<PAGE> 1
OHIO NATIONAL FUND, INC.
ONE FINANCIAL WAY
CINCINNATI, OHIO 45242
TELEPHONE (513) 794-6316
MAY 1, 1998
Ohio National Fund, Inc. (the "Fund") is a series investment company which
consists of 20 separate investment portfolios that seek the following investment
objectives:
EQUITY PORTFOLIO - long-term growth of capital by investing principally in
common stocks or other equity securities. Current income is a secondary
objective.
MONEY MARKET PORTFOLIO- maximum current income consistent with preservation of
capital and liquidity by investing in high quality money market instruments.
BOND PORTFOLIO - high level of return consistent with preservation of capital by
investing primarily in high quality intermediate and long-term debt securities.
OMNI PORTFOLIO - high level of long-term total return consistent with
preservation of capital by investing in stocks, bonds and money market
instruments.
INTERNATIONAL PORTFOLIO - long-term capital growth by investing primarily in
common stocks of foreign companies.
CAPITAL APPRECIATION PORTFOLIO - maximum capital growth by investing primarily
in common stocks that are (1) considered to be undervalued or temporarily out of
favor with investors, or (2) expected to increase in price over the short term.
SMALL CAP PORTFOLIO - maximum capital growth by investing primarily in common
stocks of small and medium size companies.
GLOBAL CONTRARIAN PORTFOLIO - long-term growth of capital by investing in
foreign and domestic securities believed to be undervalued or presently out of
favor.
AGGRESSIVE GROWTH PORTFOLIO - capital growth.
CORE GROWTH PORTFOLIO - long-term capital appreciation.
GROWTH & INCOME PORTFOLIO -long-term total return by investing in equity and
debt securities focusing on small- and mid-cap companies that offer potential
for capital appreciation, current income, or both.
S&P 500 INDEX PORTFOLIO - total return that approximates that of the Standard &
Poor's 500 Index ("S&P 500" (R)) by investing in common stocks and in stock
index futures contracts hedged by U.S. Government obligations, investment-grade
corporate bonds and cash equivalents.
SOCIAL AWARENESS PORTFOLIO - long-term capital growth by investing primarily in
common stocks and other equity securities of companies that, in the Adviser's
opinion, conduct their business in a way that enhances society's quality of
life.
STRATEGIC INCOME PORTFOLIO - high current income by investing at least 40% of
its assets in a core group of U.S. government and corporate fixed income
securities and the remainder in other income producing securities.
Continued on page 2.
- --------------------------------------------------------------------------------
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE PURCHASER OF A VARIABLE CONTRACT DESCRIBED IN THE ACCOMPANYING
PROSPECTUS OUGHT TO KNOW BEFORE PURCHASING SUCH A CONTRACT. THIS PROSPECTUS
SHOULD BE RETAINED FOR FUTURE REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IN A STATEMENT OF
ADDITIONAL INFORMATION, DATED MAY 1, 1998, WHICH IS INCORPORATED HEREIN BY
REFERENCE. THE STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST AND
WITHOUT CHARGE BY WRITING OR CALLING THE FUND AT THE ADDRESS SHOWN ABOVE.
INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER INSURED NOR GUARANTEED BY
THE UNITED STATES GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE MONEY MARKET
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $10 PER SHARE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE> 2
STELLAR PORTFOLIO - maximum total return by investing in domestic and foreign
securities (equity and fixed income), real estate securities, precious metal
securities and money market securities.
RELATIVE VALUE PORTFOLIO - maximum total return consistent with reasonable risk
by investing primarily in equity securities.
SMALL CAP GROWTH PORTFOLIO - capital appreciation by investing primarily in
common stocks of emerging growth companies.
HIGH INCOME BOND PORTFOLIO - high current income by investing primarily in lower
rated corporate debt obligations commonly referred to as "junk bonds."
Investments of this type are subject to a greater risk of loss of principal and
interest than investments in higher rated bonds. Purchasers should carefully
assess the risks associated with investment in this Portfolio.
EQUITY INCOME PORTFOLIO - above-average income and capital appreciation by
investing primarily in income-producing equity securities.
BLUE CHIP PORTFOLIO - growth of capital and income by investing in securities of
high quality companies.
The Fund's shares are not offered directly to the public but are purchased
principally for the account of certain separate accounts of The Ohio National
Life Insurance Company ("ONLI"), Ohio National Life Assurance Corporation
("ONLAC") and other insurers. Some variable contracts do not permit allocations
to all portfolios of the Fund. The accompanying variable contract prospectus
identifies the portfolios available under that contract.
TABLE OF CONTENTS
Page
Financial Highlights ................................................... 2
General Description of the Fund ........................................ 6
Investment Objectives and Policies ..................................... 7
Investment Restrictions ................................................ 13
Management of the Fund ................................................. 18
Capital Stock .......................................................... 21
Dividends, Distributions and Taxes ..................................... 22
Purchase and Redemption of Shares ...................................... 22
Fund Performance ....................................................... 23
About the S&P 500 ...................................................... 23
FINANCIAL HIGHLIGHTS
OF
OHIO NATIONAL FUND, INC.
FOR THE TEN YEARS ENDED DECEMBER 31, 1997
The following information has been audited by KPMG Peat Marwick LLP, independent
certified public accountants, and is an integral part of the Fund's audited
financial statements which appear in the Statement of Additional Information
(which may be obtained by variable contract owners and prospective purchasers),
incorporated by reference herein, and should be read in conjunction with those
financial statements.
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 32.30 $ 28.58 $ 23.20 $ 23.90 $ 21.63
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.51 0.47 0.50 0.45 0.41
Net realized and unrealized
gain (loss) on investments 5.24 4.58 5.65 (0.39) 2.57
-------- -------- -------- -------- --------
Total income from
investment operations 5.75 5.05 6.15 .06 2.98
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.63) (0.46) (0.39) (0.44) (0.42)
Distributions from net
realized capital gains (1.98) (0.87) (0.38) (0.32) (0.29)
-------- -------- -------- -------- --------
Total distributions (2.61) (1.33) (0.77) (0.76) (0.71)
-------- -------- -------- -------- --------
Net asset value, end of period $35.44 $ 32.30 $ 28.58 $ 23.20 $ 23.90
======== ======== ======== ======== ========
Total return(a) 18.17% 18.35% 27.20% 0.25% 14.09%
Ratios/supplemental data:
Ratio of expenses to
average net assets 0.67% 0.73% 0.73% 0.62% 0.63%
Ratio of net investment
income to average
net assets 1.43% 1.60% 1.90% 1.90% 1.91%
Portfolio turnover rate 19% 11% 14% 8% 18%
Average commission rate (f) $ 0.07 $ 0.07 N/A N/A N/A
Net assets, end of period (millions) $ 288.1 $ 232.8 $ 175.7 $ 123.3 $ 109.9
</TABLE>
EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 20.61 $ 18.02 $ 20.09 $ 17.99 $ 16.82
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.50 0.60 0.86 0.71 0.66
Net realized and unrealized
gain (loss) on investments 1.02 2.97 (1.62) 3.42 1.86
-------- -------- -------- -------- --------
Total income from
investment operations 1.52 3.57 (0.76) 4.13 2.52
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.50) (0.63) (0.87) (0.66) (0.67)
Distributions from net
realized capital gains (0.87) (0.35) (0.44) (1.37) (0..68)
-------- -------- -------- -------- --------
Total distributions (0.50) (0.98) (1.31) (2.03) (1.35)
-------- -------- -------- -------- --------
Net asset value, end of period $ 21.63 $ 20.61 $ 18.02 $ 20.09 $ 17.99
======== ======== ======== ======== ========
Total return(a) 7.55% 20.18% (3.85%) 23.21% 15.01%
Ratios/supplemental data:
Ratio of expenses to
average net assets 0.65% 0.66% 0.69% 0.70% 0.71%
Ratio of net investment
income to average
net assets 2.44% 3.12% 4.75% 3.55% 3.59%
Portfolio turnover rate 12% 23% 5% 16% 9%
Average commission rate (f) N/A N/A N/A N/A N/A
Net assets, end of period (millions) $ 87.4 $ 68.2 $ 49.2 $ 42.8 $ 33.3
</TABLE>
2
<PAGE> 3
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.52 0.50 0.54 0.39 0.27
Less distributions:
Dividends from net
investment income (0.52) (0.50) (0.54) (0.39) (0.27)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
======== ======== ======== ======== ========
Total return(a) 5.37% 5.17% 5.62% 4.00% 2.71%
Ratios net of fees waived
by advisor : (c)
Ratio of expenses to
average net assets(c) 0.38% 0.44% 0.44% 0.39% 0.53%
Ratio of net investment
income to average
net assets(c) 5.11% 4.98% 5.39% 3.69% 2.71%
Ratios assuming no fees
waived by advisor: (c)
Ratio of expenses to
average net assets (c) 0.43% 0.49% 0.55% 0.59% 0.63%
Ratio of net investment
income to average net assets (c) 5.06% 4.93% 5.27% 3.51% 2.60%
Net assets, end of period (millions) $ 29.1 $ 25.6 $ 15.7 $ 13.1 $ 19.1
</TABLE>
MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.31 0.54 0.76 0.86 0.69
Less distributions:
Dividends from net
investment income (0.31) (0.54) (0.76) (0.86) (0.69)
-------- -------- -------- -------- --------
Net asset value, end of period $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
======== ======== ======== ======== ========
Total return(a) 3.12% 5.39% 7.60% 8.56% 6.89%
Ratios net of fees waived
by advisor : (c)
Ratio of expenses to
average net assets(c) 0.66% 0.67% 0.68% 0.70% 0.71%
Ratio of net investment
income to average
net assets(c) 3.16% 5.41% 7.57% 8.51% 6.87%
Ratios assuming no fees
waived by advisor: (c)
Ratio of expenses to
average net assets (c) N/A N/A N/A N/A N/A
Ratio of net investment
income to average net assets (c) N/A N/A N/A N/A N/A
Net assets, end of period (millions) $ 20.6 $ 24.2 $ 26.1 $ 23.6 $ 22.8
</TABLE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.62 $ 10.93 $ 9.70 $ 10.87 $ 10.45
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.71 0.69 0.70 0.67 0.69
Net realized and unrealized
gain (loss) on investments 0.23 (0.32) 1.08 (1.07) 0.41
-------- -------- -------- -------- --------
Total Income (loss) from
investment operations 0.94 0.37 1.78 (0.40) 1.10
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.88) (0.68) (0.55) (0.69) (0.68)
Distributions from net
realized capital gains 0.00 0.00 0.00 (0.08) 0.00
-------- -------- -------- --------
Total distributions (0.88) (0.68) (0.55) (0.77) (0.68)
-------- -------- -------- -------- --------
Net asset value, end of period $10.68 $ $ 10.62 $ 10.93 $ 9.70 $ 10.87
======== ======== ======== ======== ========
Total return(a) 9.28% 3.71% 18.90% (3.84%) 10.69%
Ratios/supplemental data:
Ratio of expenses to
average net assets 0.78% 0.79% 0.75% 0.63% 0.62%
Ratio of net investment
income to average
net assets 6.67% 6.54% 6.76% 6.71% 6.33%
Portfolio turnover rate 10% 3% 4% 5% 13%
Net assets, end of period (millions) $ 21.8 $ 20.8 $ 18.1 $ 13.1 $ 12.0
</TABLE>
BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.37 $ 9.89 $ 9.93 $ 9.72 $ 9.84
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.67 0.74 0.79 0.81 0.77
Net realized and unrealized
gain (loss) on investments 0.10 0.49 (0.05) 0.20 (0.13)
-------- -------- -------- -------- --------
Total Income (loss) from
investment operations 0.77 1.23 0.74 1.01 0.64
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.69) (0.75) (0.78) (0.80) (0.76)
Distributions from net
realized capital gains 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions (0.69) (0.75) (0.78) (0.80) (0.76)
-------- -------- -------- -------- --------
Net asset value, end of period $10.45 $ 10.37 $ 9.89 $ 9.93 $ 9.72
======== ======== ======== ======== ========
Total return(a) 7.55% 12.96% 7.82% 10.71% 6.74%
Ratios/supplemental data:
Ratio of expenses to
average net assets 0.65% 0.65% 0.70% 0.70% 0.79%
Ratio of net investment
income to average
net assets 6.73% 7.42% 8.02% 8.21% 7.50%
Portfolio turnover rate 20% 18% 4% 0% 27%
Net assets, end of period (millions) $ 8.9 $ 5.9 $ 4.7 $ 4.0 $ 3.7
</TABLE>
3
<PAGE> 4
OMNI PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 19.40 $ 17.60 $ 14.76 $ 15.38 $ 14.14
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.56 0.53 0.58 0.55 0.58
Net realized and unrealized
gain (loss) on investments 2.87 2.10 2.72 (0.63) 1.21
-------- -------- -------- -------- --------
Total Income (loss)
from investment operations 3.43 2.63 3.30 (0.08) 1.79
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.69) (0.52) (0.46) (0.54) (0.55)
Distributions from net
realized capital gains (1.08) (0.31) 0.00 0.00 0.00
-------- -------- -------- -------- --------
Total distributions (1.77) (0.83) (0.46) (0.54) (0.55)
-------- -------- -------- -------- --------
Net asset value, end of period $ 21.06 $ 19.40 $ 17.60 $ 14.76 $ 15.38
======== ======== ======== ======== ========
Total return(a) 18.15% 15.54% 22.75% (0.53%) 12.85%
Ratios/supplemental data:
Ratio of expenses to
average net assets 0.71% 0.76% 0.75% 0.62% 0.62%
Ratio of net investment
income to average
net assets 2.69% 2.89% 3.56% 3.67% 3.74%
Portfolio turnover rate 18% 12% 10% 7% 17%
Average commission rate (f) $ 0.07 $ 0.07 N/A N/A N/A
Net assets, end of period (millions) $ 193.7 $ 145.5 $ 109.6 $ 85.0 $ 74.2
</TABLE>
OMNI PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 13.63 $ 12.16 $ 12.76 $ 11.89 $ 11.23
-------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income 0.63 0.65 0.78 0.75 0.67
Net realized and unrealized
gain (loss) on investments 0.51 1.49 (0.54) 1.07 0.99
-------- -------- -------- -------- --------
Total Income (loss)
from investment operations 1.14 2.14 0.24 1.82 1.66
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.63) (0.67) (0.78) (0.73) (0.66)
Distributions from net
realized capital gains 0.00 0.00 (0.06) (0.22) (0.34)
-------- -------- -------- -------- --------
Total distributions (0.63) (0.67) (0.84) (0.95) (1.00)
-------- -------- -------- -------- --------
Net asset value, end of period $ 14.14 $ 13.63 $ 12.16 $ 12.76 $ 11.89
======== ======== ======== ======== ========
Total return(a) 8.61% 18.14% 1.92% 15.45% 15.05%
Ratios/supplemental data:
Ratio of expenses to
average net assets 0.65% 0.67% 0.69% 0.70% 0.71%
Ratio of net investment
income to average
net assets 4.66% 5.04% 6.32% 5.99% 5.40%
Portfolio turnover rate 16% 15% 7% 24% 14%
Average commission rate (f) N/A N/A N/A N/A N/A
Net assets, end of period (millions) $ 46.4 $ 36.5 $ 35.4 $ 31.9 $ 26.1
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO
------------------------------------------------------------------
1997 1996 1995 1994 1993(e)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 15.49 $ 14.38 $ 13.30 $ 12.48 $ 10.00
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income 0.28 0.25 0.31 0.16 0.02
Net realized and unrealized
