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STATEMENT OF ADDITIONAL INFORMATION
ONE GROUP(R) INVESTMENT TRUST
ONE GROUP INVESTMENT TRUST BOND PORTFOLIO (THE "BOND PORTFOLIO")
ONE GROUP INVESTMENT TRUST GOVERNMENT BOND PORTFOLIO (THE "GOVERNMENT BOND
PORTFOLIO")
ONE GROUP INVESTMENT TRUST BALANCED PORTFOLIO (THE "BALANCED PORTFOLIO")
ONE GROUP INVESTMENT TRUST LARGE CAP GROWTH PORTFOLIO (THE "LARGE CAP GROWTH
PORTFOLIO")
ONE GROUP INVESTMENT TRUST EQUITY INDEX PORTFOLIO (THE "EQUITY INDEX
PORTFOLIO")
ONE GROUP INVESTMENT TRUST DIVERSIFIED EQUITY PORTFOLIO
(THE "DIVERSIFIED EQUITY PORTFOLIO")
ONE GROUP INVESTMENT TRUST DIVERSIFIED MID CAP PORTFOLIO
(THE "DIVERSIFIED MID CAP PORTFOLIO")
ONE GROUP INVESTMENT TRUST MID CAP GROWTH PORTFOLIO (THE "MID CAP GROWTH
PORTFOLIO")
ONE GROUP INVESTMENT TRUST MID CAP VALUE PORTFOLIO
(THE "MID CAP VALUE PORTFOLIO")
(EACH A "PORTFOLIO," AND COLLECTIVELY THE "PORTFOLIOS")
MARCH 31, 1999
as Revised January 1, 2000
This Statement of Additional Information is not a Prospectus, but
supplements and should be read with the Prospectus dated March 31, 1999 for the
Portfolios (the "Prospectus"). This Statement of Additional Information is
incorporated in its entirety into the Prospectus. A copy of the Prospectus may
be obtained by writing to One Group Investment Trust (the "Trust") at 1111
Polaris Parkway, Suite B2, Columbus, Ohio 43240 or by calling toll free at
1-800-480-4111.
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TABLE OF CONTENTS
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THE TRUST................................................................................................................1
INVESTMENT OBJECTIVES AND POLICIES.......................................................................................3
Additional Information on Portfolio Investments.......................................................................3
Asset-Backed Securities...........................................................................................3
Bank Obligations..................................................................................................3
Commercial Paper..................................................................................................4
Common Stock......................................................................................................4
Convertible Securities............................................................................................4
Demand Features...................................................................................................4
Foreign Investments...............................................................................................5
Limitations on the Use of Foreign Investments.....................................................................5
Futures and Options Trading.......................................................................................6
Futures Contracts...............................................................................................6
Limitations on the Use of Futures Contracts.....................................................................7
Risk Factors in Futures Transactions............................................................................8
Options Contracts...............................................................................................9
Writing (Selling) Covered Calls.................................................................................9
Purchasing Call Options........................................................................................11
Purchasing Put Options.........................................................................................11
Secured Puts...................................................................................................11
Straddles and Spreads..........................................................................................11
Risk Factors in Options Transactions...........................................................................11
Limitations on the Use of Options..............................................................................12
Government Securities............................................................................................12
High Yield/High Risk Securities/Junk Bonds.......................................................................13
Investment Company Securities....................................................................................13
Loan Participations and Assignments..............................................................................14
Mortgage-Related Securities......................................................................................14
Mortgage-Backed Securities (CMOs and REMICs)...................................................................14
Mortgage Dollar Rolls..........................................................................................16
Stripped Mortgage Backed Securities............................................................................17
Adjustable Rate Mortgage Loans.................................................................................17
Risk Factors of Mortgage-Related Securities....................................................................18
Municipal Securities.............................................................................................19
Risk Factors in Municipal Securities...........................................................................21
PERCs............................................................................................................23
Preferred Stock..................................................................................................23
Real Estate Investment Trusts ("REITs")..........................................................................23
Repurchase Agreements............................................................................................24
Reverse Repurchase Agreements....................................................................................24
Restricted Securities............................................................................................24
Securities Lending...............................................................................................26
Short-term Funding Agreements....................................................................................26
SPDRs............................................................................................................26
Structured Instruments...........................................................................................27
Swaps, Caps and Floors...........................................................................................27
Treasury Receipts................................................................................................29
U.S. Treasury Obligations........................................................................................29
Variable and Floating Rate Instruments...........................................................................29
Limitations on the Use of Variable and Floating Rate Notes.......................................................30
Warrants.........................................................................................................30
When-Issued Securities and Forward Commitments.................................................................. 30
Investment Restrictions.............................................................................................31
Portfolio Turnover..................................................................................................32
Additional Tax Information Concerning All Portfolios................................................................33
VALUATION...............................................................................................................34
Valuation of the Portfolios.............................................................................................34
ADDITIONAL INFORMATION REGARDING THE
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CALCULATION OF PER SHARE NET ASSET VALUE............................................................................35
Additional Purchase and Redemption Information..........................................................................35
MANAGEMENT OF THE TRUST.................................................................................................35
Trustees & Officers..............................................................................................35
Investment Advisor...............................................................................................37
Glass-Steagall Act...............................................................................................40
Portfolio Transactions...........................................................................................40
Administrator....................................................................................................41
Custodian, Sub-Custodian, and Transfer Agent.....................................................................43
Experts..........................................................................................................44
ADDITIONAL INFORMATION..................................................................................................44
Description of Shares............................................................................................44
Shareholder and Trustee Liability................................................................................46
Shareholders.....................................................................................................46
Calculation of Performance Data..................................................................................48
Administrative Services Plan.....................................................................................50
Miscellaneous....................................................................................................50
FINANCIAL STATEMENTS ...................................................................................................51
DESCRIPTION OF RATINGS
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THE TRUST
One Group Investment Trust(formerly called The One Group Investment Trust) (the
"Trust") is an open-end management investment company. The Trust was formed as a
Massachusetts business trust on June 7, 1993. The Trust consists of nine series
of units of beneficial interest ("Shares") each representing interests in one of
the following separate investment portfolios:
1. Bond Portfolio (formerly called the Bond Fund)
2. Government Bond Portfolio (formerly called the Government Bond
Fund)
3. Balanced Portfolio (formerly called the Asset Allocation Fund)
4. Mid Cap Growth Portfolio (formerly called the Growth
Opportunities Fund)
5. Large Cap Growth Portfolio (formerly called the Large Company
Growth Fund)
6. Equity Index Portfolio (formerly called the Equity Index Fund)
7. Diversified Equity Portfolio (formerly called the Value Growth
Fund)
8. Diversified Mid Cap Portfolio (formerly called the Mid Cap
Opportunities Fund)
9. Mid Cap Value Portfolio (formerly called the Mid Cap Value
Fund)
For ease of reference, this Statement of Additional Information sometimes refers
to the portfolios as the BOND PORTFOLIOS and the EQUITY PORTFOLIOS.
The BOND PORTFOLIOS include:
1. Bond Portfolio and
2. Government Bond Portfolio.
The EQUITY PORTFOLIOS include:
1. Balanced Portfolio,
2. Mid Cap Growth Portfolio,
3. Large Cap Growth Portfolio,
4. Equity Index Portfolio,
5. Diversified Equity Portfolio,
6. Diversified Mid Cap Portfolio, and
7. Mid Cap Value Portfolio.
All of the Portfolios are diversified, as defined under the Investment Company
Act of 1940, as amended, (the "1940 ACT").
SUBSTITUTION OF ONE GROUP INVESTMENT TRUST PORTFOLIOS FOR PEGASUS VARIABLE
FUNDS. On March 31, 1999, the following portfolios of the Trust were substituted
for the following Pegasus Variable funds in separate accounts maintained by
Hartford Life and Annuity Insurance Company:
ONE GROUP INVESTMENT TRUST PORTFOLIO PEGASUS VARIABLE FUND
1. Bond Portfolio 1. Bond Fund
2. Large Cap Growth Portfolio 2. Growth Fund
3. Diversified Mid Cap Portfolio 3. Mid-Cap Opportunity Fund
4. Mid Cap Value Portfolio 4. Intrinsic Value Fund
5. Diversified Equity Portfolio 5. Growth and Value Fund
With the exception of the Large Cap Growth Portfolio, the Pegasus Variable Funds
are the surviving funds for accounting purposes. The Pegasus Variable Bond Fund,
the Pegasus Variable Mid-Cap Opportunity Fund, the Pegasus Variable Intrinsic
Value Fund, and the Pegasus Growth and Value Fund are referred to as the
"PREDECESSOR FUNDS" in this Statement of Additional Information. Individual
Predecessor Funds are identified in this Statement of Additional Information by
reference to the applicable One Group Investment Trust Portfolio.
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Much of the information in this Statement of Additional Information
expands upon subjects discussed in the Prospectus. You should not invest in the
Portfolios without first reading the Prospectus.
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INVESTMENT OBJECTIVES AND POLICIES
The following policies supplement each Portfolio's investment objective and
policies as described in the Prospectus. Additional details about each
Portfolio's investment objectives and policies is contained in the Prospectus
under "Risk/Return Summaries" and "Principal Investment Strategies" and in
Appendix A.
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS
ASSET-BACKED SECURITIES
Asset-backed securities include securities secured by company receivables, home
equity loans, truck and auto loans, leases, credit card receivables.
Asset-Backed Securities also include other securities backed by other types of
receivables or other assets. These securities are generally pass-through
securities, which means that principal and interest payments on the underlying
securities (less servicing fees) are passed through to shareholders on a pro
rata basis.
Prepayment Risks. The issuers of asset-backed securities may be able to repay
principal in advance if interest rates fall. Also, the underlying assets (for
example, the underlying credit card debt) may be refinanced or paid off prior to
maturity during periods of declining interest rates If asset-backed securities
are pre-paid, a Portfolio may have to reinvest the proceeds from these
securities at a lower rate. In addition, potential market gains on a security
subject to prepayment risk may be more limited than securities that cannot be
prepaid. Under certain prepayment rate scenarios, a Portfolio may fail to
recover any premium paid on asset-backed securities.
BANK OBLIGATIONS
Bank obligations include bankers' acceptances, certificates of deposit, and
demand and time deposits. The Portfolios (other than the Government Bond
Portfolio) may invest in bank obligations.
BANKERS' ACCEPTANCES are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise. These drafts are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. To be eligible for purchase
by a Portfolio, a bankers' acceptance must be guaranteed by domestic and foreign
banks and savings and loan associations having, at the time of investment, total
assets in excess of $1 billion (as of the date of their most recently published
financial statements).
CERTIFICATES OF DEPOSIT are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return. To be eligible for investment, a
certificate of deposit must be issued by domestic and foreign branches of U.S.
commercial banks which are members of the Federal Reserve System or the deposits
of which are insured by the Federal Deposit Insurance Corporation, and in
certificates of deposit of domestic savings and loan associations the deposits
of which are insured by the Federal Deposit Insurance Corporation if, at the
time of purchase, such institutions have total assets in excess of $1 billion
(as of the date of their most recently published financial statements).
Certificates of deposit may also include those issued by foreign banks outside
the United States with total assets at the time of purchase in excess of the
equivalent of $1 billion.
The Portfolios may also invest in Eurodollar certificates of deposit. Eurodollar
certificates of deposit are U.S. dollar-denominated certificates of deposit
issued by branches of foreign and domestic banks located outside the United
States. The Portfolios may also invest in Yankee certificates of deposit. Yankee
certificates of deposits are certificates of deposit issued by a U.S. branch of
a foreign bank denominated in U.S. dollars and held in the United States. The
Portfolios may also invest in obligations (including banker's acceptances and
certificates of deposit) denominated in foreign currencies (see "Foreign
Investments").
DEMAND DEPOSITS are funds deposited in a commercial bank or a savings and loan
association which, without prior notice to the bank, may be withdrawn generally
by negotiable draft. Time and demand deposits will be maintained only at banks
or savings and loan associations from which a Portfolio could purchase
certificates of deposit. TIME DEPOSITS are interest-bearing non-negotiable
deposits at a bank or a savings and loan association that have a specific
maturity date. A time deposit earns a specific rate of interest over a definite
period of time. Time deposits cannot be traded on the
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secondary market. Time deposits that exceed seven days and include a withdrawal
penalty are considered to be illiquid.
COMMERCIAL PAPER
Commercial paper consists of promissory notes issued by corporations.
Although these notes are generally unsecured, the Portfolios may also purchase
secured commercial paper. Except as noted below with respect to variable amount
master demand notes, issues of commercial paper normally have maturities of less
than nine months and fixed rates of return. The Portfolios only purchase
commercial paper that meet the following criteria.
Bond Portfolio. The Bond Portfolio may purchase commercial paper
consisting of issues rated at the time of purchase in the highest or
second highest rating category by at least one Nationally Recognized
Statistical Rating Organization ("NRSRO") (such as A-2 or better by
Standard & Poor's Corporation ("S&P"), Aa or better by Moody's Investors
Service, Inc. ("Moody's") or A2 or better by Fitch IBCA ("Fitch")) or if
unrated, determined by Banc One Investment Advisors Corporation ("BANC
ONE INVESTMENT ADVISORS") to be of comparable quality.
Equity Portfolios. The Equity Portfolios may purchase commercial paper
consisting of issues rated at the time of purchase in the highest or
second highest rating category by at least one NRSRO (such as A-2 or
better by S&P, P-2 or better by Moody's or F-2 or better by Fitch) or if
unrated, determined by Banc One Investment Advisors to be of comparable
quality.
COMMON STOCK
Common stock represents a share of ownership in a company and usually carries
voting rights and earns dividends. Unlike preferred stock, common stock
dividends are not fixed but are declared at the discretion of the issuer's board
of directors.
CONVERTIBLE SECURITIES
Convertible securities are similar to both fixed income and equity securities.
Convertible securities may be issued as bonds or preferred stock. Because of the
conversion feature, the market value of convertible securities tends to move
together with the market value of the underlying stock. As a result, the
Portfolios base selection of convertible securities, to a great extent, on the
potential for capital appreciation that may exist in the underlying stock. The
value of convertible securities is also affected by prevailing interest rates,
the credit quality of the issuer, and any call provisions.
DEMAND FEATURES
The Bond Portfolio and the Balanced Portfolio may invest in securities that are
subject to puts and standby commitments ("DEMAND FEATURES"). A demand feature
allows a Portfolio to buy securities at their principal amount (usually with
accrued interest) within a fixed period (usually seven days) following a demand
by the Portfolio. The demand feature may be issued by the issuer of the
underlying securities, a dealer in the securities or by another third party, and
may not be transferred separately from the underlying security. The underlying
securities subject to a put may be sold at any time at market rates. The
Portfolios expect that they will acquire puts only where the puts are available
without the payment of any direct or indirect consideration. However, if
advisable or necessary, a premium may be paid for put features. A premium paid
will reduce the yield otherwise payable on the underlying security.
Under a "STAND-BY COMMITMENT," a dealer agrees to purchase, at a Portfolio's
option, specified municipal securities at a specified price. A Portfolio will
acquire these commitments only to aid portfolio liquidity and does not intend to
exercise the demand feature for trading purposes. Stand-by commitments may also
be referred to as put options. Each Portfolio will generally limit its
investments in stand-by commitments to 25% of its total assets.
The Portfolios engage in put transactions to maintain flexibility and liquidity
to permit them to meet redemption requests and remain as fully invested as
possible.
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FOREIGN INVESTMENTS
All of the Portfolios (except the Government Bond Portfolio and the Equity Index
Portfolio) may invest in certain obligations or securities of foreign issuers.
Possible investments include equity securities of foreign entities, obligations
of foreign branches of U.S. banks and of foreign banks, including, without
limitation, Eurodollar Certificates of Deposit, Eurodollar Time Deposits,
Eurodollar Banker's Acceptances, Canadian Time Deposits and Yankee Certificates
of Deposits, and investments in Canadian Commercial Paper, foreign securities
and Europaper.
The Equity Portfolios may purchase sponsored and unsponsored American Depository
Receipts ("ADRs"). Sponsored ADRs are listed on the New York Stock Exchange;
unsponsored ADRs are not. Therefore, there may be less information available
about the issuers of unsponsored ADRs than the issuers of sponsored ADRs.
Unsponsored ADRs are restricted securities.
RISK FACTORS OF FOREIGN INVESTMENTS
Political and Exchange Risks. Foreign investments involve investment risks that
differ in some respects from those related to investments in obligations of U.S.
domestic issuers. These risks include future adverse political and economic
developments, the possible imposition of withholding taxes on interest or other
income, possible seizure, nationalization or expropriation of foreign deposits,
the possible establishment of exchange controls or taxation at the source,
greater fluctuations in value due to changes in exchange rates, or the adoption
of other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations.
Higher Transaction Costs. Foreign investments may entail higher custodial fees
and sales commissions than domestic investments.
Accounting and Regulatory Differences. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks are not
regulated by U.S. banking authorities and may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
In addition, foreign banks generally are not bound by the accounting, auditing,
and financial reporting standards comparable to those applicable to U.S. banks.
Currency Risk. On January 1, 1999, the European Economic and Monetary Union
introduced the "euro." The euro serves as a common currency for participating
European nations. All stocks issued by corporations located in those nations
will be denominated in euros. In addition, outstanding shares will be
redenominated in euros. All government bonds issued by participating nations
will be in euros , and outstanding government bonds will be redenominated in
euros. The introduction of the euro presents some uncertainties, such as the
adequacy of newly created accounting, clearing, settlement, and payment systems
for the new currency. These uncertainties could adversely affect the value of
the foreign securities held by the Portfolios.
LIMITATIONS ON THE USE OF FOREIGN INVESTMENTS. Investments in all types of
foreign obligations or securities will not exceed 25% of the net assets of a
Portfolio.
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FUTURES AND OPTIONS TRADING
The Portfolios may enter into futures contracts, options, options on futures
contracts and stock index futures contracts and options thereon for the purposes
of remaining fully invested, reducing transaction costs, or managing interest
rate risk.
FUTURES CONTRACTS
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security, class of securities,
or an index at a specified future time and at a specified price. A stock index
futures contract is a bilateral agreement where two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. government agency.
Although the terms of most futures contracts call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. The acquisition
of put and call options on futures contracts will, respectively, give a
Portfolio the right (but not the obligation), for a specified price, to sell or
to purchase the underlying futures contract, upon exercise of the option, at any
time during the option period. Brokerage commissions are incurred when a futures
contract is bought or sold.
When making futures trades, the Portfolios are required to make a good faith
margin deposit in cash or government securities with a broker or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Initial margin deposits on futures
contracts are customarily set at levels much lower than the prices at which the
underlying securities are purchased and sold, typically ranging upward from less
than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The
Portfolios expect to earn interest income on their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Portfolios intend to enter into futures
contracts, options on futures contracts, index futures and options thereon that
are traded on an exchange regulated by the CFTC if, to the extent that these
futures and options are not for "bona fide hedging purposes" (as defined by the
CFTC), the aggregate initial margin and premiums on these positions (excluding
the amount by which options are in the money) do not exceed 5% of the
Portfolio's total assets at current value. A Portfolio, however, may invest more
than this amount for bona fide hedging purposes, and also may invest more than
that amount if it obtains authority to do so from the CFTC without rendering the
Portfolio a commodity pool operator.
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A Portfolio may buy and sell futures contracts and related options to manage its
exposure to changing interest rates and security prices. When interest rates are
expected to rise or market values of portfolio securities are expected to fall,
a Portfolio can seek through the sale of futures contracts to offset a decline
in the value of its portfolio securities. When interest rates are expected to
fall or market values are expected to rise, a Portfolio, through the purchase of
these contracts, can attempt to secure better rates or prices for the Portfolio
than might later be available in the market when it makes anticipated purchases.
Although techniques other than the sale and purchase of futures contracts could
be used to control the Portfolios' exposure to market fluctuations, the use of
futures contracts may be a more effective means of managing this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs may be lower than transaction costs that would be
incurred in the purchase and sale of the underlying securities.
A Portfolio's ability to effectively use futures trading depends on several
factors. First, price correlation between the futures contracts and their
underlying reference security or index may not be perfect. Second, it is
possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that a Portfolio could lose more than the original margin deposit required to
initiate a futures transaction.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS
Except for bona fide hedging purposes, none of the Portfolios will enter into
futures contract transactions if immediately after the transaction, the sum of
its initial margin deposits and premiums on open contracts exceeds 5% of the
market value of the respective Portfolio's total assets. None of the Portfolios
will enter into futures contracts if the value of the futures contracts held
would exceed 25% of the applicable Portfolio's total assets.
The Portfolios restrict their futures contract trading as follows:
1. The Portfolios will not engage in transactions in futures contracts for
speculative purposes;
2. The Portfolios will not market themselves to the public as commodity
pools or otherwise as vehicles for trading in the commodities futures
or commodity options markets;
3. The Portfolios will disclose to all prospective Shareholders the
purpose of and limitations on their commodity futures trading;
4. The Portfolios will submit to the CFTC special calls for information.
Accordingly, registration as a commodities pool operator with the CFTC
is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds in a segregated account pursuant
to requirements imposed by the SEC. Under those requirements, where a Portfolio
has a long position in a futures contract, it may be required to establish a
segregated account (not with a futures commission merchant or broker) containing
cash or certain liquid assets equal to the purchase price of the contract (less
any margin on deposit). For a short position in futures or forward contracts
held by a Portfolio, those requirements may mandate the establishment of a
segregated account (not with a futures commission merchant or broker) with cash
or certain liquid assets that, when added to the amounts deposited as margin,
equal the market value of the instruments underlying the futures contracts (but
are not less than the price at which the short positions were established).
However, segregation of assets is not required if a Portfolio "covers" a long
position. For example, instead of segregating assets, a Portfolio, when holding
a long position in a futures contract, could purchase a put option on the same
futures contract with a strike price as high or higher than the price of the
contract held by the Portfolio. In addition, where a Portfolio takes short
positions, or engages in sales of call options, it need not segregate assets if
it "covers" these positions. For example, where a Portfolio holds a short
position in a futures contract, it may cover by owning the instruments
underlying the contract. The Portfolios may also cover such a position by
holding a call option permitting it to purchase the same futures contract at a
price no higher than the price at which the short position was established.
Where a Portfolio sells a call option on a futures contract, it may cover either
by entering into a long position in the same contract at a price no higher than
the strike price of the call option or by owning the instruments underlying the
futures contract. A Portfolio could also cover this position
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by holding a separate call option permitting it to purchase the same futures
contract at a price no higher than the strike price of the call option sold by
the Portfolio. In certain circumstances, entry into a futures contract that
substantially eliminates risk of loss and the opportunity for gain in an
"appreciated financial position" will also accelerate gain to the Portfolios.
RISK FACTORS IN FUTURES TRANSACTIONS
LIQUIDITY. Positions in futures contracts may be closed out only on an exchange
which provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Portfolio would continue to
be required to make daily cash payments to maintain the required margin. In
these situations, if a Portfolio has insufficient cash, it may have to sell
portfolio securities to meet daily margin requirements even though it may be
disadvantageous to do so. In addition, a Portfolio may be required to deliver
the instruments underlying futures contracts it holds. The inability to close
options and futures positions could also adversely impact the Portfolio's
ability to effectively hedge these positions. The Portfolios will minimize the
risk that they will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
RISK OF LOSS. The risk of loss in trading futures contracts in some strategies
can be substantial, due both to the low margin deposits required, and the
extremely high degree of leverage involved in futures pricing. Because the
deposit requirements in the futures markets are less onerous than margin
requirements in the securities market, there may be increased participation by
speculators in the futures market which may also cause temporary price
distortions. A relatively small price movement in a futures contract may result
in immediate and substantial loss (as well as gain) to the investor. For
example, if at the time of purchase, 10% of the value of the futures contract is
deposited as margin, a subsequent 10% decrease in the value of the futures
contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. Thus,
a purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the futures strategies engaged
in by the Portfolios typically are for risk management purposes, Banc One
Investment Advisors does not believe that the Portfolios are subject to the
risks of loss frequently associated with futures transactions. Each Portfolio
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
CORRELATION RISK. A Portfolio's use of futures transactions involves the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. A
Portfolio could also lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
a Portfolio of margin deposits in the event of bankruptcy of a broker with whom
the Portfolio has an open position in a futures contract or related option.
PRICE FLUCTUATIONS. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Some futures strategies, including selling futures, buying puts and writing
covered calls, may reduce a Portfolio's exposure to price fluctuations. Other
strategies, including buying futures, and buying calls, tend to increase market
exposure. Futures and options may be combined with each other in order to adjust
the risk and return characteristics of the overall portfolio. A Portfolio
expects to enter into these transactions to manage a return or spread on a
particular investment or portion of its assets, to protect against any increase
in the price of securities a Portfolio anticipates purchasing at a later date,
or for other risk management strategies.
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OPTIONS CONTRACTS
The Portfolios may use options on securities or futures contracts as a hedging
device. An option gives the buyer of the option the right (but not the
obligation) to purchase a futures contract or security at a specified price
(also called the STRIKE price). A CALL OPTION gives the buyer the "right to
purchase" a security at a specified price (the exercise price) at any time until
a certain date (the expiration date). So long as the obligation of the writer of
a call option continues, the writer may be assigned an exercise notice by the
broker-dealer through whom the option was sold, requiring the writer to deliver
the underlying security against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at which
the writer effects a closing purchase transaction by repurchasing an option
identical to that previously sold. To secure the writer's obligation to deliver
the underlying security in the case of a call option, subject to the rules of
the Options Clearing Corporation, a writer is required to deposit in escrow the
underlying security or other assets in accordance with these rules.
A PUT OPTION gives the buyer the right to sell the underlying futures contract
or security. The seller (or "writer") of a put option must purchase futures
contracts or securities at a strike price if the option is exercised. In the
case of a call option, the seller must sell the futures contract or security in
the underlying futures contract or security at the strike price if the option is
exercised.
A NAKED OPTION is an option written by a party who does not own the underlying
futures contract or security. A COVERED OPTION is an option written by a party
who does own the underlying position. The initial purchase (sale) of an option
is an "opening transaction." In order to close out an option position, the
Portfolio may enter into a "closing transaction". This involves the sale
(purchase) of an option contract on the same security with the same exercise
price and expiration date as the option contract originally opened.
A call option on a futures contract or security is said to be "in-the-money" if
the strike price is below current market levels and "out-of-the-money" if the
strike price is above current market levels. A put option is "in-the-money" if
the strike price is above current market levels, and "out-of-the-money" if the
strike price is below current market levels.
Options have limited life spans, usually tied to the delivery or settlement date
of the underlying futures contract or security. Some options, however, expire
significantly in advance of such dates. An option that is "out-of-the-money" and
not offset by the time it expires becomes worthless. On certain exchanges
"in-the-money" options are automatically exercised on their expiration date, but
on others unexercised options simply become worthless after their expiration
date. Options usually trade at a premium (referred to as the "time value" of the
option) above their intrinsic value (the difference between the market price for
the underlying futures contract or equity security and the strike price). As an
option nears its expiration date, the market value and the intrinsic value move
into parity as the time value diminishes.
Increased market volatility generally increases the value of options by
increasing the probability of favorable market swings, putting outstanding
options "in-the-money." Although purchasing options is a limited risk trading
approach, significant losses can be incurred by doing so.
WRITING (SELLING) COVERED CALLS
The Portfolios may write (sell) covered call options and purchase options to
close out options previously written by the Portfolio. The Portfolios' purpose
in writing covered call options is to generate additional premium income. This
premium income will serve to enhance a Portfolio's total return and will reduce
the effect of any price decline of the security involved in the option.
Generally, the Portfolios will write covered call options on securities which,
in the opinion of Banc One Investment Advisors are not expected to make any
major price moves in the near future but which, over the long term, are deemed
to be attractive investments for the Portfolio. The Portfolios will write only
covered call options. This means that a Portfolio will only write a call option
on a security which a Portfolio already owns.
Portfolio securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with each
Portfolio's investment objectives. The writing of
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covered call options is a conservative investment technique believed to involve
relatively little risk (in contrast to the writing of naked options, which a
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security above the exercise price, but conversely retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, a Portfolio has no control over when it may be required to
sell the underlying securities, since it may be assigned an exercise notice at
any time prior to the expiration of its obligation as a writer. Thus, the
security could be "called away" at a price substantially below the fair market
value of the security. If a call option which a Portfolio has written expires, a
Portfolio will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, a Portfolio will realize a
gain or loss from the sale of the underlying security. The security covering the
call will be maintained in a segregated account of the Portfolio's custodian.
The Portfolios do not consider a security covered by a call to be "pledged" as
that term is used in each Portfolio's policy which limits the pledging or
mortgaging of its assets.
The premium received is the market value of an option. The premium each
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security, the relationship of
the exercise price to the market price, the historical price volatility of the
underlying security, and the length of the option period. Once the decision to
write a call option has been made, Banc One Investment Advisors, in determining
whether a particular call option should be written on a particular security,
will consider the reasonableness of the anticipated premium and the likelihood
that a liquid secondary market will exist for those options. The premium
received by a Portfolio for writing covered call options will be recorded as a
liability in the Portfolio's statement of assets and liabilities. This liability
will be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per Share of the
Portfolio is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The liability will be extinguished upon
expiration of the option, the purchase of an identical option in the closing
transaction, or delivery of the underlying security upon the exercise of the
option.
Generally, a Portfolio, in order to avoid the exercise of an option sold by it,
will be able to cancel its obligation under the option by entering into a
closing purchase transaction, if available, unless selling (in the case of a
call option) or purchasing (in the case of a put option) the underlying
securities is determined to be in a Portfolio's best interest. A closing
purchase transaction consists of a Portfolio purchasing an option having the
same terms as the option sold by a Portfolio, and has the effect of cancelling a
Portfolio's position as a seller. The premium which a Portfolio will pay in
executing a closing purchase transaction may be higher (or lower) than the
premium received when the option was sold, depending in large part upon the
relative price of the underlying security at the time of each transaction. To
the extent options sold by a Portfolio are exercised and a Portfolio delivers
securities to the holder of a call option, a Portfolio's turnover rate will
increase, which would cause a Portfolio to incur additional brokerage expenses.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction permits a Portfolio to write another call option on the underlying
security with either a different exercise price or expiration date or both. If a
Portfolio desires to sell a particular security from its portfolio on which it
has written a call options it will seek to effect a closing transaction prior
to, or concurrently with, the sale of the security. There is, of course, no
assurance that a Portfolio will be able to effect such closing transactions at a
favorable price. If a Portfolio cannot enter into a closing transaction, it may
be required to hold a security that it might otherwise have sold, in which case
it would continue to be at market risk on the security. This could result in
higher transaction costs. A Portfolio will pay transaction costs in connection
with the writing of options to close out previously written options. Such
transaction costs are normally higher than those applicable to purchases and
sales of portfolio securities.
Call options written by a Portfolio will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
at the time the options are written. From time to time, a Portfolio may purchase
an underlying security for delivery in accordance with an exercise notice of a
call option assigned to it, rather than delivering the security from its
portfolio. In such cases, additional costs will be incurred.
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A Portfolio will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from the
writing of the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
Portfolio.
PURCHASING CALL OPTIONS
The Portfolios may purchase call options to hedge against an increase in the
price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option because the Portfolio,
as holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. These costs will reduce any profit the Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option. If paying a premium for a call option, together with
a price movement in the underlying security, is such that exercise of the option
would not be profitable to the Portfolio, loss of the premium may be offset by a
decrease in the acquisition cost of securities by the Portfolio.
PURCHASING PUT OPTIONS
The Portfolios may also purchase put options to protect their portfolio holdings
in an underlying security against a decline in market value. Hedge protection is
provided during the life of the put option since the Portfolio, as holder of the
put option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. For a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the Portfolio will
reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
cost. However, any loss of premium may be offset by an increase in the value of
the Portfolio's securities.
SECURED PUTS
The Portfolios may write secured puts. For the secured put writer, substantial
depreciation in the value of the underlying security would result in the
security being "put to" the writer at the strike price of the option which may
be substantially greater than the fair market value of the security. If a
secured put option expires unexercised, the writer realizes a gain in the amount
of the premium.
STRADDLES AND SPREADS
The Portfolios also may engage in straddles and spreads. In a straddle
transaction, a Portfolio either buys a call and a put or sells a call and a put
on the same security. In a spread, the Portfolio purchases and sells a call or a
put. The Portfolio will sell a straddle when Banc One Investment Advisors
believes the price of a security will be stable. The Portfolio will receive a
premium on the sale of the put and the call. A spread permits the Portfolio to
make a hedged investment that the price of a security will increase or decline.
RISK FACTORS IN OPTIONS TRANSACTIONS
Risk of Loss. When it purchases an option, a Portfolio runs the risk of losing
its entire investment in the option in a relatively short period of time, unless
the Portfolio exercises the option or enters into a closing sale transaction
with respect to the option during the life of the option. If the price of the
underlying security does not rise (in the case of a call) or fall (in the case
of a put) to an extent sufficient to cover the option premium and transaction
costs, a Portfolio will lose part or all of its investment in the option. This
contrasts with an investment by a Portfolio in the underlying securities,
because the Portfolio may continue to hold its investment in those securities
notwithstanding the lack of a change in price of those securities. In addition,
there may be imperfect or no correlation between the changes in market value of
the securities held by the Portfolios and the prices of the options.
Judgement of Advisor. The successful use of the options strategies depends on
the ability of Banc One Investment Advisors to assess interest rate and market
movements correctly and to accurately
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calculate the fair price of the option. The effective use of options also
depends on a Portfolio's ability to terminate option positions at times when
Banc One Investment Advisors deems it desirable to do so. A Portfolio will take
an option position only if Banc One Investment Advisors believes there is a
liquid secondary market for the option, however, there is no assurance that a
Portfolio will be able to effect closing transactions at any particular time or
at an acceptable price.
Liquidity. If a secondary trading market in options were to become unavailable,
a Portfolio could no longer engage in closing transactions. Lack of investor
interest might adversely affect the liquidity of the market for particular
options or series of options. A marketplace may discontinue trading of a
particular option or options generally. In addition, a market could become
temporarily unavailable if unusual events, such as volume in excess of trading
or clearing capability, were to interrupt normal market operations. A
marketplace may at times find it necessary to impose restrictions on particular
types of options transactions, which may limit a Portfolio's ability to realize
its profits or limit its losses.
Market Restrictions. Disruptions in the markets for the securities underlying
options purchased or sold by a Portfolio could result in losses on the options.
If trading is interrupted in an underlying security, the trading of options on
that security is normally halted as well. As a result, a Portfolio as purchaser
or writer of an option will be unable to close out its positions until option
trading resumes, and it may be faced with losses if trading in the security
reopens at a substantially different price. In addition, the Options Clearing
Corporation ("OCC") or other options markets may impose exercise restrictions.
If a prohibition on exercise is imposed at the time when trading in the option
has also been halted, a Portfolio as purchaser or writer of an option will be
locked into its position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by a Portfolio
has expired, the Portfolio could lose the entire value of its option.
Foreign Investment Risks. Special risks are presented by internationally-traded
options. Because of time differences between the United States and the various
foreign countries, and because different holidays are observed in different
countries, foreign option markets may be open for trading during hours or on
days when U.S. markets are closed. As a result, option premiums may not reflect
the current prices of the underlying interest in the United States.
LIMITATIONS ON THE USE OF OPTIONS.
Each Portfolio will limit the writing of put and call options to 25% of its net
assets. Some Portfolios may enter into over-the-counter option transactions.
There will be an active over-the-counter market for such options which will
establish their pricing and liquidity. The Portfolios will only enter into these
option transactions with broker/dealers who have a minimum net worth of
$20,000,000.
GOVERNMENT SECURITIES
The Portfolios invest in securities issued by agencies and instrumentalities of
the U.S. Government. Not all securities issued by U.S. Government agencies and
instrumentalities are backed by the full faith and credit of the U.S. Treasury.
- - Obligations of certain agencies and instrumentalities of the U.S.
government, such as the Government National Mortgage Association
("Ginnie Mae") and the Export-Import Bank, are supported by the full
faith and credit of the U.S. Treasury;
- - Others, such as the Federal National Mortgage Association ("Fannie
Mae"), are supported by the right of the issuer to borrow from the
Treasury;
- - Others are supported by the discretionary authority of the U.S.
government to purchase the agency's obligations; and
- - Still others, such as the Federal Farm Credit Banks and the Federal
Home Loan Mortgage Corporation ("Freddie Mac") are supported only by
the credit of the instrumentality.
No assurance can be given that the U.S. government would provide financial
support to U.S. government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. A Portfolio will invest in the obligations of these
agencies or instrumentalities only when Banc One Investment Advisors believes
that the credit risk is minimal. For information on mortgage-related securities
issued by certain agencies or instrumentalities of the U.S. government, see
"Investment
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Objectives and Policies--Mortgage-Related Securities" in this Statement of
Additional Information.
HIGH YIELD/ HIGH RISK SECURITIES/JUNK BONDS
The Diversified Mid Cap Portfolio may invest in convertible securities that
are rated below investment grade by the primary rating agencies (BB or lower by
S&P and BA or lower by Moody's). Such convertible securities may be structured
as bonds or preferred stock that convert to common stock. Terms used to describe
these convertible securities include "high yield securities," "lower rated
bonds," "non-investment grade bonds," "below investment ". These securities are
considered to be high risk investments. The risks include the following:
GREATER RISK OF LOSS. There is a greater risk that issuers of lower
rated securities will default than issuers of higher rated securities.
Issuers of lower rated securities may be less creditworthy, highly
indebted, financially distressed, or bankrupt. These issuers are more
vulnerable to real or perceived economic changes, political changes or
adverse industry developments. If an issuer fails to pay principal or
interest, the Portfolio would experience a decrease in income and a
decline in the market value of their investments. The Portfolio may
also incur additional expenses in seeking recovery from the issuer.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The income and
market value of lower-rated securities may fluctuate more than higher
rated securities. Although non-investment grade securities tend to be
less sensitive to interest rate changes than investment grade
securities, non-investment grade securities are more sensitive to
short-term corporate, economic and market developments. During periods
of economic uncertainty and change, the market price of the investments
in lower-rated securities may be volatile.
VALUATION DIFFICULTIES. It is often more difficult to value lower rated
securities than higher rated securities. If an issuer's financial
condition deteriorates, accurate financial and business information may
be limited or unavailable. In addition, the lower rated investments may
be thinly traded and there may be no established secondary market.
Because of the lack of market pricing and current information for
investments in lower rated securities, valuation of such investments is
much more dependent on judgment than is the case with higher rated
securities.
LIQUIDITY. There may be no established secondary or public market for
investments in lower rated securities. As a result, the Funds may be
required to sell investments at substantial losses or retain them
indefinitely even where an issuer's financial condition is
deteriorating.
HIGH YIELD BOND MARKET. Unlike investment grade securities (including
securities which were investment grade when issued but have fallen
below investment grade), the track record for bond default rates on new
issues of non-investment grade bonds is relatively short. It may be
that future default rates on new issues of non-investment grade
securities will be more widespread and higher than in the past,
especially if economic conditions deteriorate.
CREDIT QUALITY. Credit quality of non-investment grade securities can
change suddenly and unexpectedly, and even recently-issued credit
ratings may not fully reflect the actual risks posed by a particular
high-yield security.
NEW LEGISLATION. Future legislation may have a possible negative impact
on the market for high yield, high risk bonds. As an example, in the
late 1980's, legislation required federally-insured savings and loan
associations to divest their investments in high yield, high risk
bonds. New legislation, if enacted, could have a material negative
effect on a Portfolio's net asset value and investment practices.
INVESTMENT COMPANY SECURITIES
The Portfolios may invest up to 5% of their total assets in the securities of
any one investment company (another mutual fund), but may not own more than 3%
of the outstanding securities of any one investment company or invest more than
10% of their total assets in the securities of other
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investment companies. Other investment company securities may include
securities of a money market fund of One Group(R), and securities of other money
market funds for which Banc One Investment Advisors or its affiliate serves as
investment advisor or administrator. Because other investment companies employ
an investment advisor, such investments by the Portfolios may cause Shareholders
to bear duplicate fees. Banc One Investment Advisors will waive its fee
attributable to Portfolio assets invested in funds advised by Banc One
Investment Advisors. Banc One Investment Advisors will also waive its fees
attributable to the assets of any Portfolio invested in any investment company
if required by the laws of any state in which shares of the Trust are sold.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Some of the Portfolios may invest in fixed and floating rate loans ("Loans").
Loans are arranged through private negotiations between borrowers (which may be
corporate issuers or issuers of sovereign debt obligations) and one or more
financial institutions ("Lenders"). Generally, the Portfolios invest in Loans by
purchasing Loan Participations ("Participations") or assignments of all or a
portion of Loans ("Assignments") from third parties.
Typically, a Portfolio will have a contractual relationship only with the Lender
and not with the borrower when it purchases a Participation. In contrast, a
Portfolio has direct rights against the borrower on the Loan when it purchases
an Assignment. Because Assignments are arranged through private negotiations
between potential assignees and potential assignors, however, the rights and
obligations acquired by a Portfolio as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender.
Limitations on Investments in Loan Participations and Assignments. Loan
participants and assignments may be illiquid. As a result, a Portfolio will
invest no more than 15% of its net assets in these investments. If a government
entity is a borrower on a Loan, the Portfolio will consider the government to be
the issuer of a Participation or Assignment for purposes of the Portfolio's
fundamental investment policy that it will not invest 25% or more of its total
assets in securities of issuers conducting their principal business activities
in the same industry (i.e., foreign government).
Risk Factors of Loan Participations and Assignments. A Portfolio may have
difficulty disposing of Assignments and Participations because to do so it will
have to assign such securities to a third party. Because there is no liquid
market for such securities, the Portfolios anticipate that such securities could
be sold only to a limited number of institutional investors. The lack of a
liquid secondary market may have an adverse impact on the value of such
securities and a Portfolio's ability to dispose of particular Assignments or
Participations when necessary to meet a Portfolio's liquidity needs in response
to a specific economic event such as a deterioration in the creditworthiness of
the borrower. The lack of a liquid secondary market for Assignments and
Participations also may make it more difficult for a Portfolio to assign a value
to those securities when valuing the Portfolio's portfolio and calculating its
net asset value.
MORTGAGE-RELATED SECURITIES
Mortgage-Backed Securities (CMOs and REMICs). Mortgage-backed securities include
collateralized mortgage obligations ("CMOs") and Real Estate Mortgage Investment
Conduits ("REMICs"). (A REMIC is a CMO that qualifies for special tax treatment
under the Code and invests in certain mortgages principally secured by interests
in real property and other permitted investments).
Mortgage-backed securities represent pools of mortgage loans assembled for sale
to investors by:
- - various governmental agencies such as Ginnie Mae;
- - government-related organizations such as Fannie Mae and Freddie Mac;
- - nongovernmental issuers such as commercial banks, savings and loan
institutions, mortgage bankers, and private mortgage insurance companies.
(Non-governmental mortgage securities cannot be treated as U.S. government
securities for purposes of investment policies).
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-related securities
and among the securities that they issue.
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Ginnie Mae Securities. Mortgage-related securities issued by Ginnie Mae
include Ginnie Mae Mortgage Pass-Through Certificates which are
guaranteed as to the timely payment of principal and interest by Ginnie
Mae. Ginnie Mae's guarantee is backed by the full faith and credit of the
United States. Ginnie Mae is a wholly-owned U.S. government corporation
within the Department of Housing and Urban Development. Ginnie Mae
certificates also are supported by the authority of Ginnie Mae to borrow
funds from the U.S. Treasury to make payments under its guarantee.
Fannie Mae Securities. Mortgage-related securities issued by Fannie Mae
include Fannie Mae Guaranteed Mortgage Pass-Through Certificates which
are solely the obligations of Fannie Mae and are not backed by or
entitled to the full faith and credit of the United States. Fannie Mae is
a government-sponsored organization owned entirely by private
stock-holders. Fannie Mae Certificates are guaranteed as to timely
payment of the principal and interest by Fannie Mae.
Freddie Mac Securities. Mortgage-related securities issued by Freddie Mac
include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a
corporate instrumentality of the United States, created pursuant to an
Act of Congress, which is owned entirely by Federal Home Loan Banks.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Banks and do not constitute a debt or obligation of
the United States or of any Federal Home Loan Bank. Freddie Mac
Certificates entitle the holder to timely payment of interest, which is
guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When Freddie Mac does not guarantee timely payment of
principal, Freddie Mac may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on
an underlying mortgage, but in no event later than one year after it
becomes payable.
CMOs and guaranteed REMIC pass-through certificates ("REMIC Certificates")
issued by Fannie Mae, Freddie Mac, Ginnie Mae and private issuers are types of
multiple class pass-through securities. Investors may purchase beneficial
interests in REMICs, which are known as "regular" interests or "residual"
interests. The Bond Portfolio does not currently intend to purchase residual
interests in REMICs. The REMIC Certificates represent beneficial ownership
interests in a REMIC Trust, generally consisting of mortgage loans or Fannie
Mae, Freddie Mac or Ginnie Mae guaranteed mortgage pass-through certificates
(the "Mortgage Assets"). The obligations of Fannie Mae, Freddie Mac or Ginnie
Mae under their respective guaranty of the REMIC Certificates are obligations
solely of Fannie Mae, Freddie Mac or Ginnie Mae, respectively.
GINNIE MAE REMIC CERTIFICATES. Ginnie Mae guarantees the full and timely
payment of interest and principal on each class of securities (in
accordance with the terms of those classes as specified in the related
offering circular supplement). The Ginnie Mae guarantee is backed by the
full faith and credit of the United States of America.
FANNIE MAE REMIC CERTIFICATES. Fannie Mae REMIC Certificates are issued
and guaranteed as to timely distribution of principal and interest by
Fannie Mae. In addition, Fannie Mae will be obligated to distribute the
principal balance of each class of REMIC Certificates in full, whether or
not sufficient funds are available.
FREDDIE MAC REMIC CERTIFICATES. Freddie Mac guarantees the timely payment
of interest, and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified residential
mortgages or participation therein purchased by Freddie Mac and placed in
a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees
timely payment of principal on certain PCs referred to as "Gold PCs."
REMIC Certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are treated
as U.S. government securities for purposes of investment policies.
CMOs and REMIC Certificates provide for the redistribution of cash flow
to multiple classes. Each class of CMOs or REMIC Certificates, often referred to
as a "tranche," is issued at a specific adjustable or fixed interest rate and
must be fully retired no later than its final distribution date. This
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reallocation of interest and principal results in the redistribution of
prepayment risk across to different classes. This allows for the creation of
bonds with more or less risk than the underlying collateral exhibits. Principal
prepayments on the mortgage loans or the Mortgage Assets underlying the CMOs or
REMIC Certificates may cause some or all of the classes of CMOs or REMIC
Certificates to be retired substantially earlier than their final distribution
dates. Generally, interest is paid or accrues on all classes of CMOs or REMIC
Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in the parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates which generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount of principal payable on the next payment date. The
PAC Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying Mortgage Assets. These tranches tend to have market prices and
yields that are much more volatile than the PAC classes. The Z-Bonds in which
the Portfolios may invest may bear the same non-credit- related risks as do
other types of Z-Bonds. Z-Bonds in which the Portfolio may invest will not
include residual interest.
