May 1, 1999
CARILLON FUND, INC.
- -----------------------------------------------------------
Carillon Fund, Inc. is a mutual fund with eight separate
Portfolios, each with its own investment objective. This
Prospectus offers four of the Portfolios. We cannot assure you
that any Portfolio will meet its objective. Their investment
objectives are:
THE EQUITY PORTFOLIO seeks primarily long-term
appreciation of capital, without incurring unduly high risk, by
investing primarily in common stocks and other equity
securities. Current income is a secondary objective.
THE BOND PORTFOLIO seeks as high a level of current
income as is consistent with reasonable investment risk, by
investing primarily in long-term, fixed-income, investment-grade
corporate bonds.
THE CAPITAL PORTFOLIO seeks to provide the highest total
return through a combination of income and capital appreciation
consistent with the reasonable risks associated with an
investment portfolio of above-average quality by investing in
equity securities, debt instruments and money market
instruments.
THE S&P 500 INDEX PORTFOLIO seeks investment results
that correspond to the total return performance of U.S. common
stocks, as represented by the S&P 500 Index.
THIS PROSPECTUS CONTAINS INFORMATION YOU SHOULD KNOW BEFORE
ALLOCATING YOUR CONTRACT VALUES TO ANY OF THE PORTFOLIOS. WE
SUGGEST THAT YOU READ IT AND KEEP IT FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") NOR ANY STATE.
NEITHER THE SEC NOR ANY STATE HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
UCCF 514EX 4-99
<PAGE>
TABLE OF CONTENTS
INTRODUCTION TO THE FUND..................................3
PORTFOLIO PROFILES........................................3
EQUITY PORTFOLIO PROFILE................................3
BOND PORTFOLIO PROFILE..................................5
CAPITAL PORTFOLIO PROFILE...............................8
S&P 500 INDEX PORTFOLIO PROFILE........................10
PORTFOLIO OPERATING EXPENSES.............................12
OTHER INVESTMENT POLICIES, STRATEGIES AND RISKS..........13
FOREIGN SECURITIES.....................................13
FOREIGN CURRENCY TRANSACTIONS..........................14
JUNK BONDS.............................................14
REPURCHASE AGREEMENTS..................................15
REVERSE REPURCHASE AGREEMENTS..........................15
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS....15
OPTIONS ON SECURITIES INDICES..........................17
COLLATERALIZED MORTGAGE OBLIGATIONS....................17
LENDING PORTFOLIO SECURITIES...........................17
MIXED FUNDING..........................................17
OTHER INFORMATION......................................18
FUND MANAGEMENT..........................................18
INVESTMENT ADVISER.....................................18
ADVISORY FEE...........................................18
EXPENSES...............................................19
CAPITAL STOCK..........................................19
VALUATION OF PORTFOLIO SHARES..........................19
DIVIDENDS AND DISTRIBUTIONS..............................20
TAXES....................................................20
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT........20
PREPARING FOR YEAR 2000..................................20
S&P DISCLAIMER...........................................21
FINANCIAL HIGHLIGHTS.....................................22
APPENDIX A: RATINGS......................................26
CORPORATE BOND RATINGS.................................26
COMMERCIAL PAPER RATINGS...............................27
APPENDIX B: S&P 500 RETURNS..............................28
<PAGE>
INTRODUCTION TO THE FUND
This prospectus explains the objectives, risks and strategies of
six of the Portfolios of Carillon Fund, Inc. (the "Fund"). The
Portfolios are mutual funds used solely as investment options
for variable annuity or variable life insurance contracts
offered by The Union Central Life Insurance Company ("Union
Central"). Although you cannot purchase shares of the
Portfolios directly, you can instruct Union Central how to
allocate your contract's values among the Portfolios. Each
Portfolio Profile below summarizes important facts about the
Portfolio, including its investment objective, strategy, risks
and past investment performance. More detailed information
about some of the Portfolios' investment policies and strategies
is provided after the Profiles, along with information about
Portfolio expenses, share pricing and Financial Highlights for
each Portfolio.
PORTFOLIO PROFILES
EQUITY PORTFOLIO PROFILE
Investment Objective
The Equity Portfolio seeks primarily long-term appreciation of
capital, without incurring unduly high risk, by investing
primarily in common stocks and other equity securities. Current
income is a secondary objective.
Investment Strategies
A major portion of the Equity Portfolio will be invested in
common stocks. The Portfolio seeks special opportunities in
securities that are selling at a discount from theoretical
price/earnings ratios and that seem capable of recovering from
their temporary out-of-favor status (a "value" investment
style). The Portfolio may invest all or a portion of its assets
in preferred stocks, bonds, convertible preferred stocks,
convertible bonds, and convertible debentures. When market
conditions for equity securities are adverse, and for temporary
defensive purposes, the Portfolio may invest in Government
securities, money market instruments, or other fixed-income
securities, or retain cash or cash equivalents. However, the
Portfolio normally will remain primarily invested in common
stocks.
The Equity Portfolio's investment strategy is based upon the
belief of the Fund's investment adviser (the "Adviser") that the
pricing mechanism of the securities market lacks total
efficiency and has a tendency to inflate prices of some
securities and depress prices of other securities in different
market climates. The Adviser believes that favorable changes in
market prices are more likely to begin when:
> securities are out-of-favor,
> price/earnings ratios are relatively low,
> investment expectations are limited, and
> there is little interest in a particular security or
industry.
The Adviser believes that securities with relatively low
price/earnings ratios in relation to their profitability are
better positioned to benefit from favorable but generally
unanticipated events than are securities with relatively high
price/earnings ratios which are more susceptible to unexpected
adverse developments. The current institutionally-dominated
market tends to ignore the numerous second tier issues whose
market capitalizations are below those of a limited number of
established large companies. Although this segment of the market
may be more volatile and speculative, the Adviser expects that a
well-diversified Portfolio represented in this segment of the
market has potential long-term rewards greater than the
potential rewards from investments in more highly capitalized
equities.
PRIMARY RISKS
> Market risk: The Equity Portfolio's total return, like stock
prices generally, will fluctuate within a wide range in response
to stock market trends. As a result, shares of the Portfolio
could drop in value over short or even long periods. Stock
markets tend to move in cycles, with periods of rising prices
and periods of falling prices.
> Financial risk: The Equity Portfolio's total return will
fluctuate with fluctuations in the earnings stability or overall
financial soundness of the companies whose stock the Portfolio
purchases.
> Investment style risk: The Equity Portfolio's investment
style risks that returns from "value" stocks it purchases will
trail returns from other asset classes or the overall stock
market.
Bar Chart and Performance Table
The bar chart and table below provide an indication of the risk
of investing in the Equity Portfolio. The bar chart shows the
Portfolio's performance in each of the past 10 calendar years.
The table shows how the Portfolio's average annual returns for
one, five and 10 calendar years compare with those of a broad-
based stock market index. The Portfolio's returns are net of
its expenses, but do NOT reflect the additional fees and
expenses of your variable annuity or variable life insurance
contract. If those contract fees and expenses were included,
the returns would be lower. Keep in mind that the Portfolio's
past performance does not indicate how it will perform in the
future.
<PAGE>
Annual Total Return
[The bar chart displayed here shows the Total Returns for the
calendar years as follows:
11.79%, 1989
-15.45%, 1990
45.55%, 1991
11.78%, 1992
14.11%, 1993
3.42%, 1994
26.96%, 1995
24.52%, 1996
20.56%, 1997
-15.31%, 1998 ]
The Equity Portfolio's return for the most recent calendar
quarter ended March 31, 1999, was -7.12%. During the period
shown in the bar chart, the highest return for a calendar
quarter was 26.7% (quarter ending 3/31/91) and the lowest return
for a quarter was -23.9% (quarter ending 9/30/90).
Average Annual Total Returns for Years Ended December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Equity Portfolio -15.3%% 10.8% 15.0%
Russell 2000 -3.5% 10.2% 11.1%
</TABLE>
BOND PORTFOLIO PROFILE
Investment Objective
The Bond Portfolio seeks as high a level of current income as is
consistent with reasonable investment risk, by investing
primarily in long-term, fixed-income, investment-grade corporate
bonds.
Investment Strategies
The Bond Portfolio normally will invest at least 75% of the
value of its assets in:
- - publicly-traded or 144a debt securities rated BBB or BAA3 or
higher by a nationally recognized rating service such as
Standard & Poor's or Moody's,
- - obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities, or
- - cash and cash equivalents.
Up to 25% of the Bond Portfolio's total assets may be invested
in:
- - debt securities that are unrated or below investment-grade
bonds ("high yield" or "junk" bonds),
- - convertible debt securities,
- - convertible preferred and preferred stocks, or
- - other securities.
The Bond Portfolio will not directly purchase common stocks.
However, it may retain up to 10% of the value of its total
assets in common stocks acquired either by conversion of
fixed-income securities or by the exercise of warrants
attached thereto. The Portfolio may also write covered call
options on U.S. Treasury Securities and options on futures
contracts for such securities. A description of
the corporate bond ratings assigned by Standard & Poor's and
Moody's is included in Appendix A: Ratings - Corporate Bond
Ratings.
Primary Risks
- - Interest Rate Risk: Interest rate risk is the potential for
fluctuation in bond prices due to changing interest rates. Bond
prices generally rise when interest rates fall. Likewise, bond
prices generally fall when interest rates rise. Furthermore,
the price of bonds with a longer maturity generally fluctuates
more than bonds with a shorter maturity. To compensate
investors for larger fluctuations, longer maturity bonds usually
offer higher yields than shorter maturity bonds. Interest rate
risk is a risk inherent in all bonds, regardless of credit
quality.
The Portfolio maintains an intermediate-term average
maturity (5 to 15 years), and is therefore subject to a moderate
to high level of interest rate risk.
- - Credit Risk: Credit risk is the risk that an issuer of a
security will be unable to make payments of principal and/or
interest on a security held by the Portfolio. When an issuer
fails to make a scheduled payment of principal or interest on a
security, or violates other terms and agreements of a security,
the issuer and security are in default. A default by the issuer
of a security generally has a severe negative affect on the
market value of that security.
The credit risk of the Portfolio is a function of the
credit quality of its underlying securities. The average credit
quality of the Portfolio is expected to be very high.
Therefore, the credit risk of the Portfolio is expected to be
low. As of December 31, 1998, the average quality of the
Portfolio, as rated by Moody's Investors Service, was AA2 (See
Appendix A: Ratings - Corporate Bond Ratings). However,
certain individual securities held in the Portfolio may have
substantial credit risk. The Portfolio may contain up to 25% of
securities rated below investment grade. Securities rated below
investment grade generally have substantially more credit risk
than securities rated investment grade. Securities rated below
investment grade are defined as having a rating below Baa by
Moody's Investors Services and below BBB by Standard & Poor's
Corporation (See Appendix A: Ratings - Corporate Bond Ratings).
As of December 31, 1998, 15.1% of the debt securities held by
the Bond Portfolio were of less than investment grade.
- - Income Risk: Income risk is the risk of a decline in the
Portfolio's income due to falling market interest rates. Income
risk is generally higher for portfolios with short term average
maturities and lower for portfolios with long term average
maturities. Income risk is also generally higher for portfolios
that are actively traded and lower for portfolios that are less
actively traded. The Portfolio maintains an intermediate
average maturity and is actively traded. Therefore, income risk
is expected to be moderate to high.
- - Prepayment Risk: Prepayment risk is the risk that, during
periods of declining interest rates, the principal of mortgage-
backed securities and callable bonds will be repaid earlier than
scheduled, and the portfolio manager will be forced to reinvest
the unanticipated repayments at generally lower interest rates.
The Portfolio's exposure to mortgage-backed securities and
currently callable bonds is generally low to moderate.
Therefore, the prepayment risk of the Portfolio is expected to
be low to moderate. Other factors, including interest rate risk
and credit risk can cause fluctuation in bond prices.
Bar Chart and Performance Table
The bar chart and table below provide an indication of the risk
of investing in the Bond Portfolio. The bar chart shows the
Portfolio's performance in each of the past 10 calendar years.
The table shows how the Portfolio's average annual returns for
one, five and 10 calendar years and compare with those of a
broad-based bond index. The Portfolio's returns are net of its
expenses, but do not reflect the additional fees and expenses of
your variable annuity or variable life insurance contract. If
those contract fees and expenses were included, the returns
would be lower. Keep in mind that the Portfolio's past
performance does not indicate how it will perform in the future.
Annual Total Return
[The bar chart displayed here shows the Total Returns for the
calendar years as follows:
10.72%, 1989
8.66%, 1990
17.89%, 1991
7.65%, 1992
11.94%, 1993
-1.63%, 1994
19.03%, 1995
7.19%, 1996
11.02%, 1997
6.52%, 1998 ]
The Bond Portfolio's return for the most recent calendar quarter
ended March 31, 1999, was -0.1%.During the period shown in the
bar chart, the highest return for a calendar quarter was 6.1%
(quarter ending 6/30/95) and the lowest return for a quarter was
- -1.6% (quarter ending 3/31/94).
Average Annual Total Returns for Years Ended December 31, 1998
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
<S> <C> <C> <C>
Bond Portfolio 6.5% 8.2% 9.8%
Lehman Aggregate Bond Index 8.7% 7.3% 9.3%
</TABLE>
CAPITAL PORTFOLIO PROFILE
Investment Objective
The Capital Portfolio seeks to provide the highest total return
through a combination of income and capital appreciation
consistent with the reasonable risks associated with an
investment portfolio of above-average quality by investing in
equity securities, debt instruments and money market
instruments.
Investment Strategies
There are no percentage limitations on the class of securities
in which the Capital Portfolio may invest. The Capital Portfolio
may invest entirely in equity securities, entirely in debt,
entirely in money market instruments, or in any combination of
these types of securities at the sole discretion of the Adviser.
The Adviser determines the proportion of Capital Portfolio
assets invested in equity, debt and money market securities
based on fundamental value analysis; analysis of historical
long-term returns among equity, debt and money market
investments; and other market influencing factors. The
fundamental value analysis considers the Adviser's outlook over
both the near and long-term, for corporate profitability, short
and long-term interest rates, stock price earnings ratios for
the market in total and individual stocks and inflation rates.
When the investment climate as indicated by the fundamental
factors is near historical relationships, the Portfolio will be
structured approximately 55%-65% in equity, 35%-45% in debt and
0%-5% in money market securities. In addition, the Adviser
considers market monetary policy, equity momentum, market
sentiment, economic influences and market cycles in making its
asset allocation decision.
Equity Securities. In its equity investments, the Capital
Portfolio emphasizes a combination of several themes in order to
diversify its investment exposure. Most stocks purchased by the
Portfolio display one or more of the following criteria:
- Low price earnings ratios in relation to their return on
equity.
- High asset values in relation to stock price.
- Foreign securities of companies judged to represent
better fundamental value than those of similar domestic
companies.
- A high level of dividend payment providing a yield that
is competitive with debt investments.
Debt Securities. The Capital Portfolio may invest in rated or
unrated debt securities, including obligations of the U.S.
Government and its agencies, and corporate debt obligations
rated BBB or Baa or higher by a nationally recognized rating
service such as Standard & Poor's or Moody's, or, if not rated,
of equivalent quality as determined by the investment adviser.
Only 25% of the value of any bonds held by the Capital Portfolio
may be unrated or less than investment-grade bonds.