gain on investments and
foreign currency transactions 0.08 1.76 1.28 0.84 2.47
-------- -------- -------- -------- --------
Total income from investment operations 0.36 2.01 1.59 1.00 2.49
-------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.37) (0.25) (0.28) (0.12) (0.01)
Distributions from net realized
capital gains and foreign
currency related transactions (2.09) (0.65) (0.23) (0.06) 0.00
-------- -------- -------- -------- --------
Total distributions (2.46) (0.90) (0.51) (0.18) (0.01)
-------- -------- -------- -------- --------
Net asset value, end of period $13.39 $ 15.49 $ 14.38 $ 13.30 $ 12.48
======== ======== ======== ======== ========
Total return(a) 2.11% 14.48% 12.10% 8.07% 24.96%
Ratios/supplemental data:
Ratio of expenses to
average net assets(d) 1.22% 1.15% 1.12% 1.05% 1.13%(b)
Ratio of net investment
income to average
net assets(d) 1.82% 1.64% 2.29% 1.23% 0.41%(b)
Portfolio turnover rate 24% 14% 7% 16% 8%
Average commission rate (f) $ 0.02 $ 0.03 N/A N/A N/A
Net assets, end of period (millions) $ 156.0 $ 137.3 $ 90.6 $ 62.9 $ 17.5
<CAPTION>
CAPITAL APPRECIATION PORTFOLIO
----------------------------------------------------
1997 1996 1995 1994(e)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 12.93 $ 11.99 $ 10.25 $ 10.00
-------- -------- -------- --------
Income from investment operations:
Net investment income 0.39 0.48 0.39 0.22
Net realized and unrealized
gain on investments and
foreign currency transactions 1.48 1.31 1.85 0.23
-------- -------- -------- --------
Total income from investment operations 1.87 1.79 2.24 0.45
-------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.46) (0.44) (0.29) (0.20)
Distributions from net realized
capital gains and foreign
currency related transactions (0.81) (0.41) (0.21) 0.00
-------- -------- -------- --------
Total distributions (1.27) (0.85) (0.50) (0.20)
-------- -------- -------- --------
Net asset value, end of period $ 13.53 $ 12.93 $ 11.99 $ 10.25
======== ======== ======== ========
Total return(a) 15.19% 15.75% 22.62% 4.53%
Ratios/supplemental data:
Ratio of expenses to
average net assets(d) 0.95% 0.97% 0.96% 0.98%(b)
Ratio of net investment
income to average
net assets(d) 2.88% 3.90% 3.47% 3.24%(b)
Portfolio turnover rate 41% 37% 32% 20%
Average commission rate (f) $ 0.04 $ 0.05 N/A N/A
Net assets, end of period (millions) $ 59.8 $ 38.3 $ 19.3 $ 6.8
</TABLE>
<TABLE>
<CAPTION>
SMALL CAP PORTFOLIO
-----------------------------------------------------
1997 1996 1995 1994(e)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 18.03 $ 15.85 $ 11.99 $ 10.00
-------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) (0.02) (0.08) (0.02) 0.18
Net realized and unrealized
gain (loss) on investments 1.54 2.80 3.95 1.94
-------- -------- -------- --------
Total income from investment operations 1.52 2.72 3.93 2.12
-------- -------- -------- --------
Less distributions:
Dividends from net
investment income 0.00 0.00 (0.07) (0.13)
Distributions from net realized
capital gains (0.83) (0.54) 0.00 0.00
-------- -------- -------- --------
Total distributions (0.83) (0.54) (0.07) (0.13)
-------- -------- -------- --------
Net asset value, end of period $ 18.72 $ 18.03 $ 15.85 $ 11.99
======== ======== ======== ========
Total return(a) 8.47% 17.71% 33.01% 21.26%
Ratios/supplemental data:
Ratio of expenses to
average net assets(d) 0.94% 0.96% 0.96% 0.91%(b)
Ratio of net investment
income to average
net assets(d) (0.11%) (0.48%) (0.11%) 3.27%(b)
Portfolio turnover rate 80% 70% 75% 222%(b)
Average commission rate (f) $ 0.05 $ 0.60 N/A N/A
Net assets, end of period (millions) $ 58.3 $ 38.5 $ 16.0 $ 3.3
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
GLOBAL CONTRARIAN AGGRESSIVE GROWTH
------------------------------------ -------------------------------------
1997 1996 1995(e) 1997 1996 1995(e)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 11.66 $ 10.80 $ 10.00 $ 10.03 $ 11.84 $ 10.00
-------- -------- -------- -------- -------- --------
Income (loss) from investment operations:
Net investment income (loss) (0.02) 0.28 0.13 (0.05) 1.64 1.56
Net realized and unrealized
gain (loss) on investments 1.03 1.00 0.75 1.29 (1.59) 1.08
-------- -------- -------- -------- -------- --------
Total income from investment operations 1.32 1.28 0.88 1.24 0.05 2.64
-------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.38) (0.24) (0.08) (0.14) (1.86) (0.80)
Distributions from net realized
capital gains (0.87) (0.18) 0.00 (0.04) 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions (1.25) (0.42) (0.08) (0.18) (1.86) (0.80)
-------- -------- -------- -------- -------- --------
Net asset value, end of period $ 11.73 $ 11.66 $ 10.80 $ 11.09 $ 10.03 $ 11.84
======== ======== ======== ======== ======== ========
Total return(a) 11.67% 12.09% 8.89% 12.53% 0.76% 26.95%
Ratios/supplemental data:
Ratio of expenses to
average net assets(d) 1.32% 1.29% 1.58%(b) 0.97% 1.01% 1.02%(b)
Ratio of net investment
income to average
net assets(d) 2.33% 2.44% 1.64%(b) (0.40%) 15.81% 18.18%(b)
Portfolio turnover rate 29% 18% 6%(b) 193% 1,987% 1,488%(b)
Average commission rate (f) $0..01 $ 0.03 N/A $ 0.06 $ 0.03 N/A
Net assets, end of period (millions) $ 18.0 $ 11.3 $ 4.4 $ 19.9 $ 12.0 $ 4.0
</TABLE>
<TABLE>
<CAPTION>
CORE GROWTH GROWTH & INCOME S&P 500 INDEX
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
1997(e) 1997(e) 1997(e)
-------- -------- --------
<S> <C> <C> <C>
Net asset value,
beginning of period $ 10.00 $ 10.00 $ 10.00
Loss from investment operations:
Net investment income (loss) (0.02) 0.11 (0.45)
Net realized and unrealized
gain (loss) on investments (0.30) 3.52 (2.70)
-------- -------- --------
Total gain (loss) from
investment operations (0.32) 3.63 (3.15)
-------- -------- --------
Less distributions:
Dividends from net
investment income 0.00 (0.11) (0.45)
Distributions from net
realized capital gains 0.00 (0.67) (0.91)
-------- -------- --------
Distributions from excess
realized capital gains 0.00 0.00 (0.06)
Total Distributions 0.00 (0.78) (1.42)
-------- -------- --------
Net asset value, end of period $ 9.68 $ 12.85 $ 11.73
======== ======== ========
Total return(a) (3.08%) 36.58% 31.75%
Ratios/supplemental data:
Ratio of expenses to
average net assets(d) 1.11% 0.95% 0.52%
Ratio of net investment
loss to average
net assets(d) (0.18%) 1.04% 5.29%
Portfolio turnover rate 65% 185% 445%
Average commission rate (f) $ 0.05 $ 0.06 $ 0.04
Net assets, end of period (millions) $ 9.5 $ 18.7 $ 22.1
<CAPTION>
SOCIAL STRATEGIC RELATIVE
AWARENESS INCOME STELLAR VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- -------- --------- ---------
1997(e) 1997(e) 1997(e) 1997(e)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 10.00 $ 10.00 $ 10.00 $ 10.00
Loss from investment operations:
Net investment income (loss) 0.09 0.71 0.32 0.16
Net realized and unrealized
gain (loss) on investments 2.47 0.13 0.64 2.66
-------- -------- -------- --------
Total gain (loss) from
investment operations 2.56 0.84 0.96 2.82
-------- -------- -------- --------
Less distributions:
Dividends from net
investment income (0.07) (0.67) (0.31) (0.14)
Distributions from net
realized capital gains (1.09) (0.01) 0.00 0.00
-------- -------- -------- --------
Distributions from excess
realized capital gains 0.00 0.00 0.00 0.00
Total Distributions (1.16) (0.68) (0.31) (0.14)
-------- -------- -------- --------
Net asset value, end of period $ 11.40 $ 10.16 $ 10.65 $ 12.68
======== ======== ======== ========
Total return(a) 25.63% 8.74% 9.70% 28.28%
Ratios/supplemental data:
Ratio of expenses to
average net assets(d) 0.95% 1.30% 1.54% 1.18%
Ratio of net investment
loss to average
net assets(d) 0.75% 7.04% 3.07% 1.35%
Portfolio turnover rate 40% 102% 17% 7%
Average commission rate (f) $ 0.07 $ 0.04 $ 0.18 $ 0.24
Net assets, end of period (millions) $ 4.8 $ 3.2 $ 2.8 $ 5.7
</TABLE>
FINANCIAL HIGHLIGHTS FOOTNOTES
(a) This total return information does not reflect expenses that apply to any
separate account or the related variable annuity or variable life insurance
contracts. Inclusion of those charges would reduce the total return figures
for all periods shown.
(b) Annualized.
(c) On and after June 17, 1993, the investment adviser has waived part of the
management fee with respect to the Money Market Portfolio, to the extent
such fee exceeds an annual rate of 0.25% of the Money Market Portfolio's
daily net asset value.
(d) The investment adviser reimbursed certain operating expenses of the
International Portfolio in 1993, the Capital Appreciation and Small Cap
Portfolios in 1994, and the Global Contrarian Portfolio in 1995. Had the
investment adviser not reimbursed such expenses, the annualized ratio of
expenses to average net assets would have been 1.39% and the annualized
ratio of net investment income to average net assets would have been 0.15%
for the International Portfolio in 1993. Had the investment adviser not
reimbursed such expenses of the Capital Appreciation and Small Cap
Portfolios, the annualized ratio of expenses to average net assets would
have been 1.05% and 0.95%, respectively in 1994. The annualized ratio of
net investment income to average net assets would have been 3.18% and
3.24%, respectively, for the Capital Appreciation and Small Cap Portfolios.
Had the investment adviser not reimbursed such expenses of the Global
Contrarian Portfolio, the annualized ratio of expenses to average net
assets would have been 1.90% and the annualized ratio of net investment
income to average net assets would have been 1.32% for the Global
Contrarian Portfolio in 1995.
5
<PAGE> 6
(e) Total return was calculated on an aggregate basis (not annualized) for the
International Portfolio from the commencement of its operations on April
30, 1993, through December 31, 1993, for the Capital Appreciation and Small
Cap Portfolios, from their commencement of operations, May 1, 1994, through
December 31, 1994, for the Global Contrarian and Aggressive Growth
Portfolios from their commencement of operations, March 31, 1995, through
December 31, 1995, and for the Core Growth, Growth & Income, S&P 500 Index,
Social Awareness, Strategic Income, Stellar and Relative Value Portfolios,
from the commencement of their operations, January 3, 1997, though December
31, 1997.
(f) Represents the total amount of commissions paid on equity security
transactions divided by the total number of shares purchased and sold by
the respective portfolio for which commissions were charged.
GENERAL DESCRIPTION OF THE FUND
The Fund, incorporated under the laws of Maryland on March 6, 1980, is an
open-end diversified management investment company commonly referred to as a
"mutual fund." It is a "no-load" fund which sells and redeems its shares at net
asset value without any sales or redemption charge. The Fund is organized as a
"series" company, which means that it has several different investment
portfolios. Currently there are 20 investment portfolios as listed on pages 1
and 2. Interests in each portfolio are represented by a separate class of
common stock, par value $1. Each class represents an undivided interest in the
assets of the portfolio attributable to that class.
Fund shares are currently offered only to the separate accounts of ONLI (a
mutual life insurance company organized under Ohio law) and ONLAC (a stock life
insurer organized under Ohio law and wholly owned by ONLI), but may in the
future be offered to the separate accounts of other life insurance companies
(the "separate accounts"). Such separate accounts use Fund shares as the
underlying investment medium to support certain benefits under variable annuity
and variable life insurance contracts. As is described in the accompanying
variable contract prospectus, each contract owner will select the Fund portfolio
or portfolios that will support certain benefits under his or her contract. The
value of such benefits will vary with the investment experience of the
underlying portfolio(s) of the Fund. Consequently, each prospective contract
owner should carefully review the objectives, policies and risks of each
portfolio and the operation of the Fund generally as set forth in this
prospectus.
It is conceivable that in the future it may become disadvantageous for both
variable life and variable annuity separate accounts to invest in the Fund.
Although ONLI, ONLAC and the Fund do not currently foresee any such
disadvantage, the Board of Directors of the Fund will monitor events in order to
identify any material conflict between variable life and variable annuity
contract owners and to determine what action, if any, should be taken in
response thereto. Such action could include the withdrawal of a separate account
from participation in the Fund. Material conflicts could result from such things
as (1) changes in state insurance law; (2) changes in federal income tax law;
(3) changes in the investment management of any portfolio of the Fund; or (4)
differences between voting instructions given by variable life and variable
annuity contract owners.
The Fund may be used in the future to support benefits under other types of
contracts or for other purposes. Fund shares are not now, and without a change
in applicable law will never be, offered directly to the public. Consequently,
the separate accounts will be the sole shareholders of the Fund. Fund shares
attributable to contracts participating in such separate accounts will be voted
by such separate accounts as directed by the contract owners.
The investment and reinvestment of Fund assets is managed by Ohio National
Investments Inc. (the "Adviser") directly or through sub-advisers. See
"Management of the Fund," page 17. The investment and reinvestment of the assets
of the following portfolios are managed by the firms indicated as sub-advisers:
<TABLE>
<CAPTION>
PORTFOLIO SUB-ADVISER
- --------- -----------
<S> <C>
International and Global Contrarian Societe Generale Asset Management Corp. ("SGAM")
Capital Appreciation T. Rowe Price Associates, Inc. ("TRPA")
Small Cap Founders Asset Management, LLC ("FAM ")
Aggressive Growth Strong Capital Management, Inc. ("SCM")
Core Growth Pilgrim Baxter & Associates, Ltd. ("PBA")
Growth & Income and Small Cap Growth Robertson Stephens Investment Management, L.P. ("RSIM")
Strategic Income, Stellar and Relative Value Star Bank, N.A. ("Star")
High Income Bond, Equity Income and Blue Chip Federated Investment Counseling ("FIC")
</TABLE>
6
<PAGE> 7
INVESTMENT OBJECTIVES AND POLICIES
Each portfolio has a different investment objective which it pursues through
separate investment policies as described below. The differences in objectives
and policies among the portfolios can be expected to affect the return of each
portfolio and the degree of market and financial risk to which each portfolio is
subject. Financial risk refers to the ability of an issuer of a debt security to
pay principal and interest on such security, and to the earnings stability and
overall financial soundness of an issuer of an equity security. Market risk
refers to the volatility of the price of a security in response to changes in
conditions in the securities markets in general and, particularly in the case of
debt securities, changes in the overall level of interest rates. There is no
assurance that the investment objective of any portfolio will be realized.
