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OHIO NATIONAL FUND, INC.
One Financial Way
Montgomery, Ohio 45242
Telephone (800) 366-6654
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 3, 2000
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the prospectus of Ohio National Fund, Inc. (the "Fund")
dated May 1, 1999 and supplemented January 3, 2000.
To obtain a free copy of the Fund's prospectus, write or call the Fund at the
above address.
Table of Contents
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Page
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The Fund.....................................................................3
Fund Performance.............................................................4
Current Yield of Money Market Portfolio
Total Return
Portfolio Turnover
Investment Objectives and Policies...........................................9
Money Market Instruments
Investment Restriction......................................................10
Hedging Transactions
Covered Call Options and Put Options
Futures Contracts
Options on Futures Contracts and Financial Indexes
Foreign Currency Hedging Transactions
Short Sales
Borrowing Money
Zero-Coupon and Pay-in-kind Debt Securities
Management of the Fund .....................................................23
Directors and Officers
Compensation of Directors
Shareholders' Meetings
Investment Advisory and Other Services
Brokerage Allocation .......................................................29
Purchase and Redemption of Shares ..........................................30
Tax Status .................................................................31
Experts.....................................................................32
Legal Counsel...............................................................32
The S&P 500 ................................................................32
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Appendix ...................................................................34
Debt Security Ratings
Financial Statements .......................................................39
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THE FUND
The Fund is an open-end diversified management investment company which
currently consists of 20 separate portfolios - the Equity portfolio, the Money
Market portfolio, the Bond portfolio, the Omni portfolio, the International
portfolio, the Capital Appreciation portfolio, the Small Cap portfolio, the
International Small Company portfolio, the Aggressive Growth portfolio, the Core
Growth portfolio, the Growth & Income portfolio, the S&P 500 Index portfolio,
the Social Awareness portfolio, the Strategic Income portfolio, the Firstar
Growth & Income portfolio, the Relative Value portfolio, the Capital Growth
portfolio, the High Income Bond portfolio, the Equity Income portfolio and the
Blue Chip portfolio. At present, the Fund sells its shares only to separate
accounts of The Ohio National Life Insurance Company ("ONLI") and Ohio National
Life Assurance Corporation ("ONLAC") to support certain benefits under variable
contracts issued by ONLI and ONLAC. In the future, Fund shares may be used for
other purposes, but unless there is a change in applicable law, they will not be
sold directly to the public.
The Fund is a Maryland corporation. It was created on November 2, 1982 when O.N.
Fund, Inc. was merged into O.N. Market Yield Fund, Inc. The shares of O.N. Fund,
Inc. were converted to an equal number of shares of the Equity portfolio, all
shares of O.N. Market Yield Fund, Inc. were converted into an equal number of
shares of the Money Market portfolio, and the Bond portfolio was created. The
Omni portfolio was added in 1984, the International portfolio in 1993, the
Capital Appreciation and Small Cap portfolios in 1994, the International Small
Company and Aggressive Growth portfolios in 1995, the Core Growth, Growth &
Income, S&P 500 Index, Social Awareness, Strategic Income, Firstar Growth &
Income and Relative Value portfolios in 1997, and the Capital Growth, High
Income Bond, Equity Income and Blue Chip portfolios in 1998. The investments
held by each portfolio are maintained separately from those held by the other
portfolios.
The investment and reinvestment of the assets of the Money Market, Bond, Omni,
S&P 500 Index and Social Awareness portfolios is directed by the Fund's
investment adviser, Ohio National Investments, Inc. (the "Adviser"), a
wholly-owned subsidiary of ONLI. The principal business address of ONLI, ONLAC
and the Adviser is One Financial Way, Montgomery, Ohio 45242.
The investment and reinvestment of Equity portfolio assets is managed by Legg
Mason Fund Adviser, Inc. ("Legg Mason") as sub-adviser. The principal business
address of Legg Mason is 100 Light Street, Baltimore, Maryland 21202.
The investment and reinvestment of International and International Small Company
portfolio assets is managed by Federated Global Investment Management Corp.
("Federated Global") as sub-adviser. The principal business address of Federated
Global is 175 Water Street, New York, New York 10038.
The investment and reinvestment of Capital Appreciation portfolio assets is
managed by Jennison Associates LLC ("Jennison") as sub-adviser. The principal
business address of Jennison is 466 Lexington Avenue, New York, New York 10017.
The investment and reinvestment of Small Cap portfolio assets is managed by
Founders Asset Management LLC ("Founders") as sub-adviser. The principal
business address of Founders is 2930 East Third Avenue, Denver, Colorado 80206.
The investment and reinvestment of Aggressive Growth portfolio assets is managed
by Janus Capital Corporation ("Janus") as sub-adviser. The principal business
address of Janus is 100 Fillmore Street, Denver, Colorado 80206.
The investment and reinvestment of Core Growth portfolio assets is managed by
Pilgrim Baxter & Associates, Ltd. ("Pilgrim Baxter") as sub-adviser. The
principal business address of Pilgrim Baxter is 825 Duportail Road, Wayne,
Pennsylvania 19087.
The investment and reinvestment of Growth & Income and Capital Growth portfolio
assets is managed by RS Investment Management Co. LLC. ("RSIM") as sub-adviser.
The principal business address of RSIM is 555 California Street, San Francisco,
California 94104.
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The investment and reinvestment of Strategic Income and Relative Value portfolio
assets is managed by Firstar Bank, N.A. ("Firstar") as sub-adviser. The
principal business address of Firstar is 425 Walnut Street, Cincinnati, Ohio
45202.
The investment and reinvestment of Firstar Growth & Income portfolio assets is
managed by Firstar Investment Research & Management Company, LLC ("FIRMCO") as
sub-adviser. The principal business address of FIRMCO is 615 East Michigan
Street, Milwaukee, Wisconsin 53201.
The investment and reinvestment of High Income Bond, Equity Income and Blue Chip
portfolio assets is managed by Federated Investment Counseling ("Federated
Investment") as sub-adviser. The principal business address of Federated
Investment is Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh,
Pennsylvania 15222.
Interests in each portfolio are represented by a separate class of the Fund's
capital stock, par value $1. Each class represents an undivided interest in the
assets of the portfolio corresponding to that class. All shares of each
portfolio have one vote per share and are freely transferable. When matters
arise that affect only one portfolio, shares of just that portfolio are entitled
to vote on those matters. Approval of certain matters by a vote of all Fund
shareholders may not bind a portfolio whose shareholders did not approve that
matter.
Each share of each portfolio may participate equally in the portfolio's
dividends, distributions and net assets. 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. This means the holders of more than half
of the Fund shares voting to elect directors can elect all the directors if they
so choose. In that event, the holders of the remaining shares could not 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.
American Data Services, Inc. is the Fund's transfer agent and fund accounting
agent. It is located at 150 Motor Parkway, Suite 109, Hauppauge, New York 11788.
Firstar is custodian for those portfolios other than the International and
International Small Company portfolios. The custodian for the International and
International Small Company portfolios is Investors Fiduciary Trust Company. It
is located at 801 Pennsylvania Street, Kansas City, Missouri. For assets held
outside the United States, the custodians enter into subcustodial agreements.
The Board of Directors approves all these relationships.
FUND PERFORMANCE
From time to time, we advertise the current yield, average annual total return
and cumulative total returns for the portfolios. We might compare the results 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.
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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 the 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.
The Fund may distribute sales literature comparing the performance of its
portfolios against the Consumer Price Index or such established market indices
as the Dow Jones Industrial Average, the Standard & Poor's 500, 400, 600 or 1500
Indices, one or more of Lehman Brothers Bond Indices, the Morgan Stanley Capital
International Europe, Australia and Far East Index, the Morgan Stanley Capital
International World Index, the Russell 2000, 2500 or 3000 Indices, the New York
Stock Exchange Composite Index, the American Stock Exchange Index, the National
Association of Securities Dealers Automated Quotations Composite Index, the
Value Line Composite Index, the Investors Business Daily 6000 Index, the
Wilshire 5000 Index, IBC's Money Fund Reports, or other management investment
companies having investment objectives similar to the portfolio being compared.
These comparisons may include graphs, charts, tables or examples. The average
annual total return and cumulative total returns for each portfolio may also be
advertised.
The Fund may also advertise the performance ratings or rankings assigned to
certain portfolios or their subadvisers by various statistical services,
including Morningstar, Inc. and Lipper Analytical Services, Inc., or as they
appear in various publications including The Wall Street Journal, Investors
Business Daily, The New York Times, Barron's, Forbes, Fortune, Business Week,
Financial Services Week, Financial World, Kiplinger's Personal Finance and Money
Magazine.
The prospectus sets forth in tabular form, under the caption "Financial
Highlights," certain information concerning the Fund and its individual
portfolios. The following discussion describes the methods of calculating the
current yield of the Money Market portfolio and the total return of all
portfolios, and states the Fund's policy with respect to each portfolio's
turnover rate.
CURRENT YIELD OF MONEY MARKET PORTFOLIO
Current annualized yield quotations for the Money Market portfolio are based on
the portfolio's net investment income for a seven-day period and exclude any
realized or unrealized gains or losses on portfolio securities. Current
annualized yield is computed by determining the net change (exclusive of
realized gains and losses from the sale of securities and unrealized
appreciation and depreciation) in the value of a hypothetical account having a
balance of one share at the beginning of such seven-day period, dividing such
net change in account value by the value of the account at the beginning of the
period, and annualizing this quotient on a 365-day basis. The net change in
account value reflects the value of any additional shares purchased with
dividends from the original share in the account during the seven-day period,
any dividends declared on such original share and any such additional shares
during the period, and expenses accrued during the period. The Fund may also
disclose the effective yield of the Money Market portfolio for a seven-day
period for which the current annualized yield is computed by expressing the
unannualized return on a compounded, annualized basis.