Mortgage Dollar Rolls. Some of the Portfolios may enter into Mortgage Dollar
Rolls. In a Mortgage Dollar Role transaction, the Portfolios sell securities for
delivery in the current month and simultaneously contract with the same
counterparty to repurchase similar (same type, coupon and maturity) but not
identical securities on a specified future date. When a Portfolio enters into
mortgage dollar rolls, the Portfolio will hold and maintain a segregated account
until the settlement date. The segregated account will contain cash or liquid,
high grade debt securities in an amount equal to the purchase price that the
Portfolio is required to pay. The Portfolios benefit from a mortgage dollar roll
to the extent of:
- - the difference between the price received for the securities sold and the
lower price for the future purchase (often referred to as the "drop"); and
- - fee income plus the interest earned on the cash proceeds of the securities
sold until the settlement date of the future purchase.
Unless such benefits exceed the amount of income, capital appreciation or gains
on the securities sold as part of the mortgage dollar roll, the investment
performance of the Portfolios will be less than what the performance would have
been without the use of mortgage dollar rolls. The benefits of mortgage dollar
rolls may depend upon Banc One Investment Advisors' ability to predict mortgage
prepayments and interest rates. There is no assurance that mortgage dollar rolls
can be successfully employed. The Portfolios currently intend to enter into
mortgage dollar rolls that are accounted for as a financing transaction. For
purposes of diversification and investment limitations, mortgage dollar rolls
are considered to be mortgage-backed securities.
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STRIPPED MORTGAGE BACKED SECURITIES. Stripped Mortgage Backed Securities
("SMBS") are derivative multi-class mortgage securities. SMBS are usually
structured with two classes that receive different proportions of the interest
and principal distributions from a pool of mortgage assets. A common type of
SMBS will have one class receiving all of the interest from the mortgage assets
("IOs"), while the other class will receive all of the principal ("POs").
Mortgage IOs receive monthly interest payments based upon a notional amount that
declines over time as a result of the normal monthly amortization and
unscheduled prepayments of principal on the associated mortgage POs.
In addition to the risks applicable to Mortgage-Related Securities in general,
SMBS are subject to the following additional risks:
PREPAYMENT/INTEREST RATE SENSITIVITY. SMBS are extremely sensitive to
changes in prepayments and interest rates. Even though these securities
have been guaranteed by an agency or instrumentality of the U.S.
government, under certain interest rate or prepayment rate scenarios, the
Portfolios may lose money on investments in SMBS.
INTEREST ONLY SMBS. Changes in prepayment rates can cause the return on
investment in IOs to be highly volatile. Under extremely high prepayment
conditions, IOs can incur significant losses.
PRINCIPAL ONLY SMBS. POs are bought at a discount to the ultimate
principal repayment value. The rate of return on a PO will vary with
prepayments, rising as prepayment increase and falling as prepayments
decrease. Generally, the market value of these securities is unusually
volatile in response to changes in interest rates.
YIELD CHARACTERISTICS. Although SMBS may yield more than other
mortgage-backed securities, their cash flow patterns are more volatile
and there is a greater risk that any premium paid will not be fully
recouped. Banc One Investment Advisors will seek to manage these risks
(and potential benefits) by investing in a variety of such securities and
by using certain analytical and hedging techniques.
A Portfolio may only invest in SMBS issued or guaranteed by the U.S. government,
its agencies or instrumentalities. Although the market for SMBS is increasingly
liquid, certain SMBS may not be readily marketable and will be considered
illiquid for purposes of the Portfolios' limitations on investments in illiquid
securities.
ADJUSTABLE RATE MORTGAGE LOANS. The Bond Portfolios and the Balanced
Portfolio may invest in adjustable rate mortgage loans ("ARMS"). ARMs eligible
for inclusion in a mortgage pool will generally provide for a fixed initial
mortgage interest rate for a specified period of time. Thereafter, the interest
rates (the "Mortgage Interest Rates") may be subject to periodic adjustment
based on changes in the applicable index rate (the "Index Rate"). The adjusted
rate would be equal to the Index Rate plus a gross margin, which is a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some borrowers may
find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above a maximum rate or below a
minimum rate. Certain ARMs may also be subject to limitations on the maximum
amount by which the Mortgage Interest Rate may adjust for any single adjustment
period (the "Maximum Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may
provide for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing on a
Negatively Amortizing ARM, any excess interest is added to the principal balance
of the loan, causing negative amortization and will be repaid through future
monthly payments. It may take borrowers under Negatively Amortizing ARMs longer
periods of time to achieve equity and may increase the likelihood of default by
such borrowers. In the event that a monthly payment exceeds the sum of the
interest accrued at the applicable Mortgage Interest Rate and the principal
payment which would have been necessary to amortize the outstanding principal
balance over the remaining term of the loan, the excess (or "accelerated
amortization") further reduces the principal balance of the ARM. Negatively
Amortizing ARMs do not provide for the
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extension of their original maturity to accommodate changes in their Mortgage
Interest Rate. As a result, unless there is a periodic recalculation of the
payment amount (which there generally is), the final payment may be
substantially larger than the other payments. These limitations on periodic
increases in interest rates and on changes in monthly payment protect borrowers
from unlimited interest rate and payment increases.
Certain adjustable rate mortgage loans may provide for periodic adjustments of
scheduled payments in order to amortize fully the mortgage loan by its stated
maturity. Other adjustable rate mortgage loans may permit their stated maturity
to be extended or shortened in accordance with the portion of each payment that
is applied to interest as affected by the periodic interest rate adjustments.
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year constant maturity Treasury bill rates, the three-month Treasury bill
rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities,
the 11th District Federal Home Loan Bank Cost of funds, the National Median Cost
of funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate ("LIBOR"), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury rate,
closely mirror changes in market interest rate levels. Others, such as the 11th
District Federal Home Loan Bank Cost of funds index, tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. The degree of
volatility in the market value of the Portfolio's portfolio and therefore in the
net asset value of the Portfolio's shares will be a function of the length of
the interest rate reset periods and the degree of volatility in the applicable
indices.
In general, changes in both prepayment rates and interest rates will change the
yield on Mortgage-Backed Securities. The rate of principal prepayments with
respect to ARMs has fluctuated in recent years. As is the case with fixed
mortgage loans, ARMs may be subject to a greater rate of principal prepayments
in a declining interest rate environment. For example, if prevailing interest
rates fall significantly, ARMs could be subject to higher prepayment rates than
if prevailing interest rates remain constant because the availability of fixed
rate mortgage loans at competitive interest rates may encourage mortgagors to
refinance their ARMs to "lock-in" a lower fixed interest rate. Conversely, if
prevailing interest rates rise significantly, ARMs may prepay at lower rates
than if prevailing rates remain at or below those in effect at the time such
ARMs were originated. As with fixed rate mortgages, there can be no certainty as
to the rate of prepayments on the ARMs in either stable or changing interest
rate environments. In addition, there can be no certainty as to whether
increases in the principal balances of the ARMs due to the addition of deferred
interest may result in a default rate higher than that on ARMs that do not
provide for negative amortization. Other factors affecting prepayment of ARMs
include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgage properties and servicing decisions.
RISKS FACTORS OF MORTGAGE-RELATED SECURITIES.
Guarantor Risk. There can be no assurance that the U.S. government would provide
financial support to Fannie Mae, Freddie Mac or Ginnie Mae if necessary in the
future. Although certain mortgage-related securities are guaranteed by a third
party or otherwise similarly secured, the market value of the security, which
may fluctuate, is not so secured.
Interest Rate Sensitivity. If a Portfolio purchases a mortgage-related security
at a premium, that portion may be lost if there is a decline in the market value
of the security whether resulting from changes in interest rates or prepayments
in the underlying mortgage collateral. As with other interest-bearing
securities, the prices of such securities are inversely affected by changes in
interest rates. However, though the value of a mortgage-related security may
decline when interest rates rise, the converse is not necessarily true because
in periods of declining interest rates the mortgages underlying the securities
are prone to prepayment. For this and other reasons, a mortgage-related
security's stated maturity may be shortened by unscheduled prepayments on the
underlying mortgages and, therefore, it is not possible to predict accurately
the security's return to the Portfolios. In addition, regular payments received
on mortgage-related securities include both interest and principal. No assurance
can be given as to the return the Portfolios of the Trust will receive when
these amounts are reinvested.
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Market Value. The market value of the Portfolio's adjustable rate
Mortgage-Backed Securities may be adversely affected if interest rates rise
faster than the rates of interest payable on these securities or by the
adjustable rate mortgage loans underlying the securities. Furthermore,
adjustable rate Mortgage-Backed Securities or the mortgage loans underlying
these securities may contain provisions limiting the amount by which rates may
be adjusted upward and downward and may limit the amount by which monthly
payments may be increased or decreased to accommodate upward and downward
adjustments in interest rates.
Prepayments. Adjustable rate Mortgage-Backed Securities have less potential for
capital appreciation than fixed rate Mortgage-Backed Securities because their
coupon rates will decline in response to market interest rate declines. The
market value of fixed rate Mortgage-Backed Securities may be adversely affected
by increases in interest rates and, because of the risk of unscheduled principal
prepayments, may benefit less than other fixed rate securities of similar
maturity from declining interest rates. Finally, to the extent Mortgage-Backed
Securities are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the Portfolio's principal
investment to the extent of the premium paid. On the other hand, if these
securities are purchased at a discount, both a scheduled payment of principal
and an unscheduled prepayment of principal will increase current and total
returns and will accelerate the recognition of income.
Yield Characteristics. The yield characteristics of Mortgage-Backed Securities
differ from those of traditional fixed income securities. The major differences
typically include more frequent interest and principal payments, usually
monthly, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors and cannot be
predicted with certainty. As with fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater prepayment rate in a declining
interest rate environment. The yields to maturity of the Mortgage-Backed
Securities in which the Portfolios invest will be affected by the actual rate of
payment (including prepayments) of principal of the underlying mortgage loans.
The mortgage loans underlying these securities generally may be prepaid at any
time without penalty. In a fluctuating interest rate environment, a predominant
factor affecting the prepayment rate on a pool of mortgage loans is the
difference between the interest rates on the mortgage loans and prevailing
mortgage loan interest rates (giving consideration to the cost of any
refinancing). In general, if mortgage loan interest rates fall sufficiently
below the interest rates on fixed rate mortgage loans underlying mortgage
pass-through securities, the rate of prepayment would be expected to increase.
Conversely, if mortgage loan interest rates rise above the interest rates on the
fixed rate mortgage loans underlying the mortgage pass-through securities, the
rate of prepayment may be expected to decrease.
MUNICIPAL SECURITIES
Municipal Securities are issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as:
1. bridges,
2. highways,
3. roads,
4. schools,
5. water and sewer works, and
6. other utilities.
Other public purposes for which Municipal Securities may be issued include:
1. refunding outstanding obligations,
2. obtaining funds for general operating expenses and
3. obtaining funds to lend to other public institutions and facilities.
In addition, certain debt obligations known as "private activity bonds" may be
issued by or on behalf of municipalities and public authorities to obtain funds
to provide
1. water, sewage and solid waste facilities,
2. qualified residential rental projects,
3. certain local electric, gas and other heating or cooling facilities,
4. qualified hazardous waste facilities,
5. high-speed intercity rail facilities,
6. governmentally-owned airports, docks and wharves and mass
transportation facilities,
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7. qualified mortgages,
8. student loan and redevelopment bonds;
9. and bonds used for certain organizations exempt from Federal income
taxation.
Certain debt obligations known as "industrial development bonds" under prior
Federal tax law may have been issued by or on behalf of public authorities to
obtain funds to provide:
1. privately operated housing facilities,
2. sports facilities,
3. industrial parks,
4. convention or trade show facilities,
5. airport, mass transit, port or parking facilities,
6. air or water pollution control facilities,
7. sewage or solid waste disposal facilities, and
8. facilities for water supply.
Other private activity bonds and industrial development bonds issued to fund the
construction, improvement, equipment or repair of privately-operated industrial,
distribution, research, or commercial facilities may also be Municipal
Securities, but the size of such issues is limited under current and prior
Federal tax law. The aggregate amount of most private activity bonds and
industrial development bonds is limited (except in the case of certain types of
facilities) under federal tax law by an annual "volume cap." The volume cap
limits the annual aggregate principal amount of such obligations issued by or on
behalf of all governmental instrumentalities in the state.
The two principal classifications of Municipal Securities consist of "general
obligation" and "limited" (or revenue) issues. General obligation bonds are
obligations involving the credit of an issuer possessing taxing power and are
payable from the issuer's general unrestricted revenues and not from any
particular fund or source. The characteristics and method of enforcement of
general obligation bonds vary according to the law applicable to the particular
issuer, and payment may be dependent upon appropriation by the issuer's
legislative body. Limited obligation bonds are payable only from the revenues
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. Private
activity bonds and industrial development bonds generally are revenue bonds and
thus not payable from the unrestricted revenues of the issuer. The credit and
quality of these bonds is generally related to the credit of the bank selected
to provide the letter of credit underlying the bonds. Payment of principal of
and interest on industrial development revenue bonds is the responsibility of
the corporate user (and any guarantor).
The Portfolios may also acquire "moral obligation" issues, which are normally
issued by special purpose authorities, and in other tax-exempt investments
including pollution control bonds and tax-exempt commercial paper. Each
Portfolio that may purchase municipal securities may purchase:
1. Short-term tax-exempt General Obligations Notes,
2. Tax Anticipation Notes,
3. Bond Anticipation Notes,
4. Revenue Anticipation Notes,
5. Project Notes, and
6. Other forms of short-term tax-exempt loans.
Such notes are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements, or other revenues. Project Notes
are issued by a state or local housing agency and are sold by the Department of
Housing and Urban Development. While the issuing agency has the primary
obligation with respect to its Project Notes, they are also secured by the full
faith and credit of the United States through agreements with the issuing
authority which provide that, if required, the federal government will lend the
issuer an amount equal to the principal of and interest on the Project Notes.
There are, of course, variations in the quality of Municipal Securities, both
within a particular classification and between classifications. Also, the yields
on Municipal Securities depend upon a variety of factors, including:
- general money market conditions,
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- - the financial condition of the issuer,
- - general conditions of the municipal bond market,
- - the size of a particular offering,
- - the maturity of the obligations, and
- - the rating of the issue.
The ratings of Moody's and S&P represent their opinions as to the quality of
Municipal Securities. However,ratings are general and are not absolute standards
of quality. Municipal Securities with the same maturity, interest rate and
rating may have different yields while Municipal Securities of the same maturity
and interest rate with different ratings may have the same yield. Subsequent to
its purchase by a Portfolio, an issue of Municipal Securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Portfolio. Banc One Investment Advisors or the applicable
Sub-Advisor will consider such an event in determining whether the Portfolio
should continue to hold the obligations.
Municipal securities may include obligations of municipal housing authorities
and single-family mortgage revenue bonds. Weaknesses in Federal housing subsidy
programs and their administration may result in a decrease of subsidies
available for payment of principal and interest on housing authority bonds.
Economic developments, including fluctuations in interest rates and increasing
construction and operating costs, may also adversely impact revenues of housing
authorities. In the case of some housing authorities, inability to obtain
additional financing could also reduce revenues available to pay existing
obligations. Single-family mortgage revenue bonds are subject to extraordinary
mandatory redemption at par in whole or in part from the proceeds derived from
prepayments of underlying mortgage loans and also from the unused proceeds of
the issue within a stated period which may be within a year from the date of
issue.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Municipal
Leases may be considered to be illiquid. They may take the form of a lease, an
installment purchase contract, a conditional sales contract, or a participation
interest in any of the above. The Board of Trustees is responsible for
determining the credit quality of unrated municipal leases, on an ongoing basis,
including an assessment of the likelihood that the lease will not be canceled.
RISK FACTORS IN MUNICIPAL SECURITIES
Tax Risk. The Code imposes certain continuing requirements on issuers of
tax-exempt bonds regarding the use, expenditure and investment of bond
proceeds and the payment of rebates to the United States of America.
Failure by the issuer to comply after the issuance of tax-exempt bonds
with certain of these requirements could cause interest on the bonds to
become includable in gross income retroactive to the date of issuance.
Housing Authority Tax Risk. The exclusion from gross income for Federal
income tax purposes for certain housing authority bonds depends on
qualification under relevant provisions of the Code and on other
provisions of Federal law. These provisions of Federal law contain
requirements relating to the cost and location of the residences financed
with the proceeds of the single-family mortgage bonds and the income
levels of tenants of the rental projects financed with the proceeds of
the multi-family housing bonds. Typically, the issuers of the bonds, and
other parties, including the originators and servicers of the
single-family mortgages and the owners of the rental projects financed
with the multi-family housing bonds, covenant to meet these requirements.
However, there is no assurance that the requirements will be met. If such
requirements are not met:
- the interest on the bonds may become taxable, possibly retroactively
from the date of issuance;
- the value of the bonds may be reduced;
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- you and other Shareholders may be subject to unanticipated tax
liabilities;
- a Portfolio may be required to sell the bonds at the reduced value;
- it may be an event of default under the applicable mortgage;
- the holder may be permitted to accelerate payment of the bond; and
- the issuer may be required to redeem the bond.
In addition, if the mortgage securing the bonds is insured by the Federal
Housing Administration ("FHA"), the consent of the FHA may be required
before insurance proceeds would become payable.
Information Risk. Information about the financial condition of issuers of
Municipal Securities may be less available than about corporations having
a class of securities registered under the Securities Exchange Act of
1934.
State and Federal Laws. An issuer's obligations under its Municipal
Securities are subject to the provisions of bankruptcy, insolvency, and
other laws affecting the rights and remedies of creditors. These laws may
extend the time for payment of principal or interest, or restrict the
Portfolio's ability to collect payments due on Municipal Securities.
Litigation and Current Developments. The power or ability of an issuer to
meet its obligations for the payment of interest on and principal of its
Municipal Securities may be materially adversely affected by litigation
or other conditions. Such litigation or conditions may from time to time
have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the
credit risk with respect to particular bonds or notes. Adverse economic,
business, legal or political developments might affect all or a
substantial portion of a Portfolio's Municipal Securities in the same
manner.
New Legislation. From time to time, proposals have been introduced before
Congress that would restrict or eliminate the Federal income tax
exemption for interest on tax exempt bonds, and similar proposals may be
introduced in the future. The Supreme Court has held that Congress has
the constitutional authority to enact such legislation. It is not
possible to determine what effect the adoption of these proposals could
have on (i) the availability of Municipal Securities for investment by
the Portfolios, and (ii) the value of the investment portfolios of the
Portfolios.
LIMITATIONS ON THE USE OF MUNICIPAL SECURITIES
The Bond Portfolio may invest in Municipal Securities either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Municipal Securities, provided that, in the opinion of counsel to the initial
seller of each certificate or instrument, any discount accruing on the
certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Municipal Securities will to the same
extent as interest on such Municipal Securities be exempt from Federal income
tax and state income tax (where applicable) and not treated as a preference item
for individuals for purposes of the Federal alternative minimum tax.
The Portfolio may also invest in Municipal Securities by purchasing from banks
participation interests in all or part of specific holdings of Municipal
Securities. Such participation may be backed in whole or in part by an
irrevocable letter of credit or guarantee of the selling bank. The selling bank
may receive a fee from the Portfolio in connection with the arrangement. The
Portfolio will not purchase participation interests unless it receives an
opinion of counsel or a ruling of the Internal Revenue Service that interest
earned by it on Municipal Securities in which it holds such participation
interest is exempt from Federal income tax and state income tax (where
applicable) and not treated as a preference item for individuals for purposes of
the Federal alternative minimum tax.
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NEW FINANCIAL PRODUCTS
New options and futures contracts and other financial products, and various
combinations thereof, continue to be developed. These various products may be
used to adjust the risk and return characteristics of each Portfolio's
investments. These various products may increase or decrease exposure to
security prices, interest rates, commodity prices, or other factors that affect
security values, regardless of the issuer's credit risk. If market conditions do
not perform as expected, the performance of each Portfolio would be less
favorable than it would have been if these products were not used. In addition,
losses may occur if counterparties involved in transactions do not perform as
promised. These products may expose the Portfolio to potentially greater return
as well as potentially greater risk of loss than more traditional fixed income
investments.
PERCS*
The Equity Portfolios may invest in Preferred Equity Redemption Cumulative Stock
("PERCS"). PERCS are preferred stock which convert to common stock after a
specified period of time, usually three years, and are considered the equivalent
of equity by the ratings agencies. PERCs are mandatorily convertible into common
stock. However, PERCS may be called at any time at an initial call price that
reflects a substantial premium to the stock's issue price. PERCS offer a higher
dividend than that available on the common stock, but in exchange the investors
agree to the company placing a cap on the potential price appreciation. The call
price declines daily in an amount that reflects the incremental dividend that
holders enjoy. PERCS are listed on an exchange where the common stock is listed.
*PERCS is a registered trademark of Morgan Stanley, which does not sponsor and
is in no way affiliated with The One Group Investment Trust.
PREFERRED STOCK
Preferred stock is a class of stock that generally pays dividends at a specified
rate and has preference over common stock in the payment of dividends and
liquidation. Preferred stock generally does not carry voting rights. As with all
equity securities, the price of preferred stock fluctuates based on changes in a
company's financial condition and on overall market and economic conditions.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
The Portfolios may invest in equity interests or debt obligations issued by
REITs. REITs are pooled investment vehicles which invest primarily in income
producing real estate or real estate related loans or interest. REITs are
generally classified as equity REITs, mortgage REITs or a combination of equity
and mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling property that has appreciated in
value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. Similar to
investment companies, REITs are not taxed on income distributed to shareholders
provided they comply with several requirements of the Code. A Portfolio will
indirectly bear its proportionate share of expenses incurred by REITs in which a
Portfolio invests in addition to the expenses incurred directly by a Portfolio.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs
may be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of any credit
extended. REITs are dependent upon management skills, are not diversified, are
subject to heavy cash flow dependency, default by borrowers and
self-liquidation. Other possible risks include failing to qualify for tax free
pass-through of income under the Code and failing to maintain their exemption
from registration under the Act.
REITs (especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT's investment in fixed rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT's investment in fixed rate obligations can be expected to
decline. In contrast, as interest rates on adjustable rate mortgage loans are
reset periodically, yields on a REIT's investment in such loans will gradually
align themselves to fluctuate
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less dramatically in response to interest rate fluctuations than would
investments in fixed rate obligations.
Investment in REITs involves risks similar to those associated with investing in
small capitalization companies. These risks include:
- limited financial resources
- infrequent or limited trading
- more abrupt or erratic price movements than larger company securities
Historically, small capitalization stocks, such as REITs, have been more
volatile in price than the larger capitalization stocks included in the S&P
Index of 500 Common Stocks.
REPURCHASE AGREEMENTS
Under the terms of a repurchase agreement, a Portfolio would acquire securities
from a seller, subject to the seller's agreement to repurchase such securities
at a mutually agreed-upon date and price. The repurchase price would generally
equal the price paid by the Portfolio plus interest negotiated on the basis of
current short-term rates, which may be more or less than the rate on the
underlying portfolio securities. The seller under a repurchase agreement will be
required to maintain the value of collateral held pursuant to the agreement at
not less than the repurchase price (including accrued interest).
If the seller defaults on its repurchase obligation or becomes insolvent, the
Portfolio holding such obligation would suffer a loss to the extent that the
proceeds from a sale of the underlying portfolio securities were less than the
repurchase price under the agreement, or to the extent that the disposition of
such securities by the Portfolio were delayed pending court action.
Additionally, there is no controlling legal precedent under U.S. law and there
may be no controlling legal precedents under the laws of certain foreign
jurisdictions confirming that a Portfolio would be entitled, as against a claim
by such seller or its receiver or trustee in bankruptcy, to retain the
underlying securities. However, with respect to repurchase agreements subject to
U.S. law, the Board of Trustees of the Trust believes that, under the regular
procedures normally in effect for custody of a Portfolio's securities subject to
repurchase agreements and under federal laws, a court of competent jurisdiction
would rule in favor of the Trust if presented with the question. Securities
subject to repurchase agreements will be held by the Trust's custodian or
another qualified custodian or in the Federal Reserve/Treasury book-entry
system. Repurchase agreements are considered by the SEC to be loans by a
Portfolio under the 1940 Act.
Repurchase Agreement Counterparties. Repurchase counterparties include
Federal Reserve member banks with assets in excess of $1 billion and
registered broker dealers which Banc One Investment Advisors deems
creditworthy under guidelines approved by the Board of Trustees.
REVERSE REPURCHASE AGREEMENTS
Portfolios may borrow money for temporary purposes by entering into reverse
repurchase agreements. Under these agreements, a Portfolio would sell portfolio
securities to financial institutions such as banks and broker-dealers, and agree
to repurchase them at a mutually agreed-upon date and price. A Portfolio would
enter into reverse repurchase agreements only to avoid otherwise selling
securities during unfavorable market conditions to meet redemptions. At the time
a Portfolio entered into a reverse repurchase agreement, it would establish a
segregated custodial account. The Portfolio would deposit assets (such as cash
or liquid securities) that have a value equal to the repurchase price (including
accrued interest). The Portfolio would monitor the account to ensure that such
equivalent value was maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by a Portfolio may decline below
the price at which the Portfolio is obligated to repurchase the securities.
Reverse repurchase agreements are considered by the SEC to be borrowings by a
Portfolio under the 1940 Act.
RESTRICTED SECURITIES
The Portfolios may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933 and other restricted securities. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is
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generally sold to institutional investors, such as the Portfolios, who agree
that they are purchasing the paper for investment purposes and not with a view
to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Portfolios through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Portfolios believe that Section 4(2)
commercial paper and possibly certain other restricted securities which meet the
criteria for liquidity established by the Trustees are quite liquid. The
Portfolios intend, therefore, to treat restricted securities that meet the
liquidity criteria established by the Board of Trustees, including Section 4(2)
commercial paper and Rule 144A Securities, as determined by Banc One Investment
Advisors, as liquid and not subject to the investment limitation applicable to
illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a SEC Staff position set forth in the adopting
release for Rule 144A under the Securities Act of 1933 ("Rule 144A"). Rule 144A
is a nonexclusive safe-harbor for certain secondary market transactions
involving securities subject to restrictions on resale under federal securities
laws. Rule 144A provides an exemption from registration for resales of otherwise
restricted securities to qualified institutional buyers. Rule 144A was expected
to further enhance the liquidity of the secondary market for securities eligible
for resale. The Portfolios believe that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees have directed Banc One Investment Advisors to consider
the following criteria in determining the liquidity of certain restricted
securities:
- the frequency of trades and quotes for the security;
- the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
- dealer undertakings to make a market in the security; and
- the nature of the security and the nature of the marketplace trades.
Certain Section 4(2) commercial paper programs cannot rely on Rule 144A because,
among other things, they were established before the adoption of the rule.
However, the Trustees may determine for purposes of the Trust's liquidity
requirements that an issue of 4(2) commercial paper is liquid if the following
conditions, which are set forth in a 1994 SEC no-action letter, are met:
- The 4(2) paper must not be traded flat or in default as to principal
or interest;
- The 4(2) paper must be rated in one of the two highest rating
categories by a least two NRSROs, or if only one NRSRO rates the
security, by that NRSRO, or if unrated, is determined by Banc One
Investment Advisors to be of equivalent quality; and
- Banc One Investment Advisors must consider the trading market for the
specific security, taking into account all relevant factors, including
but not limited, to whether the paper is the subject of a commercial
paper program that is administered by an issuing and paying agent bank
and for which there exists a dealer willing to make a market in that
paper, or is administered by a direct issuer pursuant to a direct
placement program; and
- Banc One Investment Advisors shall monitor the liquidity of the 4(2)
commercial paper purchased and shall report to the Board of Trustees
promptly if any such securities are no longer determined to be liquid.
If such determination causes a Portfolio to hold more than 15% of its
net assets in illiquid securities, the Board of Trustees shall
consider what action, if any, should be taken on behalf of the Trust,
unless Banc One Investment Advisors is able to dispose of illiquid
assets in an orderly manner in an amount that reduces the Portfolio's
holdings of illiquid assets to less than 15% of its net assets; and
- Banc One Investment Advisors shall report to the Board of Trustees on
the appropriateness of the purchase and retention of liquid restricted
securities under these Guidelines no less frequently that quarterly.
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SECURITIES LENDING
To generate additional income, each of the Portfolios may lend up to 33 1/3% of
the securities in which they are invested pursuant to agreements requiring that
the loan be continuously secured by collateral equal at all times to at least
100% of the market value plus accrued interest on the securities lent.
Collateral may include cash, securities of the U.S. government or its agencies,
shares of an investment trust or mutual fund, letters of credit or any
combination of such collateral. The Portfolios will continue to receive interest
on the securities lent while simultaneously seeking to earn interest on the
investment of cash collateral in U.S. government securities, shares of an
investment trust or mutual fund, commercial paper, repurchase agreements,
variable and floating rate instruments, restricted securities, asset-backed
securities, and the other types of investments permitted by the applicable
Portfolio's prospectus. Collateral is marked to market daily to provide a level
of collateral at least equal to the market value of the securities lent. There
may be risks of delay in recovery of the securities or even loss of rights in
the collateral should the borrower of the securities fail financially. However,
loans will only be made to borrowers deemed by Banc One Investment Advisors to
be of good standing under guidelines established by the Trust's Board of
Trustees and when, in the judgment of Banc One Investment Advisors, the
consideration which can be earned currently from such securities loans justifies
the attendant risk. Loans are subject to termination by the Portfolios or the
borrower at any time, and are therefore, not considered to be illiquid
investments.
SHORT-TERM FUNDING AGREEMENTS
To enhance yield, the Bond Portfolio maymake limited investments in short-term
funding agreements issued by banks and highly rated U.S. insurance companies.
Short-term funding agreements issued by insurance companies are sometimes
referred to as Guaranteed Investment Contracts ("GICs"), while those issued by
banks are referred to as Bank Investment Contracts ("BICs"). Pursuant to these
agreements, the Portfolio makes cash contributions to a deposit account at a
bank or insurance company. The bank or insurance company then credits to the
Portfolio on a monthly basis guaranteed interest at either a fixed, variable or
floating rate. These contracts are general obligations of the issuing bank or
insurance company (although they may be the obligations of an insurance company
separate account) and are paid from the general assets of the issuing entity.
The Portfolio will purchase short-term funding agreements only from banks and
insurance companies which, at the time of purchase, are rated in one of the
three highest rating categories and have assets of $1 billion or more.
Generally, there is no active secondary market in short-term funding agreements.
Therefore, short-term funding agreements may be considered by the Portfolio to
be illiquid investments. To the extent that a short-term funding agreement is
determined to be illiquid, such agreements will be acquired by the Portfolio
only if, at the time of purchase, no more than 15% of the Portfolio's net assets
will be invested in short-term funding agreements and other illiquid securities.
SPDRs
The Equity Portfolios (except for the Diversified Mid Cap Portfolio) may invest
in Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are interests in unit
investment trusts. These investment trusts invest in a securities portfolio that
includes substantially all of the common stocks (in substantially the same
weights) as the common stocks included in a particular Standard & Poor's Index
such as the S&P 500. SPDRs are traded on the American Stock Exchange, but may
not be redeemed. The results of SPDRs will not match the performance of the
designated S&P Index due to reductions in the SPDRs' performance attributable to
transaction and other expenses, including fees paid by the SPDR to service
providers. SPDRs distribute dividends on a quarterly basis.
SPDRs are not actively managed. Rather, a SPDR's objective is to track the
performance of a specified index. Therefore, securities may be purchased,
retained and sold by SPDRs at times when an actively managed trust would not do
so. As a result, you can expect greater risk of loss (and a correspondingly
greater prospect of gain) from changes in the value of securities that are
heavily weighted in the index than would be the case if SPDR was not fully
invested in such securities. Because of this, a SPDR's price can be volatile,
and a Portfolio may sustain sudden, and sometimes substantial, fluctuations in
the value of its investment in SPDRs.
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A Portfolio will limit its investments in SPDRs to 5% of the Portfolio's total
assets and 3% of the outstanding voting securities of the SPDRs issuer.
Moreover, a Portfolio's investments in SPDRs will not exceed 10% of the
Portfolio's total assets, when aggregated with all other investments in
investment companies.
STRUCTURED INSTRUMENTS
Structured instruments are debt securities issued by agencies of the U.S.
government (such as Ginnie Mae, Fannie Mae, and Freddie Mac), banks,
corporations, and other business entities whose interest and/or principal
payments are indexed to certain specific foreign currency exchange rates,
interest rates, or one or more other reference indices. Structured instruments
frequently are assembled in the form of medium-term notes, but a variety of
forms are available and may be used in particular circumstances. Structured
instruments are commonly considered to be derivatives.
The terms of structured instruments provide that their principal and/or interest
payments are adjusted upwards or downwards to reflect changes in the reference
index while the structured instruments are outstanding. In addition, the
reference index may be used in determining when the principal is redeemed. As a
result, the interest and/or principal payments that may be made on a structured
product may vary widely, depending on a variety of factors, including the
volatility of the reference index and the effect of changes in the reference
index on principal and/or interest payment.
While structured instruments may offer the potential for a favorable rate of
return from time to time, they also entail certain risks. Structured instruments
may be less liquid than other debt securities, and the price of structured
instruments may be more volatile. If the value of the reference index changes in
a manner other than that expected by Banc One Investment Advisors, principal
and/or interest payments on the structured instrument may be substantially less
than expected. In addition, although structured instruments may be sold in the
form of a corporate debt obligation, they may not have some of the protection
against counterparty default that may be available for publicly traded debt
securities (i.e., the existence of a trust indenture). In that case, the risks
of default associated with structured instruments may be similar to those
associated with swap contracts. See "Swaps, Caps and Floors."
The Portfolios will invest only in structured securities that are consistent
with each Portfolio's investment objective, policies and restrictions and Banc
One Investment Advisors' outlook on market conditions. In some cases, depending
on the terms of the reference index, a structured instrument may provide that
the principal and/or interest payments may be adjusted below zero; however, a
Portfolio will not invest in structured instruments if the terms of the
structured instrument provide that the Portfolio may be obligated to pay more
than its initial investment in the structured instrument, or to repay any
interest or principal that has already been collected or paid back.
Structured instruments that are registered under the federal securities laws may
be treated as liquid. However, many structured instruments may not be registered
under the federal securities laws. In that event, a Portfolio's ability to
resell such a structured instrument may be more limited than its ability to
resell other Portfolio securities. The Portfolio will treat these instruments as
illiquid, and will limit its investments in these instruments to no more than
15% of its net assets, when combined with all other illiquid investments of the
Portfolio.
SWAPS, CAPS AND FLOORS
The Portfolios may enter into swaps, caps, (collectively, "Swap Contracts") and
floors on various securities (such as U.S. government securities), securities
indexes, interest rates, prepayment rates, foreign currencies or other financial
instruments or indexes, in order to protect the value of the Portfolio from
interest rate fluctuations and to hedge against fluctuations in the floating
rate market in which the Portfolio's investments are traded, for both hedging
and non-hedging purposes. The Portfolios may enter into these transactions to
manage their exposure to changing interest rates and other market factors. Some
transactions may reduce each Portfolio's exposure to market fluctuations while
others may tend to increase market exposure. Although different from options,
futures and options on futures, swap contracts are used by the Portfolios for
similar purposes (i.e., risk management and hedging) and therefore, expose the
Portfolios to generally the same risks and opportunities as these investments.
Swap contracts typically involve an exchange of obligations by two sophisticated
parties. For example, in an interest rate swap, the Portfolio may exchange with
another party their respective rights to receive interest, such as an exchange
of fixed rate payments for floating rate payments.
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Currency swaps involve the exchange of respective rights to make or receive
payments in specified currencies. Mortgage swaps are similar to interest rate
swaps in that they represent commitments to pay and receive interest. The
notional principal amount, however, is tied to a reference pool or pools of
mortgages.
Caps and floors are variations on swaps. The purchase of a cap entitles the
purchaser to receive a principal amount from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of an interest rate floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to the
extent that a specified index falls below a predetermined interest rate or
amount. Caps and floors are similar in many respects to over-the-counter options
transactions, and may involve investment risks that are similar to those
associated with options transactions and options on futures contracts.
Because swap contracts are individually negotiated, they remain the obligation
of the respective counterparties, and there is a risk that a counterparty will
be unable to meet its obligations under a particular swap contract. If a
counterparty defaults on a swap contract with a Portfolio, the Portfolio may
suffer a loss. To address this risk, each Portfolio will usually enter into
interest rate swaps on a net basis, which means that the two payment streams
(one from the Portfolio to the counterparty, one to the Portfolio from the
counterparty) are netted out, with the Portfolio receiving or paying, as the
case may be, only the net amount of the two payments.
Interest rate swaps do not involve the delivery of securities, other underlying
assets, or principal, except for the purposes of collateralization as discussed
below. Accordingly, the risk of loss with respect to interest rate swaps entered
into on a net basis would be limited to the net amount of the interest payments
that the Portfolio is contractually obligated to make. If the other party to an
interest rate swap defaults, the Portfolio's risk of loss consists of the net
amount of interest payments that a Portfolio is contractually entitled to
receive. In addition, the Portfolio may incur a market value adjustment on
securities held upon the early termination of the swap. To protect against
losses related to counterparty default, the Portfolios may enter into swaps that
require transfers of collateral for changes in market value.
In contrast, currency swaps and other types of swaps may involve the delivery of
the entire principal value of one designated currency or financial instrument in
exchange for the other designated currency or financial instrument. Therefore,
the entire principal value of such swaps may be subject to the risk that the
other party will default on its contractual delivery obligations.
In addition, because swap contracts are individually negotiated and ordinarily
non-transferable, there also may be circumstances in which it would be
impossible for a Portfolio to close out its obligations under the swap contract
prior to its maturity. Under these circumstances, the Portfolio might be able to
negotiate another swap contract with a different counterparty to offset the risk
associated with the first swap contract. Unless the Portfolio is able to
negotiate such an offsetting swap contract, however, the Portfolio could be
subject to continued adverse developments, even after Banc One Investment
Advisors determines that it would be prudent to close out or offset the first
swap contract.
The Portfolios will not enter into any mortgage swap, interest rate swap, cap or
floor transaction unless the unsecured commercial paper, senior debt, or the
claims paying ability of the other party thereto is rated in one of the top two
rating categories by at least one NRSRO, or if unrated, determined by Banc One
Investment Advisors to be of comparable quality.
The use of swaps involves investment techniques and risks different from and
potentially greater than those associated with ordinary Portfolio securities
transactions. If Banc One Investment Advisors is incorrect in its expectations
of market values, interest rates, or currency exchange rates, the investment
performance of the Portfolios would be less favorable than it would have been if
this investment technique were not used. In addition, in certain circumstances
entry into a swap contract that substantially eliminates risk of loss and the
opportunity for gain in an "appreciated financial position" will accelerate gain
to the Portfolios.
The Staff of the SEC is presently considering its position with respect
to swaps, caps and floors as senior securities. Pending a determination by the
Staff, the Portfolios will either treat swaps, caps and floors as being subject
to their senior securities restrictions or will refrain from engaging in swaps,
caps and floors. Once the Staff has expressed a position with respect to swaps,
caps and floors, the Portfolios intend to engage in swaps, caps and floors, if
at all, in a manner
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consistent with such position. To the extent the net amount of an interest rate
or mortgage swap is held in a segregated account, consisting of cash or liquid,
high grade debt securities, the Portfolios and Banc One Investment Advisors
believe that swaps do not constitute senior securities under the Investment
Company Act of 1940 and, accordingly, will not treat them as being subject to
each Portfolio's borrowing restrictions. The net amount of the excess, if any,
of each Portfolio's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Portfolios'
Custodian. The Bond Portfolios generally will limit their investments in swaps,
caps and floors to 25% of their total assets.
TREASURY RECEIPTS
The Portfolios may purchase interests in separately traded interest and
principal component parts of U.S. Treasury obligations that are issued by banks
or brokerage firms and are created by depositing U.S. Treasury notes and U.S.
Treasury bonds into a special account at a custodian bank. Receipts include:
o Treasury Receipts ("TRS"),
o Treasury Investment Growth Receipts ("TIGRS"), and
o Certificates of Accrual on Treasury Securities ("CATS").
U.S. TREASURY OBLIGATIONS
The Portfolios may invest in bills, notes and bonds issued by the U.S. Treasury
and separately traded interest and principal component parts of those
obligations that are transferable through the Federal book-entry system known as
Separately Traded Registered Interest and Principal Securities ("STRIPS") and
Coupon Under Book Entry Safekeeping ("CUBES"). The Portfolios may also invest in
Inflation Indexed Treasury Obligations.
VARIABLE AND FLOATING RATE INSTRUMENTS
Certain obligations purchased by the Portfolios may carry variable or floating
rates of interest, may involve a conditional or unconditional demand feature and
may include variable amount master demand notes.
VARIABLE AMOUNT MASTER DEMAND NOTES are demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Because master demand
notes are direct lending arrangements between a Portfolio and the issuer, they
are not normally traded. Although there is no secondary market in the notes, a
Portfolio may demand payment of principal and accrued interest. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes (which are normally manufacturing, retail, financial,
brokerage, investment banking and other business concerns) must satisfy the same
criteria as set forth above for commercial paper. Banc One Investment Advisors
will consider the earning power, cash flow, and other liquidity ratios of the
issuers of such notes and will continuously monitor their financial status and
ability to meet payment on demand. In determining average weighted portfolio
maturity, a variable amount master demand note will be deemed to have a maturity
equal to the period of time remaining until the principal amount can be
recovered from the issuer through demand.
The Portfolios, subject to their investment objective policies and
restrictions, may acquire VARIABLE AND FLOATING RATE INSTRUMENTS. A variable
rate instrument is one whose terms provide for the adjustment of its interest
rate on set dates and which, upon adjustment, can reasonably be expected to have
a market value that approximates its par value. A floating rate instrument is
one whose terms provide for the adjustment of its interest rate whenever a
specified interest rate changes and which, at any time, can reasonably be
expected to have a market value that approximates its par value. These
instruments are frequently not rated by credit rating agencies; however, unrated
variable and floating rate instruments purchased by a Portfolio will be
determined by Banc One Investment Advisors under guidelines established by the
Trust's Board of Trustees to be of comparable quality at the time of purchase to
rated instruments eligible for purchase under the
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Portfolio's investment policies. In making these determinations, Banc One
Investment Advisors will consider the earning power, cash flow and other
liquidity ratios of the issuers of these instruments (these issuers include
financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. There may be no active secondary
market with respect to a particular variable or floating rate instrument
purchased by a Portfolio. The absence of an active secondary market, could make
it difficult for the Portfolio to dispose of the variable or floating rate
instrument involved in the event the issuer of the instrument defaulted on its
payment obligations, and the Portfolio could, for this or other reasons, suffer
a loss to the extent of the default. Variable or floating rate instruments may
be secured by bank letters of credit or other assets. A Portfolio will purchase
a variable or floating rate instrument to facilitate portfolio liquidity or to
permit investment of the Portfolio's assets at a favorable rate of return.
LIMITATIONS ON THE USE OF VARIABLE AND FLOATING RATE NOTES. Variable
and floating rate instruments for which no readily available market exists will
be purchased in an amount which, together with securities with legal or
contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceeds 15% of the Portfolio's net assets only if these
instruments are subject to a demand feature that will permit the Portfolio to
demand payment of the principal within seven days after demand by the Portfolio.
There is no limit on the extent to which a Portfolio may purchase demand
instruments that are not illiquid. If not rated, these instruments must be found
by Banc One Investment Advisors under guidelines established by the Trust's
Board of Trustees, to be of comparable quality to instruments that are rated
high quality. A rating may be relied upon only if it is provided by a nationally
recognized statistical rating organization that is not affiliated with the
issuer or guarantor of the instruments. For a description of the rating symbols
of S&P, Moody's, and Fitch used in this paragraph, see the Appendix.
WARRANTS
Warrants are securities, typically issued with preferred stock or
bonds, that give the holder the right to buy a proportionate amount of common
stock at a specified price, usually at a price higher than the market price at
the time of issuance of the warrant. The right may last for a period of years or
indefinitely.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Portfolios may purchase securities on a "when-issued" and forward
commitment basis. When a Portfolio agrees to purchase securities, the
Portfolio's custodian will set aside cash or liquid portfolio securities equal
to the amount of the commitment in a separate account. The Portfolios may
purchase securities on a when-issued basis when deemed by Banc One Investment
Advisors to present attractive investment opportunities. When-issued securities
are purchased for delivery beyond the normal settlement date at a stated price
and yield, thereby involving the risk that the yield obtained will be less than
that available in the market at delivery. The Portfolios generally will not pay
for these securities or earn interest on them until received. Although the
purchase of securities on a when-issued basis is not considered to be
leveraging, it has the effect of leveraging. When Banc One Investment Advisors
purchases a when-issued security, the Custodian will set aside cash or liquid
securities to satisfy the purchase commitment. In this case, a Portfolio may be
required subsequently to place additional assets in the separate account to
assure that the value of the account remains equal to the amount of the
Portfolio's commitment. The Portfolio's net assets may fluctuate to a greater
degree when it sets aside portfolio securities to cover purchase commitments
than when it sets aside cash. In addition, when a Portfolio engages in
"when-issued" transactions, it relies on the seller to complete the trade.
Failure of the seller to do so may result in the Portfolio's incurring a loss or
missing the opportunity to obtain a price considered to be advantageous.
In a forward commitment transaction, the Portfolios contract to
purchase securities for a fixed price at a future date beyond customary
settlement time. The Portfolios are required to hold and maintain in a
segregated account until the settlement date, cash, U.S. government securities
or liquid high-grade debt obligations in an amount sufficient to meet the
purchase price. Alternatively, the Portfolios may enter into offsetting
contracts for the forward sale of other securities that they own. The purchase
of securities on a when-issued or forward commitment basis involves a risk of
loss if the value of the security to be purchased declines prior to the
settlement date.
Limitations on the Use of When Issued Securities and Forward
Commitments. No Portfolio intends to purchase "when-issued" securities for
speculative purposes but only for the purpose of
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acquiring portfolio securities. Because a Portfolio will set aside cash or
liquid portfolio securities to satisfy its purchase commitments in the manner
described, the Portfolio's liquidity and the ability of Banc One Investment
Advisors to manage the Portfolio might be affected in the event its commitments
to purchase when-issued securities ever exceeded 40% of the value of its assets.
Commitments to purchase when-issued securities will not, under normal market
conditions, exceed 25% of a Portfolio's total assets, and a commitment will not
exceed 90 days. A Portfolio may dispose of a when-issued security or forward
commitment prior to settlement if Banc One Investment Advisors deems it
appropriate to do so.
INVESTMENT RESTRICTIONS
The following investment restrictions are "fundamental policies" of
each Portfolio. The investment objectives of each Portfolio (which can be found
in response to the first question in each of the Risk/Return Summaries) are also
"fundamental policies." Fundamental policies cannot be changed with respect to a
Portfolio without the consent of the holders of a majority of the Portfolio's
outstanding shares. The term "majority of the outstanding shares" means the vote
of (i) 67% or more of the Portfolio's shares present at a meeting, if more than
50% of the outstanding shares of the Portfolio are present or represented by
proxy, or (ii) more than 50% of the Portfolio's outstanding shares, whichever is
less.
