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PROSPECTUS
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS JNCMF LOGO
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P.O. Box 419102 - Kansas City, Missouri 64141-61021 - 1-800-888-3863
Jackson National Capital Management Funds (the "Fund") is an open-end,
diversified management investment company, better known as a mutual fund. The
Fund offers five separate investment portfolios (the "Funds"):
JACKSON NATIONAL MONEY MARKET FUND
JACKSON NATIONAL TAX-EXEMPT FUND
JACKSON NATIONAL INCOME FUND
JACKSON NATIONAL GROWTH FUND
JACKSON NATIONAL TOTAL RETURN FUND
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An investment in the Jackson National Money Market Fund (the "Money Market
Fund") is neither insured nor guaranteed by the U.S. Government. There can be no
assurance that the Money Market Fund will be able to maintain a stable net asset
value of $1.00 per share.
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The Funds' shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, nor are they federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency. Investment
in a Fund's shares involves risk, including the possible loss of principal.
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This Prospectus contains information about the Funds that a prospective
investor should know before investing and should be retained for future
reference. A Statement of Additional Information for the Funds, dated March 1,
1996, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Statement of Additional Information is
available upon request and without charge from the Funds at the address or
telephone number above.
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the shares of the Funds in any jurisdiction in which such may
not lawfully be made.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THIS PROSPECTUS DATED MARCH 1, 1996
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
HIGHLIGHTS............................................................................ 1
FUND EXPENSES......................................................................... 2
FINANCIAL HIGHLIGHTS.................................................................. 4
HOW THE FUNDS WORK.................................................................... 6
INVESTMENT OBJECTIVES................................................................. 6
INVESTMENT RISKS...................................................................... 6
HOW EACH FUND PURSUES ITS INVESTMENT OBJECTIVE........................................ 8
MONEY MARKET FUND..................................................................... 8
TAX-EXEMPT FUND....................................................................... 9
INCOME FUND........................................................................... 10
GROWTH FUND........................................................................... 11
TOTAL RETURN FUND..................................................................... 11
MORE INFORMATION ABOUT CERTAIN INVESTMENTS, PRACTICES
AND RISK CONSIDERATIONS............................................................. 12
PERFORMANCE........................................................................... 16
MANAGEMENT OF THE FUNDS............................................................... 18
HOW TO BUY SHARES..................................................................... 19
SHAREHOLDER SERVICES.................................................................. 23
DISTRIBUTIONS AND TAXES............................................................... 27
HOW TO REDEEM SHARES.................................................................. 28
ORGANIZATION AND DESCRIPTION OF SHARES................................................ 31
APPENDIX A -- MONEY MARKET INSTRUMENTS................................................ A-1
</TABLE>
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HIGHLIGHTS
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INVESTMENT OBJECTIVES. Jackson National Capital Management Funds (the
"Fund") is an open-end, diversified management investment company, currently
offering a choice of five investment portfolios (the "Funds") designed for
long-term investors. Jackson National Money Market Fund (the "Money Market
Fund") seeks as high a level of current income as is consistent with the
preservation of capital and maintenance of liquidity by investing in high
quality, short-term money market instruments. Jackson National Tax-Exempt Fund
(the "Tax-Exempt Fund") seeks as high a level of current income exempt from
federal income tax as is consistent with preservation of capital by investing in
a diversified portfolio of municipal obligations. Jackson National Income Fund
(the "Income Fund") seeks as high a level of current income as is consistent
with preservation of capital by investing primarily in investment-grade debt
securities. Jackson National Growth Fund (the "Growth Fund") seeks to replicate
the aggregate price and yield performance of the Standard & Poor's 500 Composite
Stock Price Index. Jackson National Total Return Fund (the "Total Return Fund")
seeks as high a level of total return, which is a combination of income and
capital appreciation, as is consistent with reasonable risk by investing in
stocks, bonds and money market instruments. See "How Each Fund Pursues Its
Investment Objective."
RISK FACTORS. There is no assurance that the investment objective of any
Fund will be achieved and investment in the Fund includes risks, which vary in
degree and kind depending upon the investment policies of each Fund. The returns
and per share net asset value of a Fund will fluctuate, except that the Money
Market Fund seeks to maintain a net asset value of $1.00 per share. There is no
assurance that the $1.00 net asset value will be maintained. Each Fund is
subject to market and financial risks, and in some cases, to prepayment risk. In
general, debt securities prices vary inversely with changes in interest rates.
Investors should note that investments in high yield securities by the Total
Return Fund entail relatively greater risk of loss of income and principal than
investments in higher rated securities and market prices of high yield
securities may fluctuate more than market prices of higher rated securities. The
government guarantee of the U.S. Government securities in which certain Funds
invest (Money Market, Income and Total Return) does not guarantee the market
value of the shares of such Funds, and such securities are subject to various
degrees of government backing. Foreign investments by certain Funds (Money
Market, Income and Total Return) involve risk and opportunity considerations not
typically associated with investing in U.S. companies. However, since all
investments will be U.S. dollar denominated, the Funds are not subject to
currency risks from foreign investments. See "Investment Risks" and "More
Information About Certain Investments, Practices and Risk Considerations."
INVESTMENT ADVISER AND DISTRIBUTOR. Jackson National Financial Services,
Inc. ("JNFSI") serves as investment adviser for each Fund, and PPM America, Inc.
serves as sub-investment adviser for each Fund. JNFSI is paid an investment
management fee by each Fund, and JNFSI in turn pays a sub-investment advisory
fee to PPM America, Inc., based upon average daily net assets of that Fund at an
annual rate that differs for each Fund. JNFSI also serves as distributor and
principal underwriter for the Funds. See "Management of the Funds."
PURCHASES AND REDEMPTIONS. Investors may purchase a Fund's shares at net
asset value plus a maximum sales charge of 4.75% of the offering price. There is
no sales charge on shares of the Money Market Fund. Reduced sales charges apply
to purchases of $100,000 or more. The minimum initial investment (including
applicable sales charge) is $1,000 per Fund, and investments thereafter must be
at least $50. Different minimums may apply to qualified plans. See "How To Buy
Shares." Shares may be redeemed without charge or penalty at net asset value,
which may be more or less than original cost. See "How To Redeem Shares."
1
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FUND EXPENSES
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The following table illustrates the expenses and fees that you would incur
as a shareholder of a Fund.
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SHAREHOLDER TRANSACTION EXPENSES.
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering
price)...................................................................... 4.75%*
Maximum Sales Charge Imposed on Reinvested Dividends......................... None
Deferred Sales Charge........................................................ None
Redemption Fees.............................................................. None**
Exchange Fee................................................................. None
</TABLE>
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* There is no sales charge on purchases of the Money Market Fund.
** There is a $10 charge for wire redemptions.
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ANNUAL FUND OPERATING EXPENSES.
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MONEY TAX- TOTAL
MARKET EXEMPT INCOME GROWTH RETURN
FUND FUND FUND FUND FUND
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Management Fees........................... .50% .50% .60% .25% .70%
12b-1 Fees................................ None None None None None
Other Expenses After Reimbursement........ 0% .40% .40% 0% .50%
------ ------ ------ ------ ------
Total Fund Operating Expenses............. .50% .90% 1.00% .25% 1.20%
===== ====== ===== ====== =====
</TABLE>
The purpose of this table is to assist you in understanding the various
costs and expenses that you would bear directly or indirectly as an investor in
the Funds.
"Other Expenses" are based on actual amounts incurred by the Funds for the
previous fiscal year after reimbursements restated to reflect the investment
adviser's current level of voluntary reimbursements. During the period ended
October 31, 1995, certain fees were waived and certain expenses reimbursed by
the investment adviser. If the Funds had paid all of their expenses for the year
ended October 31, 1995, the Total Fund Operating Expenses would have been 1.69%
for the Money Market Fund, 1.54% for the Tax-Exempt Fund, 1.66% for the Income
Fund, 1.57% for the Growth Fund, and 1.79% for the Total Return Fund. The
adviser is currently reimbursing all Other Expenses incurred by the Money Market
Fund, and the Growth Fund. Voluntary reimbursements to these Funds may be
modified or discontinued at any time by the adviser.
2
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EXAMPLE.
The following example illustrates the expenses you would incur on a $1,000
investment, assuming (1) 5% annual return and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund.... $ 5 $16 $ 28 $ 63
Tax-Exempt Fund...... $ 56 $75 $ 95 $153
Income Fund.......... $ 57 $78 $ 100 $164
Growth Fund.......... $ 50 $55 $ 61 $ 78
Total Return Fund.... $ 59 $84 $ 110 $186
</TABLE>
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO BE A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. The example
assumes a 5% annual rate of return pursuant to the requirements of the
Securities and Exchange Commission. This hypothetical rate of return is not
intended to be representative of past or future performance of the Funds.
Reduced sales charges apply to purchases of $100,000 or more as well as to
certain other purchases. See "How to Buy Shares."
3
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FINANCIAL HIGHLIGHTS
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The table below shows, financial information for each Fund expressed in
terms of one share outstanding throughout the period.
The information in the table for each Fund is covered by the report of the
Fund's independent accountants. The report is contained in the Fund's Statement
of Additional Information and is available from the Fund. The Financial
Statements contained in the Fund's 1995 Annual Report to Shareholders are
incorporated herein by reference and may be obtained, without charge, by writing
or calling the Fund.
<TABLE>
<CAPTION>
MONEY MARKET FUND TAX-EXEMPT FUND
-------------------------------- ---------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/95 10/31/94 10/31/93* 10/31/95 10/31/94 10/31/93*
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net asset value, beginning of period... $ 1.00 $ 1.00 $ 1.00 $ 9.87 $ 10.78 $ 10.00
Income From Investment Operations
Net investment income(c)............. 0.06 0.04 0.03 0.48 0.46 0.44
Net realized and unrealized gains
(losses) on investments............ -- -- -- 0.60 (0.91) 0.78
------- ------ ------ ------- ------- -------
Total from investment
operations.................... 0.06 0.04 0.03 1.08 (0.45) 1.22
------- ------ ------ ------- ------- -------
Less Distributions From
Net investment income................ (0.06) (0.04) (0.03) (0.48) (0.46) (0.44)
Net realized gain on
investments(f)..................... -- -- -- (0.06) -- --
------- ------ ------ ------- ------- -------
Total distributions to
shareholders.................. (0.06) (0.04) (0.03) (0.54) (0.46) (0.44)
------- ------ ------ ------- ------- -------
Net increase (decrease) in net asset
value................................ -- -- -- 0.54 (0.91) 0.78
------- ------ ------ ------- ------- -------
Net asset value, end of period......... $ 1.00 $ 1.00 $ 1.00 $ 10.41 $ 9.87 $ 10.78
======= ====== ====== ======= ======= =======
TOTAL RETURN(A)(B)..................... 5.87% 3.94% 3.25% 11.32% (4.27)% 12.82%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in
thousands)........................... $24,098 $9,102 $ 4,115 $21,709 $29,464 $29,890
Ratio of net expenses to average net
assets(b)(d)......................... 0.31% 0.00% 0.00% 0.88% 0.90% 0.88%
Ratio of net investment income to
average net assets(b)(d)............. 5.71% 4.00% 3.15% 4.64% 4.46% 4.38%
Portfolio turnover rate................ -- -- -- 79.18% 41.74% 0.00%
RATIO INFORMATION ASSUMING NO EXPENSE
REIMBURSEMENT OR OFFSET
Ratio of expenses to average net
assets(b)(e)......................... 1.69% 3.19% 5.35% 1.54% 1.22% 1.07%
Ratio of net investment income to
average net assets(b)(e)............. 4.33% 0.81% (2.20)% 3.98% 4.14% 4.19%
</TABLE>
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* From commencement of operations on November 12, 1992.
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete redemption
of the investment at the net asset value at the end of the period.
(b) The amounts for the period ended October 31, 1993 have been annualized.
(c) For the year ended October 31, 1995, less than $.01 per share of investment
income in the Tax-Exempt Fund is subject to federal taxes. In prior years,
no investment income in the Tax-Exempt Fund was subject to federal taxes.
(d) Computed after giving effect to the Adviser's expense reimbursement, and
after fees paid indirectly for the year ended October 31, 1995.
The accompanying notes to financial statements are an integral part of these
statements.
4
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<TABLE>
<CAPTION>
INCOME FUND GROWTH FUND TOTAL RETURN FUND
--------------------------------- --------------------------------- ---------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
10/31/95 10/31/94 10/31/93* 10/31/95 10/31/94 10/31/93* 10/31/95 10/31/94 10/31/93*
-------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.49 $ 10.80 $ 10.00 $ 11.38 $ 11.24 $ 10.00 $ 10.75 $ 11.48 $ 10.00
0.60 0.57 0.57 0.42 0.25 0.23 0.53 0.40 0.43
0.61 (1.24) 0.80 2.43 0.13 1.05 1.82 (0.33) 1.11
-------- ------- --------- -------- -------- --------- -------- ------- ---------
1.21 (0.67) 1.37 2.85 0.38 1.28 2.35 0.07 1.54
-------- ------- --------- -------- -------- --------- -------- ------- ---------
(0.60) (0.57) (0.57) (0.26) (0.24) (0.04) (0.41) (0.44) (0.06)
-- (0.07) -- (0.06) -- -- (0.01) (0.36) --
------- ------- --------- ------- ------- --------- ------- ------- ---------
(0.60) (0.64) (0.57) (0.32) (0.24) (0.04) (0.42) (0.80) (0.06)
------- ------- --------- ------- ------- --------- ------- ------- ---------
0.61 (1.31) 0.80 2.53 0.14 1.24 1.93 (0.73) 1.48
------- ------- --------- ------- ------- --------- ------- ------- ---------
$ 10.10 $ 9.49 $ 10.80 $ 13.91 $ 11.38 $ 11.24 $ 12.68 $ 10.75 $ 11.48
======= ======= ========= ======= ======= ========= ======= ======= =========
13.13% (6.42)% 14.50% 25.83% 3.46% 13.19% 22.72% 0.63% 15.92%
$22,105 $29,439 $30,331 $13,544 $34,968 $31,719 $23,650 $35,814 $32,418
0.97% 0.97% 0.99% 0.23% 0.46% 0.49% 1.16% 1.16% 1.18%
6.01% 5.68% 5.66% 2.60% 2.32% 2.27% 4.22% 3.82% 4.26%
100.91% 141.95% 31.49% 9.10% 2.83% 0.53% 90.23% 50.29% 56.86%
1.66% 1.30% 1.18% 1.57% 0.96% 0.85% 1.79% 1.35% 1.27%
5.32% 5.35% 5.47% 1.26% 1.83% 1.91% 3.59% 3.63% 4.17%
</TABLE>
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(e) For the year ended October 31, 1995, the manner in which total expenses are
calculated changed to exclude expense offsets for custodian fees (i.e., fees
paid indirectly).
(f) For the year ended October 31, 1995, all capital gain distributions were
from long-term capital gains, which are taxed as capital gains to the
shareholder. For the year ended October 31, 1994, all capital gain
distributions were from short-term capital gains, which are taxed as
ordinary income to the shareholder.
5
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HOW THE FUNDS WORK
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The Funds are designed to provide long-term investors with professional
management of their assets. There are currently five Funds, each of which
represents a separate investment portfolio that pursues a separate investment
objective. As investors change their investment outlook or objectives, they can
exchange their holdings among the Funds. THERE IS NO ASSURANCE THAT A FUND'S
OBJECTIVE WILL BE ACHIEVED.
INVESTMENT OBJECTIVES
JACKSON NATIONAL MONEY MARKET FUND (the "Money Market Fund") -- seeks as
high a level of current income as is consistent with the preservation of capital
and maintenance of liquidity. The Money Market Fund pursues this objective by
investing in high quality, short-term money market instruments.
JACKSON NATIONAL TAX-EXEMPT FUND (the "Tax-Exempt Fund") -- seeks as high a
level of current income exempt from federal income tax as is consistent with
preservation of capital. The Tax-Exempt Fund pursues this objective by investing
in a diversified portfolio of municipal obligations, the interest from which is
exempt from federal income taxes.
JACKSON NATIONAL INCOME FUND (the "Income Fund") -- seeks as high a level
of current income as is consistent with preservation of capital. The Income Fund
pursues this objective by investing primarily in investment-grade debt
securities.
JACKSON NATIONAL GROWTH FUND (the "Growth Fund") -- seeks to replicate the
aggregate price and yield performance of the Standard & Poor's 500 Composite
Stock Price Index (the "S&P 500 Index"). The Growth Fund pursues this objective
by investing in a portfolio that nearly replicates the investments in the S&P
500 Index.
JACKSON NATIONAL TOTAL RETURN FUND (the "Total Return Fund") -- seeks as
high a level of total return, which is a combination of income and capital
appreciation, as is consistent with reasonable risk. The Total Return Fund
pursues this objective by investing in stocks, bonds and money market
instruments.
In addition to the investment objectives and investment policies set forth
above, each Fund has adopted certain investment restrictions which are presented
in the Statement of Additional Information (the "SAI"). The investment
objective, as well as any investment policies and investment restrictions
specifically designated as fundamental, cannot be changed without approval by
holders of a majority of the Fund's outstanding voting shares as defined in the
Investment Company Act of 1940 ("1940 Act"). All investment policies or
restrictions of a Fund that are not specifically designated as fundamental may
be changed by the Board of Trustees of the Fund without shareholder approval.
INVESTMENT RISKS
There are risks inherent in any investment. The Funds are subject to
varying degrees of market risk, financial risk, and in some cases, prepayment
risk.
Market risk is the potential for fluctuations in the price of the security
because of market factors. For equity securities, market risk is the possibility
of change in price caused by stock market price changes; for debt securities,
market risk is the possibility that the price will fall because of changing
interest rates. In general, debt securities' prices vary inversely with changes
in interest rates. If interest rates rise, bond prices fall; if interest rates
fall, bond prices generally rise. In addition, for a given change in interest
rates, longer-maturity bonds fluctuate more in price (gaining or losing more in
value) than shorter-maturity bonds.
Financial risk is based on the financial situation of the issuer. For
equity securities, financial risk is the possibility that the price of the
security will fall because of poor earnings performance by the issuer. For debt
securities, financial risk is the possibility that a bond issuer will fail to
make timely payments
6
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of interest or principal to a Fund. The financial risk
of a Fund depends on the credit quality of its underlying securities. In
general, the lower the credit quality of a Fund's securities, the higher a
Fund's yield, all other factors such as maturity being equal.
Prepayment risk is the possibility that, during periods of falling interest
rates, a debt security with a high stated interest rate will be prepaid (or
"called") prior to its expected maturity date. If during periods of falling
interest rates a debt security with a high stated interest rate is called away,
the unanticipated proceeds would likely be invested at lower interest rates, and
the Fund's income may decline. Call provisions are most common for intermediate
and long-term municipal, corporate and mortgage-backed securities. To the extent
securities subject to call were acquired at a premium, the potential for
appreciation in the event of a decline in interest rates may be limited, and may
even result in losses.
The market value of U.S. Government securities is not guaranteed and will
fluctuate. In addition, U.S. Government securities involve various degrees of
government backing. Although investments in U.S. Government securities provide
substantial protection against financial risk, they do not protect investors
against price changes due to market risk. Obligations issued by the U.S.
Treasury and some obligations issued or guaranteed by U.S. Governmental agencies
or instrumentalities are backed by the full faith and credit of the United
States, such as Treasury bills, notes and bonds and modified pass-through
certificates issued by the Government National Mortgage Association; while
others are backed exclusively by the agency or instrumentality with limited
rights of the issuer to borrow from the U.S. Treasury (such as obligations of
the Federal National Mortgage Association and the Federal Home Loan Mortgage
Corporation), and others are backed only by the credit of the issuer itself
(such as obligations of the Student Loan Marketing Association). There is no
guarantee that the U.S. Government will provide support to such agencies.
Because of market risks, you should anticipate that the share prices of the
Funds will fluctuate. The one exception is the Money Market Fund which, although
it cannot be guaranteed, is expected to maintain a stable price of $1.00.
The following is a brief summary of the relative differences in the level
of risks associated with each Fund. For a full understanding of the risks
involved with each Fund, the complete description of each Fund should be read.
THE MONEY MARKET FUND should entail the smallest degree of market and
financial risks because of the short term and high quality nature of the debt
investments held in the portfolio.
THE TAX-EXEMPT FUND and the INCOME FUND should be subject to moderate to
high levels of market risk and low to moderate levels of financial risk. The
level of market risk for each Fund will vary depending on the maturities of the
underlying securities of each.
THE GROWTH FUND is subject to greater market risks than portfolios
investing solely in debt instruments. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when prices
generally decline. Although common stocks, as measured by the S&P 500 Index from
1935 to 1994, provided an average annual total return (capital appreciation plus
dividend income) of +10.91%, stock returns are quite volatile from year to year
(best year +52.12%, worst year -34.73%). Therefore, the Growth Fund may be
subject to sudden, sometimes substantial, fluctuations in value. Because the
Growth Fund invests in selected securities included within the S&P 500 Index,
which emphasizes large-capitalization stocks, it is less subject to market and
financial risks than portfolios invested primarily in small to medium
capitalization stocks.
THE TOTAL RETURN FUND is subject to the greatest degree of market and
financial risks. The Total Return Fund's investment policies permit total
investment in stocks or total investment in debt instruments that are primarily
investment grade, but which may include a percentage of non-investment grade
debt instruments.
7
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HOW EACH FUND PURSUES ITS INVESTMENT OBJECTIVE
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MONEY MARKET FUND
The Money Market Fund invests exclusively in high quality money market
instruments. These instruments are considered to be among the safest investments
available because of their short maturities, liquidity and high quality ratings.
The Money Market Fund seeks to maintain a net asset value of $1.00 per share.
Nevertheless, there is no guarantee that the objective of the Money Market Fund
will be achieved or that the net asset value of $1.00 per share will be
maintained.
The Money Market Fund will invest exclusively in the following types of
high quality, U.S. dollar denominated money market instruments that mature in
397 days or less:
- Obligations issued or guaranteed as to principal and interest by the U.S.
Government, its agencies and instrumentalities.
- Obligations, such as time deposits, certificates of deposit and bankers
acceptances, issued by U.S. banks and savings banks that are members of
the Federal Deposit Insurance Corporation, including their foreign
branches and foreign subsidiaries, and issued by domestic and foreign
branches of foreign banks.
- Corporate obligations, including commercial paper, of domestic and
foreign issuers.
- Obligations issued or guaranteed by one or more foreign governments or
any of their political subdivisions, agencies or instrumentalities,
including obligations of supranational entities.
- Repurchase agreements on obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
A more complete description of the types of investments made by the Money
Market Fund is found in Appendix A of the Prospectus. See also "More Information
About Certain Investments, Practices and Risk Considerations."
Investments are managed to meet the quality and diversification
requirements of the 1940 Act. Under Rule 2a-7 under the 1940 Act, the Money
Market Fund must maintain a dollar-weighted average portfolio maturity of 90
days or less and may only purchase U.S. dollar denominated instruments that are
determined to present minimal credit risks and that at the time of acquisition
are rated in the top two rating categories by the required number of nationally
recognized statistical rating organizations ("Rating Agencies") (at least two
or, if only one Rating Agency has rated the security, that one agency) or, if
unrated, are deemed comparable in quality. Determination of credit risks and
quality will be made by the sub-investment adviser in accordance with procedures
adopted by the Funds' Board of Trustees. The diversification requirements of
Rule 2a-7 provide generally that the Money Market Fund may not at the time of
acquisition invest more than 5% of its assets in securities of any one issuer or
invest more than 5% of its assets in securities that have not been rated in the
highest category by the required number of Rating Agencies or, if unrated, have
not been deemed comparable, except U.S. Government securities and repurchase
agreements on such securities. For example, the highest rating categories by
Standard & Poor's Corporation ("S&P") and Moody's Investors Services, Inc.
("Moody's") are A-1 and P-1, respectively. A more complete description of the
rating categories is set forth under Appendix A in the SAI.
The Money Market Fund will not invest more than 25% of its total assets in
any one industry, except that the Money Market Fund may invest more than 25% of
its total assets in the domestic banking industry, which would cause the Fund to
be more exposed to the risks of such industry. (See the SAI for a discussion of
such risks.) Bank obligations held by the Money Market Fund do not benefit
materially from insurance from the Federal Deposit
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<PAGE> 11
Insurance Corporation. The 25% limitation does not
apply to U.S. Government securities, including obligations issued or guaranteed
by its agencies or instrumentalities.
TAX-EXEMPT FUND
The Tax-Exempt Fund will invest in a diversified portfolio of Municipal
Obligations. As a fundamental policy, under normal conditions, at least 80% of
the Tax-Exempt Fund's net assets will be invested in tax-exempt securities. The
Tax-Exempt Fund may, on a temporary basis or for defensive purposes, hold and
invest up to 20% of its assets in cash and in taxable investments with the
remaining maturities of one year or less.
Municipal Obligations are debt obligations issued by states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate agencies
or authorities, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from federal income tax. Municipal Obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities. Municipal Obligations are classified as general obligation bonds,
revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. Revenue bonds
are payable from the revenue derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, but not from the general taxing power. Tax exempt
industrial development bonds, in most cases, are revenue bonds that generally do
not carry the pledge of the credit of the issuing municipality, but generally
are guaranteed by the corporate entity on whose behalf they are issued. Notes
are short-term instruments which are obligations of the issuing municipalities
or agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues.
Municipal Obligations include municipal lease/purchase agreements that are
similar to installment purchase contracts for property or equipment issued by
municipalities. These obligations typically are not fully backed by the
municipality's credit and their interest may become taxable if the lease is
assigned. If the governmental user does not appropriate sufficient funds for the
following year's lease payments, the lease will terminate, with the possibility
of default on the lease obligations and significant loss to the Tax-Exempt Fund.
Municipal lease/purchase agreements will be considered illiquid investments
except where they are determined to be liquid by the sub-investment adviser in
accordance with procedures established by the Board of Trustees. The Tax-Exempt
Fund may also invest in resource recovery bonds, which may be general
obligations of the issuing municipality or supported by corporate or bank
guarantees. The viability of the resource recovery project, environmental
protection regulations and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.
The Tax-Exempt Fund may also invest in zero-coupon securities and
pay-in-kind bonds. In addition, the Tax-Exempt Fund may purchase securities on a
when-issued basis and purchase or sell securities on a delayed delivery basis.
See "More Information About Certain Investments, Practices and Risk
Considerations." Municipal Obligations bear fixed, floating or variable rates of
interest.
The Tax-Exempt Fund will invest all its assets in investment grade
Municipal Obligations, at least 90% of which will be rated investment grade by a
Rating Agency. Investment grade is defined as a rating equivalent to or higher
than BBB- by S&P or Baa3 by Moody's. Up to 10% of total assets may be invested
in unrated Municipal Obligations determined by the sub-investment adviser to be
of equivalent or higher quality.
Like higher rated securities, securities rated in the BBB or Baa categories
are considered to have adequate capacity to pay principal and interest, although
they have a weakened capacity to make principal and interest payments than is
the case with
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<PAGE> 12
higher rated securities and they may have fewer protective provisions than
higher rated securities, and thus may be adversely affected by severe economic
circumstances and are considered to have some speculative characteristics. See
Appendix A in the SAI for a complete description of ratings. Rating standards
are applied at the time an investment is made. If an instrument is subsequently
downgraded, or if the sub-investment adviser determines that its quality has
declined, the sub-investment adviser will determine whether the investment
should be sold.
The Tax-Exempt Fund may invest more than 25% of the value of its total
assets in Municipal Obligations which are related in such a way that an
economic, business or political development or change affecting one such
security also would affect the other securities; for example, securities the
interest upon which is paid from revenues of similar types of projects, or
securities whose issuers are located in the same state. As a result, the
Tax-Exempt Fund may be subject to greater risk as compared to a fund that does
not follow this practice.
INCOME FUND
The Income Fund invests in the following types of investment grade
securities:
- U.S. dollar denominated long-term debt securities of domestic or foreign
issuers, such as notes, bonds and debentures.
- Obligations of or guaranteed by the United States Government, its
agencies or instrumentalities.
- Mortgage-Backed Securities, including securities issued by U.S.
Government agencies and instrumentalities and non-government entities
such as banks, mortgage lenders, or other financial institutions.
- Asset-Backed Securities.
- U.S. dollar denominated short-term debt securities (money market
instruments) of domestic or foreign issuers.
- Convertible debt securities, convertible preferred stocks and
non-convertible preferred stocks.
In addition, the Income Fund may purchase zero coupon securities and
pay-in-kind bonds; may purchase securities on a when-issued basis and may
purchase or sell securities on a delayed delivery basis; may invest in
repurchase agreements; and may lend portfolio securities. More information about
the Fund's investments is contained under "More Information About Certain
Investments, Practices and Risk Considerations."
At least 90% of the Income Fund's total assets will be invested in
corporate debt, mortgage-backed and asset-backed securities rated investment
grade and U.S. Government securities, including repurchase agreements thereon.
Investment grade is defined as a rating equivalent to or higher than BBB- by S&P
or Baa3 by Moody's for corporate debt and A-2 by S&P or P-2 by Moody's for
commercial paper. No more than 30% of the Income Fund's total assets will
consist of investment grade securities rated below A- or A3. Up to 10% of the
Income Fund's total assets may be invested in unrated securities deemed by the
investment adviser to be of investment grade.
Securities rated in the BBB or equivalent categories by a Rating Agency are
considered to have adequate capacity to pay principal and interest, although
they have a weakened capacity to make principal and interest payments than is
the case with higher rated securities and they may have fewer protective
provisions than higher rated securities and thus may be adversely affected by
severe economic circumstances and are considered to have some speculative
characteristics. Rating standards are applied as of the time an investment is
made. If an instrument is subsequently downgraded, or if the sub-investment
adviser determines that its quality has declined, the sub-investment adviser
will determine whether the investment should be sold. A more complete
description of the rating categories is set forth under Appendix A in the SAI.
