions of net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.85% of average daily net assets each year. In addition to its contractual agreement to limit expenses to 0.85%, the Advisor has voluntarily agreed to waive fees and reimburse expenses during the current fiscal year in order to keep total operating expenses from exceeding 0.75% of average daily net assets. The Advisor may change or eliminate all or part of its voluntary waiver at any time. For the year ended December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
19
<page>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $12,597,202 and $4,374,550, respectively. There were no purchases or sales of United States Government securities.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of New York Tax Exempt Series were:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 1,217,413 | $12,838,558 | 1,344,216 | $14,370,660 |
| Reinvested | 252,977 | 2,650,023 | 288,035 | 3,053,897 |
| Repurchased | (744,729) | (7,842,027) | (430,022) | (4,567,145) |
| Total | 725,661 | $7,646,554 | 1,202,229 | $12,857,412 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
7. | CONCENTRATION OF CREDIT |
The Series primarily invests in debt obligations issued by the State of New York and its political subdivisions, agencies and public authorities to obtain funds for various public purposes. The Series is more susceptible to factors adversely affecting issues of New York municipal securities than is a municipal bond fund that is not concentrated in these issues to the same extent.
20
<page>
Notes to Financial Statements
| 8. | FEDERAL INCOME TAX INFORMATION |
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including market discount. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series’ net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $- | $25,857 |
| Tax exempt income | 2,708,429 | 2,989,513 |
| Long-term capital gains | 97,103 | 223,458 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2005. In addition, the Series hereby designates the tax exempt income disclosed above as tax exempt dividends for the year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| Cost for federal income tax purposes | $79,134,333 |
| | |
| Unrealized appreciation | $2,687,401 |
| Unrealized depreciation | (344,218) |
| | |
| Net unrealized appreciation | $2,343,183 |
| Undistributed tax exempt income | 350,656 |
| Undistributed long-term capital gains | 18,038 |
21
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Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of New York Tax Exempt Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the New York Tax Exempt Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
22
<page>
Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
23
<page>
Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
24
<page>
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
25
<page>
Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
26
<page>
Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
27
<page>
Exeter Fund, Inc.
Annual Report
December 31, 2005
Diversified Tax Exempt
<page>
<page>
Management Discussion and Analysis (unaudited)
Dear Shareholders:
While investing is definitely not child’s play, it is sometimes useful to draw upon one’s childhood experiences when looking for analogies that best describe what has occurred in the financial markets. In 2005, the most appropriate analogy as far as the fixed income markets, including the municipal market, were concerned, would have been the “teeter- totter”. Its movements, one side rising while the other side falls, aptly describe what happened to the change in the shape of the municipal yield curve, and that change was the key determinant of the various investment performances within the municipal market.
At the start of the year, short-term municipal yields were relatively low (medium quality general obligation bonds were yielding about 2.20%), while long-term yields were substantially higher (medium quality government obligation bonds were yielding about 4.85%). At the end of the year, short-term interest rates had moved up quite dramatically (up to about 3.35%) but long-term interest rates had actually drifted lower (down to about 4.60%). It was as if a fulcrum had been placed somewhere between the 10 and 15 year maturities and the yields on those securities with shorter maturities had “teetered” up, while the yields of securities with longer maturities had actually “tottered” down.
The increase in short-term rates reflected the tighter monetary policies that the Federal Reserve (the “Fed”) started to put in place in June of 2004 and which the Fed continued to implement throughout all of 2005. The Fed “tightens” monetary policy by pulling reserves out of the banking system, thereby causing the overnight lending rate that banks charge each other to rise. The overnight rate is referred to as the Fed Funds rate. Increasing or decreasing reserves is the mechanism that the Fed uses to target the Fed Funds rate. In 2005, the Fed withdrew reserves, thereby increasing the “targeted” Fed Funds rate, on eight separate occasions. Each time the target was increased by 25 basis points (0.25%). Short-term interest rates across all market sectors, including the municipal market, rose in tandem.
Given the improvements in the economic environment, the Fed began its tightening policy in an effort to unwind what were universally considered to be “accommodative” monetary policies. As the economy continued to grow over the next 18 months (the second half of 2004 and all of 2005) the Fed continued to tighten. During the second half of 2005, although the core rate of inflation remained relatively stable, the sizable increases in energy prices pushed up the overall rate of inflation, which gave the Fed an additional reason to push up short-term interest rates.
Longer-term interest rates are driven to a greater degree by investors’ expectations about the future course of inflation. The fact that the core rate of inflation (i.e. inflation less the volatile effects of food and energy prices) barely budged in 2005 in conjunction with the Fed acting in a proactive (i.e. before inflation accelerated) rather than reactive fashion, allowed long-term fixed income investors to remain relatively sanguine about the risk of inflation. That, along with a limited number of higher yielding investment alternatives, made longer-term fixed income securities relatively attractive, which caused long-term yields to remain steady. Yields on long-term municipal bonds were also aided by the fact that federal income tax rates remained unchanged in 2005, allowing municipal bonds to remain the best tax-shielding game in town.
The teeter-totter action of the yield curve caused the various municipal market indices to behave differently. The shortest index, which measures municipal bonds with maturities of 1-3 years, posted a total return of 1.41%; intermediate municipal bonds, the benchmark for our Series, returned 1.87%, while longer-term muni bonds did more than twice as well, posting a return of 3.94%.
1
<page>
Management Discussion and Analysis (unaudited)
The Diversified Tax Exempt Series outperformed its benchmark in 2005 with a return of 2.60%. The relative outperformance reflected the slightly “barbelled” nature of the series; a “barbelled” portfolio focuses its positions in very short-term securities and longer-term securities. Those securities did well in 2005 compared to intermediate-term securities, hence the strong relative comparison. The performance is even more encouraging when taking into account that the Series invests almost exclusively in the highest quality municipal securities, which carry lower yields.
We wish you a happy and healthy new year.
Sincerely,
Exeter Asset Management
2
<page>
Performance Update as of December 31, 2005 (unaudited)
| | Average Annual Total Returns |
| | As of December 31, 2005 |
| | | | | |
| | One | Five | Ten | Since |
| | Year | Year | Year | Inception1 |
Exeter Fund, Inc. - Diversified Tax Exempt Series2 | 2.60% | 4.77% | 4.80% | 4.87% |
| | | | | |
Merrill Lynch Intermediate Municipal Bond Index3 | 1.87% | 5.11% | 5.35% | 5.34% |
The following graph compares the value of a $10,000 investment in the Exeter Fund, Inc. - Diversified Tax Exempt Series from its inception1 (2/14/94) to present (12/31/05) to the Merrill Lynch Intermediate Municipal Bond Index.
<graphic>
<line graph>
Data for line graph to follow:
| | Exeter Fund, Inc. | Merrill Lynch |
| Date | Diversified Tax Exempt Series | Intermediate Municipal Bond Index |
| | | |
| 2/14/94 | $10,000 | $10,000 |
| 12/94 | 9,461 | 9,709 |
| 12/95 | 11,003 | 11,009 |
| 12/96 | 11,370 | 11,520 |
| 12/97 | 12,270 | 12,406 |
| 12/98 | 12,944 | 13,183 |
| 12/99 | 12,340 | 13,182 |
| 12/00 | 13,935 | 14,453 |
| 12/01 | 14,453 | 15,197 |
| 12/02 | 15,783 | 16,789 |
| 12/03 | 16,518 | 17,597 |
| 12/04 | 17,146 | 18,203 |
| 12/31/05 | 17,591 | 18,543 |
1Performance numbers for the Series and Index are calculated from February 14, 1994, the Series' inception date.
2The Series' performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of shares. The Series' performance is historical and may not be indicative of future results.
3The unmanaged Merrill Lynch Intermediate Municipal Bond Index is a market value weighted measure of over 6,000 municipal bonds issued across the United States. The Index is comprised of investment grade securities. The Index returns assume reinvestment of coupons and, unlike Series returns, do not reflect any fees or expenses.
3
<page>
Shareholder Expense Example (unaudited)
As a shareholder of the Series, you may incur two types of costs: (1) transaction costs, including potential wire charges on redemptions and (2) ongoing costs, including management fees and other Series expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Series and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005).
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid during the period. You may use this information to compare the ongoing costs of investing in the Series and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs, such as potential wire charges on redemptions. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| | Beginning | Ending | Expenses Paid |
| | Account Value | Account Value | During Period* |
| | 7/1/05 | 12/31/05 | 7/1/05-12/31/05 |
| Actual | $1,000.00 | $1,002.40 | $3.53 |
| Hypothetical | | | |
| (5% return before expenses) | $1,000.00 | $1,021.68 | $3.57 |
*Expenses are equal to the Series’ annualized expense ratio (for the six-month period) of 0.70%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). Expenses are based on the most recent fiscal half year; therefore, the expense ratio stated above may differ from the expense ratio stated in the financial highlights, which is based on one-year data.
4
<page>
Portfolio Composition as of December 31, 2005 (unaudited)
<graphic>
<pie chart>
Bond Types1
| | |
| Certificate of Participation | 1.5% |
| General Obligation Bonds | 68.5% |
| Revenue Bonds | 25.5% |
| Special Tax | 1.4% |
| Tax Allocation | 1.5% |
| Cash, short-term investments, and other assets, less liabilities | 1.6% |
1As a percentage of net assets.
Credit Quality Ratings2,3
| | |
| Aaa | 83.9% |
| Aa | 13.3% |
| A | 1.2% |
| Unrated investments, such as cash, short-term investments, and other assets, less liabilities | 1.6% |
2As a percentage of net assets.