The investment objectives of each portfolio discussed below and in the Statement
of Additional Information may not be changed without the approval of the holders
of a majority of the outstanding shares of that portfolio. Each portfolio may
invest any portion of its assets in cash, short-term obligations and U.S.
government securities for defensive purposes during times of unusual market or
economic conditions or pending selection of securities in accordance with the
portfolio's policies. The relatively high portfolio turnover rates for the Small
Cap, Aggressive Growth, Core Growth, Growth & Income and Strategic Income
Portfolios and expected for the Small Cap Growth Portfolio will result in
correspondingly higher brokerage costs that must be borne by these portfolios.
The Statement of Additional Information provides a fuller description of the
types of financial instruments in which the Money Market Portfolio may invest
and definitions of debt ratings of nationally recognized statistical rating
organizations, and information about portfolio turnover rates for each
portfolio.
EQUITY PORTFOLIO
The principal investment objective of the Equity Portfolio is long-term growth
of capital. Current income is a secondary consideration although growth of
income may accompany growth of capital. This Portfolio will seek to attain its
objective of capital growth by investing primarily in common stocks or
securities convertible into, or which carry the right to buy, common stocks. It
may also invest to a limited degree in non-convertible preferred stocks, debt
securities and readily marketable mortgage notes.
This Portfolio will invest primarily in securities listed on national securities
exchanges, but from time to time it may also purchase securities traded in the
over-the-counter market and foreign securities. In general, investment in shares
of this Portfolio should involve greater market and financial risk than an
investment in any of the Money Market, Bond, Omni or Capital Appreciation
Portfolios, but less risk than investments in the International, Small Cap,
Global Contrarian or Aggressive Growth Portfolios.
MONEY MARKET PORTFOLIO
The objective of the Money Market Portfolio is to obtain maximum current income
consistent with preservation of principal and liquidity. This Portfolio seeks to
achieve its objective by investing in high quality money market instruments,
including:
1. obligations maturing in 13 months or less and issued or guaranteed as to
principal and interest by the United States Government, or any agency or
authority controlled or supervised by and acting as an instrumentality of
the U.S. Government pursuant to authority granted by Congress;
2. commercial paper, certificates of deposit and bankers' acceptances that
have received the highest rating by any two nationally recognized
statistical rating organizations ("NRSRO's"), or the highest rating by one
NRSRO if that is the only NRSRO having rated the security, or whose issuer
has received such a rating or ratings with respect to a class of short-term
debt obligations that is now comparable in priority and security to those
to be purchased;
3. commercial paper, certificates of deposit, bankers' acceptances or other
corporate obligations maturing in 13 months or less and which, although not
rated by any NRSRO, the Board of Directors determines to be of a quality
comparable to that of instruments receiving either of the two highest
ratings, provided, that any security determined to be comparable in quality
to the second highest rating shall be included in the 5% limitation under
item 5; and
4. repurchase agreements with respect to any of the foregoing obligations.
7
<PAGE> 8
5. as to no more than 5% of the Portfolio's assets, in commercial paper,
certificates of deposit or bankers' acceptances receiving the second
highest rating by any two NRSRO's (or by one NRSRO if (a) that is the only
NRSRO having rated the security or (b) one other NRSRO has given the
security its highest rating), or whose issuer has received such a rating or
ratings with respect to a class of short-term debt obligations that is now
comparable in priority and security to those to be purchased, provided,
that no more than $1 million (or 1% of Portfolio assets, if greater) may be
invested in such securities of any one issuer;
This Portfolio may invest up to 50% of its assets in the securities of foreign
issuers (including private issuers and foreign governments or political
subdivisions, agencies or instrumentalities of foreign governments), provided
they meet the above quality standards and they are denominated in U.S. dollars
and held in custody in the United States.
The investments of this Portfolio in such money market instruments are subject
to the terms and conditions of Rule 2a-7 under the Investment Company Act of
1940, including the requirement that they be limited to those instruments which
the Board of directors determines, present minimal credit risks.
Generally, this Portfolio will purchase money market securities with the
intention of holding them until maturity, at which time they will be redeemed.
To the extent it is able to do so, the Portfolio will not realize any gain or
loss on these securities. There may be times, however, when it may be necessary
or appropriate to sell securities prior to maturity in order to shorten the
Portfolio's average maturity, to meet redemptions, or because of a reevaluation
of an issuer's credit-worthiness.
Rule 2a-7 permits this Portfolio to value its assets on the basis of amortized
cost as a means of maintaining the net asset value of the Money Market shares at
$10 per share. Under the terms of the rule, the Portfolio may neither purchase
any debt security having a remaining maturity of more than 397 days nor maintain
a dollar-weighted average portfolio maturity of more than 90 days. Under the
amortized cost method, all such debt securities are valued at their cost on the
date of acquisition with a daily adjustment being made to accrued income to
reflect amortization of premium or accretion of discount to the maturity date.
If such method results in a deviation in excess of 1/2 of 1% from value based
on available market quotations, the Board of Directors will promptly consider
what, if any, action it should initiate. Such action may include selling
portfolio instruments; withholding dividends; recapitalizing outstanding shares;
requiring shareholders to contribute shares to capital or using available market
quotations.
An investor's rate of return will vary as short-term interest rates vary. The
rate of return will also be affected by other factors such as the operating
expenses of the Portfolio and the sales, if any, of portfolio securities prior
to maturity. On balance, however, investment in this Portfolio should involve
less market and financial risk than an investment in any other portfolio.
BOND PORTFOLIO
The principal investment objective of the Bond Portfolio is to obtain a high
level of income and opportunity for capital appreciation consistent with
preservation of capital. Investments will be made primarily in intermediate-term
and long-term fixed-income securities.
At least 80% of the total assets of this Portfolio (exclusive of cash and U.S.
government securities) will be invested in: (1) publicly traded, investment
grade, non-convertible corporate debt securities issued by United States
corporations and assigned within the four highest bond ratings by Moody's or
Standard and Poor's ("S&P"); and (2) corporate debt securities used for
short-term investment and limited to the top grade of these two rating
services.
Up to 20% of the total assets of the Portfolio may be invested in: (1)
securities having high potential for capital appreciation; (2) preferred stocks,
convertible securities and securities carrying warrants to purchase equity
securities; and (3) debt securities issued by U.S. banks and savings and loan
associations which at the date of investment have capital, surplus and undivided
profits as of the date of their most recent financial statements in excess of
$100,000,000.
This Portfolio will not invest in common stocks directly, but it may retain for
reasonable periods of time up to 10% of its total assets in common stocks
acquired upon the conversion of debt securities or upon the exercise of warrants
acquired with debt securities.
8
<PAGE> 9
It is expected that this Portfolio will include debt securities with varying
maturities selected from various industries, depending upon the Adviser's
evaluation of current and anticipated market conditions. The market values of
debt instruments will vary depending upon their respective yields; therefore,
the net asset value per share of the Portfolio will change from time to time as
the general level of interest rates changes. Consequently, an investment in the
shares of this Portfolio involves substantial market risk, but should involve
less financial risk than an investment in any of the portfolios other than the
Money Market Portfolio.
OMNI PORTFOLIO
The principal investment objective of the Omni Portfolio is to realize a high
level of long-term total rate of return consistent with prudent investment
risks. Total rate of return consists of current income including dividends,
interest and discount accruals and capital appreciation.
This Portfolio will seek to attain its objectives by investing in any of the
securities in which the Equity, Money Market and Bond Portfolios may invest. The
mix of investments will be adjusted from time to time among the various market
sectors (stocks, bonds and money market instruments) to capitalize on perceived
variations in return potential produced by the interaction of changing market
and economic conditions. The Portfolio may at times be invested in less than all
three of the market sectors. No minimum portion of the Portfolio is required to
be invested in any sector. The frequency of changes in investment mix depends
upon market and economic conditions.
The Portfolio's principal investment objective is supplemented and limited by
the investment objectives, policies and restrictions established for each of the
market sectors. Within the equity sector, the Portfolio will attempt to obtain
long-term growth of capital while current income will be a secondary
consideration. Within the bond sector, the Portfolio will attempt to obtain a
high level of income and opportunity for capital appreciation consistent with
preservation of capital. Within the money market sector, the Portfolio will
attempt to obtain maximum current income consistent with the preservation of
principal and liquidity. Investment in this Portfolio involves all of the risks
associated with investing in the other portfolios. In addition, there is the
risk that at any given time this Portfolio will invest too much or too little in
each of the respective market sectors.
INTERNATIONAL PORTFOLIO
The principal investment objective of the International Portfolio is to obtain
long-term capital growth by investing primarily in common stocks (and securities
convertible into common stocks) of foreign companies. This Portfolio may also
invest in fixed-income securities of foreign issuers. When deemed appropriate
for short-term investment or for defensive purposes, it may invest in short-term
debt instruments of U.S. or foreign issuers, in U.S. government obligations, or
in U.S. common stocks.
This Portfolio enables variable contractowners to diversify their investment by
participating in companies and economies outside the U.S. However, investing in
foreign securities may involve a greater degree of risk than investing in
domestic securities because of the possibilities of currency exchange rate
fluctuations, currency exchange controls, less publicly available information,
more volatile markets, thinner markets (less trading volume), slower settlement
of trades, greater likelihood of trade failures, less securities regulation,
less favorable tax provisions, lack of uniformity of accounting, auditing and
financial reporting standards, war and expropriation. Foreign investments also
generally involve higher brokerage commissions, higher custodian costs, and
currency conversion fees. Investment in this Portfolio will generally involve a
greater degree of market and financial risk than any of the portfolios except
for the Global Contrarian Portfolio.
CAPITAL APPRECIATION PORTFOLIO
The principal investment objective of the Capital Appreciation Portfolio is to
maximize capital growth through investment primarily in common stocks. This
Portfolio seeks to achieve capital appreciation by investing in securities of
companies that are undervalued in relation to the company's assets, earnings,
market position or breakup value; are currently out of favor in the investment
community; or have attractive growth potential in their business markets.
Securities are also sought that have been over-discounted due to adverse
operating results, deteriorating economic or industry conditions, or unfavorable
publicity.
9
<PAGE> 10
The Portfolio may also invest in fixed-income securities and money market
instruments to preserve its principal value during uncertain or declining market
conditions. The Portfolio's total return will consist principally of capital
appreciation (or depreciation) and, to a lesser extent, current income. The
Portfolio's active management may result in a higher portfolio turnover rate and
correspondingly higher brokerage costs. Investment in this Portfolio will
generally involve market and financial risks that are comparable to, or somewhat
less than, those of the Equity Portfolio.
SMALL CAP PORTFOLIO
To achieve its investment objective of capital appreciation, this Portfolio
invests primarily in the common stocks of small and medium sized companies.
Ordinarily, these companies are not listed on a national securities exchange but
will be traded over the counter. Under normal market conditions, at least 65% of
this Portfolio's assets will be invested in common stocks of companies with
market capitalizations of less than $1 billion. However it may also invest in
larger companies if they appear to present better prospects for capital
appreciation. This Portfolio may invest up to 30% of its assets in foreign
securities.
Small and medium sized companies selected for this Portfolio are generally those
that are still in the developing stages of their life cycles and are able to
achieve rapid growth in sales, earnings and share prices. Investments in such
companies involve greater volatility and risk than is customarily associated
with more established companies because such companies often have limited
product lines, markets or financial resources, and their securities may be
subject to more abrupt or erratic movements in price than securities of larger
companies or the market averages. Investment in this Portfolio generally
involves a higher degree of market and financial risks than those of the Equity
Portfolio.
GLOBAL CONTRARIAN PORTFOLIO
The objective of the Global Contrarian Portfolio is to provide long-term growth
of capital by investing in foreign and domestic securities that, in the judgment
of the portfolio manager, are undervalued or presently out of favor with other
investors but have positive prospects for eventual appreciation. While this
Portfolio will primarily invest in common stocks (and securities convertible
into common stocks), it may also invest in fixed income securities that appear
to be undervalued or out of favor.
A substantial portion (at least 25%) of this Portfolio will be invested in
foreign securities, in at least three countries, under normal market conditions.
To that extent, the risk factors described in the second paragraph under
"International Portfolio," above, will apply. In addition, "contrarian"
investing generally involves substantial risks, particularly in the short term.
Companies or markets that appear to be undervalued or are out of favor with
investors may remain so for an extended period of time or may never recover.
Therefore, this Portfolio should be considered primarily for long-term
investments. Investment in this Portfolio generally involves a high degree of
market and financial risk.
AGGRESSIVE GROWTH PORTFOLIO
The investment objective of the Aggressive Growth Portfolio is to seek capital
growth. The Portfolio invests in a diversified portfolio of securities believed
to represent attractive growth opportunities. The Portfolio normally emphasizes
equity securities, although it has the flexibility to invest in any type of
security that is believed to have the potential for capital appreciation. The
Portfolio may invest up to 100% of its assets in equity securities, including
common stocks, preferred stocks, securities that are convertible into common or
preferred stocks, such as convertible bonds, and warrants. The Portfolio may
invest up to 100% of its assets in intermediate - to long-term corporate or U.S.
government debt securities. Although the debt securities in which the Portfolio
invests will be primarily investment-grade debt securities, the Portfolio may
invest up to 5% of its total assets in non-investment-grade debt securities.
The Portfolio may invest up to 15% of its assets in foreign securities, which
involve certain risks.
10
<PAGE> 11
The Portfolio seeks to uncover emerging investment trends and attractive growth
opportunities. In its search for potential investments, the Portfolio attempts
to identify companies that are poised for accelerated earnings growth due to
innovative products or services, new management, or favorable economic or market
cycles. These companies may be small, unseasoned firms in the early stages of
development, or they may be mature organizations. The Portfolio engages in
substantial short-term trading, which involves significant risk and may be
deemed speculative. Such trading results in a higher portfolio turnover rate and
correspondingly higher brokerage costs. Investment in this Portfolio involves a
high degree of market and financial risk.
CORE GROWTH PORTFOLIO
The objective of the Core Growth Portfolio is to provide long-term capital
appreciation by investing primarily in equity securities of large, medium and
small companies that PBA believes have strong earnings growth and long-term
capital appreciation prospects. PBA seeks companies poised for rapid growth that
have a history of above-average earnings growth, demonstrate the ability to
sustain that growth, and operate in industries or markets experiencing increased
demand for their products or services.
In managing the Core Growth Portfolio, PBA uses both quantitative and
fundamental processes focusing on quality earnings growth. PBA begins by
creating a universe of rapidly growing companies having desired quality
characteristics. Using proprietary software and research models that incorporate
attributes of successful growth (such as positive earnings surprises, upward
earnings estimate revisions, and accelerating sales and earnings growth), PBA
creates a universe of growing companies. Then, using fundamental research, PBA
evaluates each company's earnings quality and assesses the sustainability of the
company's current growth trends. Through this highly disciplined process, PBA
seeks to construct an investment portfolio having strong growth characteristics.
This portfolio's investments in small and medium capitalization companies may
experience greater price volatility than portfolios investing primarily in
larger, more established companies. Because the universe of companies in which
this portfolio invests will experience stock price volatility, it is important
that investors maintain a long-term investment perspective.
GROWTH & INCOME PORTFOLIO
The Growth & Income Portfolio's investment objective is long-term total return.
The Portfolio will pursue this objective primarily by investing in equity and
debt securities, focusing on small- and mid-cap companies that offer the
potential for capital appreciation, current income, or both.