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<PAGE> 13
GROWTH FUND
The Growth Fund uses an indexing investment approach, whereby the Fund
invests in a portfolio that nearly replicates the investments in the S&P 500(R)*
Index. The Growth Fund is unlike the typical equity mutual fund, which engages
in "active" investment management based on economic, financial and market
analysis in an attempt to "beat" such market averages with often unpredictable
results. Instead, the Growth Fund seeks to "match" the S&P 500 Index and, thus,
is expected to provide a highly predictable return relative to that benchmark.
The S&P 500 Index emphasizes large-capitalization stocks. The 500 stocks
included in the Index are selected by Standard and Poor's Corporation on a
statistical basis and not on the basis that the stock is believed to be an
attractive investment. The 500 securities, most of which trade on the New York
Stock Exchange, represent approximately 75% of the market value of all U.S.
common stocks. Each stock in the S&P 500 Index is weighted by its market value.
Because of the market-value weighting, the 50 largest companies in the S&P Index
currently account for approximately 50% of the Index.
In order to reduce transaction costs, the Growth Fund will invest in a
representative sample of the stocks included in the S&P 500 Index, selected to
have aggregate investment characteristics similar to those of the S&P 500 Index.
Over time, the correlation between the Growth Fund and the S&P 500 Index is
expected to be 0.95 or greater. A correlation of 1.00 would indicate perfect
correlation.
Although the Growth Fund is designed to replicate the performance of the
S&P 500 Index, the Growth Fund has expenses and costs associated with it, such
as transactional costs, investment advisory fees and custodial costs, that do
not affect the S&P 500 Index. Therefore, performance of the Growth Fund is
expected to be lower than that of the S&P 500 Index.
Although the Growth Fund may invest in money market instruments as cash
reserves, it intends to remain fully exposed to the S&P 500 Index through
investments in stock index futures contracts and options on stock index futures
and stock indices. Cash reserves and aggregate obligations underlying futures
contracts and options are each normally expected to represent less than 5% of
the portfolio assets. See "More Information About Certain Investments." The
Growth Fund will not invest in cash reserves, futures contracts or options as a
part of a temporary defensive strategy, such as lowering the portfolio's
investment in common stock to protect against potential stock market declines.
TOTAL RETURN FUND
The Total Return Fund invests in common and preferred stocks, securities
convertible into common stocks and warrants (Equity Class), bonds and other debt
securities (Income Class) and money market instruments (Money Market Class). The
Total Return Fund may invest in any one or a combination of these classes of
investments, in any proportion.
The Equity Class includes domestic equity securities of all types (other
than adjustable rate preferred stocks, which are included in the Income Class).
The sub-investment adviser seeks to maximize total return within this asset
class by actively allocating assets to industry sectors expected to benefit from
major trends, and to individual stocks that it believes to have superior return
potential. Securities in the Equity Class may include common stocks, fixed-rate
preferred stocks (including convertible preferred stocks), warrants, rights,
securities of closed-end investment companies, and other equity securities
issued by companies of any size.
Permissible Income Class investments include all varieties of domestic
fixed-income securities with maturities greater than one year. The
sub-investment adviser seeks to maximize total returns within the Income Class
by adjusting the Fund's investments in
- ---------------
* The S&P 500(R) is a servicemark of Standard & Poor's
Corporation and has been licensed for use by Jackson National Capital
Management Funds. Jackson National Capital Management Funds' Growth Fund is
not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation and
Standard & Poor's Corporation makes no representation regarding the
advisability of investing in the Growth Fund.
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<PAGE> 14
securities with different credit qualities, maturities, and coupon or dividend
rates, and by seeking to take advantage of yield differentials between
securities. Securities in this class include all investments permitted for the
Income Fund. In addition, the Fund may also invest in lower quality,
high-yielding debt securities (commonly referred to as "junk bonds"). The Fund
currently intends to limit its investments in these securities to securities
rated or determined by the sub-investment adviser to be of equivalent or higher
quality than B- by S&P or B3 by Moody's and to no more than 20% of its assets.
Rating standards are applied as of the time an investment is made. If an
instrument is subsequently downgraded, or if the sub-investment adviser
determines that its quality has declined, the sub-investment adviser will
determine whether the investment should be sold. See "High Yield Bonds" under
"More Information About Certain Investments, Practices and Risk Considerations."
More information about rating categories is set forth under Appendix A in the
SAI.
The Money Market Class includes all types of money market instruments with
remaining maturities of one year or less permitted for the Money Market Fund.
The sub-investment adviser will seek to maximize total return within the Money
Market Class by taking advantage of yield differentials between different
instruments and issuers. See "Money Market Fund."
The Total Return Fund may also purchase and sell options on securities and
stock indices and may purchase and sell financial futures contracts and options
on financial futures contracts, lend portfolio securities, enter into repurchase
agreements, and purchase securities on a when-issued basis and purchase or sell
securities on a delayed delivery basis. See "More Information About Certain
Investments, Practices and Risk Considerations."
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MORE INFORMATION ABOUT CERTAIN INVESTMENTS,
PRACTICES AND RISK CONSIDERATIONS
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
The Income and Total Return Funds may invest in various types of
mortgage-backed securities. Mortgage-backed securities may be issued or created
by government entities and non-government entities such as banks, mortgage
lenders, or other financial institutions. The dominant issuers or guarantors of
mortgage-backed securities today are the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed securities
include mortgage pass-through securities, mortgage-backed bonds, and mortgage
pay-through securities. A mortgage pass-through security, such as a GNMA
Certificate, is a pro-rata interest in a pool of mortgages where a cash flow
generated from the mortgage collateral is passed through to the security holder.
Mortgage-backed bonds are general obligations of their issuers, payable out of
the issuers' general funds and additionally secured by a first lien on a pool of
mortgages. Mortgage pay-through securities, such as Collateralized Mortgage
Obligations ("CMOs"), exhibit characteristics of both pass-throughs and
mortgage-backed bonds. Mortgage-backed securities also include other debt
obligations secured by mortgages on commercial real estate or residential
properties. Other types of mortgage-backed securities will likely be developed
in the future, and a Fund may invest in them, subject to any necessary
prospectus disclosure, if the sub-investment adviser determines that they are
consistent with a Fund's investment objective and policies.
The value of mortgage-backed securities may change due to changes in the
market's perception of issuers. In addition, the mortgage securities market in
general may be adversely affected by regulatory or tax changes. Non-government
mortgage-backed securities may offer a higher yield than those issued
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<PAGE> 15
by government entities but also may be subject to greater risk than government
securities.
Mortgage-backed securities are subject to prepayment (or call) risk. (See
"Investment Risks.") When prepayment occurs, unscheduled or early payments are
made on the underlying mortgages, which may shorten the effective maturities of
these securities and may lower their total returns. The returns of
mortgage-backed securities are dependent upon their actual prepayment
experience.
CMOs are pay-through securities collateralized by mortgages or
mortgage-backed securities. Interest and principal on a CMO are paid, in most
cases, monthly. CMOs are issued in classes and series that have different
maturities and often are retired in sequence. Real Estate Mortgage Investment
Conduits ("REMICs") are CMOs that qualify for special tax treatment under the
Internal Revenue Code ("Code") and invest in mortgages principally secured by
interests in real property and other investments permitted under the Code. No
Fund will invest in residual interests in REMICs.
Stripped mortgage-backed securities are created when the principal and
interest payments of a mortgage-backed security are separated by a U.S.
Government agency or a financial institution. The holder of the "principal-only"
security receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security receives interest
payments from the same underlying security. The Funds currently intend to treat
stripped non-government mortgage-backed securities as illiquid and subject to
the 10% limitation on illiquid securities. The prices of stripped
mortgage-backed securities can be significantly affected by changes in interest
rates. As interest rates fall, prepayment rates tend to increase, which in turn
tends to reduce prices of "interest-only" securities and increase prices of
"principal-only" securities. Rising interest rates can have the opposite effect.
ASSET-BACKED SECURITIES
The Income and Total Return Funds may invest in asset-backed securities,
which represent interests in pools of consumer loans (generally unrelated to
mortgage loans) and most often are structured as pass-through securities.
Interest and principal payments ultimately depend on payment of the underlying
loans by individuals, although the securities may be supported by letters of
credit or other credit enhancements. The value of asset-backed securities may
also depend on the creditworthiness of the servicing agent for the loan pool,
the originator of the loans, or the financial institution providing the credit
enhancement. Asset-backed securities present certain risks that are not
presented by mortgage-backed obligations. Primarily, these obligations do not
have the benefit of the same security interest in the related collateral. For
example, credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Other types of
asset-backed obligations, such as Certificates for Automobile ReceivablesSM, may
entail problems with recovery of the collateral. Therefore, there is the
possibility that the collateral may not, in some cases, be available to support
payments on these obligations.
HIGH YIELD BONDS
The Total Return Fund may invest up to 20% of its assets in fixed income
securities that are in the lower rating categories of Rating Agencies or are
non-rated. These lower-rated and non-rated fixed income securities, commonly
known as "junk bonds," are considered as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation and generally will involve more credit risk than securities in
the higher rating categories. The market values of such securities tend to
reflect individual corporate developments to a greater extent than do those of
higher rated securities, which are affected primarily by fluctuations in the
general level of interest rates. Such lower rated securities also tend to be
more sensitive to economic conditions than are higher rated securities, and
certain securities may be subject to call risk (see "Investment Risks"). The
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<PAGE> 16
Total Return Fund may have difficulty disposing of certain high yield securities
because they may have a thin trading market. The lack of a liquid secondary
market may have an adverse effect on the market prices of the securities and may
also make it difficult for the Total Return Fund to obtain accurate market
quotations for purposes of valuing these assets.
ZERO-COUPON SECURITIES
The Tax-Exempt, Income and Total Return Funds may invest in zero coupon
securities and pay-in-kind bonds. Zero coupon securities are debt obligations
that do not entitle the holder to any periodic payments of interest prior to
maturity or a specified cash payment date when the securities begin paying
current interest (the "cash payment date") and therefore are issued and traded
at a discount from their face amount or par value. Pay-in-kind bonds pay
interest through the issuance of additional bonds. The market prices of zero
coupon securities are generally more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than do securities paying interest
currently having similar maturities and credit quality. Zero coupon and
pay-in-kind bonds carry additional risk in that, unlike bonds that pay interest
throughout the period to maturity, a Fund will realize no cash until the cash
payment date unless a portion of such securities are sold and, if the issuer
defaults, a Fund may realize a complete loss on its investment.
For Funds other than the Tax-Exempt Fund, current federal income tax law
requires the holder of a zero coupon security or of certain pay-in-kind bonds to
accrue income with respect to these securities prior to the receipt of cash
payments. To maintain its qualification as a registered investment company and
avoid liability for federal income and excise taxes, a Fund (other than the
Tax-Exempt Fund with regard to its investments in Municipal Obligations) will be
required to distribute income accrued with respect to these securities and may
be required to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
FUTURES AND OPTIONS
To a limited extent, the Total Return Fund may purchase options on
securities and may sell covered call and secured put options on securities; the
Total Return and Growth Funds also may purchase and sell options on securities
indices. A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security or other asset at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security or other asset at
the exercise price during the option period.
To a limited extent, the Growth and Total Return Funds may also purchase
and sell stock index futures contracts and options thereon. Financial futures
contracts are commodity contracts that obligate the long or short holder to take
or make delivery of a specified quantity of a financial instrument, such as a
security, or the cash value of a securities index during a specified future
period at a specified price.
Options and futures contracts may be used for several reasons: to maintain
cash reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, to seek higher investment returns when a futures contract is
priced more attractively than the underlying security or index, or as an attempt
to hedge against market risks. A Fund may not use futures contracts or options
to leverage its assets or for speculation. Further, a Fund may enter into
futures contracts only to the extent that not more than 5% of a Fund's total
assets are required as initial margin; in addition, a Fund may enter into
futures contracts and options only to the extent that obligations underlying
such contracts or options represent not more than 20% of the Fund's total
assets.
The primary risks associated with the use of futures contracts and options
are: (i) gains and losses on investments in futures and options depend on the
investment adviser's ability to predict correctly the direction of stock prices,
interest rates and other economic factors and there is an imperfect correlation
between the change in market value of the stocks held by a Fund and the prices
of futures
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<PAGE> 17
contracts and options; (ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a futures position when
desired; (iii) loss from investing in futures is not limited to the amount
invested in the contract; and (iv) an option purchased by a Fund may expire
worthless, in which case the Fund would lose the premium paid.
The risk of imperfect correlation will be minimized by investing only in
those contracts whose behavior is expected to resemble that of the Fund's
underlying securities. The risk that a Fund will be unable to close out a
futures position will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary market.
FOREIGN SECURITIES
Although the Money Market, Income and Total Return Funds will invest
primarily in securities of domestic entities, such Funds have the discretion to
invest a portion of their assets in foreign securities, including foreign
securities traded principally in securities markets outside the United States,
but only to the extent that the foreign securities are denominated in U.S.
dollars. Accordingly, the Funds are not subject to currency risks.
Foreign securities may be subject to risks not applicable to domestic
securities. Foreign securities may be subject to government taxes that reduce
their attractiveness. Other risks of investing in such securities include
political or economic instability in the country involved and the difficulty of
predicting international trade patterns. The prices of such securities may be
more volatile than those of domestic securities. In addition, there may be less
publicly available information about foreign issuers than about domestic
issuers. Many foreign issuers are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
issuers. There is generally less regulation of stock exchanges, brokers, banks
and listed companies abroad than in the United States. With respect to certain
foreign countries, there is a possibility of expropriation or diplomatic
developments that could affect investment in these countries. To the extent the
Funds purchase foreign securities, consideration will be given to their
marketability and to regulations imposed by the domicile country of the foreign
issuer.
PORTFOLIO TURNOVER AND BORROWINGS
Although the Funds will not normally engage in the trading of securities
for the purpose of realizing short-term profits, the Funds will adjust their
portfolios as considered advisable in view of prevailing or anticipated market
conditions. Portfolio turnover rates for each Fund will vary. Higher portfolio
turnover may result in higher transactions costs for a Fund and may result in
the realization of greater net short-term capital gains. For federal income tax
purposes, less than 30% of the annual gross income of a Fund may be derived from
the sale or disposition of securities and certain other investments held by a
Fund for less than three months.
Each Fund may borrow money from banks only for temporary or emergency
purposes in an aggregate amount not exceeding one-third of the value of its
total assets.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds, other than the Growth Fund, may purchase newly-issued securities
appropriate for its portfolio on a "when-issued" basis and may purchase or sell
securities appropriate for its portfolio on a "delayed delivery" basis. These
transactions involve a commitment by the portfolio to purchase or sell
particular securities with payment and delivery to take place at a future date.
These transactions allow the Funds to lock in an attractive purchase price or
yield on a security a Fund intends to purchase or an attractive sale price on a
security a Fund intends to sell. Normally, settlement occurs within one month of
the purchase or sale. During the period between purchase or sale and settlement,
no payment is made or received by the Fund and, for delayed delivery purchases,
no interest accrues to the Fund. However, during this period the market value of
the security may increase or decrease so that the market value of the security
at the time of payment may be greater
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<PAGE> 18
or less than the purchase price. Because the Fund is required to set aside cash
or liquid high grade debt securities at least equal in value to its commitments
to purchase when-issued or delayed delivery securities, the sub-investment
adviser's ability to manage the portfolio assets is affected by such
commitments. The Funds will only make commitments to purchase securities on a
when-issued or delayed delivery basis with the intention of actually acquiring
the securities, but reserves the right to sell them before the settlement date
if deemed advisable.
LENDING PORTFOLIO SECURITIES
The Funds, other than the Tax-Exempt Fund, may from time to time lend
securities. Securities may be lent to brokers, dealers and financial
institutions, provided that: (1) the loan is continuously secured by collateral
consisting of U.S. Government securities, cash or cash equivalents adjusted
daily to have a market value at least equal to the current market value of the
securities loaned plus accrued interest; (2) the Fund may at any time call the
loan and regain the securities loaned; and (3) the sub-investment adviser has
reviewed the creditworthiness of the borrower and has found it satisfactory. The
Fund will receive from the borrower amounts equal to the interest paid on the
securities loaned, and will also earn income for having made the loan. Any cash
collateral will be invested in short-term securities, the income from which will
increase the return to the portfolio. The risks associated with lending
portfolio securities are similar to those of entering into repurchase
agreements. See "Repurchase Agreements."
REPURCHASE AGREEMENTS
The Funds, other than the Tax-Exempt Fund, may invest in or enter into
repurchase agreements. Repurchase agreements are instruments under which the
Fund acquires ownership of a security and the seller, who usually is a
broker-dealer or a bank, agrees to repurchase the security at a mutually agreed
upon date and price. A repurchase agreement may be considered a loan
collateralized by securities. The repurchase agreement serves to fix the yield
of the security during the Fund's holding period. The maturity of a security
subject to repurchase may exceed one year. The value of the security subject to
repurchase is marked to market daily. If the value of the underlying security
declines, the seller would be required to provide the Fund with cash or
additional securities so that the aggregate value of the underlying collateral
is at least equal to the repurchase price.
The Funds currently intend to enter into repurchase agreements only with
member banks of the Federal Reserve System, or with registered broker-dealers.
In all cases, the sub-investment adviser must be satisfied with the
creditworthiness of the seller before entering into a repurchase agreement. In
the event of the bankruptcy or other default of the seller of a repurchase
agreement, the Fund could incur expenses and delays enforcing its rights under
the agreement and experience a decline in the value of the underlying securities
and loss of income.
Repurchase agreements maturing in more than 7 days are considered illiquid,
and together with any other securities that are considered to be illiquid, will
not exceed 10% of the net assets of a Fund.
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PERFORMANCE
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A Fund's performance may be quoted in advertising in terms of yield or
total return. Both types of performance are based on historical results and are
not intended to indicate future performance. Yields are calculated according to
accounting methods that are standardized. Because yield accounting methods
differ from the methods used for financial reporting and tax accounting
purposes, the Fund's yield may not equal its distribution rate, the income paid
to your account, or the income reported in the Fund's financial statements.
Yield is a way of showing the rate of income the Fund earns on its
investments as a percentage of its
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<PAGE> 19
share price. From time to time, the Funds other than the Growth Fund may
advertise yield figures. To calculate yield, a Fund other than the Money Market
Fund takes the net investment income per share earned from its portfolio of
investments for a specific one month or 30-day period and expresses the result
as an annualized percentage rate based on the Fund's maximum offering price at
the end of the period. Yield is an annualized percentage, which means that it is
assumed that a Fund generates the same level of investment income over a one
year period.
The Money Market Fund calculates yield based on the net investment income
per share earned for a specific 7-day period and expresses the result as an
annualized percentage rate based on the Fund's offering price, which is not
subject to any sales charge, at the beginning of the period (expected to remain
stable at $1.00). In addition, the Money Market fund may advertise an effective
yield, which is calculated similarly, but the net investment earned is assumed
to be compounded weekly when annualized. The effective yield will be slightly
higher.
Total returns are based on the overall dollar or percentage change in value
of a hypothetical investment in a Fund and assume all of the Fund's dividends
and capital gain distributions are reinvested. A cumulative total return
reflects the Fund's performance over a stated period of time. An average annual
total return reflects the hypothetical annually compounded return that would
have produced the same cumulative total return if the Fund's performance had
been constant over the entire period. Because average annual returns tend to
smooth out variations in the Fund's returns, you should recognize that they are
not the same as actual year-by-year results.
The Tax-Exempt Fund may also quote tax equivalent yields, which show the
taxable yields an investor would have to earn before taxes to equal the Funds'
tax-exempt yields. A tax equivalent yield is calculated by dividing the Fund's
tax-exempt yield by the result of one minus a stated federal tax rate.
The performance of the Funds may be compared to the performance of other
mutual funds or mutual fund indices with similar objectives and policies as
reported by Lipper Analytical Services, Inc. ("Lipper"), CDA Investment
Technologies, Inc. ("CDA") or Donoghue's Money Fund Report. Lipper and CDA
performance calculations are based upon changes in net asset value with all
dividends reinvested and do not include the effect of any sales charges. The
Funds' performance may also be compared to that of the Consumer Price Index or
various unmanaged stock and bond indices including, but not limited to, Salomon
Brothers High Grade Corporate Bond Index, the Lehman Brothers Government/
Corporate Bond Index, Lehman Brothers Municipal Bond Index, Lehman Brothers
Aggregate Bond Index, the Salomon Brothers Long-Term High Yield Index, the
Merrill Lynch Government/Corporate Master Index and the Standard & Poor's 500
Composite Stock Price Index.
From time to time, a Fund also may quote information from publications
including, but not limited to, the following: Morningstar, Inc., The Wall Street
Journal, Money Magazine, Forbes, Barron's, The New York Times, USA Today,
Institutional Investor and Registered Representative. Also, investors may want
to compare the historical returns of various investments, performance indices of
those investments or economic indicators, including but not limited to stocks,
bonds, certificates of deposit and other bank products, money market funds and
U.S. Treasury obligations. Certain of these alternative investments may offer
fixed rates of return and guaranteed principal, and may be insured. Economic
indicators may include, without limitation, indicators of market rate trends and
cost of funds, such as Federal Home Loan Bank Board 11th District Cost of Funds
Index (COFI).
Each Fund's shares are sold at net asset value plus a maximum sales charge
of 4.75% of the offering price (0% for the Money Market Fund). While the maximum
sales charge is normally reflected in the Fund's performance figures, certain
total return calculations may not include such charge and those results would be
reduced if it were included. Each Fund's returns will fluctuate. Shares of a
Fund are redeemable by an investor at the then current net asset value, which
may be more or less than original cost. Additional information concerning each
Fund's performance appears in the SAI, and in the Fund's Annual Report to
Shareholders which may be obtained, without charge, by writing or calling the
Fund.
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<PAGE> 20
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUNDS
- --------------------------------------------------------------------------------
The officers of the Fund, along with the investment adviser and
sub-investment adviser, manage the day-to-day operations of each Fund, subject
to the supervision of the Board of Trustees. The Board sets broad policies for
each Fund and chooses the Fund's officers and the companies that provide the
Fund with services.
Jackson National Financial Services, Inc. ("JNFSI"), 5901 Executive Drive,
Lansing, Michigan 48911, is the investment adviser of each Fund and provides
each Fund with professional investment supervision and management. JNFSI is a
wholly-owned subsidiary of Jackson National Life Insurance Company, which is in
turn wholly-owned by Prudential Corporation plc, the largest life insurance
company in the United Kingdom.
JNFSI has entered into a sub-investment advisory agreement with PPM
America, Inc. ("PPM America"), an affiliate of JNFSI, to provide investment
advice for the assets of each of the Funds. PPM America, 225 West Wacker Drive,
Chicago, Illinois 60606, is a wholly-owned subsidiary of Prudential Portfolio
Managers Ltd., ("PPM Ltd.") an investment management company engaged in global
money management, which is in turn wholly-owned by Prudential Corporation plc.
PPM Ltd. and its subsidiaries manages over $120 billion in various currencies
and markets.
Since November of 1992, JNFSI has served as investment adviser, and PPM
America has served as sub-investment adviser, to the Fund. PPM America currently
manages over $24 billion of Jackson National Life Insurance Company assets.
Additionally, PPM America manages assets of over $4.2 billion for other
affiliated companies and over $900 million for non-affiliated entities.
For managing its investments and business affairs, the Management Agreement
provides for the payment by the Funds to JNFSI of an investment management fee,
payable monthly, based on the following annual percentage of average daily net
assets in each Fund: Money Market Fund 0.50%; Tax Exempt Fund 0.50%; Income Fund
0.60%; Growth Fund 0.25%; and Total Return Fund 0.70%.
JNFSI pays PPM America a sub-investment advisory fee, payable monthly,
based on the following annual percentages of average daily net assets of each
Fund: Money Market Fund 0.035%; Tax-Exempt Fund 0.035%; Income Fund 0.035%;
Growth Fund 0.035%; and Total Return Fund 0.035%.
In its capacity as sub-investment adviser, PPM America supervises and
manages the investment portfolios of the Funds and directs the purchase and sale
of its investment securities. PPM America utilizes teams of investment
professionals acting together to manage the assets of the Funds. The teams meet
regularly to review portfolio holdings and to discuss purchase and sale
activity. The teams adjust holdings in the portfolios as they deem appropriate
in the pursuit of the Funds' investment objectives.
Investors Fiduciary Trust Company ("IFTC"), 127 West 10th Street, P.O. Box
419102, Kansas City, Missouri 64141-6102, serves as the Fund's Transfer and
Dividend Paying Agent ("Transfer Agent") and Custodian. IFTC maintains the
Fund's shareholder records and assets and performs certain accounting services
for the Fund.
JNFSI acts as agent of the Fund in the sale of its shares. JNFSI receives
no compensation from the Fund as principal underwriter and pays all expenses of
distribution of the Fund's shares under the underwriting agreement not otherwise
paid by dealers or other financial services firms. As indicated under "How to
Buy Shares," JNFSI retains the sales charge upon the purchase of shares and pays
or allows concessions or discounts to firms for the sale of the Fund's shares.
Effective June 1, 1994, JNFSI provides information and administrative
services ("administrative services") for shareholders of the Fund pursuant to an
Administrative Services Agreement. Such administrative services may include, but
are not limited to, maintaining shareholder accounts and records,
18
<PAGE> 21
answering routine inquiries regarding the Fund and
its features, assisting shareholders with shareholder transactions, processing
purchase and redemption transactions, assisting shareholders in changing
dividend and investment options, account designations and addresses, and such
other services as the Fund may reasonably request. JNFSI may enter into related
agreements with various financial service firms, such as broker-dealers or
banks, for the provisions of such administrative services for their clients or
customers who are shareholders of the Fund. For services under the
Administrative Services Agreement, each Portfolio other than the Money Market
Fund pays JNFSI a fee, payable monthly at the annual rate of 0.25% of average
daily net assets of the Portfolio. Pursuant to its agreements with financial
service firms, JNFSI will pay such firms, for providing such administrative
services to their customers, up to 0.25% per annum of average daily net assets
of those accounts maintained and serviced for each portfolio other than the
Money Market Fund.
Other expenses paid by the Funds include: the investment management fee;
transaction costs; interest; taxes; legal, accounting, audit, transfer agent and
custodial fees; and certain other operational expenses.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
INITIAL INVESTMENT IN THE FUNDS
Shares are offered continuously for sale by JNFSI and are available through
authorized investment dealers. Your representative will help you fill out the
application contained in this Prospectus.
Initial investments in the Funds may be made by mailing a completed
application, together with a check for the total purchase price, to JNFSI at its
Home Office, P.O. Box 25127, Lansing, Michigan 48909-9979.
Initial investments may also be made by giving your completed application
and check to an authorized investment dealer who will forward them to the Fund's
Transfer Agent, P.O. Box 419102, Kansas City, Missouri 64141-6102. The dealer is
responsible for transmitting the order promptly to the Transfer Agent in order
to permit the investor to obtain the current price.
Checks must be drawn on a U.S. bank or its foreign branch or subsidiary and
must be payable in U.S. dollars.
Initial investments may also be made by wiring Federal Funds to Investors
Fiduciary Trust Company; Routing #1010-0362-1; Deposit Account: Bank Account
751-4085; From: [Shareholder Name] For purchase of: [Fund Name]. In order for a
wire investment to be processed on the same day, (1) the investor must notify
the Transfer Agent of his or her intention to make such investment by 12 noon
Eastern time on the day of his or her investment by calling the Transfer Agent
at 1-800-888-3863; and (2) the wire must be received by 4:00 p.m. Eastern time
that same day.
The minimum initial investment in each Fund is $1,000. Different minimums
may apply to qualified plans. The Fund may also reduce the minimum for certain
payroll deduction plans. If you have questions or need additional forms, call
the Transfer Agent at 1-800-888-3863.
The Funds reserve the right to withdraw all or any part of the offering
made by this Prospectus and to reject purchase orders. Also, from time to time,
each Fund may temporarily suspend the offering of its shares to new investors.
During the period of such suspension, persons who are already shareholders of a
Fund normally are permitted to continue to purchase additional shares and to
have dividends reinvested.
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<PAGE> 22
SUBSEQUENT PURCHASES
You may make subsequent purchases in a Fund by mailing your check directly
to the Transfer Agent at Jackson National Capital Management Funds c/o IFTC,
P.O. Box 419642, Kansas City, Missouri 64141-6642. Please make your check
payable to Jackson National Capital Management Funds. Indicate your account
number on the check and indicate into which Fund the money is to be invested. If
payment is wired in Federal funds, the payment should be directed to Investors
Fiduciary Trust Company; Routing #1010-0362-1: Deposit Account: Bank Account
751-4085; From: [Shareholder/Account Name and Account Number]; For purchase of:
[Fund Name]. The minimum subsequent investment in each Fund is $50.
OFFERING PRICE
Shares are sold at the offering price, which includes the net asset value
per share next computed after an order in proper form is received and accepted
by JNFSI or the Transfer Agent, plus the applicable sales charge. For Funds
other than the Money Market Fund, the order must be received by JNFSI or the
Transfer Agent prior to the calculation of the net asset value in order to
receive that day's price. Because the Money Market Fund invests in instruments
that normally require immediate payment in Federal funds (monies credited to a
bank's account with a Federal Reserve Bank), an order to purchase shares of the
Money Market Fund will not be effective until the Money Market Fund receives
payment in Federal funds. Checks drawn on a member bank of the Federal Reserve
System are normally converted into Federal funds within two business days
following receipt at the Transfer Agent.
On sales of shares other than the Money Market Fund, JNFSI, as principal
underwriter, retains the sales charge, as set forth in the table below, from
which it allows discounts or concessions from the applicable public offering
price to investment dealers, which discounts or concessions are uniform for all
dealers in the United States and its territories. The normal discount allowed to
dealers is set forth in the table. Upon notice to all dealers with whom it has
sales agreements, JNFSI may reallow up to the full applicable sales charge, as
shown in the table, during periods and for transactions specified in such notice
and such reallowances may be based upon attainment of minimum sales levels.