3Based on ratings from Moody's, or the S&P equivalent. The Series may use different ratings provided by other rating agencies for purposes of determining compliance with the Series' investment policies.
Top Ten States4
| | |
| California | 5.5% |
| Pennsylvania | 5.2% |
| Florida | 5.1% |
| Ohio | 4.6% |
| New York | 4.6% |
| Texas | 4.1% |
| New Jersey | 4.1% |
| Massachussetts | 4.0% |
| Georgia | 3.7% |
| Tenneessee | 3.5% |
4As a percentage of total investments.
5
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
MUNICIPAL SECURITIES - 98.4% | | | |
| | | | |
Alabama - 2.4% | | | |
| Bessemer Governmental Utility Services Corp., Water Supply, | | | |
| Revenue Bond, MBIA, 5.20%, 6/1/2024 | Aaa | $500,000 | $527,535 |
| Fort Payne Waterworks Board, Revenue Bond, AMBAC, | | | |
| 3.50%, 7/1/2015 | Aaa | 665,000 | 631,437 |
| Hoover Board of Education, Capital Outlay Warrants, | | | |
| Special Tax Warrants, MBIA, 5.25%, 2/15/2017 | Aaa | 500,000 | 533,210 |
| Mobile County Board of School Commissioners, Capital Outlay Warrants, G.O. Bond, | | | |
| Series B, AMBAC, 5.00%, 3/1/2018 | Aaa | 500,000 | 518,785 |
| Odenville Utilities Board Water, Revenue Bond, MBIA, | | | |
| 4.30%, 8/1/2028 | Aaa | 500,000 | 500,780 |
| | | | 2,711,747 |
| | | | |
Alaska - 0.4% | | | |
| Alaska Municipal Banking Authority, Revenue Bond, MBIA, 4.10%, 6/1/2017 | Aaa | 455,000 | 456,611 |
| | | | |
Arizona - 2.7% | | | |
| Phoenix, G.O. Bond, Series B, 4.20%, 7/1/2021 | Aa1 | 1,500,000 | 1,484,820 |
| Salt River Project, Agricultural Impt. & Power | | | |
| District, Certificate of Participation, MBIA, 5.00%, 12/1/2011 | Aaa | 1,500,000 | 1,605,645 |
| | | | 3,090,465 |
| | | | |
California - 5.4% | | | |
| California State, G.O. Bond, 5.25%, 2/1/2023 | A2 | 500,000 | 555,760 |
| California State, G.O. Bond, 4.75%, 12/1/2028 | A2 | 795,000 | 800,334 |
| Chula Vista Elementary School District, G.O. Bond, | | | |
| Series F, MBIA, 4.80%, 8/1/2024 | Aaa | 435,000 | 448,698 |
| Chula Vista Elementary School District, G.O. Bond, | | | |
| Series F, MBIA, 4.875%, 8/1/2025 | Aaa | 425,000 | 439,905 |
| Oak Grove School District, Prerefunded Balance, G.O. Bond, FSA, 5.25%, 8/1/2024 | Aaa | 500,000 | 510,850 |
| Oak Valley Hospital District, G.O. Bond, FGIC, 4.50%, 7/1/2025 | Aaa | 1,395,000 | 1,380,701 |
| Richmond Joint Powers Financing Authority, Tax Allocation, Series A, MBIA, | | | |
| 5.25%, 9/1/2025 | Aaa | 1,570,000 | 1,670,684 |
| Wiseburn School District, Prerefunded Balance, G.O. Bond, Series A, FGIC, 5.25%, 8/1/2016 | Aaa | 330,000 | 346,912 |
| | | | 6,153,844 |
| | | | |
Colorado - 3.0% | | | |
| Broomfield Water Activity, Enterprise Water, Revenue | | | |
| Bond, MBIA, 5.00%, 12/1/2015 | Aaa | 700,000 | 750,932 |
| Colorado Water Resources & Power Development Authority, Water Resource, | | | |
| Revenue Bond, Series D, FSA, 4.375%, 8/1/2035 | Aaa | 1,420,000 | 1,369,689 |
The accompanying notes are an integral part of the financial statements.
6
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Colorado (continued) | | | |
| Denver City & County School District No. 1, Prerefunded Balance, G.O. Bond, | | | |
| FGIC, 5.00%, 12/1/2023 | Aaa | $895,000 | $954,947 |
| Denver City & County School District No. 1, Unrefunded Balance, G.O. Bond, | | | |
| FGIC, 5.00%, 12/1/2023 | Aaa | 105,000 | 110,687 |
| El Paso County School District No. 020, G.O. Bond, Series A, MBIA, | | | |
| 6.20%, 12/15/2007 | Aaa | 160,000 | 168,707 |
| | | | 3,354,962 |
| | | | |
Delaware - 1.0% | | | |
| Delaware Transportation Authority, Revenue Bond, MBIA, 5.00%, 7/1/2011 | Aaa | 1,000,000 | 1,074,490 |
| | | | |
Florida - 5.1% | | | |
| Florida State, Jacksonville Transportation, Prerefunded Balance, G.O. Bond, | | | |
| Series A, 5.00%, 7/1/2027 | Aa1 | 710,000 | 735,056 |
| Florida State Board of Education, Capital Outlay, Prerefunded Balance, G.O. Bond, Series A, | | | |
| 5.00%, 6/1/2027 | Aaa | 750,000 | 775,417 |
| Florida State Board of Education, Capital Outlay, Public Education, G.O. Bond, | | | |
| Series C, AMBAC, 5.00%, 6/1/2011 | Aaa | 425,000 | 455,515 |
| Florida State Board of Education, Capital Outlay, Public Education, G.O. Bond, | | | |
| Series A, FSA, 4.50%, 6/1/2025 | Aa1 | 1,280,000 | 1,287,782 |
| Florida State Department of Transportation, G.O. Bond, | | | |
| 5.00%, 7/1/2027 | Aa1 | 1,000,000 | 1,045,790 |
| Hillsborough County, Capital Impt. Program, County Center Project, Revenue Bond, | | | |
| Series B, MBIA, 5.125%, 7/1/2022 | Aaa | 400,000 | 411,112 |
| Miami-Dade County, Educational Facilities Authority, Revenue Bond, Series A, | | | |
| AMBAC, 5.00%, 4/1/2015 | Aaa | 510,000 | 551,101 |
| Tohopekaliga Water Authority, Utility System, Revenue | | | |
| Bond, Series A, FSA, 5.00%, 10/1/2028 | Aaa | 510,000 | 532,950 |
| | | | 5,794,723 |
| | | | |
Georgia - 3.7% | | | |
| Atlanta, Prerefunded Balance, G.O. Bond, 5.60%, 12/1/2018 | Aa3 | 350,000 | 357,686 |
| Atlanta, Water & Wastewater, Revenue Bond, Series A, MBIA, 5.00%, 11/1/2033 | Aaa | 310,000 | 319,650 |
| Atlanta, Water & Wastewater, Revenue Bond, FSA, 5.00%, 11/1/2043 | Aaa | 1,500,000 | 1,544,505 |
| Georgia State, G.O. Bond, Series B, 5.65%, 3/1/2012 | Aaa | 200,000 | 223,428 |
| Georgia State, G.O. Bond, Series B, 4.00%, 3/1/2022 | Aaa | 1,270,000 | 1,224,432 |
| Rockdale County, Water & Sewer Authority, Prerefunded Balance, Revenue Bond, | | | |
| FSA, 5.00%, 7/1/2022 | Aaa | 450,000 | 469,966 |
| | | | 4,139,667 |
The accompanying notes are an integral part of the financial statements.
7
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Hawaii - 0.2% | | | |
| Hawaii State, G.O. Bond, Series CH, 6.00%, 11/1/2007 | Aa2 | $260,000 | $272,285 |
| | | | |
Illinois - 3.5% | | | |
| Chicago, G.O. Bond, FGIC, 5.25%, 1/1/2027 | Aaa | 250,000 | 261,712 |
| Chicago, G.O. Bond, MBIA, Series A, 5.00%, 1/1/2034 | Aaa | 830,000 | 855,190 |
| Chicago Neighborhoods Alive 21 Program, G.O. Bond, FGIC, 5.375%, 1/1/2026 | Aaa | 500,000 | 531,590 |
| Cook County, G.O. Bond, Series A, FGIC, 5.00%, 11/15/2022 | Aaa | 750,000 | 784,125 |
| Illinois State, Certificate of Participation, Series 1995 A, MBIA, 5.60%, 7/1/2010 | Aaa | 100,000 | 102,188 |
| Illinois State, G.O. Bond, 5.00%, 12/1/2027 | Aa3 | 600,000 | 622,338 |
| Madison & St. Clair Counties School District No. 010 Collinsville, School Building, | | | |
| Prerefunded Balance, G.O. Bond, FGIC, 5.125%, 2/1/2019 | Aaa | 500,000 | 537,225 |
| Rock Island County School District No. 041 Rock Island, | | | |
| G.O. Bond, FSA, 5.125%, 12/1/2015 | Aaa | 200,000 | 208,674 |
| | | | 3,903,042 |
| | | | |
Indiana - 1.7% | | | |
| Avon Community School Building Corp., Prerefunded Balance, Revenue Bond, | | | |
| AMBAC, 5.25%, 1/1/2022 | Aaa | 310,000 | 319,198 |
| Avon Community School Building Corp., Prerefunded Balance, Revenue Bond, | | | |
| AMBAC, 5.25%, 1/1/2022 | Aaa | 615,000 | 633,247 |
| La Porte County, G.O. Bond, FGIC, 5.20%, 1/15/2018 | Aaa | 300,000 | 323,919 |
| Monroe County Community School Corp., Prerefunded Balance, Revenue Bond, MBIA, | | | |
| 5.25%, 7/1/2016 | Aaa | 125,000 | 129,867 |
| North Lawrence Indiana Community Schools Building Corp., Revenue Bond, | | | |
| FSA, 5.00%, 7/15/2020 | Aaa | 450,000 | 474,345 |
| | | | 1,880,576 |
| | | | |
Iowa - 1.0% | | | |
| Indianola Community School District, G.O. Bond, FGIC, 5.20%, 6/1/2021 | Aaa | 425,000 | 459,149 |
| Iowa City, Sewer, Revenue Bond, MBIA, 5.75%, 7/1/2021 | Aaa | 250,000 | 252,992 |
| Iowa City Community School District, G.O. Bond, FSA, 4.00%, 6/1/2018 | Aaa | 425,000 | 420,151 |
| | | | 1,132,292 |
| | | | |
Kansas - 3.2% | | | |
| Derby, Prerefunded Balance, G.O. Bond, Series A, FSA, 5.00%, 6/1/2015 | Aaa | 275,000 | 276,966 |
| Johnson County Unified School District No. 229, Prerefunded Balance, G.O. | | | |
| Bond, Series A, 5.00%, 10/1/2014 | Aa1 | 220,000 | 226,459 |
The accompanying notes are an integral part of the financial statements.
