OCC ACCUMULATION TRUST
Prospectus February 1, 2000
As supplemented April 18, 2000
OCC ACCUMULATION TRUST (the "Fund") is an open-end investment company with the
following investment portfolios (the "Portfolios"):
Equity Portfolio
Blended Equity Portfolio
Large Cap Growth Portfolio
Small Cap Growth Portfolio
Target Portfolio
Mid Cap Portfolio
Small Cap Portfolio
Global Equity Portfolio
Managed Portfolio
Balanced Portfolio
U.S. Government Income Portfolio
Shares of the Portfolios are sold only to variable accounts of certain life
insurance companies as an investment vehicle for their variable annuity and
variable life insurance contracts and to qualified pension and retirement plans.
The Securities and Exchange Commission has not approved any Portfolio's shares
as an investment or determined whether this Prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
Page
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Risk/Return Summary............................................................3
Principal Investment Strategies...............................................12
Risks.........................................................................18
Investment Policies...........................................................20
Fund Management...............................................................21
Share Price...................................................................27
Distributions and Taxes.......................................................27
Financial Highlights..........................................................27
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RISK/RETURN SUMMARY
Investment Goals Equity Portfolio.............Long term capital appreciation
Blended Equity Portfolio.....Long term capital appreciation
Large Cap Growth Portfolio...Long term capital appreciation
Small Cap Growth Portfolio...Capital appreciation
Target Portfolio.............Capital appreciation
Mid Cap Portfolio............Long term capital appreciation
Small Cap Portfolio..........Capital appreciation
Global Equity Portfolio......Long term capital appreciation
Managed Portfolio............Growth of capital over time
Balanced Portfolio...........Growth of capital and
investment income
U.S. Gov't Income Portfolio..High current income and
protection of capital
Principal Investment
Strategies o The Equity Portfolio invests primarily in equity
securities listed on the New York Stock Exchange.
o The Blended Equity Portfolio invests generally in
equity securities of companies with market
capitalizations of at least $5 billion that the
sub-adviser believes offer growth opportunities
and in equity securities of companies with market
capitalizations of more than $2 billion that the
investment adviser believes are undervalued
relative to their industry group.
o The Large Cap Growth Portfolio invests primarily
in equity securities of companies with market
capitalizations of at least $5 billion.
o The Small Cap Growth Portfolio invests primarily
in equity
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securities of companies with market
capitalizations under $2 billion.
o The Target Portfolio invests primarily in equity
securities of companies with market
capitalizations between $1 billion and $10
billion.
o The Mid Cap Portfolio invests primarily in equity
securities of companies with market
capitalizations between $500 million and $5
billion.
o The Small Cap Portfolio invests primarily in
equity securities of companies with market
capitalizations under $1 billion.
o The Global Equity Portfolio invests primarily in
equity securities on a worldwide basis and may
invest in U.S. or foreign fixed income securities.
o The Managed Portfolio invests in common stocks,
bonds and cash equivalents, allocated based on the
investment adviser's judgment.
o The Balanced Portfolio invests in common stocks,
preferred stocks, securities convertible into
common stock and debt securities.
o The U.S. Government Income Portfolio invests
solely in debt obligations including
mortgage-backed securities issued or guaranteed by
the U.S. government, its agencies or
instrumentalities.
Investment
Philosophy OpCap Advisors is the investment adviser to all of the
Portfolios. OpCap Advisors has retained PIMCO Equity
Advisors, a division of PIMCO Advisors L.P. ("PIMCO
Equity Advisors"), as sub-adviser to the Large Cap
Growth, Small Cap Growth and Target Portfolios, and for
a portion of the assets of the Blended Equity Portfolio.
OpCap Advisors has retained Pacific Investment
Management Company ("PIMCO") as sub-adviser for a
portion of the assets of the Managed Portfolio.
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For the equity investments it manages directly, i.e.,
the Equity, Mid Cap, Small Cap, Global Equity and
Balanced Portfolios and the portion of the assets of the
Blended Equity and Managed Portfolios not sub-advised by
its affiliates, OpCap Advisors applies principles of
value investing, although the individual portfolio
managers may implement those principles differently.
When selecting equity securities, OpCap Advisors
believes there are two major components of value.
o A company's ability to generate earnings that
contribute to shareholder value. OpCap Advisors
considers discretionary cash flow-cash that
remains after a company spends what is needed to
sustain its industrial position as a primary
determinant of a company's potential to add
economic value.
o Price - OpCap Advisors looks for market
undervaluation great enough to offer the potential
for upside reward with what it believes is modest
downward risk.
OpCap Advisors uses fundamental company analysis to
select securities. Fundamental company analysis involves
intensive evaluation of historic financial data
including:
o Company financial statements
o Market share analysis
o Unit volume growth
o Barriers to entry
o Pricing policies
o Management record.
OpCap Advisors uses fundamental company analysis to
select companies they believe have one or more of the
following characteristics:
o substantial and growing discretionary cash flow
o strong shareholder value-oriented management
o valuable consumer or commercial franchises
o high returns on capital
o favorable price to intrinsic value relationship.
In selecting debt securities, OpCap Advisors analyzes
yield relationships between different sectors and among
securities along the yield curve. OpCap Advisors seeks
to take advantage of maturities and individual issues
that are inexpensive and have the
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potential to provide superior returns. In evaluating
high yield debt securities, OpCap Advisors supplements
its traditional credit analysis with an evaluation of an
issuer's asset values.
There can be no assurance that OpCap Advisors will
achieve its goals.
PIMCO Equity Advisors acts as sub-adviser to the Large
Cap Growth, Small Cap Growth and Target Portfolios and
has been retained by OpCap Advisors to act as
sub-adviser for a portion of the investments of the
Blended Equity Portfolio.
PIMCO Equity Advisors' investment philosophy focuses on
the wealth-creating characteristics of a growing
business. By combining the characteristics of growth,
quality, and time, its investment process seeks to
capture the powerful compounding effect of a growing
enterprise. PIMCO Equity Advisors seeks to invest in
superior companies and then monitor accounts to ensure
that it maintains a portfolio of the highest-quality
companies available. The investment process includes
both quantitative and qualitative screens at identifying
candidate securities. PIMCO Equity Advisors aims to
significantly outperform the relevant market index over
the long term and to control risk relative to the
market. There can be no assurance that it will achieve
these goals.
PIMCO acts as the sub-adviser to the Managed Portfolio.
In selecting securities for the Managed Portfolio, PIMCO
develops an outlook for interest rates, currency
exchange rates and the economy; analyzes credit and call
risks, and uses other security selection techniques. The
proportion of the Portfolio's assets committed to
investment in securities with particular characteristics
(such as quality, section interest rate or maturity)
varies based on PIMCO's outlook for the U.S. economy and
the economies of other countries in the world, the
financial markets and other factors.
PIMCO attempts to identify areas of the bond market that
are undervalued relative to the rest of the market.
PIMCO identifies these areas by grouping bonds into the
following sectors: money markets, governments,
corporates, mortgages, asset-backed and international.
Sophisticated proprietary software then assists in
evaluating sectors and pricing specific securities. Once
investment opportunities are identified, PIMCO will
shift assets among sectors depending upon changes in
relative valuations and credit spreads. There is no
guarantee that PIMCO's security selection techniques
will produce the desired results.
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Principal Risks If you invest in the Portfolios that invest in equity
securities, you could lose money or those Portfolios
could underperform other investments if any of the
following happens:
o The stock market goes down
o The Portfolio's investment style (i.e., value or
growth) falls out of favor with the stock market
o The Portfolio's investment sector (e.g., small
cap, mid cap or foreign securities, which
generally are more volatile than U.S. large cap
securities) declines or becomes less liquid
o For the Equity, Mid Cap, Small Cap, Global Equity,
Managed and Balanced Portfolios, the market
undervalues the stocks held for longer than
expected, or the stocks purchased turn out not to
be undervalued.
o The stocks selected for growth potential do not
achieve such growth.
If you invest in the Portfolios that invest in debt
securities, you could lose money or your investment may
underperform other investments if any of the following
happens:
o Interest rates rise and the bond market goes down
o Issuers of debt instruments cannot meet their
obligations
o Bond issuers' call bonds selling at a premium to
their call price before the maturity date
o Loans securing mortgage-backed obligations prepay
principal more rapidly than expected. The
Portfolios may have to reinvest these prepayments
at lower rates.
The U.S. Government Income Portfolio principally buys
fixed income securities that are issued or guaranteed by
the U.S. Government or its agencies or
instrumentalities, so credit risk should be low.
Bar Chart &
Performance
Table The bar charts provide some indication of the risks of
investing in the Portfolios by showing changes in the
performance of each Portfolio's shares from year to year for
the life of each Portfolio and the highest and lowest
quarterly return during the life of each Portfolio.
Performance is not shown in a table for the Blended Equity,
Balanced, Large Cap Growth, Small Cap Growth and Target
Portfolios because they do not have a full calendar
year of performance.
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The Portfolios' past performance does not necessarily indicate
how each Portfolio will perform in the future. The Portfolios'
performance does not reflect charges and deductions which are
imposed under the variable contracts.
Equity Portfolio
[The following table was depcited as a bar chart in the printed material.]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(2.22)% 31.33% 17.90% 7.85% 3.81% 38.85% 23.26% 26.63% 11.86% 2.54%
During the period from the inception of the Equity Portfolio through December
31, 1999, the highest quarterly return was 14.17% (for the quarter ended March
31, 1991) and the lowest quarterly return was (13.32)% (for the quarter ended
September 30, 1990).
Mid Cap Portfolio
[The following table was depcited as a bar chart in the printed material.]
1999
----
21.63%
During the period from the inception of the Mid Cap Portfolio through December
31, 1999, the highest quarterly return was 23.78% (for the quarter ended
December 31, 1999) and the lowest quarterly return was (17.87)% (for the quarter
ended September 30, 1998).
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Small Cap Portfolio
[The following table was depcited as a bar chart in the printed material.]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(9.76)% 48.12% 21.49% 19.51% (1.01)% 15.23% 18.72% 22.24% (9.03)% (1.80)%
During the period from the inception of the Small Cap Portfolio through December
31, 1999, the highest quarterly return was 19.20% (for the quarter ended March
31, 1991) and the lowest quarterly return was (17.26)% (for the quarter ended
September 30, 1998).
Global Equity
[The following table was depcited as a bar chart in the printed material.]
1996 1997 1998 1999
---- ---- ---- ----
15.02% 14.02% 13.29% 26.53%
During the period from the inception of the Global Equity Portfolio through
December 31, 1999, the highest quarterly return was 14.89% (for the quarter
ended December 31, 1998) and the lowest quarterly return was (15.04)% (for the
quarter ended September 30, 1998).
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Managed Portfolio
[The following table was depcited as a bar chart in the printed material.]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(3.63)% 45.98% 18.65% 10.39% 2.61% 45.55% 22.77% 22.29% 7.12% 5.00%
During the period from the inception of the Managed Portfolio through December
31, 1999, the highest quarterly return was 20.80% (for the quarter ended March
31, 1991) and the lowest quarterly return was (13.37)% (for the quarter ended
September 30, 1998).
U.S. Government Income Portfolio
[The following table was depcited as a bar chart in the printed material.]
1996 1997 1998 1999
---- ---- ---- ----
3.02% 7.04% 8.15% (1.61)%
During the period from the inception of the U.S. Government Income Portfolio
through December 31, 1999, the highest quarterly return was 4.68% (for the
quarter ended September 30, 1998) and the lowest quarterly return was (1.05)%
(for the quarter ended June 30, 1999).