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TOTAL RETURN
Total returns quoted in advertising reflect all aspects of a portfolio's
investment return, including the effects of reinvesting dividends and capital
gain distributions as well as changes in the portfolio's net asset value per
share over the period shown. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical historical
investment in a portfolio over a stated period, and then calculating the
annually compounded percentage rate that would have produced the same result had
the rate of growth or decline been constant over that period. While average
annual returns are a convenient means of comparing investment alternatives, no
portfolio will experience a constant rate of growth or decline over time.
The average annual compounded rate of return for a portfolio over a given period
is found by equating the initial amount invested to the ending redeemable value
using the following formula:
P(1 + T)n = ERV
where: P = a hypothetical initial payment of $1,000,
T = the average annual total return,
n = the number of years, and
ERV = the ending redeemable value of a
hypothetical $1,000
beginning-of-period payment at the end
of the period (or fractional portion
thereof).
The average annual total returns for each of the portfolios from the inception
of the portfolio and for the one-, five- and ten-year periods ending on December
31, 1998, are as stated below:
<TABLE>
<CAPTION>
One Five Ten From Inception
Year Years Years Inception Date
---- ----- ----- --------- ----
<S> <C> <C> <C> <C> <C>
Equity* 5.72% 13.52% 12.66% 10.87% 10-06-69
Money Market 5.39% 5.11% 5.36% 7.20% 03-20-80
Bond 5.22% 6.40% 8.15% 8.48% 11-02-82
Omni 4.53% 11.75% 11.50% 11.50% 09-10-84
International* 3.88% 8.03% N/A 11.36% 04-30-93
Capital Appreciation* 5.91% N/A N/A 13.55% 05-01-94
Small Cap 10.57% N/A N/A 19.28% 05-01-94
International Small Company* 3.53% N/A N/A 9.64% 03-31-95
Aggressive Growth* 7.84% N/A N/A 12.47% 03-31-95
Core Growth 8.82% N/A N/A 2.74% 01-03-97
Growth & Income 7.09% N/A N/A 21.05% 01-03-97
S&P 500 Index 30.00% N/A N/A 31.03% 01-03-97
Social Awareness (22.41%) N/A N/A (1.24%) 01-03-97
Strategic Income (1.42%) N/A N/A 3.55% 01-03-97
Firstar Growth & Income* 2.92% N/A N/A 6.28% 01-03-97
Relative Value 20.72% N/A N/A 24.53% 01-03-97
Capital Growth N/A N/A N/A 4.62% 05-01-98
High Income Bond N/A N/A N/A (0.20%) 05-01-98
Equity Income N/A N/A N/A 5.92% 05-01-98
Blue Chip N/A N/A N/A 2.34% 05-01-98
</TABLE>
In addition to average annual total returns, advertising may reflect cumulative
total returns that simply reflect the change in value of an investment in a
portfolio over a period. This may be expressed as either a percentage change,
from the beginning to the end of the period, or the end-of-period dollar value
of an initial hypothetical investment. The cumulative total returns for each of
the portfolios from the inception of the portfolio and for the five- and
ten-year periods ending on December 31, 1998 (assuming a hypothetical initial
investment of $1,000) were as follows:
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<TABLE>
<CAPTION>
Five Years Ten Years From Inception
---------- --------- --------------
<S> <C> <C> <C>
Equity* $1,885 $3,293 $17,926
Money Market $1,283 $1,686 $ 3,601
Bond $1,363 $2,188 $ 3,543
Omni $1,742 $2,969 $ 4,748
International* $1,471 N/A $ 1,839
Capital Appreciation* N/A N/A $ 1,810
Small Cap N/A N/A $ 2,277
International Small Company* N/A N/A $ 1,412
Aggressive Growth* N/A N/A $ 1,553
Core Growth N/A N/A $ 1,055
Growth & Income N/A N/A $ 1,437
S&P 500 Index N/A N/A $ 1,714
Social Awareness N/A N/A $ 975
Strategic Income N/A N/A $ 1,072
Firstar Growth & Income* N/A N/A $ 1,129
Relative Value N/A N/A $ 1,549
Capital Growth N/A N/A $ 1,046
High Income Bond N/A N/A $ 998
Equity Income N/A N/A $ 1,059
Blue Chip N/A N/A $ 1,023
</TABLE>
*Prior to January 1, 1999, the sub-adviser of the International and
International Small Company portfolios was Societe Generale Asset Management
Corp. and the investment policies of the International Small Company portfolio
were substantially different. Prior to May 1, 1999, the Firstar Growth & Income
Portfolio's investment policies were substantially different and its sub-adviser
was Firstar Bank, N.A. Prior to August 2, 1999, the Equity portfolio was managed
by the Adviser. Prior to January 3, 2000, the Capital Appreciation portfolio was
managed by T. Rowe Price Associates, Inc. and the Aggressive Growth portfolio
was managed by Strong Capital Management, Inc.
PORTFOLIO TURNOVER
Each portfolio has a different expected rate of portfolio turnover. However, the
rate of portfolio turnover will not be a limiting factor when the management of
the Fund deems it appropriate to purchase or sell securities for a portfolio.
The Small Cap, Aggressive Growth and Strategic Income portfolios may engage in
the purchase and sale of securities close to the ex-dividend date in order to
receive the anticipated dividend and then sell the securities after the
ex-dividend date. This practice could substantially increase the portfolio's
turnover rate. Higher turnover rates are often reflected in higher portfolio
brokerage expenses. The Fund's policy with respect to each portfolio is as
follows:
EQUITY PORTFOLIO - Although this portfolio will not normally purchase
securities with the intention of obtaining short-term capital
appreciation, purchases and sales will be made whenever deemed prudent and
consistent with the investment objectives of the portfolio. During periods
of relatively stable market and economic conditions, it is anticipated
that the annual portfolio turnover rate of the portfolio will be low.
During periods when changing market or economic conditions are foreseen,
shifts in portfolio emphasis may cause the rate of portfolio turnover to
increase. During 1998, the turnover rate for this portfolio was 25%.
MONEY MARKET PORTFOLIO - Since the assets of this portfolio consist of
short-term instruments, replacement of portfolio securities will occur
frequently. However, since purchases are generally effected with dealers
or issuers on a net basis, it is not expected that the portfolio will
incur significant brokerage commissions.
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BOND PORTFOLIO - This portfolio will engage in transactions when the
Adviser believes that they will help to achieve the overall objectives of
the portfolio. Portfolio securities may or may not be held to maturity.
The rate of portfolio turnover will vary from time to time but is not
expected to exceed 50% annually. The turnover rate for this portfolio was
12% in 1998.
OMNI PORTFOLIO - The rate of portfolio turnover will vary from time to
time but is not expected to exceed 50% annually. The turnover rate for
this portfolio was 18% in 1998.
INTERNATIONAL PORTFOLIO - Although this portfolio will not normally engage
in short-term trading, purchases and sales of securities will be made
whenever deemed appropriate to achieve the portfolio's objective of a
total return on its assets. The rate of portfolio turnover will not be a
limiting factor when portfolio changes are deemed appropriate to achieve
this portfolio's stated objective. Under normal circumstances, the
portfolio turnover rate for this portfolio is not expected to exceed 200%
annually. The turnover rate for this portfolio was 22% in 1998.
CAPITAL APPRECIATION PORTFOLIO - Although Jennison generally seeks less
volatile securities for this portfolio, the portfolio may be traded fairly
aggressively. Its portfolio turnover rate is normally expected to be 50%
to 150% annually. The turnover rate for this portfolio was 45% in 1998.
SMALL CAP PORTFOLIO - While this portfolio purchases and holds securities
with the goal of meeting its investment objectives, portfolio changes are
made whenever Founders believes they are advisable, usually without
reference to the length of time a security has been held. The engagement
in a substantial number of short-term transactions is expected to result
in annual portfolio turnover rates of 100% to 300%. The turnover rate for
this portfolio was 99% in 1998.
INTERNATIONAL SMALL COMPANY PORTFOLIO - Federated Global will not attempt
to set or meet a portfolio turnover rate because turnover is incidental to
transactions made in an attempt to achieve the portfolio's investment
objective. Securities will be sold whenever Federated Global believes it
is appropriate, regardless of how long they have been held. The turnover
rate for this portfolio was 55% in 1998.
AGGRESSIVE GROWTH PORTFOLIO - The securities of this portfolio are
generally expected to be traded more aggressively than those of the other
portfolios. Its portfolio turnover rate can normally be expected to be in
the range of 100% to 300% annually. The turnover rate for this portfolio
was 203% in 1998.
CORE GROWTH PORTFOLIO - Although the securities held in this portfolio are
generally held for appreciation, Pilgrim Baxter's disciplined reponse to
its analytic process will occasionally result in sales without regard to
the length of time a security has been held. The annual turnover rate is
normally expected to be in the range of 150% to 350%. The turnover rate
for this portfolio was 134% in 1998.
GROWTH & INCOME PORTFOLIO - RSIM exercises "sell" disciplines. A stock
held in this portfolio is likely to be sold if it declines substantially
in price (at least 15%), if it reaches its upside target price, if the
company's business fundamentals turn negative, or if a more attractive
opportunity appears. The prices of small- and mid-cap company securities
in which this portfolio invests may be more volatile than those of larger
companies. As a result, the portfolio's annual turnover rate is normally
expected to be in excess of 100%. The turnover rate for this portfolio was
286% in 1998.
S&P 500 INDEX PORTFOLIO - Securities held in this portfolio generally will
not be actively traded. Although it will often purchase fixed-income
securities with relatively short maturities, those transactions are not
expected to generate substantial brokerage commissions. The annual
turnover rate is not normally expected to exceed 100%. The turnover rate
for this portfolio was 115% in 1998/
SOCIAL AWARENESS PORTFOLIO - This portfolio will not normally purchase
securities with the intention of obtaining short-term returns. Under
normal market conditions, the annual turnover rate is not expected to
exceed 100%. The turnover rate for this portfolio was 71% in 1998.