8
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Kansas (continued) | | | |
| Johnson County Unified School District No. 231, Prerefunded Balance, G.O. | | | |
| Bond, Series A, FGIC, 5.75%, 10/1/2016 | Aaa | $500,000 | $541,040 |
| Johnson & Miami Counties Unified School District No. 230, G.O. Bond, | | | |
| FGIC, 4.00%, 9/1/2022 | Aaa | 1,000,000 | 953,730 |
| Sedgwick County Unified School District No. 265, G.O. Bond, | | | |
| FSA, 5.00%, 10/1/2025 | Aaa | 1,090,000 | 1,151,966 |
| Wyandotte County School District No. 204 Bonner Springs, G.O. Bond, | | | |
| Series A, FSA, 5.375%, 9/1/2015 | Aaa | 400,000 | 430,548 |
| | | | 3,580,709 |
| | | | |
Kentucky - 0.5% | | | |
| Jefferson County School District Finance Corp., School | | | |
| Building, Prerefunded Balance, Revenue Bond, Series A, MBIA, 5.00%, 2/1/2011 | Aaa | 300,000 | 306,417 |
| Kentucky State Turnpike Authority, Economic Development, Revenue Bond, AMBAC, | | | |
| 6.50%, 7/1/2008 | Aaa | 250,000 | 268,693 |
| | | | 575,110 |
| | | | |
Louisiana - 2.8% | | | |
| Caddo Parish Parishwide School District, G.O. Bond, MBIA, 4.35%, 3/1/2026 | Aaa | 660,000 | 642,998 |
| Caddo Parish Parishwide School District, G.O. Bond, MBIA, 4.375%, 3/1/2027 | Aaa | 1,090,000 | 1,067,241 |
| Lafayette Public Power Authority, Revenue Bond, Series A, AMBAC, 5.00%, 11/1/2012 | Aaa | 730,000 | 777,742 |
| New Orleans Sewage Service, Revenue Bond, FGIC, 5.25%, 6/1/2012 | Aaa | 300,000 | 308,190 |
| Orleans Parish Parishwide School District, G.O. Bond, | | | |
| Series A, FGIC, 5.125%, 9/1/2016 | Aaa | 400,000 | 407,656 |
| | | | 3,203,827 |
| | | | |
Maine - 0.7% | | | |
| Kennebec Water District, Revenue Bond, FSA, 5.125%, 12/1/2021 | Aaa | 750,000 | 781,402 |
| | | | |
Maryland - 0.2% | | | |
| Baltimore, Water Project, Revenue Bond, Series A, FGIC, 5.55%, 7/1/2009 | Aaa | 260,000 | 278,668 |
| | | | |
Massachusetts - 4.0% | | | |
| Boston, G.O. Bond, Series A, MBIA, 4.125%, 1/1/2021 | Aaa | 1,000,000 | 980,800 |
| Boston, G.O. Bond, Series A, MBIA, 4.125%, 1/1/2022 | Aaa | 410,000 | 398,983 |
| Lowell, State Qualified, G.O. Bond, AMBAC, 5.00%, 2/1/2020 | Aaa | 500,000 | 530,690 |
The accompanying notes are an integral part of the financial statements.
9
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Massachusetts (continued) | | | |
| Massachusetts Bay Transportation Authority, General Transportation System, | | | |
| Prerefunded Balance, Revenue Bond, Series B, FSA, 5.25%, 3/1/2026 | Aaa | $315,000 | $319,104 |
| Massachusetts Bay Transportation Authority, General Transportation System, | | | |
| Prerefunded Balance, Revenue Bond, Series B, FSA, 5.25%, 3/1/2026 | Aaa | 185,000 | 187,435 |
| Massachusetts State, G.O. Bond, Series C, AMBAC, 5.75%, 8/1/2010 | Aaa | 400,000 | 438,256 |
| Massachusetts State, G.O. Bond, Series D, 5.25%, 10/1/2014 | Aa2 | 1,000,000 | 1,101,570 |
| Plymouth, G.O. Bond, MBIA, 5.25%, 10/15/2020 | Aaa | 100,000 | 107,610 |
| Richmond, G.O. Bond, MBIA, 5.00%, 4/15/2021 | Aaa | 400,000 | 426,156 |
| | | | 4,490,604 |
| | | | |
Michigan - 3.0% | | | |
| Comstock Park Public Schools, Prerefunded Balance, G.O. Bond, FSA, 5.50%, 5/1/2011 | Aaa | 150,000 | 151,088 |
| Detroit City School District, School Building & Site Impt., G.O. Bond, | | 750,000 | 775,058 |
| Series B, FGIC, 5.00%, 5/1/2033 | Aaa | | |
| Holly Area School District, G.O. Bond, FGIC, 5.00%, 5/1/2022 | Aaa | 500,000 | 519,560 |
| Hudsonville Public Schools, Prerefunded Balance, G.O. Bond, FGIC, 5.15%, 5/1/2027 | Aaa | 185,000 | 192,698 |
| Hudsonville Public Schools, Unrefunded Balance, G.O. Bond, FGIC, 5.15%, 5/1/2027 | Aaa | 40,000 | 41,238 |
| Lincoln Park School District, G.O. Bond, FGIC, 5.00%, 5/1/2026 | Aaa | 480,000 | 491,438 |
| Muskegon Water, Revenue Bond, FSA, 4.75%, 5/1/2019 | Aaa | 565,000 | 581,820 |
| Oakland County, George W. Kuhn Drain District, | | | |
| G.O. Bond, Series B, 5.375%, 4/1/2021 | Aaa | 475,000 | 499,292 |
| St. Joseph County, Sewer Disposal Systems - Constantine, | | | |
| G.O. Bond, FSA, 5.00%, 4/1/2012 | Aaa | 100,000 | 101,428 |
| | | | 3,353,620 |
| | | | |
Minnesota - 1.6% | | | |
| Albert Lea Independent School District No. 241, G.O. Bond, MBIA, | | | |
| 5.00%, 2/1/2018 | Aaa | 500,000 | 500,730 |
| Big Lake Independent School District No. 727, G.O. Bond, MBIA, | | | |
| 5.50%, 2/1/2014 | Aaa | 500,000 | 512,020 |
| Pine County, G.O. Bond, Series A, FGIC, 4.40%, 2/1/2028 | Aaa | 555,000 | 547,413 |
| Western Minnesota Municipal Power Agency, Revenue | | | |
| Bond, 6.625%, 1/1/2016 | Aaa | 175,000 | 205,940 |
| | | | 1,766,103 |
The accompanying notes are an integral part of the financial statements.