Money Market Instruments. The following securities are
considered money market instruments if their remaining
maturities are less than 13 months: repurchase agreements, U.S.
government obligations, government agency securities,
certificates of deposit, time deposits, bankers' acceptances,
commercial paper and corporate debt securities.
The Capital Portfolio may also write covered call options on
U.S. Treasury Securities and options on futures contracts for
such securities. See "Futures Contracts and Options on Futures
Contracts," page 19.
Primary Risks
- - Asset allocation risks: Because the Adviser has complete
discretion regarding allocation of the Capital Portfolio's
investments among equity, debt and money market instruments, the
primary risk of that Portfolio is that the Adviser will not
accurately predict the relative performance of those market
segments for any particular economic cycle and may not optimally
time reallocations of the Portfolio's assets among those market
segments.
- - Market risk: When the Capital Portfolio is substantially
invested in equity securities, its total return, like stock
prices generally, will fluctuate within a wide range in response
to stock market trends. As a result, shares of the Portfolio
could drop in value over short or even long periods. Stock
markets tend to move in cycles, with periods of rising prices
and periods of falling prices.
- - Financial risk: The Capital Portfolio's total return will
fluctuate with fluctuations in the earnings stability or overall
financial soundness of the companies whose stock the Portfolio
purchases and in the ability of an issuer of a debt security it
purchases to pay principal and interest on that security.
- - Other risks: The risks relating to the Capital Portfolio's
investments in debt securities are the same as those described
above for the Bond Portfolio.
Bar Chart and Performance Table
The bar chart and table below provide an indication of the risk
of investing in the Capital Portfolio. The bar chart shows the
Portfolio's performance in each calendar year since inception.
The table shows how the Portfolio's average annual returns for
one and five calendar years and since inception compare with
those of a broad-based bond and a stock market index. The
Portfolio's returns are net of its expenses, but do not reflect
the additional fees and expenses of your variable annuity or
variable life insurance contract. If those contract fees and
expenses were included, the returns would be lower. Keep in
mind that the Portfolio's past performance does not indicate how
it will perform in the future.
Annual Total Return
[The bar chart displayed here shows the Total Returns for the
calendar years as follows:
26.10%, 1991
7.93%, 1992
12.72%, 1993
0.94%, 1994
14.28%, 1995
14.94%, 1996
7.40%, 1997
-13.25%, 1998 ]
The Capital Portfolio's return for the most recent calendar
quarter ended March 31, 1999, was -2.67%. During the period
shown in the bar chart, the highest return for a calendar
quarter was 13.5% (quarter ending 3/31/91) and the lowest return
for a quarter was -15.2% (quarter ending 9/30/98).
Average Annual Total Returns for Years Ended December 31, 1998
<TABLE>
<CAPTION>
Since
1 Year 5 Years Inception*
<S> <C> <C> <C>
Capital Portfolio -13.1% 4.3% 7.6%
Lehman Aggregate Bond Index 8.7% 7.3% 9.3%
S&P 500 Index 28.6% 24.0% 18.3%
</TABLE>
*May 1, 1990
S&P 500 INDEX PORTFOLIO PROFILE
Investment Objective
The S&P 500 Index Portfolio seeks investment results that
correspond to the total return performance of U.S. common
stocks, as represented by the S&P 500 Index.
Investment Strategies
The S&P 500 Index Portfolio seeks to substantially replicate the
total return of the securities comprising the S&P 500 Index,
taking into consideration redemptions, sales of additional
shares, and other adjustments described below. Precise
replication of the capitalization weighting of the securities in
the S&P 500 is not feasible. The Index Portfolio will attempt
to achieve, in both rising and falling markets, a correlation of
at least 95% between the total return of its net assets before
expenses and the total return of the S&P 500. A correlation of
100% would represent perfect correlation between the Portfolio
and index performance. The correlation of the Portfolio's
performance to that of the S&P 500 should increase as the
Portfolio grows. There can be no assurance that the Portfolio
will achieve a 95% correlation.
The S&P 500 Index Portfolio may invest up to 5% of its assets in
Standard & Poor's Depositary Receipts(R) ("SPDRs(R)"). SPDRs are
units of beneficial interest in a unit investment trust,
representing proportionate undivided interests in a portfolio of
securities in substantially the same weighting as the common
stocks that comprise the S&P 500.
Although the Adviser will attempt to invest as much of the S&P
500 Index Portfolio's assets as is practical in stocks included
among the S&P 500 and futures contracts and related options, a
portion of the Portfolio may be invested in money market
instruments pending investment or to meet redemption requests or
other needs for liquid assets. In addition, for temporary
defensive purposes, the Portfolio may invest in government
securities, money market instruments, or other fixed-
income securities, or retain cash or cash equivalents.
Primary Risks
- - Market risk: The S&P 500 Index Portfolio's total return,
like stock prices generally, will fluctuate within a wide range
in response to stock market trends, so a share of the Portfolio
could drop in value over short or even long periods. Stock
markets tend to move in cycles, with periods of rising prices
and periods of falling prices.
- - Investment style risk: Stocks of large companies, such as
those listed among the S&P 500 Index, occasionally go through
cycles of doing worse (or better) than the stock markets in
general or other types of investments.
- - Correlation risk: Because the S&P Index Portfolio has
expenses, and the S&P 500 Index does not, the Portfolio may be
unable to replicate precisely the performance of the Index.
While the Portfolio remains small, it may have a greater risk
that its performance will not match that of the Index.
Bar Chart and Performance Table
The bar chart and table below provide an indication of the risk
of investing in the S&P 500 Index Portfolio. The bar chart
shows the Portfolio's performance in each calendar year since
its inception. The table shows how the Portfolio's average
annual returns for one year and since inception compare with
those of the S&P 500 Index whose performance it seeks to
replicate. The Portfolio's returns are net of its expenses, but
do NOT reflect the additional fees and expenses of your variable
annuity or variable life insurance contract. If those contract
fees and expenses were included, the returns would be lower.
Keep in mind that the Portfolio's past performance does not
indicate how it will perform in the future.
Annual Total Return
[The bar chart displayed here shows the Total Returns for the
calendar years as follows:
23.37%, 1996
32.72%, 1997
28.54%, 1998 ]
The S&P 500 Index Portfolio's return for the most recent
calendar quarter ended March 31, 1999, was 4.83%. During the
period shown in the bar chart, the highest return for a calendar
quarter was 21.2% (quarter ending 12/31/98) and the lowest
return for a quarter was -9.9% (quarter ending 9/30/98).
Average Annual Total Returns for Years Ended December 31, 1998
<TABLE>
<CAPTION>
Since
1 Year Inception*
<S> <C> <C>
S&P 500 Index Portfolio 28.5% 28.2%
S&P 500 Index 28.6% 28.1%
</TABLE>
*December 29, 1995
PORTFOLIO OPERATING EXPENSES
This table describes the fees and expenses of the Portfolios:
EXPENSES (as a percentage of average net assets)
<TABLE>
<CAPTION>
S&P 500
Equity Bond Capital Index
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Management
Fees .56% .47% .69% .30%
Other
Expenses .06% .11% .10% .13%
---- ---- ---- ----
Total
Operating
Expenses .62% .58% .79% .43%
</TABLE>
EXAMPLE
The table below shows the amount of expenses a Shareholder would
pay on a $10,000 investment assuming a 5% annual return.+
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Equity Portfolio $64 $199 $347 $776
Bond Portfolio $59 $186 $325 $727
Capital Portfolio $81 $253 $440 $981
S&P 500 Index Portfolio $44 $138 $241 $543
</TABLE>
The purpose of this table is to help you understand the Fund expenses
that you may bear indirectly through your purchase of a Union Central
contract. This table does NOT include any contract or variable account
charges. Those charges, along with the Fund's expenses, are contained
in the prospectus for your contract.
This table should not be considered a representation of past or future
expenses. Actual expenses may be more or less than those shown.
- -------------
+ The 5% annual return is a standardized rate prescribed for the
purpose of this example and does not represent the past or
future return of the Fund.
OTHER INVESTMENT POLICIES, STRATEGIES AND RISKS
FOREIGN SECURITIES
Each Portfolio may invest in foreign securities that are suitable for
the Portfolio's investment objectives and policies. Foreign securities
investments are limited to 25% of net assets for the Equity and Bond
Portfolios and to 35% of net assets for the Capital Portfolio. The
S&P 500 Index Portfolio is limited to investing in those foreign
securities included in the Standard & Poor's 500 Composite Stock Index.
Each Portfolio that invests in foreign securities limits not only its
total purchases of foreign securities, but also its purchases for any
single country. For "major countries," the applicable limit is 10% of
Portfolio net assets for the Equity and Bond Portfolios and 20% for the
Capital Portfolio; for other countries, the applicable limit is 5% for
each Portfolio. "Major countries" currently include: The United
Kingdom, Germany, France, Italy, Switzerland, Netherlands, Spain,
Belgium, Canada, Mexico, Argentina, Chile, Brazil, Australia, Japan,
Singapore, New Zealand, Hong Kong, Sweden and Norway.
Investing in foreign securities involves risks which are not ordinarily
associated with investing in domestic securities, including:
- political or economic instability in the foreign country;
- diplomatic developments that could adversely affect the
value of the foreign security;
- foreign government taxes;
- costs incurred by a Portfolio in converting among various
currencies;
- fluctuation in currency exchange rates;
- the possibility of imposition of currency controls,
expropriation or nationalization measures or withholding
dividends at the source;
- in the event of a default on a foreign debt security,
possible difficulty in obtaining or enforcing a judgment
against the issuer;
- less publicly available information about foreign issuers
than domestic issuers;
- foreign accounting and financial reporting requirements
are generally less extensive than those in the U.S.;
- securities of foreign issuers are generally less liquid
and more volatile than those of comparable domestic
issuers;
- there is often less governmental regulation of exchanges,
broker-dealers and issuers and brokerage costs may be
higher than in the United States.
Foreign securities purchased by the Portfolios may include securities
issued by companies located in countries not considered to be major
industrialized nations. Such countries are subject to more economic,
political and business risk than major industrialized nations, and the
securities they issue may be subject to abrupt or erratic price
fluctuations, and are expected to be more volatile and more uncertain as
to payments of interest and principal. Developing countries may have
relatively unstable governments, economies based only on a few
industries, and securities markets that trade only a small number of
securities. The secondary market for such securities is expected to be
less liquid than for securities of major industrialized nations.
FOREIGN CURRENCY TRANSACTIONS
Each Portfolio other than the S&P 500 Index Portfolio may engage in
forward foreign currency contracts ("forward contracts") in connection
with the purchase or sale of a specific security. A forward contract
involves an obligation to purchase or sell a specific foreign 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.
Portfolios will not enter into forward contracts for longer-term hedging
purposes. The possibility of changes in currency exchange rates will be
incorporated into the long-term investment considerations when
purchasing the investment and subsequent considerations for possible
sale of the investment.
JUNK BONDS
The Capital and Bond Portfolios may each invest up to 25% of its assets
in bonds rated below the four highest grades used by Standard & Poor's
or Moody's (frequently referred to as "junk" bonds). These bonds
present greater credit and market risks than higher rated bonds. Such
risks relate not only to the greater financial weakness of the issuers
of such securities but also to other factors including:
- greater likelihood that an economic downturn or rising interest
rates could create financial stress on the issuers of such bonds,
possibly resulting in their defaulting on their obligations than is the
case with higher-rated bonds;
- greater likelihood that redemption or call provisions, if
exercised in a period of lower interest rates, would result in the bonds
being replaced by lower yielding securities;
- limited trading markets that may make it more difficult to
dispose of the bonds and more difficult to determine their fair value.
REPURCHASE AGREEMENTS
A repurchase agreement is a transaction where a Portfolio buys a
security at one price and simultaneously agrees to sell that same
security back to the original owner at a higher price. None of the
Portfolios engage extensively in repurchase agreements, but each may
engage in them from time to time. The Adviser reviews the credit-
worthiness of the other party to the agreement and must find it
satisfactory before engaging in a repurchase agreement. A majority of
these agreements will mature in seven days or less. In the event of the
bankruptcy of the other party, a Portfolio could experience delays in
recovering its money, may realize only a partial recovery or even no
recovery, and may also incur disposition costs.
REVERSE REPURCHASE AGREEMENTS
The S&P 500 Index Portfolio may enter into reverse repurchase
agreements. Under reverse repurchase agreements, the Portfolio
transfers possession of portfolio securities to banks in return for cash
in an amount equal to a percentage of the portfolio securities' market
value and agrees to repurchase the securities at a future date by
repaying the cash with interest. The Portfolio retains the right to
receive interest and principal payments from the securities while they
are in the possession of the financial institutions. While a reverse
repurchase agreement is in effect, the Custodian will segregate from
other Portfolio assets an amount of cash or liquid high quality debt
obligations equal in value to the repurchase price (including any
accrued interest).
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
For hedging purposes, including protecting the price or interest rate of
securities that the Portfolio intends to buy, the S&P 500 Index
Portfolio may enter into futures contracts that relate to securities in
which it may directly invest and indices comprised of such securities
and may purchase and write call and put options on such contracts. The
Portfolio may invest up to 20% of its assets in such futures and/or
options contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments (such as U.S. Treasury bills, notes
and bonds, commercial paper and bank certificates of deposit or the cash
value of a financial instrument index at a specified future date at a
price agreed upon when the contract is made). A stock index futures
contract is a contract to buy or sell specified units of a stock index
at a specified future date at a price agreed upon when the contract is
made. The value of a unit is based on the current value of the contract
index. Under such contracts no delivery of the actual stocks making up
the index takes place. Rather, upon expiration of the contract,
settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index
at expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement
date or called for cash settlement. A futures contract is closed out by
buying or selling an identical offsetting futures contract. Upon
entering into a futures contract, the Portfolio is required to deposit
an initial margin with the Custodian for the benefit of the futures
broker. The initial margin serves as a "good faith" deposit that the
Portfolio will honor their futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily
basis as the price of the underlying investment fluctuates. In the
event of the bankruptcy of the futures broker that holds margin on
behalf of the Portfolio, the Portfolio may be entitled to return of
margin owed to it only in proportion to the amount received by the
broker's other customers. The Adviser will attempt to minimize this
risk by monitoring the creditworthiness of the futures brokers with
which the Portfolio does business.
Because the value of index futures depends primarily on the value of
their underlying indexes, the performance of the broad-
based contracts will generally reflect broad changes in common stock
prices. However, because the Portfolio may not be invested in precisely
the same proportion as the S&P 500, it is likely that the price changes
of the Portfolio's index futures positions will not match the price
changes of the Portfolio's other investments.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
The Bond and Capital Portfolios may engage in certain limited options
strategies as hedging techniques. These options strategies are limited
to selling/writing call option contracts on U.S. Treasury Securities and
call option contracts on futures on such securities held by the
Portfolio (covered calls). These Portfolios may purchase call option
contracts to close out a position acquired through the sale of a call
option. These Portfolios will only write options that are traded on a
domestic exchange or board of trade.
The S&P 500 Index may write and purchase covered put and call options on
securities in which it may directly invest. Option transactions of the
Portfolio will be conducted so that the total amount paid on premiums
for all put and call options outstanding will not exceed 5% of the value
of the Portfolio's total assets. Further, the Portfolio will not write
put or call options or combination thereof if, as a result, the
aggregate value of all securities or collateral used to cover its
outstanding options would exceed 25% of the value of the Portfolio's
total assets.