STRATEGIC INCOME PORTFOLIO - The securities of this portfolio will
generally be traded more frequently than those of other income oriented
portfolios. Its portfolio turnover rate can normally be expected to be in
the range of 50% to 250% annually. The turnover rate for this portfolio
was 104% in 1998.
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FIRSTAR GROWTH & INCOME PORTFOLIO - Although this portfolio does not seek
short-term profits, its securities will be sold whenever FIRMCO believes
it is appropriate to do so in light of the portfolio's investment
objective without regard to the length of time a particular security may
have been held. Its portfolio turnover rate is normally expected to be 50%
to 150%. The turnover rate for this portfolio was 91% in 1998.
RELATIVE VALUE PORTFOLIO - Although this portfolio does not seek
short-term profits, its securities will be sold whenver Star believes it
is appropriate to do so in light of the portfolio's investment objective
without regard to the length of time a particular security may have been
held. Its portfolio turnover rate is not expected to exceed 75% during
normal economic and market conditions. The turnover rate for this
portfolio was 54% in 1998.
CAPITAL GROWTH PORTFOLIO - Securities held in this portfolio tend to be
actively traded. Its portfolio turnover rate is normally expected to
exceed 100%. The turnover rate was 121% in 1998.
HIGH INCOME BOND PORTFOLIO - The rate of portfolio turnover will vary from
time to time, but it is not normally expected to exceed 100% for this
portfolio. The turnover rate was 11% in 1998.
EQUITY INCOME PORTFOLIO - The portfolio turnover rate for this portfolio
is normally expected to be in the range of 50% to 150% annually. The
turnover rate was 38% in 1998.
BLUE CHIP PORTFOLIO - The portfolio will not engage in short-term trading,
but it may dispose of securities held for a short period if, after
examination of their value, the sub-adviser believes such disposition to
be advisable in order to attain the portfolio's investment objective. The
annual turnover rate is not normally expected to exceed 100%. The turnover
rate was 32% in 1998.
INVESTMENT OBJECTIVES AND POLICIES
The following descriptions of money market instruments supplement the
"Investment Objectives and Policies" set forth for each portfolio in the
prospectus. The Money Market portfolio and the Omni and Strategic Income
portfolios, to the extent they invest in the money market sector, will invest
extensively in these instruments. The other portfolios may invest in such
instruments to a limited extent (to invest otherwise idle cash) or on a
temporary basis for defensive purposes. The debt security ratings referred to in
the prospectus in connection with the investment policies of the portfolios are
defined in the Appendix to this Statement of Additional Information.
MONEY MARKET INSTRUMENTS
U.S. GOVERNMENT OBLIGATIONS - Bills, notes, bonds and other debt
securities issued or guaranteed as to principal or interest by the United
States or by agencies or authorities controlled or supervised by and
acting as instrumentalities of the U.S. Government established under
authority granted by Congress, including, but not limited to, the
Government National Mortgage Association, the Tennessee Valley Authority,
the Bank for Cooperatives, the Farmers Home Administration, and Federal
Home Loan Banks. Some obligations of U.S. Government agencies, authorities
and other instrumentalities are supported by the full faith and credit of
the U.S. Treasury; others by the right of the issuer to borrow from the
Treasury; and others only by the credit of the issuer. Certain of the
foregoing may be purchased on a "when issued" basis at which time the rate
of return will not have been set.
CERTIFICATES OF DEPOSIT - Certificates issued against funds deposited in a
bank for a definite period of time, at a specified rate of return.
Normally they are negotiable.
BANKERS' ACCEPTANCES - Short-term credit instruments issued by
corporations to finance the import, export, transfer or storage of goods.
They are termed "accepted" when a bank guarantees their payment at
maturity and reflect the obligation of both the bank and drawer to pay the
face amount of the instrument at maturity.
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COMMERCIAL PAPER - Promissory notes issued by corporations to finance
their short-term credit needs. Commercial paper obligations may include
variable amount master demand notes. Variable amount master demand notes
are obligations that permit the investment of fluctuating amounts by the
portfolio at varying rates of interest pursuant to direct arrangements
between the portfolio, as lender, and the borrower. These notes permit
daily changes in the amounts borrowed. The portfolio has the right to
increase the amount under the note at any time up to the full amount
provided by the note agreement, or to decrease the amount, and the
borrower may prepay up to the full amount of the note without penalty.
Because variable amount master demand notes are direct lending
arrangements between the lender and the borrower, it is not generally
contemplated that such instruments will be traded, and there is no
secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued
interest, at any time. In connection with a master demand note
arrangement, the Adviser will monitor, on an ongoing basis, the earning
power, cash flow, and other liquidity ratios of the issuer, and the
borrower's ability to pay principal and interest on demand. While master
demand notes, as such, are not typically rated by credit rating agencies,
if not so rated the portfolio may invest in them only if at the time of an
investment the issuer meets the criteria set forth above for all other
commercial paper issuers. Such notes will be considered to have a maturity
of the longer of the demand period or the period of the interest
guarantee.
CORPORATE OBLIGATIONS - Bonds and notes issued by corporations in order to
finance longer-term credit needs.
REPURCHASE AGREEMENTS - Agreements by which 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
term of these repurchase agreements will generally be short, from
overnight to one week, and at no time more than one year.
INVESTMENT RESTRICTIONS
The prospectus lists the most significant investment restrictions to which the
Fund is subject. The following is a complete list of the Fund's investment
restrictions. Except as otherwise specified, investment restrictions stated in
the prospectus and this Statement of Additional Information are fundamental
policies. Restrictions number 4, 7, 8, 12 and 13 are fundamental policies of the
Money Market, Bond and Omni portfolios and nonfundamental as to the remaining
portfolios. The fundamental policies and nonfundamental operating policies of
the International, International Small Company, Capital Appreciation, Aggressive
Growth, High Income Bond, Equity Income and Blue Chip portfolios are shown
separately below. Fundamental policies may not be changed without the
affirmative vote of the majority of the outstanding voting securities of the
Fund or a particular portfolio, as appropriate. The Investment Company Act of
l940 defines a majority vote as the vote of the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding voting securities. With
respect to the submission of a change in an investment policy to the holders of
outstanding voting securities of a particular portfolio, such matter shall be
deemed to have been effectively acted upon with respect to such portfolio if a
majority of the outstanding voting securities of such portfolio vote for the
approval of such matter, notwithstanding (1) that such matter has not been
approved by the holders of a majority of the outstanding voting securities of
any other portfolio affected by such matter, and (2) that such matter has not
been approved by the vote of a majority of the outstanding voting securities of
the Fund.
The Fund may not issue senior securities and each portfolio of the Fund (other
than the International, International Small Company, Capital Appreciation,
Aggressive Growth, High Income Bond, Equity Income and Blue Chip portfolios)
will not:
l. invest more than 5% of the value of the total assets of such
portfolio in the securities of any one issuer (except U.S.
government securities) (this restriction only applies as to 75% of
the Equity portfolio's assets);
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2. purchase more than l0% 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 Money Market, Bond and Omni 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 Capital
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 borrowed money for purposes of
this restriction. The Growth & Income, Strategic Income and
Capital 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, and (b) the S&P 500 Index portfolio may purchase or sell
stock index futures contracts in accordance with its stated
investment objectives;
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. invest in securities of foreign issuers except that (a) each of
the Bond, Omni, Core Growth, Growth & Income, S&P 500 Index,
Social Awareness and Relative Value portfolios may (i) invest up
to l5% of their respective assets in securities of foreign issuers
(including 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 l0% 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 Capital
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) each of the Equity and Firstar Growth & Income portfolios 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;
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9. underwrite securities of other issuers except insofar as the Fund
may be considered an underwriter under the Securities Act of l933
in selling portfolio securities;
10. purchase or sell real estate, except that each portfolio may
invest in securities secured by real estate or interests therein
or securities issued by companies which invest in real estate or
interests therein. For purposes of this restriction, "real estate"
does not include investments in readily marketable notes or other
evidence of indebtedness secured by mortgages or deeds of trust
relating to real property;
11. lend money to other persons except by the purchase of obligations
in which the portfolio is authorized to invest and by entering
into repurchase agreements. Other than the Strategic Income
portfolio, no more than 10% of a portfolio's total assets will be
invested in repurchase agreements maturing in more than seven
days;
12. sell securities short or purchase securities on margin except such
short-term credits as are required to clear transactions, except
that the Growth & Income portfolio may sell securities short and
the Strategic Income portfolio may sell securities short if (i) it
owns, or has a right to acquire, an equal amount of those
securities or (ii) if it does not own the securities, it has
segregated an amount of its other assets equal to the lesser of
the market value of the securities sold short or the amount
required to acquire those securities (while in a short position,
the portfolio will retain the securities, rights or segregated
assets);
13. as to the Money Market, Bond and Omni portfolios, participate on a
joint or joint and several basis in any trading account in
securities, or purchase securities for the purpose of exercising
control or management;
14. purchase securities of other investment companies, except in
connection with a merger, consolidation or reorganization, or
except the purchase by any portfolio other than the Money Market
or Bond portfolios of the securities of closed-end investment
companies if after the purchase: (i) a portfolio does not own more
than 3% of the total outstanding voting stock of the other
investment company or (ii) the value of the securities of all
investment companies held by such portfolio does not exceed 10% of
the value of the total assets of that portfolio. Purchases of
investment company securities will be made (a) only on the open
market or through dealers or underwriters receiving the customary
sales loads, or (b) as part of a merger, consolidation or plan of
reorganization.
As a nonfundamental policy of each portfolio other than the Money Market,
International, International Small Company, 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,
each 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).
In addition to the above restrictions, in order to comply with Rule 2a-7 under
the Investment Company Act of 1940, no more than 5% of the assets of the Money
Market portfolio will be invested in "second-tier" short-term debt instruments,
that is those receiving the second highest rating by any two nationally
recognized statistical rating organizations ("NRSRO's") and not receiving the
highest rating from more than one NRSRO (or receiving the second highest rating
from 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. In addition, not more than $1 million (or 1% of this portfolio's
assets, if greater) may be invested in the second-tier instruments of any one
issuer.