10
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Mississippi - 1.4% | | | |
| Biloxi Public School District, Revenue Bond, MBIA, 5.00%, 4/1/2017 | Aaa | $500,000 | $517,575 |
| De Soto County School District, G.O. Bond, FSA, 5.00%, 2/1/2013 | Aaa | 1,000,000 | 1,069,280 |
| | | | 1,586,855 |
| | | | |
Missouri - 0.5% | | | |
| Metropolitan St. Louis Sewer District Wastewater System, Revenue Bond, | | | |
| Series A, MBIA, 3.60%, 5/1/2013 | Aaa | 600,000 | 593,454 |
| | | | |
Nevada - 2.2% | | | |
| Clark County Transportation, G.O. Bond, Series A, FGIC, 4.50%, 12/1/2019 | Aaa | 500,000 | 505,895 |
| Clark County Public Facilities, G.O. Bond, Series C, FGIC, 5.00%, 6/1/2024 | Aaa | 425,000 | 442,026 |
| Nevada State, Project Nos. 66 & 67, Prerefunded Balance, G.O. Bond, Series A, | | | |
| FGIC, 5.00%, 5/15/2028 | Aaa | 625,000 | 649,131 |
| Nevada State, Project Nos. 66 & 67, Unrefunded Balance, G.O. Bond, Series A, | | | |
| FGIC, 5.00%, 5/15/2028 | Aaa | 125,000 | 128,028 |
| Truckee Meadows, Water Authority, Revenue Bond, Series A, FSA, 5.00%, 7/1/2025 | Aaa | 750,000 | 783,330 |
| | | | 2,508,410 |
| | | | |
New Jersey - 4.0% | | | |
| East Brunswick Township Board of Education, G.O. Bond, FSA, 4.50%, 11/1/2028 | Aaa | 835,000 | 836,269 |
| East Brunswick Township Board of Education, G.O. Bond, FSA, 4.50%, 11/1/2029 | Aaa | 1,000,000 | 999,940 |
| Essex County, G.O. Bond, Series A, MBIA, 4.50%, 5/1/2031 | Aaa | 500,000 | 496,980 |
| Jersey City Water, Prerefunded Balance, G.O. Bond, FSA, 5.50%, 3/15/2011 | Aaa | 225,000 | 235,244 |
| Morris County Impt. Authority, School District, Morris Hills Regional District, Revenue Bond, | | | |
| 3.70%, 10/1/2018 | Aaa | 540,000 | 512,908 |
| North Hudson Sewerage Authority, Revenue Bond, FGIC, 5.25%, 8/1/2016 | Aaa | 250,000 | 255,178 |
| South Brunswick Township Board of Education, G.O. Bond, MBIA, 4.125%, 8/1/2012 | Aaa | 1,200,000 | 1,233,564 |
| | | | 4,570,083 |
| | | | |
New Mexico - 0.7% | | | |
| New Mexico Finance Authority, Public Project Revolving Fund, Revenue Bond, | | | |
| Series A, MBIA, 3.25%, 6/1/2013 | Aaa | 800,000 | 758,880 |
| | | | |
New York - 4.5% | | | |
| Erie County, Public Impt., G.O. Bond, Series A, FGIC, 5.00%, 9/1/2014 | Aaa | 380,000 | 408,546 |
The accompanying notes are an integral part of the financial statements.
11
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
New York (continued) | | | |
| Mount Morris Central School District, G.O. Bond, FGIC, 4.125%, 6/15/2014 | Aaa | $1,290,000 | $1,331,667 |
| New York City Municipal Water Finance Authority, Revenue Bond, Series E, | | | |
| FGIC, 5.00%, 6/15/2026 | Aaa | 750,000 | 776,760 |
| New York State Urban Development Corp., Special Tax Bond, MBIA, 5.00%, 1/1/2019 | AAA2 | 1,000,000 | 1,076,650 |
| Orange County, G.O. Bond, 5.125%, 9/1/2024 | Aa1 | 500,000 | 519,915 |
| Orange County, G.O. Bond, Series A, 3.00%, 11/1/2006 | Aa1 | 500,000 | 499,360 |
| Spencerport Central School District, G.O. Bond, FSA, 5.00%, 11/15/2012 | Aaa | 350,000 | 366,328 |
| Westchester County, G.O. Bond, 4.75%, 11/15/2016 | Aaa | 15,000 | 15,341 |
| Westchester County, Unrefunded Balance, G.O. Bond, 4.75%, 11/15/2016 | Aaa | 135,000 | 137,371 |
| | | | 5,131,938 |
| | | | |
North Carolina - 2.8% | | | |
| Cary, G.O. Bond, 5.00%, 3/1/2018 | Aaa | 700,000 | 748,069 |
| Mecklenburg County, Public Impt., G.O. Bond, Series A, 4.125%, 2/1/2022 | Aaa | 1,455,000 | 1,425,609 |
| Raleigh, G.O. Bond, 4.40%, 6/1/2017 | Aaa | 250,000 | 257,160 |
| Union County, Prerefunded Balance, G.O. Bond, Series B, FGIC, 5.30%, 3/1/2013 | Aaa | 250,000 | 269,323 |
| Wilson, G.O. Bond, AMBAC, 5.10%, 6/1/2019 | Aaa | 400,000 | 429,428 |
| | | | 3,129,589 |
| | | | |
North Dakota - 1.6% | | | |
| Fargo, G.O. Bond, Series A, MBIA, 4.70%, 5/1/2030 | Aaa | 1,840,000 | 1,857,351 |
| | | | |
Ohio - 4.6% | | | |
| Cleveland, Various Purposes, G.O. Bond, MBIA, 5.00%, 12/1/2012 | Aaa | 1,140,000 | 1,233,685 |
| Licking Heights Local School District, School Facilities Construction & Impt., G.O. Bond, | | | |
| Series A, MBIA, 5.00%, 12/1/2022 | Aaa | 1,450,000 | 1,541,742 |
| Newark City School District, School Impt., G.O. Bond, FGIC, 4.25%, 12/1/2027 | Aaa | 500,000 | 477,575 |
| Oak Hills Local School District, Prerefunded Balance, G.O. Bond, MBIA, 5.125%, 12/1/2025 | Aaa | 490,000 | 511,462 |
| Ohio State Conservation Project, G.O. Bond, Series A, | | | |
| 5.00%, 3/1/2015 | Aa1 | 1,000,000 | 1,082,090 |
| Springfield City School District, G.O. Bond, FGIC, 5.20%, | | | |
| 12/1/2023 | Aaa | 325,000 | 352,615 |
| | | | 5,199,169 |
The accompanying notes are an integral part of the financial statements.
12
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
Oklahoma - 0.7% | | | |
| Oklahoma State Turnpike Authority, Revenue Bond, | | | |
| Series A, FGIC, 5.00%, 1/1/2023 | Aaa | $750,000 | $776,603 |
| | | | |
Oregon - 2.9% | | | |
| Josephine County Unit School District Three Rivers, Prerefunded Balance, G.O. | | | |
| Bond, FSA, 5.25%, 6/15/2017 | Aaa | 825,000 | 894,234 |
| Oregon State Board of Higher Education, G.O. Bond, Series B, 5.00%, 8/1/2033 | Aa3 | 1,500,000 | 1,527,015 |
| Salem, Pedestrian Safety Impts., Prerefunded Balance, G.O. Bond, FGIC, 5.50%, 5/1/2010 | Aaa | 255,000 | 256,849 |
| Washington County School District No. 015 Forest Grove, Prerefunded Balance, G.O. Bond, | | | |
| FSA, 5.50%, 6/15/2017 | Aaa | 500,000 | 548,115 |
| | | | 3,226,213 |
| | | | |
Pennsylvania - 5.2% | | | |
| Beaver County, G.O. Bond, MBIA, 5.15%, 10/1/2017 | Aaa | 300,000 | 308,520 |
| Cambria County, G.O. Bond, Series A, FGIC, 6.10%, 8/15/2016 | Aaa | 65,000 | 65,795 |
| Jenkintown School District, G.O. Bond, Series A, FGIC, 4.50%, 5/15/2032 | Aaa | 1,000,000 | 990,800 |
| Pennsylvania State, G.O. Bond, MBIA, 5.00%, 1/1/2011 | Aaa | 1,500,000 | 1,606,710 |
| Pennsylvania State Turnpike Commission, Prerefunded Balance, Revenue Bond, AMBAC, | | | |
| 5.375%, 7/15/2019 | Aaa | 530,000 | 582,565 |
| Philadelphia, Water & Wastewater, Revenue Bond, | | | |
| MBIA, 5.60%, 8/1/2018 | Aaa | 20,000 | 21,774 |
| Plum Boro School District, G.O. Bond, Series A, FGIC, 4.50%, 9/15/2030 | AAA2 | 855,000 | 851,161 |
| Uniontown Area School District, G.O. Bond, FSA, 4.35%, 10/1/2034 | AAA2 | 1,500,000 | 1,438,125 |
| | | | 5,865,450 |
| | | | |
Rhode Island - 0.9% | | | |
| Rhode Island Clean Water Finance Agency, Revenue Bond, | | | |
| Series A, MBIA, 5.00%, 10/1/2035 | Aaa | 1,000,000 | 1,031,030 |
| | | | |
South Carolina - 3.0% | | | |
| Beaufort County School District, Prerefunded Balance, G.O. Bond, Series A, 5.00%, 3/1/2020 | Aa1 | 500,000 | 534,745 |
| Orangeburg County Consolidated School District 5, G.O. Bond, | | | |
| 5.625%, 3/1/2019 | Aa1 | 800,000 | 859,592 |
| South Carolina, Transportation Infrastructure Bank, Prerefunded Balance, Revenue Bond, | | | |
| Series A, AMBAC, 5.25%, 10/1/2021 | Aaa | 1,500,000 | 1,610,130 |
| South Carolina State Highway, Prerefunded Balance, G.O. Bond, Series B, | | | |
| 5.625%, 7/1/2010 | Aaa | 350,000 | 361,053 |
| | | | 3,365,520 |
The accompanying notes are an integral part of the financial statements.