The table below shows how the average annual returns for one year, five years
and for the life of the Equity and Managed Portfolios compare to that of the
Standard & Poor's Composite Index of 500 Stocks, how the average annual returns
for one year and for the life of the Mid Cap Portfolio compare to those of the
Wilshire 750 Mid Cap Index, how the average annual returns for the Small Cap
Portfolio compare to the Russell 2000, how the average annual returns for the
Global Equity Portfolio compare to the MSCI World Index, and how the returns for
the U.S. Government Income Portfolio compare to the Lehman Intermediate
Government Bond Index. The table gives some indication of the risks of the
Portfolios by comparing the performance of each Portfolio with a broad measure
of market performance. The Blended Equity, Balanced, Large Cap Growth, Small Cap
Growth and Target Portfolios do not have one year track records yet.
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Average Annual Total Returns for the periods ended December 31, 1999
Past Year Past 5 Years Since Inception
Equity Portfolio 2.54% 19.98% 15.66%*
Managed Portfolio 5.00% 19.69% 17.70%*
S&P 500 Index 21.04% 28.54% 18.98%
Small Cap Portfolio (1.83)% 8.35% 11.48%*
Russell 2000 21.26% 16.69% 13.06%
Mid Cap Portfolio 21.63% N/A 9.96%
Wilshire 750 Mid Cap Index 26.63% N/A 16.29%
Global Equity Portfolio 26.53% N/A 18.06%
MSCI World Index 24.93% N/A 20.50%
U.S. Government Income Portfolio (1.61)% N/A 5.78%
Lehman Intermediate Government
Bond Index 0.49% N/A 6.93%
U.S. Government Income Portfolio
Yield for the 30-day period ended
December 31, 1999 5.38%
*On September 16, 1994, an investment company then called Quest for Value
Accumulation Trust (the "Old Trust") was effectively divided into two investment
funds, the Old Trust and the Fund, at which time the Fund commenced operations.
The total net assets for each of the Equity, Small Cap and Managed Portfolios
immediately after the transaction were $86,789,755, $139,812,573 and
$682,601,380, respectively, with respect to the Old Trust and for each of the
Equity, Small Cap and Managed Portfolios, $3,764,598, $8,129,274 and
$51,345,102, respectively, with respect to the Fund. For the period prior to
September 16, 1994, the performance figures above for each of the Equity, Small
Cap and Managed Portfolios reflect the performance of the corresponding
Portfolios of the Old Trust. The Old Trust commenced operations on August 1,
1988.
The benchmark for the portion of the Managed Portfolio managed by PIMCO is the
Lehman Brothers Aggregate Bond Index.
For current yield information please call 1-800-700-8258.
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PRINCIPAL INVESTMENT STRATEGIES
Equity Portfolio
Q What is the Portfolio's investment objective?
A Long term capital appreciation through investment in a diversified
portfolio of equity securities selected on the basis of a value approach
to investing.
Q What is the Portfolio's investment program?
A The Equity Portfolio invests primarily in equity securities of companies
that OpCap Advisors believes are undervalued in the marketplace. Under
normal conditions, the Portfolio will invest at least 65% of its total
assets in equity securities listed on the New York Stock Exchange. The
Portfolio also may purchase securities listed on other U.S. or foreign
securities exchanges or traded in the U.S. or foreign over the counter
markets.
The Equity Portfolio is managed to follow a composite portfolio
constructed by a group of senior portfolio managers at OpCap Advisors.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks and other equity securities offer a way to invest for long
term growth of capital. Equity investors should have a long term
investment horizon and should be prepared for the ups and downs of the
stock markets.
Blended Equity Portfolio
Q What is the Portfolio's investment objective?
A Long term capital appreciation.
Q What is the Portfolio's investment program?
A The Portfolio invests generally in equity securities of companies with
market capitalization of a least $5 billion at the time of purchase that
PIMCO Equity Advisors believes will experience relatively rapid earnings
growth and in equity securities of companies with market capitalizations
of at least $2 billion that OpCap Advisors believes are undervalued
relative to their industry group. The majority of the stocks purchased by
the Portfolio will be listed on a domestic stock exchange or traded in the
U.S. over the counter market. The Portfolio may purchase foreign
securities that are listed on a U.S. or foreign exchange or traded in the
U.S. or foreign over the counter market, purchase and sell foreign
currencies and use derivatives for risk management purposes or as part of
its investment strategy. In response to unfavorable market and other
conditions, the Portfolio may invest temporarily in
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high-quality fixed income securities.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks and other equity securities offer a way to invest for long
term growth of capital. Opportunities for long term growth of capital
arise from companies that are undervalued relative to their industry group
or show strong potential for growth or experience better than anticipated
earnings growth.
Large Cap Growth Portfolio
Q What is the Portfolio's investment objective?
A Long term capital appreciation.
Q What is the Portfolio's investment program?
A The Portfolio invests primarily in equity securities of companies with
market capitalizations of at least $5 billion at the time of purchase
which PIMCO Equity Advisors believes will experience relatively rapid
earnings growth. The majority of the stocks purchased by the Portfolio
will be listed on a domestic stock exchange or traded in the U.S. over the
counter market. The Portfolio may purchase foreign securities that are
listed on a U.S. or foreign exchange or traded in the U.S. or foreign over
the counter market, purchase and sell foreign currencies and use
derivatives for risk management purposes or as part of its investment
strategy. In response to unfavorable market and other conditions, the
Portfolio may invest temporarily in high-quality fixed income securities.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks and other equity securities offer a way to invest for long
term growth of capital. The prices of securities of large cap companies
may be less volatile than those of less highly-capitalized companies.
Small Cap Growth Portfolio
Q What is the Portfolio's investment objective?
A Capital appreciation.
Q What is the Portfolio's investment program?
A The Portfolio invests primarily in equity securities of companies with
market capitalizations of under $2 billion at the time of purchase which
PIMCO Equity Advisors believes will experience relatively rapid earnings
growth. The majority of the stocks purchased by the
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Portfolio will be listed on a domestic stock exchange or traded in the
U.S. over the counter market. The Portfolio may purchase foreign
securities that are listed on a U.S. or foreign exchange or traded in the
U.S. or foreign over the counter market, purchase and sell foreign
currencies and use derivatives for risk management purposes or as part of
its investment strategy. In response to unfavorable market and other
conditions, the Portfolio may invest temporarily in high- quality fixed
income securities.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks and other equity securities offer a way to invest for long
term growth of capital. Opportunities for appreciation for small cap
companies could result from product expansion or product improvement,
industry transition, new management or the sale of the company. Small cap
companies are followed by fewer analysts than are large and mid cap
companies. So as additional analysts follow a small cap stock, investor
demand for the stock may increase.
Target Portfolio
Q What is the Portfolio's investment objective?
A Capital appreciation.
Q What is the Portfolio's investment program?
A The Portfolio invests primarily in equity securities of companies with
market capitalizations between $1 billion and $10 billion at the time of
purchase which PIMCO Equity Advisors believes will experience relatively
rapid earnings growth. The majority of the stocks purchased by the
Portfolio will be listed on a domestic stock exchange or traded in the
U.S. over the counter market. The Portfolio may purchase foreign
securities that are listed on a U.S. or foreign exchange or traded in the
U.S. or foreign over the counter market, purchase and sell foreign
currencies and use derivatives for risk management purposes or as part of
its investment strategy. In response to unfavorable market and other
conditions, the Portfolio may invest temporarily in high-quality fixed
income securities.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks offer a way to invest for long term growth of capital. To
the extent the Portfolio invests in mid cap companies it may take
advantage of opportunities for value creation resulting from regional or
product line expansion or the sale of such companies. Investments in
larger-size companies help mitigate the volatility of the Portfolio.
Mid Cap Portfolio
Q What is the Portfolio's investment objective?
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A Long term capital appreciation.
Q What is the Portfolio's investment program?
A The Portfolio invests primarily in equity securities of companies with
market capitalizations between $500 million and $5 billion at the time of
purchase which OpCap Advisors believes are undervalued. The majority of
the stocks purchased by the Portfolio will be listed on a domestic stock
exchange or traded in the U.S. over the counter market. The Portfolio may
purchase foreign securities that are listed on a U.S. or foreign exchange
or traded in the U.S. or foreign over the counter markets. The Portfolio
also may purchase securities in initial public offerings or shortly after
those offerings have been completed.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks offer a way to invest for long term growth of capital. Mid
cap companies generally are studied by fewer analysts than are large cap
companies. Institutional investors may not want to hold large positions in
mid cap companies. Opportunities for capital appreciation for mid cap
companies could result from regional or product line expansion or sale of
the company.
Small Cap Portfolio
Q What is the Portfolio's investment objective?
A Capital appreciation through a diversified portfolio consisting primarily
of securities of companies with market capitalizations of under $1 billion
at time of purchase.
Q What is the Portfolio's investment program?
A The Portfolio invests primarily in equity securities of companies with
market capitalizations under $1 billion at the time of purchase that OpCap
Advisors believes are undervalued in the marketplace. The Portfolio may
purchase securities listed on U.S. or foreign securities exchanges or
traded in the U.S. or foreign over the counter markets. The Portfolio also
may purchase securities in initial public offerings or shortly after those
offerings have been completed.
Q What are the potential rewards of investing in the Portfolio?
A Common stocks offer a way to invest for long term growth of capital.
Opportunities for value creation for small cap companies could result from
product expansion or product improvement, industry transition, new
management or sale of the company. Small cap companies are followed by
fewer analysts than are large and mid cap companies. So as additional
analysts follow a small cap stock, investor demand for the stock may
increase.
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Global Equity Portfolio
Q What is the Portfolio's investment objective?
A Long term capital appreciation through pursuit of a global investment
strategy primarily involving equity securities.
Q What is the Portfolio's investment program?
A The Portfolio invests primarily in equity securities of companies located
throughout the world which OpCap Advisors believes are undervalued in the
marketplace. The Portfolio may invest up to 35% of its total assets in
fixed income securities which may be lower than investment grade.
Q What are the potential rewards of investing in the Portfolio?
A Foreign securities provide additional opportunities and diversification.
U.S. stocks represent less than half of the world's stock market
capitalization.
Managed Portfolio
Q What is the Portfolio's investment objective?
A Growth of capital over time through investment in a portfolio consisting
of common stocks, bonds and cash equivalents, the percentages of which
will vary based on OpCap Advisors' and PIMCO's assessments of the relative
outlook for such investments.
Q What is the Portfolio's investment program?
A The Portfolio seeks to meet its objective by investing in common stocks,
bonds and cash equivalents in varying percentages based on OpCap Advisors'
and PIMCO's view of relative values. The Portfolio may purchase securities
listed on U.S. or foreign securities exchanges or traded in the U.S. or
foreign over the counter markets. The Portfolio also may purchase
investment grade U.S. government and corporate bonds and high quality
money market securities. The Portfolio can invest up to 100% of its assets
in debt securities but will only do so if equity securities are not an
attractive investment.
Q What are the potential rewards of investing in the Portfolio?
A The Portfolio normally invests mainly in equity securities. Common stocks
offer a way to invest for long term growth of capital.
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Balanced Portfolio
Q What is the Portfolio's investment objective?
A Growth of capital and investment income.
Q What is the Portfolio's investment program?
A The Portfolio invests in equity securities (with an emphasis on
dividend-paying stocks) and debt securities that OpCap Advisors believes
are undervalued. Generally, the Portfolio will invest at least 25% of its
total assets in equity securities and at least 25% of its total assets in
debt securities. The Portfolio seeks debt securities that offer investment
income and the potential for capital appreciation if interest rates
decline or the issuer's credit improves. OpCap Advisors seek to find
convertible securities that have the potential for investment income prior
to conversion and capital growth. Convertible debt securities may be
classified as equity securities or as debt securities depending on the
value of the conversion feature as compared to the debt feature. The
Portfolio may purchase securities listed on U.S. or foreign securities
exchanges or traded in U.S. or foreign over the counter markets. The
Portfolio may invest up to 25% of its total assets in debt securities
rated below investment grade.