A call option is a short-term contract (generally nine months or less)
which gives the purchaser of the option the right to purchase from the
seller of the option (the Portfolio) the underlying security or futures
contract at a fixed exercise price at any time prior to the expiration
of the option period regardless of the market price of the underlying
instrument during the period. A futures contract obligates the buyer to
purchase and the seller to sell a predetermined amount of a security at
a predetermined price at a selected time in the future. A call option on
a futures contract gives the purchaser the right to assume a "long"
position in a futures contract, which means that if the option is
exercised the seller of the option (the Portfolio) would have the legal
right (and obligation) to sell the underlying security to the purchaser
at the specified price and future time.
As consideration for the call option, the buyer pays the seller (the
Portfolio) a premium, which the seller retains whether or not the option
is exercised. The selling of a call option will benefit the Portfolio
if, over the option period, the underlying security or futures contract
declines in value or does not appreciate to a price higher than the
total of the exercise price and the premium. The Portfolio risks an
opportunity loss of profit if the underlying instrument appreciates to a
price higher than the exercise price and the premium. When the Adviser
anticipates that interest rates will increase, the Portfolio may write
call options in order to hedge against an expected decline in value of
portfolio securities.
The Portfolio may close out a position acquired through selling a call
option by buying a call option on the same security or futures contract
with the same exercise price and expiration date as the option
previously sold. A profit or loss on the transaction will result
depending on the premium paid for buying the closing call option. If a
call option on a futures contract is exercised, the Portfolio intends to
close out the position immediately by entering into an offsetting
transaction or by delivery of the underlying security (or other related
securities).
Options transactions may increase the Portfolio's portfolio turnover
rate and attendant transaction costs, and may be somewhat more
speculative than other investment strategies. It may not always be
possible to close out an options position, and with respect to options
on futures contracts there is a risk of imperfect correlation between
price movements of a futures contract (or option thereon) and the
underlying security.
OPTIONS ON SECURITIES INDICES
The S&P 500 Index Portfolio may purchase or sell options on the S&P 500,
subject to the limitations set forth above and provided such options are
traded on a national securities exchange or in the over-the-counter
market. Options on securities indices are similar to options on
securities except there is no transfer of a security and settlement is
in cash. A call option on a securities index grants the purchaser of
the call, for a premium paid to the seller, the right to receive in cash
an amount equal to the difference between the closing value of the index
and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
COLLATERALIZED MORTGAGE OBLIGATIONS
The Portfolios other than the S&P 500 Index Portfolio may invest in
collateralized mortgage obligations ("CMOs") or mortgage-backed bonds
issued by financial institutions such as commercial banks, savings and
loan associations, mortgage banks and securities broker-dealers (or
affiliates of such institutions established to issue these securities).
To a limited extent, the Portfolios may also invest in a variety of more
risky CMOs, including interest only ("IOs"), principal only ("POs"),
inverse floaters, or a combination of these securities.
LENDING PORTFOLIO SECURITIES
The S&P 500 Index Portfolio may lend portfolio securities with a value
up to 10% of its total assets. Such loans may be terminated at any
time. The Portfolio will continuously maintain as collateral cash or
obligations issued by the U.S. government, its agencies or
instrumentalities in an amount equal to not less than 100% of the
current market value (on a daily marked-to-market basis) of the loaned
securities plus declared dividends and accrued interest.
The Portfolio will retain most rights of beneficial ownership, including
the right to receive dividends, interest or other distributions on
loaned securities. Should the borrower of the securities fail
financially, the Portfolio may experience delay in recovering the
securities or loss of rights in the collateral. Loans will be made only
to borrowers that the Adviser deems to be of good financial standing.
MIXED FUNDING
The Fund offers its shares, without sales charge, only for purchase by
Union Central and its separate accounts to fund benefits under both
variable annuity contracts and variable universal life insurance
policies. The Fund's Board of Directors will monitor the Fund for the
existence of any material irreconcilable conflict between the interests
of variable annuity contractowners investing in the Fund and interests
of holders of variable universal life insurance policies investing in
the Fund. Union Central will report any potential or existing conflicts
to the Directors of the Fund. If a material irreconcilable conflict
arises, Union Central will, at its own cost, remedy such conflict up to
and including establishing a new registered management company and
segregating the assets underlying the variable annuity contracts and
variable universal life insurance policies. It is possible that at some
later date the Fund may offer shares to other investors. The Fund
continuously offers shares in each of its Portfolios at prices equal to
the respective net asset values of the shares of each Portfolio.
OTHER INFORMATION
In addition to the investment policies described above, each Portfolio's
investment program is subject to further restrictions which are
described in the Statement of Additional Information. Unless otherwise
specified, each Portfolio's investment objectives, policies and
restrictions are not fundamental policies and may be changed without
shareholder approval. Shareholder inquiries and requests for the Fund's
annual report should be directed to the Fund at (513) 595-2600, or at
P.O. Box 40409, Cincinnati, Ohio 45240-0409.
FUND MANAGEMENT
INVESTMENT ADVISER
The Adviser is Carillon Advisers, Inc., P.O. Box 40407, Cincinnati, Ohio
45240. The Adviser was incorporated under the laws of Ohio on August 18,
1986, as successor to the advisory business of Carillon Investments,
Inc., the investment adviser for the Fund since 1984. The Adviser is a
wholly-owned subsidiary of Union Central, a mutual life insurance
company organized in 1867 under the laws of Ohio. Subject to the
direction and authority of the Fund's board of directors, the Adviser
manages the investment and reinvestment of the assets of each Portfolio
and provides administrative services and manages the Fund's business
affairs.
Gary R. Rodmaker, CFA is primarily responsible for the day-to-day
management of the S&P 500 Index Portfolio, Equity Portfolio, and Capital
Portfolio. The Adviser is in the process of hiring a Portfolio Manager
for the Equity Portfolio who will manage the Portfolio on a permanent
basis.
Mr. Rodmaker is the Corporate Bond Portfolio Manager of the Adviser and
has been affiliated with the Adviser and Union Central since 1989. Mr.
Rodmaker is also primarily responsible for the day-to-day management of
the Micro-Cap Portfolio, which is currently not available as an
investment option under Union Central's variable annuity contracts and
variable universal life insurance policies.
Mr. Rodmaker and Michael J. Schultz are primarily responsible for the
day-to-day management of the Bond Portfolio. Mr. Schultz is the
Mortgage-backed Securities Portfolio Manager of the Adviser and has been
affiliated with the Adviser and Union Central as a portfolio manager
since 1992.
ADVISORY FEE
The Fund pays the Adviser, as full compensation for all facilities and
services furnished, a monthly fee computed separately for each Portfolio
on a daily basis, at an annual rate, as follows:
<TABLE>
<CAPTION>
Portfolio Advisory Fee
<S> <C>
Equity Portfolio .65% of the first $50,000,000, .60% of the next
$100,000,000, and .50% of all over $150,000,000
of the current value of the net assets;
Bond Portfolio .50% of the first $50,000,000, .45% of the next
$100,000,000, and .40% of all over $150,000,000
of the current value of the net assets;
Capital Portfolio .75% of the first $50,000,000, .65% of the next
$100,000,000, and .50% of all over $150,000,000
of the current value of the net assets;
S&P 500 Index Portfolio .30% of the current value of the net assets;
</TABLE>
The effective rates paid by each Portfolio are set forth in
"Portfolio Operating Expenses" section on page 16.
EXPENSES
The Fund's expenses are deducted from total income before
dividends are paid. These expenses, which are accrued daily,
include: the fee of the Adviser; taxes; legal, dividend
disbursing, bookkeeping and transfer agent, custodian and
auditing fees; and printing and other expenses relating to the
Fund's operations which are not expressly assumed by the Adviser
under its investment advisory agreement with the Fund. Certain
expenses are paid by the particular Portfolio that incurs them,
while other expenses are allocated among the Portfolios on the
basis of their relative size (i.e., the amount of their net
assets). The Adviser will pay any expenses of the S&P 500 Index
Portfolio, other than the advisory fee for that Portfolio, to
the extent that such expenses exceed .30% of that Portfolio's
net assets.
CAPITAL STOCK
The Fund currently has eight classes of stock, one for each
Portfolio. Shares (including fractional shares) of each
Portfolio have equal rights with regard to voting, redemptions,
dividends, distributions, and liquidations with respect to that
Portfolio. When issued, shares are fully paid and nonassessable
and do not have preemptive or conversion rights or cumulative
voting rights. The Fund's sole shareholder, Union Central, will
vote Fund shares allocated to its registered separate accounts
in accordance with instructions received from its contract
owners. However, by virtue of Fund shares allocated to its other
separate accounts, Union Central currently has voting control
and can make fundamental changes regardless of the voting
instructions received from its contract owners.
VALUATION OF PORTFOLIO SHARES
The net asset value of the shares of each Portfolio of the Fund
is determined once daily, Monday through Friday, as of the
close of regular trading on the New York Stock Exchange
(normally 4:00 p.m., Eastern Time), when there are purchases or
redemptions of Fund shares, except:
- when the New York Stock Exchange is closed and
- any day on which changes in the value of the Portfolio
securities of the Fund will not materially affect the
current net asset value of the shares of a Portfolio.
Portfolio shares are valued by:
- adding the values of all securities and other assets of
the Portfolio,
- subtracting liabilities and expenses, and
- dividing by the number of shares of the Portfolio
outstanding.
Expenses, including the investment advisory fee payable to the
Adviser, are accrued daily.
Securities held by the Portfolios, except for money market
instruments maturing in 60 days or less, are valued at their
market value if market quotations are readily available. Other
wise, such securities are valued at fair value as determined in
good faith by the Fund's board of directors, although the actual
calculations may be made by persons acting pursuant to the
direction of the board. All money market instruments with a
remaining maturity of 60 days or less are valued on an amortized
cost basis.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of the net
investment income, if any, of each Portfolio. For dividend
purposes, net investment income of each Portfolio consists of
all dividends or interest earned by that Portfolio, minus
estimated expenses (including the investment advisory fee). All
net realized capital gains, if any, of each Portfolio are
distributed periodically, no less frequently than annually. All
dividends and distributions of a Portfolio are reinvested in
additional shares of the Portfolio at net asset value.
TAXES
Each Portfolio has qualified and has elected to be taxed as a
"regulated investment company" under the provisions of
Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). If a Portfolio qualifies as a "regulated
investment company" and complies with the appropriate provisions
of the Code, the Portfolio will pay no federal income taxes on
the amounts distributed.
Because the sole shareholder of the Fund is Union Central, no
discussion is included herein as to the federal income tax
consequences to shareholders. For information about the federal
tax consequences of purchasing the contracts, see the prospectus
for your contract.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701, acts as Custodian of the Fund's assets,
and is its bookkeeping, transfer and dividend disbursing agent.
PREPARING FOR YEAR 2000
Like all financial services providers, the Adviser utilizes
systems that may be affected by Year 2000 transition issues. In
addition to the Adviser, the Fund relies on service providers,
including the Fund's custodian, transfer agent, and dividend
disbursing agent, that also may be affected. The Adviser has
advised the Fund that it has developed, and is in the process of
implementing, a Year 2000 transition plan. Management of the
Fund is in the process of confirming that the service providers
to the Fund are also engaged in similar transition plans. While
the Adviser has made representations to Management that each
party is implementing a Year 2000 transition plan, the resources
that are being devoted to this effort are substantial and it is
difficult to predict with precision whether the amount of
resources ultimately devoted, or the outcome of these efforts,
will have any negative impact on their operations. However, as
of the date of this prospectus, Fund management does not
anticipate that shareholders will experience negative effects on
their investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation.
The Adviser has advised Fund management that it currently
anticipates that its systems will be Year 2000 compliant on or
about June 30, 1999, but there can be no assurance that it will
be successful, or that interaction with other service providers
will not impair the Adviser's services at that time.
S&P 500 DISCLAIMER
The S&P 500 is an unmanaged index of common stocks comprised of
500 industrial, financial, utility and transportation companies.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard &
Poor's 500(R)", and "500" are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by the Fund. The
Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's ("S&P"). S&P makes no representation or
warranty, express or implied, to the beneficial 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
Fund 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 Fund or the Portfolio.
S&P has no obligation to take the needs of the Fund or the
beneficial 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.
See further information in the Statement of Additional
Information.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial statements for the year ended December 31, 1998,
have been audited by Deloitte & Touche LLP, whose unqualified
report thereon is included in the Statement of Additional
Information. The financial statements for the years ended
December 31, 1997, December 31, 1996 and December 31, 1995 have
been audited by Deloitte & Touche LLP, whose reports expressed
unqualified opinions on those statements. The financial
statements for the year ended December 31, 1994 have been
audited by another independent accountant, whose report
expressed an unqualified opinion on those statements. These
financial highlights should be read in conjunction with the
financial statements and notes thereto included in the Statement
of Additional Information. Further information about the
performance of the Fund is contained in the Fund's annual report
which may be obtained without charge. (See "Other Information"
below.)
<PAGE>
<TABLE>
<CAPTION>
Equity Portfolio
Year ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of year $20.35 $19.45 $16.54 $14.30 $14.58
Investment Activities:
Net investment income .25 .23 .29 .24 .20
Net realized and
unrealized gains (losses) (2.80) 3.23 3.61 3.36 .31
------- ------- ------- ------- -------
Total from
Investment Operations (2.55) 3.46 3.90 3.60 .51
Distributions:
Net investment income (.23) (.27) (.27) (.23) (.19)
Net realized gains (2.68) (2.29) (.72) (1.13) (.60)
------- ------- ------- ------- -------
Total Distributions (2.91) (2.56) (.99) (1.36) (.79)
Net Asset Value,
End of year $14.89 $20.35 $19.45 $16.54 $14.30
====== ====== ====== ====== ======
Ratios/Supplemental Data:
Total Return <F1> (15.31%) 20.56% 24.52% 26.96% 3.42%
Ratio of Expenses to
Average Net Assets .62% .62% .64% .66% .69%
Ratio of Net Investment
Income to Average
Net Assets 1.41% 1.23% 1.66% 1.73% 1.45%
Portfolio Turnover Rate 62.50% 57.03% 52.53% 34.33% 40.33%
Net Assets, End of Period
(in thousands) $248,783 $335,627 $288,124 $219,563 $157,696
<FN>
<F1> Total Return does not reflect expenses that apply to the separate account
or the related insurance policies. Inclusion of these charges would reduce the
Total Return figures for all periods shown.