Each Portfolio may not:
1. Purchase securities of any issuer (except securities issued or
guaranteed by the United States, its agencies or instrumentalities and
repurchase agreements involving such securities) if as a result more than 5% of
the total assets of the Portfolio would be invested in the securities of such
issuer or the Portfolio would own more than 10% of the outstanding voting
securities of such issuer. This restriction applies to 75% of the Portfolio's
assets. For purposes of this limitation, a security is considered to be issued
by the government entity whose assets and revenues guarantee or back the
security. With respect to private activity bonds or industrial development bonds
backed only by the assets and revenues of a nongovernmental user, such user
would be considered the issuer.
2. Purchase any securities which would cause more than 25% of the total
assets of the Portfolio to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that this limitation does not apply to investments in the obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities and
repurchase agreements involving such securities. For purposes of this limitation
(i) utility companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be considered a separate
industry; and (ii) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily related to
financing the activities of their parents.
3. Make loans, except that a Portfolio may (i) purchase or hold debt
instruments in accordance with its investment objectives and policies; (ii)
enter into repurchase agreements; and (iii) engage in securities lending as
described in the Prospectus and in the Statement of Additional Information.
4. Purchase securities on margin or sell securities short.
5. Underwrite the securities of other issuers except to the extent that
a Portfolio may be deemed to be an underwriter under certain securities laws in
the disposition of "restricted securities."
6. Purchase or sell commodities or commodity contracts, except that the
Portfolios may purchase or sell financial futures contracts for bona fide
hedging and other permissible purposes.
7. Purchase participations or other direct interests in oil, gas or
mineral exploration or development programs (although investments by the
Portfolios in marketable securities of companies engaged in such activities are
not hereby precluded).
8. Invest in any issuer for purposes of exercising control or
management.
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9. Purchase securities of other investment companies except as
permitted by the Investment Company Act of 1940 and the rules and regulations
thereunder.
10. Purchase or sell real estate (however, each Portfolio may, to the
extent appropriate to its investment objective, purchase securities secured by
real estate or interests therein or securities issued by companies investing in
real estate or interests therein).
11. Borrow money or issue senior securities, except that each Portfolio
may borrow from banks or enter into reverse repurchase agreements for temporary
purposes in amounts up to 10% of the value of its total assets at the time of
such borrowing; or mortgage, pledge, or hypothecate any assets, except in
connection with any such borrowing and in amounts not in excess of the lesser of
the dollar amounts borrowed or 10% of the value of the Portfolio's total assets
at the time of its borrowing. A Portfolio will not purchase securities while its
borrowings (including reverse repurchase agreements) in excess of 5% of its
total assets are outstanding. The foregoing percentages will apply at the time
of the purchase of a security.
The following investment restrictions are non-fundamental except as
noted otherwise and therefore can be changed by the Board of Trustees without
prior shareholder approval.
No Portfolio may invest in illiquid securities in an amount exceeding,
in the aggregate, 15% of the Portfolio's net assets. An illiquid security is a
security which cannot be disposed of promptly (within seven days) and in the
usual course of business without a loss, and includes repurchase agreements
maturing in excess of seven days, time deposits with a withdrawal penalty,
non-negotiable instruments and instruments for which no market exists.
The foregoing percentages apply at the time of purchase of a security.
Banc One Investment Advisors Corporation shall report to the Board of Trustees
promptly if any of a Portfolio's investments are no longer determined to be
liquid or if the market value of Portfolio assets has changed if such
determination or change causes a Portfolio to hold more than 15% of its net
assets in illiquid securities in order for the Board of Trustees to consider
what action, if any, should be taken on behalf of the Trust, unless Banc One
Investment Advisors is able to dispose of illiquid assets in an orderly manner
in an amount that reduces the Portfolio's holdings to less than 15% of its net
assets.
PORTFOLIO TURNOVER
The portfolio turnover rate for each Portfolio is calculated by
dividing the lesser of purchases or sales of portfolio securities for the year
by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities at the time of acquisition were one
year or less. The Portfolio turnover rates for the years ended December 31, 1998
and 1997 for the following Portfolios were as follows:
<TABLE>
<CAPTION>
Portfolio 1997 1998
--------- ---- ----
<S> <C> <C>
Government Bond Portfolio 21.3% 40.4%
Balanced Portfolio 60.9% 32.1%
Large Cap Growth Portfolio 34.4% 61.0%
Mid Cap Growth Portfolio 175.6% 87.7%
Equity Index Portfolio NA* 2.3%**
</TABLE>
*The Equity Index Portfolio began operations on May 1, 1998.
**not annualized
The higher portfolio rates for the Mid Cap Growth Portfolio was the
result of a conscience shift into larger capitalization issuers and the
volatility in small and mid capitalization technology stocks.
The Portfolio turnover rates for the years ended December 31, 1998 and
1997 for the Predecessor Funds of the Bond Fund, the Diversified Mid Cap
Portfolio, the Mid Cap Value Portfolio, and the Diversified Equity Portfolio
were as follows:
<TABLE>
<CAPTION>
Portfolio 1997 1998
--------- ---- ----
<S> <C> <C>
Bond Portfolio 14.8% 14.5%
Diversified Mid Cap Portfolio 80.7% 26.2%
</TABLE>
32
<PAGE> 36
Mid Cap Value Portfolio 19.6% 39.3%
Diversified Equity Portfolio 31.1% 43.2%
Higher turnover rates will generally result in higher brokerage
expenses. Portfolio turnover may vary greatly from year to year as well as
within a particular year.
ADDITIONAL TAX INFORMATION CONCERNING THE PORTFOLIOS
It is the policy of each Portfolio to meet the requirements necessary
to qualify as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). By following such
policy, each Portfolio expects to eliminate or reduce to a nominal amount the
federal income taxes to which it may be subject.
In order to qualify as a regulated investment company, each Portfolio
must, among other things, (1) derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock or securities, foreign currencies or
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in stock, securities or
currencies, and (2) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Portfolio's assets
is represented by cash or cash items, United States Government securities,
securities of other regulated investment companies, and other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than United States
Government securities or the securities of other regulated investment companies)
or of two or more issuers that the Portfolio controls and that are engaged in
the same, similar, or related trades or businesses. These requirements may limit
the range of the Portfolio's investments. If a Portfolio qualifies as a
regulated investment company, it will not be subject to federal income tax on
the part of its income distributed to shareholders, provided the Portfolio
distributes during its taxable year at least (a) 90% of its investment company
taxable income, and (b) 90% of the excess of (i) its tax-exempt interest income
less (ii) certain deductions attributable to that income. Each Portfolio intends
to make sufficient distributions to Shareholders to meet this requirement.
For a discussion of the tax consequences of variable annuity contracts,
refer to the prospectuses of the separate accounts offering variable life and
variable annuity contracts as they may be applicable to your situation. Variable
annuity contracts purchased through insurance company separate accounts provide
for the accumulation of all earnings from interest, dividends, and capital
appreciation without current federal income tax liability for the owner.
Depending on the variable annuity contract, distributions from the contract may
be subject to ordinary income tax and, in addition, on distributions before age
59 1/2, a 10% penalty tax. Only the portion of a distribution attributable to
income on the investment in the contract is subject to federal income tax.
Investors should consult with competent tax advisors for a more complete
discussion of possible tax consequences in a particular situation.
The Code imposes a non-deductible excise tax on regulated investment
companies that do not distribute in each calendar year (regardless of whether
they otherwise have a non-calendar taxable year) an amount equal to 98% of their
"ordinary income" (as defined) for the calendar year plus 98% of their "capital
gain net income" (as defined) for the 1-year period ending on October 31 of such
calendar year. The balance, if any, of such income must be distributed during
the next calendar year. If distributions during a calendar year were less than
the required amount, a particular Portfolio would be subject to a non-deductible
excise tax equal to 4% of the deficiency. A Portfolio is exempt from this excise
tax if at all times during the calendar year each shareholder in the Portfolio
was either a trust described in Section 401(a) of the Code and exempt from tax
under section 501(a) of the Code or a segregated asset account of a life
insurance company held in connection with variable contracts.
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of variable annuity contracts held in the Portfolios. The
Code provides that a variable annuity contract shall not be treated as an
annuity contract for any period (and any subsequent period) for which the
investments are not, in accordance with regulations prescribed by the Treasury
Department, adequately diversified. Disqualification of the variable annuity
contract as an annuity
33
<PAGE> 37
contract would result in immediate imposition of federal income tax on variable
annuity contract owners with respect to earnings allocable to the contract. This
liability would generally arise prior to the receipt of payments under the
contract. Section 817(h)(2) of the Code is a safe harbor provision which
provides that variable annuity contracts meet the diversification requirements
if, as of the close of each quarter, the underlying assets meet the
diversification standards for a regulated investment company and no more than
fifty-five percent (55%) of the total assets consists of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
The Treasury Department has issued Regulations (Treas. Reg. 1.817-5),
that establish diversification requirements for the investment portfolios
underlying variable annuity contracts. The Regulations amplify the
diversification requirements for variable annuity contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the total
assets of the portfolio is represented by any one investment; (ii) no more than
70 percent of such value is represented by any two investments; (iii) no more
than 80 percent of such value is represented by any three investments; and (iv)
no more than 90 percent of such value is represented by any four investments.
For purposes of these Regulations all securities of the same issuer, all
interests in the same real estate project and all interests in the same
commodity are treated as a single investment. The Code provides that for
purposes of determining whether or not the diversification standards imposed on
the underlying assets of variable annuity contracts by Section 817(h) of the
Code have been met, "each United States government agency or instrumentality
shall be treated as a separate issuer."
Treasury regulations provide that a variable annuity contract will be
able to look through to the assets held by a Portfolio for the purpose of
meeting the diversification test if the Portfolio meets certain requirements.
Each Portfolio will be managed in such a manner as to comply with the
diversification requirements and to allow the variable annuity contracts to be
treated as owning a proportionate share of such Portfolio's assets. It is
possible that in order to comply with the diversification requirements, less
desirable investment decisions may be made which would affect the investment
performance of such Portfolio.
The above discussion of the federal income tax treatment of the
Portfolios assumes that all the insurance company accounts holding shares of a
Portfolio are either segregated asset accounts underlying variable contracts as
defined in Section 817(d) of the Code or the general account of a life insurance
company as defined in Section 816 of the Code. Additional tax consequences may
apply to holders of variable contracts investing in a Portfolio if any of those
contracts are not treated as annuity, endowment or life insurance contracts.
VALUATION
VALUATION OF THE PORTFOLIOS
Securities traded on a securities exchange are valued at the last
quoted sale price on the principal exchange, or if no sale, at their fair value
as determined in good faith under consistently applied procedures authorized by
the Board of Trustees. Securities traded only in the over-the-counter (OTC)
market are valued at the last quoted sale price, or if there is no sale, at the
mean of the last quoted bid and ask prices provided by an independent pricing
agent. Corporate debt securities and debt securities of U.S. issuers, including
municipal securities, are valued by a combination of daily quotes and matrix
evaluations provided by an independent pricing service approved by the Board of
Trustees. Inactive securities that have little or no trading activity are
evaluated by the independent pricing services by obtaining dealer quotes.
Futures contracts and options thereon traded on a commodities exchange or board
of trade are valued at the last sales price at the close of trading, or if there
was no sale, at the mean of the latest quoted bid and ask prices. Securities for
which either reliable market quotations are not readily available or for which
the pricing agent does not provide a valuation that in the judgment of the
Portfolio's investment adviser, represents fair value, shall each be valued in
accordance with procedures authorized by the Board of Trustees.
The Portfolios may invest in repurchase agreements with institutions that the
investment advisor has determined are creditworthy. Each repurchase agreement is
recorded at cost. The value of a foreign security is determined in its national
currency as of the close of trading on the foreign exchange or other principal
market on which it is traded, which value is then converted into its U.S. Dollar
equivalent at the foreign exchange rate reported by the independent pricing
agent via WM/Reuters Forex as of the close of the London Exchange.
Security Valuation Specifics
- - U.S. Government Securities, Mortgage Pools, Collateralized Mortgage
Obligations, Asset Backed Securities, Corporate Bonds, and Municipal
Securities shall be valued by an independent pricing vendor. A mean of the
latest bid and ask quotations or the last sale in the case of a listed bond
shall be used to evaluate the security. Fixed income securities with less
than 61 days to maturity shall be valued at amortized cost.
- - Securities for which the primary market is a foreign exchange shall be
valued at the last available quoted sale price on said exchange for the
current day or, if traded on the London Exchange and are not part of the
FTSE 100, the securities will receive the mid-market close. Quotations of
foreign securities shall be converted into the U.S. dollar equivalent using
a spot currency value provided by an independent pricing vendor.
- - Securities for which readily available market quotations are not available
or for which the pricing agent provides a valuation that in the judgment
of the Trust's Pricing Committee does not represent a fair value, shall be
valued in accordance with the Trust's "Securities Valuation Procedures."
34
<PAGE> 38
ADDITIONAL INFORMATION REGARDING THE CALCULATION OF PER SHARE NET ASSET VALUE
The net asset value of each Portfolio is determined and its Shares are
priced as of the times specified in the Portfolios' Prospectus. The net asset
value per Share of each Portfolio is calculated by determining the value of the
interest in the securities and other assets of the Portfolio, less liabilities
and dividing such amount by the number of Shares of the Portfolio outstanding.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Portfolios are sold continuously to insurance company
separate accounts. The Portfolios may suspend the right of redemption or
postpone the date of payment for Shares during any period when (a) trading on
the New York Stock Exchange (the "Exchange") is restricted by applicable rules
and regulations of the Securities and Exchange Commission, (b) the Exchange is
closed for other than customary weekend and holiday closings, (c) the Securities
and Exchange Commission has by order permitted such suspension, or (d) an
emergency exists as determined by the Securities and Exchange Commission.
MANAGEMENT OF THE TRUST
TRUSTEES & OFFICERS
Overall responsibility for management of the Trust rests with the Board
of Trustees of the Trust who were elected by the Shareholders of the Trust. The
Trustees are responsible for making major decisions about each Portfolio's
investment objectives and policies, but delegate the day-to-day administration
of the Portfolios to the officers of the Trust. There are currently eight
Trustees, all of whom, except John F. Finn, are not "interested persons" of the
Trust within the meaning of that term under the 1940 Act. The Trustees of the
Trust, their addresses, their ages, and principal occupations during the past
five years are set forth below.
<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION HELD PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
WITH THE TRUST
<S> <C> <C> <C>
Peter C. Marshall 56 Trustee From November, 1993 to present, President, DCI
DCI Marketing, Inc. Marketing, Inc.
2727 W. Good Hope Rd.
Milwaukee, WI 53209
Charles I. Post 71 Trustee From July, 1986 to present, self employed as a
7615 4th Avenue West consultant.
Bradenton, FL 34209
Frederick W. Ruebeck 60 Trustee From June, 1988 to present, Director of
Eli Lilly & Company Investments, Eli Lilly and Company.
Lilly Corporate Center
307 East McCarty
Indianapolis, IN 46258
Robert A. Oden, Jr. 53 Trustee From 1995 to present, President, Kenyon College;
Office of the President from 1989 to 1995, Headmaster, The Hotchkiss
Ransom Hall School.
</TABLE>
35
<PAGE> 39
<TABLE>
<S> <C> <C> <C>
Kenyon College
Gambier, OH 43022
*John Finn 51 Trustee Since 1975, President of Gardner, Inc.
President (wholesale distributor to outdoor
Gardner, Inc. power equipment industry)
1150 Chesapeake Ave.
Columbus, Ohio 43212
Marilyn McCoy 51 Trustee Vice President of Administration
Northwestern University and Planning, Northwestern
Office of the Vice President University (1985 to present).
Administration Planning Trustee of Pegasus Variable Funds
633 Clark St. Crown 2-112 since 1996.
Evanston, IL 60208
Julius L. Pallone 69 Trustee President, J.L. Pallone Associates
J.L. Pallone Associates (1994 to present). Trustee of
3000 Town Center Pegasus Variable Funds since 1987.
Suite 732
Southfield, MI 48075
Donald L. Tuttle 65 Trustee Vice President (1995 to present)
Association for Management and Senior Vice President (1992 to
and Research 1995), Association for Investment
PO Box 3668 Management and Research. Trustee
560 Ray C. Hunt Drive of Pegasus Variable Funds since 1993.
Charlottesville, VA 22903
</TABLE>
*John F. Finn is an "interested person" as that term is defined in the
Investment Company Act of 1940.
The Trustees of the Portfolios receive fees and expenses for each meeting of the
Board of Trustees attended. The Compensation Table below sets forth
the total compensation to the Trustees from the Trust for the fiscal year ended
December 31, 1998.
COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
- -------------------------- ------------------ ------------------- --------------------- --------------------
NAME OF PERSON, AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL COMPENSATION
POSITION COMPENSATION RETIREMENT BENEFITS UPON FROM THE PORTFOLIO
FROM THE BENEFITS ACCRUED RETIREMENT COMPLEX
PORTFOLIOS(2) AS PART OF
PORTFOLIO
EXPENSES
- -------------------------- ------------------ ------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Peter C. Marshall, $3000 NA NA $51,000
Trustee
- -------------------------- ------------------ ------------------- --------------------- --------------------
Charles I. Post, Trustee $3000 NA NA $48,500
- -------------------------- ------------------ ------------------- --------------------- --------------------
Frederick W. Ruebeck, $3000(3) NA NA $48,500
Trustee
- -------------------------- ------------------ ------------------- --------------------- --------------------
Robert A. Oden, Jr., $3000 NA NA $48,500
Trustee
- -------------------------- ------------------ ------------------- --------------------- --------------------
John F. Finn, Trustee $1500(4) NA NA $24,500
- -------------------------- ------------------ ------------------- --------------------- --------------------
Marilyn McCoy, NA NA NA NA
Trustee(5)
- -------------------------- ------------------ ------------------- --------------------- --------------------
Julius L. Pallone, NA NA NA NA
Trustee(5)
- -------------------------- ------------------ ------------------- --------------------- --------------------
Donald L. Tuttle, NA NA NA NA
Trustee(5)
- -------------------------- ------------------ ------------------- --------------------- --------------------
</TABLE>
(1) "Portfolio Complex" comprises the 9 Portfolios of the Trust, as well as
the Funds of The One Group(R) as of December 31, 1998 Compensation for
the "Portfolio Complex" is for the fiscal year ended December 31, 1998.
(2) Pursuant to a Deferred Compensation Plan for Trustees of One Group
Investment Trust (the "Plan") adopted at the November 19, 1998 Board of
Trustee's meeting, the Trustees may defer all or a part of their
compensation payable by the Trust. Under the Plan, the Trustees may
specify Class I Shares (formerly fiduciary class shares) of one or more
funds of The One Group to be used to measure the performance of a
Trustee's deferred compensation account. A Trustee's deferred
compensation account will be paid at such times as elected by the
Trustee subject to certain mandatory payment provisions in the Plan
(e.g., death of a Trustee).
(3) Includes $750 of deferred compensation.
(4) Includes $750 of deferred compensation.
(5) Did not serve as trustee as of December 31, 1998.
The officers of the Portfolios receive no compensation directly from the
Portfolios for performing the duties of their offices. The officers of the
Trust, their addresses, ages and principal occupations during the past five
years are shown below:
36
<PAGE> 40
<TABLE>
<CAPTION>
- -------------------------------- --------- ------------------ --------------------------------------------------------
NAME AND ADDRESS AGE POSITION(S) HELD PRINCIPAL OCCUPATION DURING PAST 5 YEARS
WITH THE TRUST
- -------------------------------- --------- ------------------ --------------------------------------------------------
<S> <C> <C> <C>
Mark A. Beeson 42 President Mr. Beeson has served as Senior Managing Director of Banc
1111 Polaris Parkway, Suite B2 One Investment Advisors Corporation since August, 1994.
Columbus, Ohio 43240 Mr. Beeson has also served as Chief Executive Officer
and President of One Group Administrative Service, Inc.
since October 26, 1999.
- -------------------------------- --------- ------------------ --------------------------------------------------------
Robert L. Young 36 Vice President Mr. Young has served as Managing Director of Banc One
1111 Polaris Parkway, Suite B2 and Treasurer Investment Advisors Corporation since December, 1996.
Columbus, Ohio 43240 Prior to that, Mr. Young was a senior audit manager of
Deloitte & Touche until December, 1996. Previously, Mr. Young
also worked for Dayton, Power & Light as the Director of
Internal Audit. Mr. Young has also served as Vice President and
Treasurer of One Group Administrative Services, Inc. since
October 26, 1999.
- -------------------------------- --------- ------------------ --------------------------------------------------------
Mark S. Redman 45 Secretary Mr. Redman has been an employee of BISYS Fund Services, Inc.
1111 Polaris Parkway, Suite B2 since 1989. He has also served as the President of The One
Columbus, Ohio 43240 Group Services Company since November, 1997 and as an officer
of The One group Services Company from June, 1995 to November,
1997.
- -------------------------------- --------- ------------------ --------------------------------------------------------
Gary R. Young 30 Assistant Mr. Young has served as a Director of Mutual Fund Administration
1111 Polaris Parkway, Suite B2 Treasurer and for Banc One Investment Advisors Corporation since December,
Columbus, Ohio 43240 Assistant 1998. Prior to that, Mr. Young was Vice President and Manager of the
Secretary Mutual Fund Accounting, Custody and Financial Administration
Group at First Chicago NBD Investment Management Company. He
has also worked for One Group Administrative Services, Inc. since
January 1, 2000.
- -------------------------------- --------- ------------------ --------------------------------------------------------
Jessica K. Ditullio 37 Assistant Ms. Ditullio has served as an attorney in the law department
Bank One Corporation Secretary of Bank One Corporation since August, 1990.
100 East Broad Street
Columbus, Ohio 43215
- -------------------------------- --------- ------------------ --------------------------------------------------------
Nancy E. Fields 50 Assistant Ms. Fields has served as Project Manager at Banc One Investment
1111 Polaris Parkway, Suite B2 Secretary Advisors Corporation since July, 1999. Prior to that, Ms. Fields
Columbus, Ohio 43240 served as Vice President with the Ohio Bankers' Association
from January, 1998 until July, 1999. Prior to that, Ms. Fields
was Vice President of BISYS Fund Services, Inc. Ms. Fields has
also worked for One Group Administrative Services, Inc. since
January 1, 2000.
- -------------------------------- --------- ------------------ --------------------------------------------------------
Michael V. Wible 37 Assistant Mr. Wible has served as an attorney in the law department of
Bank One Corporation Secretary Bank One Corporation since September, 1994.
100 East Broad Street
Columbus, Ohio 43215
- -------------------------------- --------- ------------------ --------------------------------------------------------
James F. Laird, Jr. 42 Vice President Mr. Laird was elected Vice President-General Manager
Three Nationwide Plaza and Assistant of Nationwide Advisory Services, Inc., on April 5,
Columbus, Ohio 43215 Treasurer 1995. Prior to being elected General Manager, Mr.
Laird served as Treasurer of Nationwide Advisory
Services, Inc. since November, 1987.
- -------------------------------- --------- ------------------ --------------------------------------------------------
Karen R. Tackett 32 Vice President Since August, 1998, Ms. Tackett has been Director
Three Nationwide Plaza and Assistant Strategic Development of Nationwide Advisory Services,
Columbus, Ohio 43215 Secretary Inc. From March, 1996 until July, 1998, Ms. Tackett
was Accounting Manager for Nationwide Advisory
Services, Inc. Prior to that, Ms. Tackett was Audit
Manager and held various other positions with
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand,
L.L.P.)
- -------------------------------- --------- ------------------ --------------------------------------------------------
</TABLE>
All officers listed above are "interested persons" of the Portfolios as
defined in the Investment Company Act of 1940.
INVESTMENT ADVISOR
Investment advisory services to each of the Portfolios are provided by
Banc One Investment Advisors. Banc One Investment Advisors makes the investment
decisions for the assets of the Portfolios and continuously reviews, supervises
and administers the Portfolio's investment program, subject to the supervision
of, and policies established by, the Trustees. The Portfolios' shares are not
sponsored, endorsed or guaranteed by, and do not constitute obligations or
deposits of any bank affiliate of Banc One Investment Advisors and are not
insured by the FDIC or issued or guaranteed by the U.S. Government or any of its
agencies.
37
<PAGE> 41
As of December 31, 1998, Banc One Investment Advisors, an indirect
wholly-owned subsidiary of BANK ONE CORPORATION, a bank holding company located
in the state of Illinois, managed over $54 billion in assets. BANK ONE
CORPORATION has affiliate banking organizations in Arizona, Colorado, Illinois,
Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Texas, Utah, West
Virginia and Wisconsin. In addition, BANK ONE CORPORATION has several affiliates
that engage in data processing, venture capital, investment and merchant
banking, and other diversified services including trust management, investment
management, brokerage, equipment leasing, mortgage banking, consumer finance,
and insurance.
Banc One Investment Advisors represents a consolidation of the
investment advisory staffs of a number of bank affiliates of BANK ONE
CORPORATION, which have considerable experience in the management of open-end
management investment company portfolios, including One Group (an open-end
management investment company which offered units of beneficial interest in 34
separate Portfolios as of December 31, 1998, some of which have similar names as
the Portfolios of the Trust and are managed similarly to such Portfolios) since
1985.
All investment advisory services are provided to the Portfolios by Banc
One Investment Advisors pursuant to an investment advisory agreement dated
August 1, 1994 (the "Advisory Agreement"). Unless sooner terminated, the
Advisory Agreement will continue in effect until August 31, 1999, and will
continue in effect as to a particular Portfolio from year to year thereafter if
such continuance is approved at least annually by the Trust's Board of Trustees
or by vote of a majority of the outstanding Shares of such Portfolio (as defined
under "ADDITIONAL INFORMATION-- Miscellaneous" in this Statement of Additional
Information), and a majority of the Trustees who are not parties to the
respective investment advisory agreements or interested persons (as defined in
the Investment Company Act of 1940) of any party to the respective investment
advisory agreements by votes cast in person at a meeting called for such
purpose. The Advisory Agreement may be terminated as to a particular Portfolio
at any time on 60 days' written notice without penalty by:
1.___the Trustees,
2.___vote of a majority of the outstanding Shares of that Portfolio, or
3.___the Portfolio's Advisor, as the case may be.
The Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the Investment Company Act of 1940.
The Advisory Agreement provides that Banc One Investment Advisors shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the performance of the Advisory
Agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Advisor in the
performance of its duties, or from reckless disregard by it of its duties and
obligations under the Agreement.
Banc One Investment Advisors is entitled to a fee, which is calculated
daily and paid monthly, at the following percentages of the average daily net
assets of each Portfolio:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO PERCENTAGE
<S> <C>
Bond Portfolio 0.60%
Government Bond Portfolio 0.45%
Balanced Portfolio 0.70%
Mid Cap Growth Portfolio 0.65%
Large Cap Growth Portfolio 0.65%
Equity Index Portfolio 0.30%
Diversified Equity Portfolio 0.74%
Diversified Mid Cap Portfolio 0.74%
Mid Cap Value Portfolio. 0.74%
</TABLE>
38
<PAGE> 42
Banc One Investment Advisors has voluntarily agreed to waive all or
part of its fees in order to limit the Portfolios' total operating expenses on
an annual basis to not more than the following percentages of the average daily
net assets of each of the Portfolios:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO PERCENTAGE
<S> <C>
Bond Portfolio 0.75%
Government Bond Portfolio 0.75%
Balanced Portfolio 1.00%
Mid Cap Growth Portfolio 1.10%
Large Cap Growth Portfolio 1.00%
Equity Index Portfolio 0.55%
Diversified Equity Portfolio 0.95%
Diversified Mid Cap Portfolio 0.95%
Mid Cap Value Portfolio 0.95%
</TABLE>
These fee waivers are voluntary and may be terminated at any time.
For the fiscal years ended December 31, 1998, 1997, and 1996, the following
Portfolios paid investment advisory fees as follows:
FISCAL YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Portfolio Net Waived Net Waived Net Waived
- --------- --- ------ --- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Government Bond Portfolio $128,907 $ 9,393 $78,818 $23,446 $23,470 $31,993
Balanced Portfolio $490,270 $ 2,862 $189,332 $44,906 $26,690 $31,993
Mid Cap Growth Portfolio $431,700 $ -- $233,609 $ 4,114 $43,318 $48,685
Large Cap Growth Portfolio $948,112 $ -- $458,066 $ 1,114 $136,980 $53,497
Equity Index Portfolio $ -- $15,432 NA* NA* NA* NA*
</TABLE>
* The Equity Index Portfolio commenced operations on May 1, 1998.
Prior to March 31, 1999, First Chicago NBD Investment Management Company
("FCNIMCO") provided investment management services to the Predecessor Funds of
the Bond Fund, the Diversified Mid Cap Portfolio, the Mid Cap Value Portfolio,
and the Diversified Equity Portfolio. FCNIMCO is an indirect subsidiary of BANK
ONE CORPORATION and an affiliate of Banc One Investment Advisors. For the fiscal
years ended December 31, 1998, 1997, and 1996, the following Portfolios paid
investment advisory fees to FCNIMCO as follows:
FISCAL YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Portfolio Net Waived Net Waived Net Waived
- --------- --- ------ --- ------ --- ------
<S> <C> <C> <C> <C> <C> <C>
Bond Portfolio $164,396 $26,975 $59,313 $ 2,899 $ NA* $ NA*
Diversified Mid Cap Portfolio $ 5,234 $82,956 $ 2,396 $58,356 $ -- $48,992
Mid Cap Value Portfolio $ 50,740 $57,553 $20,834 $17,342 $ NA* $ NA*
Diversified Equity Portfolio $263,173 $33,240 $96,428 $37,901 $ -- $42,701
</TABLE>
*Commenced operations on May 1, 1997.
39
<PAGE> 43
GLASS-STEAGALL ACT
In 1971, the United States Supreme Court held in Investment Company
Institute v. Camp that the Federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a Portfolio for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any of its non-bank affiliates from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit a
bank holding company or affiliate from acting as investment advisor, transfer
agent, and custodian to an investment company. In 1981, the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisors to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisors to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
In the Advisory Agreement, Banc One Investment Advisors has represented
to the Portfolios that it possesses the legal authority to perform the
investment advisory services contemplated by the agreement and described in the
Prospectus and this Statement of Additional Information without violation of
applicable statutes and regulations. Future changes in either Federal or state
statutes and regulations relating to the permissible activities of banks or bank
holding companies and the subsidiaries or affiliates of those entities, as well
as further judicial or administrative decisions or interpretations of present
and future statutes and regulations, could prevent or restrict Banc One
Investment Advisors from continuing to perform such services for the Portfolios.
Depending upon the nature of any changes in the services which could be provided
by Banc One Investment Advisors, the Board of Trustees of the Portfolios would
review the Portfolios' relationship with Banc One Investment Advisors and
consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of BANK ONE CORPORATION subsidiary banks or
their correspondent banks in connection with customer purchases of Shares of the
Trust, these banks might be required to alter materially or discontinue the
services offered by them to Customers. It is not anticipated, however, that any
change in the Portfolios' method of operations would affect its net asset value
per Share or result in financial losses to any customer.
PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreement, Banc One Investment Advisors
determines, subject to the general supervision of the Board of Trustees of the
Portfolios and in accordance with each Portfolio's investment objective and
restrictions, which securities are to be purchased and sold by each such
Portfolio and which brokers are to be eligible to execute its portfolio
transactions. Purchases and sales of portfolio securities with respect to the
Bond Portfolios usually are principal transactions in which portfolio securities
are purchased directly from the issuer or from an underwriter or market maker
for the securities. Purchases from underwriters of portfolio securities include
a commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers may include the spread between the bid and
asked price. Transactions on stock exchanges (other than certain foreign stock
exchanges) involve the payment of negotiated brokerage commissions. Transactions
in the over-the-counter market are generally principal transactions with
dealers. With respect to the over-the-counter market, the Portfolios, where
possible, will deal directly with the dealers who make a market in the
securities involved except in those circumstances where better price and
execution are available elsewhere. While Banc One Investment Advisors generally
seeks competitive spreads or commissions, the Portfolios may not necessarily pay
the lowest spread or commission available on each transaction, for reasons
discussed below. During each of the past three fiscal years, the brokerage
commissions paid by the Portfolios were as follows:
40
<PAGE> 44
<TABLE>
<CAPTION>
Portfolio Aggregate Brokerage Commissions
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balanced Portfolio $47,608 $34,413 $12,571
Large Cap Growth Portfolio $109,720 $40,915 $29,546
Equity Index Portfolio $6,217 NA* NA*
Diversified Equity Portfolio $76,844 $46,091 $21,983
Mid Cap Growth Portfolio $92,962 $125,008 $98,102
Diversified Mid Cap Portfolio $21,501 $19,787 $19,819
Mid Cap Value Portfolio $17,896 $16,891 NA**
</TABLE>
* The Equity Index Portfolio commenced operations of May 1, 1998.
** The Mid Cap Value Portfolio commenced operations on May 1, 1997.
As of December 31, 1998, the following Portfolios held investments in securities
of their regular broker-dealers as follows:
<TABLE>
<CAPTION>
SHARES OR
PORTFOLIO SECURITY PRINCIPAL AMOUNT VALUE
--------- -------- ---------------- -----
<S> <C> <C> <C>
Balanced Portfolio Bear Stearns 4,220 $ 157,722
Morgan Stanley 8,120 $ 576,520
Goldman Sachs $ 300,000 $ 317,563
Lehman Brothers $1,353,206 $1,353,206
Mid Cap Growth Portfolio Lehman Brothers $8,671,517 $8,671,517
Large Cap Growth Portfolio Morgan Stanley Dean
Witter & Co. 100 $ 7,100
Prudential Securities $1,000,000 $1,000,000
Lehman Brothers $3,330,837 $3,330,837
Equity Index Portfolio Bear Stearns 200 $ 7,475
Lehman Brothers 200 $ 8,813
Lehman Brothers $ 138,974 $ 138,974
Merrill Lynch 500 $ 33,375
Morgan Stanley Dean
Witter & Co. 800 $ 56,800
</TABLE>
Allocation of transactions, including their frequency, to various
dealers is determined by Banc One Investment Advisors with respect to the
Portfolios based on its best judgment and in a manner deemed fair and reasonable
to Shareholders. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Subject to this consideration,
dealers who provide supplemental investment research to Banc One Investment
Advisors may receive orders for transactions by the Portfolios. Information so
received is in addition to and not in lieu of services required to be performed
by Banc One Investment Advisors and does not reduce the advisory fees payable to
Banc One Investment Advisors. Such information may be useful to Banc One
Investment Advisors in serving both the Portfolios and other clients and,
conversely, supplemental information obtained by the placement of business of
other clients may be useful to Banc One Investment Advisors in carrying out its
obligations to the Portfolios.
The Portfolios will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Banc One Investment Advisors or
its affiliates except as may be permitted under the Investment Company Act of
1940, and will not give preference to correspondents of BANK ONE CORPORATION
subsidiary banks with respect to such transactions, securities, savings
deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Portfolio are made independently from
those for the other Portfolios or any other investment company or account
managed by Banc One Investment Advisors. Any such other investment company or
account may also invest in the same securities as the Portfolios. When a
purchase or sale of the same security is made at substantially the same time on
behalf of a given Portfolio and another Portfolio, investment company or account
the transaction will be averaged as to price, and available investments
allocated as to amount, in a manner which Banc One Investment Advisors believes
to be equitable to the Portfolio(s) and such other investment company or
account. In some instances, this investment procedure may adversely affect the
price paid or received by a Portfolio or the size of the position obtained by a
Portfolio. To the extent permitted by law, Banc One Investment Advisors may
aggregate the securities to be sold or purchased by it for a Portfolio with
those to be sold or purchased by it for other Portfolios or for other investment
companies or accounts in order to obtain best execution. As provided by the
Advisory Agreement, in making investment recommendations for the Portfolios,
Banc One Investment Advisors will not inquire or take into consideration whether
an issuer of securities proposed for purchase or sale by the Portfolios is a
customer of Banc One Investment Advisors or its parent or subsidiaries or
affiliates and, in dealing with its commercial customers, Banc One Investment
Advisors and its parent, subsidiaries, and affiliates will not inquire or take
into consideration whether securities of such customers are held by the
Portfolios.
ADMINISTRATOR
Effective January 1, 2000, One Group Administrative Services, Inc.,
1111 Polaris Parkway, Columbus, Ohio 43240 began serving as administrator for
the Trust ("One Group Administrative Services" or the "Administrator"). One
Group Administrative Services is an affiliate of Banc One Investment Advisors,
the advisor of the Trust, and an indirect wholly-owned subsidiary of Bank One
Corporation.
41
<PAGE> 45
The Administrator assists in supervising all operations of each
Portfolio to which it serves (other than those performed under the Advisory
Agreement, the Custodian Agreement and the Transfer Agency Agreement for that
Portfolio). Under the Administration Agreement, the Administrator has agreed to
maintain the necessary office space for the Portfolios, to price the Portfolio
securities of each Portfolio it serves and compute the net asset value and net
income of the Portfolios on a daily basis, to maintain each Portfolio's
financial accounts and records, and to furnish certain other services required
by the Portfolios with respect to each Portfolio. The Administrator prepares
annual and semi-annual reports to the Securities and Exchange Commission,
prepares federal and state tax returns, and generally assists in all aspects of
the Trust's operations other than those performed under the Advisory Agreement,
the Custodian Agreement and the Transfer Agency Agreement. Under the
Administration Agreement, the Administrator may, at its expense, subcontract
with any entity or person concerning the provision of services under the
Administration Agreement.
Unless sooner terminated, the Administration Agreement between the
Trust and One Group Administrative Services will continue in effect through
November 1, 2000. The Administration Agreement thereafter shall be renewed
automatically for successive one year terms, unless written notice not to renew
is given by the non-renewing party to the other party at least sixty days prior
to the expiration of the then-current term. The Administration Agreement may be
terminated with respect to the Trust only upon mutual agreement of the parties
to the Administration Agreement and for cause (as defined in the Administration
Agreement) by the party alleging cause, on not less than sixty days' notice by
the Board of Trustees or by One Group Administrative Services.
The Administrator is entitled to a fee for its services, which is calculated
daily and paid monthly, at the annual rates specified below:
For all Portfolios except the Equity Index Portfolio:
- .18% on the first $250 million in Trust assets (except for the Equity
Index Portfolio)
- .14% on Trust assets in excess of $250 million (other than assets in
the Equity Index Portfolio)
For the Equity Index Portfolio:
- .14% on Equity Index Portfolio assets.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Portfolios in connection with the matters to which the Administration
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
or gross negligence in the performance of its duties, or from the reckless
disregard by it of its obligations and duties thereunder.
Prior to January 1, 2000, Nationwide Advisory Services, Inc. Three
Nationwide Plaza, Columbus, Ohio 43215 ("NAS") served as Administrator to each
Portfolio pursuant to an administration agreement with the Trust. (NAS is a
wholly owned subsidiary of Nationwide Life Insurance Company, which in turn is a
wholly owned subsidiary of Nationwide Financial Services, Inc., a holding
company of the Nationwide Insurance Enterprise).
For the fiscal years ended December 31, 1998, 1997, and 1996, the
following Portfolios paid administration fees to NAS as follows:
42
<PAGE> 46
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
- ------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Portfolio Net Net Net
- -----------------------------------------------------------------------------------------
Government Bond Portfolio $ 69,649 $42,036 $29,580
- -----------------------------------------------------------------------------------------
Balanced Portfolio $158,161 $64,914 $24,178
- -----------------------------------------------------------------------------------------
Mid Cap Growth Portfolio $151,830 $86,256 $33,970
- -----------------------------------------------------------------------------------------
Large Cap Growth Portfolio $330,612 $169,132 $ 70,330
- -----------------------------------------------------------------------------------------
Equity Index Portfolio $ 7,202 NA* NA*
- -----------------------------------------------------------------------------------------
</TABLE>
* The Equity Index Portfolio commenced operations on May 1, 1998.
FCNIMCO and BISYS served as co-administrators to the Predecessor Funds of the
Bond Fund, the Diversified Mid Cap Portfolio, the Mid Cap Value Portfolio, and
the Diversified Equity Portfolio. For the fiscal years ended December 31, 1998,
1997, and 1996, the following Portfolios paid investment administration fees to
FCNIMCO and BISYS as follows:
FISCAL YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Portfolio Net Waived Net Waived Net Waived
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bond Portfolio $71,764 $ -- $23,329 $ -- NA* NA*
- -----------------------------------------------------------------------------------------------------------
Diversified Mid Cap Portfolio $22,048 $ -- $15,188 $ -- -- $10,277
- -----------------------------------------------------------------------------------------------------------
Mid Cap Value Portfolio $27,073 $ -- $ 9,544 $ -- NA* NA*
- -----------------------------------------------------------------------------------------------------------
Diversified Equity Portfolio $74,103 $ -- $33,582 $ -- -- $ 8,957
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Commenced operations on May 1, 1997.
SUB-ADMINISTRATOR
For the period beginning November 14, 1998 and ending March 31, 1999, NAS
served as sub-administrator to the Predecessor Funds and received fees equal to
0.15% of the average net assets of the Predecessor Funds from the Predecessor
Funds' administrator.
The Board of Trustees of the Trust approved a Sub-Administration Agreement
between Banc One Investment Advisors and NAS that was effective on April 1,
1999. Under the contract, Banc One Investment Advisors was entitled to a fee
equal to 0.05% of the average net assets of the Trust. The contract terminated
on December 31, 1999 with the termination of the administration agreement
between the Trust and NAS.
CUSTODIANS, SUB-CUSTODIAN AND TRANSFER AGENT
Custodian. State Street Bank and Trust Company ( "State Street"), P.O. Box
8500, Boston, MA 02266-8500 acts as custodian for the Portfolios under a
Custodian Agreement with the Trust (the "Custodian Agreement"). Under the
Custodian Agreement, State Street:
(i) maintains a separate account or accounts in the name of each
Portfolio;
(ii) makes receipts and disbursements of money on behalf of each Portfolio;
(iii) collects and receives all income and other payments and distributions
on account of the Portfolios' portfolio securities; responds to
correspondence from security brokers and others relating to its
duties; and
(iv) makes periodic reports to the Board of Trustees concerning the
Portfolios' operations.
43
<PAGE> 47
State Street may, at its own expense, open and maintain a sub-custody account or
accounts on behalf of the Trust, provided that State Street shall remain liable
for the performance of all of its duties under the Custodian Agreements.
NBD ("NBD"), an indirect wholly-owned subsidiary of BANK ONE CORPORATION, served
as Custodian for the Predecessor Funds pursuant to a Custodian Agreement.
Sub-Custodian. Bank One Trust Company, N.A. (the "Sub-Custodian")
serves as Sub-Custodian in connection with the Trust's securities lending
activities, pursuant to a Subcustodian Agreement, dated as of June 11, 1998
between the Trust, State Street and Bank One Trust Company and a Securities
Lending Agreement, dated as of June 15, 1998 between the Trust, Banc One
Investment Advisors, and the Subcustodian. The Sub-Custodian is an indirect
subsidiary of BANK ONE CORPORATION and an affiliate of Banc One Investment
Advisors. The Sub-Custodian is entitled to a fee from the Trust, which is
calculated on an annual basis and accrued daily, equal to:
- .05% of the value of collateral received from the Borrower for each
securities loan of U.S. Government and Agency Securities; and
- .10% of the value of collateral received from the Borrower for each
loan of equities and corporate bonds.
Use of Depositories. Rules adopted under the Investment Company Act of
1940 permit the Portfolios to maintain their securities and cash in the custody
of certain eligible banks and securities depositories.
Transfer Agent. State Street Bank and Trust Company ("State Street"),
225 Franklin Street, Boston, Massachusetts 02110, serves as Transfer Agent for
each Portfolio pursuant to a Transfer Agency and Service Agreement with the
Trust (the "Transfer Agency Agreement"). Under the Transfer Agency Agreement,
State Street has agreed to perform the customary services of a transfer agent
and dividend disbursing agent including issuing and redeeming Shares of the
Portfolios, maintaining Shareholder accounts, and preparing and mailing account
statements and activity statements to Shareholders.
EXPERTS
Independent Public Accountants. PricewaterhouseCoopers LLP, 100 East Broad
Street, Columbus, Ohio 43215 serves as the independent accountants of the Trust.
For all Portfolios other than the Predecessor Funds, the financial statements
for the fiscal year ended December 31, 1998 have been audited by
PricewaterhouseCoopers LLP. The Financial Statements for the fiscal year ended
December 31, 1998 for the Predecessor Funds to the Bond Portfolio, the
Diversified Mid Cap Portfolio, the Mid Cap Value Portfolio and the Diversified
Equity Portfolio have been audited by Arthur Andersen LLP, 500 Woodward Avenue,
Suite 2700, Detroit, Michigan 48226-3474. (See "Financial Statements" in this
Statement of Additional Information).
Fund Counsel. The law firm of Ropes & Gray, One Franklin Square, 1301 K Street,
N.W., Suite 800 East, Washington, D.C. 20005-3333 is counsel to the Trust.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust. The Trust's Declaration of Trust
was filed with the Secretary of State of the Commonwealth of Massachusetts on
June 7, 1993 and authorizes the Board of Trustees to issue an unlimited number
of Shares, which are units of beneficial interest, without par value. The
Trust's Declaration of Trust authorizes the Board of Trustees to establish one
or more series of Shares of the Trust, and to classify or reclassify any series
into one or more classes by setting or changing in any one or more respects the
preferences, designations, conversion, or other rights, restrictions, or
limitations as to dividends, conditions of redemption, qualifications, or other
terms applicable to the Shares of such class, subject to those matters expressly
provided for in the
44
<PAGE> 48
Declaration of Trust, as amended, with respect to the Shares of each series of
the Trust. The Trust presently includes nine series of Shares which represent
interests in the following Portfolios:
1. Bond Portfolio
2. Government Bond Portfolio
3. Balanced Portfolio
4. Mid Cap Growth Portfolio
5. Large Cap Growth Portfolio
6. Equity Index Portfolio
7. Diversified Equity Portfolio
8. Diversified Mid Cap Portfolio
9. Mid Cap Value Portfolio
The Declaration of Trust may not be amended without the affirmative
vote of a majority of the outstanding shares of the Trust, except that the
Trustees may amend the Declaration of the Trust without the vote or consent of
shareholders to:
(1) designate series of the Trust;
(2) change the name of the Trust; or
(3) supply any omission, cure, correct, or supplement any ambiguous,
defective, or inconsistent provision to conform the Declaration of Trust to the
requirements of applicable federal and state laws or regulations if they deem it
necessary.
Shares have no pre-emptive or conversion rights. Shares are fully paid
and non-assessable, except as set forth below. When a majority is required, it
means the lesser of 67% or more of the shares present at a meeting when the
holders of more than 50% of the outstanding shares are present or represented by
proxy, or more than 50% of the outstanding shares. Shares have no subscription
or preemptive rights and only those conversion or exchange rights as the Board
of Trustees may grant in its discretion. When issued for payment as described in
the Prospectus and this Statement of Additional Information, the Trust's Shares
will be fully paid and non-assessable. In the event of a liquidation or
dissolution of the Trust, Shares of a Portfolio are entitled to receive the
assets available for distribution belonging to the Portfolio, and a
proportionate distribution, based upon the relative asset values of the
respective Portfolios, of any general assets not belonging to any particular
Portfolio which are available for distribution.