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INTERNATIONAL, INTERNATIONAL SMALL COMPANY, 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.
INTERNATIONAL, INTERNATIONAL SMALL COMPANY, HIGH INCOME BOND, EQUITY INCOME AND
BLUE CHIP PORTFOLIO NONFUNDAMENTAL OPERATING POLICIES
As a matter of nonfundamental operating policy:
F.I.9. The portfolios will not pledge, mortgage or hypothecate any assets
except to secure permitted borrowings. In those cases, a portfolio may
pledge, mortgage or hypothecate assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value
of its total assets at the time of borrowing.
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F.I.10. The portfolios will not sell securities short unless during the time
the short position is open, a portfolio owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and not more than 10% of a portfolio's net assets (taken at
current value) is held as collateral for such sales at any one time.
F.I.11. Each of the portfolios will not invest more than 15% of its net assets
in illiquid securities, including, among others, repurchase agreements
providing for settlement more than seven days after notice, and certain
restricted securities not determined by the Board of Directors to be
liquid.
Under normal market conditions, at least 65% of the assets of the International
and International Small Company Portfolios will be invested in securities of
issuers in at least three different foreign countries. As of the date of this
Statement of Additional Information, the Board of Directors has approved
investment by those portfolios other than the Money Market Portfolio in 60
countries with developed securities markets, including the following countries
with developed economies: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, New
Zealand, Norway, Spain, Sweden, Switzerland and the United Kingdom; and the
following countries with developing economies: Argentina, Bahamas, Bangla Desh,
Botswana, Brazil, Chile, China (Hong Kong, Shanghai and Shenzhen Exchanges),
Colombia, Czech Republic, Ecuador, Egypt, Estonia, Ghana, Greece, Hungary,
India, Indonesia, Jordan, Latvia, Malaysia, Mauritius, Mexico, Morocco,
Pakistan, Peru, Philippines, Poland, Portugal, Romania, Russia, Singapore, South
Africa, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Uruguay, Venezuela and
Zimbabwe.
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 Jennison 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 Jennison 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;
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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.
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 Jennison
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.
CAPITAL APPRECIATION PORTFOLIO NONFUNDAMENTAL OPERATING POLICIES
As a matter of nonfundamental operating policy, the portfolio may not:
C.A.10. Purchase additional securities when money borrowed exceeds
5% of its total assets;
C.A.11. Invest in companies for the purpose of exercising
management or control;
C.A.12. Purchase a futures contract or an option thereon if, with
respect to positions in futures or options on futures which
do not represent bona fide hedging, the aggregate initial
margin and premiums on such options would exceed 5% of the
portfolio's net asset value;
C.A.13. Purchase illiquid securities (including securities eligible
for resale under Rule 144A of the Securities Act of 1933)
and securities of unseasoned issuers if, as a result, more
than 15% of its net assets would be invested in such
securities;
C.A.14. Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company
Act of 1940;
C.A.15. Purchase securities on margin, except (i) for use of
short-term credit necessary for clearance of purchases of
portfolio securities and (ii) to make margin deposits in
connection with futures contracts or other permissible
investments;
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C.A.16. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the portfolio as security for
indebtedness except as may be necessary in connection with
permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33
1/3% of the Portfolio's total assets at the time of
borrowing or investment;
C.A.17. Purchase participations or other direct interests in or
enter into leases with respect to, oil, gas, or other
mineral exploration or development programs if as a result
more than 5% of the value of the total assets of the
portfolio would be invested in such programs;
C.A.18. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the
prospectus and Statement of Additional Information;
C.A.19. Effect short sales of securities;
C.A.20. Purchase any warrants if as a result the portfolio will
have more than 5% of its total assets invested in warrants;
provided that this restriction does not apply to warrants
acquired as a result of the purchase of another security;
or
C.A.21. Invest more than 25% of the portfolio's total assets
(excluding reserves) in foreign securities.
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
Janus 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 of 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.
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<PAGE> 17
A.G.7. May not purchase the securities of any issuer if, as a
result, more that 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).
AGGRESSIVE GROWTH PORTFOLIO NONFUNDAMENTAL OPERATING POLICIES
As a matter of nonfundamental operating policy, the portfolio may not:
A.G.9. Sell securities short, unless the portfolio owns or has the
right to obtain securities equivalent in kind and amount to
the securities sold short, or unless it covers such short
sale as required by the current rules and positions of the
SEC or its staff, and provided that transactions in
options, futures contracts, options on futures contracts,
or other derivative instruments are not deemed to
constitute selling securities short.
A.G.10. Purchase securities on margin, except that the portfolio
may obtain such short-term credits as are necessary for the
clearance of transactions; and provided that margin
deposits in connection with futures contacts, options on
futures contracts, or other derivative instruments shall
not constitute purchasing securities on margin.
A.G.11. Invest in illiquid securities if, as a result of such
investment, more than 15% of its net assets would be
invested in illiquid securities, or such other amounts as
may be permitted under the Investment Company Act of 1940.
A.G.12. Purchase securities of other investment companies except in
compliance with the Investment Company Act of 1940.
A.G.13. Invest in direct interests in oil, gas, or other mineral
exploration programs or leases; however, the portfolio may
invest in the securities of issuers that engage in these
activities.
A.G.14. Engage in futures or options on futures transactions which
are impermissible pursuant to Rule 4.5 under the Commodity
Exchange Act and, in accordance with Rule 4.5, will use
futures or options on futures transactions solely for bona
fide hedging transactions (within the meaning of the
Commodity Exchange Act), provided, however, that the
portfolio may, in addition to bona fide hedging
transactions, use futures and options on futures
transactions if the aggregate initial margin and premiums
required to establish such positions, less the amount by
which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed
5% of the portfolio's net assets.
In addition, (i) the aggregate value of securities
underlying call options on securities written by the
portfolio or obligations underlying put options on
securities written by the portfolio determined as of the
date the options are written will not exceed 50% of the
portfolio's net assets; (ii) the aggregate premiums paid on
all options purchased by the portfolio and which are being
held will not exceed 20% of the portfolio's net assets; and
(iii) the portfolio will not purchase put or call options,
other than hedging positions, if, as a result thereof, more
than 5% of its total assets would be so invested.
A.G.15. Pledge, mortgage or hypothecate any assets owned by the
portfolio except as may be necessary in connection with
permissible borrowings or investments and then such
pledging, mortgaging, or hypothecating may not exceed 33
1/3% of the portfolio's total assets at the time of the
borrowing or investment.
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A.G.16. Borrow money except (i) from banks or (ii) through reverse
repurchase agreements or mortgage dollar rolls, and will
not purchase securities when bank borrowings exceed 5% of
its total assets.
A.G.17. Make any loans other than loans of portfolio securities,
except through (i) purchases of debt securities or other
debt instruments, or (ii) engaging in repurchase
agreements.
INTERNATIONAL, INTERNATIONAL SMALL COMPANY, 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.
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INTERNATIONAL, INTERNATIONAL SMALL COMPANY, HIGH INCOME BOND, EQUITY INCOME AND
BLUE CHIP PORTFOLIO NONFUNDAMENTAL OPERATING POLICIES
As a matter of nonfundamental operating policy:
F.I.9. The portfolios will not pledge, mortgage or hypothecate any assets
except to secure permitted borrowings. In those cases, a portfolio may
pledge, mortgage or hypothecate assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value
of its total assets at the time of borrowing.
F.I.10. The portfolios will not sell securities short unless during the time
the short position is open, a portfolio owns an equal amount of the
securities sold or securities readily and freely convertible into or
exchangeable, without payment of additional consideration, for
securities of the same issue as, and equal in amount to, the securities
sold short; and not more than 10% of a portfolio's net assets (taken at
current value) is held as collateral for such sales at any one time.
F.I.11. Each of the portfolios will not invest more than 15% of its net assets
in illiquid securities, including, among others, repurchase agreements
providing for settlement more than seven days after notice, and certain
restricted securities not determined by the Board of Directors to be
liquid.
HEDGING TRANSACTIONS
The purpose of hedging transactions using put and call options on individual
securities, financial futures contracts, and options on such contracts and on
financial indexes, all to the extent provided in investment restriction 7, is to
reduce the risk of fluctuation of portfolio securities values or to take
advantage of expected market fluctuations. However, while such transactions are
defensive in nature and are not speculative, some risks remain.
The use of options and futures contracts may help the Fund to gain exposure or
to protect itself from changes in market values. For example, the Fund may have
a substantial amount of cash at the beginning of a market rally. Conventional
procedures of purchasing a number of individual issues requires time and may
result in missing a significant market movement. By using futures contracts, the
Fund can obtain immediate exposure to the market.
The buying program will then proceed and, once it is completed (or as it
proceeds), the futures contracts will be closed. Conversely, in the early stages
of a market decline, market exposure can be promptly offset by selling futures
contracts, and individual securities can be sold over a longer period under
cover of the resulting short contract position.
COVERED CALL OPTIONS AND PUT OPTIONS
In writing (i.e., selling) "covered" call options on securities owned by a
portfolio, the portfolio gives the purchaser of the call option the right to
purchase the underlying securities owned by the portfolio at a specified
"exercise" price at any time prior to the expiration of the option, normally
within nine months. In purchasing put options on securities owned by a
portfolio, the portfolio pays the seller of the put option a premium for the
right of the portfolio to sell the underlying securities owned by the portfolio
at a specified exercise price prior to the expiration of the option.
Whenever a portfolio has a covered call option outstanding, the underlying
securities will be segregated by the Custodian and held in an escrow account to
assure that such securities will be delivered to the option holder if the option
is exercised. While the underlying securities are subject to the option, the
portfolio remains the record owner of the securities, entitling it to receive
dividends and to exercise any voting rights.