The Portfolio will normally invest the majority of its assets in common stocks,
convertible securities, bonds, and notes. Although the Portfolio is intended to
focus on companies with market capitalizations of up to $3 billion, the
Portfolio will remain flexible and may invest in securities of larger companies.
The Portfolio may also engage in short sales of securities expected to decline
in price. Small- and mid-cap companies may present greater opportunities for
investment return than do larger companies, but may also involve greater risks.
They may have limited product lines, marketing or financial resources, or may
depend on a limited management group. Their securities may trade less frequently
and in limited volume. As a result, the prices of these securities may fluctuate
more than prices of securities of larger, widely traded companies.
S&P 500 INDEX PORTFOLIO
The investment objective of the S&P 500 Index Portfolio is to seek total return
approximating that of the S&P 500, including reinvestment of dividends, at a
risk level consistent with that of the S&P 500. It will seek this objective by
investing primarily in (a) common stocks and other securities that need not be
included among the 500 stocks in the S&P 500, and/or (b) S&P 500 stock index
futures contracts which will be hedged by investing in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
investment-grade corporate bonds and cash equivalents. This strategy is intended
to replicate the performance of the S&P 500. However, Portfolio expenses will
reduce the Portfolio's ability to exactly track the S&P 500 and there can be no
assurance that the Portfolio's investments will have the desired effect.
11
<PAGE> 12
The value of S&P 500 stock index futures contracts is tied directly to the
fluctuations of the S&P 500. The Portfolio's ability to use futures contracts as
a substitute for maintaining a fully-invested market position in the 500 stocks
comprising the S&P 500 obligates the Portfolio to hedge its position by
delivering a specific dollar amount equal to the difference between the value of
the S&P 500 at the time the contract was made and the closing of the contract.
The futures contracts can result in a high degree of leverage so that, were the
Portfolio's position in the contracts not to be hedged by its position in U.S.
government obligations, investment-grade corporate bonds and cash equivalents, a
relatively small decline in the S&P 500 could result in a substantial loss to
the Portfolio, including part or all of the margin deposits required on the
contracts. See "About the S&P 500" on page 35.
SOCIAL AWARENESS PORTFOLIO
The objective of the Social Awareness Portfolio is to provide long-term growth
of capital by investing primarily in the common stocks and other equity
securities of companies that, in the Adviser's opinion, conduct their business
in a way that enhances society's quality of life. The Portfolio's social concern
criteria will necessarily limit the universe of securities that may be selected
for this Portfolio. However, the Adviser believes the Portfolio's objective of
long-term capital growth can be achieved despite this limitation.
In choosing investments, the Adviser will consider a company's record in (a)
quality and safety of its products and services, (b) environmental protection
and enhancement, (c) employee relations, opportunities and safety, (d) consumer
relations and protection, (e) community involvement, and (f) expectations for
the creation of new jobs and economic development due to anticipated company
growth. In addition, each potential investment will be subject to the Adviser's
standards of investment analysis. As a matter of operating policy that may be
modified by the Board of Directors, the Portfolio will not invest in any company
substantially engaged in the manufacture of or distribution of tobacco products,
alcoholic beverages or weapons, or the operation of gambling casinos, or the
support of repressive regimes. The Adviser will attempt to monitor and respond
to changes in business practices of the companies selected for investment and,
in case of any adverse development, will consider whether or not the Portfolio's
policies would require it to sell its position in that company. Any sale under
those circumstances would, however, be subject to prudent market considerations.
STRATEGIC INCOME PORTFOLIO
The investment objective of the Strategic Income Portfolio is to generate high
current income by investing at least 80% of its assets in income producing
securities, including at least 40% of its assets in a core asset group of U.S.
government and corporate fixed income securities, and 5% to 20% of its assets in
each of the following satellite categories: (a) foreign bonds, (b) real estate
investment trusts, (c) domestic equity securities, (d) money market securities
and (e) the following structured fixed income securities: mortgage backed
securities, collateralized mortgage obligations ("CMOs"), adjustable rate
mortgage securities ("ARMS") and asset-backed securities.
The core assets are selected based on the outlook for interest rates and their
yield in relation to other fixed income securities of similar quality and
maturity and only include investment grade bonds (i.e., those rated Baa or
higher by Moody's, or BBB or higher by S&P or Fitch or which, if unrated, are
deemed by Star to be of comparable quality). The foreign bonds are of non-U.S.
companies and governments. They are investment grade, are denominated in
currencies other than U.S. dollars and may include American Depositary Receipts
and International Depositary Receipts. The Portfolio may also invest in shares
of investment companies that invest primarily in foreign bonds. Real estate
investment trusts include equity or mortgage real estate trusts integrated to
capture income diversified by sector (e.g., shopping malls, apartment buildings
and health care facilities) and by geographic location. The domestic equity
category consists of high-dividend common and preferred stocks of U.S. companies
with a history of stable earnings and/or growing dividends. The domestic equity
category may also include warrants and securities convertible into the common
stocks of these U.S. companies. The money market category includes (a)
commercial paper and Europaper (dollar-denominated commercial paper issued
outside the U.S.) having at least one rating in one of the two highest
categories of any NRSRO; (b) instruments of domestic and foreign banks and
savings and loans (such as certificates of
12
<PAGE> 13
deposit, demand and time deposits, savings shares and bankers acceptances) if
they have capital, surplus and individual profits of over $100,000,000, or if
the principal amount of the instrument is insured by a fund administered by the
Federal Deposit Insurance Corporation ("FDIC insured"), including Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs")
and Eurodollar Time Deposits ("ETDs"); (c) obligations of the U.S. government or
its agencies or instrumentalities; (d) repurchase agreements, and (e) other
unrated short-term instruments deemed by Star to be of comparable quality to the
other obligations in which the Portfolio may invest. This Portfolio may also
engage in short sales from time to time. See "Risks Related to Short Sales" on
page 17.
STELLAR PORTFOLIO
The investment objective of the Stellar Portfolio is to maximize total return by
investing approximately 15% to 25% of its assets in each of the following
categories: (a) domestic equity securities which Star deems to be undervalued
relative to stocks contained in the S&P 500 Composite Stock Index; (b) domestic
fixed income securities including investment grade corporate debt obligations
and obligations of the U.S. government and its agencies and instrumentalities;
(c) foreign securities including securities of non-U.S. companies, investment
grade corporate and government fixed income securities denominated in currencies
other than U.S. dollars, and investment companies that invest primarily in
foreign securities; (d) real estate securities including publicly traded equity
and convertible debt securities of real estate related companies and real estate
investment trusts, and (e) precious metal securities and/or money market
securities. Precious metal securities include equity securities of domestic and
foreign companies that explore for, extract, process, or deal in precious metals
such as gold, silver, palladium and platinum. Up to 5% of the Portfolio may be
invested in domestic and foreign asset-based securities for which the principal
amount, redemption terms or conversion terms are related to the market price of
some precious metals. Money market securities in which the Portfolio may invest
are U.S. and foreign short-term money market instruments including commercial
paper and Europaper (dollar-denominated commercial paper issued outside the
U.S.) having at least one rating in one of the two highest categories of any
NRSRO; instruments of domestic and foreign banks and savings and loans (such as
certificates of deposit, demand and time deposits, savings shares and bankers'
acceptances) if they have capital, surplus and undivided profits of over
$100,000,000, or if the principal amount of the instrument is FDIC insured
(these may include ECDs, Yankee CDs and ETDs); obligations of the U.S.
government or its agencies or instrumentalities; repurchase agreements, or other
short-term instruments deemed by Star to be of comparable quality to the other
foregoing money market securities.
RELATIVE VALUE PORTFOLIO
The investment objective of the Relative Value Portfolio is to obtain the
highest total return as is consistent with reasonable risk by investing
primarily in stocks which Star deems to represent characteristics with low
volatility, above-average yields, and are undervalued relative to the stocks
comprising the S&P Composite Stock Index. Unless it is in a defensive position,
at least 70% of the Portfolio's assets will be invested in common stocks of
companies in the top 25% of their industries with regard to revenues. However,
other factors, such as product position or market share, will also be considered
and may outweigh revenues.
The Portfolio will also invest in fixed income securities, including convertible
securities; domestic corporate debt obligations (rated or A or higher by Moody's
or S&P or Fitch); and obligations of the U.S. government or its agencies or
instrumentalities.
SMALL CAP GROWTH PORTFOLIO
The investment objective of the Small Cap Growth Portfolio is capital
appreciation. To achieve this objective, the Portfolio invests in an actively
managed portfolio of equity securities (principally common stocks) of small cap
growth companies. These are companies that, in RSIM's opinion, have the
potential, based on superior products or services, operating characteristics,
and financing capabilities, for more rapid growth than the over-all economy.
Investments generally are held in companies in industry segments experiencing
rapid growth or in companies with proprietary advantages. In evaluating
potential investments, RSIM may consider a number of factors including the rate
of earnings growth, the quality of management, the extent of proprietary
operating advantage, the return on equity and/or the financial condition of the
company. Up to 30% of this Portfolio's assets may be invested in foreign
securities.
Smaller companies may present greater opportunities for investment return than
do larger companies, but may also involve greater risks. They may have limited
product lines, markets or financial resources, and they may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, the prices of these securities may fluctuate more than
prices of larger, more widely traded companies. The Portfolio may experience
some difficulty in establishing or closing out positions in these securities at
prevailing market prices. There may be less publicly available information about
the issuers or less market interest in their securities than in the case of
larger companies, and it may take longer for prices of these securities to
reflect the full value of their issuers' underlying earnings potential or
assets. Securities of some smaller issuers may be restricted as to resale or may
otherwise be illiquid, thus limiting the Portfolio's ability to dispose of the
securities.
HIGH INCOME BOND PORTFOLIO
The objective of the High Income Bond Portfolio is to seek high current income.
The Portfolio invests primarily in lower rated corporate debt obligations
commonly referred to as "junk bonds." Some of these fixed income securities may
involve equity features. Capital growth will be considered, but only when
consistent with the objective of high current income. Under normal
circumstances, the Portfolio will not invest more than 10% of the value of its
assets in equity securities and their equivalents. Fixed income securities in
which the Portfolio invests include, but are not limited to, preferred stocks,
bonds, debentures, notes, equipment lease certificates and equipment trust
certificates. The Portfolio's investments are generally rated Baa or lower by
Moody's, or BBB or lower by S&P or Fitch, or are not rated but are determined by
FIC to be of comparable quality, and may include bonds in default. There is no
lower limit with respect to rating categories for securities in which the
Portfolio may invest. These lower rated securities have speculative
characteristics. Changes in economic conditions or other circumstances are more
likely to lead to weakened capacity to make principal and interest payments than
highly rated bonds.
The Portfolio may invest in various kinds of convertible securities that can be
exchanged for or converted into common stock. Convertible securities are often
rated below investment grade or not rated because they fall below debt
obligations and just above common stock in order of preference on the issuer's
balance sheet. The Portfolio may invest its assets in foreign securities,
including those not publicly traded in the United States. The Portfolio may also
invest in debt and equity securities issued by real estate investment trusts.
EQUITY INCOME PORTFOLIO
The investment objective of the Equity Income Portfolio is to provide
above-average income and capital appreciation. The Portfolio invests primarily
in income-producing equity securities including common stocks, preferred stocks,
real estate investment trusts and securities (including debt securities)
convertible into common stocks. The Portfolio emphasizes those common stocks in
each sector that have good value, attractive yield and dividend growth
potential. Convertible securities are used because they typically offer high
yields and good potential for capital appreciation.
The Portfolio invests in convertible securities without regard to their rating.
They are often rated below investment grade, or not rated, because they fall
below debt obligations and just above common equity in order of preference or
priority on the issuer's balance sheet. Hence, an issuer with investment grade
senior debt may issue convertible securities with ratings below investment grade
or not rated. These securities may be subject to some of the same risks as those
inherent in junk bonds as described for the High Income Bond Portfolio. This
Portfolio may invest in foreign securities, and it may also engage in short
sales from time to time.
BLUE CHIP PORTFOLIO
The investment objective of the Blue Chip Portfolio is to seek growth of capital
and income by concentrating investment decisions in securities of high quality
companies. The Portfolio pursues its investment objective by investing primarily
in a portfolio of securities issued by companies selected by FIC principally on
the basis of fundamental research techniques and standards with emphasis on
earning power, financial condition and valuation. The companies are among the
leaders in their industries in terms of sales, earnings, and/or market
capitalization. FIC places emphasis on earning power, financial condition and
valuation when making portfolio selections, and it believes that these
companies' securities represent diversified and highly marketable investments.
The securities in which the Portfolio invests include, but are not limited to,
common stocks, preferred stocks, corporate debt obligations, convertible
securities, warrants, American depository receipts and foreign securities.
Corporate debt obligations will be rated Baa or better by Moody's, or BBB or
better by S&P or Fitch, or if not rated, will be determined by FIC to be of
comparable quality. If a security loses its rating or has its rating reduced
after the Portfolio has purchased it, the Portfolio is not required to drop the
security from the Portfolio, but that will be considered. Bonds rated below Baa
or BBB have some speculative characteristics.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of restrictions in implementing its investment
policies. The following is a list of certain significant restrictions for all
portfolios other than the Capital Appreciation, Aggressive Growth, High Income
Bond, Equity Income and Blue Chip Portfolios, the restrictions for which are
listed separately. The Statement of Additional Information provides a complete
list of all investment restrictions applicable to the Fund. Restriction number
8 is a fundamental policy of the Global Contratrian Portfolio, and restrictions
number 4, 7 and 8 are fundamental policies of the Equity, Money Market, Bond,
Omni and International Portfolios, and nonfundamental as to the remaining
portfolios. Nonfundamental policies may be changed by the Board of Directors.
Fundamental policies may not be changed without the affirmative vote of a
majority of the outstanding voting securities of the Fund or of a particular
portfolio, as appropriate.
13
<PAGE> 14
Each portfolio of the Fund (other than the Capital Appreciation, Aggressive
Growth, High Income Bond, Equity Income and Blue Chip Portfolios) will not:
1. invest more than 5% of the value of the total assets of such portfolio in
the securities of any one insurer (except U.S. government securities);
2. purchase more than 10% of the outstanding voting securities of any one
issuer, and the Money Market Portfolio will not acquire the voting
securities of any issuer except in connection with a merger, consolidation
or other reorganization;
3. invest more than 25% of the value of its total assets in any one industry,
except that each portfolio may invest more than 25% of the value of its
total assets in obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities or in certificates of deposit, bankers'
acceptances, bank time deposits or other obligations of banks or financial
institutions. However, it is the intention of management not to invest in
time deposits which involve any penalty or other restriction on withdrawal;
4. invest more than 15% of the value of its assets (10% in the case of the
Equity, Money Market, Bond, Omni and International Portfolios) in
securities or other investments, including repurchase agreements maturing
in more than seven days, that are subject to legal or contractual
restrictions upon resale or are otherwise not readily marketable;
5. other than the Growth & Income, Strategic Income and Small Cap Growth
Portfolios, borrow money, except for temporary or emergency purposes from
banks, in which event the aggregate amount borrowed shall not exceed 5% of
the value of the assets of the portfolio. In the case of such borrowing,
each portfolio may pledge, mortgage or hypothecate up to 5% of its assets.