Rule 18f-2 under the Investment Company Act of 1940 provides that any
matter required to be submitted to the holders of the outstanding voting
securities of an investment company such as the Trust shall not be deemed to
have been effectively acted upon unless approved by the holders of a majority of
the outstanding Shares of each Portfolio affected by the matter. For purposes of
determining whether the approval of a majority of the outstanding Shares of a
Portfolio is required in connection with a matter, a Portfolio is deemed to be
affected by a matter unless it is clear that the interests of each Portfolio in
the matter are identical, or that the matter does not affect any interest of the
Portfolio. Under Rule 18f-2, the approval of an investment advisory agreement or
any change in investment policy would be effectively acted upon with respect to
a Portfolio only if approved by a majority of the outstanding Shares of the
Portfolio. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
Shareholders of the Trust voting without regard to series.
The Trust may suspend the right of redemption only under the following
unusual circumstances:
(i) when the New York Stock Exchange is closed (other than weekends
and holidays) or trading is restricted;
45
<PAGE> 49
(ii) when an emergency exists, making disposal of portfolio securities
or the valuation of net assets not reasonably practicable; or
(iii) during any period when the Securities and Exchange Commission has
by order permitted a suspension of redemption for the protection of
shareholders.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, holders of units of beneficial interest in a
business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. However, the Trust's Declaration of
Trust provides that Shareholders shall not be subject to any personal liability
for the obligations of the Trust, and that every written agreement, obligation,
instrument, or undertaking made by the Trust shall contain a provision to the
effect that the Shareholders are not personally liable thereunder. The
Declaration of Trust provides for indemnification out of the trust property of
any Shareholder held personally liable solely by reason of his being or having
been a Shareholder. The Declaration of Trust also provides that the Trust shall,
upon request, assume the defense of any claim made against any Shareholder for
any act or obligation of the Trust, and shall satisfy any judgment thereon.
Thus, the risk of a Shareholder incurring financial loss on account of
Shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
The Declaration of Trust states further that no Trustee, officer, or
agent of the Trust shall be personally liable in connection with the
administration or preservation of the assets of the trust or the conduct of the
Trust's business; nor shall any Trustee, officer, or agent be personally liable
to any person for any action or failure to act except for his own bad faith,
willful misfeasance, gross negligence, or reckless disregard of his duties. The
Declaration of Trust also provides that all persons having any claim against the
Trustees or the Trust shall look solely to the assets of the Trust for payment.
SHAREHOLDERS
All Shares of the Portfolios will be purchased by insurance company
separate accounts to fund variable annuity and variable life contracts
("Insurance Contracts"). For information concerning the purchase and redemption
of Shares by Separate Accounts, you should refer to the prospectus or other
documents that you received when you purchased your variable life or variable
insurance contract.
As of March 17, 1999, the Trust believes that no Shareholder owned
beneficially more than 25% of the outstanding shares of any Portfolio of the
Trust.
46
<PAGE> 50
5% SHAREHOLDERS
In addition, as of March 17, 1999, the following persons were the owners of
more than 5% of the outstanding Shares of the following Portfolios:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PERCENT TYPE OF
NAME AND ADDRESS PORTFOLIO OWNERSHIP OWNERSHIP
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nationwide VA Separate Account C Government Bond Portfolio 86% Record
Nationwide Life and
Annuity Insurance Company
CO 68 c/o IPO
PO Box 182029
Columbus, Ohio 43218-2029
- ----------------------------------------------------------------------------------------------------
Nationwide Life and Annuity Insurance Government Bond Portfolio 14% Record &
Company Beneficial
CO 68 c/o IPO
PO Box 182029
Columbus, Ohio 43218-2029
- ----------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 51
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Nationwide VA Separate Account C
Nationwide Life and Annuity Insurance Balanced Portfolio 98% Record
Company
CO 68 c/o IPO
PO Box 182029
Columbus, Ohio 43218-2029
- ----------------------------------------------------------------------------------------------------
Nationwide VA Separate Account C
Nationwide Life and Annuity Insurance Mid Cap Growth Portfolio 99% Record
Company
CO 68 c/o IPO
PO Box 182029
Columbus, Ohio 43218-2029
- ----------------------------------------------------------------------------------------------------
Nationwide VA Separate Account C
Nationwide Life and Annuity Insurance Large Cap Growth Portfolio 96% Record
Company
CO 68 c/o IPO
PO Box 182029
Columbus, Ohio 43218-2029
- ----------------------------------------------------------------------------------------------------
Nationwide Life Insurance Company Equity Index Portfolio 14% Record
Nationwide Life Insurance Co Seed Account & Beneficial
One Nationwide Plaza
c/o Investment Accounting
Attn Pam Smith 1-32-05
Columbus, Ohio 43215-2239
- ----------------------------------------------------------------------------------------------------
Nationwide VA Separate Account C
Nationwide Life and Annuity Insurance Equity Index Portfolio 82% Record
Company
CO 68 c/o IPO
PO Box 182029
Columbus, Ohio 43218-2029
- ----------------------------------------- --------------------------------------- ------------------- -------------------
</TABLE>
As of March 17, 1999, the Trust believes that the trustees and
officers of the Trust, as a group, owned less than 1% of the shares of any
Portfolio of the Trust.
CALCULATION OF PERFORMANCE DATA
The Portfolios may quote their performance in various ways. All
performance information supplied by the Portfolios in advertising is historical
and is not intended to indicate future returns. The Portfolios' share prices,
yields and total returns fluctuate in response to market conditions and other
factors, and the value of Portfolio shares when redeemed may be more or less
than their original cost.
48
<PAGE> 52
From time to time, Banc One Investment Advisors and/or Administrator
may voluntarily waive all or a portion of its respective fee and absorb certain
expenses for the Portfolios. Performance information contained in advertisements
includes the effect of deducting a Portfolio's expenses, but may not include
charges and expenses attributable to the variable annuity, variable life or
pension/retirement plan through which you have made your investment (a "Funding
Vehicle"). Because the Portfolios' shares may only be purchased through a
Funding Vehicle, you should carefully review your insurance contracts for
information on fees and expenses associated with the Funding Vehicle through
which your shares have been purchased. Excluding such fees and expenses from the
Portfolios' performance quotations has the effect of increasing the performance
quoted.
A Portfolio's respective total return and average annual total return
is determined by calculating the change in the value of a hypothetical $1,000
investment in a Portfolio for each of the periods shown. Total return for a
Portfolio is computed by determining the average annual compounded rate of
return over the applicable period that would equate the initial amount invested
to the ending redeemable value of the investment. The ending redeemable value
includes dividends and capital gain distributions reinvested at net asset value.
The resulting percentages indicated the positive or negative investment results
that an investor would have experienced from changes in net asset value and
reinvestment of dividends and distributions.
Performance will fluctuate from time to time and is not necessarily
representative of future results. Accordingly, a Portfolio's performance may not
provide for comparison with bank deposits or other investments that pay a fixed
return for a stated period of time. Performance is a function of a Portfolio's
quality, composition, and maturity, as well as expenses allocated to the
Portfolio.
Statistical and performance information compiled and maintained by CDA
Technologies, Inc. ("CDA") and Interactive Data Corporation may also be used.
CDA is a performance evaluation service that maintains a statistical data base
of performance, as reported by a diverse universe of independently-managed
mutual Portfolios. Interactive Data Corporation is a statistical access service
that maintains a data base of various industry indicators, such as historical
and current price/earning information and individual stock and fixed income
price and return information.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H. 15), may also be used. Current rate information on municipal debt
obligations of various durations, as reported daily by the Bond Buyer, may also
be used. The Bond Buyer is published daily and is an industry-accepted source
for current municipal bond market information.
Comparative information on the Consumer Price Index may also be
included. This Index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return on
investment. From time to time, all of the Portfolios may quote actual total
return performance in advertising and other types of literature compared to
results reported by the Dow Jones Industrial Average.
The Dow Jones Industrial Average is an industry-accepted unmanaged
index of generally conservative securities used for measuring general market
performance. The performance reported will reflect the reinvestment of all
distributions on a quarterly basis and market price fluctuations. The index does
not take into account any brokerage commissions or other fees. Comparative
information on the Consumer Price Index may also be included.
The Portfolios may also promote the yield and/or total return
performance and use comparative performance information computed by and
available from certain industry and general market research and publications,
such as Lipper Analytical Services, Inc.
The Portfolios may quote actual yield and/or total return performance
in advertising and other types of literature compared to indices or averages of
alternative financial products available to prospective investors. The
performance comparisons may include the average return of various bank
instruments, some of which may carry certain return guarantees offered by
leading banks and thrifts as monitored by Bank Rate Monitor, and those of
corporate bond and government security price indices of various durations.
Comparative information on the Consumer Price Index may also be included.
49
<PAGE> 53
The Portfolios may also use comparative performance information
computed by and available from certain industry and general market research and
publications, as well as statistical and performance information, compiled and
maintained by CDA and Interactive Data Corporation.
The Portfolios may also use current interest rate and yield information
on government debt obligations of various durations, as reported weekly by the
Federal Reserve (Bulletin H. 15). In addition, current rate information on
municipal debt obligations of various durations, as reported daily by the Bond
Buyer, may also be used.
The average annual total return for the one year ended December 31,
1998 and for the life of each Portfolio was as follows:
<TABLE>
<CAPTION>
Date Portfolio
One Year Life Commenced Operation
-------- ---- -------------------
<S> <C> <C> <C>
Bond Portfolio 8.66% 10.21% 5/1/97
Government Bond Portfolio 7.32% 7.87% 8/1/94
Balanced Portfolio 19.09% 16.32% 8/1/94
Mid Cap Growth Portfolio 38.82% 23.13% 8/1/94
Large Cap Growth Portfolio 41.27% 25.34% 8/1/94
Equity Index Portfolio -- 10.52% 5/1/98
Diversified Equity Portfolio 13.10% 20.31% 3/30/95
Diversified Mid Cap Portfolio 4.91% 17.47% 3/30/95
Mid Cap Value Portfolio -3.31% 7.65% 5/1/97
</TABLE>
The 30 day yield for the Portfolios listed below is as follows:
30 Day Yield @ 12/31/98
Bond Portfolio 4.89%
---------------------------------------------------------
Government Bond Portfolio 5.24%
---------------------------------------------------------
Balanced Portfolio 1.99%
---------------------------------------------------------
ADMINISTRATIVE SERVICES PLAN
On November 17, 1999, a majority of the disinterested Trustees of the
Trust approved an Administrative Services Plan (the "Plan") and authorized any
officer of the Trust to execute and deliver, in the name and on behalf of the
Portfolios, written agreements in substantially the form presented to the Board
of Trustees of the Trust ("Servicing Agreements") with insurance companies and
other entities which are shareholders of record or which have a servicing
relationship ("Service Organization") with the beneficial owners of a class of a
Portfolio's shares of beneficial interest ("Shares"). Such Servicing Agreements
must provide that the Service Organizations are required to provide
administrative support services to their customers who own of record or
beneficially Shares. In consideration for providing such services, a Service
Organization will receive a fee, computed daily and paid monthly, of up to the
annual rate of 0.25% of the average daily net assets of the Portfolio owned
beneficially by its customers. Any bank, trust company, thrift institution,
broker-dealer, insurance company or other financial institution is eligible to
become a Service Organization and to receive fees under the Plan. All expenses
incurred by a Portfolio with respect to its Shares in connection with the
Servicing Agreements and the implementation of the Plan shall be borne entirely
by the holders of Shares of that Portfolio.
The Plan further provides that the Trustees shall review, at least
quarterly, a written report of the amounts expended pursuant to the Plan and the
purposes for which such expenditures were made. Unless sooner terminated, the
Plan shall continue until November 31, 2000, and thereafter, shall continue
automatically for successive annual periods provided such continuance is
approved at least annually by a majority of the Board of Trustees, including a
majority of the Disinterested Trustees.
MISCELLANEOUS
The Trust is not required to hold a meeting of Shareholders for the
purpose of annually electing Trustees except that
(i) the Trust is required to hold a Shareholders' meeting for the
election of Trustees at such time as less than a majority of the Trustees
holding office have been elected by Shareholders, and
(ii) if, as a result of a vacancy on the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the Shareholders,
that vacancy may only be filled by a vote of the Shareholders. In addition,
Trustees may be removed from office by a written consent signed by the holders
of Shares representing two-thirds of the outstanding Shares of the Trust at a
meeting duly called for the purpose. This meeting shall be held upon the written
request of the holders of Shares representing not less than 20% of the
outstanding Shares of the Trust. Except as set forth above, the Trustees may
continue to hold office and may appoint successor Trustees.
As used in the Portfolios' Prospectus and in this Statement of
Additional Information, "assets belonging to a Portfolio" means the
consideration received by the Trust upon the issuance or sale of Shares in that
Portfolio, together with all income, earnings, profits, and proceeds derived
from the investment thereof, including any proceeds from the sale, exchange, or
liquidation of such investments, and any Portfolios or payments derived from any
reinvestment of such proceeds, and any general assets of the Trust not readily
identified as belonging to a particular Portfolio that are allocated to that
Portfolio by the Board of Trustees. The Board of Trustees may allocate such
general assets in any manner it deems fair and equitable. It is anticipated that
the factor that will be used by the Board of Trustees in making allocations of
general assets to particular Portfolios will be the relative net asset values of
the respective Portfolios at the time of allocation. Each Portfolio's direct
liabilities and expenses will be charged to the assets belonging to that
Portfolio. Each Portfolio will also be charged in proportion to its relative net
asset value for the general liabilities and expenses of the Trust. The timing of
allocations of general assets and general liabilities and expenses of the Trust
50
<PAGE> 54
to particular Portfolios will be determined by the Board of Trustees of the
Trust and will be in accordance with generally accepted accounting principles.
Determinations by the Board of Trustees of the Trust as to the timing of the
allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular Portfolio
are conclusive.
As used in the Portfolios' Prospectuses and in this Statement of
Additional Information, a "vote of a majority of the outstanding Shares" of the
Trust, a particular Portfolio, or a particular class of Shares of a Portfolio,
means the affirmative vote of the lesser of (a) more than 50% of the outstanding
Shares of the Trust, such Portfolio, or such class of Shares of such Portfolio,
or (b) 67% or more of the Shares of the Trust, such Portfolio, or such class of
Shares of such Portfolio present at a meeting at which the holders of more than
50% of the outstanding Shares of the Trust, such Portfolio, or such class of
Shares of such Portfolio are represented in person or by proxy.
The Trust is registered with the Securities and Exchange Commission as
a management investment company. Such registration does not involve supervision
by the Commission of the management or policies of the Trust.
The Prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement filed with the
Securities and Exchange Commission. Copies of such information may be obtained
from the Commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and Statement of Additional Information.
51
<PAGE> 55
PEGASUS VARIABLE FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
Mid-Cap Intrinsic
Growth and Opportunity Growth Value Bond
Value Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in securities at value (Note 2) $57,585,080 $17,485,201 $25,147,781 $18,527,487 $53,487,003
Repurchase agreements at cost (Note 2) 1,675,000 598,000 -- 3,981,000 6,963,000
Total Investments (cost $50,283,752, $15,373,376,
$15,841,827, $22,909,793, $58,145,667) 59,260,080 18,083,201 25,147,781 22,508,487 60,450,003
Cash 56,792 64,643 -- 8,391 958
Receivable for investment securities sold 249,984 32,130 1,488,727 -- 8,010
Interest and dividends receivable 49,269 8,845 15,514 17,923 477,374
Receivable from investment advisor 5,158 11,115 7,447 9,296 5,097
Deferred organization expenses (Note 2) 4,094 4,137 4,137 -- --
TOTAL ASSETS 59,625,377 18,204,071 26,663,606 22,544,097 60,941,442
LIABILITIES
Cash overdraft -- -- 1,125,400 -- --
Payable for investment securities purchased -- -- 308,990 -- --
Accrued investment advisory fees 29,679 8,724 13,071 10,549 19,023
Accrued administration fees 7,420 2,181 3,268 2,637 7,134
Accrued custodial fees 3,861 3,267 5,323 3,173 2,448
Accrued professional fees 18,988 21,902 21,618 18,933 16,995
Accrued printing fees 4,285 7,219 7,654 6,489 3,454
Other accrued expenses 785 911 1,362 960 832
TOTAL LIABILITIES 65,018 44,204 1,486,686 42,741 49,886
NET ASSETS $59,560,359 $18,159,867 $25,176,920 $22,501,356 $60,891,556
Net assets consist of:
Capital shares (unlimited number of shares authorized $.10
per share) $ 334,541 $ 123,044 $ 117,095 $ 210,305 $ 567,692
Additional paid-in-capital 49,941,245 15,294,125 13,897,590 22,781,563 58,031,770
Accumulated undistributed net investment income 1,427 994 2,573 -- --
Accumulated undistributed (distributions in excess of)
realized gain (loss) 306,818 31,879 1,853,708 (89,206) (12,242)
Net unrealized appreciation (depreciation) on investments 8,976,328 2,709,825 9,305,954 (401,306) 2,304,336
NET ASSETS $59,560,359 $18,159,867 $25,176,920 $22,501,356 $60,891,556
Shares of capital stock outstanding 3,345,408 1,230,435 1,170,945 2,103,050 5,676,924
NET ASSET VALUE and redemption price per share $ 17.80 $ 14.76 $ 21.50 $ 10.70 $ 10.73
</TABLE>
See accompanying notes to financial statements.
<PAGE> 56
PEGASUS VARIABLE FUNDS
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Mid-Cap
Growth and Opportunity Growth
Value Fund Fund Fund
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income $ 675,456 $ 96,578 $ 117,327
Interest income 132,794 28,472 27,006
TOTAL INVESTMENT INCOME 808,250 125,050 144,333
EXPENSES:
Investment advisory fees 296,413 88,190 123,263
Administration fees 74,103 22,048 30,816
Professional fees 56,598 48,840 46,378
Custodial fees 32,222 25,699 17,569
Amortization of deferred organization cost 9,335 9,276 9,276
Printing expense 23,180 17,738 13,427
Other 10,566 10,565 11,007
TOTAL EXPENSES BEFORE WAIVERS 502,417 222,356 251,736
Less waivers (33,240) (82,956) (56,564)
NET EXPENSES 469,177 139,400 195,172
NET INVESTMENT INCOME (LOSS) $ 339,073 $(14,350) $ (50,839)
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments $1,444,929 $311,810 $1,853,797
Net change in unrealized appreciation (depreciation) on investments $4,450,770 551,852 5,582,309
NET REALIZED AND UNREALIZED GAIN (LOSS) 5,895,699 863,662 7,436,106
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $6,234,772 $849,312 $7,385,267
</TABLE>
<TABLE>
<CAPTION>
Intrinsic
Value Fund Bond Fund
<S> <C> <C>
INVESTMENT INCOME:
Dividend income $ 428,435 $ --
Interest income 85,054 2,920,779
TOTAL INVESTMENT INCOME 513,489 2,920,779
EXPENSES:
Investment advisory fees 108,293 191,371
Administration fees 27,073 71,764
Professional fees 50,303 53,067
Custodial fees 19,005 30,024
Amortization of deferred organization cost -- --
Printing expense 13,659 27,976
Other 10,595 11,178
TOTAL EXPENSES BEFORE WAIVERS 228,928 385,380
Less waivers (57,553) (26,975)
NET EXPENSES 171,375 358,405
NET INVESTMENT INCOME (LOSS) $ 342,114 $2,562,374
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on investments $ 283,047 $ 44,671
Net change in unrealized appreciation (depreciation) on investments (1,346,908) 1,451,053
NET REALIZED AND UNREALIZED GAIN (LOSS) (1,063,861) 1,375,352
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (721,747) $4,058,098
</TABLE>
See accompanying notes to financial statements.
<PAGE> 57
PEGASUS VARIABLE FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Growth and Value Fund Mid-Cap Opportunity
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 339,073 $ 206,522 $ (14,350) $ 4,129
Net realized gains 1,444,929 837,720 311,810 1,743,002
Net change in unrealized appreciation
(depreciation) of investments 4,450,770 3,665,139 551,852 725,115
Net increase (decrease) in net assets resulting
from operations 6,234,772 4,709,381 849,312 2,472,246
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (355,811) (195,276) -- (3,201)
In excess of net investment income -- -- -- --
From net realized gains from investment transactions (1,328,447) (785,704) (355,970) (1,732,223)
In excess of net realized gains -- -- -- --
Decrease in net assets from distributions to
shareholders (1,684,258) (980,980) (355,970) (1,735,424)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 16,305,399 26,172,441 6,254,470 4,779,295
Net asset value of shares issued to shareholders
from reinvestment of distributions 1,684,258 980,980 355,970 1,735,424
17,989,657 27,153,421 6,610,440 6,514,719
Less: payments for shares redeemed (1,685,009) (779,182) (612,145) (4,798,971)
Net increase in net assets from capital share
transactions 16,304,648 26,374,239 5,998,295 1,715,748
NET INCREASE IN NET ASSETS 20,855,162 30,102,640 6,491,637 2,452,570
NET ASSETS:
Beginning of period 38,705,197 8,602,557 11,668,230 9,215,660
End of period $59,560,359 $38,705,197 $18,159,867 $11,668,230
CAPITAL SHARE TRANSACTIONS:
Shares sold 955,005 1,722,895 435,554 318,480
Shares issued in reinvestment of distributions to
shareholders 102,324 61,654 25,066 120,944
1,057,329 1,784,549 460,620 439,424
Less: shares redeemed (97,531) (50,917) (41,697) (312,599)
NET INCREASE IN SHARES OUTSTANDING 959,798 1,733,632 418,923 126,825
CAPITAL SHARES:
Beginning of period 2,385,610 651,978 811,512 684,687
End of period 3,345,408 2,385,610 1,230,435 811,512
</TABLE>
<TABLE>
<CAPTION>
Growth Fund Intrinsic Value Fund
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997(1)
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ (50,839) $ 28,340 $ 342,114 $ 115,690
Net realized gains 1,853,797 1,211,616 283,047 123,169
Net change in unrealized appreciation
(depreciation) of investments 5,582,309 1,819,220 (1,346,908) 945,602
Net increase (decrease) in net assets resulting
from operations 7,385,267 3,059,176 (721,747) 1,184,461
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (26,849) (345,025) (112,779)
In excess of net investment income -- -- (1,651) --
From net realized gains from investment transactions (44,524) (1,140,567) (358,921) (47,295)
In excess of net realized gains -- -- (87,555) --
Decrease in net assets from distributions to
shareholders (44,524) (1,167,416) (793,152) (160,074)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 6,423,743 6,512,260 9,477,532 13,088,467
Net asset value of shares issued to shareholders
from reinvestment of distributions 44,524 1,167,416 793,152 160,074
6,468,267 7,679,676 10,270,684 13,248,541
Less: payments for shares redeemed (4,472,001) (5,273,546) (179,987) (347,370)
Net increase in net assets from capital share
transactions 1,996,266 2,406,130 10,090,697 12,901,171
NET INCREASE IN NET ASSETS 9,337,009 4,297,890 8,575,798 13,925,558
NET ASSETS:
Beginning of period 15,839,911 11,542,021 13,925,558 --
End of period $25,176,920 $15,839,911 $22,501,356 $13,925,558
CAPITAL SHARE TRANSACTIONS:
Shares sold 367,989 428,650 834,191 1,224,500
Shares issued in reinvestment of distributions to
shareholders 2,611 74,931 77,627 14,079
370,600 503,581 911,818 1,238,579
Less: shares redeemed (229,006) (343,565) (16,644) (30,703)
NET INCREASE IN SHARES OUTSTANDING 141,594 160,016 895,174 1,207,876
CAPITAL SHARES:
Beginning of period 1,029,351 869,335 1,207,876 --
End of period 1,170,945 1,029,351 2,103,050 1,207,876
</TABLE>
<TABLE>
<CAPTION>
Bond Fund
Year Ended Period Ended
December 31, December 31,
1998 1997(1)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ 2,562,374 $ 921,773
Net realized gains 44,671 20,905
Net change in unrealized appreciation
(depreciation) of investments 1,451,053 853,283
Net increase (decrease) in net assets resulting
from operations 4,058,098 1,795,961
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,606,134) (915,681)
In excess of net investment income -- --
From net realized gains from investment transactions (44,752) (20,824)
In excess of net realized gains (12,242) --
Decrease in net assets from distributions to
shareholders (2,663,128) (936,505)
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 28,019,206 33,072,130
Net asset value of shares issued to shareholders
from reinvestment of distributions 2,663,128 936,505
30,682,334 34,008,635
Less: payments for shares redeemed (5,415,618) (638,221)
Net increase in net assets from capital share
transactions 25,266,716 33,370,414
NET INCREASE IN NET ASSETS 26,661,686 34,229,870
NET ASSETS:
Beginning of period 34,229,870 --
End of period $60,891,556 $34,229,870
CAPITAL SHARE TRANSACTIONS:
Shares sold 2,630,322 3,249,652
Shares issued in reinvestment of distributions to
shareholders 269,941 90,681
2,900,263 3,340,333
Less: shares redeemed (502,456) (61,216)
NET INCREASE IN SHARES OUTSTANDING 2,397,807 3,279,117
CAPITAL SHARES:
Beginning of period 3,279,117 --
End of period 5,676,924 3,279,117
</TABLE>
(1) For the period May 1, 1997 (commencement of operations) through December
31, 1997.
See accompanying notes to financial statements.
<PAGE> 58
PEGASUS VARIABLE GROWTH AND VALUE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------- ------ ------------
<S> <C> <C>
COMMON STOCK -- 96.68%
Aerospace/Defense -- 2.04%
Boeing Co................................. 24,300 $ 792,787
Lockheed Martin Corp...................... 5,000 423,750
---------
1,216,537
---------
Banks -- 7.60%
BankAmerica Corp.......................... 18,900 1,136,362
First Union Corp.......................... 15,100 918,269
National City Corp........................ 13,600 986,000
Wells Fargo Co............................ 37,200 1,485,675
---------
4,526,306
---------
Building Materials -- 1.87%
Masco Corp................................ 38,800 1,115,500
---------
Chemicals -- 1.74%
Sigma-Aldrich Corp........................ 35,300 1,036,937
---------
Computer Products & Services -- 12.64%
Automatic Data Processing, Inc............ 20,300 1,627,806
Compaq Computer Corp...................... 17,000 712,937
Electronic Data Systems Corp.............. 25,600 1,286,400
Hewlett-Packard Co........................ 16,900 1,154,481
IMS Health, Inc........................... 17,000 1,282,437
International Business Machines Corp...... 7,900 1,459,525
---------
7,523,586
---------
Communication Services -- 6.53%
Bell Atlantic Co.......................... 28,100 1,489,300
Century Telephone Enterprises, Inc........ 20,500 1,383,750
SBC Communications, Inc................... 19,000 1,018,875
---------
3,891,925
---------
Electronics -- 3.95%
AMP, Inc.................................. 18,204 947,746
Intel Corp................................ 11,825 1,402,002
---------
2,349,748
---------
Finance -- 2.27%
Federal Home Loan Mortgage Co............. 21,000 1,353,187
---------
Food & Beverages -- 11.78%
Anheuser-Busch Cos., Inc.................. 24,800 1,627,500
BestFoods................................. 23,800 1,267,350
ConAgra, Inc.............................. 45,000 1,417,500
PepsiCo, Inc.............................. 35,100 1,436,906
Sara Lee Corp............................. 44,800 1,262,800
---------
7,012,056
---------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 59
PEGASUS VARIABLE GROWTH AND VALUE FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- ---------------------------------------- ------ ------------
<S> <C> <C>
Health Care/Pharmaceutical -- 9.88%
Abbott Laboratories................ 19,800 $ 970,200
American Home Products Corp........ 29,900 1,683,744
Bristol-Meyers Squibb Co........... 14,900 1,993,806
Schering-Plough Corp............... 22,400 1,237,600
----------
5,885,350
----------
Household Products -- 2.57%
Kimberly Clark Corp................ 28,100 1,531,450
----------
Housewares -- 2.02%
Newell Co.......................... 29,200 1,204,500
----------
Insurance -- 4.92%
American International Group, Inc.. 12,300 1,188,487
Chubb Corp......................... 15,600 1,012,050
MGIC Investment Corp............... 18,400 732,550
----------
2,933,087
----------
Manufacturing -- 4.59%
Dover Corp......................... 32,900 1,204,963
Johnson Controls, Inc.............. 15,700 926,300
York International Corp............ 14,700 599,944
----------
2,731,207
----------
Multi-Industry -- 1.54%
General Electric Co................ 9,000 918,563
----------
Oil & Gas -- 9.17%
British Petroleum PLC ADR.......... 14,406 1,368,570
Enron Corp......................... 23,100 1,318,144
Mobil Corp......................... 15,900 1,385,288
Schlumberger Ltd................... 30,100 1,388,363
----------
5,460,365
----------
Publishing -- 3.66%
Gannett Co., Inc................... 19,500 1,257,750
Washington Post Co. Class B........ 1,600 924,700
----------
2,182,450
----------
Retail -- 3.83%
J. C. Penney Company, Inc.......... 22,900 1,073,438
Officemax, Inc.*................... 98,700 1,209,075
----------
2,282,513
----------
Utilities -- 4.08%
FPL Group, Inc..................... 17,700 1,090,763
Pinnacle West Capital Corp......... 31,600 1,339,050
----------
2,429,813
----------
TOTAL COMMON STOCK...................... 57,585,080
----------
(Cost $48,608,752)
</TABLE>
See accompanying notes to financial statements.
<PAGE> 60
PEGASUS VARIABLE GROWTH AND VALUE FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Face Amount Market Value
----------- ------------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 2.81%
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99, collateralized by
$1,490,000 U.S. Treasury Note, 7.25%, due 05/15/04, market value
$1,684,390 (Cost $1,646,000)............................................ $1,646,000 $ 1,646,000
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99, collateralized by
$25,000 U.S. Treasury Bond, 10.75%, due 08/15/05, market value $34,375
(Cost $29,000).......................................................... 29,000 29,000
-----------
TOTAL REPURCHASE AGREEMENTS..................................................... 1,675,000
-----------
(Cost $1,675,000)
TOTAL INVESTMENTS............................................................... $59,260,080
===========
(Cost $50,283,752)
</TABLE>
Percentages indicated are based on net assets.
*Non-income producing security.
See accompanying notes to financial statements.
<PAGE> 61
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- ---------------------------------------------------- ------ ------------
<S> <C> <C>
COMMON STOCK -- 96.28%
Apparel -- 1.88%
Tommy Hilfiger Corp............................ 5,700 $ 342,000
----------
Banks -- 8.31%
Associated Banc Corp........................... 6,847 234,082
Charter One Financial, Inc..................... 16,730 464,257
First Tennessee National Corp.................. 5,800 220,763
Peoples Heritage Financial Group, Inc.......... 12,100 242,000
TCF Financial Corp............................. 14,400 348,300
----------
1,509,402
----------
Business Equipment & Services -- 7.24%
Comdisco, Inc.................................. 10,300 173,812
Convergys Corp................................. 3,700 82,788
HON Industries, Inc............................ 11,500 275,281
Omnicom Group.................................. 4,800 278,400
Sterling Commerce, Inc.*....................... 5,200 234,000
Young & Rubicam Inc............................ 8,400 271,950
----------
1,316,231
----------
Chemicals -- 1.29%
OM Group, Inc.................................. 6,400 233,600
----------
Computer Products & Services -- 8.83%
Affiliated Computer Services, Inc.-- Class A 7,800 351,000
Autodesk, Inc.................................. 4,700 200,631
DST Systems, Inc............................... 5,600 319,550
National Data Corp............................. 5,600 272,650
Sungard Data Systems, Inc...................... 11,600 460,375
----------
1,604,206
----------
Construction -- 4.14%
Applied Power, Inc.-- Class A.................. 8,100 305,775
Crane Co....................................... 14,787 446,383
----------
752,158
----------
Containers -- 1.59%
AptarGroup, Inc................................ 10,300 289,044
----------
Electronics -- 10.71%
Ametek, Inc.................................... 7,500 167,344
Lexmark International Group, Inc............... 5,800 582,900
Littlefuse, Inc................................ 8,100 155,925
Microchip Technology, Inc.*.................... 8,100 299,700
Molex, Inc. Class A............................ 7,113 226,727
Teradyne, Inc.*................................ 5,100 216,112
Xilinx, Inc.*.................................. 4,550 296,319
----------
1,945,027
----------
Energy & Utilities -- .84%
Noble Affiliates, Inc.......................... 6,200 152,675
----------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 62
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------- ------ ------------
<S> <C> <C>
Finance -- 6.91%
A. G. Edwards, Inc.............................. 6,750 $ 251,438
FINOVA Group Inc................................ 7,700 415,319
Heller Financial, Inc........................... 12,500 367,188
Waddell & Reed Financial, Inc. Class A.......... 9,300 220,294
----------
1,254,239
----------
Food Wholesalers -- 1.51%
U.S. Foodservice................................ 5,600 274,400
----------
Health Care/Pharmaceutical -- 6.58%
DENTSPLY International, Inc..................... 7,200 185,400
HCR Manor Care, Inc.*........................... 5,800 170,375
Health Management Associates, Inc. Class A...... 6,543 141,492
Sybron International Corp....................... 16,500 448,594
Universal Health Services, Inc.-- Class B....... 4,800 249,000
----------
1,194,861
----------
Home Furnishings -- 1.53%
Leggett & Platt, Inc............................ 12,600 277,200
----------
Industrial Automation -- 0.68%
DT Industries, Inc.............................. 7,800 122,850
----------
Information Technology -- 1.05%
Galileo International, Inc...................... 4,400 191,400
----------
Insurance -- 7.19%
Capital Re Corp................................. 9,000 180,562
CMAC Investment Corp............................ 6,000 275,625
Everest Reinsurance Holdings, Inc............... 9,100 354,331
Executive Risk, Inc............................. 3,900 214,256
PMI Group, Inc.................................. 2,850 140,718
Transatlantic Holdings, Inc..................... 1,850 139,791
----------
1,305,283
----------
Manufacturing -- 5.67%
Harsco Corp..................................... 6,100 185,669
Hubbell Inc. Class B............................ 4,000 152,000
Idex Corp....................................... 4,775 116,987
Juno Lighting, Inc.............................. 11,100 259,462
Teleflex, Inc................................... 6,900 314,813
----------
1,028,931
----------
Miscellaneous -- 3.13%
Kemet Corp...................................... 6,300 70,875
Waters Corp..................................... 5,700 497,325
----------
568,200
----------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 63
PEGASUS VARIABLE MID-CAP OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- --------------------------------------- ------ ------------
<S> <C> <C>
Motor Vehicles -- 6.51%
Borg-Warner Automotive, Inc....... 5,900 $ 329,294
Harley-Davidson, Inc.............. 9,300 440,587
Tower Automotive, Inc............. 16,500 411,469
-----------
1,181,350
-----------
Multi-Industry -- 0.83%
Lancaster Colony Corp............. 4,700 150,988
-----------
Oil & Gas -- 2.32%
Apache Corp....................... 8,300 210,094
Cooper Cameron Corp............... 5,900 144,550
Global Industries, Limited........ 10,900 66,762
-----------
421,406
-----------
Retail -- 7.54%
Kohls Corp.*...................... 3,600 221,175
Saks Inc.......................... 12,600 397,687
The Men's Wearhouse, Inc.......... 10,750 341,313
Zale Corp......................... 12,700 409,575
-----------
1,369,750
-----------
TOTAL COMMON STOCK..................... 17,485,201
-----------
(Cost $14,775,376)
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
------
<S> <C> <C>
REPURCHASE AGREEMENTS -- 3.29%
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99,
collateralized by $450,000 U.S. Treasury Bond, 8.00% due 11/15/21,
market value $607,364 (Cost $590,000)................................. $590,000 $ 590,000
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99,
collateralized by $10,000 U.S. Treasury Bond, 7.25% due 05/15/16,
market value $12,184 (Cost $8,000).................................... 8,000 8,000
------------
TOTAL REPURCHASE AGREEMENTS.............................................. 598,000
------------
(Cost $598,000)
TOTAL INVESTMENTS........................................................ $18,083,201
===========
(Cost $15,373,376)
</TABLE>
Percentages indicated are based on net assets.
*Non-income producing security.
See accompanying notes to financial statements.
<PAGE> 64
PEGASUS GROWTH FUND
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- ---------------------------------------------- ------ ------------
<S> <C> <C>
COMMON STOCK -- 99.88%
Banks -- 2.26%
State Street Corp......................... 3,000 $ 208,688
Wells Fargo Co............................ 9,000 359,437
----------
568,125
----------
Beverages -- 3.75%
Coca Cola Co.............................. 8,000 535,000
PepsiCo, Inc.............................. 10,000 409,374
----------
944,374
----------
Business Services -- 2.78%
Interpublic Group Cos., Inc............... 4,000 319,000
Service Corp. International............... 10,000 380,625
----------
699,625
----------
Health Care/Pharmaceutical -- 22.98%
American Home Products Corp............... 5,000 281,563
Amgen, Inc.*.............................. 5,000 522,813
Elan Corp. PLC ADR*....................... 10,000 695,624
Eli Lilly & Co............................ 5,000 444,375
Guidant Corp.............................. 5,000 551,250
Merck & Co., Inc.......................... 4,000 590,750
Mylan Laboratories, Inc................... 14,000 441,000
Pfizer, Inc............................... 4,500 564,469
SmithKline Beecham PLC ADR................ 8,000 556,000
Stryker Corp.............................. 7,000 385,438
United HeathCare Corp..................... 7,000 301,438
Warner-Lambert Co......................... 6,000 451,125
----------
5,785,845
----------
Computer Products & Services -- 17.59%
Dell Computer Corp.*...................... 8,000 585,500
Cisco Systems, Inc.*...................... 12,000 1,113,750
Compuware Corp.*.......................... 5,000 390,625
International Business Machines Corp...... 2,000 369,500
Microsoft Corp.*.......................... 8,000 1,109,499
Sun Microsystems, Inc.*................... 10,000 856,249
----------
4,425,123
----------
Electronics -- 5.47%
Altera Corp.*............................. 9,000 547,875
Intel Corp................................ 7,000 829,937
----------
1,377,812
----------
Entertainment -- 0.83%
Walt Disney Co............................ 7,000 210,000
----------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 65
PEGASUS GROWTH FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
- -------------------------------------------- ------ ------------
<S> <C> <C>
Finance -- 5.22%
Associates First Capital Corp.......... 10,000 $ 423,750
Freddie Mac............................ 8,000 515,500
MBNA Corp.............................. 15,000 374,063
-----------
1,313,313
-----------
Household Products -- 1.09%
Procter & Gamble Co.................... 3,000 273,938
-----------
Insurance -- 2.90%
AFLAC, Inc............................. 6,000 264,000
UNUM Corp.............................. 8,000 467,000
-----------
731,000
-----------
Manufacturing -- 2.95%
Illinois Tool Works, Inc............... 5,000 290,000
Tyco International Ltd................. 6,000 452,625
-----------
742,625
-----------
Multi-Industry -- 4.05%
General Electric Co.................... 10,000 1,020,625
-----------
Oil & Gas -- 0.91%
Baker Hughes, Inc...................... 13,000 229,938
-----------
Retail -- 12.48%
Dollar General Corp.................... 20,000 472,500
Home Depot, Inc........................ 13,000 795,438
Rite Aid Corp.......................... 9,000 446,062
Staples, Inc.*......................... 14,000 611,625
Walgreen Co............................ 7,000 409,938
Wal-Mart Stores, Inc................... 5,000 407,188
-----------
3,142,751
-----------
Telecommunications -- 10.81%
AirTouch Communications, Inc.*......... 11,000 793,375
Lucent Technologies, Inc............... 4,000 440,000
MCI WorldCom, Inc.*.................... 10,000 717,500
Telefonaktiebolaget LM Ericsson ADR.... 15,000 359,063
Tellabs, Inc.*......................... 6,000 411,374
-----------
2,721,312
-----------
Tobacco -- 2.12%
Philip Morris Cos., Inc................ 10,000 535,000
-----------
Utilities -- 1.69%
AES Corp.*............................. 9,000 426,375
-----------
TOTAL INVESTMENTS........................... $25,147,781
===========
(Cost $15,841,827)
</TABLE>
Percentages indicated are based on net assets.
*Non-income producing security.
See accompanying notes to financial statements.
<PAGE> 66
PEGASUS VARIABLE INTRINSIC VALUE FUND
PORTFOLIO OF INVESTMENTS
December 31, 1998
<TABLE>
<CAPTION>
Description Face Amount Market Value
- ---------------------------------------------------- ----------- ------------
<S> <C> <C>
CONVERTIBLE BOND -- 0.70%
Pep Boys, Zero Coupon, 09/20/11.................. $300,000 $ 157,125
----------
(Cost $169,945)
Shares
------
COMMON STOCK -- 81.64%
Aerospace -- 3.54%
Lockheed Martin Corp........................... 9,400 796,650
----------
Apparel -- 3.47%
Unifi, Inc..................................... 40,000 782,500
----------
Auto Parts & Equipment -- 2.65%
Bandag, Inc. Class A........................... 17,090 596,014
----------
Banks -- 5.34%
Marshall & Ilsley Corp......................... 6,100 356,469
Pacific Century Financial Corp................. 21,000 511,875
SouthTrust Corp................................ 9,000 332,438
----------
1,200,782
----------
Business Services -- 1.91%
Grey Advertising, Inc.......................... 1,180 429,520
----------
Chemicals -- 1.90%
NCH Corp....................................... 7,200 428,400
----------
Communication Services -- 1.65%
Century Telephone Enterprises, Inc............. 5,500 371,250
----------
Consumer Cyclicals -- 1.26%
Enesco Group, Inc.............................. 12,200 283,650
----------
Energy & Utilities -- 11.19%
Allegheny Energy, Inc.......................... 9,400 324,300
Arch Coal, Inc................................. 22,100 378,463
CMS Energy Corp................................ 6,500 314,844
Energy East Corp............................... 5,600 316,400
Pinnacle West Capital Corp..................... 7,000 296,625
SJW Corp....................................... 3,500 205,625
Sierra Pacific Resources....................... 10,300 391,399
St. Joseph Light & Power Co.................... 12,200 218,838
Tennant Co..................................... 1,800 72,225
----------
2,518,719
----------
Finance -- 6.54%
Financial Security Assurance Holdings Ltd...... 7,000 379,750
Fund American Enterprises Holdings, Inc........ 7,800 1,092,487
----------
1,472,237
----------
Food & Agriculture -- 2.19%
Farmer Brothers Co............................. 2,300 492,200
----------
Health Care -- 1.12%
Block Drug Co., Inc. Class A................... 5,799 251,527
----------
Houseware -- 0.95%
National Presto Industries, Inc................ 5,000 213,125
----------
</TABLE>
See accompanying notes to financial statements.
<PAGE> 67
PEGASUS VARIABLE INTRINSIC VALUE FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Shares Market Value
------------------------------------------------------------------------------------- ------ ------------
<S> <C> <C>
Insurance -- 14.20%
American National Insurance Co..................................................... 7,400 $ 612,350
Leucadia National Corp............................................................. 28,100 885,150
Ohio Casualty Corp................................................................. 6,250 257,031
Old Republic International Corp.................................................... 27,550 619,874
PXRE Corp.......................................................................... 15,260 382,454
SAFECO Corp........................................................................ 10,200 437,963
-----------
3,194,822
-----------
Multi-Industry -- 4.88%
Loews Corp......................................................................... 11,180 1,098,434
-----------
Oil & Gas -- 3.48%
Atlantic Richfield Co.............................................................. 2,300 150,075
El Paso Energy Corp................................................................ 9,300 323,756
Southwest Gas Corp................................................................. 11,500 309,063
-----------
782,894
-----------
REITS -- 0.33%
Associates Estates Realty Corp..................................................... 6,200 73,238
-----------
Restaurants -- 5.82%
Luby's Cafeterias, Inc............................................................. 19,200 296,400
Sbarro, Inc........................................................................ 38,700 1,013,455
-----------
1,309,855
-----------
Retail -- 4.97%
Office Depot, Inc.*................................................................ 9,600 354,600
Payless ShoeSource, Inc.*.......................................................... 16,100 762,738
-----------
1,117,338
-----------
Tobacco -- 1.16%
UST, Inc........................................................................... 7,500 261,563
-----------
Transportation-Railroads -- 3.09%
Canadian National Railway Co. ADR.................................................. 13,410 695,644
-----------
TOTAL COMMON STOCK..................................................................... $18,370,362
-----------
(Cost $18,758,848)
REPURCHASE AGREEMENTS -- 17.69%
Face Amount
-----------
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99, collateralized by
$10,000 U.S. Treasury Bond, 7.50% due 11/15/16, market value $12,486 (Cost
$11,000)........................................................................... $11,000 $ 11,000
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99, collateralized by
$3,585,000 U.S. Treasury Note, 7.25% due 05/15/04, market value $4,052,710
(Cost $3,970,000).................................................................. 3,970,000 3,970,000
-----------
TOTAL REPURCHASE AGREEMENTS............................................................ 3,981,000
-----------
(Cost $3,981,000)
TOTAL INVESTMENTS....................................................................... $22,508,487
===========
(Cost $22,909,793)
</TABLE>
Percentages indicated are based on net assets.
* Non-income producing security.
See accompanying notes to financial statements.
<PAGE> 68
PEGASUS VARIABLE INTRINSIC VALUE FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Face Amount Market Value
- ---------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 77.21%
U.S. Treasury Securities -- 45.66%
U.S. Treasury Bonds:
10.375%, 11/15/09................................................ $400,000 $ 511,375
12.75%, 11/15/10................................................. 9,745,000 14,169,844
10.375%, 11/15/12................................................ 2,790,000 3,858,048
8.75%, 05/15/17.................................................. 2,400,000 3,342,751
U.S. Treasury Inflation Protection Securities:
3.625%, 07/15/02................................................. 200,000 203,458
3.375%, 01/15/07................................................. 200,000 199,584
3.625%, 04/15/28................................................. 550,000 543,567
U.S. Treasury Note, 7.125%, 02/29/00............................... 4,000,000 4,110,000
U.S. Treasury Strips:
11/15/11......................................................... 500,000 254,178
02/15/13......................................................... 300,000 140,836
02/15/14......................................................... 450,000 198,476
05/15/18......................................................... 800,000 274,068
-----------
(Cost $26,016,836) 27,806,185
-----------
Agency Obligations -- 31.55%
Federal Home Loan Mortgage Corp. Participation Ctfs.:
#555238, 12.00%, 07/01/19........................................ 77,175 85,333
#G10777, 9.00%, 06/01/10......................................... 642,506 675,807
Federal Home Loan Mortgage Corp. Gtd. Multi-Class Mortgage
Participation Ctfs.:
Series 11 Class D, 9.50%, 07/15/19............................... 250,000 263,274
Series 22 Class C, 9.50%, 04/15/20............................... 151,920 159,821
Series 47 Class F, 10.00%, 06/15/20.............................. 80,546 84,783
Series 99 Class Z, 9.50%, 01/15/21............................... 45,739 48,767
Series 128 Class I, 6.50%, 02/15/21.............................. 161,630 162,088
Series 1051 Class D, 7.00%, 11/15/19............................. 14,266 14,278
Series 1065 Class J, 9.00%, 04/15/21............................. 75,419 79,688
Series 1250 Class J, 7.00%, 05/15/22............................. 211,000 215,554
Series 1295 Class JB, 4.50%, 03/15/07............................ 300,000 292,433
Series 1297 Class H, 7.50%, 01/15/20............................. 212,671 215,995
Series 1370 Class F, 6.75%, 03/15/19............................. 110,040 110,252
Series 1389 Class SA, IF, 10/15/07............................... 25,024 24,273
Series 1465 Class SA, IO, IF, 02/15/08........................... 501,442 17,748
Series 1489 Class L, 5.50%, 04/15/08............................. 64,574 64,449
Series 1505 Class Q, 7.00%, 05/15/23............................. 200,000 202,703
Series 1543 Class JC, IF, 07/15/23............................... 95,000 85,894
Series 1586 Class A, 6.00%, 09/15/08............................. 127,711 127,656
Series 1589 Class Z, 6.25%, 09/15/23............................. 762,949 732,003
Series 1595 Class S, IO, IF, 10/15/13............................ 689,513 18,407
Series 1603 Class JF, IF, 01/15/23............................... 45,000 45,542
Series 1606 Class LC, IF, 05/15/08............................... 167,150 170,201
Series 1609 Class LG, IF, 11/15/23............................... 145,827 139,348
Series 1619 Class SD, IF, 11/15/23............................... 144,098 144,548
</TABLE>
See accompanying notes to financial statements.