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<PAGE> 20
In order to terminate its position as the writer of a call option or the
purchaser of a put option, the portfolio may enter into a "closing" transaction,
which is the purchase of a call option or sale of a put option on the same
underlying securities and having the same exercise price and expiration date as
the option previously sold or purchased by the portfolio.
FUTURES CONTRACTS
The Fund may invest in two kinds of financial futures contracts: stock index
futures contracts and interest rate futures contracts. Stock index futures
contracts are contracts developed by and traded on national commodity exchanges
whereby the buyer will, on a specified future date, pay or receive a final cash
payment equal to the difference between the actual value of the stock index on
the last day of the contract and the value of the stock index established by the
contract multiplied by the specific dollar amount set by the exchange. Futures
contracts may be based on broad-based stock indexes such as the S&P 500 Index or
on narrow-based stock indexes. A particular index will be selected according to
the Adviser's investment strategy for the particular portfolio. An interest rate
futures contract is an agreement whereby one party agrees to sell and another
party agrees to purchase a specified amount of a specified financial instrument
(debt security) at a specified price at a specified date, time and place.
Although interest rate futures contracts typically require actual future
delivery of and payment for financial instruments, the contracts are usually
closed out before the delivery date. A public market exists in interest rate
futures contracts covering primarily the following financial instruments: U.S.
Treasury bonds; U.S. Treasury notes; Government National Mortgage Association
(GNMA) modified pass-through mortgage-backed securities; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit; and
Eurodollar certificates of deposit. It is expected that futures contracts
trading in additional financial instruments will be authorized.
At the time the Fund enters into a contract, it sets aside a small portion of
the contract value in an account with the Fund's custodian as a good faith
deposit (initial margin) and each day during the contract period requests and
receives or pays cash equal to the daily change in the contract value (variable
margin). The Fund, its futures commission merchant and the Fund's custodian
retain control of the initial margin until the contract is liquidated.
OPTIONS ON FUTURES CONTRACTS AND FINANCIAL INDEXES
Instead of entering into a financial futures contract, the Fund may buy an
option giving it the right to enter into such a contract at a future date. The
price paid for such an option is called a premium. The Fund also may buy options
on financial indexes that are traded on securities exchanges. Options on
financial indexes react to changes in the value of the underlying index in the
same way that options on financial futures contracts do. All settlements for
options on financial indexes also are for cash.
Financial futures contracts, options on such contracts and options on financial
indexes will primarily be used for hedging purposes and will, therefore, be
incidental to the Fund's activities in the securities market. Accordingly,
portfolio securities subject to options, or money market instruments having the
market value of any futures contracts, generally will be set aside to
collateralize the options or futures contracts.
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.
The portfolios generally conduct their foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market. When a portfolio purchases or sells a security denominated in
or exposed to a foreign currency, it may enter into a forward foreign currency
contract ("forward contract") for the purchase or sale, for a fixed amount of
dollars, of the amount of currency involved in the underlying security
transaction. A forward contract involves an obligation to purchase or sell a
specific
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<PAGE> 21
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.
Forward contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. Generally
a forward contract has no deposit requirement, and no commissions are charged.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference between the prices at which they buy
and sell various currencies. When the portfolio manager believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, a portfolio may enter into a forward contract to sell,
for a fixed amount of dollars, the amount of foreign currency approximating the
value of some or all of that portfolio's securities denominated in or exposed to
such foreign currency. No portfolio will enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the portfolio to deliver an amount of foreign currency
in excess of the value of its assets denominated in or exposed to that currency.
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.
If the portfolio retains the hedged security and engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been
movement in spot or forward contract prices. If a portfolio engages in an
offsetting transaction, it may subsequently enter into a new forward contract to
sell the foreign currency. Should forward prices decline during the period
between the portfolio's entering into a forward contract for the sale of a
foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the portfolio will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
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. In addition, it must be remembered that 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. Additionally, although such contracts tend to
minimize
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<PAGE> 22
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.
SHORT SALES
Until a borrowed security borrowed in connection with a short sale (as described
in the prospectus) is replaced, a portfolio will be required to maintain daily a
segregated account, containing cash or U.S. government securities, at such a
level that (i) the amount deposited in the account plus the amount deposited
with the broker as collateral will at all times be equal to at least 100% of the
current value of the security sold short and (ii) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short.
A portfolio may purchase call options to provide a hedge against an increase in
the price of a security sold short. When a portfolio purchases a call option, it
has to pay a premium to the person writing the option and a commission to the
broker selling the option. If the option is exercised by a portfolio, the
premium and the commission paid may be more than the amount of the brokerage
commission charged if the security were to be purchased directly. See "Hedging
Transactions" and "Covered Call Options and Put Options." In addition to the
short sales discussed above, a portfolio also may make short sales "against the
box," a transaction in which a portfolio enters into a short sale of a security
which the portfolio owns. The proceeds of the short sale are held by a broker
until the settlement date, at which time the portfolio delivers the security to
close the short position. A portfolio receives the net proceeds from the short
sale. No portfolio will, at any time, have more than 5% of the value of its net
assets in deposits on short sales against the box.
BORROWING MONEY
The portfolios will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only in amounts not in excess of 5%
of the value of a portfolio's total assets. In addition, certain portfolios may
enter into reverse repurchase agreements and otherwise borrow up to one-third of
the value of the portfolio's total assets, including the amount borrowed, in
order to meet redemption requests without immediately selling portfolio
securities. This latter practice is not for investment leverage but solely to
facilitate management of a portfolio by enabling it to meet redemption requests
when the liquidation of portfolio instruments would be inconvenient or
disadvantageous.
Interest paid on borrowed funds will not be available for investment and will
reduce net income. A portfolio will liquidate any such borrowings as soon as
possible and may not purchase any portfolio securities while the borrowings are
outstanding. However, during the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion of the
reverse repurchase agreements, the purchase of portfolio securities will be
limited to money market instruments maturing on or before the expiration date of
the reverse repurchase agreements.
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.
When debt obligations have been stripped of their unmatured interest coupons by
the holder, the stripped coupons are sold separately. The principal or corpus is
sold at a deep discount because the buyer receives only the right to receive a
future fixed payment on the security and does not receive any rights to periodic
cash interest payments. Once stripped or separated, the corpus and coupons may
be sold separately. Typically,
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<PAGE> 23
the coupons are sold separately or grouped with other coupons with like maturity
dates and sold in such bundled form. Purchasers of stripped obligations acquire,
in effect, discount obligations that are economically identical to the
zero-coupon securities issued directly by the obligor.
Zero-coupon convertible securities are debt instruments issued at a discount to
their face amount and convertible to common stock (see "Convertible Securities,"
above). These securities usually have put features giving the holder the
opportunity to sell them back to the issuer at a stated price prior to maturity.
The prices of zero-coupon convertible securities are generally more sensitive to
interest rate fluctuations than are conventional convertible securities.
Zero-coupon securities allow an issuer to avoid the need to generate cash to
meet current interest payments. Even though zero-coupon securities do not pay
current interest in cash, federal income tax law requires zero-coupon holders to
recognize accrued income prior to receipt of actual cash payment (i.e., at
maturity). In order to avoid federal income tax liability and maintain its
status as a regulated investment company, a portfolio may have to sell these
securities at disadvantageous times in order to generate cash for the
distribution of accrued income.
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS OF THE FUND
The Fund's Board of Directors is responsible for the Fund's management. The
Board of Directors can amend the Fund's By-laws, elect its officers, declare and
pay dividends, and exercise all the Fund's powers except those reserved to the
shareholders.
The directors and officers of the Fund, together with information as to their
principal occupations during the past five years are listed below:
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address the Fund During Past Five Years
- -------------------- -------------- ----------------------
<S> <C> <C>
Ronald L. Benedict* Secretary and Corporate Vice President, Counsel and
One Financial Way Director Secretary, ONLI; Secretary of
Cincinnati, Ohio the Adviser
George E. Castrucci Director Retired; formerly President and
8355 Old Stable Rd. Chief Operating Officer of Great
Cincinnati, Ohio American Communications Co. and
Chairman and Chief Executive Officer
of Great American Broadcasting Co.;
Director of Benchmark Savings Bank;
Director of Baldwin Piano & Organ Co.
Ross Love Director President & CEO, Blue Chip
615 Windings Way Broadcasting Ltd.; Trustee, Health
Cincinnati, Ohio Alliance of Greater Cincinnati; Director,
Partnership for a Drug Free America
(Chairman of African-American Task
Force); Advisory Board, Syracuse
University School of Management;
Director, Association of National
Advertisers; Until 1996 was Vice
President of Advertising, Procter &
Gamble Co.
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C> <C>
John J. Palmer* President and Senior Vice President, Strategic Initiatives,
One Financial Way Director ONLI; Prior to March 1997 was Senior Vice
Cincinnati, Ohio President of Life Insurance Company of
Virginia
George M. Vredeveld Director Professor of Economics, University of
University of Cincinnati of Cincinnati; Director of Center for
P.O. Box 210223 Economic Education; Private Consultant;
Cincinnati, Ohio Director of Benchmark Savings Bank
Thomas A. Barefield Vice President Senior Vice President, Institutional Sales,
One Financial Way ONLI; Prior to November 1997 was Senior
Cincinnati, Ohio Vice President of Life Insurance Company
of Virginia
Michael A. Boedeker Vice President Vice President, Senior Investment Officer,
One Financial Way ONLI; Vice President and Director of
Cincinnati, Ohio the Adviser
Joseph P. Brom Vice President Executive Vice President, ONLI; Prior to
One Financial Way June 1999 was Senior Vice President &
Cincinnati, Ohio Chief Investment Officer, ONLI; President
and Director of the Adviser
Dennis R. Taney Treasurer Assistant Vice President, Mutual Fund
One Financial Way Operations, ONLI; Treasurer of the
Cincinnati, Ohio Adviser
</TABLE>
*Indicates Directors who are "Interested Persons" as defined by the Investment
Company Act of 1940, as amended.