Reverse repurchase agreements are not considered to be borrowing money for
purposes of this restriction. The Growth & Income, Strategic Income and
Small Cap Growth Portfolios may borrow money directly or through reverse
repurchase agreements in amounts up to one-third of the value of each of
their total net assets, other than the amount borrowed;
6. purchase or sell commodities or commodity contracts except that (a) each
portfolio other than the Money Market Portfolio may, for hedging purposes,
purchase and sell financial futures contracts and options thereon within
the limits of investment restriction 7 below, (b) notwithstanding
restriction 7 below, the S&P 500 Index Portfolio may purchase and sell
stock index futures contracts in accordance with its stated investment
objectives, and (c) the Stellar Portfolio may purchase or sell precious
metal securities;
7. other than the S&P 500 Index Portfolio, purchase or sell put or call
options, except that each portfolio other than the Money Market Portfolio
may, for hedging purposes, (a) write call options traded on a registered
national securities exchange if such portfolio owns the underlying
securities subject to such options, and purchase call options for the
purpose of closing out positions in options it has written, (b) purchase
put options on securities owned, and sell such options in order to close
its positions in put options, (c) purchase and sell financial futures
contracts and options thereon, and (d) purchase and sell financial index
options; provided, however, that no option or futures contract shall be
purchased or sold if, as a result, more than one-third of the total assets
of the portfolio would be hedged by options or futures contracts, and no
more than 5% of any portfolio's total assets, at market value, may be used
for premiums on open options and initial margin deposits on futures
contracts;
8. other than the International and Global Contrarian Portfolios, invest in
securities of foreign issuers except that (a) each of the Equity, Bond,
Omni, Core Growth, Growth & Income, S&P 500 Index, Social Awareness and
Relative Value Portfolios may (i) invest up to 15% of their respective
assets in securities of foreign issuers (including private issuers and
foreign governments or political subdivisions, agencies or
instrumentalities of foreign governments), American Depository Receipts,
and securities of United States domestic issuers denominated in foreign
currency, and (ii) invest up to an additional 10% of the assets of the
portfolio in securities issued by foreign governments or political
subdivisions, agencies or instrumentalities thereof, (b) each of the
Small Cap and Small Cap Growth Portfolios may invest up to 30% of its
assets in the securities of foreign issuers, (c) the Money Market
Portfolio may invest up to 50% of its assets in the securities of foreign
issuers, provided the securities are denominated in U.S. dollars and held
in custody in the United States, (d) the Strategic Income Portfolio may
invest up to 20% of its assets in foreign bonds and (e) the Stellar
Portfolio may invest up to 25% of its assets in the securities of foreign
issuers. For purposes of this restriction number 8, U.S. dollar
denominated depository receipts traded in domestic markets do not
constitute foreign securities;
14
<PAGE> 15
As nonfundamental policies of each portfolio other than the Capital
Appreciation, Aggressive Growth, High Income Bond, Equity Income and Blue Chip
Portfolios, which policies may be changed at any time by the vote of a majority
of the Board of Directors, (a) no portfolio will invest more than 20% of its
assets in securities of issuers located in any one foreign country, except that
up to an additional 5% of its assets may be invested in securities of issuers
located in each of any three of Australia, Canada, France, Germany, Japan or
the United Kingdom; and (b) each portfolio other than the Money Market
Portfolio, in order to hedge against changes in the exchange rates of foreign
currencies in relation to the U.S. dollar, may engage in forward foreign
currency contracts, foreign currency options and foreign currency futures
contracts in connection with the purchase, sale or ownership of specific
securities (but, not more than 5% of a portfolio's assets may be invested in
such currency hedging contracts).
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in the investment's percentage of the value of a
portfolio's total assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction.
CAPITAL APPRECIATION PORTFOLIO FUNDAMENTAL POLICIES As a matter of fundamental
policy, the Portfolio may not:
C.A.1. Borrow money except that the Portfolio may (i) borrow for
non-leveraging, temporary or emergency purposes and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner
consistent with the Portfolio's investment objective and program,
provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Portfolio's total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this
amount will be reduced in accordance with applicable law. The Portfolio
may borrow from banks, other portfolios managed by TRPA or other
persons to the extent permitted by applicable law;
C.A.2. Purchase or sell physical commodities; except that it may enter into
futures contracts and options thereon;
C.A.3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the
securities of issuers having their principal business activities in the
same industry;
C.A.4. Make loans, although the Portfolio may (i) lend portfolio securities
and participate in an interfund lending program with other portfolios
managed by TRPA provided that no such loan may be made if, as a result,
the aggregate of such loans would exceed 33 1/3% of the value of the
Portfolio's total assets; (ii) purchase money market securities and
enter into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and purchase
debt;
C.A.5. Purchase a security if, as a result, with respect to 75% of the value
of its total assets, more than 5% of the value of the Portfolio's total
assets would be invested in the securities of a single issuer, except
securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities;
C.A.6. Purchase a security if, as a result, with respect to 75% of the value
of the Portfolio's total assets, more than 10% of the outstanding
voting securities of any issuer would be held by the Fund (other than
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities);
C.A.7. Purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Portfolio from investing in securities or other instruments backed by
real estate or in securities of companies engaged in the real estate
business);
C.A.8. Issue senior securities except in compliance with the Investment
Company Act of 1940; or
C.A.9. Underwrite securities issued by other persons, except to the extent
that the Portfolio may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase
and sale of its portfolio securities in the ordinary course of pursuing
its investment program.
15
<PAGE> 16
With respect to investment restrictions C.A.1. and C.A.4., the Portfolio will
not borrow from or lend to any other portfolios managed by TRPA unless they
apply for and receive an exemptive order from the SEC or the SEC issues rules
permitting such transactions. The Portfolio has no current intention of engaging
in any such activity and there is no assurance the SEC would grant any order
requested by the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction C.A.2., the Portfolio does not consider
currency contracts or hybrid investments to be commodities.
For purposes of investment restriction C.A.3., U.S., state or local governments,
or related agencies or instrumentalities, are not considered an industry.
For purposes of investment restriction C.A.4., the Portfolio will consider the
acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
AGGRESSIVE GROWTH PORTFOLIO FUNDAMENTAL POLICIES
As a matter of fundamental policy, the Portfolio:
A.G.1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities) if, as a result,
(i) more than 5% of the Portfolio's total assets would be invested in
the securities of that issuer, or (ii) the Portfolio would hold more
than 10% of the outstanding voting securities of that issuer.
A.G.2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 which may involve a borrowing, provided that the
combination of (i) and (ii) shall not exceed 33 1/3% of the value of
the Portfolio's total assets (including the amount borrowed), less the
Portfolio's liabilities (other than borrowings), except that the
Portfolio may borrow up to an additional 5% of its total assets (not
including the amount borrowed) from a bank for temporary or emergency
purposes (but not for leverage or the purchase of investments). The
Portfolio may also borrow money from the other mutual funds managed by
SCM or other persons to the extent permitted by applicable law.
A.G.3. May not issue senior securities, except as permitted under the
Investment Company Act of 1940.
A.G.4. May not act as an underwriter or another issuer's securities, except to
the extent that the Portfolio may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities.
A.G.5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Portfolio from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
A.G.6. May not make loans if, as a result, more than 33 1/3% of the
Portfolio's total assets would be lent to other persons, except through
(i) purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
A.G.7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Portfolio's total assets would be invested in the
securities of issuers, the principal business activities of which are
in the same industry.
A.G.8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Portfolio from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities.
HIGH INCOME BOND, EQUITY INCOME AND BLUE CHIP PORTFOLIO FUNDAMENTAL POLICIES
As a matter of fundamental policy:
F.I.1 The portfolios will not issue senior securities, except that a
portfolio may borrow money directly or through reverse repurchase
agreements in amounts not in excess of one-third of the value of
its total assets; provided that, while borrowings and reverse
repurchase agreements outstanding exceed 5% of a portfolio's total
assets, any such borrowings will be repaid before additional
investments are made.
F.I.2. The portfolios will not purchase securities if, as a result of such
purchase, 25% or more of a portfolio's total assets would be invested
in any one industry. However, a portfolio may at any time invest 25% or
more of its total assets in cash or cash items and securities issued
and/or guaranteed by the U.S. government, its agencies or
instrumentalities.
F.I.3. The portfolios will not purchase or sell real estate, although they may
invest in securities of companies whose business involves the purchase
or sale of real estate or in securities secured by real estate or
interests in real estate.
F.I.4. The portfolios will not lend any of their assets, except a portfolio's
securities, up to one-third of its total assets. This shall not prevent
a portfolio from purchasing or holding corporate or U.S. government
bonds, debentures, notes, certificates of indebtedness or other debt
securities of an issuer, entering into repurchase agreements, or
engaging in other transactions which are permitted by the portfolio's
investment objectives and policies.
F.I.5. The portfolios will not underwrite any issue of securities, except as a
portfolio may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities in accordance with
its investment objectives, policies, and limitations.
F.I.6. With respect to 75% of its total assets, a portfolio will not purchase
the securities of any one issuer (other than cash, cash items, or
securities issued and/or guaranteed by the U.S. government, its
agencies or instrumentalities, and repurchase agreements collateralized
by such securities) if, as a result, more than 5% of its total assets
would be invested in the securities of that issuer. Also, a portfolio
will not purchase more than 10% of any class of the outstanding voting
securities of any one issuer. For these purposes, the portfolios
consider common stock and all preferred stock of an issuer each as a
single class, regardless of priorities, series, designations, or other
differences.
F.I.7. The portfolios will not purchase any securities on margin, but they may
obtain such short-term credits as are necessary for clearance of
transactions. The deposit or payment by a portfolio of initial or
variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a
security on margin.
F.I.8. The portfolios will not purchase or sell commodities, except that a
portfolio may purchase and sell financial futures contracts and related
options.
REPURCHASE AGREEMENTS
Under a repurchase agreement, the portfolio purchases a security and obtains a
simultaneous commitment from the seller (a member bank of the Federal Reserve
System or a government securities dealer recognized by the Federal Reserve
Board) to repurchase the security at a mutually agreed upon price and date. It
may also be viewed as a loan of money by the portfolio to the seller. The resale
price is normally in excess of the purchase price and reflects an agreed upon
market rate. The rate is effective for the period of time the portfolio is
invested in the agreement and unrelated to the coupon rate on the purchased
security. The period of these repurchase agreements will usually be short, from
overnight to one week, and at no time will the portfolio invest in repurchase
agreements for more than one year. These transactions afford an opportunity for
the portfolio to earn a return on temporarily available cash. Although
repurchase agreements carry certain risks not associated with direct investments
in securities, the Fund intends to enter into repurchase agreements only with
financial institutions believed by the Adviser and any sub-adviser to present
minimal credit risks in accordance with criteria established by the Fund's Board
of Directors. The Adviser or sub-adviser will review and monitor the
creditworthiness of such institutions under the Board's general supervision. The
Fund will only enter into repurchase agreements pursuant to master repurchase
agreements that provide that all transactions be fully collateralized and that
the collateral be in the actual or constructive possession of the Fund. These
agreements must also provide that the Fund will always receive as collateral
securities whose market value, including accrued interest, will be at least
equal to 100% of the dollar amount invested by the portfolio in each agreement,
and the portfolio will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of the custodian. If
the seller were to default, the portfolio might incur a loss if the value of the
collateral securing the repurchase agreement declines and may incur disposition
costs in connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the portfolio may be delayed or limited and a
loss may be incurred if the collateral securing the repurchase agreement
declines in value during the bankruptcy proceedings.
REVERSE REPURCHASE AGREEMENTS
Under a reverse repurchase agreement, a portfolio sells a debt security and
agrees to repurchase it at an agreed upon time and at an agreed upon price. The
portfolio retains record ownership of the security and the right to receive
interest and principal payments thereon. At an agreed upon future date, the
portfolio repurchases the security by remitting the proceeds previously
received, plus interest. The difference between the amount the portfolio
receives for the security and the amount it pays on repurchase is deemed to be
payment of interest. The portfolio will maintain in a segregated custodial
account assets having an aggregate value equal to the amount of such commitment
to repurchase, including accrued interest, until payment is made. In certain
types of agreements, there is no agreed-upon repurchase date and interest
payments are calculated daily, often based on the prevailing overnight
repurchase rate. The Securities and Exchange Commission views these transactions
as collateralized borrowings by the portfolio and the portfolio will abide by
the limitations set out in the investment restrictions with respect to the
borrowing of money.
CONVERTIBLE SECURITIES
Convertible securities include a variety of instruments that can be exchanged
for or converted into common stock, including convertible bonds or debentures,
convertible preferred stock, units consisting of usable bonds and warrants, and
securities that cap or otherwise limit returns to the security holder. Examples
of these include dividend enhanced convertible stock or debt exchangeable for
common stock (DECS), liquid yield option notes (LYONS), preferred equity
redemption cumulative stock (PERCS), preferred redeemable increased dividend
securities (PRIDES) and zero coupon convertible securities.
As with all fixed-income securities, various market forces influence the market
value of convertible securities, including changes in the level of interest
rates. As the level of interest rates increases, the market value of convertible
securities may decline and, conversely, as interest rates decline, the market
value of convertible securities may increase. The unique investment
characteristic of convertible securities, the right to be exchanged for the
issuer's common stock, causes the market value of convertible securities to
increase when the underlying common stock increases. However, since securities
prices fluctuate, there can be no assurance of capital appreciation, and most
convertible securities will not reflect quite as much capital appreciation as
their underlying common stocks. When the underlying common stock is experiencing
a decline, the value of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of straight nonconvertible debt of
similar quality, often called "investment value," and may not experience the
same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a
fixed-income security with a possibility of capital appreciation due to the
conversion privilege. If this appreciation potential is not realized, the
premium may not be recovered.
ZERO-COUPON AND PAY-IN-KIND DEBT SECURITIES
Zero-coupon securities (or "step-ups") in which a portfolio may invest are debt
obligations which are generally issued at a discount and payable in full at
maturity, and which do not provide for current payments of interest prior to
maturity. Pay-in-kind securities make periodic interest payments in the form of
additional securities (as opposed to cash). Zero-coupon and pay-in-kind
securities usually trade at a deep discount from their face or par value and are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. As a result, the net asset value of shares of a portfolio investing in
zero-coupon and pay-in-kind securities may fluctuate over a greater range than
shares of other mutual funds investing in securities making current
distributions of interest and having similar maturities.
LOWER-RATED DEBT SECURITIES
Certain of the portfolios may purchase lower-rated debt securities, sometimes
referred to as "junk bonds" (those rated BB or lower by S&P or Fitch, or Ba or
lower by Moody's). See below for a description of S&P's ratings. Other ratings
are in the Appendix to the Statement of Additional Information. Under current
circumstances, only the High Income Bond Portfolio will purchase these
securities if, as a result, more than 35% of the Portfolio's assets would be
invested in securities rated below BB or Ba.