<PAGE> 69
PEGASUS VARIABLE INTRINSIC VALUE FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Face Amount Market Value
----------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
Series 1625 Class SD, IF, 12/15/08........................................ $200,000 $ 204,693
Series 1646 Class MD, IF, 8.50%, 10/15/22................................. 173,833 174,545
Series 1647 Class SB, IF, 12/15/08........................................ 66,281 66,361
Series 1679 Class O, 6.40%, 02/15/09...................................... 199,762 201,745
Series 1685 Class Z, 6.00%, 11/15/23...................................... 133,546 126,966
Series 1686 Class SL, IF, 02/15/24........................................ 88,814 88,642
Series 1689 Class SD, IF, 10/15/23........................................ 100,000 101,819
Series 1700 Class GA, PO, 02/15/24........................................ 286,574 225,167
Series 1709 Class C, 5.50%, 12/15/19...................................... 285,501 284,746
Series 1796-A Class S, IF, 02/15/09....................................... 125,000 118,307
Series 1859 Class SB, IO, IF, 10/15/23.................................... 109,262 14,420
Series 1967 Class PC, PO, 10/15/08........................................ 217,029 190,712
Series 1981 Class Z, 6.00%, 05/15/27...................................... 324,921 315,039
Series 1987 Class W, PO, 02/15/22......................................... 500,000 387,497
Series 2002 Class A, PO, 11/15/22......................................... 144,000 112,061
Series 2025 Class PE, 6.30%, 01/15/13..................................... 300,000 303,337
Series 2038 Class PN, IO, 7.00%, 03/15/28................................. 768,835 158,222
Series 2054 Class PV, 7.50%, 05/15/28..................................... 500,000 526,109
Federal National Mortgage Assn. Pass Thru Securities:
Pool #116612, AR, 03/01/19................................................ 59,457 62,537
Pool #303532, AR, 03/01/29................................................ 119,332 120,047
Federal National Mortgage Assn. Pass Thru Securities Gtd. Remic Trust:
1989 Class 83-H, 8.50%, 11/25/19.......................................... 318,238 329,249
1990 Class 1-D, 8.80%, 01/25/20........................................... 107,802 113,199
1990 Class 93-G, 5.50%, 08/25/20.......................................... 90,080 88,105
1990 Class 140-K, HB, 652.1454%, 12/25/20................................. 1,047 16,111
1990 Class 143-J, 8.75%, 12/25/20......................................... 118,963 123,696
1991 Class 161-H, 7.50%, 02/25/21......................................... 5,301 5,289
1992-G Class 15-Z, 7.00%, 01/25/22........................................ 290,006 304,121
1992-G Class 42-Z, 7.00%, 07/25/22........................................ 156,335 158,228
1992-G Class 59-F, IF, 10/25/22........................................... 105,346 102,877
1992-G Class 61-Z, 7.00%, 10/25/22........................................ 36,911 37,143
1992-G Class 66-JB, 5.00%, 11/25/21....................................... 200,000 193,785
1992 Class 143-MA, 5.50%, 09/25/22........................................ 400,000 385,392
1992 Class 204-B, 6.00%, 10/25/20......................................... 234,939 234,741
1993-G Class 1-KA, IF, 01/25/23........................................... 169,000 184,170
1993-G Class 12-C, PO, 02/25/23........................................... 218,610 207,466
1993-G Class 13-G, 6.00%, 06/25/20........................................ 138,209 138,110
1993 Class 19-G, 5.00%, 05/25/19.......................................... 208,938 207,740
1993-G Class 19-K, 6.50%, 06/25/19........................................ 20,275 20,333
1993 Class 38-S, IO, IF, 11/25/22......................................... 3,733 20
1993 Class 44-S, IO, IF, 04/25/23......................................... 92,482 3,414
1993 Class 58-J, 5.50%, 04/25/23.......................................... 29,929 29,525
1993 Class 94-K, 6.75%, 05/25/23.......................................... 28,139 28,117
1993 Class 134-SA, IF, 08/25/08........................................... 200,000 205,096
1993 Class 139-SG, IF, 08/25/23........................................... 135,828 130,045
1993 Class 155-SB, IO, IF, 09/25/23....................................... 282,447 8,598
1993 Class 175-S, IF, 05/25/07............................................ 70,953 70,945
</TABLE>
See accompanying notes to financial statements.
<PAGE> 70
PEGASUS VARIABLE BOND FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Face Amount Market Value
---------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
1993 Class 193-B, 3.00%, 09/25/23.............................................. $226,154 $ 217,405
1993 Class 196-FA, IF, 10/25/08................................................ 153,556 151,208
1993 Class 220-SD, IF, 11/25/13................................................ 49,707 48,362
1993 Class X-225C-FP, IF, 10/25/22............................................. 120,000 112,504
1993 Class 230-FA, IF, 12/25/23................................................ 179,385 178,814
1993 Class 257-C, PO, 06/25/23................................................. 600,000 419,454
1994 Class 8-G, PO, 11/25/23................................................... 86,531 80,331
1994-G Class 13-ZB, 7.00%, 11/17/24............................................ 178,642 177,001
1994 Class 30-LA, 6.50%, 10/25/21.............................................. 24,464 24,588
1994 Class 82-SA, IO, IF, 06/25/23............................................. 818,911 20,594
1995 Class 13-B, 6.50%, 03/25/09............................................... 107,087 107,378
1996 Class 7-C, 6.50%, 12/25/10................................................ 199,989 199,546
1996 Class 20-L, PO, 09/25/08.................................................. 182,059 157,588
1996 Class 24-B, PO, 10/25/08.................................................. 200,000 158,738
1996 Class 24-K, PO, 02/25/08.................................................. 100,000 92,500
1996 Class 39-J, PO, 09/25/08.................................................. 150,000 118,038
1996 Class 59-J, 6.50%, 08/25/22............................................... 268,000 268,646
1997 Class 39-PD, 7.50%, 05/20/27.............................................. 200,000 209,108
1997 Class 85-L, IO, 12/25/20.................................................. 386,108 40,780
Federal National Mortgage Assn. Strips:
Class K-2, IO, 11/01/08........................................................ 7,706 44,087
Government National Mortgage Assn. Pass Thru Securities:
Pool #297628, 8.00%, 09/15/22.................................................. 126,995 132,387
Pool #2006, 8.50%, 05/20/25.................................................... 250,859 265,722
Pool #2324, 8.00%, 11/20/26.................................................... 546,547 565,327
Pool #2362, 8.00%, 01/20/27.................................................... 897,875 929,426
Pool #460372, 8.00%, 05/15/28.................................................. 257,674 268,010
Pool #468066, 8.00%, 07/15/28.................................................. 238,900 248,482
Pool #486537, 7.50%, 09/15/28.................................................. 474,497 489,818
Government National Mortgage Assn. Pass Thru Securities Gtd. Remic Trust:
1994 Class 3-PQ, 7.4875%, 07/16/24............................................. 250,000 265,820
1994 Class 4-SA, IO, IF, 10/16/22.............................................. 546,060 22,426
1996 Class 16-E, 7.50%, 08/16/26............................................... 713,000 750,081
1996 Class 22-VB, 7.00%, 08/16/13.............................................. 120,000 124,400
1997 Class 8-PN, 7.50%, 05/16/27............................................... 500,000 521,176
1998 Class 26-K, 7.50%, 09/17/25............................................... 491,000 510,244
-----------
(Cost $18,759,129) 19,209,321
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS........................................ 47,015,506
-----------
(Cost $44,775,965)
</TABLE>
See accompanying notes to financial statements.
<PAGE> 71
PEGASUS VARIABLE BOND FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Face Amount Market Value
- ---------------------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
ASSET BACKED SECURITIES -- 7.69%
Arcadia Automobiles Receivables Trust,
Series 1997-B, Class A3, 6.30%, 07/16/01........................................... $517,542 $ 520,106
Series 1998-B, Class A3, 5.95%, 11/15/02........................................... 250,000 253,186
Series 1998-A, Class A4, 6.00%, 11/17/03........................................... 200,000 201,291
Case Equipment Loan Trust Asset Backed Pass Thru. Ctf.,
Series 1995-A, Class A, 7.30%, 03/15/02............................................ 40,549 40,611
Series 1995-B, Class A-3, 6.15%, 09/15/02.......................................... 80,917 81,057
Series 1996-A, Class A2, 5.50%, 02/15/03........................................... 72,237 72,373
Chase Manhattan Grantor Trust, Series 1995-A, Class A, 6.00%, 09/17/01............... 94,782 95,162
Chase Mortgage Finance Corp., Series 1994-E, Class A6B, IF, 04/25/10................. 156,021 155,484
CPS Auto Trust Asset Backed Pass Thru Ctf.,
Series 1997-4, Class A1, 6.07%, 03/15/03........................................... 88,499 88,921
Series 1998-3, Class A4, 6.08%, 10/15/03........................................... 400,000 409,778
Ford Credit Auto Owner Trust Asset Backed Pass Thru Ctf.,
Series 1997-B, Class A2, 5.59%, 01/15/00........................................... 87,493 87,638
Merrill Lynch Home Equity Loan, 1992-1, Class A, AR, 07/15/22........................ 43,905 43,903
Nationsbank Auto Grantor Trust Asset Backed Ctf.,
Series 1995-A, Class A, 5.85%, 06/15/02............................................ 17,640 17,714
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2, 6.55%, 11/20/01....... 36,824 36,877
Olympic Automobile Rec. Trust Asset Backed Pass Thru Ctf.,
Series 1995-C, Class A2, 6.20%, 01/15/02........................................... 138,004 138,770
Series 1996-C, Class A5, 7.00%, 03/15/04........................................... 300,000 309,266
ONYX Acceptance Grantor Trust Auto Loan Pass Thru Ctf.,
Series 1996-1, Class A, 5.40%, 05/15/01............................................ 85,014 85,190
Series 1998-B, Class A2, 5.85%, 07/15/03........................................... 250,000 253,169
Premier Auto Trust, Series 1998-5, Class A3, 5.07%, 07/08/02......................... 500,000 498,353
Sears Credit Account, Series 1998-1, Class A, 5.80%, 08/15/05........................ 200,000 201,385
WFS Financial Owner Trust Asset Backed Pass Thru Ctf.,
Series 1996-C, Class A4, 6.80%, 12/20/03........................................... 150,000 152,287
Series 1996-D, Class A3, 6.05%, 07/20/01........................................... 121,538 121,783
Series 1997-A, Class A3, 6.50%, 09/20/01........................................... 115,405 116,701
Series 1997-B, Class A2, 6.05%, 07/20/00........................................... 65,992 66,218
Series 1997-C, Class A2, 5.95%, 06/20/00........................................... 104,647 104,976
World Omni Automobile Lease Sec Trust Asset Backed Pass Thru Ctf.,
Series 1997-B, Class A1, 6.07%, 11/25/03........................................... 231,662 232,052
Series 1997-B, Class A3, 6.18%, 11/25/03........................................... 299,834 301,745
----------
TOTAL ASSET BACKED SECURITIES........................................................... 4,685,996
----------
(Cost $4,651,043)
</TABLE>
See accompanying notes to financial statements.
<PAGE> 72
PEGASUS VARIABLE BOND FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
<TABLE>
<CAPTION>
Description Face Amount Market Value
- ----------------------------------------------------------------------------- ----------- ------------
<S> <C> <C>
CORPORATE BONDS AND NOTES -- 2.93%
Automobile -- 1.02%
Ford Motor Credit, 8.20%, 02/15/02...................................... $300,000 $ 322,260
General Motors Acceptance Corp., 5.75%, 11/10/03........................ 300,000 301,571
-----------
(Cost $615,547) 623,831
-----------
Finance -- 0.87%
Associates Corp. of North America:
9.125%, 04/01/00........................................................ 85,000 88,734
8.15%, 08/01/09......................................................... 200,000 235,350
5.96%, 05/15/37......................................................... 200,000 206,141
-----------
(Cost $514,307) 530,225
-----------
Industry -- 1.04%
Boeing Co.:
6.36%, 07/15/05......................................................... 500,000 501,997
7.95%, 08/15/24......................................................... 110,000 129,448
-----------
(Cost $625,805) 631,445
-----------
TOTAL CORPORATE BONDS AND NOTES.............................................. 1,785,501
-----------
(Cost $1,755,659)
REPURCHASE AGREEMENTS -- 11.44%
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99,
collateralized by $60,000 U.S. Treasury Note, 7.25%, due 05/15/04,
market value $67,828 (cost $66,000)..................................... $ 66,000 $ 66,000
State Street Bank, 4.40%, dated 12/31/98, due 01/04/99,
collateralized by $6,225,000 U.S. Treasury Note, 7.25%, due 05/15/04,
market value $7,037,132 (cost $6,897,000)............................... 6,897,000 6,897,000
-----------
TOTAL REPURCHASE AGREEMENTS.................................................. 6,963,000
-----------
(Cost $6,963,000)
TOTAL INVESTMENTS............................................................ $60,450,003
===========
(Cost $58,145,667)
Percentages indicated are based on net assets.
</TABLE>
See accompanying notes to financial statements.
<PAGE> 73
PEGASUS VARIABLE BOND FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
NOTES TO PORTFOLIO OF INVESTMENTS
The Pegasus Variable Bond Fund invests in securities whose value is derived
from an underlying pool of mortgages or consumer loans. Some of these securities
are collateralized mortgage obligations (CMOs). CMOs are debt securities issued
by U.S. government agencies or by financial institutions and other mortgage
lenders which are collateralized by a pool of mortgages held under an indenture.
Descriptions of certain collateralized mortgage obligations are as follows:
Adjustable Rate (AR) represents securities with an interest rate that
changes periodically based upon an index of market rates. The rate reflected on
the Portfolio of Investments is the rate in effect at December 31, 1998.
Inverse Floaters (IF) represent securities that pay interest at a rate that
increases (decreases) with a decline (increase) in a specified index.
Interest Only (IO) represents the right to receive the monthly interest
payments on an underlying pool of mortgage loans. The face amount shown
represents the par value on the underlying pool. The yields on these securities
are generally higher than prevailing market yields other mortgage-backed
securities because their cash flow patterns are more volatile and there is a
greater risk that the initial investment will not be fully recouped. These
securities are subject to accelerated principal paydowns as a result of
prepayments or refinancing of the underlying pool of mortgage instruments. As a
result, interest income may be reduced considerably.
High Coupon Bonds (HB) (a.k.a. "IOettes") represent the right to receive
interest payments on an underlying pool of mortgages with similar risks as those
associated with IO securities. Unlike IO's, the owner also has a right to
receive a very small portion of principal. The high interest rate results from
taking interest payments from other classes in the REMIC Trust and allocating
them to the small principal of the HB class.
Principal Only (PO) represents the right to receive the principal portion
only on an underlying pool of mortgage loans. The market value of these
securities is extremely volatile in response to changes in market interest
rates. As prepayments on the underlying mortgages of these securities increase,
the yield on these securities increases.
The abbreviations in the Portfolio of Investments stand for the following:
ADR -- American Depositary Receipt
Ltd. -- Limited
PLC -- (British) Public Limited Company
REITS -- Real Estate Investment Trust
See accompanying notes to financial statements.
<PAGE> 74
PEGASUS VARIABLE BOND FUND
PORTFOLIO OF INVESTMENTS -- (Continued)
December 31, 1998
(1) Organization and Commencement of Operations
The Pegasus Variable Funds (the "Trust" or the "Funds") was organized as a
Delaware business trust on November 7, 1994, and registered under the Investment
Company Act of 1940, as amended, as an open-end investment company. As of
December 31, 1998, the Trust consisted of five separate series of which there
were four Equity Funds and one Bond Fund, as described below.
Equity Funds:
Pegasus Variable Growth and Value Fund
Pegasus Variable Mid-Cap Opportunity Fund
Pegasus Variable Growth Fund
Pegasus Variable Intrinsic Value Fund
Bond Fund:
Pegasus Variable Bond Fund
The Funds commenced operations on March 30, 1995, except for the Intrinsic
Value Fund and the Bond Fund, which commenced operations on May 1, 1997. Shares
of the Trust are made available to serve as the underlying investment media of
the variable annuity contracts issued by Separate Account Six of ITT Hartford
Life & Annuity Insurance Company. Orders for the Trust's shares are executed in
accordance with the investment instructions of the contract owners.
On June 26, 1997, the Pegasus Variable Annuity Managed Assets Balanced and
Money Market Funds liquidated their assets and discontinued operations.
Shareholder investments in these two portfolios were reallocated into other
existing mutual funds offered by Separate Account Six within ITT Hartford Life
and Annuity Insurance Company, such shares being equal in value to the net
assets so reallocated.
As of December 31, 1997 the Pegasus Variable Annuity Growth and Value Fund,
Pegasus Variable Annuity Mid-Cap Opportunity Fund, Pegasus Variable Annuity
Growth Fund, Pegasus Variable Annuity Intrinsic Value Fund, and Pegasus Variable
Annuity Bond Fund changed their names to the Pegasus Variable Growth and Value
Fund, Pegasus Variable Mid-Cap Opportunity Fund, Pegasus Variable Growth Fund,
Pegasus Variable Intrinsic Value Fund, and Pegasus Variable Bond Fund,
respectively.
On October 2, 1998, First Chicago NBD Investment Management Company's
(FCNIMCO) parent company, First Chicago NBD Corporation, merged with and into
BANC ONE CORPORATION at which time was renamed to BANK ONE CORPORATION. BANK ONE
CORPORATION has now begun the process of reorganizing their proprietary mutual
funds. ITT Hartford Life and Annuity Insurance Company has filed an exemption
application with the Securities and Exchange Commission (SEC) requesting relief
from certain rules in order to substitute One Group Investment Trust Funds for
the Pegasus Variable Funds in their Separate Account Six. In turn, One Group
Investment Trust has filed a post effective amendment to its registration
statement, creating four new funds with similar investment objectives as the
Funds. The Pegasus Variable Growth Fund will be substituted with an existing
fund in One Group Investment Trust. Assuming approval by the SEC, it is
anticipated this substitution will occur in March, 1999. The substitution is
intended to be effected on a tax-free basis, so that none of the Funds'
shareholders will recognize taxable gains or losses as a result of the
substitution.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies followed in
the preparation of the financial statements. The policies are in conformity with
generally accepted accounting principles for investment companies. Following
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
<PAGE> 75
PEGASUS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS
Investments
The Funds value investment securities at market value which is determined
by a pricing service based upon quoted market prices or dealer quotes.
Securities for which market prices or dealer quotes are not readily available
are valued in accordance with procedures approved by the Board of Trustees.
Fixed income securities are valued at the mean of the closing bid and ask price
as estimated by an independent pricing service.
Investment security purchases and sales are accounted for on the trade
date. Realized gains and losses from security transactions are recorded on the
specific identified cost basis.
The Trust invests in securities subject to repurchase agreements. Such
transactions are entered into only with institutions included on the Federal
Reserve System's list of institutions with whom the Federal Reserve open market
desk will do business. Under the supervision of the Board of Trustees, the
following additional policies and procedures relating to the Trust's investments
in securities subject to repurchase agreements are established: 1) the value of
the underlying collateral is required to equal or exceed 102% of the funds
advanced under the repurchase agreement including accrued interest; 2)
collateral is marked-to-market daily to assure its value remains at least equal
to 102% of the repurchase agreement amount; and 3) funds are not disbursed by
the Trust or its agent unless collateral is presented or acknowledged by the
collateral custodian.
Investment Income
Interest income is recorded daily on the accrual basis adjusted for
amortization of premium and accretion of discount on debt instruments. Bond
premiums and discounts are amortized/accreted under the effective interest rate
method. For mortgage-backed securities, as prepayments on the underlying
mortgages increase or decrease the expected life, the yield is adjusted to
amortize/accrete the security to its new expected life. Dividends are recorded
on the ex-dividend date.
Federal Income Taxes
It is the Trust's policy to comply with the requirements of Subchapter M of
the Internal Revenue Code, as amended, applicable to regulated investment
companies and to distribute substantially all of its net investment income and
realized gains to its shareholders. Therefore, no federal income tax provision
is required in the accompanying financial statements.
Net investment income and realized gains (losses) differ for financial
statement and tax purposes primarily because of the recognition of wash sales
transactions and post-October 31 capital losses. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that net investment income or realized gains were recorded
by the Funds. Certain book-to-tax timing differences for the Funds are reflected
as excess distributions in the Statements of Changes in Net Assets. These
distributions do not constitute a tax return of capital.
Shareholder Dividends
Dividends from net investment income are declared and paid quarterly by the
Equity Funds and monthly by the Bond Fund. Net realized capital gains are
distributed annually or as necessary to comply with Subchapter M of the Internal
Revenue Code. Distributions from net investment income and net realized gains
are made during each year to prevent the 4% excise tax imposed on regulated
investment companies by the Internal Revenue Code.
Deferred Organization Costs
Organization costs are amortized on a straight-line basis over a five year
period beginning with the commencement of operations of each portfolio.
Expenses
Direct expenses of a fund are allocated to that fund. General expenses of
the Trust are allocated to each Fund based upon each Fund's relative net assets.
<PAGE> 76
PEGASUS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
When Issued/To Be Announced (TBA) Securities
The Bond Fund may purchase securities on a "when issued" basis. These
securities have been registered by a municipality or government agency, but have
not yet been issued to the public. These transactions involve a commitment by
the Fund to purchase particular securities, with payment and delivery taking
place at a future date, for which all specific information, such as the face
amount and maturity date of such investment security, is not known at the time
of the trade. These transactions are subject to market fluctuations and the risk
that the value at delivery may be more or less than the purchase price at which
the transactions were entered. The current value of these securities is
determined in the same manner as that of other portfolio securities. Although
the Bond Fund generally purchases these securities with the intention of
acquisition, such securities may be sold before the settlement.
(3) Investment Advisory Fee, Administration Fee and Other Transactions With
Affiliates
FCNIMCO is the investment advisor pursuant to an Advisory Agreement with
the Trust. For its advisory services to the Trust, FCNIMCO earns an annual fee
of 0.60% from the Equity Funds and 0.40% from the Bond Fund based on the average
daily net assets of each Fund.
FCNIMCO and BISYS Fund Services serve as the Trust's Co-Administrators
pursuant to an Administration Agreement. Under the Administration Agreement, the
Co-Administrators generally assist in aspects of the Trust's administration and
operations, other than providing investment advice, subject to the overall
authority of the Trust's Board of Trustees in accordance with Delaware law.
FCNIMCO and BISYS appointed Nationwide Advisory Services, Inc. ("NAS") to
provide the administrative services of the Trust. Under the terms of the
Administration Agreement, the Co-Administrators are entitled to a monthly
administration fee at the annual rate of 0.15% of each Fund's average daily net
assets which is then paid to NAS.
FCNIMCO has agreed that they may waive their fees in whole or in part; and,
if in part, may specify the particular Fund to which such waiver relates as may
be required to satisfy any expense limitation imposed by state securities laws
or other applicable laws. At present, no restrictive expense limitation is
imposed on the Trust. Restrictive limitations could be imposed as a result of
changes in current state laws and regulations in those states where the Trust
has qualified its shares, or by a decision of the Trustees to qualify the shares
in other states having restrictive expense limitations. For the year ended
December 31, 1998, FCNIMCO voluntarily agreed to waive their advisory fees to
the extent that the Funds' expenses exceeded 0.95% for the Growth and Value,
Mid-Cap Opportunity, Growth, and Intrinsic Value Funds and 0.75% for the Bond
Fund (as a percentage of each Fund's average daily net assets). For the year
ended December 31, 1998, FCNIMCO waived fees in the amounts of $33,240 in the
Variable Growth and Value Fund, $82,956 in the Variable Mid-Cap Opportunity
Fund, $56,564 in the Variable Growth Fund, $57,553 in the Variable Intrinsic
Value Fund, and $26,975 in the Variable Bond Fund.
<PAGE> 77
PEGASUS VARIABLE FUNDS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
(4) Investment Securities Transactions
At December 31, 1998, the accumulated net unrealized appreciation
(depreciation) on investments for federal tax purposes and the federal tax cost
of investments was as follows:
<TABLE>
<CAPTION>
Mid-Cap
Growth and Opportunity Intrinsic
Value Fund Fund Growth Fund Value Fund Bond Fund
<S> <C> <C> <C> <C> <C>
Gross Unrealized Appreciation (Federal tax cost) $10,031,572 $ 3,582,525 $ 9,570,842 $ 992,072 $ 2,463,574
Gross Unrealized Depreciation (Federal tax cost) (1,055,791) (876,352) (264,888) (1,393,378) (159,238)
Net Unrealized Appreciation (Depreciation) $ 8,975,781 $ 2,706,173 $ 9,305,954 $ (401,306) $ 2,304,336
Federal Tax Cost $48,609,299 $14,779,028 $15,841,827 $18,928,793 $51,182,667
</TABLE>
The following summarizes the securities transactions entered into by the
Funds, excluding short-term investments, for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Mid-Cap
Growth and Opportunity Intrinsic
Value Fund Fund Growth Fund Value Fund Bond Fund
<S> <C> <C> <C> <C> <C>
Purchases $34,178,733 $8,870,717 $11,828,501 $12,755,820 $27,782,628
Sales $20,314,165 $3,727,831 $ 8,932,579 $ 6,595,389 $ 6,420,623
</TABLE>
(5) Equity of Affiliates:
As of December 31, 1998, Hartford Life Insurance Company held a direct
interest in shares as follows:
<TABLE>
<CAPTION>
Percentage of
Shares Total Shares
<S> <C> <C>
Pegasus Variable Growth and Value Fund 57,163 1.71%
Pegasus Variable Mid-Cap Opportunity Fund 62,050 5.04%
Pegasus Variable Growth Fund 55,179 4.71%
Pegasus Variable Intrinsic Value Fund 52,847 2.51%
Pegasus Variable Bond Fund 219,235 3.86%
</TABLE>
<PAGE> 78
PEGASUS VARIABLE FUNDS
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Growth and Value Fund
------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31 December 31, December 31,
1998 1997 1996 1995(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 16.22 $ 13.19 $ $11.63 $10.00
Net investment income (loss) 0.11 0.13 0.15 0.13
Net realized and unrealized appreciation 2.00 3.38 2.02 1.63
Total from investment operations 2.11 3.51 2.17 1.76
Distributions:
From net investment income (0.12) (0.13) (0.14) (0.13)
From net realized gains from investments (0.41) (0.35) (0.47) --
Total distributions (0.53) (0.48) (0.61) (0.13)
Net increase in net asset value 1.58 3.03 1.56 1.63
NET ASSET VALUE-END OF PERIOD $ 17.80 $ 16.22 $13.19 $11.63
Total return 13.10% 26.80% 18.75% 22.75%(2)
Ratios and supplemental data:
Net assets end of period (000) $59,560 $38,705 $8,603 $3,754
Ratio of net expenses to average net assets 0.95% 0.93% 0.85% 0.85%(2)
Ratio of expenses to average net assets excluding
waivers 1.02% 1.10% 2.27% 4.93%(2)
Ratio of net investment income (loss) to average
net assets .69% .93% 1.35% 1.78%(2)
Portfolio turnover 43.2% 31.1% 46.8% 17.5%(2)
</TABLE>
<TABLE>
<CAPTION>
Mid-Cap Opportunity
----------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1996 1995(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 14.38 $ 13.46 $11.02 $10.00
Net investment income (loss) (0.01) 0.01 0.03 0.05
Net realized and unrealized appreciation 0.70 3.55 2.67 1.02
Total from investment operations 0.69 3.56 2.70 1.07
Distributions:
From net investment income -- (0.01) (0.03) (0.05)
From net realized gains from investments (0.31) (2.63) (0.23) --
Total distributions (0.31) (2.64) (0.26) (0.05)
Net increase in net asset value 0.38 0.92 2.44 1.02
NET ASSET VALUE-END OF PERIOD $ 14.76 $ 14.38 $13.46 $11.02
Total return 4.91% 26.65% 24.53% 14.20%(2)
Ratios and supplemental data:
Net assets end of period (000) $18,160 $11,668 $9,216 $4,972
Ratio of net expenses to average net assets 0.95% 0.91% 0.85% 0.85%(2)
Ratio of expenses to average net assets excluding
waivers 1.52% 1.49% 2.11% 4.64%(2)
Ratio of net investment income (loss) to average
net assets (.10)% .04% .28% .67%(2)
Portfolio turnover 26.2% 80.7% 37.4% 32.1%(2)
</TABLE>
(1) Commenced operations on March 30, 1995.
(2) Annualized.
See accompanying notes to financial statements.
<PAGE> 79
PEGASUS VARIABLE FUNDS
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Growth Fund
---------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1996 1995(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 15.39 $ 13.28 $ 11.37 $10.00
Net investment income (loss) (0.04) 0.03 0.05 0.05
Net realized and unrealized appreciation
(depreciation) 6.19 3.36 1.94 1.38
TOTAL FROM INVESTMENT OPERATIONS 6.15 3.39 1.99 1.43
Distributions:
From net investment income -- (0.03) (0.05) (0.05)
From net realized gains from investments (0.04) (1.25) (0.01) (0.01)
In excess of realized gains from investment
transactions -- -- (0.02) --
TOTAL DISTRIBUTIONS (0.04) (1.28) (0.08) (0.06)
NET INCREASE (DECREASE) IN NET ASSET VALUE 6.11 2.11 1.91 1.37
NET ASSET VALUE-END OF PERIOD $ 21.50 $ 15.39 $ 13.28 $11.37
TOTAL RETURN 40.03% 25.48% 17.52% 18.82%(3)
RATIOS AND SUPPLEMENTAL DATA:
Net assets end of period (000) $25,177 $15,840 $11,542 $6,435
Ratio of net expenses to average net assets 0.95% 0.91% 0.85% 0.85%(3)
Ratio of expenses to average net assets excluding
waivers 1.23% 1.26% 1.65% 3.15%(3)
Ratio of net investment income (loss) to average
net assets (.25)% .21% .49% .81%(3)
Portfolio turnover 44.8% 51.0% 23.1% 4.5%(3)
</TABLE>
<TABLE>
<CAPTION>
Intrinsic Value Fund Bond Fund
------------------------- ------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997(2) 1998 1997(2)
<S> <C> <C> <C> <C>
NET ASSET VALUE - BEGINNING OF PERIOD $ 11.53 $ 10.00 $ 10.44 $ 10.00
Net investment income (loss) 0.21 0.12 0.57 0.37
Net realized and unrealized appreciation
(depreciation) (0.58) 1.57 0.31 0.45
TOTAL FROM INVESTMENT OPERATIONS (0.37) 1.69 0.88 0.82
Distributions:
From net investment income (0.21) (0.12) (0.58) (0.37)
From net realized gains from investments (0.20) (0.04) (0.01) (0.01)
In excess of realized gains from investment
transactions (0.05) -- -- --
TOTAL DISTRIBUTIONS (0.46) (0.16) (0.59) (0.38)
NET INCREASE (DECREASE) IN NET ASSET VALUE (0.83) 1.53 0.29 0.44
NET ASSET VALUE-END OF PERIOD $ 10.70 $ 11.53 $ 10.73 $ 10.44
TOTAL RETURN -3.31% 25.26%(3) 8.66% 12.29%(3)
RATIOS AND SUPPLEMENTAL DATA:
Net assets end of period (000) $22,501 $13,926 $60,892 $34,230
Ratio of net expenses to average net assets 0.95% 0.95%(3) 0.75% 0.75%(3)
Ratio of expenses to average net assets excluding
waivers 1.27% 1.22%(3) 0.81% .77%(3)
Ratio of net investment income (loss) to average
net assets 1.90% 1.83%(3) 5.36% 5.97%(3)
Portfolio turnover 39.3% 19.6%(3) 14.5% 14.8%(3)
</TABLE>
(1) Commenced operations on March 30, 1995.
(2) Commenced operations on May 1, 1997.
(3) Annualized.
See accompanying notes to financial statements.
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of the
Pegasus Variable Funds:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of the PEGASUS VARIABLE FUNDS
(comprising as indicated in Note 1, the Growth and Value, Mid-Cap Opportunity,
Growth, Intrinsic Value and Bond Funds) as of December 31, 1998, and the related
statements of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended and the financial
highlights for each of the years from inception (as indicated in Note 1) through
December 31, 1998. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included physical counts and confirmation of
securities owned as of December 31, 1998, by inspection and correspondence with
custodians, banks and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective funds constituting the Pegasus Variable Funds as of
December 31, 1998, and the results of their operations for the year then ended,
the changes in their net assets for each of the two years in the period then
ended and their financial highlights for each of the periods from inception (as
indicated in Note 1) through December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 12, 1999.
<PAGE> 81
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE ONE GROUP(R) INVESTMENT TRUST
ANNUAL REPORT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 82
THE ONE GROUP(R) INVESTMENT TRUST
ANNUAL REPORT
DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
Management Discussion of Fund Performance:
Government Bond Fund................................... 1
Asset Allocation Fund.................................. 3
Growth Opportunities Fund.............................. 5
Large Company Growth Fund.............................. 7
Equity Index Fund...................................... 9
Report of Independent Accountants........................... 11
Statements of Investments:
Government Bond Fund................................... 12
Asset Allocation Fund.................................. 14
Growth Opportunities Fund.............................. 19
Large Company Growth Fund.............................. 24
Equity Index Fund...................................... 27
Statements of Assets and Liabilities........................ 34
Statements of Operations.................................... 35
Statements of Changes in Net Assets......................... 36
Financial Highlights........................................ 38
Notes to Financial Statements............................... 43
</TABLE>
<PAGE> 83
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
GOVERNMENT BOND FUND
DECEMBER 31, 1998
HOW DID THE FUND PERFORM?
For the year ended December 31, 1998, the Government Bond Fund posted a total
return of 7.32%.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C>
$1,400 $14,103
1,300 $13,977 (Gov't Bond)
1,200
1,100
1,000
9000
8/1/94 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -.- Government Bond -..- Solomon Bros. 3-7 Yr. Treas./Gov't
</TABLE>
- --------------------------------------------------------------
*Initial public offering commenced August 1, 1994.
<TABLE>
<CAPTION>
Government Bond Fund
Average Annual Total Return
---------------------------------
<S> <C>
One Year Since Inception
---------------------------------
7.32% 7.87%
---------------------------------
</TABLE>
Past performance is not predictive of future performance.
HOW WOULD YOU CHARACTERIZE THE BOND MARKET DURING 1998?
1998 will be characterized as one of the most volatile periods for the fixed
income markets. During the year, interest rates declined overall as the economic
flu that attacked Southeast Asia in late 1997 spread to Russia and Latin
America. (The yield on the 10-year Treasury, for example, declined from 5.74% to
4.66%.)
These economic problems along with the fear of further contagion through the
developed world, especially the United States, led to a significant increase in
interest rate volatility and a huge flight to quality. For this reason, spreads
on non-Treasury securities significantly deteriorated, and illiquidity became a
concern in the markets. In addition, as non-Treasury borrowing cost rose (as the
result of the illiquidity), several large and very leveraged investors were
forced into liquidation, which only compounded the market problems. These events
led the Federal Reserve to ease monetary policy in the fall, which significantly
helped the markets return to more "normal" behavior.
WHAT HAPPENED IN THE MORTGAGE-BACKED SECTOR?
The decline in interest rates (both in January and in the fall) provided
borrowers with the best opportunities to refinance their homes since 1993. The
rapid increase in prepayments led to a significant shortening of mortgage
durations, and to large cash flows that needed to be invested at the new lower
interest rates. In addition, the rise in quality spreads meant that
mortgage-backed spreads needed to rise to compensate for both the larger
prepayment risk and the competing yields from other fixed income products. Due
to these factors, mortgages were the worst-performing fixed income sector for
the one-year period, lagging Treasuries, agencies and corporate securities.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 1
<PAGE> 84
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
GOVERNMENT BOND FUND (CONTINUED)
DECEMBER 31, 1998
HOW DID THIS INFLUENCE FUND PERFORMANCE?
With an average mortgage position of 68%, the Fund suffered from its focus on
mortgage securities. As interest rates declined, the duration of our mortgage-
backed component dropped sharply. Because our strategy involves maintaining
stable portfolio duration close to five years, the cost of maintaining this
duration rose sharply as interest rate volatility increased, also negatively
affecting the performance of the Fund.
WHAT WAS THE FUND'S PRIMARY INVESTMENT STRATEGY?
As always, the Fund's strategy is to maximize total rate of return while
maintaining a very stable duration of approximately five years. (Duration is a
measure of a fund's sensitivity to interest rate changes. A higher number
indicates greater sensitivity; a lower number indicates less.) Furthermore, the
Fund invests only in assets that are directly or indirectly guaranteed by the
U.S. government.
In our efforts to maximize the Fund's income return, we typically invest a
significant portion of the Fund in mortgage-backed securities that represent
attractive value. Because mortgage-backed durations tend to fluctuate with
changes in interest rates, we must constantly adjust the Fund's duration in
order to maintain total portfolio duration of five years.
This strategy is successful when undervalued mortgage securities appreciate to
their full value and when interest rate volatility remains low to moderate.
However, during 1998, interest rate volatility was very strong, which created
problems for mortgage-backed securities.
WHAT IS YOUR OUTLOOK FOR THE MARKET?
We expect interest rates to remain stable or decline slightly in 1999, as the
U.S. economy slows down in response to the economic problems abroad. In
addition, we expect the overall level of volatility to gradually decline, as the
uncertainty relating to emerging markets and the economic flu dissipates. In
this environment, we expect mortgage-backed securities to perform well, which
may help the Fund recapture some of the luster that it lost in 1998.
/s/ Gary J. Madich
Gary J. Madich
Senior Managing Director of Fixed Income Securities
The Fund's composition is subject to change.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
2 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 85
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
ASSET ALLOCATION FUND
DECEMBER 31, 1998
HOW DID THE FUND PERFORM?
For the year ended December 31, 1998, the Asset Allocation Fund posted a total
return of 19.09%.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C>
$30,000 $29,377
25,000 $22,055
20,000 $19,509
15,000 $13,929
10,000
8/1/94 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -.- Asset Allocation -..- Blended Index**
- -0- LB Interm Gov't Corp -00- S&P 500
</TABLE>
- --------------------------------------------------------------
*Initial public offering commenced August 1, 1994.
**Blended Index consists of 60% S&P 500 & 40% Lipper Intermediate
U.S. Government Bond Index
<TABLE>
<CAPTION>
Asset Allocation Fund
Average Annual Total Return
---------------------------------
<S> <C>
One Year Since Inception
---------------------------------
19.09% 16.32%
---------------------------------
</TABLE>
Past performance is not predictive of future performance.
WHAT WAS YOUR PRIMARY ASSET ALLOCATION STRATEGY?
In November 1998 we increased the Fund's equity weighting by 3 percentage
points, bringing the Fund's asset allocation to 60% equities and 40% fixed
income securities. Our research indicated that while stock valuations remained
fairly high, interest rates were easing. This prompted the slight shift toward
equities.
HOW DID EVENTS PLAY OUT IN THE FUND'S EQUITY PORTFOLIO?
Overall, corporate profits exceeded expectations throughout the year,
contributing to the market's strong performance. At the same time, a favorable
interest rate environment helped support additional gains in the market.
The Fund's equity philosophy is research driven. Our bottom-up stock selection
philosophy led to attractive results in the Fund's equity portfolio. Instead of
trying to time the market or focus on certain market sectors, we rely on
fundamental research to select individual stocks from all market sectors. As a
result, the Fund's stock portfolio represents the "best ideas" of the equity
research team.
Equity returns primarily were driven by stock selection in the following areas:
technology (America Online, up 164%; Dell Computer, up 248%), energy (Exxon, up
22%), capital equipment (Tyco, up 67%), retail (Wal-Mart, up 107%), and consumer
capital spending (Medusa, up 42%).
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 3
<PAGE> 86
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
ASSET ALLOCATION FUND (CONTINUED)
DECEMBER 31, 1998
WHAT WERE THE TOP 10 HOLDINGS IN THE EQUITY PORTFOLIO?*
As of December 31, 1998, the Fund's top 10 equity holdings included Microsoft
(technology), General Electric (capital goods), Intel (technology), Cisco
Systems (technology), IBM (technology), Exxon (energy), Wal-Mart (retail),
Bristol Myers Squibb (health care), Philip Morris (consumer non-durable) and MCI
WorldCom (utilities).
HOW DID EVENTS PLAY OUT IN THE FIXED INCOME PORTFOLIO?
In general, the bond market benefited from the overall decline in interest rates
throughout 1998. The most significant event, though, was a late-summer rally in
the U.S. Treasury market that was sparked by the ongoing economic problems in
Asia, Russia and Latin America. This flight-to-quality, which lasted into
October, pushed Treasuries ahead of all other bond market sectors for 1998.
Our ongoing strategy is to maintain diversity among government, agency
mortgage-backed and corporate securities, with a focus on non-Treasury sectors.
Our research indicates that over the long term, non-Treasury sectors tend to
outperform Treasuries, and we will continue to pursue this strategy. At the end
of the year, 14% of the Fund's portfolio was invested in government securities,
16% in mortgage-backed securities and 7.5% in corporate and asset-backed
securities.
Credit quality within the Fund's bond portfolio remained high, with 81% of the
portfolio's securities AAA-rated, 3% AA-rated, 13% A-rated and 4% BBB-rated.
(Percentages are rounded.)
WHAT IS YOUR OUTLOOK FOR THE FINANCIAL MARKETS AND THE FUND?
We plan to maintain the Fund's current asset allocation mix and investment
strategies, as we expect the U.S. economy to maintain steady, albeit slower,
growth during 1999. Of course, we will continue to monitor valuation levels in
the financial markets and watch for signs of inflationary pressures. Any changes
may warrant a shift in our strategy.
In the stock market, we expect corporate earnings growth to decelerate, and,
thus, we look for more "normal" performance from the stock market. We plan to
maintain our sector neutrality/research-driven stock selection process, which
presents opportunities in various industries and companies.
Because we expect economic growth to slow somewhat, we plan to upgrade the bond
portfolio's holdings by slightly reducing its corporate and asset-backed
securities. Our outlook for mortgage-backed securities remains positive, and we
have increased the portfolio's exposure to this sector.
/s/ Richard R. Jandrain III
Richard R. Jandrain III
Senior Managing Director of Equity Securities
* The Fund's composition is subject to change.
Please refer to the prospectus and the accompanying financial statements for
further information about your Fund.
4 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 87
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
GROWTH OPPORTUNITIES FUND
DECEMBER 31, 1998
HOW DID THE FUND PERFORM?
The Growth Opportunities Fund posted a total return of 38.82% for the year ended
December 31, 1998.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C>
$30,000 $27,319
25,000 $25,082
20,000 $18,433
15,000
10,000
8/1/94* 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -.- Growth Opportunities -..- Russell 2000
- -0- S&P/BARRA Midcap 400 Growth
</TABLE>
- --------------------------------------------------------------
*Initial public offering commenced August 1, 1994.
<TABLE>
<CAPTION>
Growth Opportunities Fund
Average Annual Total Return
---------------------------------
<S> <C>
One Year Since Inception
---------------------------------
38.82% 23.13%
---------------------------------
</TABLE>
Past performance is not predictive of future performance.
The Russell 2000, an unmanaged index, is generally representative of small to
mid-sized companies. The S&P/BARRA Midcap 400 Growth Index, an unmanaged index,
represents the highest price to book securities in the S&P Midcap 400 Index. The
benchmark index for the Growth Opportunities Fund will be changing from the
Russell 2000 to the S&P/BARRA Midcap 400 Growth Index in order to better
represent the investment policies of the Fund for comparison purposes.
TO WHAT DO YOU ATTRIBUTE THE FUND'S SOLID RETURN?
Despite a severe stock market downturn in late summer and early fall,
medium-capitalization growth stocks continued to benefit from a strong economy,
solid corporate earnings, low inflation and low interest rates. In addition to
these factors, the Fund's performance has benefited from good stock selection.
Instead of looking for stocks based on general economic or market trends, we
evaluate stocks on an individual basis, searching for those with appealing
fundamentals.
WHAT WERE YOUR PRIMARY STRATEGIES AND TACTICS?
Our primary investment strategy is to identify high growth companies within
attractive, fast-growing industries. We look for companies that will benefit
from strong management teams and competitive advantages. These factors should
allow sustained high growth at a rate that outpaces the industry average.
After the Asian crisis erupted, we evaluated the impact of the fallout. Many of
the Fund's technology companies had significant Asian exports, so we cut certain
technology holdings to lessen the impact that decreased Asian demand would have
on these companies. At the same time, we increased our retail holdings because
many of these companies purchase materials from Asia. As such, these retailers
were able to benefit from lower prices on Asian imports.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 5
<PAGE> 88
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
GROWTH OPPORTUNITIES FUND (CONTINUED)
DECEMBER 31, 1998
DID THE PORTFOLIO BENEFIT FROM ANY PARTICULARLY STRONG HOLDINGS?*
The Fund enjoyed outstanding performance from computer manufacturer Dell
Computer, up 248% for the year; online services provider America Online, up
164%, and technology company Compuware, up 144%.
WHAT WERE THE FUND'S TOP TEN HOLDINGS?*
At year-end, the Fund's top 10 holdings included Coca-Cola Enterprises (consumer
non-durable), BMC Software (technology), Just for Feet (retail), AES Corp.
(utilities), AFLAC (financial services), America Online, USA Waste Services
(capital equipment), Compuware, Kohl's (retail) and Staples (retail).
WHAT IS YOUR OUTLOOK FOR THE FUND?
Looking ahead, we remain optimistic about continued U.S. economic growth and low
inflation. However, we think that economic growth will slow somewhat. We believe
that interest rates may continue to decline, which would support ongoing stock
market growth, but perhaps not at the unusually strong pace we've seen over the
last several years. As such, it seems prudent to lower our expectations somewhat
for the next year.
Our overall strategy remains intact -- to search for companies with strong
fundamentals, effective management teams and favorable long-term growth rates.
Because the Asian situation remains unresolved, we will continue to monitor its
effects on the Fund's holdings.