13
<page>
Investment Portfolio - December 31, 2005
| | Credit | | |
| | Rating1 | Principal | Value |
| | (unaudited) | Amount | (Note 2) |
| | | | |
South Dakota - 0.6% | | | |
| Rapid City Area School District No. 51-4, Capital Outlay Certificates, G.O. Bond, | | | |
| FSA, 4.75%, 1/1/2018 | Aaa | $650,000 | $663,943 |
| | | | |
Tennessee - 3.5% | | | |
| Cleveland Water & Sewer, Prerefunded Balance, G.O. Bond, FGIC, 5.35%, 9/1/2023 | Aaa | 450,000 | 465,138 |
| Johnson City School Sales Tax, Prerefunded Balance, G.O. Bond, AMBAC, 6.70%, 5/1/2021 | Aaa | 350,000 | 353,913 |
| Rhea County, G.O. Bond, MBIA, 5.00%, 4/1/2018 | Aaa | 950,000 | 1,003,305 |
| Shelby County, G.O. Bond, Series A, 5.50%, 3/1/2010 | Aa2 | 2,000,000 | 2,160,520 |
| | | | 3,982,876 |
| | | | |
Texas - 4.1% | | | |
| Brazoria County, G.O. Bond, FGIC, 4.75%, 9/1/2011 | Aaa | 445,000 | 457,438 |
| Brazos River Authority, Revenue Bond, Series B, FGIC, 4.25%, 12/1/2017 | Aaa | 1,125,000 | 1,129,871 |
| McKinney Waterworks & Sewer, Revenue Bond, FGIC, | | | |
| 4.75%, 3/15/2024 | Aaa | 1,000,000 | 1,019,990 |
| North Texas Municipal Water District, Regional Wastewater, Revenue Bond, | | | |
| FSA, 5.00%, 6/1/2012 | Aaa | 150,000 | 153,176 |
| Richardson Independent School District, G.O. Bond, Series B, 5.00%, | | | |
| 2/15/2021 | Aaa | 500,000 | 510,860 |
| San Patricio Municipal Water District, Revenue Bond, FSA, 5.20%, 7/10/2028 | Aaa | 490,000 | 511,457 |
| Southlake Waterworks & Sewer System, Prerefunded Balance, G.O. Bond, AMBAC, 5.30%, | | | |
| 2/15/2011 | Aaa | 350,000 | 350,872 |
| Waller Consolidated Independent School District, G.O. Bond, 4.75%, | | | |
| 2/15/2023 | Aaa | 500,000 | 507,700 |
| | | | 4,641,364 |
| | | | |
Utah - 2.3% | | | |
| Alpine School District, Prerefunded Balance, G.O. Bond, FGIC, 5.375%, 3/15/2009 | Aaa | 250,000 | 253,698 |
| Mountain Regional Water Special Service District, Revenue Bond, MBIA, 5.00%, | | | |
| 12/15/2030 | Aaa | 1,240,000 | 1,291,162 |
| St. George, Parks and Recreation, G.O. Bond, AMBAC, 4.00%, 8/1/2019 | Aaa | 795,000 | 779,450 |
| Utah State Building Ownership Authority, Revenue Bond, Series | | | |
| C, FSA, 5.50%, 5/15/2011 | Aaa | 300,000 | 327,816 |
| | | | 2,652,126 |
| | | | |
Virginia - 1.1% | | | |
| Norfolk, Capital Impt., G.O. Bond, MBIA, 4.375%, 3/1/2024 | Aaa | 685,000 | 684,534 |
| Richmond, G.O. Bond, Series B, FSA, 4.75%, 7/15/2023 | Aaa | 400,000 | 412,000 |
The accompanying notes are an integral part of the financial statements.
14
<page>
Investment Portfolio - December 31, 2005
| | Credit | Principal | |
| | Rating1 | Amount/ | Value |
| | (unaudited) | Shares | (Note 2) |
| | | | |
Virginia (continued) | | | |
| Spotsylvania County Water & Sewer Systems, Prerefunded Balance, Revenue | | | |
| Bond, MBIA, 5.25%, 6/1/2016 | Aaa | $130,000 | $136,040 |
| | | | 1,232,574 |
| | | | |
Washington - 2.8% | | | |
| Franklin County, G.O. Bond, FGIC, 5.125%, 12/1/2022 | Aaa | 1,000,000 | 1,064,270 |
| King County, G.O. Bond, Series B, MBIA, 5.00%, 1/1/2030 | Aaa | 400,000 | 410,176 |
| King County, Sewer, Revenue Bond, Series A, MBIA, 4.50%, 1/1/2032 | Aaa | 1,070,000 | 1,047,509 |
| Seattle, Prerefunded Balance, G.O. Bond, Series A, 5.75%, 1/15/2020 | Aa1 | 230,000 | 230,232 |
| Washington State, G.O. Bond, Series A, 5.00%, 1/1/2023 | Aa1 | 410,000 | 419,959 |
| | | | 3,172,146 |
| | | | |
Wisconsin - 2.9% | | | |
| East Troy School District, G.O. Bond, Series A, MBIA, 4.625%, | | | |
| 10/1/2011 | Aaa | 400,000 | 403,100 |
| Kenosha, G.O. Bond, Series B, FSA, 5.00%, 9/1/2011 | Aaa | 765,000 | 821,067 |
| Oshkosh, Corporate Purposes, G.O. Bond, Series A, FGIC, 5.05%, 12/1/2021 | Aaa | 450,000 | 477,104 |
| Stoughton Area School District, G.O. Bond, FGIC, 4.875%, 4/1/2016 | Aaa | 500,000 | 523,770 |
| Two Rivers Public School District, Prerefunded Balance, G.O. Bond, FSA, 5.625%, 3/1/2019 | Aaa | 415,000 | 450,204 |
| Washington County, Workforce Development Center, G.O. Bond, 3.75%, 3/1/2007 | Aa1 | 25,000 | 25,146 |
| West De Pere School District, Prerefunded Balance, G.O. Bond, Series A, | | | |
| FSA, 5.25%, 10/1/2017 | Aaa | 500,000 | 538,885 |
| | | | 3,239,276 |
| | | | |
TOTAL MUNICIPAL SECURITIES | | | |
| (Identified Cost $108,656,606) | | | 111,179,597 |
| | | | |
SHORT-TERM INVESTMENTS - 1.2% | | | |
| Dreyfus Municipal Reserves - Class R | | | |
| (Identified Cost $1,370,529) | | 1,370,529 | 1,370,529 |
| | | | |
TOTAL INVESTMENTS - 99.6% | | | |
| (Identified Cost $110,027,135) | | | 112,550,126 |
| | | | |
OTHER ASSETS, LESS LIABILITIES - 0.4% | | | 414,426 |
| | | | |
NET ASSETS - 100% | | | $112,964,552 |
The accompanying notes are an integral part of the financial statements.
15
<page>
Investment Portfolio - December 31, 2005
KEY:
G.O. Bond - General Obligation Bond
Impt. - Improvement
No. - Number
Scheduled principal and interest payments are guaranteed by:
AMBAC (AMBAC Assurance Corp.)
FGIC (Financial Guaranty Insurance Co.)
FSA (Financial Security Assurance)
MBIA (MBIA, Inc.)
The insurance does not guarantee the market value of the municipal bonds.
1Credit ratings from Moody’s (unaudited)
2Credit ratings from S&P (unaudited)
The Series' portfolio holds, as a percentage of net assets, greater than 10% in bonds insured by the following companies: MBIA - 29.2%; FGIC - 21.8%; FSA - 19.3%.
The accompanying notes are an integral part of the financial statements.
16
<page>
Statement of Assets and Liabilities
December 31, 2005
ASSETS: | |
| | |
| Investments, at value (identified cost $110,027,135) (Note 2) | $112,550,126 |
| Interest receivable | 1,491,529 |
| Receivable for fund shares sold | 102,291 |
| Dividends receivable | 8,271 |
| | |
| TOTAL ASSETS | 114,152,217 |
| | |
LIABILITIES: | |
| | |
| Accrued management fees (Note 3) | 47,596 |
| Accrued fund accounting and transfer agent fees (Note 3) | 11,892 |
| Accrued Chief Compliance Officer service fees (Note 3) | 132 |
| Payable for securities purchased | 1,063,870 |
| Payable for fund shares repurchased | 32,302 |
| Audit fees payable | 25,362 |
| Other payables and accrued expenses | 6,511 |
| | |
| TOTAL LIABILITIES | 1,187,665 |
| | |
TOTAL NET ASSETS | $112,964,552 |
| | |
NET ASSETS CONSIST OF: | |
| | |
| Capital stock | $103,683 |
| Additional paid-in-capital | 109,749,015 |
| Undistributed net investment income | 588,863 |
| Net unrealized appreciation on investments | 2,522,991 |
| | |
TOTAL NET ASSETS | $112,964,552 |
| | |
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION | |
PRICE PER SHARE ($112,964,552/10,368,340 shares) | $10.90 |
The accompanying notes are an integral part of the financial statements.
17
<page>
Statement of Operations
For the Year Ended December 31, 2005
INVESTMENT INCOME: | |
| | |
| Interest | $4,305,427 |
| Dividends | 80,363 |
| | |
| Total Investment Income | 4,385,790 |
| | |
EXPENSES: | |
| | |
| Management fees (Note 3) | 511,314 |
| Fund accounting and transfer agent fees (Note 3) | 137,041 |
| Directors' fees (Note 3) | 7,662 |
| Chief Compliance Officer service fees (Note 3) | 5,326 |
| Custodian fees | 15,146 |
| Miscellaneous | 52,806 |
| | |
| Total Expenses | 729,295 |
| | |
| NET INVESTMENT INCOME | 3,656,495 |
| | |
REALIZED AND UNREALIZED GAIN (LOSS) ON | |
INVESTMENTS: | |
| | |
| Net realized gain on investments | 104,286 |
| Net change in unrealized appreciation on investments | (1,163,694) |
| | |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON | |
| INVESTMENTS | (1,059,408) |
| | |
| NET INCREASE IN NET ASSETS RESULTING FROM | |
| OPERATIONS | $2,597,087 |
The accompanying notes are an integral part of the financial statements.