All directors and officers of the Fund hold similar positions with ONE Fund,
Inc. ("ONE Fund") and Dow Target Variable Fund LLC ("Dow Target"), other
investment companies sponsored by ONLI and managed by the Adviser.
COMPENSATION OF DIRECTORS
Directors who are not affiliated with the Adviser, ONLI, ONLAC or a sub-adviser
were compensated as follows in 1998:
Aggregate Compensation Total Compensation
Director From the Fund From Fund Complex*
- -------- ------------- ------------------
George E. Castrucci $11,200 $16,950
Ross Love 11,200 16,950
George M. Vredeveld 11,200 16,950
* The "Fund Complex" consists of the Fund, ONE Fund and Dow Target.
Directors and officers of the Fund who are affiliated with the Adviser, ONLI or
ONLAC receive no compensation from the Fund Complex. The Fund has no pension,
retirement or deferred compensation plan for its directors or officers.
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<PAGE> 25
SHAREHOLDERS' MEETINGS
The Fund's by-laws do not require that shareholders meetings need be held except
when matters occur that require shareholder approval. Such matters include
election of directors, approval of investment advisory and sub-advisory
agreements, and approval of fundamental investment policies and restrictions.
INVESTMENT ADVISORY AND OTHER SERVICES
The Adviser is an Ohio corporation organized on January 17, 1996 to provide
investment advice and management services to funds affiliated with ONLI. The
Adviser is a wholly-owned subsidiary of ONLI. The Adviser succeeded O.N.
Investment Management Company ("ONIMCO") as the Fund's investment adviser on May
1, 1996. Prior to that date, ONIMCO had been the investment adviser from the
Fund's inception. The Adviser, like ONIMCO before it, uses ONLI's investment
personnel and administrative systems.
The Adviser regularly furnishes to the Fund's Board of Directors recommendations
with respect to an investment program consistent with the investment policies of
each portfolio. Upon approval of an investment program by the Fund's Board of
Directors, the Adviser implements the program by placing the orders for the
purchase and sale of securities or, in the case of the Equity, International,
Capital Appreciation, Small Cap, International Small Company, Aggressive Growth,
Core Growth, Growth & Income, Strategic Income, Firstar Growth & Income,
Relative Value, Capital Growth, High Income Bond, Equity Income and Blue Chip
Portfolios, by delegating that implementation to Legg Mason, Federated Global,
Jennison, Founders, Janus, Pilgrim Baxter, RSIM, Federated Investment, Firstar
or FIRMCO as the case may be.
The Adviser's services are provided under an Investment Advisory Agreement with
the Fund. Under the Investment Advisory Agreement, the Adviser provides
personnel, including executive officers for the Fund. The Adviser also furnishes
at its own expense or pays the expenses of the Fund for clerical and related
administrative services (other than those provided by the custodian agreements
with Firstar and Investors Fiduciary Trust Company and an agency agreement with
American Data Services, Inc.), office space, and other facilities. The Fund pays
corporate expenses incurred in its operations, including, among others, local
income, franchise, issuance or other taxes; certain printing costs; brokerage
commissions on portfolio transactions; custodial and transfer agent fees;
auditing and legal expenses; and expenses relating to registration of its shares
for sale and shareholders' meetings.
As compensation for its services, the Adviser receives from the Fund annual fees
on the basis of each portfolio's average daily net assets during the month for
which the fees are paid based on the following schedule:
(a) for each of the Bond, Omni and Social Awareness portfolios, 0.60% of the
first $100 million of each portfolio's average daily 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 average daily net assets
over $2 billion;
(b) for the Money Market portfolio, 0.30% of the first $100 million of average
daily net assets, 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 average daily net assets
over $1 billion;
(c) for the International, Relative Value, Capital Growth and Blue Chip
portfolios, 0.90% of each portfolio's average daily net assets;
(d) for the Capital Appreciation, Small Cap, Aggressive Growth and Strategic
Income portfolios, 0.80% of each portfolio's average daily net assets,
(e) for the Core Growth portfolio, 0.95% of the first $150 million of average
daily net assets, and 0.80% of average daily net assets over $150 million;
(f) for the Growth & Income portfolio, 0.85% of the first $200 million of
average daily net assets, and 0.80% of average daily net assets over $200
million,
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<PAGE> 26
(g) for the S&P 500 Index portfolio, 0.40% of the first $100 million of average
daily net assets, 0.35% of the next $150 million, and 0.33% of average daily net
assets over $250 million;
(h) for the Firstar Growth & Income portfolio, 0.90% of that portfolio's average
daily net assets;
(i) for the High Income Bond and Equity Income portfolios, 0.75% of each
portfolio's average daily net assets;
(j) for the International Small Company portfolio, 1.00% of the first $100
million of average daily net assets, and 0.90% of average daily net assets over
$100 million, and
(k) for the Equity portfolio, 0.80% of the first $500 million of average daily
net assets, and 0.75% of average daily net assets over $500 million.
However, as to the Money Market portfolio, the Adviser is presently waiving any
of its fee in excess of 0.25%, and as to the International portfolio, the
Adviser is presently waiving any of its fee in excess of 0.85%.
The Fund also incurs other miscellaneous expenses for legal and accounting
services, registration and filing fees, custodial services and shareholder
services.
Under the Investment Advisory Agreement, the Fund authorizes the Adviser to
retain sub-advisers for the Equity, International, Capital Appreciation, Small
Cap, International Small Company, Aggressive Growth, Core Growth, Growth &
Income, Strategic Income, Firstar Growth & Income, Relative Value, Capital
Growth, High Income Bond, Equity Income and Blue Chip portfolios, subject to the
approval of the Fund's Board of Directors. The Adviser has entered into
Sub-Advisory Agreements with Legg Mason, Federated Global, Jennison, Founders,
Janus, Pilgrim Baxter, RSIM, Firstar, FIRMCO and Federated Investment, as the
case may be, to manage the investment and reinvestment of those portfolios'
assets, subject to the supervision of the Adviser. As compensation for their
services the Adviser pays:
(a) Federated Global fees at the annual rate of
(i) 0.45% of the first $200 million and 0.40% of average daily net
assets in excess of $200 million of the International portfolio, and
(ii) 0.75% of the first $100 million and 0.65% of average daily net
assets in excess of $100 million of the International Small Company
portfolio;
(b) Jennison a fee at the annual rate of 0.75% of the first $10 million, 0.50%
of the next $30 million, 0.35% of the next $25 million, 0.25% of the next $335
million, 0.22% of the next $600 million, and 0.20% of the average daily net
asset value in excess of $1 billion of the Capital Appreciation portfolio;
(c) Founders a fee at an annual rate of 0.55% of the first $150 million, 0.50%
of the next $150 million, and 0.40% of the average daily net asset value in
excess of $300 million of the Small Cap portfolio;
(d) Janus a fee at the annual rate of 0.55% of the first $100 million, 0.50% of
the next $400 million, and 0.45% of average daily net asset value in excess of
$500 million of the Aggressive Growth portfolio;
(e) Pilgrim Baxter a fee at an annual rate of 0.65% of the first $50 million,
0.60% of the next $100 million, and 0.50% of average daily net assets in excess
of $150 million of the Core Growth portfolio;
(f) RSIM fees at an annual rate of
(i) 0.60% of the first $100 million, 0.55% of the next $100 million, and
0.50% of average daily net assets in excess of $200 million of the
Growth & Income portfolio, and
(ii) 0.64% of the first $100 million, 0.60% of the next $100 million and
0.50% of average daily net assets in excess of $200 million of the
Capital Growth portfolio;
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<PAGE> 27
(g) Firstar fees at an annual rate of
(i) 0.55% of the first $50 million and 0.50% of average daily net assets
in excess of $50 million of the Strategic Income portfolio, and
(ii) 0.65% of the first $50 million and 0.60% of average daily net
assets in excess of $50 million of the Relative Value portfolio;
(h) Federated Investment fees at an annual rate of
(i) 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 assets in excess
of $75 million of the High Income Bond portfolio, and
(ii) 0.50% of the first $35 million, 0.35% of the next $65 million and
0.25% of average daily net assets in excess of $100 million for
directing the investment and reinvestment of the assets of each of the
Equity Income and Blue Chip portfolios;
(i) FIRMCO a fee at an annual rate of 0.65% of the first $50 million and 0.60%
of average daily net assets in excess of $50 million of the Firstar Growth
& Income portfolio, and
(j) Legg Mason a fee at an annual rate of 0.45% of the first $500 million and
0.40% of average daily net assets in excess of $500 million of the Equity
portfolio.
The following investment advisory fees from each of the Fund's portfolios were
paid to ONIMCO and the Adviser for each of the indicated years, ending December
31*:
1998 1997 1996
---- ---- ----
Equity $1,550,392 $1,431,415 $1,124,431
Money Market** 94,306 71,176 48,721
Bond 150,300 121,188 117,359
Omni 1,116,792 948,021 735,210
International** 1,346,274 1,416,777 1,045,160
Capital Appreciation 559,341 386,595 229,794
Small Cap 490,439 378,436 212,875
International Small Company 175,546 130,704 70,122
Aggressive Growth 182,408 125,073 63,707
Core Growth 96,330 62,237 N/A
Growth & Income 323,909 61,464 N/A
S&P 500 Index 212,478 43,376 N/A
Social Awareness 40,259 16,529 N/A
Strategic Income 30,384 18,318 N/A
Firstar Growth & Income 32,977 23,440 N/A
Relative Value 80,506 30,639 N/A
Capital Growth 10,726 N/A N/A
High Income Bond 50,117 N/A N/A
Equity Income 9,909 N/A N/A
Blue Chip 13,619 N/A N/A
---------- ---------- ----------
$6,567,012 $5,265,388 $3,647,379
* The International portfolio commenced operations on April 30, 1993. The
Capital Appreciation and Small Cap portfolios commenced operations on May 1,
1994. The International Small Company and Aggressive Growth portfolios commenced
operations on March 31, 1995. The Core Growth, Growth & Income, S&P 500 Index,
Social Awareness, Strategic Income, Firstar Growth & Income and Relative Value
portfolios commenced operations on January 3, 1997. The Capital Growth, High
Income Bond, Equity Income and Blue Chip portfolios commenced operations on May
1, 1998.