/s/ Ashi Parikh
Ashi Parikh
Managing Director, Growth Equity Team
/s/ Richard R. Jandrain III
Richard R. Jandrain III
Senior Managing Director of Equity Securities
* The Fund's composition is subject to change.
Please refer to the prospectus and the accompanying financial statements for
more information about your fund.
6 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 89
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
LARGE COMPANY GROWTH FUND
DECEMBER 31, 1998
HOW DID THE FUND PERFORM?
The Large Company Growth Fund posted a total return of 41.27% for the year ended
December 31, 1998.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C>
$35,000 $34,602
30,000 $29,377
25,000 $27,133
20,000
15,000
10,000
8/1/94* 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- -.- Large Co. -..- S&P 500
- -0- S&P/BARRA 500 Growth
</TABLE>
- --------------------------------------------------------------
*Initial public offering commenced August 1, 1994.
<TABLE>
<CAPTION>
Large Company Growth Fund
Average Annual Total Return
---------------------------------
<S> <C>
One Year Since Inception
---------------------------------
41.27% 25.34%
---------------------------------
</TABLE>
Past performance is not predictive of future performance.
The S&P 500, an unmanaged index, is generally representative of the performance
of large companies in the U.S. stock market. The S&P/BARRA 500 Growth Index, an
unmanaged index, represents the highest price to book securities in the S&P 500.
The benchmark index for the Large Company Growth Fund will be changing from the
S&P 500 to the S&P/BARRA 500 Growth Index in order to better represent the
investment policies of the Fund for comparison purposes.
TO WHAT DO YOU ATTRIBUTE THE FUND'S SOLID RETURN?
Despite global economic crises and a strong stock market downturn in late summer
and early fall, a strong domestic economy, low inflation and declining interest
rates all worked together to maintain a favorable equity environment. Once
again, the market favored the largest growth-oriented companies because of their
earnings reliability and stock liquidity.
WHAT WERE YOUR PRIMARY STRATEGIES AND TACTICS?
Our primary investment strategy during this market climate has been to find good
companies within industries that are growing at a faster rate than the economy.
These are companies that have the ability to exhibit sustained growth at some
multiple of their underlying industry growth rate. In addition, we search for
strong management teams and superior product positioning.
After evaluating the impact of the Asian crisis on the Fund's stocks, we cut the
portfolio's technology holdings because much of these companies' exports went to
Asia. We also increased our retail holdings, as many of these companies purchase
their materials from Asia and thus benefit from lower costs.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 7
<PAGE> 90
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
LARGE COMPANY GROWTH FUND (CONTINUED)
DECEMBER 31, 1998
DID THE PORTFOLIO BENEFIT FROM ANY PARTICULARLY STRONG HOLDINGS?*
The Fund enjoyed outstanding performance from computer manufacturer Dell
Computer, up 248% for the year; software giant Microsoft, up 115% and online
service provider America Online, up 164%.
WHAT WERE THE FUND'S TOP TEN HOLDINGS?*
At year-end, the Fund's top 10 holdings included Dell Computer, Lucent
Technologies (technology), General Electric (capital goods), Microsoft,
Coca-Cola (consumer non-durable), Wal-Mart (retail), Merck (health care),
Bristol-Myers Squibb (health care), Pfizer (health care) and Proctor & Gamble
(consumer non-durable).
WHAT IS YOUR OUTLOOK FOR THE FUND?
Looking ahead, we remain optimistic about continued U.S. economic growth and low
inflation. However, we think that economic growth will slow down somewhat. We
believe that interest rates may continue to decline, which would support ongoing
stock market growth, but perhaps not at the unusually strong pace we've seen
over the last several years. As such, it seems prudent to lower our expectations
somewhat for the next year.
Our overall strategy remains intact--to search for companies with strong
fundamentals, effective management teams and favorable long-term outlooks.
Because the Asian situation remains unresolved, we will continue to monitor its
effects on the Fund's holdings.
/s/ Ashi Parikh
Ashi Parikh
Managing Director, Growth Equity Team
/s/ Richard R. Jandrain III
Richard R. Jandrain III
Senior Managing Director of Equity Securities
* The Fund's composition is subject to change.
Please refer to the prospectus and the accompanying financial statements for
more information about your fund.
8 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 91
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
EQUITY INDEX FUND
DECEMBER 31, 1998
HOW DID THE FUND PERFORM?
For the period May 1, 1998 to December 31, 1998, the Equity Index Fund posted a
total return of 10.52%.
HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
<S> <C>
$12,000 $11,172
11,500 $11,052
11,000
10,500
10,000
5/1/98 12/31/98
- -.- S&P 500 -..- EQUITY INDEX
</TABLE>
- --------------------------------------------------------------
*Initial public offering commenced May 1, 1998.
<TABLE>
<CAPTION>
Equity Index Fund
Total Return
---------------------------------
<S> <C>
One Year Since Inception
---------------------------------
NA 10.52%
---------------------------------
</TABLE>
Past performance is not predictive of future performance.
As it is designed to do, the Fund offered a return that nearly matched that of
the S&P 500 Index, the unmanaged group of stocks the Fund seeks to track. The
S&P 500 Index returned 11.72% for the period May 1, 1998 to December 31, 1998.
The slight difference in returns between the Fund and the Index is due to fees
and transaction costs charged to the Fund but not to the Index.
WHAT CONTRIBUTED TO SUCH A STRONG RETURN?
The market suffered a severe setback in late summer and early fall, but a series
of Federal Reserve interest rate cuts helped renew investor confidence in the
U.S. stock market. In addition, a strong economy, low inflation and favorable
corporate earnings growth helped generate attractive stock market returns for
yet another year. Once again, large-capitalization growth companies, the type
represented in the S&P 500 Index, outperformed other types of U.S. stocks.
WHICH MARKET SECTORS OFFERED NOTABLE PERFORMANCE?
The Fund offered exposure to 15 market sectors. Among those sectors, retail,
telephone utilities and technology offered the strongest performance. The retail
sector benefited from lower costs on Asian imports, while telephone utilities
advanced due to acquisition activity. Strong returns late in the year from the
largest technology companies helped boost the technology sector's overall
performance.
The weakest-performing sectors included energy and industrial commodities.
Energy stocks declined due to lower oil prices, and in the industrial
commodities sector (chemical, paper and metal companies), stocks suffered from a
lack of pricing power.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 9
<PAGE> 92
THE ONE GROUP(R) INVESTMENT TRUST
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
EQUITY INDEX FUND (CONTINUED)
DECEMBER 31, 1998
WHAT WERE SOME OF THE STRONGEST AND WEAKEST STOCKS?*
The Fund enjoyed outstanding performance from a handful of stocks, including
technology provider Unisys, computer manufacturer Dell Computer, cable
television company Tele-Communications, financial service provider Providian
Financial, and auto manufacturer Ford Motor.
Weak earnings contributed to poor performance from certain holdings, including
diversified mining company Freeport-McMoran Copper and Gold, technology company
Advanced Micro Devices, and technology provider Cabletron Systems.
WHAT IS YOUR OUTLOOK FOR THE STOCK MARKET?
The environment for stocks should remain favorable during the coming year. We
expect economic growth to continue, but at a slower pace. We also expect
interest rates and inflation to remain low. Corporate earnings and stock prices
should continue to grow, but earnings are likely to come under increasing
pressure. Nevertheless, it's important to remember that returns of the last few
years have been unusually strong, and they probably are not sustainable. We
expect to see stock returns revert to more "normal" levels.
/s/ Richard R. Jandrain III
Richard R. Jandrain III
Senior Managing Director of Equity Securities
* The Fund's composition is subject to change.
Please refer to the prospectus and the accompanying financial statements for
more information about your Fund.
The S&P 500 Index is an unmanaged group of stocks generally representative of
the performance of large U.S.-based companies. Investors cannot purchase the
index directly, but they can invest in the underlying securities.
10 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
The One Group(R) Investment Trust
In our opinion, the accompanying statements of assets and liabilities, including
the statements 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 the Government Bond Fund, the Asset
Allocation Fund, the Growth Opportunities Fund, the Large Company Growth Fund,
and the Equity Index Fund (five of the portfolios constituting The One Group
Investment Trust, hereafter referred to as the "Trust"), at December 31, 1998,
and the results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's 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
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
February 17, 1999
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 11
<PAGE> 94
THE ONE GROUP(R) INVESTMENT TRUST
GOVERNMENT BOND FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ----------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(27.7%)
$1,500,000 FHLB, 6.145%, 09/30/02 $ 1,548,166
1,000,000 FNMA Disc. Note, 5.25%, 01/15/03 1,007,977
600,000 FNMA Disc. Note, 5.75%, 04/15/03 616,292
975,000 Resolution Funding Corp.,
Principal STRIP, 10/15/08 593,549
3,500,000 Resolution Funding Corp.,
Principal STRIP, 10/15/16 1,271,718
1,000,000 Resolution Funding Corp.,
Principal STRIP, 10/15/17 342,398
2,000,000 Resolution Funding Corp.,
Principal STRIP, 01/15/20 600,956
4,000,000 Resolution Funding Corp.,
Principal STRIP, 07/15/20 1,172,932
1,000,000 U.S. Treasury Bond, 6.25%,
08/15/23 (a) 1,118,750
1,000,000 U.S. Treasury Inflation
Protection Security, 3.625%,
01/15/08 (a) 995,154
900,000 U.S. Treasury Notes, 7.50%,
11/15/01 (a) 967,218
750,000 U.S. Treasury Notes, 6.50%,
08/15/05 (a) 824,062
550,000 U.S. Treasury Notes, 6.875%,
05/15/06 (a) 621,672
-----------
TOTAL U.S. GOVERNMENT AND AGENCY
OBLIGATIONS 11,680,844
-----------
(cost $11,034,677)
MORTGAGE-BACKED SECURITIES (68.6%)
64,904 FGLMC 5Y, 6.50%, Pool #G50324,
01/01/01 64,886
169,815 FGLMC 15Y, 8.50%, Pool #E20150,
12/01/09 176,509
727,897 FGLMC 15Y, 7.00%, Pool #E63959,
02/01/11 744,420
387,643 FGLMC 15Y, 6.00%, Pool #E00560,
07/01/13 389,221
1,000,000 FGLMC 15Y, 6.50%, 01/01/14 1,015,320
500,457 FGLMC 30Y, 8.00%, Pool #D55955,
09/01/24 518,623
773,120 FGLMC 30Y, 6.50%, Pool #D65545,
11/01/25 778,755
977,289 FGLMC 30Y, 6.00%, Pool #D70244,
04/01/26 966,567
476,592 FGLMC 30Y, 8.50%, Pool #G00981,
07/01/28 499,168
2,285,000 FHR, 2018 PE, 6.25%, 04/15/27 2,242,878
1,400,000 FHR, 2075 PM, 6.25%, 08/15/28 1,336,056
2,000,000 FHR, 2080 PJ, 6.50%, 08/15/28 2,027,048
1,118,000 FHR, 2091 PG, 6.00%, 11/15/28 1,055,569
363,330 FNMA 7Y, 7.00%, Pool #359952,
09/01/03 371,490
249,440 FNMA 15Y, 7.50%, Pool #279759,
08/01/09 256,706
225,793 FNMA 15Y, 6.50%, Pool #356206,
11/01/11 229,037
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ----------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES
(CONTINUED)
$ 385,645 FNMA 30Y, 6.50%, Pool #250375,
09/01/25 $ 388,352
758,485 FNMA 30Y, 6.50%, Pool #341811,
03/01/26 763,513
799,532 FNMA 30Y, 6.50%, Pool #338417,
05/01/26 804,832
840,514 FNR, 97-26 GD, 7.00%, 07/17/05 858,498
500,000 FNR, 98-37 VB, 6.00%, 01/17/13 483,330
245,000 FNR, 93-155 PJ, 7.00%, 09/25/23 252,221
1,000,000 FNR, 98-58 PC, 6.50%, 10/25/28 998,111
1,500,000 GNR, 98-14 PG, 6.375%, 11/20/26 1,519,556
500,000 GNR, 97-19 PJ, 6.50%, 06/20/27 492,831
1,000,000 GNR, 98-22 PD, 6.50%, 09/20/28 1,001,086
395,749 GNMA 30Y, 7.50%, Pool #326977,
05/15/23 408,009
239,209 GNMA 30Y, 7.50%, Pool #359588,
06/15/23 246,619
295,454 GNMA 30Y, 9.00%, Pool #780029,
11/15/24 316,153
104,206 GNMA 30Y, 7.00%, Pool #405535,
12/15/25 106,653
319,039 GNMA 30Y, 7.50%, Pool #2341,
12/20/26 326,970
709,859 GNMA 30Y, 6.00%, Pool #80094,
07/20/27 718,178
381,462 GNMA 30Y, 8.00%, Pool #412336,
10/15/27 396,301
458,471 GNMA 30Y, 7.00%, Pool #412369,
11/15/27 469,039
851,304 GNMA 30Y, 7.50%, Pool #427208,
01/15/28 877,728
488,815 GNMA 30Y, 6.50%, Pool #467705,
03/15/28 493,707
495,787 GNMA 30Y, 7.00%, Pool #472543,
04/15/28 507,254
483,708 GNMA 30Y, 7.00%, Pool #472679,
06/15/28 494,896
458,421 GNMA 30Y, 7.50%, Pool #780828,
07/15/28 472,650
249,347 GNMA 30Y, 6.50%, Pool #467225,
09/15/28 251,843
996,681 GNMA 30Y, 6.00%, Pool#2657,
10/20/28 982,986
999,127 GNMA 30Y, 7.00%, Pool #469699,
11/15/28 1,022,236
600,000 GNMA 30Y, 6.50%, Pool #2689,
12/20/28 602,825
-----------
TOTAL MORTGAGE-BACKED SECURITIES 28,928,630
-----------
(cost $28,751,462)
</TABLE>
12 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 95
THE ONE GROUP(R) INVESTMENT TRUST
GOVERNMENT BOND FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ----------------------------------------------------------
<C> <S> <C>
SHORT TERM DEBT (1.7%)
$ 703,000 FMC Discount Note 0.00%,
01/20/99 (cost $701,358) $ 701,399
-----------
- ----------
SHARES
- ----------
MUTUAL FUNDS (3.8%)
1,623,986 The One Group Government Money
Market Fund 1,623,986
-----------
(cost $1,623,986)
TOTAL INVESTMENTS $42,934,859
===========
(cost $42,111,483)
</TABLE>
- --------------------------------------------------------------------------------
Cost for federal income tax purposes: $42,111,483
The abbreviations in the above statement stand for the following:
FGLMC Federal Home Loan Mortgage Corporation Gold
FHLB Federal Home Loan Bank
FNR Fannie Mae REMIC
FNMA Federal National Mortgage Association
FHR Federal Home Loan Mortgage Corporation REMIC
GNMA Government National Mortgage Association
GNR Ginnie Mae REMIC
REMIC Real Estate Mortgage Investment Conduit
STRIP Separate Trading of Registered Interest and Principal Securities
Portfolio holding percentages represent market value as a percentage of net
assets.
(a) A portion of this security was loaned as of December 31, 1998.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 13
<PAGE> 96
THE ONE GROUP(R) INVESTMENT TRUST
ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
COMMON STOCK (59.6%)
AIRCRAFT (0.3%)
3,100 Lockheed Martin Corp. $ 262,725
------------
APPAREL (0.2%)
8,810 Jones Apparel Group, Inc.* 194,371
300 Warnaco Group, Inc. Class A 7,575
------------
201,946
------------
BANKS (5.3%)
14,540 BankAmerica Corp. 874,217
10,080 Charter One Financial, Inc. 279,720
9,590 Chase Manhattan Corp. 652,719
15,520 Citigroup, Inc. 768,240
7,080 First Union Corp. 430,552
12,590 MBNA Corp. 313,963
6,520 National City Corp. 472,700
7,230 PNC Bank Corp. 391,324
10,770 SouthTrust Corp. 397,817
4,800 State Street Corp. 333,900
14,250 Wells Fargo Co. 569,109
------------
5,484,261
------------
BEVERAGES (0.8%)
9,470 Coca Cola Co. 633,306
4,820 Coca-Cola Enterprises, Inc. 172,315
------------
805,621
------------
BROADCASTING (1.9%)
10,150 Belo, (AH) Corp. Series A 202,366
8,740 Tele-Communications, Inc.
Class A* 483,431
12,200 Time Warner, Inc. 757,163
6,860 Viacom, Inc. Class B* 507,640
------------
1,950,600
------------
BUSINESS EQUIPMENT & SERVICES (1.0%)
5,510 Herman Miller, Inc. 148,081
7,230 Office Depot, Inc.* 267,058
10,100 Service Corp. International 384,431
4,230 Waste Management, Inc. 197,224
------------
996,794
------------
CAPITAL EQUIPMENT (0.4%)
9,900 Teleflex, Inc. 451,688
------------
CHEMICALS-PETROLEUM & INORGANIC (0.6%)
7,290 Du Pont (E.I.) De Nemours &
Co. 386,826
3,700 Monsanto Co. 175,750
------------
562,576
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
CHEMICALS-SPECIALTY (1.6%)
7,350 Crompton & Knowles Corp. $ 152,053
5,620 Cytec Industries, Inc.* 119,425
2,320 Eastman Chemical Co. 103,820
8,820 Ferro Corp. 229,320
9,710 Morton International, Inc. 237,895
6,630 Nalco Chemical Co. 205,530
6,330 Olin Corp. 179,218
11,910 RPM, Inc., Ohio 190,560
3,130 Sigma-Aldrich Corp. 91,944
9,050 Wellman, Inc. 92,197
------------
1,601,962
------------
COMMUNICATION EQUIPMENT (2.6%)
7,140 BMC Software, Inc.* 318,176
15,600 Cisco Systems, Inc.* 1,447,875
8,250 Lucent Technologies, Inc. 907,500
------------
2,673,551
------------
COMPUTERS-MAIN/MINI (1.4%)
7,600 International Business
Machines Corp. 1,404,100
------------
COMPUTERS-MICRO (1.0%)
14,330 Dell Computer Corp.* 1,048,777
------------
COMPUTERS-PERIPHERAL (3.4%)
7,240 American Power Conversion
Corp.* 350,687
8,770 Cadence Design Systems, Inc.* 260,907
6,460 EMC Corp.* 549,100
16,820 Microsoft Corp.* 2,332,724
------------
3,493,418
------------
CONSTRUCTION MATERIALS (0.2%)
1,130 Martin Marietta Materials,
Inc. 70,272
2,100 Southdown, Inc. 124,294
------------
194,566
------------
COSMETIC/TOILETRY (0.1%)
5,910 Revlon, Inc. Class A* 97,146
------------
ELECTRICAL EQUIPMENT (3.5%)
7,290 Emerson Electric Co. (a) 441,045
20,180 General Electric Co. 2,059,621
3,240 Hubbell, Inc. Class B 123,120
5,020 Johnson Controls, Inc. 296,180
8,860 Tyco International Ltd. 668,376
------------
3,588,342
------------
</TABLE>
14 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 97
THE ONE GROUP(R) INVESTMENT TRUST
ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
ELECTRONIC COMPONENTS (2.0%)
12,300 Intel Corp. $ 1,458,319
6,470 Maxim Integrated Products,
Inc.* 282,658
4,880 SCI Systems, Inc.* (a) 281,820
------------
2,022,797
------------
ELECTRONIC INSTRUMENTS (0.2%)
5,210 Applied Materials, Inc.* 222,402
------------
FINANCE COMPANIES (0.2%)
4,680 Associates First Capital Corp. 198,315
------------
FOOD & RELATED (1.6%)
17,030 Archer-Daniels-Midland Co. 292,703
6,160 General Mills, Inc. 478,940
5,680 Interstate Bakeries Corp. (a) 150,165
14,760 Sara Lee Corp. 416,048
7,310 Smithfield Foods, Inc.* 247,626
------------
1,585,482
------------
FOREST/PAPER PRODUCT (0.9%)
12,110 Kimberly Clark Corp. 659,995
7,230 Pentair, Inc. 287,844
------------
947,839
------------
FURNITURE (0.6%)
11,410 Leggett & Platt, Inc. 251,020
13,230 Masco Corp. 380,363
------------
631,383
------------
HEALTH CARE-DRUGS (2.3%)
4,420 Cardinal Health, Inc. (a) 335,367
100 Elan Corp. PLC ADR* (a) 6,956
4,650 Merck & Co., Inc.* 686,747
3,150 Pfizer, Inc. 395,128
15,190 Schering-Plough Corp. 839,248
1,950 Watson Pharmaceuticals, Inc.* 122,606
------------
2,386,052
------------
HEALTH CARE-GENERAL (4.2%)
13,470 American Home Products Corp. 758,529
7,230 Bausch & Lomb, Inc. 433,800
4,910 Boston Scientific, Inc.* (a) 131,649
9,460 Bristol-Meyers Squibb Co. 1,265,866
7,360 IDEXX Laboratories, Inc.* 198,030
3,470 Johnson & Johnson 291,046
2,440 Sofamor Danek Group, Inc.* 297,070
5,190 Sybron International Corp.* 141,103
10,660 Warner-Lambert Co. 801,499
------------
4,318,592
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
HOSPITAL SUPPLY & MANAGEMENT (0.6%)
8,150 Medtronic, Inc. $ 605,138
------------
HOTELS & GAMING (0.4%)
11,860 Hilton Hotels Corp. 226,823
5,290 MGM Grand, Inc.* (a) 143,491
------------
370,314
------------
HOUSEHOLD-GENERAL PRODUCT (1.1%)
3,850 Lancaster Colony Corp. 123,681
9,100 Newell Co. 375,375
3,960 Procter & Gamble Co. 361,598
8,370 Rubbermaid, Inc. 263,132
------------
1,123,786
------------
INSURANCE-LIFE (0.2%)
4,210 Equitable Cos., Inc. 243,654
------------
INSURANCE-PROPERTY/CASUALTY (1.8%)
9,040 Allstate Corp. 349,170
5,550 American International Group,
Inc. 536,269
5,210 CIGNA Corp. 402,798
8,450 Hartford Financial Services
Group, Inc. 463,694
2,320 PMI Group, Inc. 114,550
------------
1,866,481
------------
LEISURE TIME PRODUCTS (0.6%)
9,460 Hasbro, Inc. 341,742
10,120 Walt Disney Co. 303,600
------------
645,342
------------
MOTOR VEHICLE PARTS (0.5%)
6,080 Danaher Corp. 330,220
4,980 Lear Corp.* 191,730
------------
521,950
------------
PETROLEUM-DOMESTIC (1.0%)
4,710 Ashland, Inc. 227,846
4,150 Devon Energy Corp. (a) 127,353
6,510 Tosco Corp. 168,446
6,630 Ultramar Diamond Shamrock
Corp. 160,778
13,100 USX-Marathon Group 394,638
------------
1,079,061
------------
PETROLEUM-INTERNATIONAL (2.5%)
18,520 Exxon Corp. 1,354,275
12,450 Royal Dutch Petroleum Co. 596,044
10,870 Texaco, Inc. 574,751
------------
2,525,070
------------
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 15
<PAGE> 98
THE ONE GROUP(R) INVESTMENT TRUST
ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
PETROLEUM-SERVICES (0.2%)
3,850 Halliburton Co. $ 114,056
3,880 Transocean Offshore, Inc. 104,033
------------
218,089
------------
RESTAURANTS (0.2%)
4,890 Outback Steakhouse, Inc.* 194,989
------------
RETAIL-FOOD STORES (0.8%)
7,900 Kroger Co.* 477,950
6,370 Safeway, Inc.* 388,172
------------
866,122
------------
RETAIL-GENERAL MERCHANT (2.4%)
8,680 Dayton Hudson Corp. 470,890
11,900 Family Dollar Stores, Inc. 261,800
6,260 Kohls Corp.* 384,599
16,540 Wal-Mart Stores, Inc. 1,346,976
------------
2,464,265
------------
RETAIL-SPECIALTY (0.6%)
100 Abercrombie & Fitch* 7,075
14,500 Just For Feet, Inc.* 251,938
200 Saks, Inc.* 6,313
9,720 Williams Sonoma, Inc.* 391,838
------------
657,164
------------
SECURITY & COMMERCIAL BROKER (1.5%)
4,220 Bear Stearns Cos., Inc. (a) 157,722
10,820 Fannie Mae 800,680
8,120 Morgan Stanley Dean Witter &
Co. 576,520
------------
1,534,922
------------
TIMESHARE & SOFTWARE (0.5%)
3,410 America Online, Inc.* 545,600
------------
TOBACCO (1.4%)
22,040 Philip Morris Cos., Inc. 1,179,140
8,120 UST, Inc. 283,185
------------
1,462,325
------------
UTILITIES-ELECTRIC (1.7%)
8,790 Baltimore Gas and Electric Co. 271,391
8,150 Cinergy Corp. 280,156
11,160 Energy East Corp. 630,540
9,740 GPU, Inc. 430,386
5,050 LG & E Energy Corp. 142,978
------------
1,755,451
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
UTILITIES-GAS/PIPELINE (0.6%)
6,760 El Paso Energy Corp. $ 235,332
12,980 Williams Cos., (The) 404,814
------------
640,146
------------
UTILITIES-TELEPHONE (4.7%)
7,630 Century Telephone Enterprises,
Inc. 515,025
11,570 GTE Corp. 752,050
16,260 MCI WorldCom, Inc.* 1,166,655
8,200 Qwest Communications
International, Inc.* 410,000
20,570 SBC Communications, Inc. 1,103,066
9,860 Sprint Corp. 829,473
4,200 Sprint PCS Group, Inc.* 97,125
------------
4,873,394
------------
TOTAL COMMON STOCK 61,324,198
------------
(cost $50,917,898)
- ----------
PRINCIPAL
- ----------
CORPORATE BONDS (7.0%)
BANKS (1.4%)
$ 250,000 Banco Central Hispano, 7.50%,
06/15/05 266,350
250,000 BankAmerica Corp., 8.125%,
02/01/02 268,525
376,000 First Hawaiian, Inc., 6.25%,
08/15/00 379,883
250,000 Huntington National Bank,
6.75%, 06/15/03 261,488
230,000 Society National Bank, 6.75%,
06/15/03 239,287
------------
1,415,533
------------
BROKER DEALERS (0.5%)
300,000 Goldman Sachs Group, 7.20%,
03/01/07 317,563
200,000 Morgan Stanley Group, 6.50%,
03/30/01 203,778
------------
521,341
------------
DIVERSIFIED FINANCE (2.3%)
200,000 Associates Corp. of North
America, 6.375%, 07/15/02 205,107
300,000 Boatmens Bancshares, 6.75%,
03/15/03 312,425
250,000 Chrysler Financial Corp.,
5.875%, 02/07/01 252,675
200,000 Ford Capital, 9.375%, 05/15/01 216,606
250,000 GMAC Medium Term Note, 8.25%,
02/24/04 279,110
465,000 Lockheed Corp., 6.75%,
03/15/03 483,136
333,000 McDonnel Douglas Finance,
6.45%, 12/05/02 343,242
300,000 Tyco International, 6.25%,
06/15/13 303,105
------------
2,395,406
------------
</TABLE>
16 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 99
THE ONE GROUP(R) INVESTMENT TRUST
ASSET ALLOCATION FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
OIL & GAS (0.5%)
$ 248,000 Columbia Gas Systems, 6.80%,
11/28/05 $ 261,841
250,000 Occidental Petroleum, 9.25%,
08/01/19 283,672
------------
545,513
------------
RENTAL SERVICES (0.2%)
250,000 Hertz Corp., 6.00%, 01/15/03 251,537
------------
RETAIL (0.8%)
250,000 Dayton Hudson Co., 7.25%,
09/01/04 270,244
250,000 J.C. Penny & Co., 7.25%,
04/01/02 260,196
250,000 Sears Roebuck Acceptance
Corp., 7.13%, 05/02/03 262,572
------------
793,012
------------
TELECOMMUNICATIONS (0.5%)
250,000 AT&T Corp., 7.50%, 06/01/06 281,625
200,000 Ohio Bell Telephone Co.,
5.75%, 05/01/00 201,711
------------
483,336
------------
TRANSPORTATION (0.5%)
250,000 Hunt, J.B., Transport, 6.25%,
09/01/03 248,379
250,000 International Lease, 5.875%,
01/15/01 251,681
------------
500,060
------------
UTILITIES (0.3%)
250,000 Virginia Electric & Power Co.,
6.625%, 04/01/03 261,851
------------
TOTAL CORPORATE BONDS 7,167,589
------------
(cost $7,001,847)
ASSET-BACKED SECURITIES (0.5%)
250,000 Chemical Master 95-2, 6.23%,
06/15/03 254,205
250,000 Circuit City 1995 1-A, 6.375%,
08/15/05 254,622
------------
TOTAL ASSET-BACKED SECURITIES 508,827
------------
(cost $504,591)
MORTGAGE-BACKED SECURITIES (15.7%)
303,905 FNMA 7Y, 6.50%, Pool #250357,
09/01/02 308,272
486,528 FNMA 15Y, 6.00%, Pool #251900,
08/01/13 487,900
105,248 FNMA 30Y, 7.00%, Pool #270725,
08/01/25 107,435
1,000,000 FNMA 15Y, 7.50%, Pool #292020,
08/01/09 1,029,130
901,336 FNMA 30Y, 8.50%, Pool #313280,
12/15/28 955,741
497,348 FNMA 15Y, 6.00%, Pool #323458,
11/01/13 498,751
191,122 FNMA 30Y, 7.50%, Pool #402032,
10/01/27 196,282
461,756 FNMA 15Y, 6.50%, Pool #414513,
04/01/13 468,396
398,311 FNMA 15Y, 7.00%, Pool #427488,
06/01/13 406,986
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES (CONTINUED)
$ 992,866 FNMA 30Y, 6.00%, Pool #428970,
06/01/28 $ 980,048
996,437 FNMA 30Y, 6.50%, Pool #433526,
08/01/28 1,003,362
552,203 FGLMC 30Y, 8.00%, Pool
#C00476, 09/01/26 571,745
996,384 FGLMC 30Y, 6.00%, Pool
#C13638, 08/01/28 984,138
325,144 FGLMC 30Y, 7.50%, Pool
#D81027, 07/01/27 333,946
418,560 FGLMC 30Y, 7.00%, Pool
#D83256, 10/01/27 426,797
473,877 FGLMC 15Y, 6.50%, Pool
#E00552, 06/01/13 481,137
445,110 FGLMC 15Y, 7.00%, Pool
#E00554, 06/01/13 455,080
458,354 FGLMC 15Y, 6.00%, Pool
#E69409, 03/01/13 460,220
468,647 FGLMC 15Y, 6.50%, Pool
#E69466, 03/01/13 476,291
455,167 FGLMC 30Y, 8.50%, Pool
#G00981, 07/01/28 476,728
498,341 GNMA 30Y, 6.00%, Pool #2657,
11/01/28 491,494
489,769 GNMA 30Y, 6.50%, Pool #430634,
03/15/28 494,672
496,359 GNMA 15Y, 6.50%, Pool #468228,
09/15/13 505,462
1,000,000 GNMA 15Y, 7.00%, Pool #348872,
07/15/08 1,029,410
166,194 GNMA 15Y, 7.00%, Pool #412559,
02/15/11 170,937
177,130 GNMA 30Y, 7.50%, Pool #398663,
05/15/26 182,525
331,409 GNMA 30Y, 7.50%, Pool #2360,
01/20/27 339,827
420,183 GNMA 30Y, 8.00%, Pool #451932,
09/15/27 436,528
405,966 GNMA 30Y, 7.00%, Pool #473915,
04/15/28 415,356
438,534 GNMA 30Y, 7.50%, Pool #465069,
05/15/28 452,146
497,296 GNMA 30Y, 7.00%, Pool #477123,
06/15/28 508,797
------------
TOTAL MORTGAGE-BACKED
SECURITIES 16,135,539
------------
(cost $15,975,589)
U.S. GOVERNMENT OBLIGATIONS (13.8%)
5,700,000 U.S. Treasury Note, 6.50%,
08/31/01 5,958,284
2,275,000 U.S.Treasury Note, 7.25%,
05/15/04 (a) 2,549,422
2,500,000 U.S.Treasury Note, 7.00%,
07/15/06 (a) 2,846,875
2,175,000 U.S. Treasury Bond, 7.875%,
02/15/21 (a) 2,866,243
------------
TOTAL U.S. GOVERNMENT
OBLIGATIONS 14,220,824
------------
(cost $13,635,973)
FOREIGN GOVERNMENT OBLIGATIONS (0.5%)
500,000 Province of Quebec, 6.50%,
01/17/06 522,420
------------
(cost $504,525)
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 17
<PAGE> 100
THE ONE GROUP(R) INVESTMENT TRUST
ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS (2.4%)
2,459,200 The One Group Prime Money
Market Fund $ 2,459,200
------------
(cost $2,459,200)
- ----------
PRINCIPAL
- ----------
SHORT-TERM SECURITIES HELD AS COLLATERAL
(1.3%)
$1,353,206 Lehman Brothers A2/P2
Tri-Party Repurchase Agreement
5.50%, dated 12/31/98, due
01/04/99, collateralized by
RACERS 1998-MM-12-2, 06/07/99,
market value $1,420,940 1,353,206
------------
(cost $1,353,206)
TOTAL INVESTMENTS $103,691,803
============
(cost $92,352,829)
</TABLE>
- --------------------------------------------------------------------------------
Cost for federal income tax purposes: $92,379,235
* Denotes a non-income producing security.
The abbreviations in the above statement stand for the following:
<TABLE>
<CAPTION>
<S> <C>
ADR American Depository Receipt
FGLMC Federal Home Loan Mortgage Corporation Gold
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
PLC Public Limited Company
</TABLE>
Portfolio holding percentages represent market value as percentage of net
assets.
(a) A portion of this security was loaned as of December 31, 1998.
See accompanying notes to financial statements.
18 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 101
THE ONE GROUP(R) INVESTMENT TRUST
GROWTH OPPORTUNITIES FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
COMMON STOCK (97.5%)
AIR TRANSPORTATION (0.3%)
8,600 Airborne Freight Corp. $ 310,137
------------
AIRCRAFT (0.1%)
200 United Technologies Corp. 21,750
------------
APPAREL (0.4%)
18,200 Jones Apparel Group, Inc.* 401,538
------------
BANKS (3.1%)
325 Associated Banc-Corp. 11,111
9,700 City National Corp. 403,762
100 Fifth Third Bancorp. 7,131
400 First Security Corp. 9,350
18,900 First Tennessee National
Corp. 719,381
1,300 Marshall & Ilsley Corp. 75,969
18,900 North Fork Bancorp., Inc. 452,419
100 Northern Trust Corp. 8,731
20,600 Sovereign Bancorp., Inc. 293,550
100 State Street Corp. 6,956
1,100 Union Planters Corp. 49,844
3,600 Wilmington Trust Corp. 221,850
10,400 Zions Bancorp 648,700
------------
2,908,754
------------
BEVERAGES (0.1%)
600 Coca-Cola Enterprises, Inc. 21,450
------------
BROADCASTING (0.2%)
6,600 TCA Cable TV, Inc. 235,537
------------
BUSINESS EQUIP. & SERVICE (7.0%)
23,000 Allied Waste Industries,
Inc.* 543,375
7,200 Cambridge Tech Partners,
Inc.* 159,300
16,300 Cintas Corp. 1,148,131
20,800 Comdisco, Inc. 351,000
3,400 Convergys Corp.* (a) 76,075
10,200 Corrections Corp. of America* 179,775
3,100 GTech Holdings Corp.* 79,437
14,600 Herman Miller, Inc. 392,375
100 Interpublic Group of Cos.,
Inc. 7,975
12,900 Manpower, Inc. 324,919
13,100 Modis Professional Services,
Inc.* 189,950
8,900 NOVA Corp.* 308,719
500 Omnicom Group, Inc. 29,000
1,900 Pittston Brink's Group 60,562
15,700 Reynolds & Reynolds Co. Class
A 360,119
7,850 Staples, Inc.* 342,947
14,366 Sterling Commerce, Inc.* 646,470
20,300 Sungard Data Systems, Inc.*
(a) 805,656
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
BUSINESS EQUIP. & SERVICE (CONTINUED)
8,000 Viad Corp. $ 243,000
7,000 Wallace Computer Services,
Inc. 184,625
300 Waste Management, Inc. 13,987
------------
6,447,397
------------
CAPITAL EQUIPMENT (1.0%)
9,075 Diebold, Inc. 323,864
2,100 Donaldson Co., Inc. 43,575
500 Flowserve Corp. 8,281
9,200 Sundstrand Corp. 477,250
4,800 UCAR International, Inc.* 85,500
------------
938,470
------------
CHEMICALS--PETROLEUM & INORGANIC (0.6%)
11,200 Lyondell Petrochemical Co. 201,600
17,000 Solutia, Inc. 380,375
------------
581,975
------------
CHEMICALS--SPECIALTY (1.3%)
12,200 Crompton & Knowles Corp. 252,387
6,000 Cytec Industries, Inc.* 127,500
5,900 Ferro Corp. 153,400
5,100 Vulcan Materials Co. (a) 670,969
------------
1,204,256
------------
COMMUNICATION EQUIPMENT (2.7%)
24,100 ADC Telecommunications, Inc.* 837,475
100 Cisco Systems, Inc.* 9,281
9,600 Comverse Technology, Inc.* 681,600
20,600 Fore Systems, Inc.* 377,237
300 Northern Telecom Ltd. (a) 15,037
9,200 Symbol Technology, Inc. 588,225
500 Telefonaktiebolaget LM
Ericsson ADR 11,969
300 Tellabs, Inc.* 20,569
------------
2,541,393
------------
COMPUTERS--MAIN/MINI (0.1%)
100 Xerox Corp. 11,800
------------
COMPUTERS--MICRO (0.3%)
3,700 Dell Computer Corp.* 270,794
------------
COMPUTERS--PERIPHERAL (12.1%)
13,300 American Power Conversion
Corp.* 644,219
2,100 Beyond.com Corp.* (a) 43,575
32,000 Cadence Design Systems, Inc.* 952,000
6,100 Citrix Systems, Inc.* 592,081
32,700 Compuware Corp.* 2,554,687
300 Creative Technology Ltd.* 4,500
8,800 Electronic Arts, Inc.* 493,900
8,600 Intuit, Inc.* 623,500
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 19
<PAGE> 102
THE ONE GROUP(R) INVESTMENT TRUST
GROWTH OPPORTUNITIES FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
COMPUTERS--PERIPHERAL (CONTINUED)
12,300 Keane, Inc.* $ 491,231
11,700 Lexmark International Group,
Inc.* 1,175,850
3,400 Maxtor Corp.* 47,600
400 Microsoft Corp.* 55,475
22,850 Networks Associates, Inc.* 1,513,812
700 Peoplesoft, Inc.* 13,256
13,400 Platinum Technology, Inc.*
(a) 256,275
12,700 Siebel Systems, Inc.* 431,006
17,700 Storage Technology Corp.* 629,456
2,700 Structural Dynamics Research
Corp.* 53,662
5,600 Symantec Corp.* 121,800
9,900 Synopsys, Inc.* 537,075
------------
11,234,960
------------
CONSTRUCTION MATERIALS (0.8%)
12,300 American Standard Cos.* 442,800
5,200 Martin Marietta Materials,
Inc. 323,375
------------
766,175
------------
ELECTRICAL EQUIPMENT (0.2%)
5,300 Federal Signal Corp. 145,087
300 Hubbell, Inc. Class B 11,400
200 Tyco International Ltd. 15,087
------------
171,574
------------
ELECTRONIC COMPONENTS (8.3%)
13,200 Altera Corp.* 803,550
44,433 Analog Devices, Inc.* 1,394,085
11,700 Linear Technology Corp. 1,047,881
26,500 Maxim Integrated Products,
Inc.* 1,157,719
11,700 Microchip Technology, Inc.*
(a) 432,900
10,500 SCI Systems, Inc.* (a) 606,375
17,400 Solectron Corp.* 1,617,112
10,100 Xilinx, Inc.* (a) 657,762
------------
7,717,384
------------
ELECTRONIC INSTRUMENTS (0.1%)
300 Applied Materials, Inc.* 12,806
------------
FINANCE COMPANIES (1.4%)
4,800 Capital One Financial Corp. 552,000
16,350 Robert Half International,
Inc.* 730,641
1,700 UniCapital Corp.* 12,537
------------
1,295,178
------------
FOOD & RELATED (2.3%)
9,200 Dean Foods Co. 375,475
12,400 Dole Food Co., Inc. (a) 372,000
14,600 Flowers Industries, Inc. 349,487
15,100 General Nutrition Cos., Inc.* 245,375
10,800 Interstate Bakeries Corp. (a) 285,525
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
FOOD & RELATED (CONTINUED)
14,100 McCormick & Co., Inc. $ 476,756
2,200 Vlasic Foods International,
Inc.* 52,387
200 Wrigley (Wm.) Jr. Co. 17,912
------------
2,174,917
------------
FOREST/PAPER PRODUCTS (0.6%)
200 Sealed Air Corp.* 10,212
14,650 Sonoco Products Co. 434,006
5,100 Wausau-Mosinee Paper Corp. 90,206
------------
534,424
------------
FURNITURE/FURNISHINGS (1.4%)
9,200 Hon Industries, Inc. 220,225
28,900 Leggett & Platt, Inc. 635,800
19,000 Shaw Industries, Inc. 460,750
------------
1,316,775
------------
HEALTH CARE--DRUGS (7.2%)
14,700 Biogen, Inc.* 1,220,100
2,647 Cardinal Health, Inc. (a) 200,841
10,500 Centocor, Inc.* 473,812
5,100 Covance, Inc.* 148,537
500 Eli Lilly & Co. 44,437
12,200 Forest Labs, Inc.* 648,887
10,000 ICN Pharmaceuticals, Inc. 226,250
16,100 McKesson Corp. (a) 1,272,906
17,600 Mylan Laboratories, Inc. (a) 554,400
13,400 Quintiles Transnational
Corp.* 715,225
1,000 Schering-Plough Corp. 55,250
17,600 Watson Pharmaceuticals, Inc.* 1,106,600
------------
6,667,245
------------
HEALTH CARE--GENERAL (3.3%)
1,700 Allegiance Corp. 79,263
2,500 Beckman Coulter, Inc. 135,625
300 Bristol-Meyers Squibb Co. 40,144
12,000 Dentsply International, Inc. 309,000
9,400 Hillenbrand Industries, Inc. 534,625
16,800 Omnicare, Inc. (a) 583,800
9,900 Steris Corp.* 281,531
26,300 Sybron International Corp.* 715,031
12,800 Total Renal Care Holdings,
Inc.* (a) 378,400
500 Warner-Lambert Co. 37,594
------------
3,095,013
------------
HOSPITAL SUPPLY & MANAGEMENT (3.0%)
2,100 Concentrated Managed Care,
Inc.* (a) 22,444
12,500 First Health Group Corp.* 207,031
20,000 Foundation Health Systems,
Inc* 238,750
200 Guidant Corp. 22,050
800 HBO & Co. 22,950
</TABLE>
20 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 103
THE ONE GROUP(R) INVESTMENT TRUST
GROWTH OPPORTUNITIES FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
HOSPITAL SUPPLY & MANAGEMENT (CONTINUED)
600 HCR Manor Care, Inc.* $ 17,625
35,550 Health Management Associates,
Inc. Class A* 768,769
200 HealthSouth Corp.* 3,088
6,800 Lincare Holdings, Inc.* (a) 275,825
14,200 Oxford Health Plans, Inc.* 211,225
4,800 PSS World Medical, Inc.* 110,400
13,700 Quorum Health Group, Inc.* 177,244
13,600 Stryker Corp. (a) 748,850
------------
2,826,251
------------
HOTELS & GAMING (0.5%)
17,200 International Game Technology 418,175
600 Marriott International, Inc.
Class A 17,400
475 Promus Hotel Corp.* 15,378
------------
450,953
------------
HOUSEHOLD--GENERAL PRODUCTS (0.8%)
300 Colgate-Palmolive Co. 27,863
15,300 Dial Corp. (The) (a) 441,788
8,450 Lancaster Colony Corp. 271,456
------------
741,107
------------
INSURANCE--LIFE (2.0%)
41,400 AFLAC, Inc. 1,821,600
200 SunAmerica, Inc. 16,225
------------
1,837,825
------------
INSURANCE--PROPERTY & CASUALTY (0.1%)
200 American International Group,
Inc. 19,325
300 MGIC Investment Corp. 11,944
------------
31,269
------------
LEISURE TIME INDUSTRIES (0.1%)
500 Callaway Golf Co. 5,125
100 Walt Disney Co. 3,000
------------
8,125
------------
METAL FABRICATION (0.4%)
8,500 Fastenal Co. (a) 374,000
------------
MOTOR VEHICLE PARTS (2.3%)
21,400 Danaher Corp. 1,162,288
8,600 Federal-Mogul Corp. 511,700
3,500 Kaydon Corp. 140,219
4,800 SPX Corp. 321,600
------------
2,135,807
------------
MOTOR VEHICLES (1.1%)
21,100 Harley-Davidson, Inc. 999,613
------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
MULTIPLE INDUSTRY (0.5%)
4,500 Celestica, Inc.* (a) $ 111,094
15,100 Whitman Corp. 383,163
------------
494,257
------------
NON-RESIDENT CONSTRUCTION (0.1%)
3,400 Newport News Shipbuilding,
Inc. 113,688
------------
PETROLEUM--DOMESTIC (0.1%)
14,400 Ocean Energy, Inc. 90,900
------------
PETROLEUM--SERVICES (1.1%)
300 BJ Services Co.* 4,688
600 Ensco International, Inc. 6,413
32,100 Global Marine, Inc.* 294,919
500 Halliburton Co. 14,813
1,200 Nabors Industries, Inc.* (a) 16,275
300 R & B Falcon Corp.* 2,288
1,582 Schlumberger Ltd. 72,970
6,700 Smith International, Inc.* 168,756
16,700 Varco International, Inc.* 129,425
13,800 Weatherford International,
Inc.* 267,375
------------
977,922
------------
PUBLISHING (1.2%)
300 Gannett Co., Inc. 19,350
200 McGraw-Hill Cos., Inc. 20,375
3,500 Media General, Inc. Class A 185,500
900 Meredith Corp. 34,088
200 Tribune Co. 13,200
1,400 Washington Post Co. Class B 809,113
------------
1,081,626
------------
RAILROAD (0.9%)
92 Canadian National Railway Co. 4,773
17,000 Kansas City Southern
Industries, Inc. 836,188
------------
840,961
------------
RESTAURANTS (1.3%)
7,300 Outback Steakhouse, Inc.* 291,088
15,500 Starbucks Corp.* 869,938
------------
1,161,026
------------
RETAIL--FOOD STORES (0.1%)
500 Walgreen Co. 29,281
400 Safeway, Inc. 24,375
------------
53,656
------------
RETAIL--GENERAL MERCHANDISE (0.8%)
300 Dayton Hudson Corp. 16,275
2,195 Dollar General Corp. 51,857
28,100 Family Dollar Stores, Inc. 618,200
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 21
<PAGE> 104
THE ONE GROUP(R) INVESTMENT TRUST
GROWTH OPPORTUNITIES FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
RETAIL--GENERAL MERCHANDISE (CONTINUED)
400 Kohls Corp.* $ 24,575
1,300 TJX Cos., Inc. 37,700
100 Wal-Mart Stores, Inc. 8,144
------------
756,751
------------
RETAIL--SPECIALTY (7.0%)
11,900 Abercrombie & Fitch Co.* 841,925
10,000 Barnes & Noble, Inc.* 425,000
21,100 Bed, Bath and Beyond, Inc.* 720,038
18,500 Best Buy, Inc.* 1,135,438
12,900 Borders Group, Inc.* 321,694
300 CompUSA, Inc.* 3,919
1 Consolidated Stores Corp.* 20
12,000 Dollar Tree Stores, Inc.* 524,250
400 Fred Meyer, Inc.* 24,100
750 Gap, Inc. 42,188
200 Home Depot, Inc. 12,238
96,000 Just For Feet, Inc.* 1,668,000
4,200 Lands End, Inc.* 113,138
7,900 Ross Stores, Inc. 311,063
100 Tandy Corp. 4,119
16,600 The Finish Line, Inc.* (a) 132,800
4,600 Tiffany & Co. 238,625
------------
6,518,555
------------
SAVINGS & LOANS (0.1%)
4,900 TCF Financial Corp. 118,519
------------
SECURITIES & COMMERCIAL BROKERS (0.8%)
100 American Express Co. 10,225
100 Amresco, Inc.* 875
100 Fannie Mae 7,400
900 Franklin Resources, Inc.* (a) 28,800
20,700 Price, T Rowe Associates,
Inc. (a) 708,975
150 Schwab, Charles Corp. 8,428
------------
764,703
------------
TEXTILE (0.5%)
7,300 Unifi, Inc. 142,806
10,900 Westpoint Stevens, Inc.* (a) 344,031
------------
486,837
------------
TIMESHARE & SOFTWARE (14.0%)
74,600 America Online, Inc.* 11,936,000
600 Broadcast.com, Inc.* (a) 45,900
1,200 Ebay, Inc.* (a) 289,500
12,250 Fiserv, Inc.* 630,109
150 Paychex, Inc. 7,716
6,100 Policy Management Systems
Corp.* 308,050
3,500 Unigraphics Solutions, Inc.* 50,750
------------
13,268,025
------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------
SHARES SECURITY VALUE
- -------------------------------------------------------
<C> <S> <C>
TRUCKING (0.1%)
400 CNF Transportation, Inc. $ 15,025
------------
UTILITIES--ELECTRIC (1.3%)
8,500 Interstate Energy Corp. 274,125
31,600 LG & E Energy Corp. 894,675
------------
1,168,800
------------
UTILITIES--GAS/PIPELINES (0.3%)
5,200 K N Energy, Inc. 189,150
300 MCN Energy Group, Inc. 5,719
8,000 Seagull Energy Corp.* 50,500
------------
245,369
------------
UTILITIES--TELEPHONE (2.1%)
100 AirTouch Communications,
Inc.* 7,213
922 Alltel Corp. 55,147
200 Ameritech Corp. 12,675
200 Bell Atlantic Co. 10,600
21,700 Cincinnati Bell, Inc. 820,531
191 Qwest Communications
International, Inc.* 9,550
19,151 SBC Communications, Inc. 1,026,972
100 U S West, Inc. 6,463
------------
1,949,151
------------
TOTAL COMMON STOCK 90,392,423
------------
(cost $66,829,488)
MUTUAL FUNDS (2.5%)
2,296,023 The One Group Prime Money
Market Fund 2,296,023
------------
(cost $2,296,023)
- ---------
PRINCIPAL
- ---------
SHORT-TERM SECURITIES HELD AS COLLATERAL
(9.4%)
$8,671,517 Lehman Brothers A2/P2
Tri-Party Repurchase
Agreement 5.50%, dated
12/31/98, due 01/04/99,
collateralized by RACERS
1998-MM-12-2, 06/07/99,
market value $9,105,568 8,671,517
------------
(cost $8,671,517)
TOTAL INVESTMENTS $101,359,963
============
(cost $77,797,028)
</TABLE>
22 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 105
THE ONE GROUP(R) INVESTMENT TRUST
GROWTH OPPORTUNITIES FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
- --------------------------------------------------------------------------------
Cost for federal income tax purposes: $78,093,864
* Denotes a non-income producing security.