The lower ratings of certain securities held by a portfolio reflect a greater
possibility that adverse changes in the financial condition of the issuer, or in
general economic conditions, or both, or an unanticipated rise in interest
rates, may impair the ability of the issuer to make payments of interest and
principal. The inability (or perceived inability) of issuers to make timely
payment of interest and principal would likely make the values of securities
held by a portfolio more volatile and could limit the portfolio's ability to
sell its securities at prices approximating the values that portfolio had placed
on such securities. In the absence of a liquid trading market for securities
held by it, a portfolio may be unable at times to establish the fair market
value of such securities. The rating assigned to a security by Moody's, S&P or
Fitch does not reflect an assessment of the volatility of the security's market
value or of the liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates generally will result in an increase in the value of a
portfolio's fixed-income securities. Conversely, during periods of rising
interest rates, the value of a portfolio's fixed-income securities generally
will decline. In addition, the values of such securities are also affected by
changes in general economic conditions and business conditions affecting the
specific industries of their issuers. Changes by recognized rating services in
their ratings of any fixed-income security and in the ability of an issuer to
make payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities generally will not
affect cash income derived from such securities, but will affect the portfolio's
net asset value. A portfolio will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although the Adviser
or sub-adviser will monitor the investment to determine whether continued
investment in the security will assist in meeting the portfolio's investment
objective.
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. In addition, such
issuers may not have more traditional methods of financing available to them,
and may be unable to repay debt at maturity by refinancing. The risk of loss due
to default in payment of interest or principal by such issuers is significantly
greater because such securities frequently are unsecured and subordinated to the
prior payment of senior indebtedness. Certain of the lower-rated securities in
which the portfolios may invest are issued to raise funds in connection with the
acquisition of a company in so-called "leveraged buy-out" transactions. The
highly leveraged capital structure of such issuers may make them especially
vulnerable to adverse changes in economic conditions.
Under adverse market or economic conditions or in the event of adverse changes
in the financial condition of the issuer, a portfolio could find it more
difficult to sell lower-rated securities when the Adviser or sub-adviser
believes it advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. In many cases, such
securities may be purchased in private placements and, accordingly, will be
subject to restrictions on resale as a matter of contract or under securities
laws. Under those circumstances, it may also be more difficult to determine the
fair value of the securities for purposes of computing a portfolio's net asset
value. In order to enforce its rights in the event of a default, a portfolio may
be required to take possession of and manage assets securing the issuer's
obligations on such securities, which may increase the portfolio's operating
expenses and adversely affect the portfolio's net asset value. A portfolio may
also be limited in its ability to enforce its rights and may incur greater costs
in enforcing its rights in the event an issuer becomes the subject of bankruptcy
proceedings.
Certain securities held by a portfolio may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by a portfolio during a time of declining interest rates, the portfolio may not
be able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed.
S&P LOWER BOND RATINGS
Debt rated `BB,' `B,' `CC,' and `C,' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. `BB' indicates the least degree of speculation and `C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major exposures to adverse
markets.
BB Debt rated `BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The `BB' rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied `BBB-' rating.
B Debt rated `B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal. The `B' rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied `BB' or `BB-' rating.
CCC Debt rated `CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it
is not likely to have the capacity to pay interest and repay principal.
The `CCC' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied `B' or `B-" rating.
CC The rating `CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC' rating.
C The rating `C' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC-' rating. The `C' rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating `CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated `D' is in payment default. The `D' rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The `D' rating
will also be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
The ratings from `BB' to `CCC' may be modified by the addition of a plus (+) or
minus (-) to show relative standing within the major rating categories.
RESTRICTED AND ILLIQUID SECURITIES
Restricted securities are securities in which a portfolio may otherwise invest
pursuant to its investment objective and policies, but which are subject to
restrictions on resale under federal securities law. Under criteria established
by the Board of Directors, certain restricted securities are deemed to be
liquid. The Directors consider the following criteria in determining the
liquidity of restricted securities: (a) the frequency of trades and quotes for
the security; (b) the number of dealers willing to purchase or sell the
security, and the number of other potential buyers; (c) dealer undertakings to
make a market in the security; and (d) the nature of the security and the nature
of the marketplace trades.
SECURITIES LENDING
A portfolio may lend its portfolio securities, provided: (1) the loan is secured
continuously by collateral consisting of U.S. Government securities, cash or
cash equivalents adjusted daily to have market value at least equal to the
current market value of the securities loaned; (2) the portfolio may at any time
call the loan and regain the securities loaned; (3) a portfolio will receive any
interest or dividend paid on the loaned securities; and (4) the aggregate market
value of any portfolio's securities loaned will not at any time exceed one-third
(or such other limit as the Board of Directors may establish) of the total
assets of the portfolio. In addition, it is anticipated that a portfolio may
share with the borrower some of the income received on the collateral for the
loan or that the portfolio will be paid a premium for the loan.
Before a portfolio enters into a loan, the Adviser or sub-adviser considers all
relevant facts and circumstances, including the creditworthiness of the
borrower. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible delay in recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Although
voting rights or rights to consent with respect to the loaned securities pass to
the borrower, a portfolio retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by a portfolio if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment.
WARRANTS
Warrants basically are options to purchase common stock at a specific price
(usually at a premium above the market value of the optioned common stock at
issuance) valid for a specific period of time. Warrants may have a life ranging
from less that a year to twenty years or may be perpetual. However, warrants
have expiration dates after which they are worthless. In addition, if the market
price of the common stock does not exceed the warrant's exercise price during
the life of the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in the
market price of the warrant may tend to be greater than the percentage increase
or decrease in the market price of the optioned common stock.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for a portfolio. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the portfolio
sufficient to make payment for the securities to be purchased are segregated on
the portfolio's records at the trade date. These assets are marked to market
daily and are maintained until the transaction has been settled. No portfolio
will engage in when-issued and delayed delivery transactions to an extent that
would cause the segregation of more than 20% of the total value of its assets.
RISK FACTORS WITH OPTIONS
The purchaser of an option pays the option writer a "premium" for the option. In
the case of a covered call option written by a portfolio, if the purchaser does
not exercise the call option, the premium will generate additional capital gain
to the portfolio. If the market price of the underlying security declines, the
premium received for the call option will reduce the amount of the loss the
portfolio would otherwise incur. However, if the market price of the underlying
security rises above the exercise price and the call option is exercised, the
portfolio will lose its opportunity to profit from that portion of the rise
which is in excess of the exercise price plus the option premium. Therefore, the
Fund will write call options only when the Adviser believes that the option
premium will yield a greater return to the portfolio than any capital
appreciation that might occur on the underlying security during the life of the
option.
In the case of a put option purchased by a portfolio, if the market price of the
underlying security remains or rises above the exercise price of the option, the
portfolio will not exercise the option and the premium paid for such option will
reduce the gain the portfolio would otherwise have earned. Conversely, if the
market price of the underlying security falls below the exercise price less the
premium paid for the option, the portfolio will exercise the option, thereby
reducing the loss the portfolio would have otherwise suffered. Accordingly, a
portfolio will purchase put options only when the Adviser believes that the
market price of the underlying security is more likely to decrease than
increase.
Whenever a portfolio enters into a closing transaction, the portfolio will
realize a gain (or loss) if the premium plus commission it pays for a closing
call option is less (or greater) than the premium it received on the sale of the
original call option. Conversely, the portfolio will realize a gain (or loss) if
the premium it receives, less commission, for a closing put option is greater
(or less) than the premium it paid for the original put option. The portfolio
will realize a gain if a call option it has written lapses unexercised, and a
loss if a put option it has purchased lapses unexercised.
RISK FACTORS WITH FUTURES, OPTIONS ON FUTURES AND OPTIONS ON INDEXES
One risk of entering into financial futures contracts, buying options on such
contracts and buying options on financial indexes is that there may not be
enough buyers and sellers in the market to permit the Fund to close a position
when it wants to do so. In such event, besides continuing to be subject to the
margin requirements, the Fund would experience a gain or loss to the extent that
the price movement of the securities subject to the hedge differed from the
position. To limit the risk, the Fund will invest only where there is an
established secondary market.
A risk applicable to both futures contracts and related options is that changes
in the value of the contracts or option may not correlate with changes in the
underlying financial index or with changes in the value of the securities
subject to hedge or both. This failure may be due, in part, to temporary
activity of speculators in the futures markets. To the extent there is not a
perfect correlation, changes in the value of the Fund's assets would not be
offset by change in the value of the contracts and options it had bought.
When the Fund buys an option on a futures contract or an option on a financial
index, its risk of loss is limited to the amount of the premium paid. When the
Fund enters into a futures contract, there is no such limit. However, the loss
on an options contract would exceed that of a futures contract if the change in
the value of the index does not exceed the premium paid for the option.
The success of a hedge depends upon the Adviser's ability to predict increases
or decreases in the relevant financial index. If this expectation proves
incorrect, the Fund could suffer a loss, and would be better off if those
futures contracts or options had not been purchased. The skills involved in
determining whether to enter into a futures contract or purchase or sell an
option are different from those involved in determining whether to buy or sell a
security. The Adviser has had only limited experience using financial futures
contracts, options on financial futures and options on financial indexes.
Because of the low margin deposits required, futures trading involves a high
degree of leverage. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial gain or loss. A purchase or
sale of a futures contract may result in losses in excess of the amount invested
in the futures contract. However, the Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no more
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures and subjecting some futures
traders to substantial losses.
RISK FACTORS WITH FOREIGN INVESTMENTS
Investments in foreign securities involve considerations not normally associated
with investing in domestic issuers. Such factors include changes in currency
exchange rates, currency exchange control regulations, the possibility of
seizure or nationalization of companies, political or economic instability,
imposition of unforeseen taxes, the possibility of financial information being
difficult to obtain or difficult to interpret under foreign accounting
standards, the necessity of trading in markets that in relation to U.S. markets
may be less efficient and have available less information concerning issuers, or
the imposition of other restraints that might adversely affect investments.
In selecting foreign investments, the Fund seeks to minimize these factors. It
seeks to invest in securities having investment characteristics and qualities
comparable to the kinds of domestic securities in which it invests. Securities
prices in developing countries can be significantly more volatile than in
developed countries, reflecting the greater uncertainties of investing in lesser
developed markets and economies. In particular, developing countries may have
relatively unstable governments, and may present the risk of nationalization of
businesses, expropriation, confiscatory taxation or, in certain instances,
reversion to closed market, centrally planned economies. Such countries may also
have restrictions on foreign ownership or prohibitions on the repatriation of
assets, and may have less protection of property rights than developed
countries. The economies of developing countries may be predominantly based on
only a few industries or dependent on revenues from particular commodities or on
international aid or development assistance, may be highly vulnerable to changes
in local or global trade conditions, and may suffer from extreme and volatile
debt burdens or inflation rates. In addition, securities markets in developing
countries may trade a small number of securities and may be unable to respond
effectively to increased trading volume, potentially resulting in a lack of
liquidity and in volatility in the price of securities traded on those markets.
Also, securities markets in developing countries typically offer less regulatory
protection for investors. In the past, U.S. government policies have discouraged
or restricted certain investments abroad by investors such as the Fund. Although
the Fund is unaware of any current restrictions, these policies could be
reinstituted.
Since investments in foreign securities, other than U.S. dollar denominated
securities, involve currencies of foreign countries, the value of a portfolio's
assets, as measured in U.S. dollars may be affected favorably or unfavorably by
changes in currency exchange rates and in currency exchange control regulations.
FOREIGN CURRENCY HEDGING TRANSACTIONS
In order to hedge against changes in the exchange rates of foreign currencies in
relation to the U.S. dollar, each portfolio, other than the Money Market
Portfolio, may engage in forward foreign currency contracts, foreign currency
options and foreign currency futures contracts in connection with the purchase,
sale or ownership of a specific security. A forward contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. In this manner, a portfolio
may obtain protection against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the foreign currency during the
period between the date the security is purchased or sold and the date upon
which payment is made or received. Although such contracts tend to minimize the
risk of loss due to the decline in the value of the hedged currency, at the same
time they tend to limit any potential gain which might result should the value
of such currency increase.
At the consummation of a forward contract for delivery by a portfolio of a
foreign currency, the portfolio may either make delivery of the foreign currency
or terminate its contractual obligation to deliver the foreign currency by
purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the portfolio chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of its securities denominated in such currency or
through conversion of other portfolio assets into such currency. It is
impossible to forecast the market value of portfolio securities at the
expiration of the forward contract. Accordingly, it may be necessary for the
portfolio to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency the portfolio is obligated to deliver, and if a
decision is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary for the portfolio to sell on the spot market
some of the foreign currency received on the sale of its hedged security if the
security's market value exceeds the amount of foreign currency the portfolio is
obligated to deliver.
Buyers and sellers of foreign currency options and futures contracts are subject
to the same risks previously described with respect to options and futures
generally (see "Risk Factors with Options" and "Risk Factors with Futures,
Options on Futures and Options on Indexes," above). In addition, settlement of
currency options and futures contracts with respect to most currencies must
occur at a bank located in the issuing nation. The ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market that may not always be available. Currency rates may fluctuate based on
political considerations and governmental actions as opposed to purely economic
factors.
Predicting the movements of foreign currency in relation to the U.S. dollar is
difficult and requires different skills than those necessary to predict
movements in the securities market. There is no assurance that the use of
foreign currency hedging transactions can successfully protect a portfolio
against loss resulting from the movements of foreign currency in relation to the
U.S. dollar. These methods of protecting the value of a portfolio's securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which can be achieved at some future point in time.
16
<PAGE> 17
RISKS RELATED TO HEDGING TECHNIQUES. The use for hedging purposes of options and
futures contracts on securities and foreign currencies involves certain risks,
including whether the Adviser or a sub-adviser will be able to predict correctly
the direction of movement of stock prices, interest rates, currency prices and
other economic factors, whether sufficient market liquidity will exist to permit
a portfolio to close out positions taken, and whether price movements of
portfolio securities subject to a hedge follow price movements of securities or
currencies underlying options and futures contracts, none of which can be
assured. A discussion of the risks involved in the use of such hedging
techniques is contained in the Statement of Additional Information.
RISKS RELATED TO LEVERAGING. The Capital Appreciation, Aggressive Growth, Growth
& Income, Strategic Income, Small Cap Growth, High Income Bond, Equity Income
and Blue Chip Portfolios may borrow for investment purposes. This borrowing,
which is known as leveraging, generally will be unsecured, except to the extent
the Portfolios enter into the reverse repurchase agreements described below.
The Investment Company Act of 1940 requires these Portfolios to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, a Portfolio may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time.
Borrowing creates an opportunity for increased net income to the Portfolios but,
at the same time, creates special risk considerations. For example, leveraging
may exaggerate the effect on net asset value of any increase or decrease in the
market value of a Portfolio's securities. To the extent the income derived from
securities purchased with borrowed funds exceeds the interest a Portfolio will
have to pay, that Portfolio's net income will be greater than if borrowing were
not used. Conversely, if the income from the assets retained with borrowed funds
is not sufficient to cover the cost of borrowing, the net income of that
Portfolio will be less than if borrowing were not used and , therefore, the
amount available for distribution to shareholders as dividends will be reduced.
The Portfolios also may be required to maintain minimum average balances in
connection with borrowing or to pay a commitment or other fee to maintain a line
of credit; either of these requirements would increase the cost of borrowing
over the stated interest rate.
Among the forms of borrowing in which the Capital Appreciation, Aggressive
Growth, Growth & Income, Strategic Income, Small Cap Growth, High Income Bond,
Equity Income and Blue Chip Portfolios may engage is the entry into reverse
repurchase agreements with banks, brokers or dealers. These transactions
involve the transfer by a Portfolio of an underlying debt instrument in return
for cash proceeds based on a percentage of the value of the security. The
Portfolio retains the right to receive interest and principal payments on the
security. At an agreed upon future date, the Portfolio repurchases the security
at an agreed-upon price. In certain types of agreements, there is no agreed
upon repurchase date, and interest payments are calculated daily, often based
on the prevailing U.S. government securities or other high-quality liquid debt
securities at least equal to the aggregate amount of its reverse repurchase
obligations, plus accrued interest, in certain cases, in accordance with
releases promulgated by the Securities and Exchange Commission. The Commission
views reverse repurchase transactions as collateralized borrowings by the
Portfolio. These agreements, which are treated as if reestablished each day,
can provide the Portfolios with a flexible borrowing tool.