During periods when 90% or more of the sales charge is reallowed, such dealers
may be deemed to be underwriters as that term is defined in the Securities Act
of 1933.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE FOR FUNDS
OTHER THAN THE MONEY MARKET FUND
--------------------------------------------------
AS A ALLOWED TO
AS A PERCENTAGE OF DEALERS AS A
PERCENTAGE OF NET ASSET PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE VALUE* OFFERING PRICE*
- ------------------------------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C>
Less than $100,000..................................... 4.75% 4.99% 4.00%
$100,000 but less than $200,000........................ 4.00 4.17 3.37
$200,000 but less than $500,000........................ 3.50 3.63 2.95
$500,000 but less than $1,000,000...................... 2.50 2.56 2.11
$1,000,000 but less than $5,000,000.................... 0.25 0.25 0.21
$5,000,000 and over.................................... 0.10 0.10 0.08
</TABLE>
- --------------------------------------------------------------------------------
* Rounded to the nearest one-hundredth percent.
No sales charge is imposed on sales of shares of the Money Market Fund.
Reductions in the sales charge are allowed for certain specific groups discussed
under "Reduced Sales Charges."
20
<PAGE> 23
Banks and other financial services firms may provide administrative
services related to order placement and payment to facilitate transactions in
shares of a Fund for their clients, and JNFSI may pay them a transaction fee up
to the level of the discount allowable to dealers as described above. Banks are
currently prohibited under the Glass-Steagall Act from providing certain
underwriting or distribution services. Banks or other financial services firms
may be subject to various state laws regarding the services described above and
may be required to register as dealers pursuant to state law. If banking firms
were prohibited from acting in any capacity or providing any of the described
services, management would consider what action, if any, would be appropriate.
Management does not believe that termination of a relationship with a bank would
result in any material adverse consequences to a Fund.
In addition to the discounts from the applicable public offering price
described above, JNFSI may, from time to time, pay or allow additional discounts
or promotional incentives, in the form of cash or other compensation, to firms
that sell shares of the Funds. In some instances, such discounts or other
incentives may be offered only to certain firms that sell or are expected to
sell during specified time periods certain minimum amounts of shares of the
Funds or other funds underwritten by JNFSI.
NET ASSET VALUE
The term "net asset value," or NAV, refers to the worth of one share. Each
Fund has a separate NAV, which is computed by adding the value of all its
investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The price of one share
(the offering price) represents the share's NAV plus the applicable sales
charge. The Funds are open for business each day the New York Stock Exchange is
open (business day). The Transfer Agent calculates each Fund's NAV (and offering
price) as of the earlier of the close of trading on the New York Stock Exchange
or 4:00 p.m. Eastern time on each business day. The Funds reserve the right to
determine the NAV more frequently than once a day if deemed desirable.
For the Money Market Fund, for purposes of calculating the NAV per share,
securities are valued by the "amortized cost" method of valuation in accordance
with Rule 2a-7 under the 1940 Act, which does not take into account unrealized
gains or losses. This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to 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 the Fund would receive if it sold the instrument.
As a condition of using amortized cost, the Money Market Fund complies with
the maturity, diversification and quality requirements of Rule 2a-7 and the
Board of Trustees has established procedures reasonably designed, taking into
account current market conditions, to stabilize the NAV per share for the
purposes of sales and redemptions at $1.00. These procedures include periodic
review, as the Trustees deem appropriate and at such intervals as are reasonable
in light of current market conditions, of the relationship between the amortized
cost value per share and a net asset value per share based upon available
indications of market value. In such a review, market based values are obtained
by using actual quotations provided by market makers, estimates of market value
or values obtained from yield data relating to classes of money market
instruments published by reputable sources at the mean between the bid and asked
prices for the instruments.
In the event of deviation of 1/2 of 1% or more between the Fund's net asset
value per share calculated by reference to market-based values and the Fund's
$1.00 per share NAV, the Trustees will promptly consider what action, if any,
should be taken. They will also take such action as they deem appropriate to
eliminate or to reduce, to the extent reasonably practicable, any material
dilution or other unfair results which might arise from differences between the
two. Such action may include
21
<PAGE> 24
redeeming shares in kind, selling instruments prior to
maturity to realize capital gains or losses or to shorten average maturity,
withholding dividends, paying distributions from capital or capital gains, or
utilizing a net asset value per share based upon available market values.
For other than the Money Market Fund, portfolio securities and other assets
generally are valued on the basis of market quotations or, if quotations are not
readily available, by a method that the Board of Trustees believes accurately
reflects fair value. Fixed income securities with remaining maturities of 60
days or less are valued on the basis of amortized cost. Other fixed income
securities are valued by using market quotations, or independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics. Foreign securities are valued on the basis of quotations from
the primary market in which they are traded. Otherwise, securities are valued in
good faith under the direction of the Board of Trustees.
REDUCED SALES CHARGES
CUMULATIVE DISCOUNT. You may purchase each Fund's shares at the rate
applicable to the discount bracket obtained by combining concurrent investments
in shares of any of the Funds other than the Money Market Fund.
LETTER OF INTENT. Reduced sales charges also apply to the aggregate amount
of purchases of shares of the Funds, other than the Money Market Fund, made by
any purchaser within a 13-month period under a written Letter of Intent
("Letter") provided by JNFSI. The Letter, which imposes no obligation to
purchase or sell additional shares, provides for a price adjustment depending
upon the actual amount purchased within such period. The Letter provides that
the first purchase under the Letter must be at least 5% of the amount of the
intended purchase, and that 5% of the amount of the intended purchase normally
will be held in escrow in the form of shares pending completion of the intended
purchase. If the total investments under the Letter are less than the intended
amount and thereby qualify only for a higher sales charge than actually paid,
the appropriate number of escrowed shares are redeemed and the proceeds used
toward satisfaction of the obligation to pay the increased sales charge unless
you pay the difference within 20 days after being requested. The Letter for an
employer sponsored employee benefit plan may have special provisions regarding
payment of any increased sales charge resulting from a failure to complete the
intended purchase under the Letter.
A shareholder may include the value (at the maximum offering price) of all
shares of the Funds, other than the Money Market Fund, held of record as of the
initial purchase date under the Letter as an "accumulation credit" toward the
completion of the Letter, but no price adjustment will be made on such shares.
RIGHT OF ACCUMULATION. Shares of a Fund may also be purchased at the rate
applicable to the discount bracket attained by adding to the cost of shares of a
Fund being purchased, the value of all shares of the Funds other than the Money
Market Fund (computed at the maximum offering price at the time of the purchase
for which the discount is applicable) already owned by the investor.
AVAILABILITY OF QUANTITY DISCOUNTS. An investor or the investor's dealer or
other financial services firm must notify JNFSI whenever a quantity discount or
reduced sales charge is applicable to a purchase. Upon such notification, the
investor will receive the lowest applicable sales charge. Quantity discounts
described above may be modified or terminated at any time.
The sales charge scale is applicable to purchases made at one time by any
"purchaser" which includes: an individual; or an individual, his or her spouse
and children under the age of 21; or a trustee or other fiduciary of a single
trust estate or single fiduciary account; or an organization exempt from federal
income tax under Section 501(c)(3) or (13) of the Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Code; or other organized group of persons whether
incorporated or not, provided the organization has been in existence for at
22
<PAGE> 25
least six months and has some purpose other than the purchase of redeemable
securities of a registered investment company at a discount. In order to qualify
for a lower sales charge, all orders from an organized group will have to be
placed through a single investment dealer or other firm and identified as
originating from a qualifying purchaser.
Purchases at Net Asset Value. Shares may be sold to officers, trustees,
directors, employees (including retirees) and sales representatives of the Fund,
its investment adviser, or sub-investment adviser, its principal underwriter or
certain affiliated companies, for themselves or their spouses, children or
parents, or to any trust, pension, profit-sharing or other benefit plan for only
such persons at net asset value and in any amount. Shares may be sold at net
asset value in any amount to registered representatives and employees of
broker-dealers having selling group agreements with JNFSI and officers,
directors and employees of service agents of the Fund, for themselves or their
spouses or dependent children, or to any trust or pension, profit-sharing or
other benefit plan for only such persons. Shares may be sold at net asset value
in any amount to selected employees (including their spouses and dependent
children) of banks and other financial services firms that provide
administrative services related to order placement and payment to facilitate
transactions in shares of the Fund for their clients pursuant to an agreement
with JNFSI or one of its affiliates. Only those employees of such banks and
other firms who as part of their usual duties provide services related to
transactions in Fund shares may purchase Fund shares at net asset value
hereunder. The Fund may also issue shares at net asset value in connection with
the acquisition of the assets of or merger or consolidation with another
investment company, or to shareholders in connection with the investment or
reinvestment of income and capital gain dividends.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
CHOOSING A DISTRIBUTION OPTION
When you fill out your account application, you can choose from the
following distribution options:
A. The Share Option reinvests your income dividends and capital gain
distributions in additional shares. This option will be assigned
automatically if you make no choice on your account application. Income
dividends and capital gain distributions will be reinvested at the NAV
as of the record date for the distribution.
B. The Income-Earned Option reinvests your capital gain distributions and
pays your income dividends in cash.
C. With the Cash Option, you receive both income dividends and capital gain
distributions in cash. Cash distributions will be sent to you by check
within 5 business days of the payable date, which may be more than seven
days after the reinvestment date.
If you select Option B or C and the U.S. Postal Service cannot deliver
your checks, or if your checks remain uncashed for six months, your
distribution checks may be reinvested in your account at the
then-current NAV and your election will be converted to the Share
Option.
D. You may choose the Directed Dividends Option to have all distributions
from a Fund automatically invested into another Fund, provided that the
minimum investment amounts have been satisfied. Note that certain
restrictions may apply.
EXCHANGE PRIVILEGE
Subject to the following limitations, shares of the Funds may be exchanged
for each other at their
23
<PAGE> 26
relative net asset values. Shares of the Money
Market Fund that were acquired by purchase (not including shares acquired by
dividend reinvestment) are subject to the applicable sales charge on exchange.
Shares purchased by check may not be exchanged until they have been owned for at
least 15 days.
The total value of shares being exchanged must at least equal the minimum
investment requirement of the Fund into which they are being exchanged.
Exchanges are made based on relative dollar values of the shares involved in the
exchange. There is no service fee for an exchange. Exchanges will be effected by
redemption of shares of the Fund held and purchase of shares of the other Fund.
For federal income tax purposes, any such exchange constitutes a sale upon which
a gain or loss may be realized, depending upon whether the value of the shares
being exchanged is more or less than your adjusted cost basis. Exchanges may be
accomplished by a written request with all registered owners' signatures to
Jackson National Capital Management Funds c/o IFTC, Attention: Exchange
Department, P.O. Box 419102, Kansas City, Missouri 64141-6102, or by telephone,
unless on the account application this privilege is refused or is later revoked.
So long as the telephone exchange privilege is in force, the Transfer Agent will
honor requests by telephone at 1-800-888-3863. The exchange privilege is not a
right and may be suspended, terminated or modified at any time upon 60 days'
written notice to shareholders.
TELEPHONE INSTRUCTIONS. The Transfer Agent employs procedures designed to
confirm that instructions communicated by telephone are genuine, including
requiring certain identifying information prior to acting upon instructions,
recording all telephone instructions and sending written confirmation of
telephone instructions. To the extent such procedures are reasonably designed to
prevent unauthorized or fraudulent instructions neither the Transfer Agent nor
the Fund would be liable for any losses from unauthorized or fraudulent
instructions.
During periods when it is difficult to contact the Transfer Agent by
telephone, it may be difficult to implement telephone instructions.
RESTRICTIONS. Although the exchange privilege is an important benefit, Fund
performance and shareholders can be hurt by excessive trading. To protect the
interests of shareholders, the Funds reserve the right to temporarily or
permanently terminate the exchange privilege for any person who makes more than
one exchange out of a Fund per calendar quarter. Accounts under common ownership
or control, including accounts with the same taxpayer identification number,
will be aggregated for purposes of the exchange limit. In addition, the Funds
reserve the right to refuse exchange purchases by any person or group if, in the
sub-investment adviser's judgment, a Fund would be unable to invest effectively
in accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. Your exchanges may be restricted or refused
if the Fund receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive to the Fund. Although
the Fund will attempt to give you prior notice whenever it is reasonably able to
do so, it may impose these restrictions at any time.
SYSTEMATIC EXCHANGE PRIVILEGE
The owner of $10,000 or more of the shares of a Fund may authorize the
monthly exchange of a specified amount ($100 minimum) of such shares for shares
of another Fund. This privilege may be selected by contacting the Transfer Agent
for appropriate forms. If selected, exchanges will be made automatically until
the privilege is terminated by you or the Fund. Exchanges are subject to the
terms and conditions described under "Exchange Privilege" above, except that
there is no minimum investment requirement for the Fund acquired on exchange.
AUTOMATIC MONTHLY INVESTMENT PLAN
You may automatically purchase additional shares of a Fund through the
Automatic Monthly Investment Plan. The initial purchase of a Fund's shares may
also be made through the Plan, provided that the minimum purchase requirements
will be met within a one-year period by the initial investment plus the
annualized automatic monthly
24
<PAGE> 27
investment plan amount. With the Automatic Monthly Investment Plan, monthly
investments (minimum $50) are made automatically from the shareholder's account
at a bank, savings and loan or credit union into the shareholder's Fund account.
By enrolling in the Automatic Monthly Investment Plan, the shareholder
authorizes the Fund and its agents to either draw checks or initiate Automated
Clearing House debits against the designated account at a bank or other
financial institution. Such account must have check or draft writing privileges.
This privilege may be selected by completing the appropriate section on the
Account Application or by contacting the Transfer Agent for appropriate forms.
If the shareholder also has expedited wire transfer redemption privileges with
the Fund account, the same bank, savings and loan or credit union account must
be designated for both the Automatic Monthly Investment Plan and the wire
redemption programs. You may terminate your Plan by sending written notice to
the Transfer Agent. Termination by a shareholder will become effective within
thirty days after the Transfer Agent has received the request. A Fund may
immediately terminate a shareholders' Plan in the event that any item is unpaid
by the shareholder's financial institution. Fund shares purchased through the
Automatic Monthly Investment Plan must be owned for 15 days before they may be
redeemed or exchanged. The Funds may terminate or modify this privilege at any
time.
AUTOMATIC WITHDRAWAL PLAN
The owner of $5,000 or more of a Fund's shares at the offering price (net
asset value plus the sales charge) may provide for the payment from the owner's
account of any requested dollar amount of $100 or more to be paid to the owner
or a designated payee monthly, quarterly, semiannually or annually. Shares are
redeemed on the 5th business day from the end of the month so that the payee
will receive payment approximately the first week of the following month. Any
income and capital gain dividends will be automatically reinvested at net asset
value on the reinvestment date. A sufficient number of full and fractional
shares will be redeemed to make the designated payment. Depending upon the size
of the payments requested and fluctuations in the net asset value of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account.
The purchase of shares while participating in an automatic withdrawal plan
will ordinarily be disadvantageous to the investor because the investor will be
paying a sales charge on the purchase of shares at the same time that the
investor is redeeming shares upon which a sales charge may have already been
paid. The Funds reserve the right to amend the automatic withdrawal plan on
thirty days' notice and to terminate this privilege at any time. The plan may be
changed or terminated at any time by you in writing, with all registered owners'
signatures guaranteed.
REDEMPTION REINSTATEMENT PRIVILEGE
If you have redeemed shares of a Fund, you may reinstate up to the full
amount redeemed at net asset value at the time of the reinstatement in shares of
that Fund under this privilege. Purchases through the reinstatement privilege
are subject to the minimum investment requirements applicable to the shares
being purchased. Investors must notify the Fund in writing of their intention to
rely on the reinstatement privilege at the time the money is sent in. The
reinstatement privilege can be used only once as to any specific shares and
reinstatement must be effected within 30 days of the redemption. If a loss is
realized on the redemption of shares of a Fund, the reinstatement may be subject
to the "wash sale" rules if made within 30 days of the redemption, resulting in
a postponement of the recognition of such loss for federal income tax purposes.
The reinstatement privilege may be terminated or modified at any time.
TAX-SAVING RETIREMENT PLANS
JNFSI can set up your account in the Funds under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current
25
<PAGE> 28
taxes. Minimums may differ from those listed under "How to Buy Shares."
- Individual Retirement Accounts (IRAs): retirement plans that allow anyone
under 70 1/2 years of age with earned income to contribute up to $2,000
per tax year. You may make additional contributions of up to $250 per
year, if a spousal IRA is used.
- Rollover IRAs: tax-deferred retirement plans that may retain the special
tax advantages of lump sum distributions from qualified retirement plans.
- Simplified Employee Pension Plans SEP-IRAs: designed to provide those
with self-employed income (and any eligible employees) with many of the
same advantages as a Keogh, but with fewer administrative requirements.
- Keogh or Corporate Profit-Sharing and Money-Purchase Plans: open to
self-employed people and their partners, or to corporations, to benefit
themselves and their employees.
- 403(b) Custodial Accounts: available to employees of most non-profit
organizations and public schools.
- 401(k) Program: open to corporations of all sizes. The program allows
participants to contribute a percentage of their wages on a tax-deferred
basis. (The maximum amount that may be contributed, which is adjusted
annually to reflect changes in the cost of living, is currently $9,240.)
Brochures describing the above plans and materials for establishing them
are available from IFTC upon request. Call 1-800-888-3863 for complete
information kits. The brochures for plans trusteed by IFTC describe the current
fees payable to IFTC for its services as trustee. Certain "distributions" from
qualified retirement plans and 403(b)(7) custodial accounts may be subject to a
20% withholding requirement. See "Distributions and Taxes." Investors should
consult with their own tax advisers before establishing a retirement plan.
STATEMENTS AND REPORTS
At least twice a year you will receive the Funds' financial statements with
a summary of investments. The Transfer Agent will send a confirmation statement
after every transaction (except a reinvestment of dividends or capital gains)
that affects your share balance or your account registration. In addition, an
account statement will be mailed to you quarterly. To reduce expenses only one
copy of most shareholder reports (such as the Fund's Annual Report) may be
mailed to your household. If you need additional copies or have any questions
about your account, please call or write the Transfer Agent at 1-800-888-3863,
P.O. Box 419102, Kansas City, MO 64141-6102.
The Funds pay for shareholder services, but not for special services, such
as producing and mailing historical account transcripts. You may be required to
pay fees for these special services.
If you are purchasing shares of the Funds through a program of
administrative services offered by a securities dealer or financial institution,
you should read such firm's program materials in conjunction with this
Prospectus. Certain features of a Fund, such as the minimum initial or
subsequent investment, may be modified in these programs, and administrative
charges may be imposed for the services rendered, which charges would reduce
your return. Firms also may hold the Fund's shares in nominee or street name as
agent for and on behalf of their customers. In such instances, the Fund's
transfer agent will have no information with respect to or control over the
accounts of specific shareholders. Such shareholders may obtain access to their
accounts and information about their accounts only from their firm.
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DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Each Fund intends to distribute substantially all its net investment income
and net capital gains to shareholders each year. On each day that its net asset
value per share is determined, the Money Market Fund will declare dividends as
of 4:00 p.m. Eastern time to shareholders already of record prior to the
declaration, with such dividends being paid monthly. The Tax-Exempt and Income
Funds normally declare and distribute monthly dividends of net investment income
and distribute any net realized short-term and long-term gains after the close
of the Funds' fiscal year. The Growth and Total Return Funds normally declare
and distribute dividends of net investment income and net realized short-term
and long-term capital gains annually, normally after the close of the Funds'
fiscal year. Distributions may be made more frequently to avoid excise tax.
FEDERAL TAXES
Each Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code and, if so qualified, will not be liable for
federal income taxes to the extent its earnings are distributed. Dividends
derived from net investment income and net short-term capital gains are taxable
to shareholders as ordinary income and long-term capital gain dividends are
taxable to shareholders as long-term capital gain regardless of how long the
shares have been held and whether received in cash or shares. Long-term capital
gain dividends received by corporate shareholders are taxed at the same rate as
ordinary income. Long-term capital gain dividends received by individual
shareholders are taxed at a maximum federal rate of 28%. Dividends declared in
October, November or December to shareholders of record as of a date in one of
those months and paid during the following January are treated as paid on
December 31 of the calendar year declared. A portion of the dividends paid by
the Growth and Total Return Funds may qualify for the dividends received
deduction available to corporate shareholders.
The Tax-Exempt Fund intends to meet the requirements of the Code applicable
to regulated investment companies distributing exempt-interest dividends and,
accordingly, dividends representing net interest received on tax-exempt
municipal obligations will not be includable by shareholders in their gross
income for federal income tax purposes, except to the extent such interest is
subject to the alternative minimum tax as discussed below. Other dividends, if
any, will be taxable as described under "Federal Taxes" above. Net interest on
certain "private activity bonds" issued on or after August 8, 1996 is treated as
an item of tax preference and may, therefore, be subject to both the individual
and corporate alternative minimum tax. To the extent provided by regulations to
be issued by the Secretary of the Treasury, exempt-interest dividends from a
Fund are to be treated as interest on "private activity bonds" in proportion to
the interest the Fund receives from private activity bonds, reduced by allowable
deductions. Exempt-interest dividends, except to the extent of interest from
"private activity bonds," are not treated as a tax preference item. For a
corporate shareholder, however, exempt-interest dividends will be included in
determining such corporate shareholder's "adjusted current earnings."
Seventy-five percent of the excess, if any, of "adjusted current earnings" over
the corporate shareholder's alternative minimum taxable income with certain
adjustments will be a tax preference item. Corporate shareholders are advised to
consult their tax advisers with respect to alternative minimum tax consequences.
Individuals whose modified income exceeds a base amount will be subject to
federal income tax on up to 85% of their Social Security benefits received.
Modified income includes adjusted gross income, one-half of Social Security
benefits, and tax-exempt interest, including exempt-interest dividends from the
Tax-Exempt Fund. All taxpayers are required to disclose on their federal income
tax returns the amount of tax-exempt interest earned
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<PAGE> 30
during the year, including exempt-interest dividends from the Tax-Exempt Fund.
Tax-Exempt Fund dividends are not necessarily exempt under the income or other
tax laws of any state or local taxing authority.
CAPITAL GAINS. You may realize a capital gain or loss when you redeem
(sell) or exchange shares of the Funds. For most types of accounts, the Funds
will report the proceeds of your redemptions to you and the IRS annually.
However, because the tax treatment also depends on your purchase price and your
personal tax position, you should also keep your regular account statements to
use in determining your tax.
"BUYING A DIVIDEND." On the record date for a distribution, the Fund's
share price is reduced by the amount of the distribution. If you buy shares just
before the record date ("buying a dividend"), you will pay the full price for
the shares and then receive a portion of the price back as a taxable
distribution.
OTHER TAX INFORMATION. Each Fund will send you a tax statement by January
31 showing the tax status of the distributions you received in the past year,
and will file a copy with the IRS.
Each Fund is required by law to withhold 31% of taxable dividends and
redemption proceeds paid to certain shareholders who do not furnish a correct
taxpayer identification number (in the case of individuals, a social security
number) and in certain other circumstances.
In addition to federal taxes, you may be subject to state or local taxes on
your investment, depending on the laws in your area.
Trustees of qualified retirement plans and 403(b)(7) accounts are required
by law to withhold 20% of the taxable portion of any distribution that is
eligible to be "rolled over." The 20% withholding requirement does not apply to
distributions from IRAs or any part of a distribution that is transferred
directly to another qualified retirement plan, 403(b)(7) account or IRA.
Investors should consult with their own tax advisors regarding the 20%
withholding requirement.
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HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem all or a portion of your shares on any day that the New York
Stock Exchange is open. Your shares will be redeemed at the next NAV calculated
after the Transfer Agent has received and accepted your redemption request.
Payment for shares will be made as promptly as practicable but in no event later
than seven days after receipt of a properly executed request. When a Fund is
requested to redeem shares for which it may not have yet received good payment,
it may delay the mailing of a redemption check until it has determined that
collected funds have been received for the purchase of such shares, which will
generally be within 15 days.
TELEPHONE REDEMPTION. If the proceeds of the redemption are $50,000 or less
and the proceeds are to be payable to the shareholder of record and mailed to
the address of record, normally a telephone request by any one account owner is
sufficient for redemptions by individual account owners (including joint owners)
unless the account application has declined such privilege. Once authorization
is on file the Transfer Agent will honor requests by telephone at
1-800-888-3863. Institutional account owners may exercise this special privilege
of redeeming shares by telephone request subject to the same conditions as
individual account owners provided that this privilege has been pre-authorized
by the institutional account owner by written instruction to the Transfer Agent
with signatures guaranteed. This privilege of redeeming shares by telephone
request may not be used if any address change for the shareholder's account has
been effected within 30 days of the redemption request. The Funds reserve the
right to terminate or modify this privilege at any time. See "Telephone
Instructions" under "SHAREHOLDER SERVICES" for a discussion of liability
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<PAGE> 31
in connection with unauthorized telephone instructions.
EXPEDITED WIRE REDEMPTION. If you give authorization for expedited wire
redemption, shares of the Fund can be redeemed and the proceeds sent by Federal
wire transfer to a single previously designated bank account. Requests received
by the Transfer Agent prior to calculation of the net asset value will result in
shares being redeemed that day at the next determined NAV of the Fund and
normally the proceeds being sent to the designated bank account the following
business day. Delivery of the proceeds of a wire redemption request of $250,000
or more may be delayed by the Fund for up to 7 days if deemed appropriate under
then current market conditions. Once authorization is on file, the Transfer
Agent will honor requests by telephone at 1-800-888-3863. The Funds cannot be
responsible for the efficiency of the Federal wire system or the shareholder's
financial institution. The Fund currently charges $10 for wire transfers. The
shareholder is responsible for any charges imposed by the shareholder's bank.
The minimum amount that may be wired is $2,500. The Fund reserves the right to
change this minimum or to terminate the wire redemption privilege. To change the
name of the single designated bank account to receive wire redemption proceeds,
it is necessary to send a written request with signatures guaranteed to the
Transfer Agent. See "Telephone Instructions" under "SHAREHOLDER SERVICES" for a
discussion of liability in connection with unauthorized telephone instructions.
REDEMPTION BY MAIL. When shares are held for the account of a shareholder
by the Funds' Transfer Agent, the shareholder may redeem them by making a
written request to the Transfer Agent, Attention: Redemption Department, P.O.
Box 419102, Kansas City, MO 64141-6102. If the proceeds of the redemption are
$50,000 or less on an individual account, no signature guarantee will generally
be required, unless a change in address for the shareholder's account has been
effected within 30 days of the redemption request. For all other redemptions,
signatures must be guaranteed by a bank, broker, dealer, municipal securities
broker, government securities dealer or broker, credit union, savings
association, national securities exchange, registered securities association or
clearing agency. The purpose of a signature guarantee is to protect shareholders
against the possibility of fraud. The Transfer Agent may reject redemption
instructions if the guarantor is neither a member of nor a participant in a
signature guarantee program (currently known as "STAMPsm"). Further
documentation may be requested from institution or fiduciary accounts, such as
corporations, custodians (e.g., under the Uniform Gifts to Minors Act),
executors, administrators, trustees or guardians ("institutional account
owners"). The redemption request must be signed by all registered owners exactly
as the account is registered including any special capacity of the registered
owner. The Funds currently charge for actual costs of special delivery service
of redemption proceeds.
CHECKWRITING PRIVILEGE (MONEY MARKET FUND ONLY). Upon request, shareholders
will be provided with drafts to be drawn on the Money Market Fund ("Redemption
Checks"). These Redemption Checks may be made payable to the order of any person
for not more than $1 million. Shareholders should not write Redemption Checks in
an amount less than $250 since such Redemption Checks will not be honored and a
$10 service fee will be charged as provided below. When a Redemption Check is
presented for payment, a sufficient number of full and fractional shares in the
shareholder's account will be redeemed as of the next determined net asset value
to cover the amount of the Redemption Check. This will enable the shareholder to
continue earning income dividends until the Money Market Fund receives the
Redemption Check. A shareholder wishing to use this method of redemption must
complete and file an account application which is available from the Fund or
firms through which shares were purchased. Redemption Checks should not be used
to close an account since the amount in an account may not equal the amount of
the Redemption Check. The Fund reserves the right to terminate or modify this
privilege at any time.
Unless one signer is authorized on the account application, Redemption
Checks must be signed by all account owners. If the Transfer Agent receives
29
<PAGE> 32
written notice by any owner of a revocation of the authorization to sign
individually, all account owners would be required to sign Redemption Checks.
Redemption Checks must be signed exactly as the account is registered. Shares
purchased by check may not be redeemed by Redemption Check until the shares have
been owned for at least 15 days.
The Fund may refuse to honor Redemption Checks whenever the right of
redemption has been suspended or postponed, or whenever the account is otherwise
impaired. A $10 service fee may be charged when a Redemption Check is presented
to redeem Fund shares in excess of the value of a Fund account or in an amount
less than $250; when a Redemption Check is presented that would require
redemption of shares which were purchased within 15 days; or when "stop payment"
of a Redemption Check is requested, which would require that the account be
closed and another account opened.
GENERAL. Because of the high cost of maintaining small accounts, the Fund
reserves the right to redeem an account that falls below the minimum investment
level, currently $250 per Fund, as a result of redemptions. Currently,
Individual Retirement Accounts and employee benefit plan accounts are not
subject to this procedure. You will be notified in writing and will be allowed
60 days to make additional purchases to bring the account value up to the
minimum investment level before a Fund redeems the account. The investment
required to reach that level may be made at net asset value without any sales
charge.
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- --------------------------------------------------------------------------------
ORGANIZATION AND DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund is an open-end diversified management investment company,
organized as a business trust under the laws of Massachusetts on December 12,
1991. The Fund may issue an unlimited number of shares of beneficial interest in
one or more series of "Funds," all having no par value. Each Fund may be divided
by the Board of Trustees into classes of shares, to the extent permitted by
exemptive rule or order from the Securities and Exchange Commission. The Fund's
shares are not currently divided into classes. Shares of each Fund have equal
noncumulative voting rights and equal rights with respect to dividends, assets,
and liquidation of such Fund and are subject to any preferences, rights or
privileges of any classes of shares within the Fund. Shares are fully paid and
nonassessable when issued, are transferable without restriction and have no
preemptive or conversion rights. Although the Fund is not required to hold
annual shareholder meetings, it will hold special meetings as required or deemed
desirable for such purposes as electing trustees, changing fundamental policies
or approving an investment management agreement. Pursuant to the Fund's By-Laws,
the holders of at least 10% of the shares outstanding and entitled to vote may
require the Fund to hold a special meeting of shareholders. Shareholders will
vote in the aggregate except when voting by individual fund or class is required
under the 1940 Act or when the Board of Trustees determines that voting by
series or class is appropriate.