The abbreviations in the above statement stand for the following:
<TABLE>
<S> <C>
ADR American Depository Receipt
</TABLE>
Portfolio holding percentages represent market value as a percentage of net
assets.
(a) A portion of this security was loaned as of December 31, 1998.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 23
<PAGE> 106
THE ONE GROUP(R) INVESTMENT TRUST
LARGE COMPANY GROWTH FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
COMMON STOCK (95.1%)
AIR TRANSPORT (0.1%)
3,200 Southwest Airlines Co. $ 71,800
------------
AIRCRAFT (0.2%)
3,800 United Technologies Corp. 413,250
------------
BANKS (2.9%)
29,900 Chase Manhattan Corp. 2,035,069
9,900 Fifth Third Bancorp. 705,994
26,175 MBNA Corp. 652,739
11,600 National City Corp. 841,000
8,200 State Street Corp. 570,413
24,966 US Bancorp Class A 886,293
2,100 Washington Mutual, Inc. 80,194
------------
5,771,702
------------
BEVERAGES (4.1%)
12,900 Anheuser-Busch Cos., Inc. 846,562
86,300 Coca Cola Co. 5,771,312
7,000 Coca-Cola Enterprises, Inc. 250,250
36,000 PepsiCo, Inc. 1,473,750
------------
8,341,874
------------
BROADCASTING (1.0%)
13,700 Comcast Corp. Class A 804,019
21,200 Tele-Communications, Inc.
Class A* 1,172,625
------------
1,976,644
------------
BUSINESS EQUIPMENT/SERVICES (0.8%)
3,300 Omnicom Group, Inc. 191,400
8,300 Staples, Inc.* 362,606
23,900 Waste Management, Inc. 1,114,338
------------
1,668,344
------------
CHEMICALS--PETROLEUM AND INORGANIC (1.3%)
31,100 Du Pont (E.I.) De Nemours &
Co. 1,650,244
20,400 Monsanto Co. 969,000
------------
2,619,244
------------
COMMUNICATION--EQUIPMENT (6.9%)
5,800 Ascend Communications, Inc.* 381,350
16,600 BMC Software, Inc.* 739,737
67,825 Cisco Systems, Inc.* 6,295,008
46,650 Lucent Technologies, Inc. 5,131,500
16,800 Northern Telecom Ltd. (a) 842,100
7,000 Tellabs, Inc.* 479,938
------------
13,869,633
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
COMPUTER--MAIN/MINI (3.8%)
34,300 International Business
Machines Corp. $ 6,336,925
10,900 Xerox Corp. 1,286,200
------------
7,623,125
------------
COMPUTER--MICRO (2.7%)
72,100 Dell Computer Corp.* 5,276,819
4,100 Gateway 2000, Inc.* 209,869
------------
5,486,688
------------
COMPUTER--PERIPHERAL (9.1%)
18,950 Computer Associates
International, Inc. 807,744
100 Compuware Corp.* 7,812
25,800 EMC Corp.* 2,193,000
104,100 Microsoft Corp.* 14,437,369
18,800 Oracle Corp.* 810,750
16,700 Parametric Technology Corp.* 271,375
------------
18,528,050
------------
COSMETIC AND TOILETRY (1.3%)
6,600 Avon Products, Inc. 292,050
48,374 Gillette Co. (The) 2,337,069
------------
2,629,119
------------
ELECTRICAL EQUIPMENT (7.1%)
12,400 Emerson Electric Co. 750,200
116,800 General Electric Co. 11,920,900
20,900 Tyco International Ltd. 1,576,644
------------
14,247,744
------------
ELECTRONIC COMPONENTS (3.5%)
60,100 Intel Corp. 7,125,606
------------
FINANCE COMPANIES (0.1%)
2,400 Capital One Financial Corp. 276,000
------------
FOOD AND RELATED (3.0%)
9,100 BestFoods 484,575
19,200 Campbell Soup Co. 1,056,000
11,000 ConAgra, Inc. 346,500
11,600 Heinz (H.J.) Co. 656,850
9,200 Kellogg Co. (a) 313,950
7,400 Ralston-Ralston Purina Group 239,575
31,600 Sara Lee Corp. 890,725
24,100 Unilever N.V. 1,998,794
90 Vlasic Foods International,
Inc.* 2,143
------------
5,989,112
------------
FOREST AND PAPER PRODUCTS (0.4%)
16,200 Kimberly Clark Corp. 882,900
------------
</TABLE>
24 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 107
THE ONE GROUP(R) INVESTMENT TRUST
LARGE COMPANY GROWTH FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
HEALTHCARE--DRUGS (11.0%)
42,400 Abbott Laboratories $ 2,077,600
5,800 Amgen, Inc.* 606,462
9,300 Cardinal Health, Inc. (a) 705,637
34,600 Eli Lilly & Co. 3,075,075
41,200 Merck & Co., Inc.* 6,084,725
47,400 Pfizer, Inc. 5,945,737
67,800 Schering-Plough Corp. 3,745,950
------------
22,241,186
------------
HEALTHCARE--GENERAL (7.8%)
44,900 American Home Products Corp. 2,528,431
7,500 Baxter International, Inc. 482,344
14,000 Boston Scientific, Inc.* (a) 375,375
42,000 Bristol-Meyers Squibb Co. 5,620,125
43,200 Johnson & Johnson 3,623,400
42,000 Warner-Lambert Co. 3,157,875
------------
15,787,550
------------
HOSPITAL SUPPLY AND MANAGEMENT (1.6%)
4,100 Guidant Corp. 452,025
13,700 HBO & Co. 393,019
4,100 IMS Health, Inc. 309,294
27,000 Medtronic, Inc. 2,004,750
------------
3,159,088
------------
HOTELS AND GAMING (0.1%)
7,100 Hilton Hotels Corp. (a) 135,787
------------
HOUSEHOLD--GENERAL PRODUCTS (2.9%)
11,600 Colgate-Palmolive Co. 1,077,350
5,900 Newell Co. (a) 243,375
50,500 Procter & Gamble Co. 4,611,281
------------
5,932,006
------------
INSURANCE--PROPERTY CASUALTY (1.7%)
34,762 American International Group,
Inc. 3,358,878
------------
LEISURE TIME INDUSTRY (0.1%)
6,300 Mattel, Inc. 143,719
------------
MULTIPLE INDUSTRY (0.4%)
9,900 Minnesota Mining &
Manufacturing Co. 704,137
------------
PETROLEUM--SERVICES (0.5%)
5,400 Halliburton Co. 159,975
19,100 Schlumberger Ltd. 880,988
------------
1,040,963
------------
PUBLISHING (0.3%)
9,500 Gannett Co., Inc. 612,750
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
RETAIL--FOOD STORES (0.8%)
10,800 Kroger Co.* $ 653,400
17,900 Walgreen Co. 1,048,269
------------
1,701,669
------------
RETAIL--GENERAL (4.4%)
1,600 Costco Cos., Inc.* 115,500
11,600 Dayton Hudson Corp. 629,300
2,900 Family Dollar Stores, Inc. 63,800
8,300 Kohls Corp.* 509,931
13,400 TJX Cos., Inc. 388,600
87,800 Wal-Mart Stores, Inc. 7,150,213
------------
8,857,344
------------
RETAIL--SPECIALITY (3.0%)
13,300 CVS Corp. 731,500
15,750 GAP, Inc. 885,937
52,800 Home Depot, Inc. 3,230,700
77,000 Just For Feet, Inc.* 1,337,875
------------
6,186,012
------------
SECURITY AND COMMISSION BROKER (2.1%)
14,600 American Express Co. 1,492,850
400 Fannie Mae 29,600
9,600 Franklin Resources, Inc. (a) 307,200
33,200 Freddie Mac 2,139,325
50 Marsh & McLennan Cos., Inc. 2,922
100 Morgan Stanley Dean Witter &
Co. 7,100
1,600 Price, T Rowe Associates, Inc.
(a) 54,800
5,175 Schwab, Charles Corp. 290,770
------------
4,324,567
------------
TIMESHARE AND SOFTWARE (1.5%)
7,800 America Online, Inc.* (a) 1,248,000
10,800 Automatic Data Processing,
Inc. 866,025
4,500 Computer Science Corp. 289,969
10,800 Entrust Technologies* (a) 257,850
8,300 Paychex, Inc. 426,931
------------
3,088,775
------------
TOBACCO (2.1%)
77,100 Philip Morris Cos., Inc. 4,124,850
4,200 UST, Inc. 146,475
------------
4,271,325
------------
UTILITY--TELEPHONE (6.5%)
17,400 AirTouch Communications, Inc.* 1,254,975
37,400 Ameritech Corp. 2,370,225
51,800 Bell Atlantic Co. 2,745,400
33,300 GTE Corp. 2,164,500
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 25
<PAGE> 108
THE ONE GROUP(R) INVESTMENT TRUST
LARGE COMPANY GROWTH FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
UTILITY--TELEPHONE (CONTINUED)
11,700 MCI WorldCom, Inc. $ 839,475
69,100 SBC Communications, Inc.* 3,705,488
------------
13,080,063
------------
TOTAL COMMON STOCK 192,146,654
------------
(cost $136,163,248)
MUTUAL FUNDS (4.4%)
8,835,574 The One Group Prime Money
Market Fund (cost $8,835,574) 8,835,574
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PRINCIPAL SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT (.5%)
$1,000,000 Prudential Securities, Inc.
dated 12/31/98, due 01/04/99
Collateralized by $931,000
U.S. Treasury Note, 7.50%, due
05/15/02, market value
$1,020,148.00 $ 1,000,000
------------
(cost $1,000,000)
SHORT-TERM SECURITIES HELD AS COLLATERAL
(1.6%)
3,330,837 Lehman Brothers A2/P2
Tri-Party Repurchase Agreement
5.50%, dated 12/31/98, due
01/04/99, collateralized by
RACERS 1998-MM-12-2, 06/07/99,
market value $3,497,562 3,330,837
------------
(cost $3,330,837)
TOTAL INVESTMENTS $205,313,065
============
(cost $149,329,659)
</TABLE>
- --------------------------------------------------------------------------------
Cost for federal income tax purposes: $149,403,223
* Denotes a non-income producing security.
Portfolio holding percentages represent market value as a percentage of net
assets.
(a) A portion of this security was loaned as of December 31, 1998.
See accompanying notes to financial statements.
26 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 109
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
COMMON STOCK (94.4%)
AIR TRANSPORT (0.4%)
300 AMR Corp.* $ 17,812
200 Delta Air Lines, Inc. (a) 10,400
200 FDX Corp.* 17,800
450 Southwest Airlines Co. 10,097
100 U.S. Airways Group, Inc.* 5,200
-----------
61,309
-----------
AIRCRAFT (0.8%)
1,400 Boeing Co., The 45,675
300 Lockheed Martin Corp. 25,425
100 Northrop Grumman Corp. 7,312
300 United Technologies Corp. 32,625
-----------
111,037
-----------
ALUMINUM (0.3%)
300 Alcan Aluminium Ltd. 8,119
300 Aluminum Co. of America 22,369
100 Reynolds Metals Co. 5,269
-----------
35,757
-----------
APPAREL (0.2%)
100 Fruit of the Loom, Inc.* 1,381
100 Liz Claiborne, Inc. 3,156
400 Nike, Inc. Class B 16,225
100 Reebok International Ltd.* 1,487
100 Russell Corp. 2,031
200 V.F. Corp. 9,375
-----------
33,655
-----------
BANKS (8.1%)
1,000 Bank of New York Co., Inc. 40,250
1,586 Bank One Corp. 80,985
2,392 BankAmerica Corp. 143,819
400 BankBoston Corp. 15,575
100 Bankers Trust Corp. 8,544
400 BB&T Corp. 16,125
1,200 Chase Manhattan Corp. 81,675
3,150 Citigroup, Inc. 155,925
200 Comerica, Inc. 13,637
400 Fifth Third Bancorp 28,525
100 Firstar Corp. 9,325
1,400 First Union Corp. 85,137
800 Fleet Financial Group, Inc. 35,750
310 Huntington Bancshares, Inc. 9,319
600 KeyCorp 19,200
1,050 MBNA Corp. 26,184
400 Mellon Bank Corp. 27,500
200 Mercantile Bancorp, Inc. 9,225
200 Morgan, J P & Co., Inc. 21,012
500 National City Corp. 36,250
200 Northern Trust Corp. 17,462
400 PNC Bank Corp. 21,650
300 Regions Financial Corp. 12,094
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
BANKS (CONTINUED)
100 Republic New York Corp. $ 4,556
200 State Street Corp. 13,912
200 Summit Bancorp. 8,737
300 Suntrust Banks, Inc. 22,950
350 Synovus Financial Corp. 8,531
200 Union Planters Corp. 9,062
1,000 US Bancorp Class A 35,500
300 Wachovia Corp. 26,231
818 Washington Mutual, Inc. 31,237
2,200 Wells Fargo Co. 87,862
-----------
1,163,746
-----------
BEVERAGES (2.8%)
100 Adolph Coors Co. 5,644
700 Anheuser-Busch Cos., Inc. 45,937
100 Brown-Forman Corp. Class B 7,569
3,400 Coca Cola Co. 227,375
500 Coca-Cola Enterprises, Inc. 17,875
2,000 PepsiCo, Inc. 81,875
500 Seagram Co. Ltd. 19,000
-----------
405,275
-----------
BROADCASTING (2.1%)
1,000 CBS Corp. 32,750
400 Clear Channel Communications,
Inc.* 21,800
500 Comcast Corp. Class A 29,344
100 King World Productions, Inc.* 2,944
800 MediaOne Group, Inc.* (a) 37,600
700 Tele-Communications, Inc. Class
A* 38,719
1,700 Time Warner, Inc. 105,506
500 Viacom, Inc. Class B* 37,000
-----------
305,663
-----------
BUSINESS EQUIPMENT & SERVICES (1.5%)
200 Browning Ferris Industries 5,687
100 Ceridian Corp.* 6,981
100 Deluxe Corp.* 3,656
200 Dun & Bradstreet Corp. 6,312
200 Ecolab, Inc. 7,237
700 Electronic Data Systems Corp. 35,175
600 First Data Corp. 19,012
100 H&R Block, Inc. 4,500
100 IKON Office Solutions, Inc. 856
200 Interpublic Group of Cos., Inc. 15,950
500 Laidlaw, Inc. 5,031
200 Omnicom Group 11,600
400 Pitney Bowes, Inc. 26,425
200 R. R. Donnelley & Sons Co. 8,762
100 Ryder System, Inc. 2,600
400 Service Corp. International 15,225
800 Waste Management, Inc. 37,300
-----------
212,309
-----------
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 27
<PAGE> 110
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
CAPITAL EQUIPMENT (0.7%)
100 Aeroquip-Vickers, Inc. $ 2,994
500 Caterpillar, Inc. 23,000
100 Cummins Engine Co., Inc. 3,550
100 Fluor Corp. 4,256
100 Foster Wheeler Corp. 1,319
100 Harnischfeger Industries, Inc. 1,019
300 Illinois Tool Works, Inc. 17,400
200 Ingersoll-Rand Co. 9,387
100 McDermott International, Inc. 2,469
100 Milacron, Inc. 1,925
100 NACCO Industries, Inc. 9,200
100 PACCAR, Inc. 4,112
200 Parker-Hannifin Corp. 6,550
100 Snap-on, Inc. 3,481
200 Thermo Electron Corp.* 3,387
100 Timken Co. (The) 1,888
-----------
95,937
-----------
CHEMICALS--SPECIALTY (0.4%)
300 Air Products & Chemicals, Inc. 12,000
200 Avery Dennison Corp. 9,012
100 Eastman Chemical Co. 4,475
200 Engelhard Corp. 3,900
100 Great Lakes Chemical Corp. 4,000
200 Morton International, Inc. 4,900
100 Nalco Chemical Co. 3,100
200 Pall Corp. 5,062
200 Praxair, Inc. 7,050
100 Sigma-Aldrich Corp. 2,937
-----------
56,436
-----------
CHEMICALS--PETROLEUM & INORGANIC (1.2%)
300 Dow Chemical Co. 27,281
1,600 Du Pont (E.I.) De Nemours & Co. 84,900
100 Goodrich (B.F.) Co. 3,587
100 Hercules, Inc. 2,737
900 Monsanto Co. 42,750
300 Rohm & Haas Co. 9,037
200 Union Carbide Corp. 8,500
100 W.R. Grace & Co.* 1,569
-----------
180,361
-----------
COMMUNICATION EQUIPMENT (3.8%)
500 3Com Corp.* 22,406
100 Andrew Corp.* 1,650
300 Ascend Communications, Inc.* 19,725
300 BMC Software, Inc.* 13,369
200 Cabletron System, Inc.* 1,675
2,200 Cisco Systems, Inc.* 204,187
200 General Instrument Corp.* 6,787
100 Harris Corp. 3,662
1,800 Lucent Technologies, Inc. 198,000
860 Northern Telecom Ltd. 43,107
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
COMMUNICATION EQUIPMENT (CONTINUED)
500 Novell, Inc.* $ 9,062
100 Scientific-Atlanta, Inc. 2,281
300 Tellabs, Inc.* 20,569
-----------
546,480
-----------
COMPUTERS--MAIN/MINI (2.9%)
200 Data General Corp.* 3,287
1,400 Hewlett-Packard Co. 95,637
1,300 International Business Machines
Corp. 240,175
200 Silicon Graphics, Inc. 2,575
400 Unisys Corp.* 13,775
500 Xerox Corp. 59,000
-----------
414,449
-----------
COMPUTERS--MICRO (2.0%)
200 Apple Computer, Inc.* (a) 8,187
2,394 Compaq Computer Corp. 100,398
1,800 Dell Computer Corp.* 131,737
200 Gateway 2000, Inc.* 10,237
500 Sun Microsystems, Inc.* 42,812
-----------
293,371
-----------
COMPUTERS--PERIPHERAL (4.5%)
100 Adobe Systems, Inc. 4,675
100 Autodesk, Inc. 4,269
700 Computer Associates
International, Inc. 29,837
100 Compuware Corp.* 7,813
700 EMC Corp.* 59,500
3,400 Microsoft Corp.* 471,537
1,300 Oracle Corp.* 56,062
400 Parametric Technology Corp.* 6,500
300 PeopleSoft, Inc.* 5,681
300 Seagate Technology, Inc.* 9,075
-----------
654,949
-----------
CONSTRUCTION MATERIALS (0.2%)
100 Black & Decker Corp. 5,606
150 Crane Co. 4,528
100 Owens Corning 3,544
200 PPG Industries, Inc. 11,650
200 Sherwin-Williams Co. 5,875
100 Stanley Works (The) 2,775
-----------
33,978
-----------
CONTAINERS (0.1%)
100 Ball Corp. 4,575
100 Bemis, Inc. 3,794
200 Crown Cork & Seal Co., Inc. 6,162
-----------
14,531
-----------
</TABLE>
28 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 111
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
COSMETIC/TOILETRY (0.7%)
400 Avon Products, Inc. $ 17,700
1,500 Gillette Company (The) 72,469
100 International Flavor and Fra-
grances, Inc. 4,419
-----------
94,588
-----------
DEFENSE (0.4%)
100 EG&G, Inc. 2,781
200 General Dynamics Corp. 11,725
500 Raytheon Co. 26,625
300 Rockwell International Corp. 14,569
-----------
55,700
-----------
ELECTRICAL EQUIPMENT (4.2%)
300 Dover Corp. 10,987
600 Emerson Electric Co. 36,300
4,500 General Electric Co. 459,281
200 Grainger (W.W.), Inc. 8,325
876 Tyco International Ltd. 66,083
100 Cooper Industries, Inc. 4,769
200 Honeywell, Inc. 15,062
100 Johnson Controls, Inc. 5,900
-----------
606,707
-----------
ELECTRONIC COMPONENTS (2.9%)
300 AMP, Inc. 15,619
200 Advanced Micro Devices, Inc.* 5,787
2,300 Intel Corp. 272,694
200 LSI Logic Corp.* 3,225
300 Micron Technology, Inc.* 15,169
800 Motorola, Inc. 48,850
200 National Semiconductor Corp.* 2,700
100 Raychem Corp. 3,231
500 Texas Instruments, Inc. 42,781
100 Thomas & Betts Corp. 4,331
-----------
414,387
-----------
ELECTRONIC INSTRUMENTS (0.3%)
500 Applied Materials, Inc.* 21,344
100 KLA-Tencor Corp.* 4,337
100 Perkin-Elmer Corp. (The) 9,756
100 Tektronix, Inc. 3,006
-----------
38,443
-----------
FARM MACHINERY (0.1%)
100 Case Corp. 2,181
300 Deere & Co. 9,937
100 Navistar International Corp.* 2,850
-----------
14,968
-----------
FINANCE COMPANIES (0.6%)
1,000 Associates First Capital Corp. 42,375
100 Capital One Financial Corp. 11,500
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
FINANCE COMPANIES (CONTINUED)
200 Countrywide Credit Industries,
Inc. $ 10,037
706 Household International, Inc. 27,975
-----------
91,887
-----------
FOOD & RELATED (2.4%)
815 Archer-Daniels Midland Co. 14,008
400 BestFoods 21,300
600 Campbell Soup Co. 33,000
700 ConAgra, Inc. 22,050
200 General Mills, Inc. 15,550
500 Heinz (H.J.) Co. 28,312
200 Hershey Foods Corp. 12,437
600 Kellogg Co. 20,475
300 Pioneer Hi-Bred International,
Inc. 8,100
200 Quaker Oats Co. 11,900
400 Ralston Purina Group 12,950
1,300 Sara Lee Corp. 36,644
200 Supervalu, Inc. 5,600
500 Sysco Corp. 13,719
900 Unilever NV N.Y. Shares 74,644
200 Wrigley (Wm.) Jr. Co. 17,912
-----------
348,601
-----------
FOREST/PAPER PRODUCTS (0.8%)
100 Boise Cascade Corp. 3,100
100 Champion International Corp. 4,050
100 Georgia Pacific Corp. 5,856
400 International Paper Co. 17,925
700 Kimberly Clark Corp. 38,150
100 Louisiana-Pacific Corp. 1,831
100 Mead Corp. 2,931
200 Owens-Illinois, Inc.* 6,125
100 Sealed Air Corp.* 5,106
100 Temple-Inland, Inc. 5,931
100 Union Camp Corp. 6,750
100 Westvaco Corp. 2,681
300 Weyerhauser Co. 15,244
200 Willamette Industries, Inc. 6,700
-----------
122,380
-----------
FURNITURE (0.1%)
100 Armstrong World Industries,
Inc. 6,031
500 Masco Corp. 14,375
-----------
20,406
-----------
GOLD/PRECIOUS METALS (0.1%)
500 Barrick Gold Corp. 9,750
400 Battle Mountain Gold Co. 1,650
300 Homestake Mining Co. 2,756
300 Placer Dome, Inc. 3,450
-----------
17,606
-----------
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 29
<PAGE> 112
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
HEALTH CARE--DRUGS (6.4%)
2,100 Abbott Laboratories $ 102,900
100 Allergan, Inc. 6,475
100 Alza Corp.* (a) 5,225
400 Amgen, Inc.* 41,825
250 Cardinal Health, Inc. (a) 18,969
1,500 Eli Lilly & Co. 133,312
1,600 Merck & Co., Inc.* 236,300
100 Millipore Corp. 2,844
1,800 Pfizer, Inc. 225,787
700 Pharmacia Upjohn, Inc. 39,637
2,000 Schering-Plough Corp. 110,500
-----------
923,774
-----------
HEALTH CARE--GENERAL (4.2%)
1,800 American Home Products Corp. 101,362
100 Bausch & Lomb, Inc. 6,000
400 Baxter International, Inc. 25,725
300 Becton, Dickinson and Co. 12,806
200 Biomet, Inc. 8,050
500 Boston Scientific, Inc.* (a) 13,406
1,400 Bristol-Meyers Squibb Co. 187,337
1,900 Johnson & Johnson 159,362
100 Mallinckrodt, Inc. 3,081
100 St. Jude Medical, Inc.* 2,769
1,100 Warner-Lambert Co. 82,706
-----------
602,604
-----------
HOME BUILDING, MOBILE HOMES (0.2%)
100 Centex Corp. 4,506
100 Fleetwood Enterprises, Inc. 3,475
100 Kaufman & Broad Home Corp. 2,875
200 Loews Corp. 19,650
100 Pulte Corp. 2,781
-----------
33,287
-----------
HOSPITAL SUPPLY & MANAGEMENT (1.3%)
200 Aetna, Inc. 15,725
100 Bard (C.R.), Inc. 4,950
900 Columbia/HCA Healthcare Corp. 22,275
200 Guidant Corp. 22,050
600 HBO & Co. 17,212
200 HCR Manor Care, Inc.* 5,875
600 HealthSouth Corp.* 9,262
200 Humana, Inc.* 3,562
200 IMS Health, Inc. 15,087
700 Medtronic, Inc. 51,975
400 Tenet Healthcare Corp.* 10,500
300 United HeathCare Corp. 12,919
-----------
191,392
-----------
HOTELS & GAMING (0.1%)
100 Harrah's Entertainment* 1,569
400 Hilton Hotels Corp. 7,650
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
HOTELS & GAMING (CONTINUED)
300 Marriott International, Inc.
Class A $ 8,700
200 Mirage Resorts, Inc.* 2,987
-----------
20,906
-----------
HOUSEHOLD--GENERAL PRODUCTS (1.8%)
100 American Greetings Corp. Class
A 4,106
100 Clorox Co. 11,681
400 Colgate-Palmolive Co. 37,150
300 Fort James Corp. 12,000
200 Fortune Brands, Inc. 6,325
100 Jostens, Inc. 2,619
200 Newell Co. 8,250
1,800 Procter & Gamble Co. 164,362
200 Rubbermaid, Inc. 6,288
100 Tupperware Corp. 1,644
-----------
254,425
-----------
HOUSEHOLD--MAJOR APPLIANCES (0.1%)
100 Briggs & Stratton Corp. 4,988
100 Maytag Corp. 6,225
100 Whirlpool Corp. 5,538
-----------
16,751
-----------
INSURANCE--LIFE (0.9%)
300 American General Corp. 23,400
200 AON Corp. 11,075
391 Conseco, Inc. 11,950
100 Jefferson-Pilot Corp. 7,500
200 Provident Cos., Inc. 8,300
150 Providian Corp. 11,250
300 SunAmerica, Inc. 24,338
200 Torchmark Corp. 7,063
100 Transamerica Corp. 11,550
200 UNUM Corp. 11,675
-----------
128,101
-----------
INSURANCE--PROPERTY/CASUALTY (2.0%)
1,100 Allstate Corp. 42,488
1,400 American International Group,
Inc. 135,275
200 Chubb Corp. 12,975
300 CIGNA Corp. 23,194
200 Cincinnati Financial Corp. 7,325
300 Hartford Financial Services
Group, Inc. 16,463
100 Lincoln National Corp. 8,181
100 MBIA, Inc. 6,556
200 MGIC Investment Corp. 7,963
100 Progressive Corp. OH 16,938
200 SAFECO Corp. 8,588
300 St. Paul Cos., Inc. (a) 10,425
-----------
296,371
-----------
</TABLE>
30 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 113
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
LEISURE TIME INDUSTRY (1.1%)
800 Carnival Corp. Class A $ 38,400
1,200 Cendant Corp.* 22,875
200 Hasbro, Inc. 7,225
100 Brunswick Corp. 2,475
2,800 Walt Disney Co. 84,000
400 Mattel, Inc. 9,125
-----------
164,100
-----------
MINING (0.1%)
100 Asarco, Inc. 1,506
100 Cyprus Amax Minerals Co. 1,000
100 Freeport-McMoRan Copper & Gold,
Inc. 1,044
100 Inco Ltd. 1,056
200 Newmont Mining Corp. 3,613
100 Phelps Dodge Corp. 5,088
-----------
13,307
-----------
MOTOR VEHICLE PARTS (0.2%)
200 Autozone, Inc.* 6,588
192 Dana Corp. 7,848
100 Eaton Corp. 7,069
200 Genuine Parts Co. 6,688
100 ITT Industries, Inc. 3,975
-----------
32,168
-----------
MOTOR VEHICLES (1.1%)
1,700 Ford Motor Co. 99,769
900 General Motors Corp. 64,406
-----------
164,175
-----------
MULTIPLE INDUSTRY (1.2%)
800 Allied-Signal, Inc. 35,450
.35 Berkshire Hathaway, Inc. Class
A* 24,500
300 Corning, Inc. 13,500
200 Danaher Corp. 10,863
100 FMC Corp.* 5,600
100 Harcourt General, Inc. 5,319
600 Minnesota Mining &
Manufacturing Co. 42,675
100 National Service Industries,
Inc. 3,800
200 Textron, Inc. 15,188
200 TRW, Inc. 11,238
-----------
168,133
-----------
PETROLEUM--DOMESTIC (0.8%)
200 Anadarko Petroleum Corp. 6,175
100 Apache Corp. 2,531
100 Ashland, Inc. 4,838
400 Atlantic Richfield Co. 26,100
200 Burlington Resources, Inc. 7,163
100 Kerr Mcgee Corp. (a) 3,825
500 Occidental Petroleum Corp. 8,438
100 ORYX Energy Co.* 1,344
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
PETROLEUM--DOMESTIC (CONTINUED)
400 Phillips Petroleum Co. $ 17,050
100 Sunoco, Inc. 3,606
200 Tenneco, Inc. 6,813
300 Union Pacific Resources Group,
Inc. 2,719
300 Unocal Corp. 8,756
400 USX - Marathon Group 12,050
-----------
111,408
-----------
PETROLEUM--INTERNATIONAL (4.2%)
3,000 Royal Dutch Petroleum Co. 143,625
900 Chevron Corp. 74,644
3,400 Exxon Corp. 248,625
1,100 Mobil Corp. 95,838
700 Texaco, Inc. 37,013
100 Amerada Hess Corp. 4,975
-----------
604,720
-----------
PETROLEUM SERVICES (0.4%)
370 Baker Hughes, Inc. 6,544
600 Halliburton Co. 17,775
800 Schlumberger Ltd. 36,900
-----------
61,219
-----------
PHOTO EQUIPMENT (0.2%)
400 Eastman Kodak Co. 28,800
100 Polaroid Corp. 1,869
-----------
30,669
-----------
PUBLISHING (0.5%)
100 Dow Jones & Co., Inc. 4,813
400 Gannett Co., Inc. 25,800
100 Knight-Ridder, Inc. 5,113
100 McGraw-Hill Cos., Inc. 10,188
100 Meredith Corp. 3,788
300 New York Times Co. Class A 10,406
100 Times Mirror Co. (The) (a) 5,600
200 Tribune Co. 13,200
-----------
78,908
-----------
RAILROAD (0.4%)
600 Burlington Northern Santa Fe
Corp. 20,250
300 CSX Corp. 12,450
500 Norfolk Southern Corp. 15,844
300 Union Pacific Corp. 13,519
-----------
62,063
-----------
RESTAURANTS (0.6%)
200 Darden Restaurants, Inc. (a) 3,600
900 McDonald's Corp. 68,963
200 Tricon Global Restaurants,
Inc.* 10,025
200 Wendy's International, Inc. 4,363
-----------
86,951
-----------
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 31
<PAGE> 114
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
RETAIL--FOOD STORES (1.2%)
300 Albertson's, Inc. (a) $ 19,106
400 American Stores Co. 14,775
400 Kroger Co.* 24,200
100 Longs Drug Stores Corp. 3,750
400 Rite Aid Corp. 19,825
700 Safeway, Inc.* 42,656
100 The Great Atlantic & Pacific
Tea Co., Inc. 2,963
700 Walgreen Co. 40,994
200 Winn-Dixie Stores, Inc. 8,975
-----------
177,244
-----------
RETAIL--GENERAL MERCHANDISE (3.0%)
300 Costco Cos., Inc.* 21,656
600 Dayton Hudson Corp. 32,550
100 Dillard's, Inc. 2,838
225 Dollar General Corp. 5,316
300 Federated Department Stores,
Inc.* 13,069
400 J. C. Penney Company, Inc. 18,750
700 Kmart Corp.* 10,719
200 Kohls Corp.* 12,288
300 May Department Stores Co. 18,113
200 Nordstrom, Inc. 6,938
500 Sears, Roebuck & Co.* 21,250
400 TJX Cos., Inc. 11,600
3,100 Wal-Mart Stores, Inc. 252,456
-----------
427,543
-----------
RETAIL--SPECIALTY (2.0%)
100 Circuit City Stores - Circuit
City Group 4,994
100 Consolidated Stores Corp.* 2,019
500 CVS Corp. 27,500
200 Fred Meyer, Inc.* 12,050
800 Gap, Inc. 45,000
2,200 Home Depot, Inc. 134,613
500 Lowe's Cos. 25,594
400 Staples, Inc.* 17,475
100 Tandy Corp. 4,119
300 The Limited, Inc. 8,738
200 The Pep Boys - Manny, Moe &
Jack 3,138
300 Toys 'R' Us, Inc.* 5,063
-----------
290,303
-----------
SAVINGS & LOANS (0.1%)
100 Golden West Financial Corp. 9,169
-----------
SECURITY & COMMERCIAL BROKERS (2.8%)
600 American Express Co. 61,350
200 Bear Stearns Cos., Inc. (a) 7,475
1,400 Fannie Mae 103,600
300 Franklin Resources, Inc. (a) 9,600
900 Freddie Mac 57,994
200 Lehman Brothers Holdings, Inc. 8,813
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
SECURITY & COMMERCIAL BROKERS (CONTINUED)
350 Marsh & McLennan Cos., Inc. $ 20,453
500 Merrill Lynch & Co., Inc. 33,375
800 Morgan Stanley Dean Witter &
Co.* 56,800
550 Schwab, Charles Corp. 30,903
200 Student Loan Market Association 9,600
-----------
399,963
-----------
STEEL (0.1%)
200 Allegheny Teledyne, Inc. 4,088
100 Bethlehem Steel Corp. 838
100 Nucor Corp. 4,325
100 USX-U.S. Steel Group, Inc. 2,300
100 Worthington Industries, Inc. 1,250
-----------
12,801
-----------
TEXTILE (0.1%)
100 Springs Industries, Inc. Class
A 4,144
-----------
TIMESHARE & SOFTWARE (0.4%)
400 Automatic Data Processing, Inc. 32,075
200 Computer Science Corp. 12,888
200 Equifax, Inc. 6,838
200 Paychex, Inc. 10,288
-----------
62,089
-----------
TIRES/RUBBER PRODUCTS (0.1%)
100 Cooper Tire and Rubber Co. 2,044
200 Goodyear Tire & Rubber Co. 10,088
-----------
12,132
-----------
TOBACCO (1.4%)
400 RJR Nabisco Holding Corp. 11,875
3,400 Philip Morris Cos., Inc. 181,900
300 UST, Inc. 10,463
-----------
204,238
-----------
UTILITIES--ELECTRIC (2.2%)
200 AES Corp.* 9,475
200 Ameren Corp. 8,538
300 American Electric Power
Company, Inc. 14,119
200 Carolina Power & Light Co. 9,413
200 DTE Energy Corp. 8,575
300 Dominion Resources, Inc. 14,025
300 PECO Energy Co. 12,488
500 PG&E Corp. 15,750
400 PacificCorp 8,425
200 Baltimore Gas and Electric Co. 6,175
300 Central & Southwest Corp. 8,231
200 Cinergy Corp. 6,875
300 Consolidated Edison, Inc. 15,863
500 Duke Power Co. 32,031
500 Edison International 13,938
300 Entergy Corp. 9,338
</TABLE>
32 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 115
THE ONE GROUP(R) INVESTMENT TRUST
EQUITY INDEX FUND
STATEMENT OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
UTILITIES--ELECTRIC (CONTINUED)
200 FPL Group, Inc. $ 12,325
200 GPU, Inc. 8,838
400 Houston Industries, Inc. 12,850
200 New Century Energies, Inc. 9,750
200 Niagara Mohawk Power Corp.* 3,225
200 Northern States Power Co. 5,550
200 PP&L Resources, Inc. 5,575
300 Public Service Enterprise
Group, Inc. 12,000
1,000 Southern Co. 29,063
400 Texas Utilities Co. 18,675
300 Unicom Corp. 11,569
-----------
322,679
-----------
UTILITIES--GAS/PIPELINE (0.7%)
300 Coastal Corp. (The) 10,481
150 Columbia Energy Group 8,663
100 Consolidated National Gas Co. 5,400
100 Eastern Enterprises 4,375
500 Enron Corp. 28,531
300 FirstEnergy Corp. 9,769
100 NICOR, Inc. 4,225
100 ONEOK, Inc. 3,613
100 People's Energy Corp. 3,988
300 Sempra Energy 7,613
100 Sonat, Inc. 2,706
600 Williams Cos., (The) 18,713
-----------
108,077
-----------
UTILITIES--TELEPHONE (7.9%)
800 AirTouch Communications, Inc.* 57,700
400 Alltel Corp. 23,925
1,500 Ameritech Corp. 95,063
2,500 AT&T Corp. 188,125
2,100 Bell Atlantic Co. 111,300
2,600 Bellsouth Corp. 129,675
200 Frontier Corp. 6,800
1,300 GTE Corp. 84,500
2,570 MCI WorldCom, Inc.* 184,403
400 Nextel Communication* 9,450
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SHARES SECURITY VALUE
- ---------------------------------------------------------
<C> <S> <C>
UTILITIES--TELEPHONE (CONTINUED)
2,700 SBC Communications, Inc. $ 144,788
600 Sprint Corp. 50,475
550 Sprint PCS Group, Inc.* 12,719
705 U S West Communications Group 45,561
-----------
1,144,484
-----------
TOTAL COMMON STOCK 13,665,214
-----------
(cost $12,307,823)
PREFERRED STOCK (0.1%)
100 Alberto Culver Class B 2,669
-----------
(cost $2,959)
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------
PRINCIPAL
- ---------------------------------------------------------
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS (.9%)
$ 15,000 U.S. Treasury Bills, 4.41%,
02/04/99 14,944
70,000 U.S. Treasury Bills, 4.30%,
02/18/99 69,620
35,000 U.S. Treasury Bills, 4.29%,
02/25/99 34,783
15,000 U.S. Treasury Bills, 4.35%,
03/18/99 14,868
-----------
TOTAL U.S. GOVERNMENT
OBLIGATIONS 134,215
-----------
(cost $134,165)
----------
SHARES
----------
MUTUAL FUNDS (4.2%)
621,987 The One Group Prime Money
Market Fund 621,987
-----------
(cost $621,987)
----------
PRINCIPAL
----------
SHORT-TERM SECURITIES HELD AS
COLLATERAL (1.0%)
$ 138,974 Lehman Brothers A2/P2
Tri-Party Repurchase Agreement
5.50%, dated 12/31/98, due
01/04/99, collateralized by
RACERS 1998-MM-12-2, 06/07/99,
market value $145,930 138,974
-----------
(cost $138,974)
TOTAL INVESTMENTS $14,563,059
===========
(cost $13,205,908)
</TABLE>
- --------------------------------------------------------------------------------
Cost for federal income tax purposes: $13,209,899
* Denotes a non-income producing security.
Portfolio holding percentages represent market value as a percentage of net
assets.
(a) A portion of this security was loaned as of December 31, 1998.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 33
<PAGE> 116
THE ONE GROUP(R) INVESTMENT TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT ASSET GROWTH LARGE COMPANY EQUITY
BOND ALLOCATION OPPORTUNITIES GROWTH INDEX
----------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in securities, at
value (cost $42,111,483,
$90,999,623, $69,125,511,
$144,998,822 and $13,066,934
respectively) $42,934,859 $102,338,597 $92,688,446 $ 200,982,228 $14,424,085
Repurchase agreements, at cost -- 1,353,206 8,671,517 4,330,837 138,974
----------- ------------ ----------- ------------- -----------
Total investments 42,934,859 103,691,803 101,359,963 205,313,065 14,563,059
Receivable for investment
securities sold -- -- -- -- 80,395
Interest and dividends
receivable 289,970 578,889 44,079 186,227 14,745
Withholding tax reclaim
receivable -- 227 -- 1,043 30
Prepaid assets 1,400 3,174 3,328 6,946 251
Deferred organization expenses 961 1,991 2,869 1,897 --
----------- ------------ ----------- ------------- -----------
Total assets 43,227,190 104,276,084 101,410,239 205,509,178 14,658,480
----------- ------------ ----------- ------------- -----------
LIABILITIES
Payable for investments
purchased 1,019,368 -- -- -- 17,143
Payable for return of collateral
received for securities on
loan -- 1,353,206 8,671,517 3,330,837 138,974
Investment advisory fee payable 9,644 55,660 45,038 106,050 4,937
Administration fee payable 7,499 18,000 14,918 35,127 1,560
Other accrued expenses 3,509 4,284 5,058 2,456 15,147
----------- ------------ ----------- ------------- -----------
Total liabilities 1,040,020 1,431,150 8,736,531 3,474,470 177,761
----------- ------------ ----------- ------------- -----------
NET ASSETS $42,187,170 $102,844,934 $92,673,708 $ 202,034,708 $14,480,719
=========== ============ =========== ============= ===========
REPRESENTED BY:
Capital $41,361,634 $ 91,110,984 $69,407,609 $ 146,107,612 $13,176,531
Net unrealized appreciation on
investments 823,376 11,338,974 23,562,935 55,983,406 1,357,151
Accumulated undistributed
(distributions in excess of)
realized gain (loss) on
investments and financial
futures 2,160 367,455 (296,836) (57,277) (52,963)
Accumulated undistributed
(distributions in excess of)
net investment income (loss) -- 27,521 -- 967 --
----------- ------------ ----------- ------------- -----------
NET ASSETS $42,187,170 $102,844,934 $92,673,708 $ 202,034,708 $14,480,719
=========== ============ =========== ============= ===========
Shares of beneficial interest
outstanding, no par value
(unlimited number of shares
authorized) 3,963,923 6,792,039 5,002,655 8,928,745 1,319,667
=========== ============ =========== ============= ===========
NET ASSET VALUE, redemption and
offering price per share $ 10.64 $ 15.14 $ 18.52 $ 22.63 $ 10.97
=========== ============ =========== ============= ===========
</TABLE>
See accompanying notes to financial statements.