</FN>
</TABLE>
FINANCIAL HIGHLIGHTS
(Continued)
<TABLE>
<CAPTION>
Bond Portfolio
Year ended December 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of year $11.29 $10.91 $11.07 $10.04 $11.30
Investment Activities:
Net investment income .77 .79 .79 .88 .77
Net realized and
unrealized gains (losses) (.05) .37 (.04) .98 (.95)
------- ------- ------- ------- -------
Total from
Investment Operations .72 1.16 .75 1.86 (.18)
Distributions:
Net investment income (.76) (.72) (.87) (.83) (.78)
In excess of
net investment income -- -- (.04) -- --
Net realized gains (.12) (.06) -- -- (.30)
------- ------- ------- ------- -------
Total Distributions (.88) (.78) (.91) (.83) (1.08)
Net Asset Value,
End of year $11.13 $11.29 $10.91 $11.07 $10.04
======= ======= ======= ======= =======
Ratios/Supplemental Data:
Total Return <F1> 6.52% 11.02% 7.19% 19.03% (1.63%)
Ratio of Expenses to
Average Net Assets .58% .60% .62% .65% .68%
Ratio of Net Investment
Income to
Average Net Assets 6.8% 7.15% 7.24% 7.43% 7.21%
Portfolio Turnover Rate 67.57% 113.41% 202.44% 111.01% 70.27%
Net Assets, End of Period
(in thousands) $113,762 $99,892 $85,634 $73,568 $55,929
<FN>
<F1> Total Return does not reflect expenses that apply to the separate account
or the related insurance policies. Inclusion of these charges would reduce the
Total Return figures for all periods shown.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(Continued)
<TABLE>
<CAPTION>
Capital Portfolio
Year ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value:
Beginning of period $14.10 $14.95 $13.72 $13.19 $13.81
Investment Activities:
Net investment income .41 .62 .63 .64 .52
Net realized and
unrealized gains (losses) (2.14) .37 1.36 1.15 (.39)
------ ------ ------ ------ ------
Total from
Investment Operations (1.73) .99 1.99 1.79 .13
Distributions:
Net investment income (.45) (.66) (.57) (.64) (.52)
Net realized gains (.72) (1.18) (.19) (.62) (.23)
------ ------ ------ ------ ------
Total Distributions (1.17) (1.84) (.76) (1.26) (.75)
Net Asset Value,
End of period $11.20 $14.10 $14.95 $13.72 $13.19
====== ====== ====== ====== ======
Ratios/Supplemental Data:
Total Return <F1> (13.25%) 7.40% 14.94% 14.28% .94%
Ratio of Expenses
to Average Net Assets .79% .77% .77% .77% .80%
Ratio of Net Investment
Income to Average
Net Assets 3.27% 4.22% 4.42% 4.99% 4.25%
Portfolio Turnover Rate 165.00% 60.84% 53.11% 43.83% 41.89%
Net Assets, End of Period
(in thousands) $109,678 $148,830 $159,294 $145,623 $119,263
<FN>
<F1> Total Return does not reflect expenses that apply to the separate account
or the related insurance policies. Inclusion of these charges would reduce the
Total Return figures for all periods shown.
</FN>
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(Continued)
<TABLE>
<CAPTION>
S&P 500 Index Portfolio
Year Ended December 31,
1998 1997 1996 <F1>
---- ---- ----
<S> <C> <C> <C>
Net Asset Value,
Beginning of Year $15.74 $12.13 $10.00
Investment Activities:
Net investment income .20 .20 .20
Net realized and unrealized
gains/(losses) 4.21 3.72 2.12
------ ------ ------
Total from Investment Operations 4.41 3.92 2.32
Distributions:
Net investment income (.20) (.21) (.19)
Net realized gains (.46) (.10) --
------ ------ ------
Total Distributions (.66) (.31) (.19)
Net Asset Value,
End of Year $19.49 $15.74 $12.13
====== ====== ======
Total Return, not annualized 28.54% 32.72% 23.37%
Ratios/Supplemental Data
Ratio of Net Expenses to
Average Net Assets .43% .50% .59%<F2>
Ratio of Net Investment
Income to Average Net Assets 1.25% 1.48% 2.14%<F2>
Portfolio Turnover Rate 2.64% 9.06% 1.09%
Net Assets, End of Year (000's) $131,345 $55,595 $29,205
<FN>
<F1> The portfolio commenced operation on December 29, 1995. The financial
highlights table for the period ending December 31, 1995 is not presented
because the activity for the period did not round to $0.01 in any category of
the reconciliation of beginning to ending net asset value per share. The ratios
and total return were all less than 0.1%. The net assets at December 31, 1995
were $305,148.
<F2> The ratios of net expenses to average net assets would have increased and
net investment income to average net assets would have decreased by .25% for
the year ended December 31, 1996, had the Adviser not waived a portion of its
fee.
</FN>
</TABLE>
<PAGE>
APPENDIX A: RATINGS
CORPORATE BOND RATINGS
Moody's Investors Services, Inc.
Aaa Bonds which are rated Aaa 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 Aa 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 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 are considered as medium-
grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba Bonds which are rated 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.
Standard & Poor's Rating Services
AAA This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.
AA Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong, and in the majority of instances they differ from AAA
issues only in a small degree.
A Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effect of changes in circumstances and economic
conditions.
BBB Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB-B-CCC-CC Bonds rated BB, B, CCC, and CC are regarded, on
balance, as predominately speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
Moody's Investors Services, Inc.
A Prime rating is the highest commercial paper rating assigned
by Moody's Investors Services, Inc. Issuers rated Prime are
further referred to by use of numbers 1, 2 and 3 to denote
relative strength within this highest classification. Among the
factors considered by Moody's in assigning ratings for an issuer
are the following:
- management;
- economic evaluation of the industry and an appraisal of
speculative type risks which may be inherent in certain
areas;
- competition and customer acceptance of products;
- liquidity;
- amount and quality of long-term debt;
- ten-year earnings trends;
- financial strength of a parent company and the
relationships which exist with the issuer; and
- recognition by management of obligations which may be
present or may arise as a result of public interest
questions and preparations to meet such obligations.
Standard & Poor's Rating Services
Commercial paper rated A by Standard & Poor's Rating Services
has the following characteristics:
- Liquidity ratios are better than the industry average.
- Long-term senior debt rating is "A" or better. In some
cases, BBB credits may be acceptable.
- The issuer has access to at least two additional channels
of borrowing.
- Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances.
- Typically, the issuer's industry is well established, the
issuer has a strong position within its industry and the
reliability and quality of management is unquestioned.
Issuers rated A are further referred to by use of numbers 1, 2
and 3 to denote relative strength within this classification.
<PAGE>
APPENDIX B: S&P 500 RETURNS
S&P 500 RETURNS
To illustrate the market risks relating to changes in stock
prices, the following table shows the average returns of the S&P
500 for the period from 1926 to 1998:
<TABLE>
<CAPTION>
S&P 500 Returns (1926-1998)
Over Various Time Horizons
1 Year 5 Years 10 Years 20 Years
<S> <C> <C> <C> <C>
Best 54.0% 24.1% 20.1% 17.75%
Worst -43.3 % -12.5% -0.9% 3.1%
Average 13.2% 10.7% 11.2% 11.1%
</TABLE>
Average return may not be useful for forecasting future returns
in any particular period, as stock returns are quite volatile
from year to year. These returns are those of the S&P 500 and
NOT of our S&P 500 Index Portfolio. There is no assurance that
the Portfolio will be able to replicate the performance of the
Index.
<PAGE>
[Back Cover Page]
A Statement of Additional Information dated May 1, 1999, which
contains further information about the Fund, has been filed with
the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. Additional information about
the Fund's investments is available in the Fund's annual and
semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's
performance during its last fiscal year. A copy of the
Statement of Additional Information or its annual and semi-
annual reports may be obtained without charge by calling the
Fund at (513) 595-2600, or by writing the Fund at P.O. Box
40409, Cincinnati, Ohio 45240-0409.
The Fund's Statement of Additional Information, annual and semi-
annual reports and certain other information about the Fund can
be reviewed and copied at the SEC's public reference room (which
will send copies of these documents upon request and for a fee).
Information about the operation of the SEC's public reference
room may be obtained by calling the SEC at 1-800-SEC-0330.
Copies of Fund documents may be requested by writing to the
Public reference Section of the SEC, Washington, D.C. 20549-6009.
These fund Documents and other information about the Fund are
also available without charge at the SEC's web site:
http://www.sec.gov.
File 811-04000
<PAGE>
CARILLON FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1999
This Statement of Additional Information is not a
prospectus. Much of the information contained in this Statement
of Additional Information expands upon subjects discussed in the
Prospectus. Accordingly, this Statement should be read in
conjunction with Carillon Fund, Inc.'s ("Fund") current
Prospectus, dated May 1, 1999, which may be obtained by calling
the Fund at (513) 595-2600, or writing the Fund at P.O. Box
40409, Cincinnati, Ohio 45240-0409.
Carillon Fund, Inc. is a diversified, open-end management
investment company.
TABLE OF CONTENTS
Page
Investment Policies (1)........................................2
Money Market Instruments and Investment Techniques...........2
Certain Risk Factors Relating to High-Yield, High-Risk Bonds..6
Investments in Foreign Securities.............................6
Futures Contracts.............................................7
Options.......................................................9
Lending Portfolio Securities.................................13
Investment Restrictions.......................................13
Portfolio Turnover ...........................................16
Management of the Fund (22)...................................17
Directors and Officers.......................................17
Investment Adviser...........................................19
Payment of Expenses..........................................20
Advisory Fee.................................................21
Investment Advisory Agreement................................21
Administration...............................................22
Service Agreement............................................23
Securities Activities of Adviser.............................23
Determination of Net Asset Value (24).........................24
Purchase and Redemption of Shares (23)........................24
Taxes (24)....................................................25
Portfolio Transactions and Brokerage..........................25
General Information .......................................26
Capital Stock................................................26
Voting Rights................................................27
Additional Information ......................................28
Independent Auditors .........................................28
- ----------
( ) indicates page on which the corresponding section appears in
the Prospectus.
UCCF 515 5-99
<PAGE>
CARILLON FUND, INC.
INVESTMENT POLICIES
The following specific policies supplement the Fund's
"Investment Objectives and Policies" set forth in the
Prospectus.
Money Market Instruments and Investment Techniques
Certain money market instruments and investment techniques
are described below. Money market instruments may be purchased
extensively by the Capital Portfolio. They may also be
purchased by the Equity, Bond, S&P 500 Index, S&P Midcap 400
Index, Balanced Index and Micro-Cap Portfolios to a very limited
extent (to invest otherwise idle cash) or on a temporary basis
(if invested in money market instruments for defensive
purposes).
SMALL BANK CERTIFICATES OF DEPOSIT. The Fund may invest in
certificates of deposit issued by commercial banks, savings
banks, and savings and loan associations having assets of less
than $1 billion, provided that the principal amount of such
certificates is insured in full by the Federal Deposit Insurance
Corporation ("FDIC"). The FDIC presently insures accounts up to
$100,000, but interest earned above such amount is not insured
by the FDIC.
REPURCHASE AGREEMENTS. A repurchase agreement is an instrument
under which the purchaser (i.e., one of the Portfolios) acquires
ownership of the obligation (the underlying security) and the
seller (the "issuer" of the repurchase agreement) agrees, at the
time of sale, to repurchase the obligation at a mutually agreed
upon time and price, thereby determining the yield during the
purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period.
The underlying securities will only consist of securities in
which the respective Portfolio may otherwise invest. Repurchase
agreements usually are for short periods, normally under one
week, and are considered to be loans under the Investment
Company Act of 1940. Repurchase agreements will be fully
collateralized at all times and interest on the underlying
security will not be taken into account for valuation purposes.
The investments by a Portfolio in repurchase agreements may at
times be substantial when, in the view of the Adviser, unusual
market, liquidity, or other conditions warrant.
If the issuer of the repurchase agreement defaults and does
not repurchase the underlying security, the Portfolio might
incur a loss if the value of the underlying security declines,
and the Fund might incur disposition costs in liquidating the
underlying security. In addition, if the issuer becomes
involved in bankruptcy proceedings, the Portfolio may be delayed
or prevented from obtaining the underlying security for its own
purposes. In order to minimize any such risk, the Portfolio
will only engage in repurchase agreements with recognized
securities dealers and banks determined to present minimal
credit risk by the Adviser, under the direction and supervision
of the Board of Directors.
U.S. GOVERNMENT OBLIGATIONS. Securities issued and guaranteed
as to principal and interest by the United States Government
include a variety of Treasury securities, which differ only in
their interest rates, maturities and times of issuance.
Treasury bills have a maturity of one year or less. Treasury
notes have maturities of one to seven years and Treasury bonds
generally have a maturity of greater than five years.
GOVERNMENT AGENCY SECURITIES. Government agency securities that
are permissible investments consist of securities either issued
or guaranteed by agencies or instrumentalities of the United
States Government. Agencies of the United States Government
which issue or guarantee obligations include, among others,
Export-Import Banks of the United States, Farmers Home
Administration, Federal Housing Administration, Government
National Mortgage Association ("GNMA"), Maritime Administration,
Small Business Administration and The Tennessee Valley
Authority. Obligations of instrumentalities of the United
States Government include securities issued or guaranteed by,
among others, the Federal National Mortgage Association
("FNMA"), Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal Intermediate Credit Banks, Banks
for Cooperatives, and the U.S. Postal Service. Some of these
securities, such as those guaranteed by GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as
those issued by The Tennessee Valley Authority, are supported by
the right of the issuer to borrow from the Treasury; while still
others, such as those issued by the Federal Land Banks, are
supported only by the credit of the instrumentality. The Fund's
primary usage of these types of securities will be GNMA
certificates and FNMA and FHLMC mortgage-backed obligations
which are discussed in more detail below.
CERTIFICATES OF DEPOSIT. Certificates of deposit are generally
short-term, interest-bearing negotiable certificates issued by
banks or savings and loan associations against funds deposited
in the issuing institution.
TIME DEPOSITS. Time Deposits are deposits in a bank or other
financial institution for a specified period of time at a fixed
interest rate for which a negotiable certificate is not
received.
BANKERS' ACCEPTANCE. A bankers' acceptance is a time draft
drawn on a commercial bank by a borrower usually in connection
with an international commercial transaction (to finance the
import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less
and are traded in secondary markets prior to maturity.
COMMERCIAL PAPER. Commercial paper refers to short-term,
unsecured promissory notes issued by corporations to finance
short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not
exceeding nine months.
CORPORATE DEBT SECURITIES. Corporate debt securities with a
remaining maturity of less than one year tend to become
extremely liquid and are traded as money market securities.
Such issues with between one and two years remaining to maturity
tend to have greater liquidity and considerably less market
value fluctuations than longer-term issues.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. From time to time,
in the ordinary course of business, each Portfolio of the Fund
may purchase securities on a when-issued or delayed-delivery
basis i.e., delivery and payment can take place a month or more
after the date of the transactions. The securities so purchased
are subject to market fluctuation and no interest accrues to the
purchaser during this period. At the time a Portfolio makes the
commitment to purchase securities on a when-issued or delayed-
delivery basis, the Fund will record the transaction and
thereafter reflect the value, each day, of such security in
determining the net asset value of such Portfolio. At the time
of delivery of the securities, the value may be more or less
than the purchase price. Each Portfolio will also establish a
segregated account with the Fund's custodian bank in which it
will maintain cash or cash equivalents or other Portfolio
securities equal in value to commitments for such when-issued or
delayed-delivery securities.
GNMA CERTIFICATES. GNMA certificates are mortgage-backed
securities representing part ownership of a pool of mortgage
loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. government.
GNMA certificates differ from typical bonds because principal is
repaid monthly over the term of the loan rather than returned in
a lump sum at maturity. Because both interest and principal
payments (including prepayments) on the underlying mortgage
loans are passed through to the holder of the certificate, GNMA
certificates are called "pass-through" securities.