RISKS RELATED TO SHORT SALES. From time to time, the Aggressive Growth,
Strategic Income, High Income Bond, Equity Income and Blue Chip Portfolios may
engage in short sales which are transactions in which the Portfolio sells a
security it does not own in anticipation of a decline in the market value of
that security. To complete such a transaction, the Portfolio must borrow the
security to make delivery to the buyer. The Portfolio then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Portfolio. Until the security is replaced,
the Portfolio is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. To borrow the security, the
Portfolio also may be required to pay a premium, which would increase the cost
of the security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
17
<PAGE> 18
It is anticipated that the frequency of short sales will vary substantially
under different market conditions. As an operating policy of the Aggressive
Growth, Strategic Income, High Income Bond, Equity Income and Blue Chip
Portfolios which may be changed without shareholder approval, no securities
will be sold short if, after effect is given to that short sale, the total
market value of all securities sold short would exceed 25% of the value of the
Portfolio's net assets. These Portfolios may not sell short the securities of
any single issuer listed on a national securities exchange to the extent of more
than 2% of the value of the Portfolio's net assets. These Portfolios may not
sell short the securities of any class of an issuer to the extent, at the time
of the transaction, of more than 2% of the outstanding securities of that class.
The Aggressive Growth, Strategic Income, High Income Bond, Equity Income and
Blue Chip Portfolios will incur a loss as a result of a short sale if the price
of the security increases between the date of the short sale and the date on
which the Portfolio replaces the borrowed security; conversely, the Portfolio
will realize a gain if the security declines in price between those dates. This
result is the opposite of what one would expect from a cash purchase of a long
position in a security. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium or amounts in lieu
of interest the Portfolio may be required to pay in connection with a short
sale.
RISKS RELATED TO REAL ESTATE SECURITIES. Although real estate investments will
be limited to securities secured by real estate or interests therein or issued
by companies that invest in real estate or interests therein, these investments
may be subject to risks associated with direct ownership of real estate. These
include declines in the value of real estate, risks related to general and local
economic conditions and increases in interest rates. Real estate investment
trusts ("REITs") are often not diversified and are, therefore, subject to the
risk of financing projects. They may also be subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. Those REITs that hold
equity positions in real estate may be affected by any changes in the value of
the underlying property. Those REITs that lend money to property developers may
be affected by the quality of any credit extended.
REITs are pooled investment vehicles which invest primarily in income producing
real estate, or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs, or hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Hybrid
REITs invest their assets in both real property and mortgages. REITs are not
taxed on income distributed to owners provided they comply with several
requirements of the Internal Revenue Code.
REITs may subject a portfolio to certain risks associated with the direct
ownership of real estate. These risks include, among others: possible declines
in the value of real estate; possible lack of availability of mortgage funds;
extended vacancies of properties; risks related to general and local economic
conditions; overbuilding; increases in competition, property taxes and operating
expenses; changes in zoning laws; costs resulting from the clean-up of, and
liability to third parties for damages resulting from, environmental problems;
casualty or condemnation losses; uninsured damages from floods, earthquakes or
other natural disasters; limitations on and variations in rents; and changes in
interest rates.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs
may be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified, and
are subject to heavy cash flow dependency, default by borrowers,
self-liquidation and the possibilities of failing to qualify for the exemption
from tax for distributed income under the Internal Revenue Code. REITs
(especially mortgage REITs) are also subject to interest rate risk.
RISKS RELATED TO PRECIOUS METALS. The prices of precious metals and precious
metal securities have historically been subject to high volatility. The earnings
and financial condition of precious metal companies may be adversely affected by
volatile precious metal prices.
MANAGEMENT OF THE FUND
The Fund's Board of Directors is responsible for directing the management of the
business and affairs of the Fund. The Board of Directors has the power to amend
the Fund's By-laws, to elect its officers, to declare and pay dividends, and to
exercise all the powers of the Fund except those reserved to the shareholders.
The Adviser is a wholly-owned subsidiary of ONLI and is located at One Financial
Way, Cincinnati, Ohio 45242. It has served as the Fund's investment adviser
since May 1, 1996. Prior to that date, the Fund's investment adviser was O.N.
Investment Management Company, an indirect wholly-owned subsidiary of ONLI
which, like the Adviser, made use of ONLI's investment personnel and
administrative systems.
The Adviser engages sub-advisers to direct the investments and reinvestments of
certain portfolios.
SGAM, located at 1221 Avenue of the Americas, New York, NY 10020, is owned by
Societe Generale, one of the largest banks in Europe. SGAM and its predecessors
have been investment advisers to international mutual funds since 1970. It has
managed the assets of the International Portfolio since 1993, and the Global
Contrarian Portfolio since 1995.
TRPA, located at 100 East Pratt Street, Baltimore, Maryland 21202, manages
assets for various individual and institutional investors, particularly the T.
Rowe Price group of mutual funds. It is the successor to an investment firm
founded in 1937. It has managed the assets of the Capital Appreciation
Portfolio since 1994.
FAM, located at 2930 East Third Avenue, Denver, Colorado 80206, manages the
assets of the Founders group of mutual funds as well as private accounts. It was
established in 1938 and, in 1998, it became a subsidiary of Mellon Bank. It has
managed the assets of the Small Cap Portfolio since 1994.
18
<PAGE> 19
SCM, located at 100 Heritage Reserve, Milwaukee, Wisconsin 53051, manages the
assets of the Strong group of mutual funds as well as pension funds and private
accounts. It was established in 1974. It has managed the assets of the
Aggressive Growth Portfolio since 1995.
PBA, located at 825 Duportail Road, Wayne, Pennsylvania 19087, is controlled by
United Asset Management Corp. located in Boston, Massachusetts. With its
predecessors, PBA has been an investment adviser since 1982 and it manages the
PBHG mutual funds. It has managed the assets of the Core Growth Portfolio since
1997.
RSIM, located at 555 California Street, San Francisco, California 94104, has
been an investment adviser since 1978. It specializes in growth companies and
manages the Robertson Stephens mutual funds as well as private and institutional
asset pools. It became a subsidiary of BankAmerica in 1997. It has managed the
assets of the Growth & Income Portfolio since 1997, and the Small Cap Growth
Portfolio since 1998.
Star, located at 425 Walnut Street, Cincinnati, Ohio 45202, is a national bank
founded in 1863. It is the largest bank and trust organization of StarBanc
Corporation. It has managed commingled funds since 1957. It has managed the
assets of the Strategic Income, Stellar and Relative Value Portfolios since
1997.
FIC, located at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222, is a subsidiary of Federated Investors and, together with
other Federated affiliates, it manages the assets of the Federated group of
mutual funds. FIC has been an investment adviser since 1989 and has managed the
assets of the High Income Bond, Equity Income and Blue Chip Portfolios since
1998.
The individuals primarily responsible for the day-to-day management of the
Fund's portfolios are Joseph Brom, Michael Boedeker, Stephen Williams, Douglas
Hundley, Keith Hanson, Jean-Marie Eveillard, Richard Howard, Michael Haines,
Richard Strong, James McCall, Ellen McGee, John Wallace, Randolph Bateman,
Joseph Belew, Kirk Mentzer, Peter Sorrentino, James Callinan, Mark Durbiano,
Stephanie Bachhuber, Linda Duessel, Stephen Lehman, Scott Schermerhorn and
Michael Donnelly.
Joseph Brom is president of the Adviser and senior vice president and chief
investment officer of ONLI. He oversees the management of the Equity, Money
Market, Bond, Omni, S&P 500 Index and Social Awareness Portfolios. He is a
chartered financial analyst with a bachelor's degree in economics and finance
and a law degree from the University of Wisconsin. He has been an investment
officer of ONLI since 1975 and previously had 15 years of experience in
securities management.
Michael Boedeker, a vice president of the Adviser, has managed the Bond
Portfolio since 1989. He is a chartered financial analyst with a bachelor's
degree in business and a master of business administration degree in finance
from Indiana University. He has been vice president of fixed income securities
for ONLI since 1989 and previously had over 20 years of experience in fixed
income securities and mutual fund management, most recently as senior vice
president and chief investment officer of Mutual Security Life Insurance Co. for
more than 5 years.
Stephen Williams, a vice president of the Adviser, has managed the Equity and
Omni Portfolios since 1987. He has a bachelor's degree in finance from the
University of Cincinnati. He has been vice president of equity securities for
ONLI since 1997 and was an investment analyst and director of securities for
ONLI for 20 years before that.
Douglas Hundley, a vice president of the Adviser, has been the portfolio manager
of the S&P 500 Index Portfolio since its inception in 1997, and he has managed
the Money Market Portfolio since 1996. He has a bachelor's degree in accounting
and economics from Northern Kentucky University, a master of business
administration degree in finance from the University of Texas, and is a
certified public accountant in Ohio. He has been an investment officer of ONLI
since 1995. For more than seven years prior to that he was an assistant
portfolio manager for the Metropolitan Life Insurance Co. and was a financial
analyst for Star for a year.
Keith Hanson, a vice president of the Adviser, has been the portfolio manager
of the Social Awareness Portfolio since its inception in 1997. He is a
chartered financial analyst with a bachelor's degree in business administration
from Marquette University. He has been an investment officer of ONLI since
1994. For a year prior to that he was a research analyst in the valuation of
small businesses for Blum & Colombe, SC, and for seven years before that he was
a securities analyst for Johnson Asset Management.
Jean-Marie Eveillard, president of SGAM, has managed the International Portfolio
since its inception in 1993 and the Global Contrarian Portfolio since its
inception in 1995. He is a graduate of the Ecole des Hautes Etudes Commerciales
in Paris. He has been president of SoGen International Fund since 1984 and for
21 years prior to that had been a securities analyst and mutual fund manager of
Societe Generale and SoGen International Fund.
Richard Howard, president of the T. Rowe Price Capital Appreciation Fund and a
vice president of TRPA, has been the portfolio manager of the Capital
Appreciation Portfolio since its inception in 1994. He is a chartered financial
analyst with a bachelor's degree in engineering from Millikin University and a
master of business administration degree from Harvard. He joined TRPA in 1982
and previously worked as an industry specialist for Fidelity Management and
Research and for CG Investment Management Company.
Michael Haines, senior vice president of investment of FAM, has been the
portfolio manager of the Small Cap Portfolio since its inception in 1994. He
has a bachelor's degree from the Colorado College and a master of business
administration from the University of Denver. He has been a portfolio manager
for FAM since 1990 and for 5 years prior to that was a financial analyst for
FAM.
19
<PAGE> 20
Richard Strong, chairman of the board of SCM, has been the portfolio manager of
the Aggressive Growth Portfolio since its inception in 1995. He has a
bachelor's degree from Baldwin Wallace College and a master's degree in finance
from the University of Wisconsin. He founded SCM in 1974 after 8 years of
investment experience with several other firms.
James McCall, a portfolio manager with PBA since 1994, co-manages the Core
Growth Portfolio, being primarily responsible for the Portfolio's large and mid-
cap investments. He has a bachelor's degree from the Philadelphia College of
Pharmacy and Science and masters degrees in pharmacy and business administration
from the University of Utah. Prior to joining PBA, he spent nine years as a vice
president and portfolio manager with First National Bank of Maryland and as
mutual fund portfolio manager for Provident Mutual Management Co. He spent ten
years as a pharmacist before entering the investment field.
Ellen McGee co-manages the Core Growth Portfolio, being primarily responsible
for the Portfolio's small and micro-cap investments. She is a chartered
financial analyst and has been a portfolio manager with PBA since 1997. For
three years prior to that she was a senior portfolio manager for First Union
National Bank and NationsBank, and she spent eight years before that managing
institutional portfolios for First National Bank of Maryland. Ms. McGee has a
bachelor's degree from Rutgers University.
John Wallace, a managing director of RSIM, has been the portfolio manager of
the Growth & Income Portfolio since its inception in 1997. He has a bachelor's
degree in Spanish and Anthropology from the University of Idaho and a master of
business administration degree from Pace University. He joined RSIM in 1995.
For nine years prior to that he was a mutual fund portfolio manager for
Oppenheimer Management Corp. Prior to that, he had been the co-founder, owner
and operator of an Ecuadorian export firm.
Randolph Bateman, senior vice president and chief investment officer of Star's
trust financial services group, manages the foreign bonds component of the
Strategic Income Portfolio and the foreign securities component of the Stellar
Portfolio. He oversees investment policy and research for the Star trust group's
capital management division. He is a chartered financial analyst with a
bachelor's degree in economics from North Carolina State University. He has been
an investment officer of Star since 1988. Prior to that, he had 17 years of
investment experience including serving as president of MPACT Securities.
Joseph Belew, vice president and trust officer of Star, manages the Relative
Value Portfolio. He has a bachelor's degree in business management from Belmont
College. He has been a trust officer and investment manager of Star since 1979.
Kirk Mentzer, senior trust officer and director of fixed income research for
the capital management division of Star, manages the domestic and structured
fixed income components of the Strategic Income Portfolio and the domestic
fixed income and REIT components of the Stellar Portfolio. He also manages the
money market components of the Strategic Income, Stellar and Relative Value
Portfolios. He is responsible for fixed income investment policy and strategy
for Star's capital management division. He has a bachelor's degree in finance
and insurance from the University of Cincinnati and a master's degree in
finance from Xavier University. He has been a trust officer for Star since 1989.
Peter Sorrentino, vice president and director of portfolio management and
research for the capital management division of Star, manages the domestic
equity components of the Strategic Income and Stellar Portfolios. He is a
chartered financial analyst and has bachelor's degrees in both finance and
accounting from the University of Cincinnati. He has been an investment officer
of Star since 1996 and for 9 years prior to that was a vice president and
regional director of portfolio management for Bank One Investment Advisers.
James Callinan is the portfolio manager of the Small Cap Growth Portfolio. He
joined RSIM as the portfolio manager of its Emerging Growth Fund in 1996. For
ten years before that he was employed by Putnam Investments, the last two years
of which he served as portfolio manager of the OTC Putnam Emerging Growth Fund.
He is a chartered financial analyst with a bachelor's degree in economics from
Harvard College, a master of science in accounting from New York University and
a master of business administration degree from Harvard Business School.
Mark Durbiano, a senior vice president of FIC since 1996 (and a vice president
for 8 years prior to that), co-manages the High Income Bond Portfolio. He has
been with FIC and its affiliates since 1982 and has managed the Federated High
Income Bond Fund II since 1994. He is a chartered financial analyst with a
bachelor's degree in economics from Dickinson College and a master of business
administration in finance from the University of Pittsburgh.
Stephanie Bachhuber co-manages the High Income Bond Portfolio. She has been an
assistant vice president of FIC since 1996 and was an investment analyst for
three years prior to that. Ms. Bachhuber is a chartered financial analyst with a
bachelor's degree in management from Tulane University and a master of business
administration degree in finance from Duke University.
Linda Duessel, a vice president of FIC since 1995 (and an assistant vice
president for four years prior to that), co-manages the Equity Income Portfolio.