Q What are the potential rewards of investing in the Portfolio?
A The Portfolio's mix of equity securities, convertible securities and debt
securities may result in the Portfolio's being less volatile than the
market.
U.S. Government Income Portfolio
Q What is the Portfolio's investment objective?
A High level of current income together with protection of capital by
investing exclusively in debt obligations, including mortgage-backed
securities issued or guaranteed by the United States government, its
agencies or instrumentalities.
Q What is the Portfolio's investment program?
A The Portfolio invests in debt obligations issued or guaranteed by the
United States Government, its agencies or instrumentalities. These
securities are referred to as "U.S. Government Securities." The Portfolio
also may purchase mortgage-backed securities to effectuate this program.
OpCap Advisors observes current and historical yield relationships between
maturities and sectors to seek the best relative values. The Portfolio
generally maintains an average maturity between five and ten years. OpCap
Advisors does not attempt to forecast interest rates in managing the
Portfolio.
Q What are the potential rewards of investing in the Portfolio?
A The Portfolio consists of the highest quality debt instruments. Since the
average maturity of the Portfolio's investments are between five and ten
years, the Portfolio should be less volatile than a longer term bond fund.
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RISKS
Q What are the risks of investing in the Portfolios?
A The Equity, Blended Equity, Large Cap Growth, Small Cap Growth, Target,
Mid Cap, Small Cap, Global Equity, Managed and Balanced Portfolios invest
principally in equity securities which may be affected by the following:
Stock Market Volatility - The stock market in general may fluctuate in
response to political, market and economic developments and you can lose
money on your investments.
Equity investors should have a long-term investment horizon and should be
prepared for the ups and downs of the stock market.
Stock Picking - The portfolio manager may select stocks that have prices
that turn out not to be undervalued or do not achieve expectations for
growth in income or revenues.
Issuer Changes - Changes in the financial condition of an issuer or
changes in economic conditions that affect a particular type of issuer can
affect the value or credit quality of an issuer's securities.
Small Cap and Mid Cap Volatility - Mid cap stocks are more volatile and
have less trading volume than large cap stocks. Small cap stocks are more
volatile and have less trading volume than both large cap and mid cap
stocks.
Sector Risk - OpCap Advisors are bottom up investment managers. That means
that they select securities for a Portfolio based on the investment merits
of a particular issue rather than the business sector.
Investment Styles - Value or growth stocks may be out of favor for a
period of time. Both investment styles can produce poor returns for a
period of time.
Asset Allocation Risk - The Managed and Balanced Portfolios invest in a
mix of equity and fixed income securities. The portfolio managers of those
Portfolios can make the wrong allocation decisions.
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Foreign Exposure - When selecting foreign securities for the Portfolios,
OpCap Advisors use approximately the same standards that they set for U.S.
issuers. Foreign securities, foreign currencies and securities issued by
U.S. entities with substantial foreign operations may have additional
risks than U.S. securities. This risk is greater for the Global Equity
Portfolio which invests on a worldwide basis.
o Political Risk - Foreign governments can take over the assets
or operations of a company or may impose taxes or limits on
the removal of the Portfolio's assets from that country.
o Currency risk - The value of securities held in foreign
currencies will be affected by changes in the value of that
currency.
o Liquidity - Some foreign markets are less liquid and more
volatile than the U.S. stock market.
o Limited information - There may be less public information
about foreign issuers than there is about U.S. issuers.
o Settlement and clearance - Some foreign markets experience
delays in settlement. These delays could cause the Portfolio
to miss investment opportunities or to be unable to sell a
security.
o Euro - The effect of the Euro on international markets has not
yet been determined.
o Emerging Markets - There are greater risks of unstable
governments and economies and restriction on foreign ownership
in these countries. The Portfolios presently intend to limit
investment in emerging markets to no more than 5% of their
total assets.
To the extent that the Portfolios invest in debt securities, the
Portfolios are exposed to these risks:
o Interest rate risk - The risk that changes in interest rates
will affect the value of fixed income securities in the
Portfolio.
o Prepayment risk - The risk that the holder of a mortgage
underlying a mortgage backed security will prepay principal.
o Credit risk - The risk that an issuer of a fixed income
security will be unable to pay principal and interest payments
when they are due.
To the extent that the Global Equity Portfolio or the Balanced Portfolio
invests in lower grade debt securities, you should know that lower grade
debt may have the following additional risks:
o more volatility
o less liquidity
o greater risk of issuer default or insolvency.
19
<PAGE>
INVESTMENT POLICIES
Q Can a Portfolio change its investment objective and investment policies?
A Fundamental policies of a Portfolio cannot be changed without the approval
of a majority of the outstanding voting shares of the Portfolio. A
Portfolio's investment objective is a fundamental policy. Investment
restrictions that are fundamental policies are listed in the Statement of
Additional Information. Investment policies are not fundamental and can be
changed by the Fund's Board of Trustees.
Q Can the Portfolios use derivative instruments?
A Yes. The Equity, Blended Equity, Large Cap Growth, Small Cap Growth,
Target, Mid Cap, Small Cap, Global Equity, Managed and Balanced Portfolios
may use the following derivative instruments:
o futures contracts
o options on futures contracts
o forward foreign currency contracts
o covered calls written on individual securities
o uncovered calls and puts
o options on stock indices.
The Equity, Mid Cap, Small Cap, Global Equity and Balanced Portfolios do
not expect to use derivative instruments significantly, if at all. The
Blended Equity, Managed, Large Cap Growth, Small Cap Growth and Target
Portfolios will sometimes use derivative instruments as part of a strategy
designed to reduce exposure to other risks, such as interest risk or
currency risk, and may use derivative instruments to meet their investment
objectives.
Q What are the risks of derivative instruments?
A Derivative instruments can reduce the return of a Portfolio if :
o Its investment adviser uses a derivative instrument at the wrong
time
o The prices of a Portfolio's futures or options positions are not
correlated with its other investments
o A Portfolio cannot close out a position because of an illiquid
market.
Q Do the Portfolios expect to engage in short-term trading?
A The Portfolios do not expect to engage in frequent short-term trading. The
Financial Highlights table in this prospectus shows the turnover rates
during prior fiscal years for the Portfolios that were active during this
period.
Q Can the Portfolios vary from their investment goals?
A When a Portfolio's investment adviser or subadviser thinks market or
economic conditions are adverse, it may invest up to 100% of its assets in
defensive investments such as U.S. Government securities and money market
instruments. To the extent that a Portfolio takes a defensive position, it
will not be pursuing its investment objective.
20
<PAGE>
FUND MANAGEMENT
OpCap Advisors
The Board of Trustees of the Fund has hired OpCap Advisors to serve as manager
of the Fund.
OpCap Advisors is a subsidiary of Oppenheimer Capital, an investment advisory
firm with approximately $53 billion of assets under management as of December
31, 1999. They are indirect wholly-owned subsidiaries of PIMCO Advisors L.P. The
mailing address is 1345 Avenue of the Americas, New York, New York 10105.
The general partners of PIMCO Advisors L.P. are PIMCO Partners G.P. and PIMCO
Advisors Holding L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership
between PIMCO Holdings LLC, a Delaware limited liability company and an indirect
wholly-owned subsidiary of Pacific Life Insurance Company, and PIMCO Partners
LLC, a California limited liability company controlled by the current Managing
Directors and two former Managing Directors of Pacific Investment Management
Company, a subsidiary of PIMCO Advisors L.P. PIMCO Partners, G.P. is the sole
general partner of PAH.
On October 31, 1999, PIMCO Advisors L.P., PAH and Allianz AG ("Allianz")
announced that they had reached a definitive agreement pursuant to which Allianz
will acquire majority ownership of PIMCO Advisors L.P. and its subsidiaries,
including OpCap Advisors (the "Allianz Transaction"). Under the terms of the
transaction, Allianz will acquire all of PAH, the publicly traded general
partner of PIMCO Advisors L.P. Pacific Life Insurance Company will retain an
approximately 30% interest in PIMCO Advisors L.P. The Allianz Transaction is
currently expected to be completed by on or about May 5, 2000.
Allianz is the world's second largest insurance company and a leading provider
of financial services, particularly in Europe, and is represented in 68
countries world-wide through subsidiaries, branch and representative offices,
and other affiliated entities. Allianz currently has assets under management of
more than $390 billion, and in its last fiscal year wrote approximately $50
billion in gross insurance premiums. After consummation of the transaction, the
combined firms will have over $650 billion in assets under management.
Affiliates of Allianz currently include Dresdner Bank AG, Deutsche Bank AG,
Munich Re, and Hypo Vereinsbank. These entities, as well as certain broker-
dealers controlled by or affiliated with these entities, such as Bankers Trust
Company and BT Alex Brown, Inc. are considered the "Affiliated Brokers." Once
the Allianz transaction is consummated, absent an SEC exemption or other relief,
the Fund's Portfolios would generally be precluded from effecting principal
transactions with the Affiliated Brokers, and each Portfolio's ability to
purchase securities being underwritten by an Affiliated Broker or to utilize the
Affiliated Brokers for agency transactions would be subject to restrictions.
OpCap Advisors does not believe that the restrictions on transactions with the
Affiliated Brokers described above will materially adversely affect its ability,
post-closing, to provide services to the Fund, the ability of the Portfolios to
take advantage of market opportunities, or the overall performance of the
Portfolios.
21
<PAGE>
The consummation of the Allianz Transaction is subject to the approval of the
public unitholders of PAH, as well as to certain regulatory and client
approvals, and other conditions customary to transactions of this kind.
This Prospectus will be supplemented or revised if the Allianz Transaction does
not occur substantially as set forth above.
OpCap Advisors has been in business as an investment adviser since 1987 and
Oppenheimer Capital has been in business as an investment adviser since 1969.
OpCap Advisors manages the investments of certain Portfolios (and places
brokerage orders) and conducts the business affairs of the Fund. Employees of
Oppenheimer Capital, PIMCO Advisors and OpCap Advisors perform these services.
Each Portfolio pays OpCap Advisors fees in return for providing or arranging for
the provision of investment advisory services. In the case of the Blended
Equity, Large Cap Growth, Small Cap Growth and Target Portfolios for which
OpCap Advisors has retained PIMCO Equity Advisors as subadvisor, OpCap Advisors
(and not the Fund) pays a portion of the advisory fees its receives to PIMCO
Equity Advisors in return for its services. OpCap also pays a portion of its
advisory fees to PIMCO in return for the advisory services PIMCO performs for
the Managed Portfolio. The Portfolios of the Fund listed below paid OpCap
Advisors the following fees as a percentage of average daily net assets during
the fiscal year ended December 31, 1999:
Equity Portfolio....................................0.80%
Mid Cap Portfolio...................................0.10%
Small Cap Portfolio.................................0.80%
Global Equity Portfolio.............................0.80%
Managed Portfolio...................................0.77%
U.S. Government Income Portfolio....................0.60%
OpCap will pay PIMCO a fee at the annual rate of 0.25% of the average daily net
assets of the Managed Portfolio for the advisory services PIMCO performed for
the Managed Portfolio.
OpCap Advisors waived a portion of its fees from the MidCap Portfolio for the
fiscal year ended December 31, 1999. Absent such waiver the advisory fee for the
MidCap Portfolio would have been 0.80% of the average daily net assets of the
Portfolio.