Although the mortgage loans in the pool have maturities of
up to 30 years, the actual average life of the GNMA certificates
typically will be substantially less because the mortgages are
subject to normal principal amortization and may be prepaid
prior to maturity. Prepayment rates vary widely and may be
affected by changes in market interest rates. In periods of
falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the GNMA
certificates. Conversely, when interest rates are rising, the
rate of prepayment tends to decrease, thereby lengthening the
actual average life of the GNMA certificates. Accordingly, it is
not possible to predict accurately the average life of a
particular pool. Reinvestment of prepayments may occur at higher
or lower rates that the original yield on the certificates. Due
to the prepayment feature and the need to reinvest prepayments
of principal at current rates, GNMA certificates can be less
effective than typical bonds of similar maturities at "locking-
in" yields during periods of declining interest rates, although
they may have comparable risks of decline in value during
periods of rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS The Federal
National Mortgage Association ("FNMA"), a federally chartered
and privately owned corporation, issues pass-through securities
representing an interest in a pool of conventional mortgage
loans. FNMA guarantees the timely payment of principal and
interest but this guarantee is not backed by the full faith and
credit of the U.S. government. The Federal Home Loan Mortgage
Corporation ("FHLMC"), a corporate instrumentality of the United
States, issues participation certificates that represent an
interest in a pool of conventional mortgage loans. FHLMC
guarantees the timely payment of interest and the ultimate
collection of principal and maintains reserves to protect
holders against losses due to default, but the certificates are
not backed by the full faith and credit of the U.S. government.
As is the case with GNMA certificates, the actual maturity of
and realized yield on particular FNMA and FHLMC pass-through
securities will vary based on the prepayment experience of the
underlying pool of mortgages.
MORTGAGE-RELATED SECURITIES. Each Portfolio of the Fund other
than the S&P 500 Index Portfolio and S&P Midcap 400 Index
Portfolio may invest in collateralized mortgage obligations
("CMOs") or mortgage-backed bonds issued by financial
institutions such as commercial banks, savings and loan
associations, mortgage banks and securities broker-dealers (or
affiliates of such institutions established to issue these
securities). CMOs are obligations fully collateralized directly
or indirectly by a pool of mortgages on which payments of
principal and interest are dedicated to payment of principal and
interest on the CMOs. Payments on the underlying mortgages (both
interest and principal) are passed through to the holders,
although not necessarily on a pro rata basis, on the same
schedule as they are received. Mortgage-backed bonds are general
obligations of the issuer fully collateralized directly or
indirectly by a pool of mortgages. The mortgages serve as
collateral for the issuer's payment obligations on the bonds,
but interest and principal payments on the mortgages are not
passed through either directly (as with GNMA certificates and
FNMA and FHLMC pass-through securities) or on a modified basis
(as with CMOs). Accordingly, a change in the rate of prepayments
on the pool of mortgages could change the effective maturity of
a CMO but not that of a mortgage-backed bond (although, like
many bonds, mortgage-backed bonds may be callable by the issuer
prior to maturity).
Each Portfolio of the Fund other than the S&P 500 Index
Portfolio and the S&P Midcap 400 Index Portfolio may also invest
in a variety of more risky CMOs, including interest only
("IOs"), principal only ("POs"), inverse floaters, or a
combination of these securities. Stripped mortgage-backed
securities ("SMBS") are usually structured with several classes
that receive different proportions of the interest and principal
distributions from a pool of mortgage assets. A common type of
SMBS will have one class receiving all of the interest from the
mortgage assets (an IO), while the other class will receive all
of the principal (a PO). However, in some instances, one class
will receive some of the interest and most of the principal
while the other class will receive most of the interest and the
remainder of the principal. If the underlying mortgage assets
experience greater-than-anticipated or less-than-anticipated
prepayments of principal, the Fund may fail to fully recoup its
initial investment or obtain its initially assumed yield on some
of these securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile
in response to changes in interest rates. The yields on classes
of SMBS that have more uncertain timing of cash flows are
generally higher than prevailing market yields on other
mortgage-backed securities because there is a greater risk that
the initial investment will not be fully recouped or received as
planned over time.
Each Portfolio of the Fund other than the S&P 500 Index
Portfolio and the S&P Midcap 400 Index Portfolio may invest in
another CMO class known as leveraged inverse floating rate debt
instruments ("inverse floaters"). The interest rate on an
inverse floater resets in the opposite direction from the market
rate of interest to which the inverse floater is indexed. An
inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the
magnitude of the change in the index rate of interest. The
higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its
stated final maturity.
Certain CMOs may be deemed to be illiquid securities for
purposes of the Fund's 10% limitation on investments in such
securities. The investment adviser limits investments in more
risky CMOs (IOs, POs, inverse floaters) to no more than 5% of
its total assets.
Certain Risk Factors Relating to High-Yield, High-Risk Bonds
The descriptions below are intended to supplement the
material in the Prospectus regarding high-yield, high-risk
bonds.
SENSITIVITY TO INTEREST RATES AND ECONOMIC CHANGES. High-yield
bonds are very sensitive to adverse economic changes and
corporate developments and their yields will fluctuate over
time. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience
financial stress that would adversely affect their ability to
service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional
financing. If the issuer of a bond defaulted on its obligations
to pay interest or principal or entered into bankruptcy
proceedings, the Portfolio may incur losses or expenses in
seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and changes can be expected to result in
increased volatility of market prices of high-yield bonds and
the Portfolio's net asset value.
PAYMENT EXPECTATIONS. High-yield bonds may contain redemption
or call provisions. If an issuer exercised these provisions in
a declining interest rate market, the Portfolio would have to
replace the security with a lower-yielding security, resulting
in a decreased return for investors. Conversely, a high-yield
bond's value will decrease in a rising interest rate market, as
will the value of the Portfolio's assets. If the Portfolio
experiences unexpected net redemptions, this may force it to
sell high-yield bonds without regard to their investment merits,
thereby decreasing the asset base upon which expenses can be
spread and possibly reducing the Portfolio's rate of return.
LIQUIDITY AND VALUATION. There may be little trading in the
secondary market for particular bonds, which may affect
adversely the Portfolio's ability to value accurately or dispose
of such bonds. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the
values and liquidity of high-yield bonds, especially in a thin
market.
Investments in Foreign Securities
AMERICAN DEPOSITARY RECEIPTS. American Depositary Receipts
("ADRs") may be issued in sponsored or unsponsored programs. In
sponsored programs, the issuer makes arrangements to have its
securities traded in the form of ADRs; in unsponsored programs,
the issuer may not be directly involved in the creation of the
program. Although the regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, the
issuers of unsponsored ADRs are not obligated to disclose
material information in the United States and, therefore, such
information may not be reflected in the market value of the
ADRs.
FOREIGN EXCHANGE. If a foreign country cannot generate
sufficient earnings from foreign trade to service its external
debt, it may need to depend on continuing loans and aid from
foreign governments, commercial banks, multilateral
organizations, and inflows of foreign investment. The cost of
servicing external debt will also generally be adversely
affected by rising international interest rates because many
external debt obligations bear interest at rates which are
adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the
relevant government's international currency reserves and its
access to foreign currencies. Currency devaluations may affect
the ability of an obligor to obtain sufficient foreign
currencies to service its external debt.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Each Portfolio that
engages in foreign currency exchange transactions may do so on
a spot (i.e., cash) basis at the spot rate prevailing in the
foreign exchange currency market, or on a forward basis to "lock
in" the U.S. dollar price of the security. By entering into a
forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the
underlying transactions, a Portfolio attempts to protect itself
against possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign
currency during the period between the date on which the
security is purchased or sold and the date on which related
payments are made or received.
Portfolios will not enter into forward contracts for
longer-term hedging purposes. The possibility of changes in
currency exchange rates will be incorporated into the long-term
investment considerations when purchasing the investment and
subsequent considerations for possible sale of the investment.
FOREIGN MARKETS. Delays in settlement which may occur in
connection with transactions involving foreign securities could
result in temporary periods when a portion of the assets of a
portfolio is uninvested and no return is earned thereon. The
inability of a portfolio to make intended security purchases due
to settlement problems could cause the portfolio to miss
attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result in
losses to a portfolio due to subsequent declines in values of
the portfolio securities or, if the portfolio has entered into a
contract to sell the security, possible liability to the
purchaser. Certain foreign markets, especially emerging markets,
may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of
securities by foreign investors. A portfolio could be adversely
affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by
the application to the portfolio of any restrictions on
investments.
FOREIGN DEBT SECURITIES. Investing in foreign debt securities
will expose the Portfolios to the direct or indirect
consequences of political, social or economic changes in the
industrialized developing and emerging countries that issue the
securities. The ability and willingness of obligor or the
governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when
due may depend on general economic and political conditions
within the relevant country. Additional country-related
factors unique to foreign issuers which may influence the
ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of
sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a
whole, and its government's relationships with the International
Monetary Fund, the World Bank and other international agencies.
Futures Contracts
For hedging purposes, including protecting the price or
interest rate of securities that the Portfolio intends to buy,
the S&P 500 Index Portfolio, the S&P Midcap 400 Index Portfolio
and the Balanced Index Portfolio may enter into futures
contracts that relate to securities in which it may directly
invest and indices comprised of such securities and may purchase
and write call and put options on such contracts. As a
temporary investment strategy, until a Portfolio reaches $25
million in net assets, the Portfolio may invest up to 100% of
its assets in such futures and/or options contracts.
Thereafter, the Portfolio may invest up to 20% of its assets in
such futures and/or options contracts. The Portfolios do not
intend to enter into futures contracts that are not traded on
exchanges or boards of trade.
A financial futures contract is a contract to buy or sell a
specified quantity of financial instruments such as U.S.
Treasury bills, notes and bonds, commercial paper and bank
certificates of deposit or the cash value of a financial
instrument index at a specified future date at a price agreed
upon when the contract is made. A stock index futures contract
is a contract to buy or sell specified units of a stock index at
a specified future date at a price agreed upon when the contract
is made. The value of a unit is based on the current value of
the contract index. Under such contracts no delivery of the
actual stocks making up the index takes place. Rather, upon
expiration of the contract, settlement is made by exchanging
cash in an amount equal to the difference between the contract
price and the closing price of the index at expiration, net of
variation margin previously paid.
Substantially all futures contracts are closed out before
settlement date or called for cash settlement. A futures
contract is closed out by buying or selling an identical
offsetting futures contract. Upon entering into a futures
contract, the Portfolio is required to deposit an initial margin
with the Custodian for the benefit of the futures broker. The
initial margin serves as a "good faith" deposit that the
Portfolio will honor their futures commitments. Subsequent
payments (called "variation margin") to and from the broker are
made on a daily basis as the price of the underlying investment
fluctuates. In the event of the bankruptcy of the futures
broker that holds margin on behalf of the Portfolio, the
Portfolio may be entitled to return of margin owed to it only in
proportion to the amount received by the broker's other
customers. The Adviser will attempt to minimize this risk by
monitoring the creditworthiness of the futures brokers with
which the Portfolio does business.
Because the value of index futures depends primarily on the
value of their underlying indexes, the performance of the broad-
based contracts will generally reflect broad changes in common
stock prices. However, because the Portfolio may not be
invested in precisely the same proportion as the S&P 500 or S&P
400, it is likely that the price changes of the Portfolio's
index futures positions will not match the price changes of the
Portfolio's other investments.
Options on futures contracts give the purchaser the right
to assume a position at a specified price in a futures contract
at any time before expiration of the option contract.
Options
The Bond, Balanced Index and Capital Portfolios may sell
(write) listed options on U.S. Treasury Securities and options
on contracts for the future delivery of U.S. Treasury Securities
as a means of hedging the value of such securities owned by the
Portfolio. The S&P 500 Index Portfolio and S&P Midcap 400 Index
Portfolio may enter into futures contracts that relate to
securities in which it may directly invest and indices comprised
of such securities and may purchase and write call and put
options on such contracts.
As a writer of a call option, a Portfolio may terminate its
obligation by effecting a closing purchase transaction. This is
accomplished by purchasing an option of the same series as the
option previously written. However, once the Portfolio has been
assigned an exercise notice, the Portfolio will be unable to
effect a closing purchase transaction. There can be no
assurance that a closing purchase transaction can be effected
when the Portfolio so desires.
The Portfolio will realize a profit from a closing
transaction if the price of the transaction is less than the
premium received from writing the option; the Portfolio will
realize a loss from a closing transaction if the price of the
transaction is more than the premium received from writing the
option. Since the market value of call options generally
reflects increases in the value of the underlying security, any
loss resulting from the closing transaction may be wholly or
partially offset by unrealized appreciation of the underlying
security. Conversely, any gain resulting from the closing
transaction may be wholly or partially offset by unrealized
depreciation of the underlying security. The principal factors
affecting the market value of call options include supply and
demand, the current market price and price volatility of the
underlying security, and the time remaining until the expiration
date.
Although the Bond, Balanced Index and Capital Portfolios
will write only options on U.S. Treasury Securities and options
on futures contracts with respect to such securities which are
traded on a national exchange or Board of Trade, and the S&P 500
Index Portfolio and S&P Midcap 400 Index Portfolio will write
only options on securities among the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500" )** and the Standard
& Poor's 400 Mid-Cap Composite Stock Price Index (the "S&P 400
Index")** respectively, and options of futures contracts with
respect to such securities, there is no assurance that a liquid
secondary market will exist for any particular option. In the
event it is not possible to effect a closing transaction, the
Portfolio will not be able to sell the underlying security,
until the option expires or the option is exercised by the
holder.
** The S&P 500 is an unmanaged index of common stocks comprised
of 500 industrial, financial, utility and transportation
companies. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)",
"Standard & Poor's 500(R)", "500", "S&P Midcap 400 Index", and
"Standard & Poor's Midcap 400 Index" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by
the Fund. The Portfolio is not sponsored, endorsed, sold or
promoted by Standard & Poor's ("S&P"). S&P makes no
representation or warranty, express or implied, to the
beneficial 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 or the S&P Midcap 400 Index to track general stock market
performance. S&P's only relationship to the Fund 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 Fund or the Portfolio. S&P has no
obligation to take the needs of the Fund or the beneficial
owners of the Portfolio into consideration in determining,
composing or calculating the S&P 500 Index and the S&P Midcap
400 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 OR S&P 400 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 CARILLON FUND,
BENEFICIAL OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR
ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 OR
S&P 400 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. **
The Portfolio will effect a closing transaction to realize
a profit on an outstanding call option, to prevent an underlying
security from being called, to permit the sale of an underlying
security prior to the expiration date of the option, or to allow
for the writing of another call option on the same underlying
security with either a different exercise price or expiration
date or both.
Possible reasons for the absence of a liquid secondary
market on an exchange include the following: (a) insufficient
trading interest in certain options; (b) restrictions on
transactions imposed by an exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying
securities; (d) inadequacy of the facilities of an exchange or
the Clearing Corporation to handle trading volume; or (e) a
decision by one or more exchanges to discontinue the trading of
options or impose restrictions on types of orders. There can be
no assurance that higher than anticipated trading activity or
order flow or other unforeseen events might not at times render
the trading facilities inadequate and thereby result in the
institution of special trading procedures or restrictions which
could interfere with the Portfolio's ability to effect closing
transactions.