JNFSI deposited the initial seed capital in the Fund. In addition, Jackson
National Life Insurance Company purchased $25,000,000 of shares of each Fund
other than the Money Market Fund, in which it purchased $2,000,000 of shares.
These purchases resulted in the ownership of more than 25% of each such Fund and
the Funds in the aggregate, which constitutes "control" under the 1940 Act. In
February 1995, Jackson National Life Insurance Company redeemed approximately
$10,500,000 of shares of the Tax-Exempt Fund, $10,000,000 of shares of the
Income Fund, $17,400,000 of shares of the Total Return Fund, and $2,100,000 of
shares of the Money Market Fund. In March 1995, Jackson National Life Insurance
Company redeemed approximately $26,000,000 of shares of the Growth Fund. Jackson
National Life Insurance Company controls the Tax-Exempt, Income, Growth and
Total Return Funds.
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APPENDIX A -- MONEY MARKET INSTRUMENTS
- --------------------------------------------------------------------------------
COMMERCIAL PAPER. These instruments include commercial paper issued by
major corporations without registration under the Securities Act of 1933 in
reliance on the exemption from registration provided by Section 3(a)(3) of the
Act as well as commercial paper issued in reliance on the so-called "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 ("Section 4(2) paper"). Section 4(2) paper is restricted
as to disposition under the federal securities laws, and generally is sold to
institutional investors such as the Funds who agree that they are purchasing the
paper for investment and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors through or with the assistance of the
issuer or investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. The sub-investment adviser considers the legally restricted
but readily saleable Section 4(2) paper to be liquid; however, pursuant to
procedures approved by the Board of Trustees, if a particular investment in
Section 4(2) paper is not determined to be liquid, that investment will be
included within the 10% limitation on illiquid securities. The investment
adviser monitors the liquidity of the Money Market Fund's investments in Section
4(2) paper on a continuing basis.
VARIABLE AND FLOATING RATE SECURITIES. These investments include
instruments having rates of interest that are adjusted periodically or that
"float" continuously or periodically according to formulae intended to minimize
fluctuation in the value of the instruments ("Variable Rate Securities"). The
interest rate on a Variable Rate Security is ordinarily determined by reference
to, or is a percentage of, an objective standard such as a bank's prime rate,
the 90-day U.S. Treasury Bill rate, or the rate of return on commercial paper or
bank certificates of deposit. Generally, the changes in the interest rates on
Variable Rate Securities reduce the fluctuation in the market value of such
securities. Accordingly, as interest rates decrease or increase, the potential
for capital appreciation or depreciation is less than for fixed-rate
obligations. Further, some Variable Rate Securities have a demand feature
entitling the portfolio to resell the securities to the issuer or a third party
at an amount approximately equal to the principal amount thereof plus accrued
interest ("Variable Rate Demand Securities"). As is the case for other Variable
Rate Securities, the interest rate on Variable Rate Demand Securities varies
according to some objective standard intended to minimize fluctuation in the
value of the instruments. Many of these Variable Rate Demand Securities are
unrated, their transfer is restricted by the issuer and there is little if any
secondary market for the securities. Thus, any inability of the issuers of such
securities to pay on demand could adversely affect the liquidity of these
securities.
The Money Market Fund determines the maturity of Variable Rate Securities
and Variable Rate Demand Securities in accordance with Rule 2a-7, allowing the
Money Market Fund to consider certain of such instruments as having maturities
shorter than the maturity date on the face of the instrument if they are
guaranteed by the U.S. Government or its agencies, they have a stated maturity
date of one year or less or they have demand features prior to maturity.
A-1
<PAGE> 35
FUND -
Jackson National Capital Management Funds
INVESTMENT ADVISER -
Jackson National Financial Services, Inc.
SUB INVESTMENT ADVISER -
PPM America, Inc.
SHAREHOLDER SERVICING AGENT,
CUSTODIAN AND TRANSFER AGENT -
Investors Fiduciary Trust Company
INDEPENDENT ACCOUNTANT -
Price Waterhouse LLP
COUNSEL -
Vedder, Price, Kaufman & Kammholz
For more information about the Jackson National Family of Funds
call your registered representative or
our toll-free number
800/USE-JNLI
(800/873-5654)
For shareholder servicing of your account
call our toll-free number
800/888-FUND
(800/888-3863)
- --------------------------------------- JNCMF LOGO
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
P.O. Box 419102
Kansas City MO 64141-6102
JNCMF LOGO
JACKSON NATIONAL
CAPITAL MANAGEMENT FUNDS
Prospectus
& Application
March 1, 1996
M2084 Rev. 2/96
<PAGE> 36
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1996
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
P.O. BOX 419102,
KANSAS CITY, MISSOURI 64141-6102
(800) 888-3863
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Prospectus of Jackson National Capital Management
Funds (the "Fund") dated March 1, 1996. The Prospectus may be obtained by
writing or calling the above address or phone number.
----------
TABLE OF CONTENTS
PAGE
----
INVESTMENT POLICIES AND TECHNIQUES 3
Money Market Instruments 3
U.S. Government Securities and Custodial Receipts 3
Mortgage-Backed and Other Asset-Backed Securities 4
Variable Rate Securities 5
Restricted Securities 5
Repurchase Agreements 6
Foreign Securities 6
High Yield Bonds 6
Futures and Options Transactions 7
Options on Securities 8
Options on Securities Indices 9
Financial Futures Contracts 9
Options on Financial Futures Contracts 10
Regulatory Restrictions 11
Delayed Delivery Transactions 11
Municipal Obligations 12
Zero Coupon Bonds 13
INVESTMENT RESTRICTIONS 14
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<PAGE> 37
INVESTMENT ADVISERS 16
The Investment Adviser 16
The Sub-Investment Adviser 18
Custodian and Transfer Agent 18
Independent Auditors and Reports to Shareholders 18
PORTFOLIO TRANSACTIONS 19
DISTRIBUTOR 20
PURCHASE OF SHARES 20
REDEMPTION OF SHARES 21
REDEMPTION-IN-KIND ELECTION 21
DIVIDENDS AND TAXES 22
Tax-Exempt, Income, Growth and Total
Return Funds Dividends 22
Money Market Fund Dividends 22
General 22
Taxes 23
PERFORMANCE 24
OFFICERS AND TRUSTEES 27
SHAREHOLDER RIGHTS 28
FINANCIAL STATEMENTS 30
APPENDIX--RATINGS OF INVESTMENTS 53
COMMERCIAL PAPER RATINGS 53
CORPORATE BONDS 53
Standard & Poor's Municipal Bond Ratings
Moody's Investors Service, Inc. Municipal
Bond Ratings
MUNICIPAL BONDS 55
Standard & Poor's Municipal Bond Ratings
Moody's Investors Service, Inc. Municipal
Bond Ratings
2
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INVESTMENT POLICIES AND TECHNIQUES
MONEY MARKET INSTRUMENTS. Each of the Funds, except for the Tax-Exempt Fund,
may invest in certain money market instruments as described in the Prospectus.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by banks or bank holding companies, corporations and finance
companies. The commercial paper purchased by the Funds consists of direct U.S.
dollar denominated obligations of domestic or foreign issuers. Bank
obligations in which the Funds may invest include certificates of deposit,
bankers' acceptances, and fixed time deposits. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers' acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are "accepted" by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. The Money Market Fund
may concentrate investments in instruments issued by the "domestic banking
industry." The domestic banking industry does not include foreign branches of
U.S. banks, although it may include U.S. branches of foreign banks if the Board
of Trustees finds that such branches are subject to the same regulation as U.S.
banks. The profitability of the banking industry is dependent largely upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing market conditions. General economic conditions, as well as
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in banking operations. To the extent the
investments of the Money Market Fund are concentrated in the domestic banking
industry, the fund is more exposed to these risks.
U.S. GOVERNMENT SECURITIES AND CUSTODIAL RECEIPTS. Obligations issued or
guaranteed as to principal and interest by the U.S. Government, its agencies
and instrumentalities include Treasury Bills, notes and bonds and Government
National Mortgage Association ("GNMA") certificates which are supported by the
full faith and credit of the United States; others, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government agencies or
instrumentalities in the future, other than as set forth above, since it is not
obligated to do so by law.
Securities issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are known by
various
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<PAGE> 39
names, including "Treasury Receipts," "Treasury Investment Growth
Receipts ("TIGR's") and "Certificates of Accrual on Treasury Securities"
("CATS"). A Fund may also invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal
of Securities Program ("STRIPS"). Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES. The total return on
mortgage-backed securities purchased by the Income and Total Return Funds
varies with changes in the general level of interest rates. The maturities of
mortgage-backed securities are variable and unknown when issued because their
maturities depend on prepayment rates. Early repayment of principal on
mortgage pass-through securities (arising from prepayments of principal due to
sale of the underlying property, refinancing, or foreclosure, net of fees and
costs which may be incurred) may expose a Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to prepayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. Mortgage prepayments generally increase with falling interest
rates and decrease with rising interest rates. Like other fixed income
securities, when interest rates rise the value of a mortgage-backed security
generally will decline; however, when interest rates are declining, the value
of mortgage-backed securities with prepayment features may not increase as much
as that of other fixed income securities.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit, which may be issued by governmental entities, private issuers or the
mortgage poolers.
CMOs are hybrid instruments with characteristics of both mortgage-backed bonds
and mortgage pass-through securities. Interest and principal on a CMO are
paid, in most cases, monthly. CMOs are usually collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA but may be
collateralized by whole mortgage loans or private mortgage pass-through
securities. CMOs are structured into multiple classes, with each class bearing
a different stated maturity. Under a common structure, monthly payments of
principal, including prepayments, are first returned to investors holding the
shortest maturity class; investors holding the longer maturity classes receive
principal only after the first class has been retired. The Income and Total
Return Funds may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date
4
<PAGE> 40
to more than one class. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are always
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
Other asset-backed securities (unrelated to mortgage loans) have been offered
to investors, such as Certificates for Automobile Receivables ("CARSsm") and
interests in pools of credit card receivables. CARSsm represent undivided
fractional interests in a trust whose assets consist of a pool of motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on CARSsm are
"passed-through" monthly to certificate holders and are guaranteed up to
certain amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the trust.
Underlying sales contracts are subject to prepayment, which may reduce the
overall return to certificate holders. If the letter of credit is exhausted,
certificate holders may also experience delays in payment or losses on CARSsm
if the full amounts due on underlying sales contracts are not realized by the
trust because of unanticipated legal or administrative costs of enforcing the
contracts, or because of depreciation, damage or loss of the vehicles securing
the contracts, or other factors. CARSsm will be deemed to be illiquid
securities. Certificates representing pools of credit card receivables have
similar characteristics although the underlying loans are unsecured. If
consistent with its investment objective and policies, a Fund may invest in
CARSsm, interests in pools of credit card receivables and in other asset-backed
securities that may be developed in the future subject to the review and
approval of the Funds' Board of Trustees. Asset-backed securities and
mortgage-backed securities, other than GNMAs, are relatively new forms of
investments. Thus, the market experience in these securities is limited and
the market's ability to sustain liquidity through all phases of the market
cycle has not been tested.
VARIABLE RATE SECURITIES. Variable Rate Securities provide for a periodic
adjustment in the interest rate paid on the obligations. The terms of such
obligations must provide that interest rates are adjusted periodically based
upon some appropriate interest rate adjustment index as provided in the
respective obligations. The adjustment intervals may be regular, and range
from daily up to annually, or may be event based, such as a change in the prime
rate. Variable Rate Securities that cannot be disposed of promptly within
seven days and in the usual course of business without taking reduced price
will be treated as illiquid and subject to the limitation on investments in
illiquid securities.
RESTRICTED SECURITIES. Each of the Funds may purchase securities that are not
registered ("restricted securities") under the Securities Act of 1933 ("1933
Act"), but can be offered and sold to "qualified institutional buyers" under
Rule 144A of the 1933 Act. However, each Fund will not invest more than 10% of
its assets in illiquid investments, which includes repurchase agreements and
fixed time deposits maturing in more than seven days, securities that are not
readily marketable and restricted securities, unless the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific restricted security, that such restricted securities are liquid. The
Board of Trustees has adopted guidelines and procedures that delegate to the
sub-investment adviser the daily function of determining and monitoring
liquidity of restricted securities. Since it is not possible to predict with
assurance exactly how this market for restricted securities sold and offered
under Rule 144A will develop, the Board will carefully monitor each Fund's
investments in
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these securities. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing restricted
securities held by such Fund. Each Fund will not invest more than 5% of its
total assets in unregistered securities, except commercial paper issued under
Section 4(2) of the 1933 Act and securities that may be resold pursuant to Rule
144A.
REPURCHASE AGREEMENTS. Each Fund, other than the Tax-Exempt Fund, may invest
in repurchase agreements. A repurchase agreement may be considered a loan
collateralized by securities. The Fund must take physical possession of the
security or receive written confirmation of the purchase and a custodial or
safekeeping receipt from a third party or be recorded as the owner of the
security through the Federal Reserve Book Entry System. The Funds may invest
in open repurchase agreements which vary from the typical agreement in the
following respects: (1) the agreement has no set maturity, but instead matures
upon 24 hours' notice to the seller; and (2) the repurchase price is not
determined at the time the agreement is entered into, but is instead based on a
variable interest rate and the duration of the agreement.
FOREIGN SECURITIES. It is expected that the expenses for custodian
arrangements of the Funds' foreign securities will be somewhat greater than the
expenses for the custodian arrangements for handling domestic securities of
equal value. Certain foreign governments levy withholding taxes against
dividend and interest income. Although in some countries a portion of these
taxes are recoverable, the non-recovered portion of foreign withholding taxes
will reduce the income received from the companies comprising each Fund's
respective investment portfolio.
HIGH YIELD BONDS. The Total Return Fund may invest up to 20% of its assets in
fixed-income securities offering high current income that are in the lower
rating categories of recognized rating agencies or will be non-rated. These
lower-rated fixed-income securities are considered on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and generally will involve more
credit risk than securities in the higher rating categories.
High yield securities frequently are issued by corporations in the growth stage
of their development. They may also be issued in connection with a corporate
reorganization or a corporate takeover. Companies that issue such high
yielding securities often are highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risk associated
with acquiring the securities of such issuers generally is greater than is the
case with higher rated securities. For example, during an economic downturn or
recession, highly leveraged issuers of high yield securities may experience
financial stress. During such periods, such issuers may not have sufficient
revenues to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. Adverse
publicity and investor perceptions regarding lower rated bonds, whether or not
based upon fundamental analysis, may also depress the price for such
securities. The risk of loss from default by the issuer is significantly
greater for the holders of high yield securities because such securities are
generally unsecured and are often subordinated to other creditors of the
issuer.
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The Total Return Fund may have difficulty disposing of certain high yield
securities because they may have a thin trading market. Because not all
dealers maintain markets in all high yield securities, the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market may also have
an adverse effect on market price and make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's assets.
Market quotations generally are available on many high yield issues, only from
a limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
The investment philosophy of the Total Return Fund with respect to high yield
bonds is based on the premise that over the long term an allocation of a
relatively minor portion of a diversified portfolio's assets in high yield
fixed income securities should, even taking into account possible losses,
provide a higher net return than that achievable on a portfolio of solely
higher rated securities. The Total Return Fund seeks to enhance total returns
through investment in high yield bonds while simultaneously attempting to
reduce relative risk through (a) diversification of investments, (b) credit
analysis by the sub-investment adviser of the issuers in which the Fund
invests, (c) purchase of high yield securities at discounts from par or stated
value when practicable and (d) monitoring and seeking to anticipate changes and
trends in the economy and financial markets that might affect the prices of
portfolio securities. The sub-investment adviser's judgment as to the
"reasonableness" of the risk involved in any particular investment will be a
function of its experience in managing fixed income investments and its
evaluation of general economic and financial conditions; of a specific issuer's
business and management, cash flow, earnings coverage of interest and
dividends, ability to operate under adverse economic conditions, and fair
market value of assets; and of such other considerations as the sub-investment
adviser may deem appropriate. The sub-investment adviser, while seeking
maximum current yield, will monitor current corporate developments with respect
to portfolio securities and potential investments and to broad trends in the
economy. In some circumstances, defensive strategies may be implemented to
preserve or enhance capital even at the sacrifice of current yield. Defensive
strategies, which may be used singly or in any combination, may include, but
are not limited to, investments in discount securities or investments in money
market instruments as well as futures and options strategies.
FUTURES AND OPTIONS TRANSACTIONS. The Growth and Total Return Funds
each may engage in options and futures transactions in accordance with their
respective investment objectives and policies. Each such Fund intends to
engage in such transactions if it appears to the investment adviser to be
advantageous to do so in order to pursue its investment objective and also to
hedge against the effects of market risks but not for speculative purposes.
The Money Market, Tax-Exempt and Income Funds do not engage in options and
futures transactions. The use of futures and options, and possible benefits
and attendant risks, are discussed below along with information concerning
other investment policies and techniques.
OPTIONS ON SECURITIES. The Total Return Fund may purchase (buy) put and call
options on securities and may write (sell) covered call and secured put options
on securities. A call option gives the purchaser the right to buy, and the
writer the obligation to sell, the underlying security at the exercise price
during the option period. A put option gives the purchaser the right to sell,
and the writer the obligation to buy, the underlying security at the exercise
price during the option
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period. The writer of a covered call option owns securities that are
acceptable for escrow and the writer of a secured put invests an amount not
less than the exercise price in eligible securities to the extent that it is
obligated as a writer. The premium received for writing an option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the
price volatility of the underlying security, the option period, supply and
demand and interest rates. The exercise price of an option may be below, equal
to or above the current market value of the underlying security at the time the
option is written. The buyer of a put who also owns the related security is
protected by ownership of a put option against any decline in that security's
price below the exercise price less the amount paid for the option. The ability
to purchase put options allows the Fund to protect capital gains in an
appreciated security it owns, without being required to actually sell that
security. At times a Fund may desire to establish a position in a security
upon which call options are available. By purchasing a call option, the Fund is
able to fix the cost of acquiring the security, this being the cost of the call
plus the exercise price of the option. This procedure also provides some
protection from an unexpected downturn in the market, because the Fund is only
at risk for the amount of the premium paid for the call option which it can, if
it chooses, permit to expire.
During the option period the covered call writer gives up the potential for
capital appreciation above the exercise price should the underlying security
rise in value, and the secured put writer retains the risk of loss should the
underlying security decline in value. For the covered call writer, substantial
appreciation in the value of the underlying security would result in the
security being "called away." For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer. If a covered call option expires
unexercised, the writer realizes a gain in the amount of the premium received.
If the covered call option writer has to sell the underlying security because
of the exercise of a call option, it realizes a gain or loss from the sale of
the underlying security, with the proceeds being increased by the amount of the
premium.
If a secured put option expires unexercised, the writer realizes a gain from
the amount of the premium, plus the interest income on the money market
investment. If the secured put writer has to buy the underlying security
because of the exercise of the put option, the secured put writer incurs an
unrealized loss to the extent that the current market value of the underlying
security is less than the exercise price of the put option. However, this
would be offset in whole or in part by gain from the premium received and any
interest income earned on the money market investment.
OPTIONS ON SECURITIES INDICES. The Growth and Total Return Funds, as part of
their options transactions, may also use options on securities indices in an
attempt to hedge against market conditions affecting the value of securities
that the Fund owns or intends to purchase, and not for speculation. The Funds
may both purchase and sell options on securities indices. Through the writing
or purchase of index options, a Fund can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This
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amount of cash is equal to such difference between the closing price of
the index and the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities.
When a Fund writes an option on a securities index, it will be required to
deposit with its custodian and mark-to-market eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract value
in the case of a call. In addition, where a Fund writes a call option on a
securities index at a time when the contract value exceeds the exercise price,
the Fund will segregate and mark-to-market, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess.
Options on futures contracts and index options involve risks similar to those
risks relating to transactions in financial futures contracts described below.
Also, an option purchased by a Fund may expire worthless, in which case the
Fund would lose the premium paid therefor.
FINANCIAL FUTURES CONTRACTS. The Growth and Total Return Funds may enter into
financial futures contracts for the future delivery of a financial instrument,
such as a security, or the cash value of a securities index. This investment
technique is designed primarily to hedge (i.e., protect) against anticipated
future changes in interest rate or equity market conditions which otherwise
might affect adversely the value of securities which the Fund holds or intends
to purchase. A "sale" of a futures contract means the undertaking of a
contractual obligation to deliver the securities or the cash value of an index
called for by the contract at a specified price during a specified delivery
period. A "purchase" of a futures contract means the undertaking of a
contractual obligation to acquire the securities or cash value of an index at a
specified price during a specified delivery period. The Growth and Total
Return Funds may purchase and sell financial futures contracts. At the time of
delivery, in the case of fixed income securities subject to the contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate than that specified in the
contract. In some cases, securities called for by a futures contract may not
have been issued at the time the contract was written. The Growth and Total
Return Funds will not enter into any futures contracts or options on futures
contracts if the aggregate of the market value of the outstanding futures
contracts of the Fund and the futures contracts subject to outstanding options
written by the Fund would exceed 20% of the net assets of the Fund.
Although some futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases a party will close out the contractual
commitment before delivery without having to make or take delivery of the
security by purchasing (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, if effected through a member of an exchange, cancels the
obligation to make or take delivery of the securities. All transactions in the
futures market are made, offset or fulfilled through a clearing house
associated with the exchange on which the contracts are traded. A Fund will
incur brokerage fees when it purchases or sells contracts, and will be required
to maintain margin deposits. At the time a Fund enters into a futures
contract, it is required to deposit with its
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custodian, on behalf of the broker, a specified amount of cash or
eligible securities, called "initial margin." The initial margin required for
a futures contract is set by the exchange on which the contract is traded.
Subsequent payments, called "variation margin," to and from the broker are made
on a daily basis as the market price of the futures contract fluctuates. The
costs incurred in connection with futures transactions could reduce the Fund's
return. Futures contracts entail risks. If the Subadviser's judgment about
the general direction of interest rates or markets is wrong, the overall
performance may be poorer than if no such contracts had been entered into.
There may be an imperfect correlation between movements in prices of futures
contracts and portfolio securities being hedged. In addition, the market prices
of futures contracts may be affected by certain factors. If participants in
the futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than engage in closing
transactions because of the resultant reduction in the liquidity of the futures
market. In addition, because, from the point of view of speculators, the
margin requirements in the futures markets are less onerous than margin
requirements in the cash market, increased participation by speculators in the
futures market could cause temporary price distortions. Due to the possibility
of price distortions in the futures market and because of the imperfect
correlation between movements in the prices of securities and movements in the
prices of futures contracts, a correct forecast of market trends by the
investment adviser may still not result in a successful hedging transaction.
If any of these events should occur, a Fund could lose money on the financial
futures contracts and also on the value of its portfolio securities.
OPTIONS ON FINANCIAL FUTURES CONTRACTS. The Total Return and Growth Funds may
purchase (buy) and write (sell) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during the period of the option. Upon
exercise, the writer of the option delivers the futures contract to the holder
at the exercise price. The Fund would be required to deposit with its
custodian initial margin and maintenance margin with respect to put and call
options on futures contracts written by it. Options on futures contracts
involve risks similar to those risks relating to transactions in financial
futures contracts described above. Also, an option purchased by the Fund may
expire worthless, in which case the Fund would lose the premium paid therefor.
REGULATORY RESTRICTIONS. To the extent required to comply with SEC Release No.
IC-10666, when entering into a futures contract, or writing a put or call
option, the Fund will maintain in a segregated account cash or liquid
high-grade debt securities equal to the value of such contracts.
To the extent required to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid "commodity pool operator" status, a Fund will
not enter into a futures contract or purchase an option thereon if immediately
thereafter the initial margin deposits for futures contracts held by the Fund
plus premiums paid by it for open options on futures would exceed 5% of the
Fund's total assets. A Fund will not engage in transactions in financial
futures contracts or options thereon for speculation, but only in an attempt to
hedge against changes in interest rates or market
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conditions affecting the value of securities which the Fund holds or
intends to purchase. Where futures contracts or options thereon are purchased
to protect against a price increase on securities intended to be purchased
later, it is anticipated that at least 75% of such intended purchases will be
completed. Where other futures contracts or options thereon are purchased, the
underlying value of such contracts will at all times not exceed the sum of:
(1) accrued profit on such contracts held by the broker; (2) cash or high
quality money market instruments set aside in an identifiable manner; and (3)
cash proceeds from investments due in 30 days.
DELAYED DELIVERY TRANSACTIONS. The Money Market, Tax-Exempt, Income and Total
Return Funds may purchase or sell portfolio securities on a when-issued or
delayed delivery basis. When a Fund enters into a delayed delivery
transaction, it becomes obligated to purchase securities and it has all of the
rights and risks attendant to ownership of a security, although delivery and
payment occur at a later date. The value of fixed income securities to be
delivered in the future will fluctuate as interest rates vary. At the time a
Fund makes the commitment to purchase a security on a when-issued or delayed
delivery basis, it will record the transaction and reflect the liability for
the purchase and the value of the security in determining its net asset value.
Likewise, at the time a Fund makes the commitment to sell a security on a
delayed delivery basis, it will record the transaction and include the proceeds
to be received in determining its net asset value; accordingly, any
fluctuations, the value of the security sold pursuant to a delayed delivery
commitment are ignored in calculating net asset value so long as the commitment
remains in effect. The Fund generally has the ability to close out a purchase
obligation on or before the settlement date, rather than take delivery of the
security. To the extent the Fund engages in when-issued or delayed delivery
purchases, it will do so for the purpose of acquiring portfolio securities
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage or to speculate in interest rate changes.
MUNICIPAL OBLIGATIONS. Municipal Obligations include debt obligations issued
to obtain funds for various public purposes, including the construction of a
wide range of public facilities such as bridges, highways, housing, hospitals,
mass transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses, and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities for water supply, gas, electricity or sewage or solid waste
disposal. Such obligations are included with the term Municipal Obligations if
the interest paid thereon qualifies as exempt from federal income tax. Other
types of industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Obligations, although the
current federal tax laws place substantial limitations on the size of such
issues.
The Tax-Exempt Fund may purchase floating and variable rate demand notes and
bonds, which are tax exempt obligations ordinarily having stated maturities in
excess of one year, but which permit the holder to demand payment of principal
at any time or at specified intervals. Variable rate
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demand notes include master demand notes which are obligations that
permit the Fund to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Fund, as lender, and the
borrower. The interest rates on these obligations fluctuate from time to time.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. Use of letters of credit or other
credit support arrangements will not adversely affect the tax exempt status of
these obligations. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary
market for these obligations, although they are redeemable at face value.
Accordingly, where these obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. Each
obligation purchased by the Tax-Exempt Fund will meet the quality criteria
established for the purchase of Municipal Obligations. The sub-investment
adviser will consider on an ongoing basis the creditworthiness of the issuers
of the floating and variable rate demand obligations in the Fund's portfolio.
The Tax-Exempt Fund will not invest more than 10% of the value of its net
assets in floating or variable rate demand obligations as to which the Fund
cannot exercise the demand feature on not more than seven days' notice if there
is no secondary market available for these obligations, and in other illiquid
securities.
The Tax-Exempt Fund may acquire "stand-by commitments" with respect to
Municipal Obligations held in its portfolio. Under a stand-by commitment, the
Fund obligates a broker, dealer or bank to repurchase, at the Fund's option,
specified securities at a specified price and, in this respect, stand-by
commitments are comparable to put options. The exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The Fund may pay for stand-by commitments if such action is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing such security's yield to
investors.
The Tax-Exempt Fund may purchase tender option bonds and similar securities. A
tender option bond is a Municipal Obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest
at a fixed-rate substantially higher than prevailing short-term tax exempt
rates, that has been coupled with the agreement of a third party, such as a
bank, broker-dealer or other financial institution, pursuant to which such
institution grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face value thereof.
As consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal Obligations's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination.
Thus, after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax exempt rate.
The sub-investment adviser will consider on an ongoing basis the
creditworthiness of the issuers of the underlying Municipal Obligation, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other
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reasons. The Fund will not invest more than 10% of the value of its
net assets in securities that are illiquid, which would include tender option
bonds as to which it cannot exercise the tender feature on not more than seven
days' notice if there is no secondary market available for these obligations.
ZERO COUPON BONDS. Subject to their investment objective and policies, the
Tax-Exempt, Income and Total Return Funds may invest in zero coupon securities.
Zero coupon bonds are purchased at a discount from the face amount. The buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. These securities
may include those created directly by the U.S. Treasury, private issuers and
those created as collateralized obligations through various proprietary
custodial, trust or other relationships (see "Investment Policies and
Techniques--Mortgage-Backed and Other Asset-Backed Securities" in this
Statement of Additional Information). The effect of owning instruments which
do not make current interest payments is that a fixed yield is earned not only
on the original investment but also, in effect, on all discount accretion
during the life of the obligations. This implicit reinvestment of earnings at
the same rate eliminates the risk of being unable to reinvest distributions at
a rate as high as the implicit yield on the zero coupon bond, but at the same
time eliminates any opportunity to reinvest earnings at higher rates. For this
reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than those of
comparable securities that pay interest currently, which fluctuation is greater
as the period to maturity or longer. Zero coupon bonds created as
collateralized obligations are similar to those created through the U.S.
Treasury, but the former investments do not provide absolute certainty of
maturity or of cash flows after prior classes of the collateralized obligations
are retired.
INVESTMENT RESTRICTIONS
Each of the Funds has adopted certain investment restrictions which, together
with the investment objective and fundamental policies of each Fund, cannot be
changed without approval by holders of a majority of the outstanding voting
shares of that Fund. As defined in the Investment Company Act of 1940, this
means the lesser of the vote of (a) 67% of the shares of the Fund at a meeting
where more than 50% of the outstanding shares are present in person or by proxy
or (b) more than 50% of the outstanding shares of the Fund.