The Fund pays OpCap Advisors at the annual rate of .80% of the first $400
million of average net assets, .75% on the next $400 million of average net
assets and .70% of assets in excess of $800 million with respect to the Equity,
Global Equity, Managed, Small Cap, Mid Cap, Balanced, Blended Equity, Large Cap
Growth, Small Cap Growth and Target Portfolios. The rate applicable
to the U.S. Government Income Portfolio is .60% of average net assets.
OpCap Advisors will pay PIMCO Equity Advisors fees at the annual rate of .40%
of the first $400 million of average net assets, .375% on the next $400
million of average net assets and .35% of assets in excess of $800 million with
respect to the Blended Equity, Large Cap Growth, Small Cap Growth and Target
Portfolios for investment advisory services PIMCO Equity Advisors renders to
those Portfolios.
22
<PAGE>
PIMCO Equity Advisors
PIMCO Equity Advisors acts as subadviser to the Large Cap Growth, Small Cap
Growth and Target Portfolios. OpCap Advisors has also retained the PIMCO Equity
Advisors to manage a portion of the investments of the Blended Equity Portfolio.
PIMCO Equity Advisors is a division of PIMCO Advisors L.P., which has its
principal offices at 800 Newport Center Drive, Newport Beach, California 92660.
Organized in 1987, PIMCO Advisors provides investment management and advisory
services to private accounts of institutional and individual clients and to
mutual funds. As of December 31, 1999 PIMCO Advisors and its subsidiary
partnerships had approximately $261 billion in assets under management.
Pacific Investment Management Company (PIMCO)
Founded in 1971, Pacific Investment currently manages $186 billion on behalf of
mutual fund and institutional clients located around the world. PIMCO, a wholly
owned subsidiary of PIMCO Advisors L.P., has its principal offices at 800
Newport Center Drive, Newport Beach, California 92660, is located at 840 Newport
Center Drive, Suite 300, Newport Beach, CA 92660. Renowned for its fixed income
management expertise, Pacific Investment manages assets for may of the largest
corporations, foundations, endowments, and governmental bodies in the United
States and the world.
23
<PAGE>
Portfolio Managers
[PHOTO OMITTED] Louis Goldstein has been the portfolio
manager of the Mid Cap Portfolio since its
inception. Mr. Goldstein, a Senior Vice
President of Oppenheimer Capital, joined
Oppenheimer Capital in 1991. He earned a BS
Summa Cum Laude and a MBA in Finance with
honors from the Wharton School of Business.
[PHOTO OMITTED] Timothy McCormack has been a portfolio
manager of the Small Cap Portfolio since May
1996. Mr. McCormack, Senior Vice President of
Oppenheimer Capital, joined the firm in 1994.
Prior to this time, he worked as a security
analyst with U.S. Trust Company from March
1993 to July 1994 and as a security analyst
with Gabelli and Company. Mr. McCormack
earned a BS in Finance from Georgetown
University and an MBA from the Wharton
School.
[PHOTO OMITTED] Mark Degenhart, who has been a portfolio
manager of the Small Cap Portfolio since
February 1999, joined Oppenheimer Capital in
January 1999 as a Vice President with
responsibilities including research, analysis
and investment management. He acts as a
portfolio manager for several small
capitalization funds. Prior to joining
Oppenheimer Capital, he was Director of
Research and Associate Portfolio Manager at
Palisade Capital Management. From 1990 to
1993, he was a Generalist for Cazenove & Co.
Previously Mr. Degenhart was a Special
Situations Analyst at Argus Research Corp.
for over three years. He has a BS degree in
marketing from the University of Scranton.
[PHOTO OMITTED] Elisa A. Mazen, Senior Vice President, has
been a member of the international equity
investment team at Oppenheimer Capital since
1994 and is primarily responsible for
European research within the firm's global
effort. Prior to joining Oppenheimer Capital,
she was a Portfolio Manager/ Analyst at
Clemente Capital, Inc. Ms. Mazen graduated
with a BA in economics/ finance from Douglass
College, Rutgers University in 1983.
24
<PAGE>
[PHOTO OMITTED] Richard Glasebrook, Managing Director of
Oppenheimer Capital, has managed the domestic
portion of the Global Equity Portfolio since
its inception. Mr. Glasebrook joined
Oppenheimer Capital in 1991. He has a BA from
Kenyan College and a MBA from the Harvard
School of Business Administration. Mr.
Glasebrook has been a portfolio manager of
the Managed Portfolio since its inception.
[PHOTO OMITTED] Colin Glinsman, Chief Investment Officer and
Managing Director of Oppenheimer Capital, has
been named the portfolio manager of the
Balanced Portfolio. He joined Oppenheimer
Capital in 1989 as a securities analyst. Mr.
Glinsman has a BA from Yale University and a
MS from New York University.
[PHOTO OMITTED] Vikki Hanges, Senior Vice President of
Oppenheimer Capital, has been the portfolio
manager of the U.S. Government Portfolio
since its inception. She joined Oppenheimer
Capital in 1982. Ms. Hanges has a BS from
Cornell University.
[PHOTO OMITTED] Kenneth W. Corba is the portfolio manager of
the Large Cap Growth Portfolio. Mr. Corba,
Chief Investment Officer, Managing Director
of PIMCO Equity Advisors, joined PIMCO Equity
Advisors in January 1999. Prior to this time,
he was the Chief Investment Officer for Eagle
Asset Management from March 1995 to March
1999 and Director of the Capital Management
Group at Stein Roe & Farnham from June 1984
to February 1995. He has a BA and MBA from
the University of Michigan.
[PHOTO OMITTED] Michael F. Gaffney, a Managing Director of
PIMCO Equity Advisors, is the portfolio
manager of the Small Cap Growth Portfolio.
Mr. Gaffney joined PIMCO Equity Advisors in
January 1999. Prior to this time, he was the
Senior Vice President and Portfolio Manager
for Alliance Capital Management from
September 1987 to January 1999. He has a BS
Magna Cum Laude from St. John's University
and a MBA from New York University.
25
<PAGE>
[PHOTO OMITTED] Jeffrey D. Parker, a senior portfolio manager
of PIMCO Equity Advisors, is the portfolio
manager of the Target Portfolio. Mr. Parker
joined PIMCO Equity Advisors in January 1999.
Prior to this time, he was an Assistant
Portfolio Manager for Eagle Asset Management
from July 1996 to December 1998 and a Senior
Consultant specializing in health care and
technology for Andersen Consulting from
February 1991 to May 1994. Mr. Parker has a
BBA from the University of Miami and a MBA
from Vanderbilt University.
[PHOTO OMITTED] William H. Gross, Managing Director and Chief
Investment Officer of PIMCO, has been a
co-portfolio manager of the Managed Portfolio
since March 2000. Mr. Gross joined PIMCO in
June 1971 and is a founding partner of PIMCO.
26
<PAGE>
SHARE PRICE
The Fund calculates each Portfolio's share price, called its net asset value, on
each business day that the New York Stock Exchange is open after the close of
regular trading (generally 4:00 p.m. Eastern Standard Time). Net asset value per
share is computed by adding up the total value of a Portfolio's investments and
other assets, subtracting its liabilities and then dividing by the number of
shares outstanding.
Net Asset Value = Total Portfolio Assets - Liabilities
------------------------------------------
Number of Portfolio Shares Outstanding
The Fund uses the market prices of securities to value a Portfolio's investments
unless securities do not have market quotations or are short-term debt
securities. When the Fund uses fair value to price a security, the Fund reviews
the pricing method with the Fund's Board. The Fund prices short-term investments
that mature in less than 60 days using amortized cost or amortized value.
Foreign securities trade on days when the Portfolios do not price their shares
so the net asset value of a Portfolio's shares may change on days when
shareholders will not be able to buy or sell shares of the Portfolio. If an
event occurs after the close of the New York Stock Exchange that the Fund
believes changes the value of a security, then the Fund will value the security
at what it believes to be fair value.
DISTRIBUTIONS AND TAXES
This discussion is about distributions to the Portfolio's shareholders, which
are variable accounts of insurance companies and qualified pension and
retirement plans. You should read the prospectus for the variable account for
information about distributions and federal tax treatment for contract owners of
variable products.
Each Portfolio pays dividends from its net investment income and distributes any
net capital gains that it has realized at least once a year. The U.S. Government
Income Portfolio pays dividends from its net investment income once a month.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Portfolios' financial performance. Certain information reflects financial
results for a single Portfolio share. The total returns in the table represent
the rate that an investor would have earned (or lost) on an investment in a
Portfolio (assuming reinvestment of all dividends and distributions). The
information in the financial highlights table for the fiscal periods ended on or
before December 31, 1998 has been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the corresponding Portfolios'
financial statements, is included in the Fund's SAI, which is available upon
request. The information in the financial highlights table for the year ended on
December 31, 1999, along with the corresponding Portfolios' financial statements
27
<PAGE>
are audited. The interim financial statements are included in the Fund's SAI.
OCC ACCUMULATION TRUST
EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
For a share of beneficial interest
outstanding throughout each year:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 38.70 $ 36.52 $ 30.07 $ 25.05 $ 18.12
---------- ---------- ---------- ---------- ----------
Income from Investment Operations:
Net investment income 0.25 0.39 0.39 0.21 0.31
Net realized and unrealized gain
on investments 0.62 3.84 7.34 5.52 6.71
---------- ---------- ---------- ---------- ----------
Total income from
investment operations 0.87 4.23 7.73 5.73 7.02
---------- ---------- ---------- ---------- ----------
Dividends and Distributions to
Shareholders from:
Net investment income (0.36) (0.39) (0.28) (0.24) (0.09)
Net realized gains (1.65) (1.66) (1.00) (0.47) --
---------- ---------- ---------- ----------
Total dividends and distributions to
shareholders (2.01) (2.05) (1.28) (0.71) (0.09)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year $ 37.56 $ 38.70 $ 36.52 $ 30.07 $ 25.05
========== ========== ========== ========== ==========
Total Return (2) 2.5% 11.9% 26.6% 23.4% 38.9%
========== ========== ========== ========== ==========
Ratios/Supplemental Data:
Net assets, end of year (000's) $ 70,512 $ 48,711 $ 28,820 $ 19,843 $ 9,036
Ratio of expenses to
average net assets (2) 0.91% 0.94% 0.99% 0.93%(3) 0.72%(3)
Ratio of net investment income to
average net assets 0.86% 1.36% 1.25% 1.29%(3) 1.74%(3)
Portfolio Turnover 84% 29% 32% 36% 31%
</TABLE>
- ----------
(1) Assumes reinvestment of all dividends and distributions.
(2) For fiscal years ended after September 1, 1995, ratios are inclusive of
expenses offset by earnings credits from custodian bank.
(3) During the fiscal years indicated above, the Investment Adviser waived a
portion or all of its fees and assumed a portion of the Portfolio's
expenses. If such waivers and assumptions had not been in effect, the
ratios of expenses to average net assets and the ratios of net investment
income to average net assets would have been 1.05% and 1.17%,
respectively, for the year ended December 31, 1996, 1.26% and 1.20%,
respectively, for the year ended December 31, 1995.
28
<PAGE>
OCC ACCUMULATION TRUST
MID CAP PORTFOLIO
FINANCIAL HIGHLIGHTS
For a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
For the Year For the Period
Ended February 9, 1998 (1) to
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 9.79 $ 10.00
--------- ---------
Income from Investment Operations:
Net investment income 0.05 0.05
Net realized and unrealized gain (loss) on
investments 2.07 (0.21)
--------- ---------
Total income (loss) from investment operations 2.12 (0.16)
--------- ---------
Dividends and Distributions to Shareholders from:
Net investment income (0.05) (0.05)
Net realized gains (0.23) --
---------
Total dividends and distributions to shareholders (0.28) (0.05)
--------- ---------
Net asset value, end of period $ 11.63 $ 9.79
--------- ---------
Total Return (2) 21.6% (1.6)%
========= =========
Ratios/Supplemental data:
Net assets, end of period (000's) $ 5,382 $ 1,885
Ratio of expenses to
average net assets (4,5) 1.03% 1.05%(3)
Ratio of net investment income to
average net assets 0.62% 0.78%(3)
Portfolio Turnover 108% 38%
</TABLE>
- ----------
(1) Commencement of operations
(2) Assumes reinvestment of all dividends and distributions. Total return for
a period of less than one year is not annualized.