The Bond, Balanced Index and Capital Portfolios may write
call options on futures contracts on U.S. Treasury Securities as
a hedge against the adverse effect of expected increases in
interest rates on the value of Portfolio securities, in order to
establish more definitely the effective return on securities
held by the Portfolio. The S&P 500 Index Portfolio, the S&P
Midcap 400 Index Portfolio or the Balanced Index Portfolio may
write call options on futures contracts on the S&P 500 or S&P
Midcap 400 Index or securities included therein only for hedging
purposes to protect the price of securities it intends to buy
and when such transactions enable it to correlate its investment
performance more closely to that of the S&P 500 or S&P Midcap
400 Index than would a direct purchase of securities included in
the S&P 500 or S&P Midcap 400 Index. The Portfolios will not
write options on futures contracts for speculative purposes.
A futures contract on a debt security is a binding
contractual commitment which will result in an obligation to
make or accept delivery, during a specified future time, of
securities having standardized face value and rate of return.
Selling a futures contract on debt securities (assuming a short
position) would give the Portfolio a legal obligation and right
as seller to make future delivery of the security against
payment of the agreed price.
Upon the exercise of a call option on a futures contract,
the writer of the option (the Portfolio) is obligated to sell
the futures contract (to deliver a long position to the option
holder) at the option exercise price, which will presumably be
lower than the current market price of the contract in the
futures market. However, as with the trading of futures, most
participants in the options markets do not seek to realize their
gains or losses by exercise of their option rights. Instead,
the holder of an option will usually realize a gain or loss by
buying or selling an offsetting option at a market price that
will reflect an increase or a decrease from the premium
originally paid. Nevertheless, if an option on a futures
contract written by the Portfolio is exercised, the Portfolio
intends to either close out the futures contract by purchasing
an offsetting futures contract, or deliver the underlying
securities immediately, in order to avoid assuming a short
position. There can be no assurance that the Portfolio will be
able to enter into an offsetting transaction with respect to a
particular contract at a particular time, but it may always
deliver the underlying security.
As a writer of options on futures contracts, the Portfolio
will receive a premium but will assume a risk of adverse
movement in the price of the underlying futures contract. If
the option is not exercised, the Portfolio will gain the amount
of the premium, which may partially offset unfavorable changes
in the value of securities held in the Portfolio. If the option
is exercised, the Portfolio might incur a loss in the option
transaction which would be reduced by the amount of the premium
it has received.
While the holder or writer of an option on a futures
contract may normally terminate its position by selling or
purchasing an offsetting option, the Portfolio's ability to
establish and close out options positions at fairly established
prices will be subject to the maintenance of a liquid market.
The Portfolio will not write options on futures contracts
unless, in the Adviser's opinion, the market for such options
has sufficient liquidity that the risks associated with such
options transactions are not at unacceptable levels.
RISKS. While options will be sold in an effort to reduce
certain risks, those transactions themselves entail certain
other risks. Thus, while the Portfolio may benefit from the use
of options, unanticipated changes in interest rates or security
price movements may result in a poorer overall performance for
the Portfolio than if it had not entered into any options
transactions. The price of U.S. Treasury Securities futures are
volatile and are influenced, among other things, by changes in
prevailing interest rates and anticipation of future interest
rate changes. The price of S&P 500 and S&P 400 futures are also
volatile and are influenced, among other things, by changes in
conditions in the securities markets in general.
In the event of an imperfect correlation between a futures
position (and a related option) and the Portfolio position which
is intended to be protected, the desired protection may not be
obtained. The correlation between changes in prices of futures
contracts and of the securities being hedged is generally only
approximate. The amount by which such correlation is imperfect
depends upon many different circumstances, such as variations in
speculative market demand for futures and for debt securities
(including technical influences in futures trading) and
differences between the financial instruments being hedged and
the instruments underlying the standard options on futures
contracts available for trading.
Due to the imperfect correlation between movements in the
prices of futures contracts and movements in the prices of the
underlying debt securities, the price of a futures contract may
move more than or less than the price of the securities being
hedged. If the price of the future moves less than the price of
the securities which are the subject of the hedge, the hedge
will not be fully effective and if the price of the securities
being hedged has moved in an unfavorable direction, the
Portfolio would be in a better position than if it had not
hedged at all. If the price of the futures moves more than the
price of the security, the Portfolio will experience either a
gain or loss on the option on the future which will not be
completely offset by movements in the price of the securities
which are the subject of the hedge.
The market prices of futures contracts and options thereon
may be affected by various factors. If participants in the
futures market elect to close out their contracts through
offsetting transactions rather than meet margin deposit
requirements, distortions in the normal relationship between the
debt securities and futures markets could result. Price
distortions could also result if investors in futures contracts
make or take delivery of underlying securities rather than
engage in closing transactions. This could occur, for example,
if there is a lack of liquidity in the futures market. From the
point of view of speculators, the deposit requirements in the
futures markets are less onerous than margins requirements in
the securities markets; accordingly, increased participation by
speculators in the futures market could cause temporary price
distortions. A correct forecast of interest rate trends by the
adviser may still not result in a successful hedging transaction
because of possible price distortions in the futures market and
because of the imperfect correlation between movements in the
prices of debt securities and movements in the prices of futures
contracts. A well-conceived hedge may be unsuccessful to some
degree because of market behavior or unexpected interest rate
trends.
LIMITATIONS ON THE USE OF OPTIONS ON FUTURES. The Portfolio
will only write options on futures that are traded on exchanges
and are standardized as to maturity date and underlying
financial instrument. The principal exchanges in the United
States for trading options on Treasury Securities are the Board
of Trade of the City of Chicago and the Chicago Mercantile
Exchange. These exchanges and trading options on futures are
regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC").
It is the Fund's opinion that it is not a "commodity pool"
as defined under the Commodity Exchange Act and in accordance
with rules promulgated by the CFTC.
The Portfolio will not write options on futures contracts
for which the aggregate premiums exceed 5% of the fair market
value of the Portfolio's assets, after taking into account
unrealized profits and unrealized losses on any such contracts
it has entered into (except that, in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount
generally may be excluded in computing the 5%).
All of the futures options transactions employed by the
Portfolio will be BONA FIDE hedging transactions, as that term
is used in the Commodity Exchange Act and has been interpreted
and applied by the CFTC. To ensure that its futures options
transactions meet this standard, the Fund will enter into such
transactions only for the purposes and with the intent that CFTC
has recognized to be appropriate.
CUSTODIAL PROCEDURES AND MARGINS. The Fund's Custodian acts as
the Fund's escrow agent as to securities on which the Fund has
written call options and with respect to margin which the Fund
must deposit in connection with the writing of call options on
futures contracts. The Clearing Corporation (CC) will release
the securities or the margin from escrow on the expiration of
the call, or when the Fund enters into a closing purchase
transaction. In this way, assets of the Fund will never be
outside the control of the Fund's custodian, although such
control might be limited by the escrow receipts issued.
At the time the Portfolio sells a call option on a contract
for future delivery of U.S. Treasury Securities ("Treasury
futures contract"), it is required to deposit with its
custodian, in an escrow account, a specified amount of cash or
U.S. Government securities ("initial margin"). The account will
be in the name of the CC. The amount of the margin generally is
a small percentage of the contract amount. The margin required
is set by the exchange on which the contract is traded and may
be modified during the term of the contract. The initial margin
is in the nature of a performance bond or good faith deposit,
and it is released from escrow upon termination of the option
assuming all contractual obligations have been satisfied. The
Portfolio will earn interest income on its initial margin
deposits.
In accordance with the rules of the exchange on which the
option is traded, it might be necessary for the Portfolio to
supplement the margin held in escrow. This will be done by
placing additional cash or U.S. Government securities in the
escrow account. If the amount of required margin should
decrease, the CC will release the appropriate amount from the
escrow account.
The assets in the margin account will be released to the CC
only if the Portfolio defaults or fails to honor its commitment
to the CC and the CC represents to the custodian that all
conditions precedent to its right to obtain the assets have been
satisfied.
Lending Portfolio Securities
The S&P 500 Index Portfolio, S&P Midcap 400 Index Portfolio
and Balanced Index Portfolio may lend portfolio securities with
a value up to 10% of its total assets. Such loans may be
terminated at any time. The Portfolio will continuously
maintain as collateral cash or obligations issued by the U.S.
government, its agencies or instrumentalities in an amount equal
to not less than 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus declared
dividends and accrued interest. While portfolio securities are
on loan, the borrower will pay the Portfolio any income accruing
thereon, and the Portfolio may invest or reinvest the collateral
(depending on whether the collateral is cash or U.S. Government
securities) in portfolio securities, thereby earning additional
income. Loans are typically subject to termination by the
Portfolio in the normal settlement time, currently five business
days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the
borrowed securities which occurs during the term of the loan
inures to the Portfolio and its shareholders. The Portfolio may
pay reasonable finders', borrowers', administrative, and
custodial fees in connection with a loan of its securities. The
Adviser will review and monitor the creditworthiness of such
borrowers on an ongoing basis.
The S&P 500 Index Portfolio may invest in Standard & Poor's
Depositary Receipts(R) ("SPDRs(R)") and the S&P Midcap 400 Index
Portfolio may invest in Standard & Poor's Mid-Cap Depository
Receipts ("MIDCAP SPDRs(R)"). SPDRs and MIDCAP SPDRs are units
of beneficial interest in a unit investment trust, representing
proportionate undivided interests in a portfolio of securities
in substantially the same weighting as the component common
stocks of the S&P 500 and S&P Midcap 400 Index respectively.
While the investment objective of such a unit investment trust
is to provide investment results that generally correspond to
the price and yield performance of the component common stocks
of the S&P 500 and S&P 400, there can be no assurance that this
investment objective will be met fully. As SPDRs and MIDCAP
SPDRs are securities issued by an investment company, non-
fundamental restriction (5) below restricts purchases of SPDRs
and MIDCAP SPDRs to 10% of the Portfolio's assets.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental restrictions
relating to the investment of assets of the Portfolios and other
investment activities. These are fundamental policies and may
not be changed without the approval of holders of the majority
of the outstanding voting shares of each Portfolio affected
(which for this purpose means 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 shares). A change in policy affecting only one
Portfolio may be effected with the approval of the majority of
the outstanding voting shares of that Portfolio only. The
Fund's fundamental investment restrictions provide that no
Portfolio of the Fund is allowed to:
(1) Issue senior securities (except that each Portfolio
may borrow money as described in restriction [9] below).
(2) With respect to 75% of the value of its total
assets, invest more than 5% of its total assets in securities
(other than securities issued or guaranteed by the United States
Government or its agencies or instrumentalities) of any one
issuer.
(3) Purchase more than either: (i) 10% in principal
amount of the outstanding debt securities of an issuer, or (ii)
10% of the outstanding voting securities of an issuer, except
that such restrictions shall not apply to securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities.
(4) Invest more than 25% of its total assets in the
securities of issuers primarily engaged in the same industry.
For purposes of this restriction, gas, gas transmission,
electric, water, and telephone utilities each will be considered
a separate industry. This restriction does not apply to
obligations of banks or savings and loan associations or to
obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities.
(5) Purchase or sell commodities, commodity contracts,
or real estate, except that each Portfolio may purchase
securities of issuers which invest or deal in any of the above,
and except that each Portfolio may invest in securities that are
secured by real estate. This restriction does not apply to
obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or to futures
contracts or options purchased by the S&P 500 Index Portfolio,
S&P Midcap 400 Index Portfolio or Balanced Index Portfolio in
compliance with non-fundamental restrictions [8 and 9] below.
(6) Purchase any securities on margin (except that the
Fund may obtain such short-term credit as may be necessary for
the clearance of purchases and sales of portfolio securities) or
make short sales of securities or maintain a short position.
(7) Make loans, except through the purchase of
obligations in private placements or by entering into repurchase
agreements (the purchase of publicly traded obligations not
being considered the making of a loan).
(8) Lend its securities, except that the S&P 500 Index
Portfolio, S&P 400 Index Portfolio and Balanced Index Portfolio
may lend securities in compliance with non-fundamental
restriction [7] below.
(9) Borrow amounts in excess of 10% of its total
assets, taken at market value at the time of the borrowing, and
then only from banks (and, in the case of the S&P 500 Index
Portfolio, S&P Midcap 400 Index Portfolio and Balanced Index
Portfolio by entering into reverse repurchase agreements) as a
temporary measure for extraordinary or emergency purposes, or to
meet redemption requests that might otherwise require the
untimely disposition of securities, and not for investment or
leveraging.
(10) Mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any securities owned or
held by such Portfolio.
(11) Underwrite securities of other issuers except
insofar as the Fund may be deemed an underwriter under the
Securities Act of 1933 in selling shares of each Portfolio and
except as it may be deemed such in a sale of restricted
securities.
(12) Invest more than 10% of its total assets in
repurchase agreements maturing in more than seven days, "small
bank" certificates of deposit that are not readily marketable,
and other illiquid investments.
The Fund has also adopted the following additional
investment restrictions that are not fundamental and may be
changed by the Board of Directors without shareholder approval.
Under these restrictions, no Portfolio of the Fund may:
(1) Participate on a joint (or a joint and several)
basis in any trading account in securities (but this does not
prohibit the "bunching" of orders for the sale or purchase of
Portfolio securities with the other Portfolios or with other
accounts advised or sponsored by the Adviser or any of its
affiliates to reduce brokerage commissions or otherwise to
achieve best overall execution).
(2) Purchase or retain the securities of any issuer,
if, to the knowledge of the Fund, officers and directors of the
Fund, the Adviser or any affiliate thereof each owning
beneficially more than 1/2% of one of the securities of such
issuer, own in the aggregate more than 5% of the securities of
such issuer.
(3) Purchase or sell interests in oil, gas, or other
mineral exploration or development programs, or real estate
mortgage loans, except that each Portfolio may purchase
securities of issuers which invest or deal in any of the above,
and except that each Portfolio may invest in securities that are
secured by real estate mortgages. This restriction does not
apply to obligations or other securities issued or guaranteed by
the United States Government, its agencies or instrumentalities.
(4) Invest in companies for the purpose of exercising
control (alone or together with the other Portfolios).
(5) Purchase securities of other investment companies
with an aggregate value in excess of 5% of the Portfolio's total
assets, except in connection with a merger, consolidation,
acquisition or reorganization, or by purchase in the open market
of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than
customary broker's commission, is involved, or by purchase of
SPDRs or MIDCAP SPDRs and only if immediately thereafter not
more than 10% of such Portfolio's total assets, taken at market
value, would be invested in such securities.
The Fund has also adopted the following additional
investment restrictions that are not fundamental and may be
changed by the Board of Directors without shareholder approval.
Under these restrictions:
The S&P 500 Index Portfolio, the S&P Midcap 400 Index
Portfolio and the Balanced Index Portfolio of the Fund may not:
(6) Lend portfolio securities with an aggregate value
of more than 10% of its total assets.
(7) Invest more than 20% of its assets in futures
contracts and/or options on futures contracts, except as a
temporary investment strategy until the Portfolio reaches $25
million in net assets, the Portfolio may invest up to 100% of
its assets in such futures and/or options contracts.
(8) Invest in options unless no more than 5% of its
assets is paid for premiums for outstanding put and call options
(including options on futures contracts) and unless no more than
25% of the Portfolio's assets consist of collateral for
outstanding options.
If a percentage restriction (for either fundamental or
nonfundamental policies) is adhered to at the time of
investment, a later increase or decrease in percentage beyond
the specified limit resulting from a change in values of
portfolio securities or amount of net assets shall not be
considered a violation.