A Fund individually may not:
(1) Purchase securities of any issuer (other than obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities) if, as a result,
more than 5% of the value of a Fund's net assets would be invested in
securities of that issuer.
(2) Purchase more than 10% of any class of securities of any issuer. All debt
securities and all preferred stocks are each considered as a class.
(3) Make loans to others (except through the purchase of debt obligations or
repurchase agreements or by lending its portfolio securities).
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(4) Borrow money, except from banks as a temporary measure for extraordinary or
emergency purposes and then only in an amount up to one-third of the value of
its total assets. If, for any reason, the current value of a Fund's total
assets falls below an amount equal to three times the amount of its
indebtedness from money borrowed, the Fund will, within three business days,
reduce its indebtedness to the extent necessary. A Fund will not borrow for
leverage purposes and will not purchase securities or make investments when
borrowings exceed 5% of net assets.
(5) Pledge, hypothecate, mortgage or otherwise encumber more than 15% of its
total assets and then only to secure borrowings permitted by restriction (4)
above. (The collateral arrangements with respect to options, financial futures
and delayed delivery transactions and any margin payments in connection
therewith are not deemed to be pledges or other encumbrances.)
(6) Purchase securities (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) if as a result of such purchase
25% or more of a Fund's total assets would be invested in any one industry;
provided, however, that the Money Market Fund may invest more than 25% of its
net assets in instruments issued by banks in accordance with its investment
objective and policies; and that the Tax-Exempt Fund may invest more than 25%
of its total assets in securities and interest upon which is paid from revenues
of similar types of projects or securities whose issues are located in the same
state.
(7) Purchase or retain the securities of any issuer if any of the officers,
trustees or directors of the Funds or the investment adviser or sub-investment
adviser owns beneficially more than 1/2 of 1% of the securities of such issuer
and together they own more than 5% of the securities of such issuer.
(8) Invest more than 5% of a Fund's total assets in securities restricted as to
disposition under the federal securities laws (except commercial paper issued
under Section 4(2) of the Securities Act of 1933 and securities that may be
resold in accordance with Rule 144A under the Securities Act of 1933).
(9) Invest for the purpose of exercising control or management of another
issuer.
(10) Invest in interests in oil, gas or other mineral exploration or
development programs or invest in oil, gas or other mineral leases, although it
may invest in the securities of issuers which invest in or sponsor such
programs.
(11) Purchase securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
(12) Underwrite securities issued by others except to the extent a Fund may be
deemed to be an underwriter, under the federal securities laws, in connection
with the disposition of portfolio securities.
(13) Issue senior securities as defined in the Investment Company Act of 1940.
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(14) Make short sales of securities, or purchase any securities on margin
except to obtain such short-term credits as may be necessary for the clearance
of transactions; however, the Growth and Total Return Funds may make margin
deposits in connection with financial futures and option transactions.
(15) Engage in put or call options; however, the Growth and Total Return Funds
may write (sell) put or call options on up to 20% of their total assets and the
Total Return and Growth Funds may purchase or sell put or call options if no
more than 5% of their total assets would be invested in premiums on put and
call options, combinations thereof or similar options; the Total Return and
Growth Funds may purchase or sell options on financial futures contracts; and
the Tax-Exempt Fund may purchase Municipal obligations subject to Standby
Commitments in accordance with its investment objective and policies.
(16) Invest in commodities or commodity futures contracts, although the Growth
and Total Return Funds may each purchase and sell financial futures contracts
and options on such contracts.
(17) Invest in real estate, including real estate limited partnership
interests, although it may invest in securities which are secured by real
estate and securities of issuers which invest or deal in real estate.
In addition, to the extent so required by any state statute or regulation where
the Funds' shares are offered for sale, each of the Funds, as a non-fundamental
policy, may not:
(i) Invest in warrants if more than 5% of the Fund's net assets would be
invested in warrants. Included within that amount, but not to exceed 2% of the
Fund's net assets, may be warrants not listed on the New York or American Stock
Exchanges. Warrants acquired in units or attached to securities may be deemed
to be without value for such purposes.
(ii) Invest more than 5% of the Fund's total assets in securities of issuers
(other than asset-backed securities, collateralized mortgage obligations and
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities including collateralized obligations thereof) which with
their predecessors have a record of less than three years continuous operation.
If a percentage restriction 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 or total assets will not be considered a violation. The Funds
have no present intention of borrowing during the coming year.
INVESTMENT ADVISERS
THE INVESTMENT ADVISER. Jackson National Financial Services, Inc., is the
Funds' investment adviser. Pursuant to an investment management agreement,
JNFSI acts as the Funds' investment adviser, manages its investments,
administers its business affairs, furnishes office facilities and equipment,
provides clerical, bookkeeping and administrative services and permits any of
its officers or employees to serve without compensation as trustees or officer
of the Funds if elected to such positions. The Funds pay the fees and expenses
of independent auditors, counsel, custodian
15
<PAGE> 51
and transfer agent and the cost of reports and notices to shareholders,
costs of calculating net asset value, brokerage commissions or transaction
costs, taxes, registration fees, the fees and expenses of qualifying the Funds
and their shares under federal securities laws and membership dues in the
Investment Company Institute or any similar organization. The Funds' expenses
are generally allocated among the Funds on the basis of relative net assets at
the time of allocation, except that expenses directly attributable to a
particular Fund are charged to that Fund.
The investment management agreement continues in effect for each Fund
from year to year after its initial two-year term so long as its continuation
is approved at least annually by a majority of the Trustees who are not parties
to such agreement or interested persons of any such party except in their
capacity as Trustees of the Funds and by the shareholders of each Fund or the
Board of Trustees. It may be terminated at any time upon 60 days' notice by
either party, or by a majority vote of the outstanding shares of a Fund with
respect to that Fund, and will terminate automatically upon assignment. If
continuation is not approved for a Fund, the investment management agreement
nevertheless may continue in effect for the Funds for which it is approved and
JNFSI may continue to serve as investment adviser for the Fund for which it is
not approved to the extent permitted by the 1940 Act. Additional Funds may be
subject to a different agreement. The investment management agreement provides
that JNFSI shall not be liable for any error of judgment or of law, or for any
loss suffered by the Fund in connection with the matters to which the agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of JNFSI in the performance of its obligations and
duties, or by reason of its reckless disregard of its obligations and duties
under the agreement.
For the services and facilities furnished, the Funds pay JNFSI an investment
management fee, payable monthly, based on the following annual percentage of
average daily net assets in each Fund: Money Market Fund 0.50%; Tax-Exempt Fund
0.50%; Income Fund 0.60%; Growth Fund 0.25%; and Total Return Fund 0.70%. The
Funds paid the following advisory fees to JNFSI for the fiscal years ended
October 31, 1995 and 1994, and for the period of November 12, 1992 to October
31, 1993, respectively: Money Market Fund $100,515, $29,349, $14,431;
Tax-Exempt Fund $118,199, $149,698, $135,241; Income Fund $142,087, $179,460,
$163,685; Growth Fund $49,986, $82,237, $71,417; and Total Return Fund
$180,773, $240,982, $201,274. The Money Market Fund was reimbursed $38,921 for
the period of November 1, 1994 to April 30, 1995, $29,349 for the fiscal year
ended October 31, 1994, and $14,431 for the period of November 12, 1992 to
October 31, 1993, by JNFSI. Pursuant to the investment management agreement,
JNFSI has agreed to reimburse the Funds to the extent required by applicable
state expense limitations should all operating expenses of the Funds, including
the investment management fee, but excluding taxes, interest, extraordinary
expenses (as determined by the Board of Trustees) and brokerage commissions or
transaction costs and any other properly excludable expenses, exceed the
applicable state expense limitations. The Funds believe that the most
restrictive state expense limitation currently in effect would require that
such operating expenses not exceed 2.5% of the first $30 million of average
daily net assets, 2% of the next $70 million and 1.5% of average daily assets
over $100 million.
Effective June 1, 1994, JNFSI began providing information and administrative
services ("administrative services") for shareholders of the Fund pursuant to
an Administrative Services
16
<PAGE> 52
Agreement. Such administrative services may include, but are not
limited to, maintaining shareholder accounts and records, answering routine
inquiries regarding the Fund and its features, assisting shareholders with
shareholder transactions, processing purchase and redemption transactions,
assisting shareholders in changing dividend and investment options, account
designations and addresses, and such other services as the Fund may reasonably
request. JNFSI may enter into related agreements with various financial
service firms, such as broker-dealers or banks, for the provision of such
administrative services for their clients or customers who are shareholders of
the Fund. For services under the Administrative Services Agreement, each
Portfolio other than the Money Market Fund pays JNFSI a fee, payable monthly at
the annual rate of 0.25% of average daily net assets of the Portfolio. JNFSI
received $59,099 and $31,390 from the Tax-Exempt Fund; $59,203 and $31,065 from
the Income Fund; $49,986 and $35,265 from the Growth Fund; and $64,562 and
$37,188 from the Total Return Fund for the years ended October 31, 1995 and
1994, respectively. Pursuant to its agreements with financial service firms,
JNFSI will pay such firms, for providing such administrative services to their
customers, up to 0.25% per annum of average daily net assets of those accounts
maintained and serviced for each Portfolio other than the Money Market Fund.
Certain trustees or officers of the Funds are also directors or officers of
JNFSI as indicated under "Officers and Trustees."
THE SUB-INVESTMENT ADVISER. PPM America, Inc. invests and reinvests the Funds'
assets consistent with the Funds' respective investment objectives and policies
and subject to the supervision of JNFSI and the Trustees pursuant to an
investment sub-advisory agreement entered into between JNFSI and PPM America.
The investment sub-advisory agreement continues in effect for each Fund from
year to year after its initial two-year term so long as its continuation is
approved at least annually by a majority of the Trustees who are not parties to
such agreement or interested persons of any such party except in their capacity
as Trustees of the Funds and by the shareholders of each Fund or the Board of
Trustees. It may be terminated at any time upon 60 days notice by either
party, or by a majority vote of the outstanding shares of a Fund with respect
to that Fund, and will terminate automatically upon assignment or upon the
termination of the investment management agreement between JNFSI and the Funds.
If continuation is not approved for a Fund, the investment sub-advisory
agreement nevertheless may continue in effect for the Funds for which it is
approved and PPM America may continue to serve as sub-investment adviser for
the Fund for which it is not approved to the extent permitted by the 1940 Act.
Additional Funds may be subject to a different agreement. The investment
sub-advisory agreement provides that PPM America shall not be liable for any
error of judgment or of law, or for any loss suffered by the Funds in
connection with the matters to which the agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of PPM America in the performance of its obligations and duties, or by reason
of its reckless disregard of its obligations and duties under the agreement.
PPM America is compensated monthly by JNFSI based on the following annual
percentage of average daily net assets of each Fund: Money Market Fund 0.035%;
Tax-Exempt Fund 0.035%; Income Fund 0.035%; Growth Fund 0.035%; and Total
Return Fund 0.035%. JNFSI paid the following sub-investment adviser fees to
PPM America for the fiscal years ended October 31, 1995 and 1994, and for the
period of November 12, 1992 to October 31, 1993, respectively:
17
<PAGE> 53
Money Market Fund $7,041, $2,055, $934; Tax-Exempt Fund $8,276, $10,474,
$8,740; Income Fund $8,290, $10,463, $8,845; Growth Fund $6,999, $11,508,
$9,248; and Total Return Fund $9,041, $12,044, $9,345.
CUSTODIAN AND TRANSFER AGENT. Investors Fiduciary Trust Company ("IFTC"), 210
West 10th Street, 8th Floor, Kansas City, Missouri 64105, as custodian, has
custody of all securities and cash of the Fund maintained in the United States.
It attends to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Fund. IFTC is also
the Fund's transfer agent and dividend-paying agent.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS. The Funds' independent
auditors, Price Waterhouse LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, audit and report on the Funds' annual financial statements, prepare the
Funds' federal income and excise tax returns, and perform other professional
accounting, auditing and advisory services when engaged to do so by the Funds.
Shareholders will receive annual audited financial statements and semi-annual
unaudited financial statements.
PORTFOLIO TRANSACTIONS
PPM America provides investment advice to the Funds as well as to other
clients, including Jackson National Life Insurance Company, the parent company
of JNFSI. At times, investment decisions may be made to purchase or sell the
same investment security for one or more Funds and for one or more of the other
clients advised by PPM America. When two or more of such clients are
simultaneously engaged in the purchase or sale of the same security, the
transactions are allocated as to amount and price in a manner considered
equitable to each and so that each receives to the extent practicable the
average price of such transactions, which may or may not be beneficial to a
Fund.
PPM America, in effecting purchases and sales of portfolio securities for the
account of a Fund, will implement the Funds' policy of seeking best execution
of orders. Consistent with this policy, orders for portfolio transactions are
placed with broker-dealer firms giving consideration to the quality, quantity
and nature of each firm's professional services which include execution,
clearance procedures, wire service quotations and statistical and other
research information provided to the Funds and PPM America. Since statistical
and other research information is only supplementary to the research efforts of
PPM America and still must be analyzed and reviewed by its staff, the receipt
of research information is not expected to reduce materially its expenses. In
selecting among the firms believed to meet the criteria for handling a
particular transaction, PPM America may give consideration to those firms that
provide market, statistical and other research information to the funds and PPM
America. PPM America is authorized to pay higher commissions to firms that
provide such services, provided that it determines, in good faith, that the
commission paid was reasonable in relation to the brokerage or research
services provided. The research services obtained may be used by PPM America
to benefit its other clients and will not necessarily be used in connection
with the Funds. While PPM America is primarily responsible for the placement
of
18
<PAGE> 54
the Fund's brokerage business, the policies and practices will be subject to
the review of the Board of Trustees. The Funds may purchase instruments issued
by banks which are receiving service payments or commissions; however, no
preferences will be given in making such portfolio purchases. Fixed income and
over the counter equity securities are normally purchased in principal
transactions directly from the issuer or from an underwriter or market maker.
There are normally no brokerage commissions paid for such purchases. Purchases
from underwriters include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asking prices. The Funds paid the following
brokerage commissions for the fiscal years ended October 31, 1995 and 1994,
and for the period of November 12, 1992 to October 31, 1993, respectively:
Income Fund $493, $715, $0; Growth Fund $20,505, $3,072, $20,673; and Total
Return Fund $15,119, $15,313, $29,859. During the fiscal year ended October
31, 1995, the Growth Fund purchased securities of its regular broker/dealers in
the following amounts: Merrill Lynch, $26,000; Salomon Brothers, $1,000.
In any particular year, market conditions could necessitate portfolio activity
which results in high or low portfolio turnover rates. A higher turnover rate
will not necessarily indicate a variation from the stated investment policy,
but may increase the brokerage costs payable by a Fund. Portfolio turnover is
calculated by dividing the lesser of the purchases or sales of a Fund's
securities during a fiscal year by the average monthly value of the Fund's
securities during such fiscal year. In determining the portfolio turnover
rate, all securities whose maturities or expiration dates at the time of
acquisition were one year or less are excluded.
DISTRIBUTOR
Jackson National Financial Services, Inc. also serves as distributor and
principal underwriter for the Fund. JNFSI is obligated to use its best efforts
to distribute the Fund's shares on a continuous basis at the offering price
described in the Prospectus. JNFSI bears all its expenses of providing
services pursuant to the underwriting agreement between JNFSI and the Fund,
including the payment of any commissions and service fees. JNFSI provides for
the preparation and distribution of advertising or sales literature, and bears
the cost of printing and mailing prospectuses to persons other than
shareholders. JNFSI bears the cost of qualifying and maintaining the
qualification of the Funds' shares for sale under the securities laws of the
various states and the Funds bear the expense of registering their shares with
the Securities and Exchange Commission. The total underwriting commissions for
each Fund is as follows for the fiscal years ended October 31, 1995 and 1994
and the period of November 12, 1992 to October 31, 1993, respectively: Money
Market Fund $0, $0, $0; Tax-Exempt Fund $18,104, $53,996, $59,240; Income Fund
$16,946, $67,537, $47,729; Growth Fund $71,151, $90,911, $72,573; Total Return
Fund $48,200, $115,853, $63,693. The amount retained by JNFSI as principal
underwriter for the same periods is as follows: Money Market Fund $0, $0, $0;
Tax-Exempt Fund $5,553, $15,538, $14,844; Income Fund $6,905,
19
<PAGE> 55
$18,002, $11,986; Growth Fund $25,311, $27,436, $18,102; and Total
Return Fund $17,318, $33,931, $15,977.
PURCHASE OF SHARES
The Fund, through the Board of Trustees or officers, reserves the right in its
sole discretion to withdraw all or any part of the offering made by the
Prospectus or to reject purchase offers. The Fund also reserves the right at
any time to waive or increase the minimum investment requirements. All orders
to purchase shares of a Fund are subject to acceptance by the Fund.
For purposes of determining net asset value, portfolio securities that are
primarily traded on a domestic securities exchange or securities listed on the
NASDAQ National Market System are valued at the last sale price on the exchange
or market where primarily traded or listed or, if there is no recent sale price
available, at the last current bid quotation. Portfolio securities that are
primarily traded on foreign securities exchanges are generally valued at the
preceding closing values of such securities on their respective exchanges where
primarily traded. A security that is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security by the Board of Trustees or its delegates.
Securities not so traded or listed are valued at the last current bid quotation
if market quotations are available. Equity options are valued at the last sale
price unless the bid price is higher or the ask price is lower, in which event
such bid or asked price is used. Exchange traded fixed income options are
valued at the last sale price unless there is no sale price, in which event
current prices provided by market makers are used. Financial futures and
options thereon are valued at the settlement price established each day by the
board of trade or exchange on which they are traded. Other securities,
including restricted securities, and other assets are valued at fair value as
determined in good faith by the Board of Trustees.
Scheduled variations in or eliminations of the sales charge of purchases by
certain classes of persons or through certain types of transactions as
described in the Prospectus is provided because of anticipated economies in
sales and sales-related efforts.
REDEMPTION OF SHARES
Upon receipt by the Transfer Agent of a request for redemption, shares will be
redeemed by a Fund at the applicable net asset value as described in the Funds'
Prospectus. When a Fund is asked to redeem shares for which it may not have
yet received good payment, it may delay the mailing of a redemption check until
it has determined that collected funds have been received for the purchase of
such shares, which will generally be within 15 days.
The Fund may suspend the right of redemption or delay payment more than seven
days (a) during any period when the New York Stock Exchange is closed (other
than customary weekend and holiday closings), (b) when trading in the markets a
Fund normally utilizes is restricted, or an emergency exists as determined by
the Securities and Exchange Commission so that disposal of the Fund's
investments or determination of its net asset value is not reasonably
practicable, or (c) for
20
<PAGE> 56
such other periods as the Securities and Exchange Commission by order may
permit for protection of the Fund's shareholders.
REDEMPTION-IN-KIND ELECTION
Although it is the Fund's present policy to redeem in cash, if the
Board of Trustees determines that a material adverse effect would be
experienced by the remaining shareholders if payment were made wholly in cash,
the Funds will pay the redemption price in whole or in part by a distribution
of portfolio securities in lieu of cash, in conformity with the applicable
rules of the SEC, taking such securities at the same value used to determine
net asset value, and selecting the securities in such manner as the Board of
Trustees may deem fair and equitable. If such a distribution occurs,
shareholders receiving securities and selling them could receive less than the
redemption value of such securities and in addition would incur certain
transaction costs. Such a redemption would not be as liquid as a redemption
entirely in cash. The Fund has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which each Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or one percent of the net asset value of a
Fund during any 90-day period for any one shareholder of record.
DIVIDENDS AND TAXES
TAX-EXEMPT, INCOME, GROWTH AND TOTAL RETURN FUNDS DIVIDENDS. Net income of the
Funds for dividend purposes (from the time of the preceding determination) will
consist of interest and dividend income earned, if any, less accrued expenses.
In computing interest income, for the Income Fund and Total Return Fund,
discounts and premiums on securities purchased are amortized to maturity. In
computing interest income for the Tax-Exempt Fund, original issue discount and
tax-exempt premiums are amortized to maturity. Gains attributable to market
discount on municipal securities acquired after April 30, 1993 are treated as
ordinary income.
MONEY MARKET FUND DIVIDENDS. On each day that the net asset value per share of
the Money Market Fund is determined, the Money Market Fund's net investment
income will be declared as of 4:00 p.m. Eastern time as a dividend to
shareholders of record prior to the declaration. Dividends will be reinvested
or paid in cash monthly. If a shareholder redeems his entire account, all
dividends accrued to the time of redemption will be paid at that time. The
Money Market Fund calculates its dividends based on its daily net investment
income. For this purpose, the net investment income of the Money Market Fund
consists of (1) accrued interest income plus or minus amortized discount or
premium, (2) plus or minus all short-term realized gains and losses on
investments and (3) minus accrued expenses allocated to the Money Market Fund.
Expenses are accrued each day. While the Money Market Fund's investments are
valued at amortized cost (see "How to Buy Shares - Net Asset Value" in the
prospectus), there will be no unrealized gains or losses on such investments.
However, should the net asset value deviate significantly from market-based
value, the Board of Trustees could decide to value the investments at market
value and then unrealized gains and losses would be included in net investment
income above.
GENERAL. The Fund may at any time vary its dividend practices and, therefore,
reserves the right from time to time to either distribute or retain for
reinvestment such of its net investment income
21
<PAGE> 57
and its net short-term capital gains as the Board of Trustees of the
Fund determines appropriate under the then current circumstances. In
particular, and without limiting the foregoing, the Fund may make additional
distributions of net investment income or capital gain net income in order to
satisfy the minimum distribution requirements contained in the Code. Under the
Code, a 4% excise tax is imposed on the excess of the required distribution for
a calendar year over the distributed amount for such calendar year. The
distributed amount includes dividends declared in October, November and
December to shareholders of record as of a specified date in one of those
months and paid during the following January. The required distribution is the
sum of 98% of a Fund's ordinary income for the calendar year plus 98% of its
capital gain net income for the one-year period ended October 31, plus any
undistributed net investment income from the prior calendar year, plus any
undistributed capital gain net income from the one-year period ended October 31
in the prior calendar year, minus any over-distribution in the prior calendar
year. Each Fund intends to declare and distribute dividends during the
appropriate periods of an amount sufficient to prevent imposition of the 4%
excise tax.
TAXES. Each of the Funds intends to continue to qualify as a regulated
investment company under Subchapter M of the Code in order for the Fund to
avoid taxation on its net investment income and net capital gains to the extent
distributed by the Fund. One of the Subchapter M requirements to be satisfied
is that less than 30% of the Fund's gross income during the fiscal year must be
derived from gains from the sale or other disposition of securities and certain
other investments held for less than three months. A Fund may be limited in
its options and futures transactions in order to prevent recognition of such
gains.
A Fund's options and futures transactions are subject to special tax provisions
that may accelerate or defer recognition of certain gains or losses, change the
character of certain gains or losses, or alter the holding periods of certain
of a Fund's securities.
Distributions of investment income and net short-term capital gains are treated
as ordinary income for federal income tax purposes whether received in cash or
shares. A portion of the ordinary income dividends from the Growth and Total
Return Funds may be eligible for the dividends received deduction available to
corporate shareholders. The aggregate amount eligible for the dividends
received deduction may not exceed the aggregate qualifying dividends received
by the Fund for the fiscal year.
A shareholder who redeems shares of a Fund will recognize capital gain or loss
for federal income tax purposes measured by the difference between the value of
the shares redeemed and the basis of the shares. Any loss recognized on the
redemption of Fund shares held six months or less will be treated as long-term
capital loss to the extent that the shareholder has received any long-term
capital gain dividends on such shares. Any loss realized on the sale of
Tax-Exempt Fund shares that have been held for six months or less will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder on such shares.
If a shareholder realized a loss on the redemption of Fund shares and reinvests
in shares of the same Fund, including dividends reinvested, within 30 days
before or after the redemption, the transactions may be subject to the wash
sale rules resulting in a postponement of the recognition on
22
<PAGE> 58
all or a portion of such loss for federal income tax purposes. An exchange of
Fund shares for shares of another Fund is treated as a redemption and
reinvestment for federal income tax purposes upon which gain or loss may be
recognized. A shareholder who has redeemed shares of a Fund, except purchased
shares of the Money Market Fund, may reinvest the amount redeemed at net asset
value at the time of the reinvestment in shares of another Fund, as described
in the prospectus under "Shareholder Services - Exchange Privilege." If the
redeemed shares were held less than 91 days, then the lesser of (a) the sales
charge waived on the reinvestment shares or (b) the sales charge incurred on
the redeemed shares is included in the basis of the reinvestment shares and is
not included in the basis of the redeemed shares.
Investment income received by the Money Market, Income and Total Return Funds
as a result of investing in foreign securities may be subject to foreign income
taxes withheld at the source. Because the amount of a Fund's investments in
various countries will change from time to time, it is not possible to
determine the effective rate of such taxes in advance.
Interest on indebtedness which is incurred to purchase or carry shares of a
mutual fund that distributes exempt-interest dividends during the year (e.g.,
the Tax-Exempt Fund) is not deductible for federal income tax purposes.
Further, the Tax-Exempt Fund may not be an appropriate investment for persons
who are "substantial users" of facilities financed by industrial development
bonds held by the Tax-Exempt Fund or are "related persons" to such users; such
persons should consult with their tax advisers before investing in the
Tax-Exempt Fund.
The "Superfund Act of 1986" (the "Superfund Act") imposes a separate tax on
corporations at a rate of 0.12% of the excess of such corporation's "modified
alternative minimum taxable income" over $2,000,000. A portion of tax-exempt
interest, including exempt-interest dividends from the Tax-Exempt Fund, may be
includable in modified alternative minimum taxable income. Corporate
shareholders of the Tax-Exempt Fund are advised to consult with their tax
advisers with respect to the consequences of the Superfund Act.
Shareholders who are non-resident aliens are subject to U.S. withholding tax on
ordinary income dividends (whether received in cash or shares) at a rate of 30%
or such lower rate as prescribed by any applicable tax treaty.
PERFORMANCE
As described in the prospectus, a Fund's historical performance or return may
be shown in the form of "average annual total return" and "cumulative total
return" figures in the case of all Funds except the Money Market Fund; "yield"
in the case of all Funds except the Growth Fund; "yield" and "effective yield"
in the case of the Money Market Fund; and "tax equivalent yield" in the case of
the Tax-Exempt Fund. These various measures of performance are described
below.
Average annual total return and cumulative total return measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments of a Fund. Yield
is a measure of the net investment income per share
23
<PAGE> 59
earned over a specific one month or 30-day period (seven-day period for the
Money Market Fund) expressed as a percentage of the net asset value.
A Fund's average annual total return quotation is computed in accordance with a
standardized method prescribed by rules of the Securities and Exchange
Commission. The average annual total return for a Fund for a specific period
is found by first taking a hypothetical $1,000 investment ("initial
investment") in the Fund's shares on the first day of the period, adjusting to
deduct the maximum sales charge, and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by
the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested
at net asset value on the reinvestment dates during the period. Average annual
total return for each Fund for the periods indicated was as follows:
<TABLE>
<CAPTION>
11/1/94- 11/12/92-*
10/31/95 10/31/95
<S> <C> <C>
TAX-EXEMPT FUND 6.00% 4.54%
INCOME FUND 7.80% 4.82%
GROWTH FUND 19.90% 11.97%
TOTAL RETURN FUND 16.90% 10.85%
*COMMENCEMENT OF OPERATIONS
</TABLE>
Calculation of a Fund's cumulative total return is not subject to a
standardized formula. Cumulative total return performance for a specific
period is calculated by first taking an investment ("initial investment") in
the Fund's shares on the first day of the period, either adjusting or not
adjusting to deduct the maximum sales charge, and computing the "ending value"
of that investment at the end of the period. The cumulative total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and
expressing the result as a percentage. The calculation assumes that all income
and capital gains dividends paid by the Fund have been reinvested at net asset
value on the reinvestment dates during the period. Cumulative total return may
also be shown as the increased dollar value of the hypothetical investment over
the period. Cumulative total return figures for various periods that do not
include the effect of the sales charge would be reduced if such charge were
included. Cumulative total return for each Fund for the periods indicated was
as follows:
24
<PAGE> 60
<TABLE>
<S> <C> <C>
11/1/94- 11/12/92*-
10/31/95 10/31/95
TAX-EXEMPT FUND 11.32% 19.82%
INCOME FUND 13.13% 20.75%
GROWTH FUND 25.83% 46.84%
TOTAL RETURN FUND 22.72% 42.56%
*COMMENCEMENT OF OPERATIONS
</TABLE>
The yield for a Fund is computed in accordance with a standardized method
prescribed by rules of the SEC. The yield for each of the Tax-Exempt Fund,
Income Fund, Growth Fund, and Total Return Fund for the 30-day period ended
October 31, 1995 was 4.07%, 5.00%, 2.03%, and 3.36%, respectively. The yield
for a Fund other than the Money Market Fund is computed by dividing the net
investment income per share earned during the specified one month or 30-day
period by the offering price per share on the last day of the period, according
to the following formula:
6
YIELD = 2 [(a - b +1) -1]
-----
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the offering price (net asset value) per share on the last
day of the period.
In computing the foregoing yield, the Funds follow certain standardized
accounting practices specified by SEC rules. These practices are not
necessarily consistent with those that Funds use to prepare annual and interim
financial statements in accordance with generally accepted accounting
principles.
The Tax-Exempt Fund's tax equivalent yield is computed by dividing that portion
of the Tax-Exempt Fund's yield (computed as described above) that is tax-exempt
by (one minus the stated federal income tax rate) and adding the result to that
portion, if any, of the yield of the Tax-Exempt Fund that is not tax-exempt.
Based upon a marginal federal income tax rate of 31.0% and the Tax-Exempt
Fund's yield computed as described above for the 30-day period ended October
31, 1995, the Tax-Exempt Fund's yield for that period was 5.90%.