(3) Annualized
(4) Inclusive of expenses offset by earnings credits from custodian bank.
(5) During the fiscal periods indicated above, the Investment Adviser waived
its fee and assumed a portion of the Portfolio's expenses. If such waivers
and assumptions had not been in effect, the ratios of expenses to average
net assets and the ratios of net investment income (loss) to average net
assets would have been 1.70% and (0.05)%, respectively for the year ended
December 31, 1999, and 4.28% (annualized) and (2.45)% (annualized),
respectively, for the period February 9, 1998 (commencement of operations)
to December 31, 1998.
29
<PAGE>
OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each year:
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 23.10 $ 26.37 $ 22.61 $ 19.91 $ 17.38
----------- ----------- ----------- ----------- -----------
Income from Investment
Operations: 0.14 0.14 0.08 0.14 0.26
Net investment income
Net realized and unrealized gain (loss)
on investments (0.57) (2.38) 4.73 3.45 2.37
----------- ----------- ----------- ----------- -----------
Total income (loss) from investment
operations (0.43) (2.24) 4.81 3.59 2.63
----------- ----------- ----------- ----------- -----------
Dividends and Distributions to
Shareholders from:
Net investment income (0.15) (0.09) (0.13) (0.25) (0.05)
Net realized gains -- (0.94) (0.92) (0.64) (0.05)
----------- ----------- ----------- ----------- -----------
Total dividends and distributions to
Shareholders (0.15) (1.03) (1.05) (0.89) (0.10)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year $ 22.52 $ 23.10 $ 26.37 $ 22.61 $ 19.91
=========== =========== =========== =========== ===========
Total Return (2) (1.8)% (9.0)% 22.2% 18.7% 15.2%
=========== =========== =========== =========== ===========
Ratios/Supplemental data:
Net assets, end of year (000's) $ 151,290 $ 155,506 $ 110,565 $ 34,257 $ 16,004
Ratio of expenses
to average net assets (3) 0.89% 0.88% 0.97% 0.93%(3) 0.74%(3)
Ratio of net investment income
to average net assets 0.61% 0.72% 0.64% 1.03%(3) 1.75%(3)
Portfolio Turnover 99% 51% 68% 50% 69%
</TABLE>
- ----------
(1) Assumes reinvestment of all dividends and distributions.
(2) For fiscal years ended after September 1, 1995, ratios are inclusive of
expenses offset by earnings credits from custodian bank.
(3) During the fiscal years indicated above, the Investment Adviser waived a
portion or all of its fees and assumed a portion of the Portfolio's
expenses. If such waivers and assumptions had not been in effect, the
ratios of expenses to average net assets and the ratios of net investment
income to average net assets would have been 1.01% and 0.95%,
respectively, for the year ended December 31, 1996, and 0.99% and 1.50%,
respectively, for the year ended December 31, 1995.
30
<PAGE>
OCC ACCUMULATION TRUST
GLOBAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
For a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------- For the Period
March 1, 1995 (1)
1999 1998 1997 1996 to December 31, 1995
---- ---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.43 $ 14.32 $ 13.23 $ 11.61 $ 10.00
---------- ---------- ---------- ---------- ------------
Income from Investment Operations:
Net investment income 0.31 0.12 0.06 0.04 0.05
Net realized and unrealized gain
on investments 3.78 1.78 1.79 1.70 1.83
---------- ---------- ---------- ---------- ----------
Total income from Investment Operations 4.09 1.90 1.85 1.74 1.88
---------- ---------- ---------- ---------- ----------
Dividends and Distributions to Shareholders:
From Net investment income in excess of (0.26) (0.18) (0.04) (0.05) (0.03)
net investment income -- -- (0.03) -- --
From net realized gains (2.70) (0.61) (0.69) (0.07) (0.24)
---------- ---------- ---------- ---------- ----------
Total dividends and distributions to shareholders (2.96) (0.79) (0.76) (0.12) (0.27)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 16.56 $ 15.43 $ 14.32 $ 13.23 $ 11.61
========== ========== ========== ========== ==========
Total Return (2) 26.5% 13.3% 14.0% 15.0% 18.9%
========== ========== ========== ========== ==========
Ratios/Supplemental data:
Net assets, end of period (000's) $ 43,412 $ 34,777 $ 25,874 $ 16,972 2,891
Ratio of net operating expenses
to average net assets (3) 1.10% 1.13% 1.19%(4) 1.42%(4) 1.25%(4)(4)
Ratio of net investment income
to average net assets 0.48% 0.79% 0.45%(4) 0.81%(4) 1.02%(4)(4)
Portfolio Turnover 83% 55% 53% 40% 67%
</TABLE>
- ----------
(1) Commencement of operations
(2) Assumes reinvestment of all dividends and distributions. Total return for
a period of less than one year is not annualized.
(3) Inclusive of expenses offset by earnings credits from custodian bank.
(4) During the fiscal periods indicated above, the Investment Adviser waived a
portion or all of its fees and assumed a portion of the Portfolio's
expenses. If such waivers and assumptions had not been in effect, the
ratios of expenses to average net assets and the ratios of net investment
income (loss) to average net assets would have been 1.20% and 0.44%,
respectively, for the year ended December 31, 1997, 1.83% and 0.40%,
respectively, for the year ended December 31, 1996 and 3.94% (annualized)
and (1.67)% (annualized), respectively, for the period March 1, 1995
(commencement of operations) to December 31, 1995.
31
<PAGE>
OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 43.74 $ 42.38 $ 36.21 $ 30.14 $ 20.83
----------- ----------- ----------- ----------- -----------
Income from Investment Operations:
Net investment income 0.56 0.60 0.34 0.43 0.42
Net realized and unrealized gain
on investments 1.47 2.40 7.45 6.31 9.02
----------- ----------- ----------- ----------- -----------
Total income from investment
operations 2.03 3.00 7.79 6.74 9.44
----------- ----------- ----------- ----------- -----------
Dividends and Distributions to Shareholders from:
Net investment income (0.65) (0.33) (0.40) (0.41) (0.13)
Net realized gains (1.47) (1.31) (1.22) (0.26) --
----------- ----------- ----------- -----------
Total dividends and distributions to shareholders
(2.12) (1.64) (1.62) (0.67) (0.13)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year $ 43.65 $ 43.74 $ 42.38 $ 36.21 $ 30.14
=========== =========== =========== =========== ===========
Total Return (1) 5.0% 7.1% 22.3% 22.8% 45.6%
=========== =========== =========== =========== ===========
Ratios/Supplemental data:
Net assets, end of Year (000's) $ 804,467 $ 777,087 $ 466,791 $ 180,728 $ 99,188
Ratio of expenses
to average net assets (2) 0.83% 0.82% 0.87% 0.84%(3) 0.66%(3)
Ratio of net investment income
to average net assets 1.27% 1.74% 1.42% 1.66%(3) 1.85%(3)
Portfolio Turnover 50% 37% 32% 27% 22%
</TABLE>
- ----------
(1) Assumes reinvestment of all dividends and distributions.
(2) For fiscal years ended after September 1, 1995, ratios are inclusive of
expenses offset by earnings credits from custodian bank.
(3) During the fiscal years indicated above, the Investment Adviser waived a
portion or all of its fees and assumed a portion of the Portfolio's
expenses. If such waivers and assumptions had not been in effect, the
ratios of expenses to average net assets and the ratios of net investment
income to average net assets would have been 0.85% and 1.65%,
respectively, for the year ended December 31, 1996 and 0.74% and 1.77%,
respectively, for the year ended December 31, 1995.
32
<PAGE>
U.S. GOVERNMENT INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------- For the Period
January 3, 1995 (1)
1999 1998 1997 1996 to December 31, 1995
---- ---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.66 $ 10.51 $ 10.38 $ 10.62 $ 10.00
---------- ---------- ---------- ---------- -------
Income from Investment Operations:
Net investment income 0.49 0.53 0.57 0.55 0.60
Net realized and unrealized gain (loss) on
investments (0.66) 0.31 0.14 (0.24) 0.68
---------- ---------- ---------- ---------- -------
Total income (loss) from investment operations (0.17) 0.84 0.71 0.31 1.28
---------- ---------- ---------- ---------- -------
Dividends and Distributions to Shareholders from:
Net investment income (0.49) (0.53) (0.57) (0.55) (0.60)
Net realized gains -- (0.16) (0.01) -- (0.06)
---------- ---------- ---------- -------
Total dividends and distributions to shareholders (0.49) (0.69) (0.58) (0.55) (0.66)
---------- ---------- ---------- ---------- -------
Net asset value, end of period $ 10.00 $ 10.66 $ 10.51 $ 10.38 $ 10.62
========== ========== ========== ========== =======
Total Return (2) (1.6)% 8.1% 7.0% 3.0% 13.1%
========== ========== ========== ========== =======
Ratios/Supplemental data:
Net assets, end of period (000's) $ 9,830 $ 10,542 $ 6,983 $ 3,422 $ 1,442
Ratio of expenses
to average net assets (3) 0.95% 1.00%(4) 0.93%(4) 0.96%(4) 0.75%(4)
Ratio of net investment income
to average net assets 4.78% 4.96%(4) 5.51%(4) 5.27%(4) 5.75%(4)
Portfolio Turnover 69% 80% 80% 31% 65%
</TABLE>
- ----------
(1) Commencement of operations.
(2) Assumes reinvestment of all dividends and distributions. Total return for
a period of less than one year is not annualized.
(3) Inclusive of expenses offset by earnings credits from custodian bank.
(4) During the fiscal periods indicated above, the Investment Adviser waived a
portion or all of its fees and assumed a portion of the Portfolio's
expenses. If such waivers and assumptions had not been in effect, the
ratios of expenses to average net assets and the ratios of net investment
income to average net assets would have been 1.19% and 4.77%,
respectively, for the year ended December 31, 1998, 1.06% and 5.38%,
respectively, for the year ended December 31, 1997, 2.34% and 3.89%,
respectively, for the year ended December 31, 1996, and 4.73% (annualized)
and 1.77%, (annualized), respectively, for the period January 3, 1995
(commencement of operations) to December 31, 1995.
33
<PAGE>
For investors who want more information about the Portfolios, the following
documents are available free upon request:
Annual/Semi-annual Reports: Additional information about the Portfolios'
investments is available in the Portfolios' annual and semi-annual reports to
shareholders. In each Portfolio's annual report, you will find a discussion of
the market conditions and investment strategies that significantly affected the
Portfolio's performance during its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Portfolios and is incorporated into this prospectus by
reference.
The SAI and the Portfolio's annual and semi-annual reports are available without
charge upon request to your insurance agent or by calling the Portfolios at
1-800-700-8258.
You can review and copy the Portfolios' reports and SAIs at the Public Reference
Room of the Securities and Exchange Commission. You can get text-only copies:
After paying a duplicating fee, by electronic request at the following
email address: [email protected], or by writing to or calling the Public
Reference Room of the Securities and Exchange Commission, Washington, D.C.