In addition to the investment restrictions described above,
the Fund will comply with restrictions contained in any current
insurance laws in order that the assets of The Union Central
Life Insurance Company's ("Union Central") separate accounts may
be invested in Fund shares.
PORTFOLIO TURNOVER
Each Portfolio has a different expected annual rate of
Portfolio turnover, which is calculated by dividing the lesser
of purchases or sales of Portfolio securities during the fiscal
year by the monthly average of the value of the Portfolio's
securities (excluding from the computation all securities,
including options, with maturities at the time of acquisition of
one year or less). A high rate of Portfolio turnover generally
involves correspondingly greater brokerage commission expenses,
which must be borne directly by the Portfolio. Turnover rates
may vary greatly from year to year as well as within a
particular year and may also be affected by cash requirements
for redemptions of each Portfolio's shares and by requirements
which enable the Fund to receive certain favorable tax
treatments. The Portfolio turnover rates will, of course,
depend in large part on the level of purchases and redemptions
of shares of each Portfolio. Higher Portfolio turnover can
result in corresponding increases in brokerage costs to the
Portfolios of the Fund and their shareholders. However, because
rate of Portfolio turnover is not a limiting factor, particular
holdings may be sold at any time, if investment judgment or
Portfolio operations make a sale advisable.
The annual Portfolio turnover rates for the Equity
Portfolio were _____% and 57.03%, respectively, for 1998 and
1997. The annual Portfolio turnover rates for the Bond
Portfolio were _____% and 113.41%, respectively, for 1998 and
1997. The annual Portfolio turnover rates for the Capital
Portfolio were _____% and 60.84%, respectively, for 1998 and
1997. The annual Portfolio turnover rates for the S&P 500 Index
Portfolio were _____% and 9.06%, respectively for 1998 and 1997.
The annual Portfolio turnover rate for the Micro-Cap Portfolio
was _____% for 1998. The annual Portfolio turnover rate for the
Micro-Cap Portfolio was _____% for 1998. The annual Portfolio
turnover rate for the S&P 400 Midcap Index Portfolio and the
Balanced Index Portfolio is expected to be 10% and 10%,
respectively.
MANAGEMENT OF THE FUND
Directors and Officers
The directors and executive officers of the Fund and their
principal occupations during the past five years are set forth
below. Unless otherwise noted, the address of each executive
officer and director is 1876 Waycross Road, Cincinnati, Ohio
45240.
<TABLE>
<CAPTION>
Name, Address Position(s) with Principal Occupation(s)
and Age the Fund During Past Five Years
- ------------- ---------------- ----------------------
<S> <C> <C>
George M. Callard, M.D. Director Professor of Clinical Surgery,
3021 Erie Avenue University of Cincinnati
Cincinnati, Ohio 45208
(Age 65)
Theodore H. Emmerich Director Consultant; former Partner,
1201 Edgecliff Place Ernst & Whinney, Accountants
Cincinnati, Ohio 45206
(72)
James M. Ewell Director Retired Senior Vice President
9000 Indian Ridge Road and Director, The Procter and
Cincinnati, Ohio 45243 Gamble Company
(83)
Richard H. Finan Director Attorney at Law; President of
11137 Main Street the Ohio State Senate
Cincinnati, Ohio 45241
(64)
Jean Patrice Director Former Interim President,
Harrington, S.C. Cincinnati State Technical and
3217 Whitfield Avenue Community College; Former
Cincinnati, Ohio 45220 Executive Director, Cincinnati
(76) Youth Collaborative; President
Emeritus (formerly, President)
College of Mount St. Joseph
John H. Jacobs* Director, President and Chief Operating
(52) President Officer, Union Central;
and Chief Director, President and Chief
Executive Executive Officer, Carillon
Officer Advisers, Inc. ("Adviser");
Director, Carillon Investments,
Inc.; prior to July, 1998,
Officer and employee, Union
Central
Charles W. McMahon Director Retired Senior Vice President
19 Iron Woods Drive and Director, Union Central
Cincinnati, Ohio 45239
(79)
Harry Rossi* Director Director Emeritus, Union
8548 Wyoming Club Drive Central; Director, Adviser;
Cincinnati, Ohio 45215 former Chairman, President and
(79) Chief Executive Officer, Union
Central
Stephen R. Hatcher Senior Vice Executive Vice President and
(56) President Chief Financial Officer, Union
Central; prior to June, 1995,
Officer and employee, Union
Central
John F. Labmeier Vice President Vice President, Associate
(50) and Secretary General Counsel and Assistant
Secretary, Union Central; Vice
President and Secretary,
Carillon Investments, Inc.;
Secretary, Adviser
Thomas G. Knipper Controller Treasurer, Adviser; prior to
(41) July, 1995, Treasurer of The
Gateway Trust and Vice
President and Controller of
Gateway Advisers, Inc.
John M. Lucas Assistant Counsel and Assistant to
(48) Secretary Secretary, Union Central
</TABLE>
- -----------
* Messrs. Jacobs and Rossi are considered to be "interested
persons" of the Fund (within the meaning of the Investment
Company Act of 1940) because of their affiliation with the
Adviser.
Each of the directors also serves as a trustee of Carillon
Investment Trust.
All directors who are not "interested persons" of the
Company are members of the Audit Committee.
As of the date of this Statement of Additional Information,
officers and directors of the Fund do not own any of the
outstanding shares of the Fund. Directors who are not officers
or employees of Union Central or Adviser are paid a fee plus
actual out-of-pocket expenses by the Fund for each meeting of
the Board of Directors attended. Total fees and expenses
incurred for 1998 were $63,657.
<TABLE>
<CAPTION>
Compensation Table
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Compensation
From Benefits Benefits From
Registrant Accrued As Upon Registrant
Part of Fund Retirement and Fund
Expenses Complex*
Paid to
Directors
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
George M. Callard, $14,800 -- -- $14,800
M.D.
Director
Theodore H. Emmerich $15,900 -- -- $15,900
Director
James M. Ewell $15,300 -- -- $15,300
Director
Richard H. Finan $15,300 -- -- $15,300
Director
Jean Patrice
Harrington, S.C. $15,500 -- -- $15,500
Director
John H. Jacobs N/A N/A N/A N/A
Director
Charles W. McMahon $14,800 -- -- $14,800
Director
Harry Rossi N/A N/A N/A N/A
Director
</TABLE>
* Each of the Directors also serves as a Trustee of Carillon
Investment Trust.
** Messrs. Callard and McMahon have been deferring their
compensation each year. As of December 31, 1998, the total
amount deferred, including interest, was as follows: Dr.
Callard - $$88,337; Mr. McMahon - $116,300.
Investment Adviser
The Fund has entered into an Investment Advisory Agreement
("Agreement") with Carillon Advisers, Inc. ("Adviser") whose
principal business address is 1876 Waycross Road, Cincinnati,
Ohio 45240 (P.O. Box 40407, Cincinnati, Ohio 45240). The
Adviser was incorporated under the laws of Ohio on August 18,
1986, and is a wholly-owned subsidiary of Union Central.
Executive officers and directors of the Adviser who are
affiliated with the Fund are John H. Jacobs, President and Chief
Executive Officer; Harry Rossi, Director; Thomas G. Knipper,
Treasurer; and John F. Labmeier, Secretary.
Pursuant to the Agreement, the Fund has retained the
Adviser to manage the investment of the Fund's assets, including
the placing of orders for the purchase and sale of Portfolio
securities. The Adviser is at all times subject to the
direction and supervision of the Board of Directors of the Fund.
The Adviser continuously furnishes an investment program
for each Portfolio, is responsible for the actual management of
each Portfolio and has responsibility for making decisions to
buy, sell or hold any particular security. The Adviser obtains
and evaluates such information and advice relating to the
economy, securities markets, and specific securities as it
considers necessary or useful to continuously manage the assets
of the Portfolios in a manner consistent with their investment
objectives, policies and restrictions. The Adviser considers
analyses from various sources, makes necessary investment
decisions and effects transactions accordingly. The Adviser
also performs certain administrative functions for the Fund.
The Adviser may utilize the advisory services of subadvisers for
one or more of the Portfolios.
Payment of Expenses
Under the terms of the Agreement, in addition to managing
the Fund's investments, the Adviser, at its expense, maintains
certain of the Fund's books and records (other than those
provided by Firstar Trust Company, by agreement) and furnishes
such office space, facilities, equipment, and clerical help as
the Fund may reasonably require in the conduct of business. In
addition, the Adviser pays for the services of all executive,
administrative, clerical, and other personnel, including
officers of the Fund, who are employees of Union Central. The
Adviser also bears the cost of telephone service, heat, light,
power and other utilities provided to the Fund. Expenses not
expressly assumed by the Adviser under the Agreement will be
paid by the Fund.
Each Portfolio pays all other expenses incurred in its
operation and a portion of the Fund's general administration
expenses allocated on the basis of the asset size of the
respective Portfolios. Expenses other than the Adviser's fee
that are borne directly and paid individually by a Portfolio
include, but are not limited to, brokerage commissions, dealer
markups, expenses incurred in the acquisition of Portfolio
securities, transfer taxes, transaction expenses of the
custodian, pricing services used by only one or more Portfolios,
and other costs properly payable by only one or more Portfolios.
Expenses which are allocated on the basis of size of the
respective Portfolios include custodian (portion based on asset
size), dividend disbursing agent, transfer agent, bookkeeping
services (except annual per Portfolio base charge), pricing,
shareholder's and directors' meetings, directors' fees, proxy
statement and Prospectus preparation, registration fees and
costs, fees and expenses of legal counsel not including
employees of the Adviser, membership dues of industry
associations, postage, insurance premiums including fidelity
bond, and all other costs of the Fund's operation properly
payable by the Fund and allocable on the basis of size of the
respective Portfolios. The Adviser will pay any expenses of the
S&P 500 Index Portfolio, S&P Midcap 400 Index Portfolio and
Balanced Index Portfolios, other than the advisory fee for those
Portfolios, to the extent that such expenses exceed .30% of that
Portfolio's net assets. The Adviser will also pay any expenses
of the Micro-Cap Portfolio, other than the advisory fee for
those Portfolios, to the extent that such expenses exceed 1.00%
of that Portfolio's net assets.
Depending on the nature of a legal claim, liability or
lawsuit, litigation costs, payment of legal claims or
liabilities and any indemnification relating thereto may be
directly applicable to a Portfolio or allocated on the basis of
the size of the respective Portfolios. The directors have
determined that this is an appropriate method of allocation of
expenses.
The Agreement also provides that if the total operating
expenses of the Fund, exclusive of the advisory fee, taxes,
interest, brokerage fees and certain legal claims and
liabilities and litigation and indemnification expenses, as
described in the Agreement, for any fiscal year exceed 1.0% of
the average daily net assets of the Fund, the Adviser will
reimburse the Fund for such excess, up to the amount of the
advisory fee for that year. Such amount, if any, will be
calculated daily and credited on a monthly basis.
Advisory Fee
As full compensation for the services and facilities
furnished to the Fund and expenses of the Fund assumed by the
Adviser, the Fund pays the Adviser monthly compensation
calculated daily as described on page 11 of the Prospectus. The
compensation after all waivers for each Portfolio was as
follows:<TABLE>
<CAPTION>
S&P 500 S&P Midcap Balanced
Equity Bond Capital Index Micro-Cap 400 Index Index
Year Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ---- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 $1,704,750 $551,146 $914,153 $274,418 $7,291 -0- -0-
1997 $1,731,351 $427,729 $1,058,086 $129,253 -0- -0- -0-
1996 $1,436,998 $384,084 $1,032,861 $ 8,233 N/A -0- -0-
</TABLE>
There is no assurance that the Portfolios will reach a net
asset level high enough to realize a reduction in the rate of
the advisory fee. Any reductions in the rate of advisory fee
will be applicable to each Portfolio separately in accordance
with the schedule of fees applicable to each Portfolio.
Investment Advisory Agreement
The Investment Advisory Agreement was initially approved by
the Fund's Board of Directors, including a majority of the
directors who are not interested persons of the Adviser, on
March 22, 1984. Unless earlier terminated as described below,
the Agreement will continue in effect from year to year if
approved annually: (a) by the Board of Directors of the Fund or
by a majority of the outstanding shares of the Fund, including a
majority of the outstanding shares of each Portfolio; and (b) by
a majority of the directors who are not parties to such contract
or interested persons (as defined by the Investment Company Act
of 1940) of any such party. The Agreement is not assignable and
may be terminated without penalty by the Fund on 60 days notice,
and by the Adviser on 90 days notice. On March 19, 1999 the
Agreement was approved for continuance for one (1) year by the
Board of Directors by unanimous vote of those present, including
a majority of the directors who are not parties to such contract
or interested persons of any such party.
On March 21, 1990, the Board of Directors took steps to
activate the Capital Portfolio of the Fund by authorizing the
issuance of shares of that Portfolio to a separate account of
Union Central. The Board of Directors also approved an
amendment to the Investment Advisory Agreement so as to make the
Agreement applicable to the Capital Portfolio and to specify the
advisory fee payable by it. The Board determined that the
amendment did not affect the interests of the classes of Fund
shares other than Capital Portfolio shares and that therefore
only the holders of Capital Portfolio shares were entitled to
vote on the amendment. On May 1, 1990, the Union Central
separate account invested $15.2 million in the Capital Portfolio
in exchange for 1,390,516 shares at a price of $10.95 per share.
Union Central, as legal owner of the Capital Portfolio shares
purchased by its separate account and as sole shareholder of the
Capital Portfolio, approved the Agreement as amended.
On September 15, 1995, the Board of Directors took steps to
activate the S&P 500 Index Portfolio of the Fund by authorizing
the issuance of shares of that Portfolio. On December 13, 1995,
the Board of Directors also approved an amendment to the
Investment Advisory Agreement so as to make the Agreement
applicable to the Index Portfolio and to specify the advisory
fee payable by it. The Board determined that the amendment did
not affect the interests of the classes of Fund shares other
than Index Portfolio shares and that therefore only the holders
of Index Portfolio shares were entitled to vote on the
amendment. The sole shareholder of the Index Portfolio approved
the Agreement as amended on January 3, 1996.
On June 16, 1997, the Board of Directors took steps to
activate the Micro-Cap Portfolio of the Fund by authorizing the
issuance of shares of that Portfolio. On September 18, 1997,
the Board of Directors also approved an amendment to the
Investment Advisory Agreement making the Agreement applicable to
the Micro-Cap Portfolio and specifying the advisory fee payable
by it. The Board determined that the amendment did not affect
the interests of the classes of Fund shares other than Micro-Cap
Portfolio shares and that therefore only the holders of Micro-
Cap Portfolio shares were entitled to vote on the amendment.
The sole shareholder of the Micro-Cap Portfolio approved the
Agreement on December 10, 1997.
On December 16, 1998, the Board of Directors took steps to
activate the S&P Midcap 400 Index Portfolio and the Balanced
Index Portfolio of the Fund by authorizing the issuance of
shares of those Portfolios. On March 19, 1999, the Board of
Directors also approved an amendment to the Investment Advisory
Agreement making the Agreement applicable to the S&P Midcap 400
Index Portfolio and the Balanced Index Portfolio, and specifying
the advisory fee payable by it. The board determined that the
amendment did not affect the interests of the classes of Fund
shares other than S&P Midcap 400 Index Portfolio and Balanced
Index Portfolio shares and that therefore only the holders of
S&P Midcap 400 Index Portfolio and Balanced Index Portfolio
shares were entitled to vote on the amendment. It is
anticipated that the sole shareholder of the S&P Midcap 400
Index Portfolio and the Balanced Index Portfolio will approve
the Agreement as amended on or about May 1, 1999.