Ms. Duessel is a chartered financial analyst with a bachelor's degree in
economics from the University of Pittsburgh and a master of science in
industrial administration from Carnegie Mellon University. She is also a
certified public accountant.
Seven Lehman, a vice president of FIC since 1997, co-manages the Equity Income
Portfolio. For twelve years prior to 1997, he served as a portfolio manager,
then vice president and senior portfolio manager, at First Chicago NBD
Investment Management Company. Mr. Lehman is a chartered financial analyst with
a bachelor's degree in economics from Ripon College and a master's degree from
the University of Chicago.
Scott Schermerhorn, a vice president of FIC since 1996, co-manages the Blue Chip
Portfolio. For six years prior to 1996, he was a senior vice president and
senior investment officer at J.W. Seligman & Co. Mr. Schermerhorn received his
bachelor's degree in finance from Boston University and a master of business
administration in finance and international business from Seton Hall University.
Michael Donnelly, a vice president of FIC since 1994 (and an investment analyst
and assistant vice president for five years prior to that), co-manages the Blue
Chip Portfolio. He is a chartered financial analyst with a bachelor's degree in
economics from Georgetown University and a master of business administration
from the University of Virginia.
Under the Investment Advisory Agreement dated May 1, 1996, and supplemented
January 2, 1997 and May 1, 1998, the Adviser provides portfolio management and
investment advice to the Fund and administers its other affairs, subject to the
supervision of the Fund's Board of Directors. As compensation for its services
to the Equity, Bond, Omni and Social Awareness Portfolios, the Adviser is paid
fees at an annual rate of 0.60% of the first $100 million of each Portfolio's
net assets, 0.50% of the next $150 million, 0.45% of the next $250 million,
0.40% of the next $500 million, 0.30% of the next $1 billion and 0.25% of net
assets over $2 billion. For the Money Market Portfolio, the Adviser is paid a
fee at an annual rate of 0.30% of the first $100 million, 0.25% of the next
$150 million, 0.23% of the next $250 million, 0.20% of the next $500 million
and 0.15% of net assets over $1 billion. However, as to the Money Market
Portfolio, the Adviser is presently waiving any of its fee in excess of 0.25%.
For the International, Global Contrarian, Relative Value, Small Cap Growth and
Blue Chip Portfolios, the Adviser is paid fees at an annual rate of 0.90% of
each Portfolio's average daily net asset value.
20
<PAGE> 21
The Adviser is paid fees at an annual rate of 0.80% of the average daily net
asset value of each of the Capital Appreciation, Small Cap, Aggressive Growth
and Strategic Income Portfolios. The Adviser is paid fees at an annual rate of
0.95% of the first $150 million of the average daily net asset value of the Core
Growth Portfolio and 0.80% of net assets over $150 million. The Adviser is paid
fees at an annual rate of 0.85% of the first $200 million of the average daily
net asset value of the Growth & Income Portfolio and 0.80% of net assets over
$200 million. The Adviser is paid fees at an annual rate of 0.40% of the first
$100 million of the average daily net asset value of the S&P 500 Index
Portfolio, 0.35% of the next $150 million and 0.33% of net assets over $250
million. The Adviser is paid fees at an annual rate of 1.00% of the average
daily net asset value of the Stellar Portfolio. The Adviser is paid fees at an
annual rate of 0.75% of the average daily net asset value of each of the High
Income Bond and Equity Income Portfolios.
Pursuant to Sub-Advisory Agreements dated May 1, 1996, the Adviser (1) pays SGAM
fees at an annual rate of 0.75% of the International and Global Contrarian
Portfolios' average daily net asset value for directing the investment and
reinvestment of those Portfolios' assets, (2) pays TRPA a fee at an annual rate
of 0.70% of the first $5 million, and 0.50% of average daily net asset value in
excess of $5 million for directing the investment and reinvestment of the
Capital Appreciation Portfolio's assets and (3) pays SCM a fee at an annual
rate of 0.70% of the first $50 million and 0.50% of average daily net asset
value in excess of $50 million for directing the investment and reinvestment of
the Aggressive Growth Portfolio's assets. Pursuant to Sub-Advisory Agreements
dated January 2, 1997, the Adviser (1) pays PBA fees at an annual rate of 0.75%
of the first $50 million, 0.70% of the next $100 million, and 0.50% of average
daily net asset value in excess of $150 million for directing the investment
and reinvestment of the Core Growth Portfolio's assets, (2) pays Star a fee at
an annual rate of 0.55 % of the first $50 million and 0.50% of average daily
net asset value in excess of $50 million for directing the investment and
reinvestment of Strategic Income Portfolio assets, (3) pays Star a fee at an
annual rate of 0.75% of the first $50 million and 0.70% of average daily net
asset value in excess of $50 million for directing the investment and
reinvestment of Stellar Portfolio assets and (4) pays Star a fee at an annual
rate of 0.65% of the first $50 million and 0.60% of average daily net asset
value in excess of $50 million for directing the investment and reinvestment of
Relative Value Portfolio assets.
Pursuant to a Sub-Advisory Agreement dated October 1, 1997, the Adviser pays
RSIM a fee at an annual rate of 0.60% of the first $100 million, 0.55% of the
next $100 million, and 0.50% of average daily net asset value in excess of $200
million for directing the investment and reinvestment of the Growth & Income
Portfolio's assets. Pursuant to a Sub-Advisory Agreement dated April 1, 1998,
the Adviser pays FAM a fee at an annual rate of 0.65% of the first $75 million,
0.60% of the next $75 million, and 0.55% of average daily net asset value in
excess of $150 million for directing the investment and reinvestment of the
Small Cap Portfolio's assets. Pursuant to Sub-Advisory Agreements dated May 1,
1998, the Adviser (1) pays RSIM a fee at an annual rate of 0.64% of the first
$100 million, 0.60% of the next $100 million and 0.50% of the average daily net
asset value in excess of $200 million for directing the investment and
reinvestment of the Small Cap Growth Portfolio's assets, (2) pays FIC a fee at
an annual rate of 0.50% of the first $30 million, 0.40% of the next $20 million,
0.30% of the next 25 million, and 0.25% of average daily net asset value in
excess of $75 million for directing the investment and reinvestment of the High
Income Bond Portfolio's assets, and (3) pays FIC fees at an annual rate of 0.50%
of the first $35 million, 0.35% of the next $65 million and 0.25% of average
daily net asset value in excess of $100 million of each of the Equity Income and
Blue Chip Portfolios for directing the investment and reinvestment of those
Portfolios' assets.
Under a service agreement among the Fund, the Adviser and ONLI, the latter has
agreed to furnish the Adviser, at cost, such research facilities, services and
personnel as may be needed by the Adviser in connection with its performance
under the Investment Advisory Agreement. The Adviser reimburses ONLI for its
expenses in this regard.
The Fund also incurs other miscellaneous expenses for legal and accounting
services, registration and filing fees, custodial services and shareholder
services.
The Fund's transfer agent and Fund accounting agent is American Data Services,
Inc., 150 Motor Parkway, Suite 109, Hauppsuge, New York 11788. The custodian for
those portfolios other than the International and Global Contrarian Portfolios
is Star, which is located at 425 Walnut Street, Cincinnati, Ohio 45202. The
custodian for the International and Global Contrarian Portfolios is Investors
Fiduciary Trust Company, 801 Pennsylvania Street, Kansas City, Missouri. For
assets held outside the United States, the custodians enter into subcustodial
agreements, subject to approval by the Board of Directors.
CAPITAL STOCK
The Fund's authorized capital consists of 250 million shares of capital stock
with a par value of $1 per share; 20 million of such shares are allocated to
each of the Equity, Omni and International Portfolios, and 10 million of such
shares are allocated to each of the other portfolios. These shares may be
reallocated by the Board of Directors to another of the existing portfolios or
to any new portfolio.
All shares of all portfolios have equal voting rights, except that only shares
of a particular portfolio are entitled to vote on matters pertaining only to
that portfolio. Pursuant to the Investment Company Act of 1940 and the rules and
regulations thereunder, certain matters approved by a vote of all Fund
shareholders may not be binding on a portfolio whose shareholders have not
approved such matter.
21
<PAGE> 22
Each issued and outstanding share is entitled to one vote and to participate
equally in dividends and distributions declared by the respective portfolio and
in net assets of such portfolio remaining upon liquidation or dissolution after
satisfaction of outstanding liabilities. The shares of each portfolio, when
issued, will be fully paid and non-assessable, have no preemptive, conversion,
cumulative dividend or similar rights, and are freely transferable. Fund shares
do not have cumulative voting rights, which means that the holders of more than
half of the Fund shares voting for election of directors can elect all of the
directors if they so choose. In such event, the holders of the remaining shares
would not be able to elect any directors.
All of the outstanding Fund shares are owned of record by ONLI and ONLAC and are
held in their various separate accounts. The shares held in connection with
those separate accounts are voted by ONLI or ONLAC in accordance with
instructions received from the owners of variable contracts issued in connection
with such separate accounts and persons receiving payments under the variable
contracts. Fund shares attributable to contracts owned by ONLI and ONLAC, and
Fund shares not attributable to variable contracts, will be voted in proportion
to instructions received from all variable contract owners.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each portfolio seeks to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code. It is the Fund's policy to comply
with the provisions of the Code regarding distribution of investment income and
net realized capital gains so that the Fund will not be subject to federal
income tax on amounts distributed. Consequently, the Fund distributes to its
shareholders each year substantially all of its net investment income and net
realized capital gains (if any). For the Money Market Portfolio, all of the
undistributed net investment income is determined and paid as a dividend to
shareholders of record immediately before each computation of the net asset
value of Money Market shares. For the other portfolios, dividends representing
net investment income will normally be distributed quarterly and any net
realized capital gains will be distributed annually. However, the Fund's Board
of Directors may declare such dividends at more frequent intervals. Dividends
and distributions are automatically reinvested in additional shares of their
respective portfolios at net asset value without a sales charge unless a
shareholder requests that they be paid in cash.
PURCHASE AND REDEMPTION OF SHARES
Fund shares are sold without a sales charge and may be redeemed at their net
asset value next computed after a purchase or redemption order is received by
the Fund. (The net asset value of the Money Market Portfolio is normally $10 per
share.) Depending upon the net asset values at that time, the amount paid upon
redemption may be more or less than the cost of the shares redeemed. Payment for
shares redeemed will be made as soon as possible, but in any event within seven
days after evidence of ownership of the shares is tendered to the Fund except in
extraordinary circumstances as described in the Statement of Additional
Information.
The net asset value of the Fund's shares is determined on each day on which an
order for purchase or redemption of the Fund's shares is received and there is a
sufficient degree of trading in portfolio securities that the current net asset
value of its shares might be materially affected. Such determination is made as
of 4:00 p.m. Eastern time on each business day. The net asset value of each
portfolio is computed by dividing the value of the securities in that portfolio
plus any cash or other assets less all liabilities of the portfolio, by the
number of shares outstanding for that portfolio.
Shares of one portfolio may be exchanged for shares of another portfolio of the
Fund on the basis of the relative net asset values next computed after an
exchange order is received by the Fund.
22
<PAGE> 23
FUND PERFORMANCE
From time to time, the current yield, average annual total return and cumulative
total returns for the portfolios will be advertised. The results might be
compared to other similar mutual funds or unmanaged indices. Management's
discussion and analysis of the Fund's performance is included in the Fund's
most-recent annual report and is available free upon request.
Total return for a portfolio reflects the sum of all of its earnings plus any
changes in the value of its assets, reduced by all expenses accrued during a
measurement period. For this purpose, it is assumed that all dividends and
capital gains distributions are reinvested. The average annual total return is
expressed as a percentage of an amount invested for a one-year period. Each
portfolio's average return is computed by a formula in which a hypothetical
initial investment of $1,000 is equated to an ending redeemable value from the
inception of the portfolio for one-, five- and ten-year periods. Cumulative
total return reflects a portfolio's aggregate performance, expressed as a dollar
amount change, from the beginning to the end of the period.
Percentage changes in net asset value per share and total returns quoted for a
portfolio include the effect of deducting that portfolio's expenses, but do not
include charges and expenses attributable to any particular insurance product.
The amount by which variable annuity separate account charges and expenses would
reduce Fund's total return may be demonstrated by comparing the Fund's total
return to that of the variable annuity separate account for the same period.
Variable life insurance separate account charges vary significantly, depending
upon a variety of demographic factors (such as age, sex and health status) and
several contract-specific factors (such as stated amount of death benefit), but
in all cases would have the result of lowering the total return from the Fund.
From time to time the annualized yield and "effective" yield will be quoted for
the Money Market Portfolio. The Money Market Portfolio's yield refers to the
income generated by an investment in the Portfolio over the seven-day period
indicated. This income is then "annualized" by assuming that the same amount of
income generated by the Portfolio that week is generated over a 52-week period
and is shown as a percentage of the investment. "Effective" yield is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
All performance quotations are based on historical investment performance and
are not intended to indicate future performance
ABOUT THE S&P 500
The S&P 500 is a widely publicized index that tracks 500 companies traded on the
New York and American Stock Exchanges and in the over-the-counter market. It is
weighted by market value so that each company's stock influences the S&P 500 in
proportions to its relative market capitalization. Most of the stocks in the S&P
500 are issued by companies that are among the 500 largest in the United States
in terms of aggregate market value. However, for diversification purposes, some
stocks of smaller companies are included in the S&P 500.
"Standard & Poor's (R)," "S&P (R)," "S&P 500 (R)" and "Standard & Poor's 500"
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by the Adviser. The S&P 500 Index Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's ("S&P") and S&P makes no representation regarding
the advisability of investing in the S&P 500 Index Portfolio. S&P makes no
representation or warranty, express or implied, to the owners of the Portfolio
or any member of the public regarding the advisability of investing in
securities generally or in the Portfolio particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship to
the Adviser is the licensing of certain trademarks and trade names of S&P and of
the S&P 500 Index which is determined, composed and calculated by S&P without
regard to the Adviser or the Portfolio. S&P has no obligation to take the needs
of the Adviser or the owners of the Portfolio into consideration in determining,
composing
23
<PAGE> 24
or calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Portfolio or
the timing of the issuance or sale of the Portfolio or in the determination or
calculation of the equation by which the Portfolio is to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE ADVISER, OWNERS OF THE PORTFOLIO, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
24
<PAGE> 25
OHIO NATIONAL FUND, INC.
SUPPLEMENT DATED SEPTEMBER 1, 1998 TO THE
PROSPECTUS DATED MAY 1, 1998
The prospectus is changed in the following particulars:
The fifth paragraph on page 31 is changed to read as follows:
Constatine Kartsonas has co-managed the High Income Bond Portfolio since August
1998. Mr. Kartsonas joined FIC in 1994 as an investment analyst and has been an
assistant vice president of FIC since March 1997. From 1990 to 1993, Mr.
Kartsonas served as an operations analyst at Lehman Brothers. He received his
master's degree in business administration with a concentration in economics
from the University of Pittsburgh.
The following is added to the second paragraph on page 32:
The Sub-Advisory Agreement with FAM has been amended to provide for the Adviser
to pay FAM fees accruing at the following rates on and after October 1, 1998:
0.625% of the first $75 million of the average daily net assets of the Small
Cap Portfolio, 0.55% of the next $75 million, 0.50% of the next $150 million
and 0.40% of all average daily net assets in excess of $300 million.