20549-0102
Telephone: 1-202-942-8090
Free from the EDGAR Database on the Commission's Internet website at
http://www.sec.gov
OCC Accumulation Trust
Equity Portfolio
Blended Equity Portfolio
Large Cap Growth Portfolio
Small Cap Growth Portfolio
Target Portfolio
Mid Cap Portfolio
Small Cap Portfolio
Global Equity Portfolio
Managed Portfolio
Balanced Portfolio
U.S. Government Income Portfolio
34
<PAGE>
Statement of Additional Information
OCC Accumulation Trust
Equity Portfolio
Blended Equity Portfolio
Large Cap Growth Portfolio
Small Cap Growth Portfolio
Target Portfolio
Mid Cap Portfolio
Small Cap Portfolio
Global Equity Portfolio
Managed Portfolio
Balanced Portfolio
U.S. Government Income Portfolio
1345 Avenue of the Americas
New York, NY 10105-4800
This Statement of Additional Information (the "Additional Statement") is
not a Prospectus. Investors should understand that this Additional Statement
should be read in conjunction with the Prospectus dated February 1, 2000 as
supplemented April 18, 2000, (the "Prospectus") of OCC Accumulation Trust
(the "Fund"). Contractowners can obtain copies of the Prospectus by written
request to the life insurance company who issued the Contract at the address
delineated in the Variable Account Prospectus or by calling the life insurance
company who issued the Contract at the telephone number listed in the Variable
Account Prospectus.
The date of this Statement of Additional Information
is February 1, 2000 as supplemented April 18, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
Investment of Assets..........................................................3
Investment Restrictions......................................................18
Trustees and Officers........................................................21
Control Persons..............................................................25
Investment Management and Other Services.....................................30
Determination of Net Asset Value.............................................32
Dividends, Distribution and Taxes............................................34
Portfolio Yield and Total Return Information.................................34
Additional Information.......................................................37
2
<PAGE>
INVESTMENT OF ASSETS
The investment objective and policies of each Portfolio of the Fund are
described in the Prospectus. A further description of the investments and
investment methods applicable to certain Portfolios appears below.
Obligations Issued or Guaranteed by U.S. Government Agencies or
Instrumentalities. Some obligations issued or guaranteed by U.S. government
agencies or instrumentalities, such as securities issued by the Federal Home
Loan Bank, are backed by the right of the agency or instrumentality to borrow
from the Treasury. Others, such as securities issued by the Federal National
Mortgage Association ("Fannie Mae"), are supported only by the credit of the
instrumentality and not by the Treasury. If the securities are not backed by the
full faith and credit of the United States, the owner of the securities must
look principally to the agency issuing the obligation for repayment and may not
be able to assert a claim against the United States in the event that the agency
or instrumentality does not meet its commitment.
Collateralized Mortgage Obligations ("CMOs"). In addition to securities
issued by the Government National Mortgage Association ("Ginnie Mae"), Fannie
Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), another type
of mortgage-backed security is the CMO, which is secured by groups of individual
mortgages but is similar to a conventional bond where the investor looks only to
the issuer for payment of principal and interest. Although the obligations are
recourse obligations to the issuer, the issuer typically has no significant
assets, other than assets pledged as collateral for the obligations, and the
market value of the collateral, which is sensitive to interest rate movements,
may affect the market value of the obligations. A public market for a particular
CMO may or may not develop and thus, there can be no guarantee of liquidity of
an investment in such obligations. Investments will only be made in CMOs which
are of high quality, as determined by the Board of Trustees.
Commercial Mortgage-Backed Securities ("CMBS"). Each of the Blended
Equity, Large Cap Growth, Small Cap Growth and Target Portfolios may invest in
CMBS. CMBS are generally multi-class or pass-through securities backed by a
mortgage loan or a pool of mortgage loans secured by commercial property, such
as industrial and warehouse properties, office buildings, retail space and
shopping malls, multifamily properties and cooperative apartments. The
commercial mortgage loans that underlie CMBS have certain distinct
characteristics. Commercial mortgage loans are generally not amortizing or not
fully amortizing. That is, at their maturity date, repayment of the remaining
principal balance or "balloon" is due and is repaid through the attainment of an
additional, loan or sale of the property. Unlike most single family residential
mortgages, commercial real estate property loans often contain provisions which
substantially reduce the likelihood that such securities will be prepaid. The
provisions generally impose significant prepayment penalties on loans and, in
some cases there may be prohibitions on principal prepayments for several years
following origination.
Stripped Mortgage-Backed Securities ("SMBs"). Each of the Blended Equity,
Large Cap Growth, Small Cap Growth and Target Portfolios may invest in SMBs.
SMBs are usually structured with two classes that receive specified proportions
of the monthly interest and principal payments from a pool of the other class
may receive all of the principal payments. SMBs are extremely sensitive to
changes in interest rates because of the impact thereon of prepayment of
principal on the underlying mortgage securities. The market for SMBs is not as
fully developed as other markets; SMBs therefore may be illiquid.
3
<PAGE>
Asset-Backed Securities ("ABS"). Each of the Blended Equity, Large Cap
Growth, Small Cap Growth and Target Portfolios may invest in asset-backed
securities. Asset-backed securities may be structured as undivided fractional
ownership interests in an underlying pool of assets or as debt instruments
issued by a special purpose entity organized solely for the purpose of owning
these assets and issuing such debt. Examples of assets used to back asset-backed
securities include motor vehicle installment sales contracts, installment loans
secured by motor vehicles, receivables representing amounts owed by businesses
to vendors or other trade creditors and receivables from revolving credit
(credit card) agreements.
Asset-backed securities present certain risks. Some asset-backed
securities may be subject to the prepayment and extension risks. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Trade receivables may also be unsecured.
Most issuers of automobile receivables permit the servicer to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of automobile receivables may not have a proper security interest in
all of the obligations backing these receivables. Therefore, it is possible that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Other types of asset-backed securities will be subject to the risks
associated with the underlying assets. If a letter of credit or other form of
credit enhancement is exhausted or otherwise unavailable, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying assets are not realized.
Information on Time Deposits and Variable Rate Notes. The Portfolios may
invest in fixed time deposits, whether or not subject to withdrawal penalties;
however, investment in such deposits which are subject to withdrawal penalties,
other than overnight deposits, are subject to the 15% limit on illiquid
investments set forth in the Prospectus.
The commercial paper obligations which the Portfolios may buy are
unsecured and may include variable rate notes. The nature and terms of a
variable rate note (i.e., a "Master Note") permit a Portfolio to invest
fluctuating amounts at varying rates of interest pursuant to a direct
arrangement between the Portfolio as lender, and the issuer, as borrower. It
permits daily changes in the amounts borrowed. The Portfolio has the right at
any time to increase, up to the full amount stated in the note agreement, or to
decrease the amount outstanding under the note. The issuer may prepay at any
time and without penalty any part of or the full amount of the note. The note
may or may not be backed by one or more bank letters of credit. Because these
notes are direct lending arrangements between the Portfolio and the issuer, it
is not generally contemplated that they will be traded; moreover, there is
currently no secondary market for them. The Portfolios have no limitations on
the type of issuer from whom these notes will be purchased; however, in
connection with such purchase and on an ongoing basis, OpCap Advisors or if
delegated to a sub-adviser, (together the "Manager") will consider the earning
power, cash flow and other liquidity ratios of the issuer, and its ability to
pay principal and interest on demand, including a situation in which all holders
of such notes made demand simultaneously. The Portfolios will not invest more
than 5% of their total assets in variable rate notes. Variable rate notes are
subject to the Portfolios' investment restrictions on illiquid securities unless
such notes can be put back to the issuer on demand within seven days.
4
<PAGE>
Insured Bank Obligations. The Federal Deposit Insurance Corporation
("FDIC") insures the deposits of federally insured banks and savings and loan
associations (collectively referred to as "banks") up to $100,000. The
Portfolios may, within the limits set forth in the Prospectus, purchase bank
obligations which are fully insured as to principal by the FDIC. Currently, to
remain fully insured as to principal, these investments must be limited to
$100,000 per bank; if the principal amount and accrued interest together exceed
$100,000, the excess principal amount and accrued interest will not be insured.
Insured bank obligations may have limited marketability. Unless the Board of
Trustees determines that a readily available market exists for such obligations,
a Portfolio will treat such obligations as subject to the 15% limit for illiquid
investments set forth in the Prospectus for each Portfolio unless such
obligations are fully payable (principal amount plus accrued interest) on demand
or within seven days after demand.
Lower Rated Bonds. Each Portfolio (except the Blended Equity, Large Cap
Growth, Small Cap Growth and Target Portfolios) may invest up to 5% of its
assets in bonds rated below Baa3 by Moody's Investors Service, Inc. ("Moody's")
or BBB- by Standard & Poor's Corporation ("S&P"), Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps, Inc. ("Duff"). These securities are commonly known
as "junk bonds." The Balanced Portfolio may invest up to 25% of its assets in
junk bonds. Securities rated less than Baa by Moody's or BBB- by S&P are
classified as non-investment grade securities and are considered speculative by
those rating agencies. It is the Fund's policy not to rely exclusively on
ratings issued by credit rating agencies but to supplement such ratings with the
Manager's own independent and ongoing review of credit quality. Junk bonds may
be issued as a consequence of corporate restructurings, such as leveraged
buyouts, mergers, acquisitions, debt recapitalizations, or similar events or by
smaller or highly leveraged companies. Although the growth of the high yield
securities market in the 1980s had paralleled a long economic expansion,
recently many issuers have been affected by adverse economic and market
conditions. It should be recognized that an economic downturn or increase in
interest rates is likely to have a negative effect on (i) the high yield bond
market, (ii) the value of high yield securities and (iii) the ability of the
securities' issuers to service their principal and interest payment obligations,
to meet their projected business goals or to obtain additional financing. The
market for junk bonds may be less liquid than the market for investment grade
bonds. In periods of reduced market liquidity, junk bond prices may become more
volatile and may experience sudden and substantial price declines. Also, there
may be significant disparities in the prices quoted for junk bonds by various
dealers. Under such conditions, a Portfolio may find it difficult to value its
junk bonds accurately. Under such conditions, a Portfolio may have to use
subjective rather than objective criteria to value its junk bond investments
accurately and rely more heavily on the judgment of the Fund's Board of
Trustees. Prices for junk bonds also may be affected by legislative and
regulatory developments. For example, new federal rules require that savings and
loans gradually reduce their holdings of high-yield securities. Also, from time
to time, Congress has considered legislation to restrict or eliminate the
corporate tax deduction for interest payments or to regulate corporate
restructurings such as takeovers, mergers or leveraged buyouts. Such
legislation, if enacted, may depress the prices of outstanding junk bonds.
Dollar Rolls. The U.S. Government Income Portfolio may enter into dollar
rolls in which the Portfolio sells securities for delivery in the current month
and simultaneously contracts to repurchase substantially similar (same type and
coupon) securities on a specified future date. During the roll period, the
Portfolio forgoes principal and interest paid on the securities. The Portfolio
is compensated by the difference between the current sale price and the lower
forward price for the future purchase (often referred to as the "drop") as well
as interest earned on the cash proceeds of the initial sale.
5
<PAGE>
The Portfolio will establish a segregated account with the Fund's
custodian bank in which the Portfolio will maintain cash, U.S. Government
securities or other liquid high grade debt obligations equal in value to its
obligations in respect of dollar rolls. Dollar rolls involve the risk that the
market value of the securities the Portfolio is obligated to repurchase may
decline below the repurchase price. In the event the buyer of securities under a
dollar roll files for bankruptcy or becomes insolvent, the Portfolio's use of
the proceeds of the transaction may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Portfolio's
obligation to repurchase the securities.