18
<page>
Statements of Changes in Net Assets
| | For the | For the |
| | Year Ended | Year Ended |
| | 12/31/05 | 12/31/04 |
| | | |
INCREASE (DECREASE) IN NET ASSETS: | | |
| | | |
OPERATIONS: | | |
| | | |
| Net investment income | $3,656,495 | $2,770,680 |
| Net realized gain on investments | 104,286 | 79,105 |
| Net change in unrealized appreciation on | | |
| investments | (1,163,694) | 85,958 |
| | | |
| Net increase from operations | 2,597,087 | 2,935,743 |
| | | |
DISTRIBUTIONS TO SHAREHOLDERS | | |
(Note 7): | | |
| | | |
| From net investment income | (3,408,479) | (3,183,863) |
| From net realized gain on investments | (108,954) | (64,781) |
| | | |
| Total distributions to shareholders | (3,517,433) | (3,248,644) |
| | | |
CAPITAL STOCK ISSUED AND | | |
REPURCHASED: | | |
| | | |
| Net increase from capital share transactions (Note 5) | 27,443,894 | 23,000,395 |
| | | |
| Net increase in net assets | 26,523,548 | 22,687,494 |
| | | |
NET ASSETS: | | |
| | | |
| Beginning of year | 86,441,004 | 63,753,510 |
| | | |
End of year (including undistributed net investment | | |
| income of $588,863 and $341,015, respectively) | $112,964,552 | $86,441,004 |
The accompanying notes are an integral part of the financial statements.
19
<page>
Financial Highlights
| | For the Years Ended |
| | 12/31/05 | 12/31/04 | 12/31/03 | 12/31/02 | 12/31/01 |
| | | | | | |
Per share data (for a share outstanding | | | | | |
throughout each year): | | | | | |
| | | | | | |
Net asset value - Beginning of year | $10.99 | $11.04 | $11.00 | $10.54 | $10.57 |
| | | | | | |
| Income (loss) from investment operations: | | | | | |
| Net investment income | 0.37 | 0.37 | 0.41 | 0.44 | 0.45 |
| Net realized and unrealized gain (loss) on | | | | | |
| investments | (0.09) | 0.04 | 0.10 | 0.51 | (0.06) |
| | | | | | |
| Total from investment operations | 0.28 | 0.41 | 0.51 | 0.95 | 0.39 |
| | | | | | |
| Less distributions to shareholders: | | | | | |
| From net investment income | (0.36) | (0.45) | (0.41) | (0.41) | (0.41) |
| From net realized gain on investments | (0.01) | (0.01) | (0.06) | (0.08) | (0.01) |
| | | | | | |
| Total distributions to shareholders | (0.37) | (0.46) | (0.47) | (0.49) | (0.42) |
| | | | | | |
Net asset value - End of year | $10.90 | $10.99 | $11.04 | $11.00 | $10.54 |
| | | | | | |
Total return1 | 2.60% | 3.80% | 4.65% | 9.21% | 3.72% |
| | | | | | |
Ratios (to average net assets)/Supplemental | | | | | |
Data: | | | | | |
| Expenses | 0.71% | 0.77% | 0.78% | 0.82% | 0.78% |
| Net investment income | 3.58% | 3.63% | 3.83% | 4.07% | 4.26% |
| | | | | | |
| Portfolio turnover | 2% | 5% | 7% | 11% | 3% |
| | | | | | |
Net assets - End of year (000's omitted) | $112,965 | $86,441 | $63,754 | $55,169 | $53,266 |
1Represents aggregate total return for the year indicated, and assumes reinvestment of all distributions.
The accompanying notes are an integral part of the financial statements.
20
<page>
Notes to Financial Statements
1. ORGANIZATION
Diversified Tax Exempt Series (the "Series") is a no-load diversified series of Exeter Fund, Inc. (the “Fund”). The Fund is organized in Maryland and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The Series' investment objective is to provide as high a level of current income exempt from federal income tax as the Advisor believes is consistent with the preservation of capital.
The Fund’s Advisor is Manning & Napier Advisors, Inc. (the “Advisor”), doing business as Exeter Asset Management. Shares of the Series are offered to investors, clients and employees of the Advisor and its affiliates. The total authorized capital stock of the Fund consists of 1.7 billion shares of common stock each having a par value of $0.01. As of December 31, 2005, 1.16 billion shares have been designated in total among 21 series, of which 50 million have been designated as Diversified Tax Exempt Series common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Municipal securities will normally be valued on the basis of market valuations provided by an independent pricing service (the “Service”). The Service utilizes the latest price quotations and a matrix system (which considers such factors as security prices of similar securities, yields, maturities and ratings). The Service has been approved by the Fund’s Board of Directors.
Securities for which representative valuations or prices are not available from the Fund's pricing service may be valued at fair value as determined in good faith by the Advisor under procedures approved by and under the general supervision and responsibility of the Fund’s Board of Directors.
Short-term investments that mature in sixty days or less are valued at amortized cost, which approximates market value. Investments in open-end investment companies are valued at their net asset value per share on valuation date.
Security Transactions, Investment Income and Expenses
Security transactions are accounted for on trade date. Interest income, including amortization of premium and accretion of discounts, is earned from settlement date and accrued daily. Dividend income and expenses are recorded on an accrual basis.
Most expenses of the Fund can be attributed to a specific series. Expenses which cannot be directly attributed are apportioned among the series in the Fund in such a manner as deemed equitable by the Fund's Directors, taking into consideration, among other things, the nature and type of expense.
The Series uses the identified cost method for determining realized gain or loss on investments for both financial statement and federal income tax reporting purposes.
Federal Taxes
The Series' policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. The Series is not subject to federal income or excise tax to the extent that the Series distributes to shareholders each year its taxable income, including any net realized gains on investments, in accordance with requirements of the Internal Revenue Code. Accordingly, no provision for federal income tax or excise tax has been made in the financial statements.
21
<page>
Notes to Financial Statements
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Distributions of Income and Gains
Distributions to shareholders of net investment income are made quarterly. Distributions of net realized gains are made annually. An additional distribution may be necessary to avoid taxation of the Series. Distributions are recorded on the ex-dividend date.
Indemnifications
The Fund’s organizational documents provide former and current directors and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.
Other
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH AFFILIATES
The Fund has an Investment Advisory Agreement (the “Agreement”) with the Advisor, for which the Series pays a fee, computed daily and payable monthly, at an annual rate of 0.50% of the Series’ average daily net assets.
Under the Agreement, personnel of the Advisor provide the Series with advice and assistance in the choice of investments and the execution of securities transactions, and otherwise maintain the Series’ organization. The Advisor also provides the Fund with necessary office space and fund administration services. The salaries of all officers of the Fund (except a percentage of the Fund’s Chief Compliance Officer’s salary, which is paid by the Fund, and the Special Assistant Secretary’s salary, which is paid by BISYS Fund Services Ohio, Inc. (“BISYS”)), and of all Directors who are "affiliated persons" of the Fund, or of the Advisor, and all personnel of the Fund, or of the Advisor, performing services relating to research, statistical and investment activities, are paid by the Advisor. Each "non-affiliated" Director receives an annual stipend, which is allocated among all the active series of the Fund. In addition, these Directors also receive a per meeting fee for each active series of the Fund plus a fee for each committee meeting attended.
The Advisor has contractually agreed, until at least April 30, 2007, to waive its fee and, if necessary, pay other operating expenses of the Series in order to maintain total expenses for the Series at no more than 0.85% of average daily net assets each year. In addition to its contractual agreement to limit expenses to 0.85%, the Advisor has voluntarily agreed to waive fees and reimburse expenses during the current fiscal year in order to keep total operating expenses from exceeding 0.78% of average daily net assets. The Advisor may change or eliminate all or part of its voluntary waiver at any time. For the year ended December 31, 2005, the Advisor did not waive its management fee or reimburse any expenses of the Series.
Manning & Napier Investor Services, Inc., a registered broker-dealer affiliate of the Advisor, acts as distributor for the Fund's shares. The services of Manning & Napier Investor Services, Inc. are provided at no additional cost to the Series.
22
<page>
Notes to Financial Statements
3. TRANSACTIONS WITH AFFILIATES (continued)
For fund accounting and transfer agent services, through October 31, 2005, the Fund paid the Advisor an annual fee of 0.13% of the Fund’s average daily net assets up to $900 million, 0.10% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.06% for the Fund’s average daily net assets over $1.5 billion. Effective November 1, 2005, the fee rates were reduced as follows: 0.12% of the Fund’s average daily net assets up to $900 million, 0.09% for the Fund’s average daily net assets between $900 million and $1.5 billion, and 0.05% for the Fund’s average daily net assets over $1.5 billion. These fee rates are scheduled to be reduced each year through 2007. Additionally, certain transaction and account-based fees and out-of-pocket expenses, including charges for reporting relating to the Fund’s compliance program, are charged. Expenses not directly attributable to a series are allocated based on each series’ relative net assets or number of accounts, depending on the expense. The Advisor has an agreement with BISYS under which BISYS serves as sub-accounting services and sub-transfer agent.
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2005, purchases and sales of securities, other than United States Government securities and short-term securities, were $31,333,106 and $1,936,950, respectively. There were no purchases or sales of United States Government securities.
5. CAPITAL STOCK TRANSACTIONS
Transactions in shares of Diversified Tax Exempt Series were:
| | For the Year Ended 12/31/05 | For the Year Ended 12/31/04 |
| | | | | |
| | Shares | Amount | Shares | Amount |
| | | | | |
| Sold | 3,259,615 | $35,783,025 | 2,625,078 | $28,823,549 |
| Reinvested | 306,477 | 3,340,725 | 281,111 | 3,071,337 |
| Repurchased | (1,066,096) | (11,679,856) | (815,090) | (8,894,491) |
| | | | | |
| Total | 2,499,996 | $27,443,894 | 2,091,099 | $23,000,395 |
Substantially all of the Series’ shares represent investments by fiduciary accounts over which the Advisor has sole investment discretion.