The Investment Advisory Agreement provides that the Adviser
shall not be liable to the Fund or to any shareholder for any
error of judgment or mistake of law or for any loss suffered by
the Fund or by any shareholder in connection with matters to
which the Investment Advisory Agreement relates, except a loss
resulting from willful misfeasance, bad faith, gross negligence,
or reckless disregard on the part of the Adviser in the
performance of its duties thereunder. In the case of
administration services, the Adviser will be held to a normal
standard of liability.
The Agreement in no way restricts the Adviser from acting
as investment manager or adviser to others.
If the question of continuance of the Agreement (or
adoption of any new Agreement) is presented to shareholders,
continuance (or adoption) with respect to a Portfolio shall be
effective only if approved by a majority vote of the outstanding
voting securities of that Portfolio. If the shareholders of any
one or more of the Portfolios should fail to approve the
Agreement, the Adviser may nonetheless serve as an adviser with
respect to any Portfolio whose shareholders approved the
Agreement.
Administration
The Adviser is responsible for providing certain
administrative functions to the Fund and has entered into an
Administration Agreement with Carillon Investments, Inc. ("CII")
under which CII furnishes substantially all of such services for
an annual fee of .20% of the average net assets of the Bond,
Capital and Equity Portfolios, .10% of the average net assets of
the Micro-Cap Portfolio, and .05% of the average net assets of
the S&P 500 Index Portfolio, S&P Midcap 400 Index Portfolio and
Balanced Index Portfolio. The fee is borne by the Adviser, not
the Fund. Under the Administration Agreement, CII is obligated
to provide persons for clerical, accounting, bookkeeping,
administrative and other similar services, to supply office
space, stationery and office supplies, and to prepare tax
returns, reports to stockholders, and filings with the
Securities and Exchange Commission and state securities
authorities.
Service Agreement
Under a Service Agreement between the Adviser and Union
Central, Union Central has agreed to make available to the
Adviser the services of certain employees of Union Central on a
part-time basis for the purpose of better enabling the Adviser
to fulfill its obligations to the Fund under the Agreement.
Pursuant to the Service Agreement, the Adviser shall reimburse
Union Central for all costs allocable to the time spent on the
affairs of the Adviser by the employees provided by Union
Central. In performing their services for the Adviser pursuant
to the Service Agreement, the specified employees shall report
and be solely responsible to the officers and directors of the
Adviser or persons designated by them. Union Central shall have
no responsibility for the investment recommendations or
decisions of the Adviser. The obligation of performance under
the Agreement is solely that of the Adviser and Union Central
undertakes no obligation in respect thereto except as otherwise
expressly provided in the Service Agreement. The Service
Agreement was approved by the shareholders of the Equity, Bond
and Capital Portfolios at a meeting held on March 20, 1992. The
sole shareholder of the S&P 500 Index Portfolio approved the
Service Agreement on January 3, 1996. The sole shareholder of
the Micro-Cap Portfolio approved the Service Agreement on
December 10, 1997. It is anticipated that the sole shareholder
of the S&P Midcap 400 Index Portfolio and the Balanced Index
Portfolio will approve the Service Agreement on or about May 1,
1999.
Securities Activities of Adviser
Securities held by the Fund may also be held by Union
Central or by other separate accounts or mutual funds for which
the Adviser acts as an adviser. Because of different investment
objectives or other factors, a particular security may be bought
by Union Central or by the Adviser or for one or more of its
clients, when one or more other clients are selling the same
security. If purchases or sales of securities for one or more
of the Fund's Portfolios or other clients of the Adviser or
Union Central arise for consideration at or about the same time,
transactions in such securities will be made, insofar as
feasible, for the Fund's Portfolios, Union Central, and other
clients in a manner deemed equitable to all. To the extent that
transactions on behalf of more than one client of the Adviser
during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there
may be an adverse effect on price.
On occasions when the Adviser deems the purchase or sale of
a security to be in the best interests of the Fund as well as
other accounts or companies, it may, to the extent permitted by
applicable laws and regulations, but will not be obligated to,
aggregate the securities to be sold or purchased for the Fund
(or for two or more Portfolios) with those to be sold or
purchased for other accounts or companies in order to obtain
more favorable execution and low brokerage commissions. In that
event, allocation of the securities purchased or sold, as well
as the expenses incurred in the transaction, will be made by the
Adviser in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Fund
Portfolio(s) and to such other accounts or companies. In some
cases this procedure may adversely affect the size of the
position obtainable for a Portfolio.
DETERMINATION OF NET ASSET VALUE
As described on page 12 of the Prospectus, the net asset
value of shares of the Fund is determined once daily, Monday
through Friday as of the close of regular trading on the New
York Stock Exchange (normally 4:00 p.m., Eastern Time), when
there are purchases or redemptions of Fund shares, except: (i)
when the New York Stock Exchange is closed (currently New Year's
Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day); and (ii)
any day on which changes in the value of the Portfolio
securities of the Fund will not materially affect the current
net asset value of the shares of a Portfolio.
Securities held by the Portfolios, except for money market
instruments maturing in 60 days or less, will be valued as
follows: Securities which are traded on stock exchanges
(including securities traded in both the over-the-counter market
and on exchange), or listed on the NASDAQ National Market
System, are valued at the last sales price as of the close of
the New York Stock Exchange on the day the securities are being
valued, or, lacking any sales, at the closing bid prices.
Securities traded only in the over-the-counter market are valued
at the last bid prices quoted by brokers that make markets in
the securities at the close of trading on the New York Stock
Exchange. Securities and assets for which market quotations are
not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors.
Money market instruments with a remaining maturity of 60
days or less are valued on an amortized cost basis. Under this
method of valuation, the instrument is initially valued at cost
(or in the case of instruments initially valued at market value,
at the market value on the day before its remaining maturity is
such that it qualifies for amortized cost valuation);
thereafter, the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the
market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than
the price that would be received upon sale of the instrument.
PURCHASE AND REDEMPTION OF SHARES
The Fund offers its shares, without sales charge, only to
Union Central and its separate accounts. It is possible that at
some later date the Fund may offer shares to other investors.
The Fund is required to redeem all full and fractional
shares of the Fund for cash at the net asset value per share.
Payment for shares redeemed will generally be made within seven
days after receipt of a proper notice of redemption. The right
to redeem shares or to receive payment with respect to any
redemption may only be suspended for any period during which:
(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 Securities and Exchange
Commission, as a result of which disposal of Portfolio
securities or determination of the net asset value of a
Portfolio is not reasonably practicable; and (c) the Securities
and Exchange Commission by order permits postponement for the
protection of shareholders.
TAXES
Each Portfolio of the Fund will be treated as a separate
entity for federal income tax purposes. Each Portfolio has
qualified and has elected to be taxed as a "regulated investment
company" under the provisions of Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If a Portfolio
qualifies as a "regulated investment company" and complies with
the provisions of the Code by distributing substantially all of
its net income (both ordinary income and capital gain), the
Portfolio will be relieved from federal income tax on the
amounts distributed.
In order to qualify as a regulated investment company, in
each taxable year each Portfolio must, among other things: (a)
derive at least 90 percent of its gross income from dividends,
interest, payments with respect to loans of securities, and
gains from the sale or other disposition of stocks or securities
or foreign currencies (subject to the authority of the Secretary
of the Treasury to exclude certain foreign currency gains) or
other income (including, but not limited to, gains from options,
futures, or forward contracts which are ancillary to the
Portfolio's principal business of investing in stocks or
securities or options and futures with respect to stocks or
securities) derived with regard to its investing in such stocks,
securities or currencies; and (b) derive less than 30 percent of
its gross income from gains (without deduction for losses)
realized on the sale or other disposition of any of the
following held for less than three months: securities, options,
futures or forward contracts (other than options, futures or
forward contracts on foreign currencies) or certain foreign
currencies. In order to meet the requirements noted above, the
Fund may be required to defer disposing of certain options,
futures contracts and securities beyond the time when it might
otherwise be advantageous to do so. These requirements may also
affect the Fund's investments in various ways, such as by
limiting the Fund's ability to:(a) sell investments held for
less than three months; (b) effect closing transactions on
options written less than three months previously; (c) write
options for a period of less than three months; and (d) write
options on securities held for less than the long-term capital
gains holding period. For a discussion of tax consequences to
owners of annuity contracts, see the Prospectus for those
contracts.
The discussion of "Taxes" in the Prospectus, in conjunction
with the foregoing, is a general and abbreviated summary of the
applicable provisions of the Code and Treasury Regulations
currently in effect as interpreted by the Courts and the
Internal Revenue Service.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is primarily responsible for the investment
decisions of each Portfolio, including decisions to buy and sell
securities, the selection of brokers and dealers to effect the
transactions, the placing of investment transactions, and the
negotiation of brokerage commissions, if any. No Portfolio has
any obligation to deal with any dealer or group of dealers in
the execution of transactions in Portfolio securities. In
placing orders, it is the policy of the Fund to obtain the most
favorable net results, taking into account various factors,
including price, dealer spread or commission, if any, size of
the transaction, and difficulty of execution. While the Adviser
generally seeks reasonably competitive spreads or commissions,
the Portfolios will not necessarily be paying the lowest spread
or commission available.
If the securities in which a particular Portfolio of the
Fund invests are traded primarily in the over-the-counter
market, where possible the Portfolio will deal directly with the
dealers who make a market in the securities involved unless
better prices and execution are available elsewhere. Such
dealers usually act as principals for their own account. On
occasion, securities may be purchased directly from the issuer.
Bonds and money market instruments are generally traded on a net
basis and do not normally involve either brokerage commissions
or transfer taxes. The cost of Portfolio securities
transactions of each Portfolio will consist primarily of
brokerage commission or dealer or underwriter spreads.
While the Adviser seeks to obtain the most favorable net
results in effecting transactions in the Portfolio securities,
brokers who provide supplemental investment research to the
Adviser may receive orders for transactions by the Fund. Such
supplemental research service ordinarily consists of assessments
and analyses of the business or prospects of a company,
industry, or economic sector. If, in the judgment of the
Adviser, the Fund will be benefited by such supplemental
research services, the Adviser is authorized to pay commissions
to brokers furnishing such services which are in excess of
commissions which another broker may charge for the same
transaction. Information so received will be in addition to and
not in lieu of the services required to be performed by the
Adviser under its Investment Advisory Agreement. The expenses
of the Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information. In some cases,
the Adviser may use such supplemental research in providing
investment advice to its other advisory accounts.
During 1998, 27% of the Fund's total brokerage was
allocated to brokers who furnish statistical data or research
information. Brokerage commissions paid during 1998, 1997 and
1996 were $740,176, $587,069 and $475,382, respectively.
GENERAL INFORMATION
Capital Stock
The Fund is a mutual fund. Its board of directors is
responsible for supervising its business affairs and
investments, which are managed on a daily basis by the Adviser.
The Fund was incorporated under the laws of the State of
Maryland on January 30, 1984. The Fund is a series fund with
seven classes of stock, one for each Portfolio. The authorized
capital stock of the Fund consists of one hundred and ninety
million shares of common stock, par value ten cents ($0.10) per
share. The shares of the authorized capital stock are currently
divided into the following classes: Equity Portfolio consisting
of forty million authorized shares; Capital Portfolio consisting
of thirty million authorized shares; Bond Portfolio consisting
of thirty million authorized shares; S&P 500 Index Portfolio
consisting of thirty million authorized shares; Micro-Cap
Portfolio consisting of twenty million shares; S&P Midcap 400
Index Portfolio, consisting of twenty million shares; and
Balanced Index Portfolio, consisting of twenty million shares.
The Board of Directors may change the designation of any
Portfolio and may increase or decrease the number of authorized
shares of any Portfolio, but may not decrease the number of
authorized shares of any Portfolio below the number of shares
then outstanding.
Each issued and outstanding share is entitled to
participate equally in dividends and distributions declared by
the respective Portfolio and, upon liquidation or dissolution,
in net assets of such Portfolio remaining after satisfaction of
outstanding liabilities.
Voting Rights
In accordance with an amendment to the Maryland General
Corporation Law, the Board of Directors of the Fund has adopted
an amendment to its Bylaws providing that unless otherwise
required by the Investment Company Act of 1940, the Fund shall
not be required to hold an annual shareholder meeting unless the
Board of Directors determines to hold an annual meeting. The
Fund intends to hold shareholder meetings only when required by
law and such other times as may be deemed appropriate by its
Board of Directors.
All shares of common stock have equal voting rights
(regardless of the net asset value per share) except that on
matters affecting only one Portfolio, only shares of the
respective Portfolio are entitled to vote. The shares do not
have cumulative voting rights. Accordingly, the holders of more
than 50% of the shares of the Fund voting for the election of
directors can elect all of the directors of the Fund if they
choose to do so and in such event the holders of the remaining
shares would not be able to elect any directors.
Matters in which the interests of all Portfolios are
substantially identical (such as the election of directors or
the approval of independent public accountants) will be voted on
by all shareholders without regard to the separate Portfolios.
Matters that affect all Portfolios but where the interests of
the Portfolios are not substantially identical (such as approval
of the Investment Advisory Agreement) would be voted on
separately by each Portfolio. Matters affecting only one
Portfolio, such as a change in its fundamental policies, are
voted on separately by that Portfolio.
Matters requiring separate shareholder voting by Portfolio
shall have been effectively acted upon with respect to any
Portfolio if a majority of the outstanding voting securities of
that Portfolio votes for approval of the matter, notwithstanding
that: (1) the matter has not been approved by a majority of the
outstanding voting securities of any other Portfolio; or (2) the
matter has not been approved by a majority of the outstanding
voting securities of the Fund.
The phrase "a majority of the outstanding voting
securities" of a Portfolio (or of the Fund) means the vote of
the lesser of: (1) 67% of the shares of the Portfolio (or the
Fund) present at a meeting if the holders of more than 50% of
the outstanding shares are present in person or by proxy; or (2)
more than 50% of the outstanding shares of the Portfolio (or the
Fund).
As noted in the Prospectus, Union Central currently has
voting control of the Fund. With voting control, Union Central
could make fundamental and substantial changes (such as electing
a new Board of Directors, changing the investment adviser or
advisory fee, changing a Portfolio's fundamental investment
objectives and policies, etc.) regardless of the views of
Contract Owners. However, under current interpretations of
presently applicable law, Contract Owners are entitled to give
voting instructions with respect to Fund shares held in
registered separate accounts and therefore all Contract Owners
would receive advance notice before any such changes could be
made.
Additional Information
This Statement of Additional Information and the Prospectus
do not contain all the information set forth in the registration
statement and exhibits relating thereto, which the Fund has
filed with the Securities and Exchange Commission, Washington,
D.C., under the Securities Act of 1933 and the Investment
Company Act of 1940, to which reference is hereby made.
INDEPENDENT AUDITORS
The financial statements of the Fund have been audited by
Deloitte & Touche LLP, 1700 Courthouse Plaza NE, Dayton, Ohio
45402, independent auditors, as stated in their report appearing
herein. The financial statements are included in this Statement
of Additional Information in reliance upon the report of
Deloitte & Touche LLP, given upon their authority as experts in
auditing and accounting.