The Money Market Fund's yield is also computed in accordance with a
standardized method prescribed by rules of the SEC. Under that method, the
current yield quotation is based on a seven-day period and is computed as
follows. The first calculation is net investment income per share; which is
accrued interest on portfolio securities, plus or minus amortized discount or
premium, less accrued expenses. This number is then divided by the price per
share (expected to remain constant at $1.00) at the beginning of the period
("base period return"). The result is then divided by 7 and
25
<PAGE> 61
multiplied by 365 and the resulting yield figure is carried to the nearest
one-hundredth of one percent. Realized capital gains or losses and unrealized
appreciation or depreciation of investments are not included in the
calculation. The Money Market Fund's yield for the seven-day period ended
October 31, 1995 was 5.37%.
The Money Market Fund's effective yield is determined by taking the base
period return (computed as described above) and calculating the effect of
assumed compounding. The formula for the effective yield is:
(base period return + 1)(365/7) - 1. The Money Market Fund's effective
yield for the seven day period ended October 31, 1995 was 5.51%.
A Fund's performance quotations are based upon historical results and are not
necessarily representative of future performance. The Funds' shares are sold
at net asset value plus any applicable sale charge (maximum 4.75%) in the case
of all Funds except the Money Market Fund. Returns and net asset value will
fluctuate, except that the Money Market Fund seeks to maintain a $1.00 net
asset value per share. Factors affecting a Fund's performance include general
market conditions, operating expenses and investment management. Share of a
Fund are redeemable at the then current net asset value, which may be more or
less than original cost.
The performance of the Funds may be compared to various indexes. There are
differences and similarities between the investments which a Fund may purchase
and the investments measured by the indexes which are described herein. The
Consumer Price Index is generally considered to be a measure of inflation. The
S & P 500 Index is an unmanaged index of common stocks which is considered to
be generally representative of the United States stock market. The market
prices and yields of the stocks in this index will fluctuate. The Salomon
Brothers High Grade Corporate Bond Index generally represents the performance
of high grade long-term corporate bonds during various market conditions. The
Lehman Brothers Government and Corporate Bond Index generally represents the
performance of intermediate and long-term government and investment grade
corporate debt securities during various market conditions. The Salomon
Brothers Long-Term High Yield Index generally represents the performance of
high yield debt securities during various market conditions. The Merrill Lynch
Government and Corporate Master Index generally represents the performance of
intermediate and high grade corporate debt securities during various market
conditions. The foregoing bond indexes are unmanaged. The market prices and
yields of corporate and government bonds will fluctuate. Lipper and CDA are
widely recognized independent mutual fund reporting services. Lipper and CDA
indexes are weighted performance averages of other mutual funds with similar
investment objectives. The net asset values and returns of the Funds will also
fluctuate. No adjustments are made for taxes payable on dividends.
OFFICERS AND TRUSTEES
The officers of the Funds manage their day to day operations and are
responsible to the Funds' Board of Trustees. The trustees set broad policies
for each Fund and choose the Funds' officers. The following is a list of the
trustees and officers of the Funds and a statement of their present positions
and principal occupations during the past five years. The mailing address of
the officers and trustees, unless otherwise noted, is 5901 Executive Drive,
Lansing, Michigan 48911.
26
<PAGE> 62
JOHN A. KNUTSON*(Age 56), President, Trustee and Chairman of the Board, June
1993 to present, Chief Financial Officer, 1992 to December 1994; President,
Chief Executive Officer, Trustee and Chairman of the Board, December 1994 to
present, JNL Series Trust; President, August 1993 to present, Chief Financial
Officer, February, 1992 to present, Director, November 1991 to present,
Jackson National Financial Services, Inc.; President, June 1993 to February
1994, Senior Vice President, September 1987 to June 1993 and February 1994 to
present, Chief Financial Officer, September 1987 to June 1994, Chief Operating
Officer, September 1992 to present, Jackson National Life Insurance Company.
R. WILLIAM SHEATHELM (Age 59), Trustee; 2419 Science Parkway, Okemos, Michigan
48864; President, Schultz Snyder & Steele Lumber Company.
BEVERLY WOLKOW (Age 54), Trustee; 3725 West Howell Road, Mason, Michigan
48854; Retired; Executive Director, Michigan Education Association;
Chairperson, MEA Financial Services, a general insurance agency; 1990 to 1995,
Executive Secretary, Verity Insurance Co.
PAUL B. (PETE) PHEFFER (Age 44), Vice President and Assistant Treasurer;
Trustee, Vice President, Treasurer and Chief Financial Officer, December 1994
to present, JNL Series Trust; Senior Vice President, Chief Financial Officer
and Treasurer, May 1994 to present, Jackson National Life Insurance Company;
Chief Financial Officer and Chief Financial Officer, March 1992 to May 1994,
Vice President and Chief Financial Officer, January 1990 to February 1992,
Kemper Life Insurance Companies.
THOMAS J. MEYER (Age 49), Vice President and Secretary; Vice President, Counsel
and Secretary, December 1994 to present, JNL Series Trust; Secretary and Chief
Legal Officer, November 1991 to present, Director, June 1995 to present,
Jackson National Financial Services, Inc.; Secretary, September 1994 to
present, Vice President September 1990 to present, General Counsel, March 1985
to present, Jackson National Life Insurance Company.
LARRY C. JORDAN (Age 53), Vice President and Assistant Secretary; Vice
President, December 1994 to present, Assistant Treasurer, December 1994 to
February 1996, Assistant Secretary, February 1996 to present, JNL Series Trust;
Treasurer and Assistant Secretary, November 1991 to present, Chief Operating
Officer, September 1992 to present, Director, June 1993 to present, Jackson
National Financial Services, Inc.; Treasurer, October 1980 to September 1994,
Vice President, October 1980 to present, Jackson National Life Insurance
Company.
ROBERT A. FRITTS (Age 47), Vice President, Controller and Assistant Treasurer,
December 1994 to present; Vice President, December 1994 to present, Assistant
Secretary, December 1994 to
27
<PAGE> 63
February 1996, Assistant Treasurer, February 1996 to present, JNL Series Trust;
Assistant Treasurer, Vice President, Jackson National Life Insurance Company.
- -------------
* Trustees who are interested persons as defined in the Investment Company Act
of 1940.
On February 1, 1996, the officers and trustees of the Funds, as a group, owned
less than 1% of the then outstanding shares of the Money Market, Tax-Exempt,
Income, Growth and Total Return Funds. Jackson National Life Insurance
Company, through its initial investment of capital into each Fund controls the
Tax-Exempt, Income, Growth and Total Return Funds and thereby would control any
shareholders' vote until such time as Jackson National Life Insurance Company
no longer controls those Funds.
The trustees and officers who are "interested persons" as designated above
receive no compensation from the Funds. The table below shows amounts paid to
those trustees who are not "interested persons" during the Funds' 1995 fiscal
year.
COMPENSATION TABLE
<TABLE>
<CAPTION>
=======================================================================================
(1) (2) (3) (4) (5)
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
PERSON, COMPENSATION RETIREMENT ANNUAL COMPENSATION
POSITION FROM BENEFITS BENEFITS FROM
REGISTRANT ACCRUED UPON REGISTRANT
AS PART OF RETIREMENT AND FUND
FUND COMPLEX PAID
TO DIRECTORS
=======================================================================================
<S> <C> <C> <C> <C>
R. William
Sheathelm,
Trustee $4,000* N/A N/A $4,000*
Beverly
Wolkow,
Trustee $4,000* N/A N/A $4,000*
</TABLE>
*For year ended October 31, 1995
SHAREHOLDER RIGHTS
The Fund generally is not required to hold meetings of its shareholders. Under
the Agreement and Declaration of Trust of the Fund ("Declaration of Trust"),
however, shareholder meetings will be held in connection with the following
matters: (1) the election or removal of trustees if a meeting is called for
such purpose; (2) the adoption of any investment advisory contract; (3) any
termination of the Funds to the extent and as provided in the Declaration of
Trust; (4) any amendment of the Declaration of Trust (other than amendments
changing the name of the Fund supplying any omission, curing any ambiguity or
curing, correcting or supplementing any defective or inconsistent provision
thereof); and (5) such additional matters as may be required by law, the
Declaration of Trust, the By-laws of the Fund, or any registration of the Fund
with the Securities and Exchange Commission or any state, or as the trustees
may consider necessary or desirable. The shareholders also would vote upon
changes in fundamental investment objectives, policies or restrictions.
28
<PAGE> 64
Each trustee serves until the next meeting of shareholders, if any, called for
the purpose of electing trustees and until the election and qualification of
his successor or until such trustee sooner dies, resigns or is removed by a
vote of two-thirds of the shares entitled to vote or a majority of the
trustees. In accordance with the 1940 Act (i) the Fund will hold a shareholder
meeting for the election of trustees at such time as less than a majority of
the trustees have been elected by shareholders, and (ii) if, as a result of a
vacancy in the Board of Trustees, less than two-thirds of the trustees have
been elected by the shareholders, that vacancy will be filled only by a vote
of the shareholders. A shareholders' meeting shall be held for the purposes
of voting upon the removal of a trustee upon the written request of the holders
of not less than 10% of the outstanding shares. Upon the written request of
ten or more shareholders who have been such for at least six months and who
hold shares constituting at least 1% of the outstanding shares of a Fund
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a trustee, the Fund has undertaken to disseminate
appropriate materials at the expense of the requesting shareholders.
The Declaration of Trust provides that the presence at a shareholder meeting in
person or by proxy of at least 30% of the shares entitled to vote on a matter
shall constitute a quorum. Thus, a meeting of shareholders of the Fund could
take place even if less than a majority of the shareholders were represented on
its scheduled date. Shareholders would in such a case be permitted to take
action which does not require a larger vote than a majority of a quorum, such
as the election of trustees and ratification of the selection of auditors.
Some matters requiring a larger vote under the Declaration of Trust, such as
termination or reorganization of the Fund and certain amendments of the
Declaration of Trust, would not be affected by this provision; nor would
matters which under the 1940 Act require the vote of a "majority of the
outstanding voting securities" as defined in the 1940 Act.
The Declaration of Trust specifically authorizes the Board of Trustees to
terminate the Fund (or any series (Fund) thereof) by notice to the shareholders
without shareholder approval.
Under Massachusetts law, shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable for obligations of the
Fund. The Declaration of Trust, however, disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, or instrument entered into or executed by
the Fund or the trustees. Moreover, the Declaration of Trust provides for
indemnification out of Fund property for all losses and expenses of any
shareholder held personally liable for the obligations of the Fund and the Fund
will be covered by insurance which the trustees consider adequate to cover
foreseeable tort claims. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is considered remote, since it is
limited to circumstances in which a disclaimer is inoperative and the Fund
itself is unable to meet its obligations.
29
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Jackson National Capital Management Funds
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Jackson National
Money Market Fund, Jackson National Tax-Exempt Fund, Jackson National Income
Fund, Jackson National Growth Fund and Jackson National Total Return Fund
(constituting the Jackson National Capital Management Funds, hereafter referred
to as the "Funds") at October 31, 1995, the results of each of their operations
for the year then ended, the changes in each of their net assets for each of
the two years in the period then ended and the financial highlights for each of
the two years in the period ended October 31, 1995 and for the period November
12, 1992 (commencement of operations) through October 31, 1993, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
/s/ Price Waterhouse LLP
November 30, 1995
/s/ Price Waterhouse LLP
30
<PAGE> 66
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
<TABLE>
<CAPTION>
MONEY MARKET TAX-EXEMPT INCOME
FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments in securities, at value (Cost: $24,181,808; $24,181,808 $21,365,546 $21,663,367
$20,722,121; $21,161,776; $10,769,062; and $20,230,669,
respectively)
Cash 2,932 91,698 2,593
Receivables
Dividends and interest - 373,635 485,118
Fund shares sold 60,076 20,528 -
Investments sold - 396,935 -
Prepaid expenses 10,630 10,630 10,630
- ---------------------------------------------------------------------------------------------------------------
ToTAL ASSETS 24,255,446 22,258,972 22,161,708
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Dividends to shareholders 4,267 1,232 1,834
Fund shares redeemed 85,813 - -
Investments purchased - 494,083 -
Adviser 19,618 19,618 19,618
Accrued expenses and other liabilities 48,038 34,651 35,396
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 157,736 549,584 56,848
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS $24,097,710 $21,709,388 $22,104,860
===============================================================================================================
NET ASSETS CONSIST OF
Trust capital (beneficial interest) $24,097,710 $20,982,723 $22,508,366
Accumulated undistributed net investment income - 552 489
Accumulated net realized gains (losses) on investments - 82,688 (905,586)
Accumulated net unrealized appreciation on investments - 643,425 501,591
- ---------------------------------------------------------------------------------------------------------------
NET ASSETS $24,097,710 $21,709,388 $22,104,860
===============================================================================================================
===============================================================================================================
SHARES OF BENEFICIAL INTEREST OUTSTANDING (UNLIMITED NUMBER OF
SHARES AUTHORIZED) 24,097,710 2,085,712 2,188,205
===============================================================================================================
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE $1.00 $10.41 $10.10
===============================================================================================================
MAXIMUM PUBLIC OFFERING PRICE (Net Asset Value Per Share divded by
0.9525 for a 4.75% sales charge except for the Money Market Fund) $1.00 $10.93 $10.60
===============================================================================================================
<CAPTION>
Growth Total Return
Fund Fund
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at value (Cost: $24,181,808; $13,547,461 $23,218,924
$20,722,121; $21,161,776; $10,769,062; and $20,230,669
respectively)
Cash 99,985 39,684
Receivables
Dividends and interest 19,685 252,035
Fund shares sold 1,598 4,364
Investments sold 905 316,380
Prepaid expenses 10,630 10,630
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS 13,680,264 23,842,017
- ---------------------------------------------------------------------------------------------------
LIABILITIES
Payables
Dividends to shareholders - -
Fund shares redeemed 800 -
Investments purchased 80,224 134,276
Adviser 19,618 19,618
Accrued expenses and other liabilities 35,664 38,385
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 136,306 192,279
- ---------------------------------------------------------------------------------------------------
NET ASSETS $ 13,543,958 $23,649,738
===================================================================================================
NET ASSETS CONSIST OF
Trust capital (beneficial interest) $ 7,295,758 $18,264,481
Accumulated undistributed net investment income 352,957 842,197
Accumulated net realized gains (losses) on investments 3,116,844 1,554,805
Accumulated net unrealized appreciation on investments 2,778,399 2,988,255
- ---------------------------------------------------------------------------------------------------
NET ASSETS $13,543,958 $23,649,738
===================================================================================================
===================================================================================================
SHARES OF BENEFICIAL INTEREST OUTSTANDING (UNLIMITED NUMBER OF
SHARES AUTHORIZED) 973,881 1,864,527
===================================================================================================
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE $13.91 $12.68
===================================================================================================
MAXIMUM PUBLIC OFFERING PRICE (Net Asset Value Per Share divided by
0.9525 for a 4.75% sales charge except for the Money Market Fund) $14.60 $13.31
===================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
31
<PAGE> 67
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
<TABLE>
<CAPTION>
MONEY MARKET TAX-EXEMPT INCOME
FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends $ - $ - $ 36,308
Taxable interest 1,206,993 9,116 1,600,987
Tax-exempt interest - 1,289,560 -
Other income - - 7,000
Foreign tax withholding - - -
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,206,993 1,298,676 1,644,295
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Administrative service fees - 59,099 59,203
Adviser fees 100,515 118,199 142,087
Custodian fees 17,018 6,801 9,549
Portfolio accounting fees 42,000 42,000 42,000
Professional fees 24,251 24,251 24,251
S.E.C. and state registration fees 22,240 22,219 22,217
Transfer agency fees 124,868 83,130 83,946
Other 8,339 6,830 7,388
- -------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 339,231 362,529 390,641
Less
Reimbursement from Adviser (277,622) (149,234) (155,633)
Fees paid indirectly (81) (5,604) (6,950)
- -------------------------------------------------------------------------------------------------------------------
TOTAL NET EXPENSES 61,528 207,691 228,058
- -------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,145,465 1,090,985 1,416,237
- -------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments - 82,674 84,845
Net change in unrealized appreciation (depreciation) on investments - 1,448,037 1,313,114
- -------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS - 1,530,711 1,397,959
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,145,465 $ 2,621,696 $ 2,814,196
===================================================================================================================
<CAPTION>
GROWTH TOTAL RETURN
FUND FUND
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends $565,352 $526,971
Taxable interest - 842,943
Tax-exempt interest - -
Other income - 12,197
Foreign tax withholding (2,258) -
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 563,094 1,382,111
- ----------------------------------------------------------------------------------------------------
EXPENSES
Administrative service fees 49,986 64,562
Adviser fees 49,986 180,773
Custodian fees 21,060 15,878
Portfolio accounting fees 42,000 42,000
Professional fees 24,251 24,251
S.E.C. and state registration fees 22,249 22,236
Transfer agency fees 85,267 98,913
Other 17,024 10,323
- ----------------------------------------------------------------------------------------------------
TOTAL EXPENSES 311,823 458,936
Less
Reimbursement from Adviser (262,088) (151,094)
Fees paid indirectly (4,147) (8,842)
- ----------------------------------------------------------------------------------------------------
TOTAL NET EXPENSES 45,588 299,000
- ----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 517,506 1,083,111
- ----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments 3,128,377 1,555,619
Net change in unrealized appreciation (depreciation) on investments (218,864) 2,295,607
- ----------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 2,909,513 3,851,226
- ----------------------------------------------------------------------------------------------------
====================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,427,019 $4,934,337
====================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
32
<PAGE> 68
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY MARKET FUND TAX-EXEMPT FUND
Year ended Year ended Year ended Year ended
10/31/95 10/31/94 10/31/95 10/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $1,145,465 $242,335 $1,090,985 $1,331,513
Net realized gains (losses) on investments - - 82,674 187,580
Net change in unrealized appreciation (depreciation) on investments - - 1,448,037 (2,850,463)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,145,465 242,335 2,621,696 (1,331,370)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (1,145,465) (242,335) (1,090,902) (1,331,695)
Net realized gains on investments - - (187,566) -
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,145,465) (242,335) (1,278,468) (1,331,695)
- ----------------------------------------------------------------------------------------------------------------------------------
TRUST SHARE TRANSACTIONS
Purchases of trust shares 41,294,922 9,912,678 666,409 1,543,929
Income dividends reinvested 1,105,023 233,871 1,077,486 1,315,151
Capital gain distributions reinvested - - 187,004 -
Redemption of trust shares (27,404,428) (5,159,230) (11,028,400) (622,347)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN TRUST CAPITAL 14,995,517 4,987,319 (9,097,501) 2,236,733
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets 14,995,517 4,987,319 (7,754,273) (426,332)
Net Assets Beginning of Period 9,102,193 4,114,874 29,463,661 29,889,993
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD $24,097,710 $9,102,193 $21,709,388 $29,463,661
==================================================================================================================================
==================================================================================================================================
UNDISTRIBUTED NET INVESTMENT INCOME $- $- $552 $469
==================================================================================================================================
<CAPTION>
INCOME FUND GROWTH FUND
Year ended Year ended Year ended Year ended
10/31/95 10/31/94 10/31/95 10/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income $1,416,237 $1,691,684 $517,506 $768,351
Net realized gains (losses) on investments 84,845 (990,465) 3,128,377 172,128
Net change in unrealized appreciation (depreciation) on investments 1,313,114 (2,705,042) (218,864) 226,877
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,814,196 (2,003,823) 3,427,019 1,167,356
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (1,416,253) (1,691,766) (794,089) (679,498)
Net realized gains on investments - (187,914) (183,124) (10,428)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,416,253) (1,879,680) (977,213) (689,926)
- -----------------------------------------------------------------------------------------------------------------------------------
TRUST SHARE TRANSACTIONS
Purchases of trust shares 593,692 1,873,137 2,885,484 2,906,392
Income dividends reinvested 1,392,590 1,672,248 793,295 678,575
Capital gain distributions reinvested - 185,633 182,992 10,414
Redemption of trust shares (10,718,110) (739,619) (27,735,223) (823,872)
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN TRUST CAPITAL (8,731,828) 2,991,399 (23,873,452) 2,771,509
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets (7,333,885) (892,104) (21,423,646) 3,248,939
Net Assets Beginning of Period 29,438,745 30,330,849 34,967,604 31,718,665
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD $22,104,860 $29,438,745 $13,543,958 $34,967,604
===================================================================================================================================
===================================================================================================================================
UNDISTRIBUTED NET INVESTMENT INCOME $489 $505 $352,957 $629,540
===================================================================================================================================
<CAPTION>
TOTAL RETURN FUND
Year ended Year ended
10/31/95 10/31/94
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income $1,083,111 $1,320,616
Net realized gains (losses) on investments 1,555,619 20,197
Net change in unrealized appreciation (depreciation) on investments 2,295,607 (1,129,267)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 4,934,337 211,546
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (1,356,169) (1,258,830)
Net realized gains on investments (20,167) (1,046,251)
- --------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (1,376,336) (2,305,081)
- --------------------------------------------------------------------------------------------------
TRUST SHARE TRANSACTIONS
Purchases of trust shares 1,829,337 4,012,336
Income dividends reinvested 1,353,794 1,255,399
Capital gain distributions reinvested 20,149 1,043,399
Redemption of trust shares (18,925,616) (821,322)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN TRUST CAPITAL (15,722,336) 5,489,812
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets (12,164,335) 3,396,277
Net Assets Beginning of Period 35,814,073 32,417,796
- --------------------------------------------------------------------------------------------------
NET ASSETS END OF PERIOD $23,649,738 $35,814,073
==================================================================================================
==================================================================================================
UNDISTRIBUTED NET INVESTMENT INCOME $842,197 $1,115,255
==================================================================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
33
<PAGE> 69
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MONEY MARKET FUND TAX-EXEMPT FUND
Year ended Year ended Period ended Year ended Year ended
10/31/95 10/31/94 10/31/93* 10/31/95 10/31/94
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $9.87 $10.78
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c) 0.06 0.04 0.03 0.48 0.46
Net realized and unrealized gains (losses) on
investments - - - 0.60 (0.91)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.06 0.04 0.03 1.08 (0.45)
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.06) (0.04) (0.03) (0.48) (0.46)
Net realized gain on investments (f) - - - (0.06) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (0.06) (0.04) (0.03) (0.54) (0.46)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net asset value - - - 0.54 (0.91)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $10.41 $9.87
===================================================================================================================================
TOTAL RETURN (A)(B) 5.87% 3.94% 3.25% 11.32% (04.2%)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $24,098 $9,102 $4,115 $21,709 $29,464
Ratio of net expenses to average net assets (b)(d) 0.31% 0.00% 0.00% 0.88% 0.90%
Ratio of net investment income to average net assets (b)(d) 5.71% 4.00% 3.15% 4.64% 4.46%
Portfolio turnover rate - - - 79.18% 41.74%
RATIO INFORMATION ASSUMING NO EXPENSE REIMBURSEMENT
OR OFFSET
Ratio of expenses to average net assets (b)(e) 1.69% 3.19% 5.35% 1.54% 1.22%
Ratio of net investment income to average net assets (b)(e) 4.33% 0.81% (02.20%) 3.98% 4.14%
===================================================================================================================================
<CAPTION>
TAX-EXEMPT FUND INCOME FUND GROWTH FUND
Period ended Year ended Year ended Period ended Year ended
10/31/93* 10/31/95 10/31/94 10/31/93* 10/31/95
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $9.49 $10.80 $10.00 $11.38
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c) 0.44 0.60 0.57 0.57 0.42
Net realized and unrealized gains (losses) on
investments 0.78 0.61 (1.24) 0.80 2.43
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.22 1.21 (0.67) 1.37 2.85
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.44) (0.60) (0.57) (0.57) (0.26)
Net realized gain on investments (f) - - (0.07) - (0.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (0.44) (0.60) (0.64) (0.57) (0.32)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net asset value 0.78 0.61 (1.31) 0.80 2.53
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.78 $10.10 $9.49 $10.80 $13.91
===================================================================================================================================
TOTAL RETURN (A)(B) 12.82% 13.13% (06.42%) 14.50% 25.83%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $29,890 $22,105 $29,439 $30,331 $13,544
Ratio of net expenses to average net assets (b)(d) 0.88% 0.97% 0.97% 0.99% 0.23%
Ratio of net investment income to average net
assets (b)(d) 4.38% 6.01% 5.68% 5.66% 2.60%
Portfolio turnover rate 0.00% 100.91% 141.95% 31.49% 9.10%
RATIO INFORMATION ASSUMING NO EXPENSE REIMBURSEMENT
OR OFFSET
Ratio of expenses to average net assets (b)(e) 1.07% 1.66% 1.30% 1.18% 1.57%
Ratio of net investment income to average net
assets (b)(e) 4.19% 5.32% 5.35% 5.47% 1.26%
===================================================================================================================================
<CAPTION>
GROWTH FUND TOTAL RETURN FUND
Year ended Period ended Year ended Year ended Period ended
10/31/94 10/31/93* 10/31/95 10/31/94 10/31/93*
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA
NET ASSET VALUE, BEGINNING OF PERIOD $11.24 $10.00 $10.75 $11.48 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c) 0.25 0.23 0.53 0.40 0.43
Net realized and unrealized gains (losses) on
investments 0.13 1.05 1.82 (0.33) 1.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.38 1.28 2.35 0.07 1.54
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM
Net investment income (0.24) (0.04) (0.41) (0.44) (0.06)
Net realized gain on investments (f) - - (0.01) (0.36) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (0.24) (0.04) (0.42) (0.80) (0.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net asset value 0.14 1.24 1.93 (0.73) 1.48
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.38 $11.24 $12.68 $10.75 $11.48
===================================================================================================================================
TOTAL RETURN (A)(B) 3.46% 13.19% 22.72% 0.63% 15.92%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $34,968 $31,719 $23,650 $35,814 $32,418
Ratio of net expenses to average net assets (b)(d) 0.46% 0.49% 1.16% 1.16% 1.18%
Ratio of net investment income to average net
assets (b)(d) 2.32% 2.27% 4.22% 3.82% 4.26%
Portfolio turnover rate 2.83% 0.53% 90.23% 50.29% 56.86%
RATIO INFORMATION ASSUMING NO EXPENSE REIMBURSEMENT
OR OFFSET
Ratio of expenses to average net assets (b)(e) 0.96% 0.85% 1.79% 1.35% 1.27%
Ratio of net investment income to average net
assets (b)(d) 1.83% 1.91% 3.59% 3.63% 4.17%
===================================================================================================================================
</TABLE>
* From commencement of operations on November 12, 1992.
(a) Assumes investment at net asset value at the beginning of the period,
reinvestment of all dividends and distributions, and a complete
redemption of the investment at the net asset value at the end of the
period.
(b) The amounts for the period ended October 31, 1993 have been annualized.
(c) For the year ended October 31, 1995, less than $.01 per share of
investment income in the Tax-Exempt Fund is subject to federal taxes.
In prior years, no investment income in the Tax-Exempt Fund was subject
to federal taxe
(d) Computed after giving effect to the Adviser's expense reimbursement, and
after fees paid indirectly for the year ended October 31, 1995.
(e) For the year ended October 31, 1995, the manner in which total expenses
are calculated changed to exclude expense offsets for custodian fees
(i.e., fees paid indirectly).
(f) For the year ended October 31, 1995, all capital gain distributions were
from long-term capital gains, which are taxed as capital gains to the
shareholder. For the year ended October 31, 1994, all capital gain
distributions were from short-term capital gains, which are taxed as
ordinary income to the shareholder.
The accompanying notes to financial statements are an integral part of these
statements.
34
<PAGE> 70
JACKSON NATIONAL CAPITAL MANAGEMENT FUNDS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE 1 - ORGANIZATION
Jackson National Capital Management Funds (the "Trust") is a Massachusetts
Business Trust registered as an open-ended diversified management investment
company under the Investment Company Act of 1940. The Trust is comprised of
five separate investment portfolios (the "Funds"): the Money Market Fund,
Tax-Exempt Fund, Income Fund, Growth Fund and Total Return Fund.
The costs associated with the organization of the Trust and certain other
initial period costs have been borne by Jackson National Financial Services,
Inc., the Trust's investment adviser ("Adviser"). The Adviser is a subsidiary
of Jackson National Life Insurance Company ("Jackson National").
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements.
SECURITY VALUATION - Portfolio securities traded on national exchanges are
valued at the last reported sales prices. Each over-the-counter security for
which the last sale price is available from NASDAQ is valued at that price.
Portfolio securities which are debt instruments are valued based on valuations
supplied by independent pricing services, including services using matrix
pricing formulas and/or independent broker bid quotations. Instruments held by
the Money Market Fund and fixed income securities purchased with remaining
maturities of 60 days or less held by the other Funds are valued on an
amortized cost basis. Otherwise, securities are valued in good faith under the
direction of the Board of Trustees.
FEDERAL INCOME TAXES - The Funds' policy is to comply with the requirements of
the Internal Revenue Code which are applicable to regulated investment
companies and to distribute substantially all of their taxable income to their
shareholders. The Funds have paid no federal income or excise taxes and no
federal income or excise tax provision is required.
The percentage of income from the Income Fund, the Growth Fund and the Total
Return Fund which is eligible for the corporate dividend received deduction,
for the year ended
35
<PAGE> 71
October 31, 1995, is 2%, 99% and 28%, respectively. The percentage of income
from the Tax-Exempt Fund which is exempt from federal income tax, for the year
ended October 31, 1995, is 99%. The Income Fund has $905,740 in net capital
losses which expire October 31, 2002 that may be used to offset capital gains
in future years to the extent provided by tax regulations. For the year ended
October 31, 1995, the Income Fund utilized $84,725 of its net capital loss
carryforward.
DISTRIBUTIONS TO SHAREHOLDERS - Net investment income is distributed to each
shareholder as a dividend. Dividends to shareholders are recorded on the
ex-dividend date. Dividends from the Money Market Fund are declared daily and
distributed monthly. Dividends from the Tax-Exempt Fund and Income Fund are
declared and paid monthly. Dividends from the Growth Fund and Total Return
Fund are declared and paid annually, but may be done more frequently to avoid
excise tax. Net realized gains from securities transactions, if any, are
distributed at least annually, after the close of the Fund's fiscal year.