34 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 117
THE ONE GROUP(R) INVESTMENT TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT ASSET GROWTH LARGE COMPANY EQUITY
BOND ALLOCATION OPPORTUNITIES GROWTH INDEX(A)
---------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
INCOME:
Dividend income $ -- $ 457,214 $ 331,712 $ 1,402,593 $ 67,907
Interest income 1,936,353 2,111,253 130,565 423,758 34,963
Income from securities lending 2,145 9,381 12,301 3,071 90
---------- ----------- ----------- ----------- ----------
Total income 1,938,498 2,577,848 474,578 1,829,422 102,960
---------- ----------- ----------- ----------- ----------
EXPENSES:
Investment advisory fees 138,300 493,132 431,700 948,112 15,432
Administration fees 69,649 158,161 151,830 330,612 7,202
Professional fees 12,800 17,700 19,000 29,400 12,800
Custodian fees 7,375 18,900 17,100 14,800 12,000
Insurance expense 2,000 3,200 4,875 8,401 156
Trustee fees 1,600 3,400 3,700 7,600 200
Other 8,169 12,843 13,839 24,104 10,472
---------- ----------- ----------- ----------- ----------
Total expenses before waivers
and reimbursements 239,893 707,336 642,044 1,363,029 58,262
Less waivers (9,393) (2,862) -- -- (15,432)
Less reimbursements -- -- -- -- (14,538)
---------- ----------- ----------- ----------- ----------
Net expenses 230,500 704,474 642,044 1,363,029 28,292
---------- ----------- ----------- ----------- ----------
NET INVESTMENT INCOME (LOSS) $1,707,998 $ 1,873,374 $ (167,466) $ 466,393 $ 74,668
---------- ----------- ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS):
Net realized gain (loss) on
investments and financial
futures $ 140,967 $ 1,660,601 $ 4,626,878 $13,358,107 $ (52,963)
Net change in unrealized
appreciation on investments 255,875 8,916,609 19,581,381 37,839,553 1,357,151
---------- ----------- ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAIN 396,842 10,577,210 24,208,259 51,197,660 1,304,188
---------- ----------- ----------- ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $2,104,840 $12,450,584 $24,040,793 $51,664,053 $1,378,856
========== =========== =========== =========== ==========
</TABLE>
- ------------------------------------------------------
(a) For the period May 1, 1998, date of commencement of operations, through
December 31, 1998.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 35
<PAGE> 118
THE ONE GROUP(R) INVESTMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT BOND ASSET ALLOCATION
--------------------------------- ---------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income $ 1,707,998 $ 1,061,995 $ 1,873,374 $ 873,061
Net realized gain on investments 140,967 45,096 1,660,601 3,089,370
Net change in unrealized appreciation
of investments 255,875 596,960 8,916,609 1,416,110
----------- ----------- ------------ -----------
Net increase in net assets
resulting from operations 2,104,840 1,704,051 12,450,584 5,378,541
----------- ----------- ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,707,998) (1,061,995) (1,873,374) (871,191)
In excess of net investment income (33,739) (5,056) (26,808) --
From net realized gain from investment
transactions (105,068) (41,992) (1,265,780) (3,031,880)
----------- ----------- ------------ -----------
Decrease in net assets from
distributions to shareholders (1,846,805) (1,109,043) (3,165,962) (3,903,071)
----------- ----------- ------------ -----------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares 19,963,136 6,514,599 49,983,354 21,414,090
Net asset value of shares issued to
shareholders from reinvestment of
distributions 1,846,805 1,109,043 3,165,962 3,903,071
Cost of shares redeemed (2,245,378) (475,970) (1,034,680) (230,267)
----------- ----------- ------------ -----------
Increase in net assets from
capital share transactions 19,564,563 7,147,672 52,114,636 25,086,894
----------- ----------- ------------ -----------
NET INCREASE IN NET ASSETS 19,822,598 7,742,680 61,399,258 26,562,364
NET ASSETS-BEGINNING OF PERIOD 22,364,572 14,621,892 41,445,676 14,883,312
----------- ----------- ------------ -----------
NET ASSETS-END OF PERIOD $42,187,170 $22,364,572 $102,844,934 $41,445,676
=========== =========== ============ ===========
Undistributed net realized gain on
investments $ 2,160 $ -- $ 367,455 $ 25,093
=========== =========== ============ ===========
Undistributed (distributions in excess
of) net investment income $ -- $ -- $ 27,521 $ 1,870
=========== =========== ============ ===========
SHARE ACTIVITY:
Shares sold 1,866,627 631,011 3,510,954 1,615,750
Reinvestment of distributions 173,661 108,358 215,204 296,400
Shares redeemed (210,017) (46,749) (75,663) (18,108)
----------- ----------- ------------ -----------
Net increase in number of shares 1,830,271 692,620 3,650,495 1,894,042
=========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements.
36 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 119
THE ONE GROUP(R) INVESTMENT TRUST
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH OPPORTUNITIES LARGE COMPANY GROWTH EQUITY INDEX
--------------------------- --------------------------------- --------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1998(a)
--------------------------- -------------------------------- -------------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income (loss) $ (167,466) $ (87,568) $ 466,393 $ 485,771 $ 74,668
Net realized gain (loss) on investments 4,626,878 4,951,110 13,358,107 3,943,220 (52,963)
Net change in unrealized appreciation of
investments 19,581,381 3,493,572 37,839,553 13,307,669 1,357,151
----------- ----------- ------------ ------------ -----------
Net increase in net assets from
operations 24,040,793 8,357,114 51,664,053 17,736,660 1,378,856
----------- ----------- ------------ ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- -- (465,426) (485,771) (74,668)
In excess of net investment income -- -- -- (11,566) --
From net realized gain from investment
transactions (4,300,170) (4,757,643) (13,342,889) (3,931,556) --
In excess of realized gain on investment
transactions (132,232) (17,827) (57,277) (1,846) --
Tax return of capital distribution (1,002,643) (61,358) -- (6,585) (601)
----------- ----------- ------------ ------------ -----------
Decrease in net assets from
distributions to shareholders (5,435,045) (4,836,828) (13,865,592) (4,437,324) (75,269)
----------- ----------- ------------ ------------ -----------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sale of shares 19,618,361 20,249,383 51,828,422 39,242,534 13,636,522
Net asset value of shares issued to
shareholders from reinvestment of
distributions 5,435,045 4,836,828 13,865,593 4,437,323 75,269
Cost of shares redeemed (1,692,146) (238,598) (1,085,409) (244,898) (534,659)
----------- ----------- ------------ ------------ -----------
Increase in net assets from capital
share transactions 23,361,260 24,847,613 64,608,606 43,434,959 13,177,132
----------- ----------- ------------ ------------ -----------
NET INCREASE IN NET ASSETS 41,967,008 28,367,899 102,407,067 56,734,295 14,480,719
NET ASSETS-BEGINNING OF PERIOD 50,706,700 22,338,801 99,627,641 42,893,346 --
----------- ----------- ------------ ------------ -----------
NET ASSETS-END OF PERIOD $92,673,708 $50,706,700 $202,034,708 $ 99,627,641 $14,480,719
=========== =========== ============ ============ ===========
Distributions in excess of net realized gain
on investments $ (296,836) $ (326,708) $ (57,277) $ (15,218) $ (52,963)
=========== =========== ============ ============ ===========
Undistributed net investment income $ -- $ -- $ 967 $ -- $ --
=========== =========== ============ ============ ===========
SHARE ACTIVITY:
Shares sold 1,240,487 1,400,572 2,584,144 2,412,572 1,370,180
Reinvestment of distributions 305,683 342,551 613,470 258,782 7,334
Shares redeemed (113,075) (17,586) (58,686) (18,404) (57,847)
----------- ----------- ------------ ------------ -----------
Net increase in number of shares 1,433,095 1,725,537 3,138,928 2,652,950 1,319,667
=========== =========== ============ ============ ===========
</TABLE>
- ------------------------------------------------------
(a) For the period May 1, 1998, date of commencement of operations, through
December 31, 1998.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 37
<PAGE> 120
THE ONE GROUP(R) INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT BOND
------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 1, -
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $ 10.48 $ 10.15 $ 10.48 $ 9.69 $10.00
------- ------- ------- ------ ------
Net investment income 0.56 0.60 0.59 0.64 0.22
Net realized and unrealized
appreciation (depreciation) 0.20 0.35 (0.33) 0.94 (0.31)
------- ------- ------- ------ ------
Total from investment
operations 0.76 0.95 0.26 1.58 (0.09)
------- ------- ------- ------ ------
Distributions:
From net investment income (0.56) (0.60) (0.59) (0.64) (0.22)
In excess of net investment
income (0.01) -- -- -- --
From net realized gains from
investments (0.03) (0.02) -- (0.15) --
------- ------- ------- ------ ------
Total distributions (0.60) (0.62) (0.59) (0.79) (0.22)
------- ------- ------- ------ ------
Net increase (decrease) in
net asset value 0.16 0.33 (0.33) 0.79 (0.31)
------- ------- ------- ------ ------
NET ASSET VALUE -- END OF PERIOD $ 10.64 $ 10.48 $ 10.15 $10.48 $ 9.69
======= ======= ======= ====== ======
Total return 7.32% 9.67% 2.69% 16.69% (.90%)(b)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000) $42,187 $22,365 $14,622 $9,016 $5,112
Ratio of expenses to average net
assets 0.75% 0.75% 0.75% 0.75% 0.75%(c)
Ratio of expenses to average net
assets excluding
waivers/reimbursements 0.78% 0.88% 1.01% 1.47% 1.94%(c)
Ratio of net investment income to
average net assets 5.56% 6.06% 6.11% 6.54% 6.09%(c)
Ratio of net investment income to
average net assets excluding
waivers/reimbursements 5.53% 5.93% 5.85% 5.80% 4.90%(c)
Portfolio turnover 40.4% 21.3% 21.3% 34.1% 3.5%(b)
</TABLE>
- ------------------------------------------------------
(a) Initial public offering was August 1, 1994.
(b) Not Annualized.
(c) Annualized.
See accompanying notes to financial statements.
38 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 121
THE ONE GROUP(R) INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSET ALLOCATION
---------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 1, -
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -- BEGINNING OF
PERIOD $ 13.19 $ 11.93 $ 11.24 $ 9.81 $10.00
-------- ------- ------- ------ ------
Net investment income 0.39 0.39 0.34 0.36 0.06
Net realized and unrealized
appreciation (depreciation) 2.14 2.31 0.98 1.64 (0.19)
-------- ------- ------- ------ ------
Total from investment
operations 2.53 2.70 1.32 2.00 (0.13)
-------- ------- ------- ------ ------
Distributions:
From net investment income (0.39) (0.39) (0.34) (0.36) (0.06)
From net realized gains from
investments (0.19) (1.05) (0.23) (0.21) --
In excess of realized gains
from investment
transactions -- -- (0.04) -- --
Tax return of capital -- -- (0.02) -- --
-------- ------- ------- ------ ------
Total distributions (0.58) (1.44) (0.63) (0.57) (0.06)
-------- ------- ------- ------ ------
Net increase (decrease) in
net asset value 1.95 1.26 0.69 1.43 (0.19)
-------- ------- ------- ------ ------
NET ASSET VALUE -- END OF PERIOD $ 15.14 $ 13.19 $ 11.93 $11.24 $ 9.81
======== ======= ======= ====== ======
Total return 19.09% 22.90% 11.92% 20.69% (1.32%)(b)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000) $102,845 $41,446 $14,883 $5,455 $2,063
Ratio of expenses to average net
assets 1.00% 1.00% 1.00% 1.00% 1.00%(c)
Ratio of expenses to average net
assets excluding waivers/
reimbursements 1.00% 1.15% 1.44% 1.96% 2.36%(c)
Ratio of net investment income
to average net assets 2.66% 3.24% 3.27% 3.66% 1.88%(c)
Ratio of net investment income
to average net assets
excluding
waivers/reimbursements 2.66% 3.07% 2.83% 2.70% 0.52%(c)
Portfolio turnover 32.1% 60.9% 64.8% 66.3% --
</TABLE>
- ------------------------------------------------------
(a) Initial public offering was August 1, 1994.
(b) Not Annualized.
(c) Annualized.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 39
<PAGE> 122
THE ONE GROUP(R) INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH OPPORTUNITIES
------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 1, -
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE --
BEGINNING OF PERIOD $ 14.21 $ 12.11 $ 11.52 $ 9.70 $10.00
------- ------- ------- ------ ------
Net investment income (loss) (0.03) (0.03) 0.18 0.04 --
Net realized and unrealized
appreciation (depreciation) 5.95 3.63 1.62 2.29 (0.30)
------- ------- ------- ------ ------
Total from investment
operations 5.92 3.60 1.80 2.33 (0.30)
------- ------- ------- ------ ------
Distributions:
From net investment income -- -- (0.19) (0.04) --
From net realized gains from
investments (1.38) (1.48) (0.78) (0.47) --
In excess of realized gains from
investment transactions (0.03) -- (0.24) -- --
Tax return of capital (0.20) (0.02) -- -- --
------- ------- ------- ------ ------
Total distributions (1.61) (1.50) (1.21) (0.51) --
------- ------- ------- ------ ------
Net increase (decrease) in
net asset value 4.31 2.10 0.59 1.82 (0.30)
------- ------- ------- ------ ------
NET ASSET VALUE --
END OF PERIOD $ 18.52 $ 14.21 $ 12.11 $11.52 $ 9.70
======= ======= ======= ====== ======
Total return 38.82% 29.81% 15.67% 24.06% (3.00%)(b)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000) $92,674 $50,707 $22,339 $6,685 $ 940
Ratio of expenses to average net
assets 0.97% 1.10% 1.06% 0.90% 0.90%(c)
Ratio of expenses to average net
assets excluding
waivers/reimbursements 0.97% 1.11% 1.40% 2.78% 2.96%(c)
Ratio of net investment income to
average net assets (0.25%) (0.25%) 1.85% 0.46% (0.17%)(c)
Ratio of net investment income to
average net assets excluding
waivers/reimbursements (0.25%) (0.26%) 1.51% (1.42%) (2.22%)(c)
Portfolio turnover 87.7% 175.6% 326.9% 193.3% 3.5%(b)
</TABLE>
- ------------------------------------------------------
(a) Initial public offering was August 1, 1994.
(b) Not Annualized.
(c) Annualized.
See accompanying notes to financial statements.
40 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 123
THE ONE GROUP(R) INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LARGE COMPANY GROWTH
------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 1, -
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995 1994(a)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE --
BEGINNING OF PERIOD $ 17.21 $ 13.67 $ 12.12 $ 9.99 $10.00
-------- ------- ------- ------- ------
Net investment income 0.06 0.10 0.16 0.20 0.05
Net realized and unrealized
appreciation 7.03 4.25 1.86 2.20 0.01
-------- ------- ------- ------- ------
Total from investment
operations 7.09 4.35 2.02 2.40 0.06
-------- ------- ------- ------- ------
Distributions:
From net investment income (0.06) (0.10) (0.16) (0.20) (0.05)
From net realized gains from
investments (1.61) (0.71) (0.30) (0.07) (0.02)
In excess of realized gains from
investment transactions -- -- (0.01) -- --
-------- ------- ------- ------- ------
Total distributions (1.67) (0.81) (0.47) (0.27) (0.07)
-------- ------- ------- ------- ------
Net increase (decrease) in
net asset value 5.42 3.54 1.55 2.13 (0.01)
-------- ------- ------- ------- ------
NET ASSET VALUE --
END OF PERIOD $ 22.63 $ 17.21 $ 13.67 $ 12.12 $ 9.99
======== ======= ======= ======= ======
Total return 41.27% 31.93% 16.67% 24.13% 0.52%(b)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000) $202,035 $99,628 $42,893 $16,119 $4,175
Ratio of expenses to average net
assets 0.93% 1.00% 0.98% 0.90% 0.90%(c)
Ratio of expenses to average net
assets excluding
waivers/reimbursements 0.93% 1.00% 1.16% 1.64% 2.08%(c)
Ratio of net investment income to
average net assets 0.32% 0.69% 1.29% 2.02% 1.39%(c)
Ratio of net investment income to
average net assets excluding
waivers/reimbursements 0.32% 0.69% 1.11% 1.28% 0.22%(c)
Portfolio turnover 61.0% 34.4% 38.7% 37.4% 4.4%(b)
</TABLE>
- ------------------------------------------------------
(a) Initial public offering was August 1, 1994.
(b) Not Annualized.
(c) Annualized.
See accompanying notes to financial statements.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 41
<PAGE> 124
THE ONE GROUP(R) INVESTMENT TRUST
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY INDEX
---------------
PERIOD ENDED
DECEMBER 31,
1998(a)
------------
<S> <C>
NET ASSET VALUE -- BEGINNING OF PERIOD $ 10.00
-------
Net investment income 0.08
Net realized and unrealized appreciation 0.97
-------
Total from investment operations 1.05
-------
Distributions:
From net investment income (0.08)
-------
Net increase (decrease) in net asset value 0.97
-------
NET ASSET VALUE -- END OF PERIOD $ 10.97
=======
Total return 10.52%(b)
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000) $14,481
Ratio of expenses to average net assets 0.55%(c)
Ratio of expenses to average net assets excluding waivers/
reimbursements 1.13%(c)
Ratio of net investment income to average net assets 1.45%(c)
Ratio of net investment income to average net assets
excluding waivers/ reimbursements 0.87%(c)
Portfolio turnover 2.3%(b)
</TABLE>
- ------------------------------------------------------
(a) Initial public offering was May 1, 1998.
(b) Not Annualized.
(c) Annualized.
See accompanying notes to financial statements.
42 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 125
THE ONE GROUP(R) INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 -- ORGANIZATION
The One Group(R) Investment Trust (the Trust) was organized as a Massachusetts
Business Trust on June 7, 1993. The Trust is registered under the Investment
Company Act of 1940 as an open-end management investment company. The Trust
comprises five operating series: the Government Bond Fund, the Asset Allocation
Fund, the Growth Opportunities Fund, the Large Company Growth Fund and the
Equity Index Fund (the Funds). The shares of the Funds are sold at net asset
value to separate accounts of insurance companies to fund variable annuity and
variable life contracts.
Investment operations commenced on August 23, 1994 for the Government Bond and
the Large Company Growth Funds, September 29, 1994 for the Asset Allocation
Fund, November 3, 1994 for the Growth Opportunities Fund and May 1, 1998 for the
Equity Index Fund.
On October 2, 1998, First Chicago NBD Corporation and BANC ONE CORPORATION
merged with and into BANK ONE CORPORATION. The Pegasus Variable Funds are
advised by First Chicago NBD Investment Management Company (FCNIMCO) which have
been sold exclusively to separate accounts of Hartford Life and Annuity
Insurance Company (Hartford) to fund variable annuity and variable life
contracts. Hartford has filed an exemptive application with the Securities and
Exchange Commission (SEC) requesting relief from certain rules in order to
substitute five of the One Group Investment Trust Funds for the Pegasus Variable
Funds. Assuming approval by the SEC, it is anticipated this substitution will
occur in March, 1999.
In 1998, The One Group Investment Trust's Declaration of Trust was amended to
create four new series. In February, 1999, the Declaration of Trust was amended
to name the four new series as follows:
One Group Investment Trust Bond Portfolio
One Group Investment Trust Diversified Equity Portfolio
One Group Investment Trust Diversified Mid Cap Portfolio
One Group Investment Trust Mid Cap Value Portfolio
In addition to the four new series, in February, 1999, the Trust's Declaration
of Trust was amended to change the name of the Trust from "The One Group
Investment Trust" to "One Group Investment Trust" and the names of the existing
series will also be changed as follows:
<TABLE>
<CAPTION>
EXISTING NAME NEW NAME
- ------------- --------
<S> <C>
Government Bond Fund One Group Investment Trust Government Bond Portfolio
Asset Allocation Fund One Group Investment Trust Balanced Portfolio
Growth Opportunities Fund One Group Investment Trust Mid Cap Growth Portfolio
Large Company Growth Fund One Group Investment Trust Large Cap Growth Portfolio
Equity Index Fund One Group Investment Trust Equity Index Portfolio
</TABLE>
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization costs incurred in connection with the organization and initial
registration of the Trust were paid by the Administrator and have been
reimbursed by the Funds. Such organization costs have been deferred and are
being amortized ratably over a period of sixty months from the commencement of
operations. If any of the initial shares are redeemed before the end of the
amortization period, the proceeds of the redemption will be reduced by the
pro-rata share of the unamortized organization costs.
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 43
<PAGE> 126
THE ONE GROUP(R) INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
SECURITY VALUATION
Securities traded on a securities exchange are valued at the last quoted sale
price on the principal exchange, or if no sale, at their fair value as
determined in good faith under consistently applied procedures authorized by the
Board of Trustees. Securities traded only in the over-the-counter (OTC) market
are valued at the last quoted sale price, or if there is no sale, at the quoted
bid price provided by and independent pricing agent. Corporate debt securities
and debt securities of U.S. issuers, including municipal securities, are valued
by a combination of daily quotes and matrix evaluations provided by an
independent pricing service approved by the Board of Trustees. Inactive
securities that have little or no trading activity are valued by the independent
pricing services by obtaining dealer quotes. Futures contracts and options
thereon traded on a commodities exchange or board of trade are valued at the
last sales price at the close of trading, or if there was no sale, the quoted
bid price at the close of trading. Securities for which either reliable market
quotations are not readily available or for which the pricing agent does not
provide a valuation that, in the judgement of the Fund's investment adviser
represent fair value, shall each be valued in accordance with procedures
authorized by the Board of Trustees.
The Funds may invest in repurchase agreements with institutions that the
investment advisor has determined are creditworthy. Each repurchase agreement is
recorded at cost. The Funds require that the securities purchased in a
repurchase agreement transaction be transferred to the custodian in a manner
sufficient to enable the Funds to obtain those securities in the event of a
counterparty default. The seller, under the repurchase agreement, is required to
maintain the value of the securities held at not less than the repurchase price,
including accrued interest.
FEDERAL INCOME TAX
The Trust treats each Fund as a separate entity for federal income tax purposes.
Each Fund intends to continue to qualify as a regulated investment company by
complying with the provisions available to certain investment companies as
defined in applicable sections of the Internal Revenue Code, and to make
distributions from net investment income and from net realized capital gains
sufficient to relieve it from all, or substantially all, federal income taxes.
As of December 31, 1998, the Equity Index Fund had a capital loss carryforward
in the amount of $48,972 which, if unused, will expire in eight years.
SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are recorded on the trade date. Net realized gains or
losses from sales of securities are determined on the specific identification
method. Dividend income is recorded on the ex-dividend date; interest income is
recorded on an accrual basis and includes, where applicable, the pro-rata
amortization of premium or accretion of discount.
DIVIDENDS TO SHAREHOLDERS
Dividends are recorded on the ex-dividend date. The Funds declare and pay income
dividends quarterly. Distributable net realized capital gains are declared and
distributed at least annually. Dividends and distributions to shareholders are
determined in accordance with federal income tax regulations which may differ
from generally accepted accounting principles. These "book/tax" differences are
considered either permanent or temporary in nature. To the extent that these
differences are permanent in nature, such amounts are reclassified within the
capital accounts based on their nature for federal income tax purposes;
temporary differences do not require reclassification. Dividends and
distributions that exceed net investment income and net realized gains for
financial reporting purposes but not for tax purposes are reported as dividends
in excess of net investment income and net realized gains. To the
44 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 127
THE ONE GROUP(R) INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
extent distributions exceed current and accumulated earnings and profits for
federal income tax purposes, they are reported as distributions of
paid-in-capital.
Accordingly, as of December 31, 1998, the capital accounts have been adjusted by
the following amounts:
<TABLE>
<CAPTION>
UNDISTRIBUTED
NET INVESTMENT DISTRIBUTIONS IN EXCESS
INCOME OF NET REALIZED GAIN CAPITAL
-------------- ----------------------- ----------
<S> <C> <C> <C>
Government Bond............... $ (33,739) $ 33,739 $ --
Asset Allocation.............. (52,459) 52,459 --
Growth Opportunities.......... 167,466 838,039 1,005,505
Equity Index.................. (601) -- 601
</TABLE>
EXPENSES
Direct expenses of a Fund are allocated to that Fund. The general expenses of
the Trust are allocated to the Funds based on the relative net assets of the
Funds at the time the expense is incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SECURITIES LENDING
To generate additional income, the Funds may lend up to 1/3 of securities in
which each fund is invested, pursuant to agreements requiring that the loan be
continuously secured by collateral equal at all times to at least 100% of the
market value plus accrued interest on the securities lent. Collateral may
include cash, U.S. Government or U.S. Government Agency securities, shares of an
investment trust or mutual fund, letters of credit or any combination of such
collateral. The Funds receive payments from borrowers equivalent to the
dividends and interest on securities lent while simultaneously seeking to earn
interest on the investment of cash collateral. Collateral is marked to market
daily to provide a level of collateral at least equal to the market value plus
accrued interest of securities lent. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially. However, loans will be made only to borrowers
deemed by the Advisor to be of good standing and creditworthy under guidelines
established by the Board of Trustees and when, in the judgment of the Advisor,
the consideration which can be earned currently from such securities loans
justifies the attendant risk. Loans are subject to termination by the Funds or
the borrower at any time, and are, therefore, not considered to be illiquid
investments. As of December 31, 1998, the following Funds had securities with
the following market values on loan (amounts in thousands):
<TABLE>
<CAPTION>
MARKET VALUE MARKET VALUE MARKET VALUE
OF CASH OF NON-CASH OF LOANED
COLLATERAL COLLATERAL SECURITIES
------ ------ ------
<S> <C> <C> <C>
Government Bond......................... $ -- $4,684 $4,527
Asset Allocation........................ 1,353 6,202 7,299
Growth Opportunities.................... 8,672 -- 8,665
Large Company Growth.................... 3,331 -- 3,209
Equity Index............................ 139 -- 135
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 45
<PAGE> 128
THE ONE GROUP(R) INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 -- RELATED PARTY TRANSACTIONS
As Investment Advisor, Banc One Investment Advisors Corporation manages the
investments of each Fund of the Trust and earns a fee from the Funds at the
following annual rates: .45% of the average daily net assets of the Government
Bond Fund, .70% of the average daily net assets of the Asset Allocation Fund,
.65% of the average daily net assets of the Growth Opportunities Fund and the
Large Company Growth Fund and .30% of the average daily net assets of the Equity
Index Fund. Such fees are calculated daily and paid monthly.
Nationwide Advisory Services, Inc. (NAS) provides administrative and accounting
services to the Funds. For its services, NAS earns a fee from the Trust at an
annual rate of .24% of the Trust's aggregate average daily net assets (excluding
the Equity Index Fund) up to $250 million, and .14% of such net assets in excess
of $250 million. NAS earns an annual rate of .14% of the aggregate average daily
net assets of the Equity Index Fund.
Nationwide Investors Services, Inc. (NIS), an affiliate of NAS, serves as the
Transfer Agent to the Trust. For its services, NIS receives an annual fee of
$2,500 for each Fund.
The Investment Advisor has voluntarily agreed to waive all or part of its fees
in order to limit the Funds' operating expenses to no more than .75% of the
average daily net assets of the Government Bond Fund, 1.00% of the average daily
net assets of the Asset Allocation Fund, 1.10% of the average daily net assets
of each of the Growth Opportunities Fund, 1.00% of the average daily net assets
of the Large Company Growth Fund and .55% of the average daily net assets of the
Equity Index Fund. During the period ended December 31, 1998, the Investment
Advisor voluntarily waived fees in the amount of $9,393 in the Government Bond
Fund, $2,862 in the Asset Allocation Fund, and $15,432 in the Equity Index Fund.
During the period ended December 31, 1998 the Investment Advisor reimbursed the
Equity Index Fund $14,538.
NOTE 4 -- INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding U.S. Government obligations,
short-term securities and financial futures), and purchases and sales of U.S.
Government Obligations for the period ended December 31, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
SECURITIES
PURCHASES SALES
------------ -----------
<S> <C> <C>
Government Bond.................................. $ 24,013,319 $ 7,542,028
Asset Allocation................................. 64,728,319 16,790,185
Growth Opportunities............................. 75,152,734 56,566,943
Large Company Growth............................. 140,902,324 84,279,396
Equity Index..................................... 12,476,568 172,258
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT OBLIGATIONS
PURCHASES SALES
------------ -----------
<S> <C> <C>
Government Bond.................................. $ 6,087,099 $ 4,612,083
Asset Allocation................................. 8,915,789 3,872,907
Equity Index..................................... 351,961 220,000
</TABLE>
The Asset Allocation Fund and Equity Index Fund engaged in trading financial
futures contracts. The Fund is exposed to market risks in excess of the amounts
recognized in the statement of assets and liabilities as a result of changes in
the value of the underlying financial instruments. Investments in financial
futures require the Fund to "mark to market" such futures on a daily basis, to
reflect the change in the market value of the contract at the close
46 THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT
<PAGE> 129
THE ONE GROUP(R) INVESTMENT TRUST
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
of each day's trading. Typically, variation margin payments are made or received
to reflect daily unrealized gains or losses. When the contracts are closed, the
Fund recognizes a realized gain or loss. Realized gains and losses have been
computed on the specific identification method.
A stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close of
trading of the contracts and the price at which the futures contract was
originally struck. The purpose of entering into futures contracts is to remain
fully invested and reduce transaction costs.
Net unrealized appreciation (depreciation) on investments at December 31, 1998,
based on cost for federal income tax purposes, was as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS UNREALIZED
UNREALIZED UNREALIZED APPRECIATION
APPRECIATION DEPRECIATION (DEPRECIATION)
------------ ------------ --------------
<S> <C> <C> <C>
Government Bond............................... $ 1,028,473 $ (205,097) $ 823,376
Asset Allocation.............................. 12,970,138 (1,657,570) 11,312,568
Growth Opportunities.......................... 27,930,804 (4,664,705) 23,266,099
Large Company Growth.......................... 57,854,922 (1,945,080) 55,909,842
Equity Index.................................. 1,697,501 (344,341) 1,353,160
</TABLE>
NOTE 5 -- SHARES HELD BY AFFILIATES
As of December 31, 1998, Nationwide Life and Annuity Insurance Company
beneficially owned shares of the Funds with the following net asset values:
<TABLE>
<S> <C>
Government Bond $6,988,511
Asset Allocation 1,902,139
Growth Opportunities 62,704
Large Company Growth 8,139,758
Equity Index 2,762,948
</TABLE>
As of December 31, 1998, Banc One Capital Corporation owned shares of the Equity
Index Fund with a net asset value of $828,884.
NOTE 6 -- FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The following represents distributions from long-term capital gains for the
Funds for the period ended December 31, 1998:
<TABLE>
<S> <C>
Government Bond $ 44,830
Asset Allocation 1,016,495
Growth Opportunities 3,170,933
Large Company Growth 9,948,349
</TABLE>
THE ONE GROUP(R) INVESTMENT TRUST ANNUAL REPORT 47
<PAGE> 130
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 131
DESCRIPTION OF RATINGS
The following is a summary of published ratings by major credit rating agencies.
Credit ratings evaluate only the safety of principal and interest payments, not
the market value risk of lower quality securities. Credit rating agencies may
fail to change credit ratings to reflect subsequent events on a timely basis.
Although Banc One Investment Advisors considers security ratings when making
investment decisions, it also performs its own investment analysis and does not
rely solely on the ratings assigned by credit agencies.
Unrated securities will be treated as non-investment grade securities unless
Banc One Investment Advisors determines that such securities are the equivalent
of investment grade securities. Securities that have received different ratings
from more than one agency are considered investment grade if at least one agency
has rated the security investment grade.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
---------------------------------------
DUFF & PHELPS CREDIT RATING CO. ("DUFF")
- ----------------------------------------
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funding, is outstanding and safety
is just below risk-free U.S. Treasury obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
D-2 Good certainty of timely payment. Liquidity facts and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital
markets is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
D-5 Issuer failed to meet scheduled principal and/interest
payments.
STANDARD & POOR'S CORPORATION ("S&P")
- -------------------------------------
A-1 Highest category of commercial paper. Capacity to meet
financial commitment is strong. Obligations designated with a
plus sign (+) indicate that capacity to meet financial
commitment is extremely strong.
A-2 Issues somewhat more susceptible to adverse effects of changes
in circumstances and economic conditions than obligations in
higher rating categories. However, the capacity to meet
financial commitments is satisfactory.
A-3 Exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
B Regarded as having significant speculative characteristics.
The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
<PAGE> 132
DESCRIPTION OF RATINGS
The following is a summary of published ratings by major credit rating agencies.
Credit ratings evaluate only the safety of principal and interest payments, not
the market value risk of lower quality securities. Credit rating agencies may
fail to change credit ratings to reflect subsequent events on a timely basis.
Although Banc One Investment Advisors considers security ratings when making
investment decisions, it also performs its own investment analysis and does not
rely solely on the ratings assigned by credit agencies.
Unrated securities will be treated as non-investment grade securities unless
Banc One Investment Advisors determines that such securities are the equivalent
of investment grade securities. Securities that have received different ratings
from more than one agency are considered investment grade if at least one agency
has rated the security investment grade.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
DUFF & PHELPS CREDIT RATING CO. ("DUFF")
D-1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funding, is outstanding and safety is
just below risk-free U.S. Treasury obligations.
D-1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
D-1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
D-2 Good certainty of timely payment. Liquidity facts and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
D-3 Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
D-4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
D-5 Issuer failed to meet scheduled principal and/interest
payments.
STANDARD & POOR'S CORPORATION ("S&P")
A-1 Highest category of commercial paper. Capacity to meet
financial commitment is strong. Obligations designated with
a plus sign (+) indicate that capacity to meet financial
commitment is extremely strong.
A-2 Issues somewhat more susceptible to adverse effects of
changes in circumstances and economic conditions than
obligations in higher rating categories. However, the
capacity to meet financial commitments is satisfactory.
A-3 Exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet
its financial commitment on the obligation.
B Regarded as having significant speculative characteristics.
The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major
ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the
obligation.
C Currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the
obligation.
<PAGE> 133
D In payment default. The D rating category is used when
payments on an obligation are not made on the date due even
if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made
during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
FITCH'S IBCA LIMITED ("FITCH")
A1 Highest capacity for timely repayment. Those issues rated
A1+ possess a particularly strong credit feature.
A2 Satisfactory capacity for timely repayment although such
capacity may be susceptible to adverse changes in business,
economic or financial conditions.
A3 Adequate capacity for timely repayment, but more susceptible
to adverse changes business, economic or financial
conditions than for obligations in higher categories.
B Capacity for timely repayment is susceptible to adverse
changes in business, economic or financial conditions.
C High risk of default or which are currently in default.
MOODY'S INVESTORS SERVICE ("MOODY'S")
Prime-1 Superior ability for repayment.
Prime-2 Strong ability for repayment.
Prime-3 Acceptable ability for repayment. The effect of industry
characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may
result in changes in the level of debt protection
measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime Does not fall within any of the Prime rating categories.
DESCRIPTION OF BANK RATINGS
MOODY'S
These ratings represent Moody's opinion of a bank's intrinsic safety and
soundness.
A These banks possess exceptional intrinsic financial
strength. Typically they will be major financial
institutions with highly valuable and defensible business
franchises, strong financial fundamentals, and a very
attractive and stable operating environment.
B These banks possess strong intrinsic financial strength.
Typically, they will be important institutions with valuable
and defensible business franchises, good financial
fundamentals, and an attractive and stable operating
environment.
C These banks possess good intrinsic financial strength.
Typically, they will be institutions with valuable and
defensible business franchises. These banks will demonstrate
either acceptable financial fundamentals within a stable
operating environment, or better than average financial
fundamentals within an unstable operating environment.
D These banks possess adequate financial strength, but may be
limited by one or more of the following factors: a
vulnerable or developing business franchise; weak financial
fundamentals; or an unstable operating environment.
E These banks possess very weak intrinsic financial strength,
require periodic outside support or suggest an eventual need
for outside assistance. Such institutions may be limited by
one or more of the following factors: a business franchise
of questionable value; financial fundamentals that are
seriously deficient in one or more respects; or a highly
unstable operating environment.
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DESCRIPTION OF TAXABLE BOND RATINGS
S&P
S&P's credit rating is a current opinion of an obligor's overall financial
capacity (its creditworthiness) to pay its financial obligation.
AAA The highest rating assigned by S&P. The obligor's capacity
to meet its financial commitment on the obligation is
extremely strong.
AA The obligor's capacity to meet its financial commitments on
the obligation is very strong.
A The obligation is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions
than obligations in higher rated categories. However, the
obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB Exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet
its financial commitment on the obligation.
Obligations rated BB, B, CCC, CC, and C are regarded as having significant
speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
BB Less vulnerable to nonpayment than other speculative issues.
However, such issues face major ongoing uncertainties or
exposure to adverse business, financial, or economic
conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B More vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial,
or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on
the obligation.
CCC Currently vulnerable to nonpayment, and dependent upon
favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
CC Currently highly vulnerable to nonpayment.
C Used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on
this obligation are being continued.
D In payment default. Used when payments on an obligation are
not made on the date due even if the applicable grace period
has not expired, unless Standard & Poor's believes that such
payments will be made during such grace period. Also used
upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
MOODY'S
INVESTMENT GRADE
Aaa Best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large, or
an exceptionally stable, margin and principal is
secure.
Aa High quality by all standards. Margins of protection
may not be as large as in Aaa securities, fluctuation
of protective elements may be greater, or there may be
other elements present that make the long-term risks
appear somewhat larger than in Aaa securities.
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A These bonds 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 These bonds are considered 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.
NON-INVESTMENT GRADE
Ba These bonds have speculative elements; their future
cannot be considered as well assured. The protection of
interest and principal payments may be very moderate
and thereby not well safeguarded during good and bad
times over the future.
B These bonds lack the characteristics of a desirable
investment (i.e., potentially low assurance of timely
interest and principal payments or maintenance of other
contract terms over any long period of time may be
small).
Caa Bonds in this category have poor standing and may be in
default. These bonds carry an element of danger with
respect to principal and interest payments.
Ca Speculative to a high degree and could be in default or
have other marked shortcomings. C is the lowest rating.
FITCH
INVESTMENT GRADE
AAA Highest rating category. The obligor's capacity for
timely repayment of principal and interest is extremely
strong.
AA The obligor's capacity for timely repayment is very
strong.
A Bonds and preferred stock considered to be investment
grade and of high credit quality. The obligor's ability
for timely repayment is strong. However, adverse
changes in business, economic, or financial conditions
are more likely to affect the capacity for timely
repayment than obligations in higher rated categories.
BBB The obligor's capacity for timely repayment of
principal and interest is adequate. However, adverse
changes in business, economic or financial conditions
and circumstances, are more likely to affect the
capacity for timely repayment than for obligations in
higher rated categories.
B The Obligor's capacity for timely repayment of
principal and interest is uncertain. Timely repayment
of principal and interest is not sufficiently protected
against adverse changes in business, economic or
financial conditions and these obligations are far more
speculative than those in higher rated categories.
CCC Obligations for which there is a current perceived
possibility of default. Timely repayment of principal
and interest is dependent on favorable business,
economic, or financial conditions and these obligations
are far more speculative than those in higher rated
categories.
CC Obligations which are highly speculative or which have
a high risk of default.
C Obligations which are currently in default.
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DESCRIPTION OF INSURANCE RATINGS
MOODY'S
These ratings represent Moody's opinions of the ability of insurance companies
to pay punctually senior policyholder claims and obligations.
Aaa Insurance companies rated in this category offer
exceptional financial security. While the financial
strength of these companies is likely to change, such
changes as can be visualized are most unlikely to
impair their fundamentally strong position.
Aa These insurance companies offer excellent financial
security. Together with the Aaa group, they constitute
what are generally known as high grade companies. They
are rated lower than Aaa companies because long-term
risks appear somewhat larger.
A Insurance companies rated in this category offer good
financial security. However, elements may be present
which suggest a susceptibility to impairment sometime
in the future.
Baa Insurance companies rated in this category offer
adequate financial security. However, certain
protective elements may be lacking or may be
characteristically unreliable over any great length of
time.
Ba Insurance companies rated in this category offer
questionable financial security. Often the ability of
these companies to meet policyholder obligations may be
very moderate and thereby not well safeguarded in the
future.
B Insurance companies rated in this company offer poor
financial security. Assurance of punctual payment of
policyholder obligations over any long period of time
is small.
Caa Insurance companies rated in this category offer very
poor financial security. They may be in default on
their policyholder obligations or there may be present
elements of danger with respect to punctual payment of
policyholder obligations and claims.
Ca Insurance companies rated in this category offer
extremely poor financial security. Such companies are
often in default on their policyholder obligations or
have other marked shortcomings.
C Insurance companies rated in this category are the
lowest rated class of insurance company and can be
regarded as having extremely poor prospects of ever
offering financial security.
S & P
An insurer rated "BBB" or higher is regarded as having financial security
characteristics that outweigh any vulnerabilities, and is highly likely to have
the ability to meet financial commitments.
AAA EXTREMELY STRONG financial security characteristics.
"AAA" is the highest Insurer Financial Strength Rating
assigned by Standard & Poor's.
AA VERY STRONG financial security characteristics,
differing only slightly from those rated higher.
A STRONG financial security characteristics, but is
somewhat more likely to be affected by adverse business
conditions than are insurers with higher ratings.
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BBB GOOD financial security characteristics, but is more
likely to be affected by adverse business conditions
than are higher rated insurers.
An insurer rated "BB" or lower is regarded as having vulnerable characteristics
that may outweigh its strength. "BB" indicates the least degree of vulnerability
within the range; "CC" the highest.
BB MARGINAL financial security characteristics. Positive
attributes exist, but adverse business conditions could
lead to insufficient ability to meet financial
commitments.
B WEAK financial security characteristics. Adverse
business conditions will likely impair its ability to
meet financial commitments.
CCC VERY WEAK financial security characteristics, and is
dependent on favorable business conditions to meet
financial commitments.
CC EXTREMELY WEAK financial security characteristics and
is likely not to meet some of its financial
commitments.
R An insurer rated "R" has experienced a REGULATORY
ACTION regarding solvency. The rating does not apply to
insurers subject only to nonfinancial actions such as
market conduct violations.
NR NOT RATED, which implies no opinion about the insurer's
financial security.
Plus (+) or minus (-)
Following ratings from "AA" to "CCC" show relative standing within the major
rating categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
MOODY'S
MIG1 & VMIG1 Short-term municipal securities rated MIG1 or VMIG1 are
of the best quality. They have strong protection from
established cash flows, superior liquidity support or
demonstrated broad-based access to the market for
refinancing.
MIG2 & VMIG2 These short-term municipal securities rated are of high
quality. Margins of protection are ample although not
so large as in the preceding group.
MIG3 & VMIG Favorable quality. All security elements are accounted
for, but the undeniable strength of the preceding
grades is lacking. Liquidity and cash flow protection
may be narrow and marketing access for refinancing is
likely to be less well established.
MIG4 & VMIG4 This denotes adequate quality protection commonly
regarded as required of an investment security is
present and although not distinctly or predominantly
speculative, there is a specific risk.
SG This denotes speculative quality.
S&P
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a
long-term debt rating.
SP-1 Strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
<PAGE> 138
DESCRIPTION OF PREFERRED STOCK RATINGS
MOODY'S
aaa Top-quality preferred stock. This rating indicates good
asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa High-grade preferred stock. This rating indicates that there
is a reasonable assurance the earnings and asset protection
will remain relatively well maintained in the foreseeable
future.
a Upper-medium grade preferred stock. While risks are judged
to be somewhat greater than in the "aaa" and "aa"
classification, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa Medium-grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great
length of time.
ba Considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b Lacks the characteristics of a desirable investment.
Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be
small.
caa Likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status
of payments.
ca Speculative in a high degree and is likely to be in arrears
on dividends with little likelihood of eventual payments.
c Lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification; 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.
S&P
S&P's preferred stock rating is an assessment of the capacity and willingness
of an issuer to pay preferred stock dividends and any applicable sinking
Portfolio obligations.
AAA Highest rating. This rating indicates an extremely strong
capacity to pay the preferred stock obligations.
AA High-quality, fixed-income security. The capacity to pay
preferred stock obligations is very strong, although not as
overwhelming as for issues rated "AAA."
A Backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB Backed by an adequate capacity to pay the preferred stock
obligations. Whereas the issuer normally exhibits adequate
protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to make payments for a preferred stock in this
category than for issues in the "A" category.
BB, B, Regarded, on balance, as predominantly speculative with
CCC respect to the issuer's capacity to pay preferred stock
obligations. BB indicates the lowest degree of speculation
and CCC the highest. While such issues will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
CC In arrears on dividends or sinking Portfolio payments, but
that is currently paying.
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C Nonpaying issue.
D Nonpaying issue with the issuer in default on debt
instruments.
N.R. No rating has been requested, insufficient information on
which to base a rating, or Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-)
To provide more detailed indications of preferred stock quality, ratings from
AA to CCC may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
DESCRIPTION OF MUNICIPAL BOND RATINGS
(INCLUDING FOREIGN, MORTGAGE AND ASSET-BACKED SECURITIES)
S&P
INVESTMENT GRADE
AAA The highest rating. The rating indicates an extremely
strong capacity to meet its financial commitment.
AA Differs from AAA issues only in a small degree. The
obligor's capacity to meet its financial commitment is
very strong.
A These bonds are somewhat more susceptible to the
adverse effects of changes in circumstances and
economic conditions than debt in higher rated
categories. However, capacity to meet its financial
commitment on the obligation is still strong.
BBB Exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to meet
its financial commitment on the obligations.
SPECULATIVE GRADE
BB Less vulnerable to non-payment than other speculative
issues. However, these bonds face major ongoing
uncertainties or exposure to adverse business,
financial or economic conditions which could lead to
inadequate capacity to meet financial commitment on the
obligations.
B More vulnerable to non-payment than obligations rated
BB, but currently has the capacity to meet its
financial commitment on the obligation. Adverse
business, financial or economic conditions will likely
impair capacity or willingness to meet its financial
commitment on the obligation.
CCC Currently vulnerable to non-payment, and is dependent
upon favorable business, financial, and economic
conditions to meet its financial commitment on the
obligation. In the event of adverse business,
financial, or economic conditions, they are not likely
to have the capacity to meet its financial commitment
on the obligation.
CC Currently highly vulnerable to non-payment.
C This rating may be used to cover a situation where a
bankruptcy petition has been filed, or similar action
has been taken, but payments on this obligation are
being continued.
D Bonds in payment default.
Ratings from AA to CCC may be modified by a plus (+) or minus (-) to show
relative standing within the major rating categories.
<PAGE> 140
MOODY'S
INVESTMENT GRADE
Aaa Best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt edged."
Interest payments are protected by a large, or an
exceptionally stable, margin and principal is secure.
Aa High quality by all standards. Margins of protection may
not be as large as in Aaa securities, fluctuation of
protective elements may be greater, or there may be other
elements present that make the long-term risks appear
somewhat larger than in Aaa securities.
A These bonds 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 These bonds are considered 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.
NON-INVESTMENT GRADE
Ba These bonds have speculative elements; their future cannot
be considered as well assured. The protection of interest
and principal payments may be very moderate and thereby not
well safeguarded during good and bad times over the future.
B These bonds lack the characteristics of a desirable
investment (i.e., potentially low assurance of timely
interest and principal payments or maintenance of other
contract terms over any long period of time may be small).
Caa Bonds in this category have poor standing and may be in
default. These bonds carry an element of danger with
respect to principal and interest payments.
Ca Speculative to a high degree and could be in default or
have other marked shortcomings. Ca is the lowest rating.
DESCRIPTION OF SHORT-TERM DEBT RATINGS
Thompson Bank Watch, Inc. ("TBW") assigns ratings to specific debt instruments
with original maturities of one year or less. The TBW Short-Term ratings
specifically assess the likelihood of an untimely payment of principal and
interest.
TBW-1 Very high degree of likelihood that principal and interest
will be paid on a timely basis.
TBW-2 While degree of safety regarding timely repayment of
principal and interest is strong, the relative degree is
not as high as for issues rated TBW-1.
TBW-3 Lowest investment grade category. While more susceptible to
adverse developments than obligations with higher ratings,
capacity to service principal and interest in a timely
fashion is considered adequate.
TBW-4 Non-investment grade and, therefore, speculative.