** For the Money Market portfolio, an additional $15,718, $14,235 and $9,697
was earned but waived in 1998, 1997 and 1996 respectively, as described above.
(The waiver of International portfolio fees in excess of 0.85% did not commence
until January 1999.)
27
<PAGE> 28
The Investment Advisory Agreement also provides that if the total expenses
applicable to any portfolio during any calendar quarter (excluding taxes,
brokerage commissions, interest and the investment advisory fee) exceed l%, on
an annualized basis, of such portfolio's average daily net asset value, the
Adviser will pay such expenses. No such amounts were paid to any portfolio
during the three years ended December 31, 1998.
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 Board of Directors and the shareholders of the respective portfolios
initially voted to approve the current Investment Advisory, Service and
Sub-Advisory Agreements on the dates indicated below:
<TABLE>
<CAPTION>
Board of
Directors Shareholders
--------- ------------
<S> <C> <C>
Equity (Investment Advisory and Service) 1-24-96 3-28-96
Equity (Sub-Advisory) 5-20-99 7-22-99
Money Market 1-24-96 3-28-96
Bond 1-24-96 3-28-96
Omni 1-24-96 3-28-96
International (Investment Advisory and Service) 1-24-96 3-28-96
International (Sub-Advisory) 12-9-98 4-05-99
Capital Appreciation (Investment Advisory and Service) 1-24-96 3-28-96
Capital Appreciation (Sub-Advisory) 11-2-99 N/A*
Small Cap (Investment Advisory and Service) 1-24-96 3-28-96
Small Cap (Sub-Advisory) 11-19-97 2-17-98
International Small Company (Investment Advisory and Service) 1-24-96 3-28-96
International Small Company (Sub-Advisory) 12-9-98 4-05-99
Aggressive Growth (Investment Advisory and Service) 1-24-96 3-28-96
Aggressive Growth (Sub-Advisory) 11-19-99 N/A*
Core Growth 8-22-96 1-02-97
Growth & Income (Investment Advisory and Service) 8-22-96 1-02-97
Growth & Income (Sub-Advisory) 2-24-99 4-05-99
S&P 500 Index 8-22-96 1-02-97
Social Awareness 8-22-96 1-02-97
Strategic Income 8-22-96 1-02-97
Firstar Growth & Income (Investment Advisory and Service) 8-22-96 1-02-97
Firstar Growth & Income (Sub-Advisory) 2-24-99 4-05-99
Relative Value 8-22-96 1-02-97
Capital Growth (Investment Advisory and Service) 2-11-98 4-30-98
Capital Growth (Sub-Advisory) 2-24-99 4-05-99
High Income Bond 2-11-98 4-30-98
Equity Income 2-11-98 4-30-98
Blue Chip 2-11-98 4-30-98
</TABLE>
*The Sub-Advisory Agreements for the Capital Appreciation and Aggressive Growth
portfolios will only continue for more than 120 days beyond their effective
dates of January 3, 2000, if each agreement is approved by the shareholders of
the respective portfolios.
These agreements will continue in force from year to year if continuance is
specifically approved at least annually by a majority of the Fund's directors
who are not parties to such agreements or interested persons of any such party,
with votes to be cast in person at a meeting called for the purpose of voting on
such continuance, and also by a majority of the Board of Directors or by a
majority of the outstanding voting securities of each portfolio voting
separately.
The Investment Advisory, Service, and Sub-Advisory Agreements may be terminated
at any time, without the payment of any penalty, on 60 days' written notice to
the Adviser by the Fund's Board of Directors or, as to
28
<PAGE> 29
any portfolio, by a vote of the majority of the portfolio's outstanding voting
securities. The Investment Advisory Agreement may be terminated by the Adviser
on 90 days' written notice to the Fund. The Service Agreement may be terminated,
without penalty, by the Adviser or ONLI on 90 days' written notice to the Fund
and the other party. The Sub-Advisory Agreements may be terminated, without
penalty, by the Adviser or the sub-adviser on 90 days' written notice to the
Fund and the other party. The Agreements will automatically terminate in the
event of their assignment.
BROKERAGE ALLOCATION
The Adviser buys and sells the portfolio securities for the Money Market, Bond,
Omni, S&P 500 Index and Social Awareness Portfolios and selects the brokers and
dealers to handle such transactions. Each of the sub-advisers selects the
brokers and dealers that execute the transactions for the portfolios managed by
the respective sub-adviser. It is the intention of the Adviser and of each
sub-adviser to place orders for the purchase and sale of securities with the
objective of obtaining the most favorable price consistent with good brokerage
service. The cost of securities transactions for each portfolio will consist
primarily of brokerage commissions or dealer or underwriter spreads. Bonds and
money market securities are generally traded on a net basis and do not normally
involve either brokerage commissions or transfer taxes.
Occasionally, securities may be purchased directly from the issuer. For
securities traded primarily in the over-the-counter market, the Adviser and
sub-advisers will, where possible, deal directly with dealers who make a market
in the securities unless better prices and execution are available elsewhere.
Such dealers usually act as principals for their own account.
In selecting brokers or dealers through whom to effect transactions, the Adviser
and sub-advisers consider a number of factors including the quality, difficulty
and efficiency of execution, and value of research, statistical, quotation and
valuation services provided. Research services by brokers include advice, either
directly or through publications or writings, as to the value of securities, the
advisability of purchasing or selling securities, the availability of securities
or purchasers or sellers of securities, and analyses and reports concerning
issuers, industries, securities, economic factors and trends, and portfolio
strategy. In making such determination, the Adviser or sub-adviser may use a
broker whose commission in effecting a securities transaction is in excess of
that of some other broker if the Adviser or sub-adviser determines in good faith
that the amount of such commission is reasonable in relation to the value of the
research and related services provided by such broker. In effecting a
transaction for one portfolio, a broker may also offer services of benefit to
other portfolios managed by the Adviser or sub-adviser, or of benefit to its
affiliates.
Generally, it is not possible to place a dollar value on research and related
services provided by brokers to the Adviser or a sub-adviser. However, receipt
of such services may tend to reduce the expenses of the Adviser or the
sub-advisers. Research, statistical and similar information furnished by brokers
may be of incidental assistance to other clients of the Adviser or the
sub-advisers and conversely, transaction costs paid by other clients of the
Adviser or the sub-advisers may generate information which is beneficial to the
Fund.
Consistent with these policies, the sub-advisers may, with the Board of
Directors' approval and subject to its review, direct portfolio transactions to
be executed by a broker affiliated with the sub-adviser so long as the
commission paid to the affiliated broker is reasonable and fair compared to the
commission that would be charged by an unaffiliated broker in a comparable
transaction.
For each of the indicated years, ending on December 3l, the following brokerage
commission amounts were paid by each portfolio:
1998 1997 1996
---- ---- ----
Equity $ 249,512 $ 167,877 $ 76,647
Money Market None None None
Bond None None None
Omni 130,934 96,409 41,879
International 253,718 286,011 187,147
Capital Appreciation 63,490 40,887 33,327
29
<PAGE> 30
Small Cap 78,359 55,034 48,973
International Small Company 101,032 45,153 17,514
Aggressive Growth 118,001 104,590 173,952
Core Growth 17,204 12,359 N/A
Growth & Income 270,046 51,188 N/A
S&P 500 Index 48,797 74,063 N/A
Social Awareness 39,951 16,522 N/A
Strategic Income 6,613 5,127 N/A
Firstar Growth & Income 16,648 4,353 N/A
Relative Value 28,388 11,110 N/A
Capital Growth 3,000 N/A N/A
High Income Bond None N/A N/A
Equity Income 2,017 N/A N/A
Blue Chip 4,014 N/A N/A
---------- ---------- --------
$1,431,724 $ 970,683 $579,439
In l998, substantially all of such commissions were paid to brokers who
furnished statistical data and research information to the Adviser or a
sub-adviser.
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 for the Money Market portfolio is normally $l0
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. However, the Fund may suspend the right of redemption or postpone the date
of payment beyond seven days during any period when (a) trading on the New York
Stock Exchange is restricted, as determined by the Securities and Exchange
Commission, or such Exchange is closed for other than weekends and holidays; (b)
an emergency exists, as determined by the Commission, as a result of which
disposal by the Fund of securities owned by it is not reasonably practicable, or
it is not reasonably practicable for the Fund fairly to determine the value of
its net assets; or (c) the Commission by order so permits for the protection of
security holders of the Fund.
Shares of one portfolio may be exchanged for shares of another portfolio of the
Fund on the basis of the relative net assets value next computed after an
exchange order is received by the Fund.
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 day the New York Stock Exchange is open for
unrestricted trading. 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.
Securities which are held in a portfolio and listed on a securities exchange are
valued at the last sale price or, if there has been no sale that day, at the
last bid price reported as of 4 p.m. Eastern time. Over-the-counter securities
are valued at the last bid price as of 4 p.m. Eastern time.
The Board of Directors is ultimately responsible for determining the current net
asset values of each portfolio. The Board has authorized the Adviser and its
service providers to use the following sources to determine the current daily
prices of securities owned by the portfolios: Interactive Data Corporation (and
related "Fundrun" services), Reuters, Bloomberg and any brokers making a market
in a particular security.
Short-term debt securities in all portfolios other than the Money Market and
Omni portfolios, with remaining maturities of 60 days or less, are valued at
amortized cost. The Fund has obtained an exemptive order from the Commission
permitting it to value all short-term debt securities in the Omni portfolio at
amortized cost.