CREDIT RISK - The Funds hold investments in variable rate demand notes, which
are unsecured instruments. The Funds may be susceptible to credit risk with
respect to these instruments to the extent the issuer defaults on its payment
obligation. The Funds' policy is to monitor the creditworthiness of the
variable rate demand note issuer and does not anticipate nonperformance on
these instruments.
OTHER - Investment security transactions are accounted for on trade date. All
discounts and premiums on securities purchased are amortized to expected
maturity. Realized gains or losses on sales are determined on a specific cost
identification basis, or if not specified, on a first-in-first-out basis.
Dividend income is recorded on the ex-dividend date, and interest income
is recorded as earned.
NOTE 3 - INVESTMENT MANAGEMENT FEES AND TRANSACTIONS
WITH AFFILIATES
The Trust has entered into an Investment Management Agreement with the Adviser
for management of each Fund's portfolio and for the administration of other
Trust affairs. As compensation for its services, the Adviser receives a fee
based on the net assets of the Funds as of the close of business on each
valuation day. The adviser fee is computed based on an annual rate of the
average daily net assets of each Fund as follows:
Money Market Fund .50%
Tax-Exempt Fund .50%
Income Fund .60%
36
<PAGE> 72
Growth Fund .25%
Total Return Fund .70%
The Trust has also entered into an Administrative Services Agreement with the
Adviser. Under the agreement, effective June 1, 1994, the Adviser appoints
various broker-dealers and other firms to provide, or itself provides,
information and administrative services to the Funds' shareholders. The
administration fee is computed at an annual rate of .25% of each Fund's average
daily net assets, with the exception of the Money Market Fund, which does not
pay the administration fee.
The Adviser has entered into a Sub-Advisory Agreement with PPM America, Inc.,
an affiliate of the Adviser. The sub-advisory fee, which is paid by the
Adviser, is at an annual rate of .035% of each Fund's average daily net assets.
Trustees not affiliated with Jackson National or the Adviser receive a fee of
one thousand dollars for each meeting of the Board of Trustees attended. No
remuneration has been paid by the Trust to any of the officers or affiliated
Trustees. The Trust paid fees of $8,000 to non-affiliated Trustees for the
year ended October 31, 1995.
Each Fund is charged for those expenses that are directly attributable to it,
such as advisory, administration, custodian, accounting services and certain
shareholder service fees, while other expenses that cannot be directly
attributable to a Fund are allocated in equal proportion to each Fund. Each
Fund earns credits on uninvested cash balances. These credits are used to
offset custodian expenses and are not included in the total operating expenses
for purposes of calculating the Adviser expense reimbursements for all Funds.
Each Fund could have invested cash balances in an income producing asset if it
had not agreed to a reduction in custodian expenses under the expense offset
arrangement.
The Adviser reimburses the Funds for annual expenses in excess of the lowest
expense limitation imposed by the states. In addition to this reimbursement,
the Adviser has voluntarily reimbursed the Funds for total operating expenses
(before custodian expense reduction) exceeding the following percentages of
average daily net assets:
Money Market Fund .50%
Tax-Exempt Fund .90%
Income Fund 1.00%
Growth Fund .25%
Total Return Fund 1.20%
37
<PAGE> 73
Prior to May 1, 1995, the Adviser reimbursed all expenses in the Money Market
Fund. Prior to October 1, 1994, the expenses that exceeded .50% of average
daily net assets in the Growth Fund were reimbursed by the Adviser. Voluntary
reimbursements to these Funds may be modified or discontinued at any time by
the Adviser.
For the year ended October 31, 1995, the Adviser, who is also the distributor
of the Funds, received sales charges of $18,104; $16,946; $71,151; and $48,200
on sales of shares of the Tax-Exempt Fund, Income Fund, Growth Fund, and Total
Return Fund, respectively.
NOTE 4 - INVESTMENT TRANSACTIONS
During the year ended October 31, 1995, purchases and sales or maturities of
securities, other than short-term obligations, were as follows (in thousands):
<TABLE>
<CAPTION>
Tax- Total
Exempt Income Growth Return
Fund Fund Fund Fund
------- ------- ------ -------
<S> <C> <C> <C> <C>
Purchases $17,748 $21,853 $1,889 $22,840
Proceeds from
sales and maturities 24,022 26,407 26,062 38,163
</TABLE>
Included in these transactions were purchases and sales of U.S. Government
obligations in the Income Fund of $16,807,266, and $10,606,269, respectively,
and in the Total Return Fund of $12,015,015, and $11,242,689, respectively.
Cost of investments is substantially the same for financial reporting purposes
and federal income tax purposes.
The gross unrealized appreciation and depreciation on investments at October
31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
Tax- Total
Exempt Income Growth Return
Fund Fund Fund Fund
------ ------ ------ ------
<S> <C> <C> <C> <C>
Appreciation $650 $558 $3,083 $3,051
Depreciation (7) (56) (305) (63)
------ ------ ------ ------
Net unrealized
appreciation $643 $502 $2,778 $2,988
====== ====== ====== ======
</TABLE>
NOTE 5 - TRUST TRANSACTIONS
Transactions in trust shares were as follows (in thousands):
38
<PAGE> 74
<TABLE>
Money Tax- Total
Market Exempt Income Growth Return
Fund Fund Fund Fund Fund
----------- ----------- ------- ------- -------
For year ended October 31, 1995:
<S> <C> <C> <C> <C> <C>
Shares purchased 41,295 66 61 234 162
Income dividends
reinvested 1,105 107 143 73 132
Capital gain
distributions
reinvested 0 19 0 17 2
Shares redeemed (27,404) (1,092) (1,119) (2,423) (1,763)
----------- ----------- ------- ------- -------
Net increase
(decrease)
of trust shares 14,996 (900) (915) (2,099) (1,467)
=========== =========== ======= ======= =======
<CAPTION>
Money Tax- Total
Market Exempt Income Growth Return
Fund Fund Fund Fund Fund
----------- ----------- ------- ------- -------
For year ended October 31, 1994:
<S> <C> <C> <C> <C> <C>
Shares purchased 9,912 148 183 264 371
Income dividends
reinvested 234 127 168 61 117
Capital gain
distributions
reinvested 0 0 18 1 97
Shares redeemed (5,159) (61) (74) (75) (76)
----------- ----------- ------- ------- -------
Net increase of
trust shares 4,987 214 295 251 509
=========== =========== ======= ======= =======
</TABLE>
In February 1995, Jackson National redeemed approximately 2,100,000; 1,040,000;
1,047,000; and 1,630,000 shares in the Money Market Fund, Tax-Exempt Fund,
Income Fund and Total Return Fund, respectively. In March 1995, Jackson
National redeemed approximately 2,277,000 shares of the Growth Fund. Jackson
National continues to have ownership of more than 25% of the outstanding shares
of the Tax-Exempt Fund, Income Fund, Growth Fund and Total Return Fund.
39
<PAGE> 75
JACKSON NATIONAL MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
COMMERCIAL PAPER - 100%
CAPTIVE FINANCE COMPANIES - 20.01%
American Express Credit
5.70%, 11/17/1995 $300,000 $299,240
American Express Credit
5.70%, 12/29/1995 650,000 644,031
Chrysler Financial Corporation
5.75%, 11/03/1995 350,000 349,888
Chrysler Financial Corporation
5.70%, 11/07/1995 700,000 699,335
Ford Motor Credit Corporation
5.67%, 11/22/1995 450,000 448,512
Ford Motor Credit Corporation
5.69%, 01/12/1995 500,000 494,310
General Motors Acceptance Corporation
5.67%, 11/16/1995 710,000 708,323
General Motors Acceptance Corporation
5.60%, 12/18/1995 235,000 233,282
J.C. Penney Funding Corporation
5.73%, 11/06/1995 815,000 814,351
J.C. Penney Funding Corporation
5.72%, 12/08/1995 150,000 149,118
---------
Subtotal 4,840,390
COMPUTERS & TECHNOLOGY - 6.48%
Hewlett-Packard Company
5.60%, 12/21/1995 875,000 868,194
IBM Corporation
5.75%, 11/15/1995 700,000 698,435
---------
Subtotal 1,566,629
CONSUMER FINANCE - 12.90%
American General Finance Corporation
5.72%, 11/27/1995 115,000 114,525
American General Finance Corporation
5.69%, 12/15/1995 280,000 278,053
American General Finance Corporation
5.70%, 01/29/1996 545,000 537,320
Beneficial Corporation
5.72%, 12/06/1995 435,000 432,581
Household Finance Corporation
5.73%, 11/30/1995 165,000 164,238
Household Finance Corporation
5.70%, 12/04/1995 800,000 795,820
Norwest Financial, Inc.
5.70%, 11/29/1995 800,000 796,453
---------
Subtotal 3,118,990
CONSUMER PRODUCTS - 13.27%
Coca-Cola Company
5.70%, 01/11/1996 400,000 395,503
ConAgra, Inc.
5.78%, 11/10/1995 475,000 474,314
Hasbro, Inc.
5.60%, 12/18/1995 700,000 694,882
Hasbro, Inc.
5.69%, 12/20/1995 250,000 248,064
H.J. Heinz Company
5.78%, 11/01/1995 125,000 125,000
H.J. Heinz Company
5.73%, 11/14/1995 800,000 798,345
Tyson Foods, Inc.
5.85%, 11/27/1995 475,000 472,993
Subtotal 3,209,101
---------
ELECTRIC UTILITIES - .58%
Florida Power Corporation
5.73%, 11/14/1995 140,000 139,710
</TABLE>
40
<PAGE> 76
<TABLE>
<S> <C> <C>
ENERGY - 7.58%
CHEVRON OIL FINANCE COMPANY
5.70%, 11/29/1995 735,000 731,741
Consolidated Natural Gas Company
5.72%, 11/01/1995 297,000 297,000
Consolidated Natural Gas Company
5.72%, 11/02/1995 500,000 499,921
Dresser Industries, Inc.
5.72%, 11/06/1995 305,000 304,758
---------
Subtotal 1,833,420
HEALTH CARE - 4.84%
A.H. Robins Company, Inc.
5.72%, 01/16/1996 325,000 321,075
Allergan, Inc.
5.66%, 12/05/1995 250,000 248,664
American Home Products
5.75%, 11/02/1995 600,000 599,904
---------
Subtotal 1,169,643
INDEPENDENT FINANCE COMPANIES - 11.04%
Associates Corporation
5.68%, 12/22/1995 885,000 877,879
CIT Group Holding, Inc.
5.73%, 11/13/1995 505,000 504,035
CIT Group Holding, Inc.
5.73%, 12/14/1995 525,000 521,407
General Electric Capital Corporation
5.70%, 11/20/1995 505,000 503,481
General Electric Capital Corporation
5.69%, 11/27/1995 265,000 263,911
---------
Subtotal 2,670,713
INSURANCE - 3.82%
USAA Capital Corporation
5.67%, 12/19/1995 930,000 922,969
MORTGAGE BANKING - 3.93%
Countrywide Funding Corporation
5.77%, 12/07/1995 450,000 447,404
Countrywide Funding Corporation
5.77%, 12/08/1995 505,000 502,005
---------
Subtotal 949,409
RETAIL - 2.37%
Wal-Mart Corporation
5.72%, 11/21/1995 575,000 573,173
TELECOMMUNICATIONS - 13.18%
AT&T Corporation
5.65%, 11/21/1995 265,000 264,168
AT&T Corporation
5.65%, 11/22/1995 210,000 209,308
BellSouth Telecommunications, Inc.
5.72%, 11/13/1995 930,000 928,227
GTE Northwest, Inc.
5.73%, 11/09/1995 900,000 898,854
GTE Corporation
5.78%, 11/28/1995 225,000 224,025
GTE Corporation
5.79%, 11/28/1995 365,000 363,415
US West Communications, Inc.
5.75%, 11/08/1995 300,000 299,664
---------
Subtotal 3,187,661
---------
TOTAL INVESTMENTS - 100%
(amortized cost $24,181,808) $24,181,808
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
41
<PAGE> 77
JACKSON NATIONAL TAX-EXEMPT FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
MUNICIPAL BONDS - 99.53%
ARIZONA - 2.59%
Arizona State Transportation Board
Highway Revenue
4.70%, 07/01/2005 $350,000 $345,912
Salt River Project AZ Electric
Systems Revenue
5.20%, 01/01/2002 200,000 206,910
----------
Subtotal 552,822
COLORADO - 1.25%
Aurora CO
4.75%, 11/01/2014 300,000 266,868
CONNECTICUT - 1.96%
Connecticut State Housing Financing
Authority 6.70%, 11/15/2012 400,000 419,304
FLORIDA - 5.32%
Florida State
5.125%, 07/01/2017 300,000 279,372
Florida State Board Education Capital
Outlay 5.00%, 06/01/2015 500,000 461,215
Jacksonville FL Electric Authority Revenue
5.20%, 10/01/2009 400,000 396,080
----------
Subtotal 1,136,667
GEORGIA - 4.49%
DeKalb County GA Water & Sewer Revenue
5.125%, 10/01/2014 400,000 377,988
Georgia State Series D
6.80%, 08/01/2006 500,000 580,880
----------
Subtotal 958,868
ILLINOIS - 8.56%
Chicago IL Metropolitan Water
5.40%, 12/01/2006 400,000 413,128
Chicago IL Public Building Revenue
5.80%, 01/01/2013 (a) 250,000 252,098
Chicago IL Wastewater Transmission Revenue
5.375%, 01/01/2013 (a) 500,000 488,730
Illinois Health Facilities Authority
Revenue 6.00%, 02/15/2019 250,000 240,285
Illinois State Sales Tax Revenue Series M
6.80%, 06/15/2009 400,000 434,168
----------
Subtotal 1,828,409
INDIANA - 3.65%
Indiana State Office Building Commission
Correctional Facilities Revenue
6.375%, 07/01/2016 350,000 361,452
Indianapolis IN Transportation Revenue
6.00%, 07/01/2010 405,000 418,458
----------
Subtotal 779,910
KENTUCKY - 2.41%
Kentucky State Turnpike Authority Economic
Development Revenue
5.375%, 01/01/2000 500,000 515,655
MARYLAND - 5.92%
Maryland State Department of Transportation
6.25%, 09/01/2003 350,000 377,783
University of Maryland System Auxiliary
Facility & Tuition Revenue
6.30%, 02/01/2008 365,000 392,094
Washington Suburban Sanitation District
Maryland 3.75%, 06/01/1998 500,000 494,750
----------
Subtotal 1,264,627
</TABLE>
42
<PAGE> 78
<TABLE>
<S> <C> <C>
MASSACHUSETTS - 6.57%
Boston MA Revenue
5.75%, 02/15/2013 (b) 330,000 330,884
Massachusetts State Convention Center
Authority Hynes Convention Center
5.90%, 09/01/1998 400,000 416,984
Massachusetts State Health & Educational
Facilities Authority Revenue
5.60%, 11/01/2014 250,000 253,053
Massachusetts State Water Pollution
Abatement Treatment
5.70%, 02/01/2014 400,000 402,936
---------
Subtotal 1,403,857
MICHIGAN - 1.89%
Michigan State Building Authority Revenue
5.625%, 10/01/2010 400,000 402,904
MINNESOTA - 2.92%
Minneapolis & St. Paul MN Housing &
Redevelopment Authority & Health
Care Systems
5.00%, 11/15/2013 (c) 300,000 277,473
Rochester MN Health Care
5.75%, 11/15/2021 350,000 345,615
---------
Subtotal 623,088
MISSOURI - 2.02%
Missouri State Environmental Improvement
& Energy Resource Authority
6.45%, 07/01/2008 400,000 432,336
NEBRASKA - 1.41%
Lincoln NE Electric Systems Revenue
5.25%, 09/01/2015 320,000 301,910
NEW JERSEY - 4.51%
New Jersey Building Authority State
Building Revenue
5.00%, 06/15/2010 (b) 500,000 486,325
New Jersey Sports & Exposition
5.20%, 01/01/2020 510,000 477,992
---------
Subtotal 964,317
NEW YORK - 6.30%
New York State Dormatory Authority Revenue
5.70%, 07/01/2011 (b) 450,000 463,149
New York State Urban Development
5.375%, 01/01/2012 (b) 500,000 492,270
Triborough Bridge & Tunnel Authority
5.05%, 01/01/2017 400,000 390,684
---------
Subtotal 1,346,103
NORTH CAROLINA - 1.85%
Mecklenburg County NC
5.00%, 04/01/2009 400,000 395,364
OHIO - 4.60%
Columbus OH Water System Revenue
6.10%, 11/01/2003 415,000 453,408
Ohio State Public Facilities Commission
5.75%, 11/01/2006 (c) 500,000 529,140
---------
Subtotal 982,548
PENNSYLVANIA - 4.32%
Pennsylvania Housing and Finance Authority
5.55%, 07/01/2007 (d) 400,000 401,300
Pennsylvania State University
5.40%, 08/15/2004 500,000 520,905
---------
Subtotal 922,205
SOUTH CAROLINA - 2.09%
Columbia SC Waterworks and Sewer System
Revenue
6.50%, 02/01/2002 405,000 446,120
</TABLE>
43
<PAGE> 79
<TABLE>
<S> <C> <C>
TEXAS - 8.89%
Dallas TX Waterworks & Sewer
5.90%, 10/01/1999 300,000 316,650
Harris County TX
5.125%, 10/01/2013 380,000 361,175
Lower Colorado River Authority TX Revenue
5.25%, 01/01/2015 300,000 279,723
San Antonio TX Electric & Gas
5.00%, 02/01/2014 225,000 207,736
Tarrant County TX Health Facilities Development
Corporation Health System Revenue
6.40%, 09/01/1998 (a) 500,000 527,805
University Texas University Revenue
6.10%, 08/15/1997 200,000 206,956
---------
Subtotal 1,900,045
UTAH - .89%
Intermountain Power Agency UT Power Supply Revenue
5.25%, 07/01/2014 200,000 190,166
VIRGINIA - 2.72%
Virginia State Transportation Board Transportation
Contract Revenue
5.25%, 05/15/2012 600,000 581,928
WASHINGTON - 8.58%
Seattle WA Water System Revenue
5.50%, 06/01/2018 410,000 394,104
South Columbia Basin Revenue
6.00%, 12/01/2003 440,000 478,698
Washington State
6.50%, 05/01/2004 400,000 447,304
Washington State Public Power Supply System
Nuclear Project
5.45%, 07/01/2000 500,000 513,620
---------
1,833,726
WISCONSIN - 3.82%
Wisconsin State
6.25%, 05/01/2012 400,000 434,536
Wisconsin State Transportation Revenue
4.75%, 07/01/2012 425,000 381,263
---------
Subtotal 815,799
---------
Total Municipal Bonds
(cost $20,622,121) 21,265,546
----------
SHORT TERM INVESTMENTS - .47%
VARIABLE RATE DEMAND NOTES - .47%
Ohio State Water Development Authority Revenue
11/01/2015 100,000 100,000
----------
Total Short Term Investments
(cost $100,000) 100,000
----------
TOTAL INVESTMENTS - 100%
(cost $20,722,121) $21,365,546
===========
(a) Insured by Financial Guarantee Insurance Company.
(b) Insured by MBIA Insurance Corporation.
(c) Insured by AMBAC Indemnity Corporation.
(d) Insured by Federal National Mortgage Association.
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
44
<PAGE> 80
JACKSON NATIONAL INCOME FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Shares
or Principal Market
Amount Value
<S> <C> <C> <C>
PREFERRED STOCKS - 1.29%
ENERGY - 1.29%
Atlantic Richfield Company
9.00% Convertible 12,445 $ 280,013
-------------
Total Preferred Stocks
(cost $335,293) 280,013
-------------
CORPORATE OBLIGATIONS - 17.80%
AEROSPACE & DEFENSE - 1.03%
Northrop Grumman Corporation
8.625%, 10/15/2004 $ 200,000 223,156
CAPITAL GOODS & MANUFACTURING - 1.42%
Case Corporation
7.25%, 08/01/2005 300,000 307,065
CHEMICALS - 2.08%
Occidental Petroleum Corporation
8.75%, 01/15/2023 200,000 229,162
Union Carbide Corporation
8.75%, 08/01/2022 200,000 221,080
-------------
Subtotal 450,242
CONSUMER PRODUCTS - .93%
Joseph Seagram & Sons
7.00%, 04/15/2008 200,000 201,248
DOMESTIC BANKS - .97%
Nationsbank Corporation
7.75%, 08/15/2015 200,000 209,894
ENERGY - 3.64%
Phillips Petroleum Company
8.86%, 05/15/2022 200,000 221,044
Vastar Resources, Inc.
8.75%, 02/01/2005 250,000 280,788
Western Atlas, Inc.
8.55%, 06/15/2024 250,000 287,820
-------------
Subtotal 789,652
FOREIGN GOVERNMENT - .68%
Quebec Province
7.50%, 07/15/2023 150,000 148,665
INDEPENDENT FINANCE COMPANIES - 2.34%
Associates Corporation North America
8.625%, 11/15/2004 200,000 227,440
Household Finance Corporation
9.00%, 09/28/2001 250,000 279,715
-------------
Subtotal 507,155
INSURANCE - 1.03%
American Reinsurance Corporation
10.875% 09/15/2004 200,000 222,752
MEDIA - .53%
Tele-Communications, Inc.
9.80%, 02/01/2012 100,000 114,556
</TABLE>
45
<PAGE> 81
<TABLE>
<S> <C> <C>
METALS & MINING - 2.12%
ASARCO, Inc.