6. FINANCIAL INSTRUMENTS
The Series may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities to assist in managing exposure to various market risks. These financial instruments include written options and futures contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. No such investments were held by the Series on December 31, 2005.
| 7. | FEDERAL INCOME TAX INFORMATION |
The amount and characterization of certain income and capital gains to be distributed are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing book and tax treatments in the timing of the recognition of net investment income or gains and losses, including market discount. The Series may periodically make reclassifications among its capital accounts to reflect income and gains available for
23
<page>
Notes to Financial Statements
| 7. | FEDERAL INCOME TAX INFORMATION (continued) |
distribution (or available capital loss carryovers) under income tax regulations, without impacting the Series' net asset value. Any such reclassifications are not reflected in the financial highlights.
The tax character of distributions paid were as follows:
| | For the Year | For the Year |
| | Ended 12/31/05 | Ended 12/31/04 |
| | | |
| Ordinary income | $- | $40,000 |
| Tax exempt income | 3,408,647 | 3,143,863 |
| Long-term capital gains | 108,786 | 64,781 |
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Series hereby designates the long-term capital gains disclosed above as capital gains for its taxable year ended December 31, 2005. In addition, the Series hereby designates the tax exempt income disclosed above as tax exempt dividends for the year ended December 31, 2005.
At December 31, 2005, the tax basis components of distributable earnings and the net unrealized appreciation based on identified cost for federal income tax purposes were as follows:
| | |
| Cost for federal income tax purposes | $109,983,593 |
| | |
| Unrealized appreciation | $2,943,672 |
| Unrealized depreciation | (377,139) |
| | |
| Net unrealized appreciation | $2,566,533 |
| Undistributed tax exempt income | 545,321 |
24
<page>
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Exeter Fund, Inc. and Shareholders of Diversified Tax Exempt Series:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio (except for credit ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Diversified Tax Exempt Series (a series of Exeter Fund, Inc., hereafter referred to as the "Series") at December 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 9, 2006
25
<page>
Renewal of Investment Advisory Agreement (unaudited)
At the Exeter Fund, Inc. (the “Fund”) Board of Directors’ annual in-person meeting, held on November 17, 2005, the Investment Advisory Agreement (the “Agreement”) between the Fund and Manning & Napier Advisors, Inc. (the “Advisor”) was reviewed by the Board for renewal. In connection with the decision whether to renew the Agreement, a variety of material was prepared for and reviewed by the Board. In addition, at the meeting of the Board, representatives of the Advisor presented additional oral and written information to help the Board evaluate the Advisor’s performance under the Agreement over the previous year. The Board then deliberated on the renewal of the Agreement in light of the various material provided prior to and at the meeting.
In connection with their review and deliberations, the Board considered the following factors and reached a conclusion with respect to such factors.
| · | The Board considered the services provided by the Advisor under the Agreement including, among others: deciding what securities to purchase and sell for each Series; arranging for the purchase and sale of such securities by placing orders with broker-dealers; administering the affairs of the Fund (including the books and records of the Fund not maintained by third party service providers such as the custodian or sub-transfer agent); arranging for the insurance coverage for the Fund; and supervising the preparation of tax returns, SEC filings (including registration statements) and reports to shareholders for the Fund. The Board discussed the quality of these services with representatives from the Advisor and concluded that the Advisor was performing its services to the Fund required under the Agreement in a reasonable manner. |
| · | The Board considered the investment performance of the various Series of the Fund. The investment performance for each Series was reviewed on a cumulative basis since inception and on a one year basis. In addition, annualized peformance for the following time periods was considered: inception, three year, five year, ten year, and current market cycle. Market cycle includes periods of both rising and falling markets. Returns for established benchmark indices for each Series were provided for each time period. In addition, the Board considered at the meeting (and considers on a quarterly basis) a peer group performance analysis consisting of Morningstar universes of mutual funds with similar investment objectives. The Board discussed the performance with representatives from the Advisor and concluded that the investment performance of each of the Fund’s Series was reasonable based on the Fund’s actual performance and comparative performance, especially performance over the current market cycle. |
| · | The Board considered the costs of the Advisor’s services and the profits of the Advisor as they relate to the Advisor’s services to the Fund under the Agreement. In reviewing the Advisor’s costs and profits, the Board discussed the Advisor’s revenues generated from the Fund (on both an actual and adjusted basis) and its expenses associated with providing the services under the Agreement. In addition, the Board reviewed the Advisor’s expenses associated with Fund activities outside of the Agreement (such as expense reimbursements pursuant to expense caps and payments made by the Advisor to third party platforms on which shares of the Fund are available for purchase). It was noted by representatives of the Advisor that 11 of the 18 active Series of the Fund are currently experiencing expenses above the capped expense ratios. After discussing the above costs and profits, the Board concluded that the Advisor’s profitability relating to its services provided under the Agreement is reasonable. |
| · | The Board considered the fees and expenses of the various Series of the Fund. The Advisor presented the advisory fees and total expenses for each Series, including the advisory fee adjusted for any expense waivers or reimbursements (either contractually or voluntarily) paid by the Advisor. The advisory fees and expense ratios of each Series were compared to an average (on both a mean and median basis) of similar funds as disclosed on the Morningstar database. Representatives of the Advisor discussed with the Board the levels of its advisory fee for the Series of the Fund and as compared to the median and mean advisory fees for similar funds as listed on Morningstar. Expense ratios for every Series are currently below the median and mean for similar funds as listed on Morningstar. Based on their review of the information provided, the Board concluded that the fees and expenses of each Series of the Fund were reasonable on a comparative basis. |
| · | The Board also considered the other benefits the Advisor derives from its relationship with the Fund. Such other benefits include certain research products provided by soft dollars. Given the level of soft dollar transactions involving the Fund, the Board concluded that these additional benefits to the Advisor were reasonable. |
26
<page>
Renewal of Investment Advisory Agreement (unaudited)
| · | In addition to the factors described above, the Board considered the Advisor’s personnel, the Advisor’s investment strategies, the Advisor’s policies and procedures relating to compliance with personal securities transactions, and the Advisor’s reputation, expertise and resources in domestic and foreign financial markets. The Board concluded that these factors support the conclusion that the Advisor performs its services in a reasonable manner. |
| · | The Board did not consider economies of scale at this time because of the multiple uses of the Fund (for the Advisor’s discretionary investment account clients in addition to direct investors), the current profitability of the Advisor’s services to the Fund under the Agreement, and the overall size of the Fund complex. |
Based on the Board’s conclusions regarding the factors described above, the Board, including a majority of Directors that are “not interested” as defined in the Investment Company Act of 1940, approved the renewal of the Agreement for another year. In the course of their deliberations, the Directors did not identify any particular information that was all important or controlling.
27
<page>
Directors’ and Officers’ Information (unaudited)
The Statement of Additional Information provides additional information about the Fund's directors and officers and can be obtained without charge by calling 1-800-466-3863, at www.manningnapieradvisors.com, or on the EDGAR Database on the SEC Internet web site (http:\\www.sec.gov). The following chart shows certain information about the Fund's officers and directors, including their principal occupations during the last five years. Unless specific dates are provided, the individuals have held the listed positions for longer than five years.
INTERESTED DIRECTOR/OFFICER | |
| | |
| Name: | B. Reuben Auspitz* |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 58 |
| Current Position(s) Held with Fund: | Principal Executive Officer, President, Chairman & Director |
Term of Office1& Length of Time Served: | Indefinite - Director since 1984; Vice President 1984 - 2003; President since 2004; |
| | Principal Executive Officer Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Executive Vice President; Co-Executive Director; Executive Group Member**; Chief |
| | Compliance Officer since 2004 - Manning & Napier Advisors, Inc.; President; Director - |
| | Manning & Napier Investor Services, Inc.; Holds or has held one or more of |
| | the following titles for various subsidiaries and affiliates: President, Vice President, |
| | Director, Chairman, Treasurer, Chief Compliance Officer or Member |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| | |
| | |
INDEPENDENT DIRECTORS | |
| Name: | Stephen B. Ashley |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 65 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1996 |
| Principal Occupation(s) During Past 5 Years: | Chairman, Director, President & Chief Executive Officer, |
| | The Ashley Group (property management and investment) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Genesee Corp. |
| | The Ashley Group |
| | Fannie Mae |
| | |
| Name: | Martin F. Birmingham |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 85 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1994 |
| Principal Occupation(s) During Past 5 Years: | Advisory Trustee, The Freedom Forum (nonpartisan, international |
| | foundation) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Peter L. Faber |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 67 |
| Current Position(s) Held with Fund: | Director, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1987 |
| Principal Occupation(s) During Past 5 Years: | Partner, McDermott, Will & Emery LLP (law firm) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | Partnership for New York City, Inc. |
| | New York Collegium |
| Name: | Harris H. Rusitzky |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 71 |
| Current Position(s) Held with Fund: | Director, Audit Committee Member, Governance & Nominating Committee Member |
| Term of Office & Length of Time Served: | Indefinite - Since 1985 |
| Principal Occupation(s) During Past 5 Years: | President, The Greening Group (business consultants) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
28
<page>
Directors’ and Officers’ Information (unaudited)
OFFICERS | |
| | |
| Name: | Jeffrey S. Coons, Ph.D., CFA |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 42 |
| Current Position(s) Held with Fund: | Vice President |
Term of Office1& Length of Time Served: | Since 2004 |
| Principal Occupation(s) During Past 5 Years: | Co-Director of Research since 2002 & Executive Group Member**, |
| | Manning & Napier Advisors, Inc.; Managing Director - Risk Management, Manning & |
| | Napier Advisors, Inc., 1993-2002; Holds one or more of the following titles for various |
| | subsidiaries and affiliates: President, Director, Treasurer or Senior Trust Officer |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Christine Glavin |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 39 |
| Current Position(s) Held with Fund: | Principal Financial Officer, Chief Financial Officer |
Term of Office1& Length of Time Served: | Principal Financial Officer since 2002; Chief Financial Officer since 2001 |
| Principal Occupation(s) During Past 5 Years: | Fund Accounting Manager, Manning & Napier Advisors, Inc. |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Jodi L. Hedberg |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Corporate Secretary, Chief Compliance Officer, Anti-Money Laundering Compliance |
| | Officer |
Term of Office1& Length of Time Served: | Corporate Secretary since 1997; Chief Compliance Officer since 2004 |
| Principal Occupation(s) During Past 5 Years: | Director of Compliance, Manning & Napier Advisors, Inc. and affiliates |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
| Name: | Alaina V. Metz |
| Address: | 290 Woodcliff Drive |
| | Fairport, NY 14450 |
| Age: | 38 |
| Current Position(s) Held with Fund: | Special Assistant Secretary |
| Term of Office & Length of Time Served: | Indefinite - Since 2002 |
| Principal Occupation(s) During Past 5 Years: | Vice President, BISYS Fund Services Ohio, Inc. (mutual fund servicing company) |
| Number of Portfolios Overseen within Fund Complex: | 21 |
| Other Directorships Held Outside Fund Complex: | N/A |
| | |
*Interested Director, within the meaning of the Investment Company Act of 1940 by reason of his position with the Fund's investment advisor and distributor. Mr. Auspitz serves as the Executive Vice President and Director, Manning & Napier Advisors, Inc. and President and Director, Manning & Napier Investor Services, Inc., the Fund's distributor.