30
<PAGE> 31
The Fund relies on Rule 2a-7 under the Investment Company Act of 1940 to value
the assets of the Money Market portfolio on the basis of amortized cost with a
view toward stabilizing the net asset value at $l0 per share and allowing
dividend payments to reflect net interest income as earned. Accordingly, the
short-term debt assets of the Omni and Money Market portfolios 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. All other assets of the Omni portfolio and of those
portfolios other than the Money Market portfolio, including restricted debt
securities and other investments for which market quotations are not readily
available, are valued at their fair value as determined in good faith by the
Board of Directors.
As a condition of the exemptive order, the Fund has agreed, with respect to
short-term debt securities in its Omni portfolio, to maintain a dollar-weighted
average maturity of not more than l20 days and to not purchase any such debt
security having a maturity of more than one year. In relying on Rule 2a-7 with
respect to short-term debt securities in its Money Market portfolio, the Fund
has agreed to maintain a dollar-weighted average portfolio maturity of not more
than 90 days and to not purchase any such debt security having a maturity of
more than 397 days. The dollar-weighted average maturity of short-term debt
securities is determined by dividing the sum of the dollar value of each such
security times the remaining days to maturity of such security by the sum of the
dollar value of all short-term debt securities. Should the disposition of a
short-term debt security result in a dollar-weighted average maturity of more
than the number of days allowed under the exemptive order or Rule 2a-7, as the
case may be, the portfolio will invest its available cash so as to reduce such
average maturity to the required number of days or less as soon as reasonably
practicable. The Fund normally holds short-term debt securities to maturity and
realizes par therefor unless an earlier sale is required to meet redemption
requirements.
In addition, the Omni and Money Market portfolios are required to limit their
short-term debt investments, including repurchase agreements, to those United
States dollar denominated instruments which the Board of Directors determines
present minimal credit risks and which are in the top two rating categories of
any nationally recognized statistical rating organizations or, in the case of
any instrument that is not rated, of comparable quality as determined by the
Board of Directors. Although the use of amortized cost provides certainty in
valuation, it may result in periods during which value so determined is higher
or lower than the price the Fund would receive if it liquidated its securities.
The Fund's Board of Directors is obligated, as a particular responsibility
within the overall duty of care owed to Money Market portfolio shareholders, to
establish procedures reasonably designed, taking into account current market
conditions and the investment objective of such portfolio, to stabilize the
portfolio's net asset value per share as computed for the purpose of
distribution, redemption and repurchase, at $l0 per share. The procedures
adopted by the Board of Directors include periodically reviewing, as it deems
appropriate and at such intervals as are reasonable in light of current market
conditions, the extent of deviation, if any, between the net asset value per
share based on available market quotations and such value based on the
portfolio's $l0 amortized cost price. If such deviation exceeds 1/2 of 1
percent, or if there is any other deviation which the Board of Directors
believes would result in a material dilution to shareholders or purchasers, the
Board of Directors will promptly consider what action, if any, it should
initiate. Such action may include redemption in kind; selling portfolio
instruments prior to maturity to realize capital gains or losses, or to shorten
the average portfolio maturity; withholding dividends; splitting, combining or
otherwise recapitalizing outstanding shares; or using available market
quotations to determine net asset value per share. The portfolio may reduce the
number of its outstanding shares by requiring shareholders to contribute to
capital proportionately the number of full and fractional shares as is necessary
to maintain the net asset value per share of $l0. ONLI and ONLAC, the sole
shareholders of the Money Market portfolio, have agreed to this procedure and
contract owners who allocate purchase payments to the Money Market portfolio
will be bound by such agreement.
TAX STATUS
At December 3l, 1998 the Fund and each portfolio qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code (the "Code").
Under such provisions, the Fund is not subject to federal income tax on such
part of its net ordinary income and net realized capital gains which it
distributes to shareholders. Each portfolio is treated as a separate entity for
federal income tax purposes, including determining whether it qualifies as a
regulated investment company and determining its net ordinary income
31
<PAGE> 32
(or loss) and net realized capital gains (or losses). To qualify for treatment
as a regulated investment company, each portfolio must, among other things,
derive in each taxable year at least 90% of its gross income from dividends,
interest and gains from the sale or other disposition of securities. Each
portfolio also intends to comply with the diversification requirements or
regulations under Section 817(h) of the Code.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and Treasury Regulations currently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and the
Treasury Regulations promulgated thereunder. Since the only eligible
shareholders of the Fund are separate accounts of ONLI, ONLAC and other
insurance companies, no discussion is stated herein as to the federal income tax
consequences at the shareholder level.
EXPERTS
The financial statements of Ohio National Fund, Inc. as of December 31, 1998 and
for the earlier periods indicated herein included in this Statement of
Additional Information and the Financial Highlights included in the prospectus
have been included herein and in the prospectus in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing in this Statement
of Additional Information, and upon the authority of said firm as experts in
accounting and auditing. KPMG LLP's business address is 201 East Fifth Street,
Cincinnati, Ohio 45202.
LEGAL COUNSEL
Messrs. Jones & Blouch L.L.P., Washington, D.C., have passed on matters
pertaining to the federal securities laws and Ronald L. Benedict, Esq.,
Secretary of the Fund and Corporate Vice President, Counsel and Secretary of
ONLI, has passed on all other legal matters relating to the legality of the
shares described in the prospectus and this Statement of Additional Information.
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 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
32
<PAGE> 33
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.
33
<PAGE> 34
APPENDIX
DEBT SECURITY RATINGS
The Commission has designated six nationally recognized statistical rating
organizations: Duff and Phelps, Inc. ("D&P"), Fitch Investors Service, Inc.
("Fitch"), Moody's Investors Service, Inc. (Moody's"), Standard & Poor's Corp.
("S&P"), and, with respect to bank-supported debt and debt issued by banks,
broker-dealers and their affiliates, IBCA Inc. and its British affiliate, IBCA
Limited ("IBCA") and Thompson Bankwatch, Inc. ("TBW"). The Adviser may use the
ratings of all six such rating organizations as factors to consider in
determining the quality of debt securities, although it will generally only
follow D&P, Fitch, Moody's and S&P. IBCA and TBW will only be consulted if fewer
than two of the other four rating organizations have given their top rating to a
security. Only the ratings of Moody's, S&P and Fitch will be considered in
determining the eligibility of bonds for acquisition by the Fund.
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
COMMERCIAL PAPER:
- -----------------
Moody's short-term debt ratings are opinions of the ability of issuers to
punctually repay senior debt obligations having an original maturity not
exceeding one year.
P-1 The Prime-1 (P-1) rating is the highest commercial paper rating assigned
by Moody's. Issuers (or supporting institutions) rated P-1 have a superior
ability for repayment of senior short-term debt obligations. P-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries, high rates of
return on funds employed, conservative capitalization structure with
moderate reliance on debt and ample asset protection, broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and well-established access to a range of financial markets
and assured sources of alternate liquidity.
P-2 Issuers (or supporting institutions) rated Prime-2 (P-2) have a strong
ability for repayment of senior short-term obligations. This will normally
be evidenced by many of the characteristics cited above for P-1, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
BONDS:
- ------
Aaa Bonds which are rated Aaa by Moody's are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated as Aa by Moody's are judged to be of high quality by
all standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A by Moody's possess many favorable investment
attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate
but elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa by Moody's are considered as medium grade
obligations, that is, they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable
34
<PAGE> 35
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORP. ("S & P")
COMMERCIAL PAPER:
- -----------------
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than one year.
A-1 This is S&P's highest category and it indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are designated A-1+.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated as A-1.
BONDS:
- ------
AAA Bonds rated AAA by S&P are the highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. Market prices
move with interest rates, and hence provide maximum safety on all counts.
AA Bonds rated AA by S&P also qualify as high grade obligations, and in the
majority of instances differ from AAA issues only in small degree. Here,
too, prices move with the long-term money market.
A Bonds rated A by S&P are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from the
adverse effects of changes in economic and trade conditions. Interest and
principal are regarded as safe. They predominantly reflect money rates in
their market behavior, but to some extent, also economic conditions.
BBB The BBB or medium grade category is the borderline between definitely
sound obligations and those where the speculative element begins to
predominate. These bonds have adequate asset coverage and normally are
protected by satisfactory earnings. Their susceptibility to changing
conditions, particularly to depressions, necessitates constant watching.
Marketwise, the bonds are more responsive to business
35
<PAGE> 36
and trade conditions than to interest rates. This is the lowest group
which qualifies for commercial bank investments.
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 `AA' to `CCC' may be modified by the addition of a plus (+) or
minus (-) to show relative standing within the major rating categories.
DUFF & PHELPS, INC. ("D & P")
COMMERCIAL PAPER:
- -----------------
D&P's short-term ratings have incorporated gradations of "1+" and "1-" in
recognition of quality differences within the first tier.
D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.
D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection.
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D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors
are small.
FITCH INVESTORS SERVICE, INC. ("FITCH")
COMMERCIAL PAPER
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
Fitch's short-term ratings emphasize the existence of liquidity necessary to
meet the issuer's obligations in a timely manner.
F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good credit quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as the F-1+ and F-1 categories.
BONDS
- -----
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated `AAA.' Because bonds
rated in the `AAA' and `AA' categories are not significantly vulnerable
to foreseeable future developments, short-term debt of these issuers is
genrally rated `F-1+.'
A Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to
be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interst and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
rating of these bonds will fall below investment grade is higher than
for bonds with higher ratings.
BB Bonds are considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt service
requirements.
B Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business
and economic activity throughout the life of the issues.
CCC Bonds have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
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C Bonds are in imminent default in payment of interest or principal.
DDD, DD and D Bonds in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of
their ultimate recovery value in liquidation or reorganization of the
obligor. `DDD' represents the highest potential for recovery on these
bonds, and `D' represents the lowest potential for recovery.
Note: Fitch ratings (other than `AAA.' `DDD,' `DD,' or `D' categories) may be
modified by the addition of a plus (+) or minus (-) sign to show relative
position of a credit within the rating category.
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