Dollar rolls are considered borrowings by the Portfolio. Under the
requirements of the Investment Company Act of 1940, as amended (the "1940 Act"),
the Portfolio is required to maintain an asset coverage (including the proceeds
of borrowings) of at least 300% of all borrowings.
Portfolio Securities Loans. The Fund on behalf of the Blended Equity,
Large Cap Growth, Small Cap Growth and Target Portfolios may lend portfolio
securities to unaffiliated brokers, dealers and financial institutions, provided
that the borrower must deposit with the Portfolio collateral, in the form of
cash, equal to at least 100% of the market value of the loaned securities,
marked to market daily. While the securities are on loan, the borrower must pay
the Portfolio any income accruing thereon. The borrower also compensates the
Portfolio by paying a loan fee or by allowing the Portfolio to retain any income
earned on the investment of the cash collateral in portfolio securities.
Although investment of the collateral may increase the Portfolio's potential
return, it will also increase the Portfolio's potential for loss.
A Portfolio normally will lend securities subject to termination by the
Portfolio in the normal settlement time or by the borrower on one day's notice.
The borrower must return the securities, and the Portfolio must return the
collateral, when the loan is terminated. Any gain or loss in the market price of
the borrowed securities that occurs during the term of the loan is borne by the
Portfolio and its shareholders, except that gains cannot be realized if the
borrower defaults on its obligation to return the borrowed securities. The
Portfolio may pay reasonable finders', administrative and custodial fees in
connection with a loan of securities.
Repurchase Agreements. The Fund on behalf of a Portfolio may enter into
repurchase agreements with broker-dealers, member banks of the Federal Reserve
System and other financial institutions. Repurchase agreements are arrangements
under which a Portfolio purchases securities and the seller agrees to repurchase
the securities within a specific time and at a specific price. The repurchase
price is generally higher than the Portfolio's purchase price, with the
difference being income to the Portfolio. The counterparty's obligations under
the repurchase agreement are collateralized with U.S. government securities with
a market value of not less than 100% of the counterparty's obligations, valued
daily. Collateral is held by the Fund's custodian for the benefit of the
Portfolio.
Repurchase agreements afford a Portfolio an opportunity to earn income on
temporarily available cash at low risk. If bankruptcy or insolvency proceedings
are commenced with respect to the counterparty before repurchase of the security
under a repurchase agreement, a Portfolio may encounter delay and incur costs
before being able to sell the security. Such a delay may involve loss of
interest or a decline in price of the security. If the court characterizes the
transaction as a loan and the Portfolio has not perfected a security interest in
the security, the Portfolio may be required to return the security to the
seller's estate and be treated as an unsecured creditor of the seller. As an
unsecured creditor, the Fund would be at risk of losing some or all of the
principal and interest involved in the transaction.
6
<PAGE>
To minimize the risk of counterparty default, the investment manager
reviews and monitors the creditworthiness of any institution which enters into a
repurchase agreement with the Fund.
Reverse Repurchase Agreements. The Fund on behalf of the Blended Equity,
Large Cap Growth, Small Cap Growth and Target Portfolios may enter into reverse
repurchase agreements with broker-dealers, member banks of the Federal Reserve
System and other financial institutions. Reverse repurchase agreements are
arrangements under which a Portfolio sells securities and agrees to repurchase
the securities within a specific time and at a specified price. The repurchase
price is generally higher than the Portfolio's sale price, with the difference
representing the cost to the Portfolio of borrowing the cash received on the
sale. Reverse repurchase agreements involve the risk that the market value of
the securities which the Portfolio is obligated to repurchase may decline below
the repurchase price or that the counterparty may default on its obligation to
resell the securities. Repurchase agreements are considered to be a form of, and
are subject to the Fund's restrictions on, borrowing.
Hedging. As stated in the Prospectus, the Blended Equity, Large Cap
Growth, Small Cap Growth, Target, Global Equity, Managed, Balanced, Mid Cap,
Small Cap and Equity Portfolios may engage in options and futures. Information
about the options and futures transactions these Portfolios may enter into is
set forth below.
Financial Futures. No price is paid or received upon the purchase of a
financial future. Upon entering into a futures transaction, a portfolio will be
required to deposit an initial margin payment equal to a specified percentage of
the contract value. Initial margin payments will be deposited with the Fund's
custodian bank in an account registered in the futures commission merchant's
name; however the futures commission merchant can gain access to that account
only under specified conditions. As the future is marked to market to reflect
changes in its market value, subsequent payments, called variation margin, will
be made to or from the futures commission merchant on a daily basis. Prior to
expiration of the future, if a portfolio elects to close out its position by
taking an opposite position, a final determination of variation margin is made,
additional cash is required to be paid by or released to the portfolio, and any
loss or gain is realized for tax purposes. Although financial futures by their
terms call for the actual delivery or acquisition of the specified security, in
most cases the obligation is fulfilled by closing out the position. All futures
transactions are effected through a clearing house associated with the exchange
on which the contracts are traded. The Blended Equity, Mid Cap, Large Cap
Growth, Small Cap Growth, Target and Global Equity Portfolios may purchase and
sell futures contracts that are currently traded, or may in the future be
traded, on U.S. and foreign commodity exchanges on common stocks, such
underlying fixed-income securities as U.S. Treasury bonds, notes, and bills
and/or any foreign government fixed-income security ("interest rate" futures),
on various currencies ("currency" futures) and on such indices of U.S. or
foreign equity and fixed-income securities as may exist or come into being, such
as the Standard & Poor's ("S&P") 500 Index or the Financial Times Equity Index
("index" futures). At present, no Portfolio intends to enter into financial
futures and options on such futures if after any such purchase, the sum of
initial margin deposits on futures and premiums paid on futures options would
exceed 5% of the Portfolio's total assets. This limitation is not a fundamental
policy.
Information on Puts and Calls. The Blended Equity, Large Cap Growth, Small
Cap Growth, Target, Mid Cap, Balanced, Managed, Small Cap and Equity Portfolios
may write calls on individual securities. The Blended Equity, Large Cap Growth,
Small Cap Growth, Target, Mid Cap, Managed, Balanced and Global Equity
Portfolios are authorized to write covered put and call options and purchase put
and call options on the securities in which they may invest. When a portfolio
writes a call, it receives a premium and agrees to sell the callable securities
to a purchaser of a corresponding
7
<PAGE>
call during the call period (usually not more than 9 months) at a fixed exercise
price (which may differ from the market price of the underlying securities)
regardless of market price changes during the call period. If the call is
exercised, the portfolio forgoes any possible profit from an increase in market
price over the exercise price. A portfolio may, in the case of listed options,
purchase calls in "closing purchase transactions" to terminate a call
obligation. A profit or loss will be realized, depending upon whether the net of
the amount of option transaction costs and the premium received on the call
written is more or less than the price of the call subsequently purchased. A
profit may be realized if the call lapses unexercised, because the portfolio
retains the underlying security and the premium received. If, due to a lack of a
market, a portfolio could not effect a closing purchase transaction, it would
have to hold the callable securities until the call lapsed or was exercised. The
Fund's Custodian, or a securities depository acting for the Custodian, will act
as the portfolio's escrow agent, through the facilities of the Options Clearing
Corporation ("OCC") in connection with listed calls, as to the securities on
which the portfolio has written calls, or as to other acceptable escrow
securities, so that no margin will be required for such transactions. OCC will
release the securities on the expiration of the calls or upon the portfolio's
entering into a closing purchase transaction.
When a portfolio purchases a call (other than in a closing purchase
transaction), it pays a premium and has the right to buy the underlying
investment from a seller of a corresponding call on the same investment during
the call period (or on a certain date for OTC options) at a fixed exercise
price. A portfolio benefits only if the call is sold at a profit or if, during
the call period, the market price of the underlying investment is above the call
price plus the transaction costs and the premium paid for the call and the call
is exercised. If a call is not exercised or sold (whether or not at a profit),
it will become worthless at its expiration date and the portfolio will lose its
premium payment and the right to purchase the underlying investment.
With OTC options, such variables as expiration date, exercise price and
premium will be agreed upon between the portfolio and the transacting dealer,
without the intermediation of a third party such as the OCC. If a transacting
dealer fails to make delivery on the securities underlying an option it has
written, in accordance with the terms of that option as written, a portfolio
could lose the premium paid for the option as well as any anticipated benefit of
the transaction. The Portfolios will engage in OTC option transactions only with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York. In the event that any OTC option transaction is not subject to
a forward price at which the portfolio has the absolute right to repurchase the
OTC option which it has sold, the value of the OTC option purchased and of the
portfolio assets used to "cover" the OTC option will be considered "illiquid
securities" and will be subject to the 15% limit on illiquid securities. The
"formula" on which the forward price will be based may vary among contracts with
different primary dealers, but it will be based on a multiple of the premium
received by the portfolio for writing the option plus the amount, if any, of the
option's intrinsic value, i.e., current market value of the underlying
securities minus the option's strike price.
A put option gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying investment at the exercise price during the
option period (or on a certain date for OTC options). The investment
characteristics of writing a put covered by segregated liquid assets equal to
the exercise price of the put are similar to those of writing a covered call.
The premium received on a put written by a portfolio represents a profit, as
long as the price of the underlying investment remains above the exercise price.
However, a portfolio has also assumed the obligation during the option period to
buy the underlying investment from the buyer of the put at the exercise price,
even though the value of the investment may fall below the exercise price. If
the put expires unexercised, the portfolio (as writer) realizes a gain in the
amount of the premium. If the put is exercised, the portfolio must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at
8
<PAGE>
that time. In that case, the portfolio may incur a loss upon disposition, equal
to the sum of the sale price of the underlying investment and the premium
received minus the sum of the exercise price and any transaction costs incurred.
When writing put options, to secure its obligation to pay for the
underlying security, the Fund, on behalf of a portfolio, will maintain in a
segregated account at its Custodian liquid assets with a value equal to at least
the exercise price of the option. As a result, the portfolio forgoes the
opportunity of trading the segregated assets or writing calls against those
assets. As long as the portfolio's obligation as a put writer continues, the
portfolio may be assigned an exercise notice by the broker-dealer through whom
such option was sold, requiring the portfolio to purchase the underlying
security at the exercise price. A portfolio has no control over when it may be
required to purchase the underlying security, since it may be assigned an
exercise notice at any time prior to the termination of its obligation as the
writer of the put. This obligation terminates upon the earlier of the expiration
of the put, or the consummation by the portfolio of a closing purchase
transaction by purchasing a put of the same series as that previously sold. Once
a portfolio has been assigned an exercise notice, it is thereafter not allowed
to effect a closing purchase transaction.
A portfolio may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying security
from being put to it. Furthermore, effecting such a closing purchase transaction
will permit the portfolio to write another put option to the extent that the
exercise price thereof is secured by the deposited assets, or to utilize the
proceeds from the sale of such assets for other investments by the portfolio.
The 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
writing the option.
When a portfolio purchases a put, it pays a premium and has the right to
sell the underlying investment at a fixed exercise price to a seller of a
corresponding put on the same investment during the put period if it is a listed
option (or on a certain date if it is an OTC option). Buying a put on securities
or futures held by it permits a portfolio to attempt to protect itself during
the put period against a decline in the value of the underlying investment below
the exercise price. In the event of a decline in the market, the portfolio could
exercise, or sell the put option at a profit that would offset some or all of
its loss on the portfolio securities. If the market price of the underlying
investment is above the exercise price and as a result, the put is not
exercised, the put will become worthless at its expiration date and the
purchasing portfolio will lose the premium paid and the right to sell the
underlying securities; the put may, however, be sold prior to expiration
(whether or not at a profit). Purchasing a put on futures or securities not held
by it permits a portfolio to protect its securities holdings against a decline
in the market to the extent that the prices of the future or securities
underlying the put move in a similar pattern to the prices of a portfolio's
securities.