**The Executive Group performs the duties of the Office of the Chief Executive of Manning & Napier Advisors, Inc., effective May 1, 2003.
1The term of office for President, Vice President, Chief Financial Officer, and Corporate Secretary is one year and until their respective successors are chosen and qualified. All other officers' terms are indefinite.
29
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Literature Requests (unaudited)
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request:
By phone 1-800-466-3863
On the Securities and Exchange
Commission’s (SEC) web site http://www.sec.gov
Proxy Voting Record
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30
th is available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
Quarterly Portfolio Holdings
The Series’ complete schedule of portfolio holdings for the 1
st and 3rd quarters of each fiscal year are provided on Form N-Q, and are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
The Series’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Prospectus and Statement of Additional Information (SAI)
The prospectus and SAI provide additional information about each Series, including charges, expenses and risks. These documents are available, without charge, upon request:
By phone 1-800-466-3863
On the SEC’s web site http://www.sec.gov
On the Advisor’s web site http://www.manningnapieradvisors.com/www/exeter_fund.asp
Additional information available at www.manningnapieradvisors.com/www/exeter_fund.asp
| 1. | Fund Holdings - Month-End |
| 2. | Fund Holdings - Quarter-End |
| 3. | Shareholder Report - Annual |
| 4. | Shareholder Report - Semi-Annual |
30
<page>
ITEM 2: CODE OF ETHICS
(a) The registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. A copy of the registrant's code of ethics is filed herewith as Exhibit 12(a)(1).
(b) During the period covered by this report, no amendments were made to the provisions of the code of ethics adopted in 2 (a) above.
(c) During the period covered by this report, no implicit or explicit waivers to the provisions of the code of ethics adopted in 2 (a) above were granted.
(d) Not applicable to the registrant due to the response given in 2 (c) above.
ITEM 3: AUDIT COMMITTEE FINANCIAL EXPERT
All of the members of the Audit committee have been determined by the Registrant's Board of Trustees to be Audit Committee Financial Experts. The members of the Audit Committee are: Harris H. Rusitzky and Stephen B. Ashley. All Audit Committee members are independent under applicable rules. This designation will not increase the designee's duties, obligations or liability as compared to their duties, obligations and liability as a member of the Audit Committee and of the Board.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees and Services
Aggregate fees for professional services rendered for the Exeter Fund, Inc. (Small Cap Series, International Series, World Opportunities Series, Life Sciences Series, Technology Series, Financial Services Series, New York Tax Exempt Series, Ohio Tax Exempt Series, Diversified Tax Exempt Series, Core Bond Series, and Core Plus Bond Series, collectively the “Fund”) by PricewaterhouseCoopers LLP (“PwC”) as of and for the years ended December 31, 2005 and 2004 were:
| | 2005 | 2004 |
| | | |
| Audit Fees (a) | $234,985 | $164,635 |
| | | |
| Audit Related Fees (b) | - | - |
| | | |
| Tax Fees (c) | 62,020 | 44,715 |
| | | |
| All Other Fees (d) | - | - |
| | | |
| | $297,005 | $209,350 |
These fees relate to professional services rendered by PwC for the audit of the Fund’s annual financial statements or services normally provided by the accountant in connection with statutory and regulatory filing or engagements. These services include the audits of the financial statements of the Fund, issuance of consents, income tax provision procedures and assistance with review of documents filed with the SEC.
These fees relate to assurance and related services by PwC that are reasonably related to the performance of the audit of the Fund’s financial statements and are not reported under “Audit Fees” above.
These fees relate to professional services rendered by PwC for tax compliance, tax advice and tax planning. The tax services provided by PwC related to the preparation of the Fund’s federal and state income tax returns, excise tax calculations and returns, a review of the Fund’s calculations of capital gain and income distributions, and additional tax research for compliance purposes.
These fees relate to products and services provided by PwC other than those reported above under “Audit Fees,” “Audit-Related Fees,” and “Tax Fees” above.
There were no amounts that were approved by the Audit Committee pursuant to the de minimus exception (Rule 2-01(c)(7) of Regulation S-X) for the fiscal years ended December 31, 2005 and 2004.
Non-Audit Services to the Fund’s Service Affiliates that were Pre-Approved by the Fund’s Audit Committee
The Fund’s Audit Committee is required to pre-approve non-audit services which meet both the following criteria:
| i) | Directly relate to the Fund’s operations and financial reporting; and |
| ii) | Rendered by PwC to the Fund’s advisor, Manning & Napier Advisors, Inc., and entities in a control relationship with the advisor (“service affiliate”) that provide ongoing services to the Fund. For purposes of disclosure, Manning & Napier Investor Services, Inc. is considered to be a service affiliate. |
| | 2005 | 2004 |
| | | |
| Audit Related Fees | $6,024 | $3,950 |
| | | |
| Tax Fees | - | 8,500 |
| | | |
| | $6,024 | $12,450 |
The Audit Related fees for the years ended December 31, 2005 and 2004 were for 17Ad-13 internal control examinations and a license for proprietary automated financial statement disclosure software.
The Tax fees for the year ended December 31, 2004 relate to research on liquidation issues, year-end reporting, and tender offers.
There were no amounts that were approved by the Audit Committee pursuant to the de minimus exception (Rule 2-01(c)(7) of Regulation S-X) for the fiscal years ended December 31, 2005 and 2004.
Aggregate Fees
Aggregate fees billed to the Fund for non-audit services for 2005 and 2004 were $62,020 and $44,715, respectively. Aggregate fees billed to the Fund’s advisor and service affiliates for non-audit services were $51,129 and $133,605, respectively. These amounts include fees for non-audit services required to be pre-approved and fees for non-audit services that did not require pre-approval since they did not relate to the Fund’s operations and financial reporting.
The Fund’s Audit Committee has considered whether the provisions for non-audit services to the Fund’s advisor and service affiliates, that did not require pre-approval, is compatible with maintaining PwC’s independence.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS
Not Applicable.
ITEM 6: SCHEDULE OF INVESTMENTS
See Investment Portfolios under Item 1 on this Form N-CSR.
ITEM 7: DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 8: PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 9: PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS
Not applicable.
ITEM 10: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedure by which shareholders may recommend nominees to the registrant's board of directors.
ITEM 11: CONTROLS AND PROCEDURES
(a) Based on their evaluation of the Funds' disclosure controls and procedures, as of a date within 90 days of the filing date, the Funds' Principal Executive Officer and Principal Financial Officer have concluded that the Funds' disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to the Funds' officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above.
(b) During the second fiscal quarter of the period covered by this report, there have been no changes in the Funds' internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, the Funds' internal control over financial reporting.
ITEM 12: EXHIBITS
(a)(1) Code of ethics that is subject to the disclosure of Item 2 above.
(a)(2) Separate certifications for the Registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as Ex-99.CERT.
(a)(3) Not applicable.
(b) A certification of the Registrant's principal executive officer and principal financial officer, as required by 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, is attached as Ex-99.906CERT. The certification furnished pursuant to this paragraph is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification is not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Exeter Fund, Inc.
/s/ B. Reuben Auspitz
B. Reuben Auspitz
President & Principal Executive Officer of Exeter Fund, Inc.
February 28, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ B. Reuben Auspitz
B. Reuben Auspitz
President & Principal Executive Officer of Exeter Fund, Inc.
February 28, 2006
/s/ Christine Glavin
Christine Glavin
Chief Financial Officer & Principal Financial Officer of Exeter Fund, Inc.
February 28, 2006