7.875%, 04/15/2013 200,000 205,142
WMC Finance Limited USA
7.25%, 11/15/2013 250,000 253,623
-------------
Subtotal 458,765
PAPER & FOREST PRODUCTS - 1.03%
Georgia-Pacific Corporation
9.50%, 05/15/2022 200,000 223,190
-------------
Total Corporate Obligations
(cost $3,616,502) 3,856,340
-------------
U.S. GOVERNMENT SECURITIES - 80.91%
U.S. TREASURY BONDS - 16.37%
U.S. Treasury Bond
11.125%, 08/15/2003 185,000 243,245
U.S. Treasury Bond
10.625%, 08/15/2015 250,000 368,945
U.S. Treasury Bond
7.25%, 05/15/2016 200,000 218,938
U.S. Treasury Bond
8.125%, 08/15/2019 215,000 258,806
U.S. Treasury Bond
8.50%, 02/15/2020 1,500,000 1,875,240
U.S. Treasury Bond
7.625%, 02/15/2025 500,000 580,470
-------------
Subtotal 3,545,644
U.S. TREASURY NOTES - 64.54%
U.S. Treasury Note
7.375%, 05/15/1996 1,350,000 1,362,447
U.S. Treasury Note
7.50%, 12/31/1996 750,000 765,585
U.S. Treasury Note
6.75%, 05/31/1997 2,300,000 2,337,743
U.S. Treasury Note
6.00%, 11/30/1997 200,000 201,468
U.S. Treasury Note
5.625%, 01/31/1998 1,200,000 1,198,872
U.S. Treasury Note
6.125%, 05/15/1998 735,000 742,695
U.S. Treasury Note
5.125%, 11/30/1998 1,200,000 1,180,128
U.S. Treasury Note
6.75%, 06/30/1999 1,880,000 1,939,634
U.S. Treasury Note
6.25%, 05/31/2000 500,000 508,515
U.S. Treasury Note
8.50%, 11/15/2000 1,150,000 1,282,606
U.S. Treasury Note
6.375%, 08/15/2002 1,300,000 1,333,514
U.S. Treasury Note
7.875%, 11/15/2004 450,000 507,163
U.S. Treasury Note
6.50%, 05/15/2005 600,000 621,000
-------------
Subtotal 13,981,370
-------------
Total U.S. Government Securities
(cost $17,209,981) 17,527,014
-------------
TOTAL INVESTMENTS - 100%
(cost $21,161,776) $ 21,663,367
=============
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
46
<PAGE> 82
JACKSON NATIONAL GROWTH FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
--------- ----------
<S> <C> <C>
PREFERRED STOCK - 0.00%
DIVERSIFIED - 0.00%
Teledyne, Inc. Series E 2 29
--------
Total Preferred Stock
(cost $0) 29
--------
WARRANTS - 0.00%
ENGINEERING - 0.00%
Emcor Group, Inc. Warrant-Z 2 -
--------
Total Warrants
(cost $0) -
--------
COMMON STOCKS - 100%
AEROSPACE & DEFENSE - 2.66%
Allied-Signal, Inc. 871 37,017
Applied Materials, Inc. (a) 600 30,075
Boeing Company 1,046 68,644
EG&G, Inc. 155 2,887
General Dynamics Corporation 182 10,078
Lockheed Martin Corporation 612 41,692
Loral Corporation 540 15,998
McDonnell Douglas Corporation 339 27,713
Northrop Grumman Corporation 139 7,958
Raytheon Company 712 31,061
Rockwell International Corporation 700 31,150
Textron, Inc. 253 17,394
United Technologies Corporation 356 31,595
Western Atlas, Inc. (a) 149 6,537
---------
Subtotal 359,799
APPAREL & TEXTILES - 0.41%
Fruit of the Loom, Inc. - Class A (a) 200 3,475
Liz Claiborne, Inc. 220 6,243
NIKE, Inc. - Class B 418 23,721
Reebok International, Ltd. 234 7,956
Russell Corporation - Class A 113 2,797
Springs Industries, Inc. 50 2,144
V.F. Corporation 187 8,953
---------
Subtotal 55,289
AUTOMOTIVE - 2.49%
Chrysler Corporation 1,200 61,950
Cooper Tire & Rubber Company 236 5,457
Dana Corporation 400 10,250
Echlin, Inc. 167 5,970
Ford Motor Company 3,300 94,875
General Motors Corporation 2,350 102,813
Genuine Parts Company 400 15,850
Goodyear Tire & Rubber Company 500 19,000
Pep Boys-Manny, Moe & Jack 173 3,784
Snap-On, Inc. 121 5,127
TRW, Inc. 185 12,164
---------
Subtotal 337,240
BROKERAGE - 0.49%
Merrill Lynch & Company, Inc. 544 30,192
Morgan Stanley Group, Inc. 250 21,750
Salomon, Inc. 400 14,450
---------
Subtotal 66,392
</TABLE>
47
<PAGE> 83
<TABLE>
<S> <C> <C>
CAPITAL GOODS & MANUFACTURING - 5.74%
AMP, Inc. 700 27,475
Ball Corporation 84 2,320
Briggs & Stratton Corporation 82 3,311
Browning-Ferris Industries, Inc. 672 19,572
Caterpillar, Inc. 650 36,481
Cincinnati Milacron, Inc. 95 2,446
Cooper Industries, Inc. 310 10,463
Corning, Inc. 800 20,900
Crane Company 85 3,007
Cummins Engine Company, Inc. 117 4,110
Deere & Company 247 22,076
Dover Corporation 326 12,877
Eaton Corporation 225 11,531
Emerson Electric Company 700 49,875
Fluor Corporation 239 13,503
FMC Corporation (a) 103 7,377
Foster Wheeler Corporation 101 3,788
General Electric Company 5,300 335,225
General Signal Corporation 133 4,239
Giddings & Lewis, Inc. 97 1,564
Grainger (W.W.), Inc. 145 9,062
Harnischfeger Industries, Inc. 130 4,095
Honeywell, Inc. 369 15,498
Illinois Tool Works, Inc. 400 23,250
Ingersoll-Rand Company 301 10,648
Johnson Controls, Inc. 115 6,699
Laidlaw, Inc. - Class B 849 7,641
Morrison Knudsen Corporation 93 605
NACCO Industries, Inc. - Class A 25 1,431
Navistar International Corporation (a) 212 2,173
Ogden Corporation 137 3,117
PACCAR, Inc. 110 4,592
Pall Corporation 335 8,166
Parker-Hannifin Corporation 207 6,986
Raychem Corporation 122 5,658
Safety-Kleen Corporation 163 2,506
Thomas & Betts Corporation 55 3,554
Timken Company 88 3,542
Trinova Corporation 81 2,278
Varity Corporation (a) 124 4,495
Westinghouse Electric Corporation 1,200 16,950
WMX Technologies, Inc. 1,500 42,188
Zurn Industries, Inc. 35 875
---------
Subtotal 778,149
CHEMICALS - 3.01%
Air Products & Chemicals, Inc. 323 16,675
Avery Dennison Corporation 155 6,936
B.F. Goodrich Company 73 4,809
Dow Chemical Company 900 61,762
Du Pont (E.I.) De Nemours & Company 1,700 106,038
Eastman Chemical Company 236 14,042
Ecolab, Inc. 191 5,539
Grace (W.R.) & Company 268 14,941
Great Lakes Chemical Corporation 195 13,089
Hercules, Inc. 339 18,094
Mallinckrodt Group, Inc. 216 7,506
Millipore Corporation 140 4,953
Monsanto Company 335 35,091
Morton International, Inc. 500 15,250
Nalco Chemical Company 192 5,760
PPG Industries, Inc. 700 29,750
Praxair, Inc. 500 13,500
Rohm & Haas Company 193 10,663
Sigma-Aldrich Corporation 141 6,698
Union Carbide Corporation 424 16,059
---------
Subtotal 407,155
</TABLE>
48
<PAGE> 84
<TABLE>
<S> <C> <C>
COMPUTERS & TECHNOLOGY - 10.83%
Advanced Micro Devices, Inc. 311 7,425
Amdahl Corporation (a) 400 3,700
Andrew Corporation (a) 108 4,563
Apple Computer, Inc. 400 14,525
Autodesk, Inc. 133 4,522
Automatic Data Processing, Inc. 500 35,750
Cabletron Systems (a) 200 15,725
Ceridian Corporation (a) 127 5,524
Cisco Systems, Inc. (a) 900 69,750
COMPAQ Computer Corporation (a) 860 47,945
Computer Associates International, Inc. 750 41,250
Computer Sciences Corporation (a) 155 10,366
Cray Research, Inc. (a) 72 1,494
Data General Corporation (a) 102 1,173
Digital Equipment Corporation (a) 500 27,063
DSC Communications Corporation (a) 400 14,800
First Data Corporation 700 46,288
Harris Corporation 111 6,452
Hewlett-Packard Company 1,572 145,606
Intel Corporation 2,550 178,181
Intergraph Corporation (a) 126 1,528
International Business Machines Corporation 1,793 174,369
Micron Technology, Inc. 650 45,906
Microsoft Corporation (a) 1,800 180,000
Motorola, Inc. 1,900 124,688
National Semiconductor Corporation (a) 358 8,726
Novell, Inc. (a) 1,122 18,513
Oracle Systems Corporation (a) 1,400 61,075
Perkin-Elmer Corporation 120 4,215
Pitney Bowes, Inc. 450 19,631
Scientific-Atlanta, Inc. 214 2,648
Silicon Graphics Corporation (a) 520 17,290
Sun Microsystems, Inc. (a) 271 21,138
Tandem Computers, Inc. (a) 400 4,500
Tektronix, Inc. 86 5,096
Texas Instruments, Inc. 600 40,950
Unisys Corporation (a) 600 3,375
Xerox Corporation 400 51,900
---------
Subtotal 1,467,650
CONSUMER PRODUCTS - 12.83%
Alberto-Culver Company - Class B 80 2,510
American Brands, Inc. 581 24,910
American Greetings Corporation - Class A 210 6,615
Anheuser-Busch Companies, Inc. 800 52,800
Archer-Daniels-Midland Company 1,667 26,880
Avon Products, Inc. 199 14,154
Bausch & Lomb, Inc. 167 5,782
Black & Decker Corporation 245 8,299
Brown Group, Inc. 51 701
Brown-Forman Corporation - Class B 195 7,434
Campbell Soup Company 800 41,900
Clorox Company 153 10,978
Coca-Cola Company 3,950 283,906
Colgate-Palmolive Company 500 34,625
ConAgra, Inc. 800 30,900
Coors (Adolph) Company - Clss B 108 1,931
CPC International, Inc. 500 33,188
CUC International, Inc. (a) 600 20,775
Dial Corporation 300 7,313
Eastman Kodak Company 1,043 65,319
General Mills, Inc. 600 34,425
Gillette Company 1,358 65,693
H.J. Heinz Company 800 37,200
Hershey Foods Corporation 248 14,818
International Flavors & Fragrances, Inc 400 19,300
Jostens, Inc. 128 2,896
Kellogg Company 700 50,575
National Service Industries, Inc. 139 4,135
Newell Company 500 12,063
Pepsico, Inc. 2,500 131,875
Philip Morris Companies, Inc. 2,600 219,700
Pioneer Hi-Bred International, Inc. 243 12,059
</TABLE>
49
<PAGE> 85
<TABLE>
<S> <C> <C>
Polaroid Corporation 130 5,557
Premark International, Inc. 182 8,417
Proctor & Gamble Company 2,150 174,150
Quaker Oats Company 500 17,063
Ralston-Ralston Purina Group 400 23,750
Rubbermaid, Inc. 550 14,369
Sara Lee Corporation 1,500 44,062
Seagram Company, Ltd. 1,142 41,112
Service Corporation International 300 12,038
Sherwin-Williams Company 244 9,180
Unilever N.V. 500 65,500
UST, Inc. 579 17,370
Wrigley (W.M.) Jr. Company 400 18,600
Zenith Electronics Corporation (a) 125 1,047
---------
Subtotal 1,737,874
DIVERSIFIED - 1.45%
Alco Standard Corporation 156 13,806
ITT Corporation 400 49,000
Loews Corporation 200 29,325
Minnesota Mining & Manufacturing Compan 1,300 73,938
Teledyne, Inc. 156 3,880
Tyco International, Ltd. 300 18,225
Whitman Corporation 400 8,500
---------
Subtotal 196,674
DOMESTIC BANKS - 6.64%
Ahmanson (H.F.) & Company 400 10,000
Banc One Corporation 1,200 40,500
Bank of Boston Corporation 494 21,983
Bank of New York Company, Inc. 700 29,400
BankAmerica Corporation 1,179 67,792
Bankers Trust New York Corporation 222 14,153
Barnett Banks, Inc. 277 15,304
Boatmen's Bancshares, Inc. 368 13,984
Chase Manhattan Corporation 517 29,469
Chemical Banking Corporation 800 45,500
Citicorp 1,235 80,121
Corestates Financial Corporation 417 15,168
First Bank System, Inc. 425 21,144
First Chicago Corporation 262 17,783
First Fidelity Bancorporation 233 15,232
First Interstate Bancorp 228 29,412
First Union Corporation 508 25,210
Fleet Financial Group, Inc. 500 19,375
Golden West Financial Corporation 171 8,571
Great Western Financial Corporation 603 13,643
KeyCorp 800 27,000
MBNA Corporation 500 18,438
Mellon Bank Corporation 500 25,062
Morgan (J.P.) & Company 600 46,275
National City Corporation 429 13,245
Nationsbank Corporation 850 55,888
NBD Bancorp, Inc. 500 19,000
Norwest Corporation 1,000 29,500
PNC Bank Corporation 750 19,688
Republic New York Corporation 160 9,380
Shawmut National Corporation 450 15,244
Suntrust Banks, Inc. 337 21,736
U.S. Bancorp, Inc. 278 8,236
Wachovia Corporation 600 26,475
Wells Fargo & Company 149 31,309
---------
Subtotal 900,220
ELECTRIC UTILITIES - 3.94%
American Electric Power Company, Inc. 600 22,875
Baltimore Gas & Electric Company 500 13,375
Carolina Power & Light Company 500 16,375
Central & Southwest Corporation 700 18,725
Cinergy Corporation 500 14,188
Consolidated Edison Company of New York 800 24,300
Detroit Edison Company 500 16,875
Dominion Resources, Inc. 600 23,850
Duke Power Company 809 36,203
</TABLE>
50
<PAGE> 86
<TABLE>
<S> <C> <C>
Entergy Corporation 698 19,893
FPL Group, Inc. 700 29,313
General Public Utilities Corporation 400 12,500
Houston Industries, Inc. 400 18,550
Niagara Mohawk Power Corporation 500 5,375
Northern States Power Company 189 8,930
Ohio Edison Company 500 11,438
Pacific Gas & Electric Company 1,400 41,125
Pacificorp 900 16,988
PECO Energy Company 740 21,645
Public Service Enterprise Group, Inc. 800 23,500
SCE Corporation 1,400 23,800
Southern Company 2,100 50,137
Texas Utilities Company 800 29,400
Unicom Corporation 720 23,580
Union Electric Company 291 11,349
---------
Subtotal 534,289
ENERGY - 9.68%
Amerada Hess Corporation 265 11,958
Amoco Corporation 1,533 97,920
Ashland, Inc. 230 7,274
Atlantic Richfield Company 500 53,375
Baker Hughes, Inc. 500 9,813
Burlington Resources, Inc. 400 14,400
Chevron Corporation 2,050 95,837
Coastal Corporation 299 9,680
Columbia Gas System, Inc. (a) 143 5,506
Consolidated Natural Gas Company 265 10,070
Dresser Industries, Inc. 600 12,450
Eastern Enterprises 58 1,733
Enron Corporation 800 27,500
ENSERCH Corporation 189 2,740
Exxon Corporation 3,900 297,863
Halliburton Company 400 16,600
Helmerich & Payne, Inc. 70 1,811
Kerr-McGee Corporation 146 8,048
Louisiana Land & Exploration 94 3,325
McDermott International, Inc. 152 2,413
Mobil Corporation 1,200 120,900
Nicor, Inc. 147 3,951
NorAm Energy Corporation 400 3,100
Occidental Petroleum Corporation 972 20,898
ONEOK, Inc. 75 1,828
Oryx Energy Company 400 4,600
Pacific Enterprises 300 7,425
Panhandle Eastern Corporation 500 12,625
Pennzoil Company 130 4,908
Peoples Energy Corporation 98 2,817
Phillips Petroleum Company 860 27,735
Rowan Companies, Inc. (a) 238 1,577
Royal Dutch Petroleum Company 1,700 208,888
Santa Fe Energy Resources, Inc. 254 2,254
Schlumberger, Ltd. 800 49,800
Sonat, Inc. 246 7,072
Sun Company, Inc. 210 6,011
Tenneco, Inc. 544 23,868
Texaco, Inc. 900 61,313
The Williams Companies, Inc. 310 11,974
Unocal Corporation 800 21,000
USX Corporation - Marathon Group 920 16,330
---------
Subtotal 1,311,190
HEALTHCARE - 10.19%
Abbott Laboratories 2,500 99,375
Allergan, Inc. 179 5,258
ALZA Corporation (a) 300 6,600
American Home Products Corporation 944 83,662
Amgen, Inc. (a) 850 40,800
Bard (C.R.), Inc. 147 4,153
Baxter International, Inc. 900 34,763
Becton, Dickinson & Company 192 12,480
Beverly Enterprises, Inc. (a) 300 3,525
Biomet, Inc. (a) 335 5,569
</TABLE>
51
<PAGE> 87
<TABLE>
<S> <C> <C>
Boston Scientific Corporation (a) 500 21,062
Bristol-Myers Squibb Company 1,573 119,941
Columbia/HCA Healthcare Corporation 1,380 67,793
Community Psychiatric Centers 123 1,338
Eli Lilly & Company 950 91,794
Johnson & Johnson 2,000 163,000
Manor Care, Inc. 176 5,764
Medtronic, Inc. 700 40,425
Merck & Company , Inc. 3,850 221,375
Pfizer, Inc. 2,000 114,750
Schering-Plough Corporation 1,200 64,350
Shared Medical Systems Corporation 65 2,511
St. Jude Medical, Inc. 131 6,976
Tenet Healthcare Corporation (a) 700 12,512
U.S. Healthcare, Inc. 600 23,100
U.S. Surgical Corporation 160 3,920
United HealthCare Corporation 600 31,875
Upjohn Company 1,050 53,288
Warner-Lambert Company 450 38,306
---------
Subtotal 1,380,265
HOSPITALITY - .93%
Hilton Hotels Corporation 139 9,313
Luby's Cafeterias, Inc. 72 1,494
Marriott International, Inc. 400 14,750
McDonald's Corporation 2,200 90,200
Ryan's Family Steak House, Inc. (a) 151 1,170
Shoney's, Inc. (a) 116 1,291
Wendy's International, Inc. 400 7,950
-------
Subtotal 126,168
HOUSING RELATED - 1.00%
Armstrong World Industries, Inc. 106 6,294
Centex Corporation 85 2,784
Fleetwood Enterprises, Inc. 130 2,665
Home Depot, Inc. 1,500 55,875
Kaufman & Broad Home Corporation 91 1,058
Lowe's Companies, Inc. 600 16,200
Masco Corporation 500 14,062
Maytag Corporation 400 7,600
Owens-Corning Fiberglas Corporation (a) 200 8,475
Pulte Corporation 78 2,467
Stanley Works 126 6,016
Whirlpool Corporation 218 11,554
-------
Subtotal 135,050
INDEPENDENT FINANCE COMPANIES - 2.42%
American Express Company 1,600 65,000
Beneficial Corporation 148 7,252
Dean Witter Discover & Company 600 29,850
Federal Home Loan Mortgage Corporation 600 41,550
Federal National Mortgage Association 888 93,129
H&R Block, Inc. 302 12,457
Household International, Inc. 275 15,469
Transamerica Corporation 200 13,550
Transport Holdings, Inc.-Class A (a) 4 157
Travelers Group, Inc. 979 49,440
-------
Subtotal 327,854
INSURANCE - 3.08%
Aetna Life & Casualty Company 400 28,150
Alexander & Alexander Services, Inc. 124 2,774
Allstate Corporation 1,400 51,450
American General Corporation 700 23,013
American International Group, Inc. 1,530 129,094
Chubb Corporation 249 22,379
CIGNA Corporation 206 20,420
General Re Corporation 236 34,190
Jefferson - Pilot Corporation 137 9,042
Lincoln National Corporation 360 16,065
Marsh & McLennan Companies, Inc. 213 17,439
Providian Corporation 280 10,990
SAFECO Corporation 182 11,682
St. Paul Companies, Inc. 240 12,180
</TABLE>
52
<PAGE> 88
<TABLE>
<S> <C> <C>
Torchmark Corporation 202 8,383
UNUM Corporation 207 10,893
USF&G Corporation 360 6,030
USLIFE Corporation 96 2,736
-------
Subtotal 416,910
LEISURE & ENTERTAINMENT - 1.01%
Bally Entertainment Corporation (a) 132 1,452
Brunswick Corporation 300 5,850
Disney (Walt) Company 1,595 91,912
Handleman Company 95 736
Harrah's Entertainment Inc. (a) 292 7,227
Hasbro, Inc. 253 7,717
Mattel, Inc. 700 20,125
Outboard Marine Corporation 56 1,162
-------
Subtotal 136,181
MEDIA - 2.80%
Capital Cities/ABC, Inc. 444 52,669
CBS, Inc. 175 14,131
Comcast Corporation Special - Class A 800 14,300
Donnelley (R.R.) & Sons Company 500 18,250
Dow Jones & Company, Inc. 280 9,870
Dun & Bradstreet Corporation 600 35,850
Gannett Company, Inc. 500 27,188
Harcourt General, Inc. 225 8,916
Harland (J.H.) Company 86 1,784
Interpublic Group 222 8,603
King World Productions, Inc. (a) 104 3,627
Knight-Ridder, Inc. 151 8,381
McGraw-Hill, Inc. 142 11,626
Meredith Corporation 78 2,788
New York Times Company - Class A 281 7,798
Tele-Communications, Inc. - Class A (a) 2,000 34,000
Time Warner, Inc. 1,164 42,486
Times Mirror Company - Class A 363 10,527
Tribune Company 191 12,057
Viacom, Inc. - Class B (a) 1,102 55,100
-------
Subtotal 379,951
METALS & MINING - 1.73%
Alcan Aluminium, Ltd. 700 22,137
Aluminum Company of America 600 30,600
Armco, Inc. (a) 400 2,450
ASARCO, Inc. 119 3,838
Barrick Gold Corporation 1,109 25,646
Bethlehem Steel Corporation (a) 400 5,250
Crown Cork & Seal Company, Inc. (a) 255 8,893
Cyprus Amax Minerals Company 261 6,819
Echo Bay Mines, Ltd. 400 3,600
Englehard Corporation 500 12,437
Freeport-McMoran Copper-B 700 15,925
Homestake Mining Company 450 6,919
Inco, Ltd. 400 13,750
Inland Steel Industries, Inc. 125 2,922
Newmont Mining Corporation 246 9,286
Nucor Corporation 249 11,983
Phelps Dodge Corporation 202 12,802
Placer Dome, Inc. 800 17,500
Reynolds Metals Company 179 9,017
USX Corporation - U.S. Steel Group 300 8,963
Worthington Industries, Inc. 256 4,256
-------
Subtotal 234,993
PAPER & FOREST PRODUCTS - 1.91%
Bemis Company, Inc. 144 3,744
Boise Cascade Corporation 132 4,785
Champion International Corporation 300 16,050
Deluxe Corporation 233 6,262
Federal Paper Board Company, Inc. 200 8,400
Georgia-Pacific Corporation 261 21,533
International Paper Company 800 29,600
James River Corporation 230 7,389
Kimberly-Clark Corporation 500 36,312
</TABLE>
53
<PAGE> 89
<TABLE>
<S> <C> <C>
Louisiana-Pacific Corporation 320 7,640
Mead Corporation 168 9,681
Moore Corporation, Ltd. 350 6,694
Potlatch Corporation 82 3,454
Scott Paper Company 500 26,625
Stone Container Corporation 300 4,950
Temple-Inland, Inc. 159 7,234
Union Camp Corporation 200 10,175
Westvaco Corporation 291 8,075
Weyerhaeuser Company 650 28,681
Willamette Industries, Inc. 200 11,600
--------
Subtotal 258,884
RESTAURANTS - 0.04%
Darden Restaurants, Inc. 500 5,688
RETAIL - 4.13%
Albertson's, Inc. 900 29,925
American Stores Company 500 14,937
Charming Shoppes, Inc. 290 834
Circuit City Stores, Inc. 300 10,013
Dayton Hudson Corporation 207 14,231
Dillard Department Stores, Inc. - Class A 326 8,843
Fleming Companies, Inc. 105 2,376
Gap (The), Inc. 500 19,687
Giant Food, Inc. - Class A 167 5,365
Great Atlantic & Pacific Tea Co., Inc. 108 2,187
Kmart Corporation 1,400 11,375
Kroger Company (a) 400 13,350
Limited, Inc. 1,094 20,102
Longs Drug Stores Corporation 58 2,320
May Department Stores Company 800 31,400
Melville Corporation 301 9,632
Mercantile Stores Company, Inc. 104 4,667
Nordstrom, Inc. 237 8,784
Penney (J.C.) Company, Inc. 800 33,700
Price/Costco, Inc. (a) 600 10,200
Rite Aid Corporation 238 6,426
Sears, Roebuck and Company 1,200 40,800
Stride Rite Corporation 140 1,575
Supervalu, Inc. 202 6,212
Sysco Corporation 600 18,225
Tandy Corporation 210 10,369
TJX Companies, Inc. 207 2,794
Toys 'R' Us, Inc. (a) 920 20,125
Wal-Mart Stores, Inc. 7,150 154,619
Walgreen Company 800 22,800
Winn-Dixie Stores, Inc. 215 13,975
Woolworth Corporation 500 7,313
--------
Subtotal 559,161
TELECOMMUNICATIONS - 8.92%
Airtouch Communications, Inc. (a) 1,600 45,600
Alltel Corporation 600 18,375
Ameritech Corporation 1,690 91,260
AT&T Corporation 4,900 313,600
Bell Atlantic Corporation 1,360 86,530
BellSouth Corporation 1,531 117,122
GTE Corporation 3,000 123,750
MCI Communications Corporation 2,150 53,616
Northern Telecom, Ltd. 776 27,936
NYNEX Corporation 1,317 61,899
Pacific Telesis Group 1,300 39,487
SBC Communications Inc. 1,900 106,163
Sprint Corporation 1,068 41,118
Tellabs, Inc. (a) 300 10,200
U.S. West, Inc. 1,500 71,437
---------
Subtotal 1,208,093
TRANSPORTATION - 1.67%
AMR Corporation (a) 217 14,322
Burlington Northern Santa Fe, Inc. 460 38,582
Conrail, Inc. 225 15,469
Consolidated Freightways, Inc. 121 2,813
</TABLE>
54
<PAGE> 90
<TABLE>
<S> <C> <C>
CSX Corporation 302 25,292
Delta Air Lines, Inc. 144 9,450
Federal Express Corporation (a) 160 13,140
Norfolk Southern Corporation 388 29,973
Pittston Services Group 118 3,245
Roadway Services, Inc. 114 5,101
Ryder System, Inc. 222 5,355
Santa Fe Pacific Gold Corporation 450 4,443
Southwest Airlines Company 500 10,000
Union Pacific Corporation 700 45,762
USAir Group, Inc. (a) 171 2,329
Yellow Corporation 79 1,037
----------
Subtotal 226,313
----------
Total Common Stocks
(cost $10,769,062) 13,547,432
----------
TOTAL INVESTMENTS - 100%
(cost $10,769,062) $13,547,461
===========
(a) Non-income producing.
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
55
<PAGE> 91
JACKSON NATIONAL TOTAL RETURN FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal Market
Amount Value
------------- -------------
<S> <C> <C>
COMMON STOCKS - 55.39%
AEROSPACE & DEFENSE - 4.36%
Lockheed Martin Corporation 3,900 $265,688
Raytheon Company 6,400 279,200
Rockwell International Corporation 4,100 182,450
United Technologies Corporation 3,200 284,000
---------
Subtotal 1,011,338
APPAREL & TEXTILES - 1.70%
NIKE, Inc. - Class B 2,500 141,875
V.F. Corporation 5,300 253,738
---------
Subtotal 395,613
AUTOMOTIVE - 1.52%
Ford Motor Company 3,900 112,125
General Motors Corporation 5,500 240,625
---------
Subtotal 352,750
CAPITAL GOODS & MANUFACTURING - 0.84%
General Electric Company 3,100 196,075
CHEMICALS - 1.91%
Grace (W.R.) & Company 3,700 206,275
PPG Industries, Inc. 5,600 238,000
---------
Subtotal 444,275
COMPUTER & TECHNOLOGY - 2.19%
Harris Corporation 4,300 249,937
Xerox Corporation 2,000 259,500
---------
Subtotal 509,437
CONSUMER PRODUCTS - 5.57%
RJR Nabisco Holdings Corporation 8,500 261,375
American Brands, Inc. 4,500 192,937
Anheuser-Busch Companies, Inc. 3,100 204,600
Dial Corporation 7,400 180,375
Philip Morris Companies, Inc. 3,200 270,400
Polaroid Corporation 4,300 183,825
----------
Subtotal 1,293,512
DIVERSIFIED - 1.06%
ITT Corporation 2,000 245,000
DOMESTIC BANKS - 5.11%
BankAmerica Corporation 3,800 218,500
Boatmen's Bancshares, Inc. 5,200 197,600
Chemical Banking Corporation 4,200 238,875
KeyCorp 7,400 249,750
Mellon Bank Corporation 5,600 280,700
---------
Subtotal 1,185,425
ELECTRIC UTILITIES - 4.42%
General Public Utilities Corporation 8,700 271,875
Ohio Edison Company 11,500 263,063
PECO Energy Company 9,900 289,575
Texas Utilities Company 5,500 202,125
---------
Subtotal 1,026,638
</TABLE>
56
<PAGE> 92
<TABLE>
<S> <C> <C>
ENERGY - 4.59%
Ashland, Inc. 8,000 253,000
Chevron Corporation 5,300 247,775
Exxon Corporation 4,000 305,500
Texaco, Inc. 3,800 258,875
---------
Subtotal 1,065,150
HEALTHCARE - 6.22%
Baxter International, Inc. 5,400 208,575
Bristol-Myers Squibb Company 3,300 251,625
Columbia/HCA Healthcare Corporation 4,600 225,975
Lilly (Eli) & Company 2,200 212,575
U.S. Healthcare, Inc. 7,700 296,450
Upjohn Company 4,900 248,675
---------
Subtotal 1,443,875
INDEPENDENT FINANCE COMPANIES - 3.21%
Beneficial Corporation 4,800 235,200
Student Loan Marketing Association 4,400 259,050
Transamerica Corporation 3,700 250,675
---------
Subtotal 744,925
INSURANCE - 2.16%
American General Corporation 7,400 243,275
CIGNA Corporation 2,600 257,725
---------
Subtotal 501,000
LEISURE & ENTERTAINMENT - 0.14%
Hasbro, Inc. 1,100 33,550
METALS & MINING - 1.12%
Phelps Dodge Corporation 4,100 259,837
RETAIL - 3.60%
Dayton Hudson Corporation 3,400 233,750
Federated Department Stores, Inc. (a) 8,500 215,688
Melville Corporation 5,000 160,000
Penney (J.C.) Company, Inc. 5,400 227,475
---------
Subtotal 836,913
TELECOMMUNICATIONS - 3.21%
BellSouth Corporation 2,700 206,550
Sprint Corporation 7,200 277,200
U.S. West, Inc. 5,500 261,937
---------
Subtotal 745,687
TRANSPORTATION - 2.46
Burlington Northern Santa Fe, Inc. 3,500 293,563
CSX Corporation 3,300 276,375
---------
Subtotal 569,938
---------
TOTAL COMMON STOCKS
(cost $10,014,255) 12,860,938
----------
CORPORATE OBLIGATIONS - 9.49%
APPAREL & TEXTILES - 1.24%
CMI Industries, Inc.
9.50%, 10/01/2003 $100,000 89,000
Day International Group
11.125%, 06/01/2005 (144A) 100,000 102,000
Hartmarx Corporation
10.875%, 01/15/2002 100,000 98,000
--------
Subtotal 289,000
CAPITAL GOODS & MANUFACTURING - 0.44%
Case Corporation
7.25%, 08/01/2005 100,000 102,355
</TABLE>
57
<PAGE> 93
<TABLE>
<S> <C> <C>
CONSUMER PRODUCTS - 1.29%
Coty, Inc.
10.25%, 05/01/2005 100,000 106,250
Joseph Seagram & Sons
7.00%, 04/15/2008 100,000 100,624
Specialty Foods Company
11.125%, 10/01/2002 100,000 93,750
--------
Subtotal 300,624
DOMESTIC BANKS - 0.45%
Nationsbank Corporation
7.75%, 08/15/2015 100,000 104,947
FOREIGN GOVERNMENTS - 0.43%
Quebec Province
7.50%, 07/15/2023 100,000 99,110
HEALTHCARE - 0.49%
Lilly (Eli) & Company
8.375%, 12/01/2006 100,000 113,949
HOTEL & GAMING - 0.47%
Showboat, Inc.
13.00%, 08/01/2009 100,000 110,000
HOUSING RELATED - 0.48%
Schuller International Group, Inc.
10.875%, 12/15/2004 100,000 111,125
INDEPENDENT FINANCE COMPANIES - 0.49%
Associated Corporation N.A.
8.625%, 11/15/2004 100,000 113,720
INSURANCE - 0.48%
American Reinsurance Corporation
10.875% 09/15/2004 100,000 111,376
MEDIA - 0.90%
Continental Cablevision, Inc.
8.875%, 09/15/2005 100,000 104,500
TCI Communications, Inc.
8.00%, 08/01/2005 100,000 103,384
--------
Subtotal 207,884
METALS & MINING - 1.42%
AK Steel Corporation
10.75%, 04/01/2004 100,000 109,000
UCAR Global Enterprises, Inc.
12.00%, 01/15/2005 105,000 118,256
WMC Finance Limited USA
7.25%, 11/15/2013 100,000 101,449
--------
Subtotal 328,705
PAPER & FOREST PRODUCTS - 0.91%
Rainy River Forest Products, Inc.
10.75%, 10/15/2001 100,000 109,500
Repap New Brunswick, Inc.
10.625%, 04/15/2005 100,000 102,000
--------
Subtotal 211,500
--------
Total Corporate Obligations
(cost $2,153,165) 2,204,295
</TABLE> ---------
58
<PAGE> 94
<TABLE>
<S> <C> <C>
U.S. GOVERNMENT SECURITIES - 34.26%
U.S. TREASURY BONDS - 10.23%
U.S. Treasury Bond
7.25%, 08/15/2004 625,000 676,756
U.S. Treasury Strip Bond
0.00% to 11/15/2009; 11.75% to
11/15/2014 150,000 60,986
U.S. Treasury Strip Bond
0.00%, 02/15/2015 300,000 98,451
U.S. Treasury Bond
9.00%, 11/15/2018 650,000 848,958
U.S. Treasury Strip Bond
0.00%, 08/15/2021 250,000 46,325
U.S. Treasury Bond
8.00%, 11/15/2021 300,000 358,593
U.S. Treasury Bond
7.50%, 11/15/2024 250,000 285,625
---------
Subtotal 2,375,694
U.S. TREASURY NOTES - 24.03%
U.S. Treasury Note
8.00%, 10/15/1996 1,100,000 1,123,892
U.S. Treasury Strip Note
0.00%, 11/15/1997 200,000 178,532
U.S. Treasury Note
8.875%, 11/15/1997 850,000 902,063
U.S. Treasury Note
9.00%, 05/15/1998 900,000 969,606
U.S. Treasury Note
5.875%, 08/15/1998 200,000 200,938
U.S. Treasury Note
6.875%, 07/31/1999 1,100,000 1,139,699
U.S. Treasury Note
8.00%, 05/15/2001 700,000 770,434
U.S. Treasury Strip Note
0.00%, 02/15/2003 450,000 292,895
---------
Subtotal 5,578,059
Total U.S. Government Securities
(cost $7,863,311) 7,953,753
---------
SHORT TERM INVESTMENTS - 0.86%
COMMERCIAL PAPER - 0.86%
General Electric Capital Corporation
5.60%, 11/03/1995 200,000 199,938
Total Short Term Investments
(cost $199,938) 199,938
-------
TOTAL INVESTMENTS - 100%
(cost $20,230,669) $23,218,924
===========
(a) Non-income producing.
</TABLE>
The accompanying notes to financial statements are an integral part of this
schedule.
59
<PAGE> 95
APPENDIX A -- RATINGS OF INVESTMENTS
COMMERCIAL PAPER RATINGS
A-1, A-2 AND PRIME-1, PRIME-2 COMMERCIAL PAPER RATINGS
Commercial paper rated by Standard & Poor's Corporation has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better. 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 and the issuer has a strong position
within the industry. The reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1 or A-2.
The ratings Prime-1 and Prime-2 are the two highest commercial paper ratings
assigned by Moody's Investors Service, Inc. Among the factors considered by it
in assigning ratings are the following: (1) evaluation of the management of
the issuer; (2) economic evaluation of the issuer's industry or industries and
an appraisal of speculative-type risks which may be inherent in certain areas;
(3) evaluation of the issuer's products in relation to competition and
customer-acceptance; (4) liquidity; (5) amount and quality of long-term debt;
(6) trend of earnings over a period of ten years; (7) financial strength of a
parent company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present or may arise
as a result of public interest questions and preparations to meet such
obligations. Relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated Prime-1 or 2.
CORPORATE BONDS
STANDARD & POOR'S CORPORATION BOND RATINGS
AAA. Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issued only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
60
<PAGE> 96
BB, B, CCC, CC, C. Debt rated BB, B, CCC, CC, and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CI. The rating CI is reserved for income bonds on which no interest is being
paid.
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. BOND RATINGS
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.
61
<PAGE> 97
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
and interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
MUNICIPAL BONDS
STANDARD & POOR'S MUNICIPAL BOND RATINGS
AAA. Bonds rated AAA have the highest rating assigned by Standard & Poors.
Capital to pay interest and repay principal is extremely sharp.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A. Bonds which are rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debit in higher rated
categories.
BBB. Bonds which are rated BBB are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated categories.
PLUS (+) OR MINUS (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATINGS
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
"glit-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
62
<PAGE> 98
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.
NOTE: Moody's applies numerical modifiers, 1, 2 AND 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
63