An option position may be closed out only on a market which provides
secondary trading for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. A portfolio's
option activities may affect its turnover rate and brokerage commissions. The
exercise of calls written by a portfolio may cause the portfolio to sell its
securities to cover the call, thus increasing its turnover rate in a manner
beyond the portfolio's control. The exercise of puts on securities or futures
will increase portfolio turnover. Although such exercise is within the
portfolio's control, holding a put might cause a portfolio to sell the
underlying investment for reasons which would not exist in the absence of the
put. A portfolio will pay a brokerage commission every time it purchases or
sells a put or a call or purchases or sells a related investment in connection
with the exercise of a put or a call.
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Options on Futures. The Blended Equity, Large Cap Growth, Small Cap
Growth, Target, Global Equity, Balanced, Managed, Mid Cap, Small Cap and Equity
Portfolios may purchase and write call and put options on futures contracts
which are traded on an exchange and enter into closing transactions with respect
to such options to terminate an existing position. An option on a futures
contract gives the purchaser the right (in return for the premium paid) to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the term of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of
the option is accompanied by delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
The Portfolios may purchase and write options on futures contracts for
hedging purposes. The purchase of a call option on a futures contract is similar
in some respects to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the price of the
futures contract upon which it is based or the price of the underlying
securities, it may or may not be less risky than ownership of the futures
contract or underlying securities. As with the purchase of futures contracts,
when a Portfolio is not fully invested it may purchase a call option on a
futures contract to hedge against an anticipated increase in securities prices.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security which is deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Portfolio will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in the Portfolio's securities holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security which is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option premium
which provides a partial hedge against any increase in the price of securities
which the Portfolio intends to purchase. If a put or call option the Portfolio
has written is exercised, the Portfolio will incur a loss which will be reduced
by the amount of the premium it receives. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its futures positions, the Portfolio's losses from existing options may
to some extent be reduced or increased by changes in the value of its
securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on securities. For example, a
Portfolio may purchase a put option on a futures contract to hedge the
Portfolio's holdings against the risk of a decline in securities prices.
The amount of risk a Portfolio assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of an
option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased.
Stock Index Futures and Related Options. Unlike when the Portfolio
purchases or sells a security, no price is paid or received by the Portfolio
upon the purchase or sale of a futures contract. Instead, the Portfolio will be
required to deposit with its broker an amount of cash or U.S. Treasury bills
equal to approximately 5% of the contract amount. This is known as initial
margin. Such initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Portfolio upon
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termination of the futures contract assuming all contractual obligations have
been satisfied. In addition, because under current futures industry practice
daily variations in gains and losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Portfolio may be
required to make additional payments during the term of the contract to its
broker. Such payments would be required where during the term of a stock index
futures contract purchased by the Portfolio, the price of the underlying stock
index declined, thereby making the Portfolio's position less valuable. In all
instances involving the purchase of stock index futures contracts by the
Portfolio resulting in a net long position, an amount of cash and cash
equivalents equal to the market value of the futures contracts will be deposited
in a segregated account with the Fund's custodian, for the benefit of the
Portfolio, to collateralize the position and thereby insure that the use of such
futures is unleveraged. At any time prior to the expiration of the futures
contract, the Portfolio may elect to close the position by taking an opposite
position which will operate to terminate the Portfolio's position in the futures
contract.
There are several risks in connection with the use of stock index futures
in the Portfolio as a hedging device. One risk arises because of the imperfect
correlation between the price of the stock index future and the price of the
securities which are the subject of the hedge. This risk of imperfect
correlation increases as the composition of the Portfolio's holdings diverges
from the securities included in the applicable stock index. The price of the
stock index future may move more than or less than the price of the securities
being hedged. If the price of the stock index future moves less than the price
of the securities which are the subject of the hedge, the hedge will not be
fully effective, but, if the price of the securities being hedged has moved in
an unfavorable direction, the Portfolio would be in a better position than if it
had not hedged at all. If the price of the securities being hedged has moved in
a favorable direction this advantage will be partially offset by the future. If
the price of the futures moves more than the price of the stock the Portfolio
will experience a loss or a gain on the future which will not be completely
offset by movement in the price of the securities which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the stock index futures,
the Portfolio may buy or sell stock index futures in a greater dollar amount
than the dollar amount of the securities being hedged if the historical
volatility of the prices of such securities has been greater than the historical
volatility of the index. Conversely, the Portfolio may buy or sell fewer stock
index futures contracts if the historical volatility of the price of the
securities being hedged is less than the historical volatility of the stock
index. It is possible that where the Portfolio has sold futures to hedge its
portfolio against a decline in the market, the market may advance and the
Portfolio's securities may decline. If this occurred, the Portfolio would lose
money on the futures and also experience a decline in the value of its
securities. While this should occur, if at all, for a very brief period or to a
very small degree, the Manager believes that over time the value of a
diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based. It is also possible that if the
Portfolio hedges against the possibility of a decline in the market adversely
affecting stocks it holds and stock prices increase instead, the Portfolio will
lose part or all of the benefit of the increased value of its stock which it had
hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Portfolio has insufficient cash, it may
have to sell securities to meet daily variation margin requirements. Such sales
of securities may be, but will not necessarily be, at increased prices which
reflect the rising market. The Portfolio may also have to sell securities at a
time when it may be disadvantageous to do so.
Where futures are purchased to hedge against a possible increase in the
price of stocks before the Portfolio is able to invest its cash (or cash
equivalents) in stock (or options) in an orderly fashion, it is possible the
market may decline instead. If the Portfolio then concluded to not invest in
stock or options at the time because of concern as to possible further market
decline or for other reasons, the Portfolio will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
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In addition to the possibility that there may be an imperfect correlation
or no correlation at all between movements in the stock index future and the
portion of the portfolio being hedged, the price of stock index futures may not
correlate perfectly with movements in the stock index due to certain market
distortions. All participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Moreover, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market and may therefore
cause increased participation by speculators in the market. Such increased
participation may also cause temporary price distortions. Due to the possibility
of price distortion in the futures market and because of the imperfect
correlation between movements in the stock index and movements in the price of
stock index futures, the value of stock index futures contracts as a hedging
device may be reduced.
Currently, stock index futures contracts can be purchased or sold with
respect to several different stock indices, each based on a different measure of
market performance. Positions in stock index futures may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Portfolios intend to purchase or sell futures only on
exchanges or boards of trade where there appears to be an active secondary
market, as with stock options, there is no assurance that a liquid secondary
market or an exchange or board of trade will exist for any particular contract
or at any particular time. In such event it may not be possible to close a
futures position and in the event of adverse price movements, the Portfolios
would continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge a portfolio's
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of securities
will, in fact, correlate with the price movements in the futures contract and
thus provide an offset to losses on a futures contract.
In addition, if the Portfolios have insufficient cash they may at times
have to sell securities to meet variation margin requirements. Such sales may
have to be effected at a time when it is disadvantageous to do so.
Regulatory Aspects of Hedging Instruments. Transactions in options by a
portfolio are subject to limitations established (and changed from time to time)
by each of the exchanges governing the maximum number of options which may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
different exchanges or through one or more brokers. Thus, the number of options
which a portfolio may write or hold may be affected by options written or held
by other investment companies and discretionary accounts of the Manager,
including other investment companies having the same or an affiliated investment
adviser. An exchange may order the liquidation of positions found to be in
violation of those limits and may impose certain other sanctions.
Due to requirements under the 1940 Act, when a portfolio sells a future,
the Fund, on behalf of the portfolio, will maintain in a segregated account or
accounts with its custodian bank, cash or readily marketable short-term
(maturing in one year or less) debt instruments in an amount equal to the market
value of such future, less the margin deposit applicable to it.
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The Fund and each Portfolio must operate within certain restrictions as to
its positions in futures and options thereon under a rule ("CFTC Rule") adopted
by the Commodity Futures Trading Commission ("CFTC") under the Commodity
Exchange Act (the "CEA"), which excludes the Fund and each Portfolio from
registration with the CFTC as a "commodity pool operator" (as defined under the
CEA). Under those restrictions, a portfolio may not enter into any financial
futures or options contract unless such transactions are for bona fide hedging
purposes, or for other purposes only if the aggregate initial margins and
premiums required to establish such non-hedging positions would not exceed 5% of
the liquidation value of its assets. Each Portfolio may use futures and options
thereon for bona fide hedging or for other purposes within the meaning and
intent of the applicable provisions of the CEA.
Tax Aspects of Hedging Instruments. Each Portfolio in the Fund intends to
qualify as a "regulated investment company" under the Internal Revenue Code. One
of the tests for such qualification is that at least 90% of its gross income
must be derived from dividends, interest and gains from the sale or other
disposition of securities. In connection with the 90% test, amendments to the
Internal Revenue Code specify that income from hedging options, futures and
other gains derived from hedging investments in securities is qualifying income
under the 90% test.
Regulated futures contracts, options on broad-based stock indices, options
on stock index futures, certain other futures contracts and options thereon
(collectively, "Section 1256 contracts") held by a portfolio at the end of each
taxable year may be required to be "marked-to-market" for federal income tax
purposes (that is, treated as having been sold at that time at market value).
Any unrealized gain or loss taxed pursuant to this rule will be added to
realized gains or losses recognized on Section 1256 contracts sold by a
portfolio during the year, and the resulting gain or loss will be deemed to
consist of 60% long-term capital gain or loss and 40% short-term capital gain or
loss. A portfolio may elect to exclude certain transactions from the
mark-to-market rule although doing so may have the effect of increasing the
relative proportion of short-term capital gain (taxable as ordinary income)
and/or increasing the amount of dividends that must be distributed annually to
meet income distribution requirements, currently at 98%, to avoid payment of
federal excise tax.
It should also be noted that under certain circumstances, the acquisition
of positions in hedging instruments may result in the elimination or suspension
of the holding period for tax purposes of other assets held by a portfolio with
the result that the relative proportion of short-term capital gains (taxable as
ordinary income) could increase.
Possible Risk Factors in Hedging. In addition to the risks with respect to
futures and options discussed in the Prospectus and above, there is a risk in
selling futures that the prices of futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of a portfolio's securities.
The ordinary spreads between prices in the cash and futures markets are subject
to distortions due to differences in the natures of those markets. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close out futures contracts through offsetting transactions which
could distort the normal relationship between the cash and futures markets.
Second, the liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Moreover, if the Manager's investment judgment about the general
direction of securities prices is incorrect, a Portfolio's overall performance
would be poorer than if it had not entered into a Hedging Transaction.
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Also, when a portfolio uses appropriate Hedging Instruments to establish a
position in the market as a temporary substitute for the purchase of individual
securities (long hedging) by buying futures and/or calls on such futures or on a
particular security, it is possible that the market may decline. If the
portfolio then concludes not to invest in such securities at that time because
of concerns as to possible further market decline or for other reasons, it will
realize a loss on the Hedging Instruments that is not offset by a reduction in
the price of the securities purchased.
Investment in Foreign Securities. As described in the Prospectus, the
Global Equity Portfolio will, and the Equity, Blended Equity, Large Cap Growth,
Small Cap Growth, Target, Balanced, Mid Cap, Small Cap and Managed Portfolios
may purchase foreign securities provided that they are listed on a domestic or
foreign securities exchange or represented by American depository receipts
listed on a domestic securities exchange or traded in a domestic or foreign
over-the-counter market. Except for the Blended Equity, Large Cap Growth, Small
Cap Growth and Target Portfolios, there is no limit on the amount of such
foreign securities that the Portfolios might acquire. Each of the Blended
Equity, Large Cap Growth, Small Cap Growth and Target Portfolios may invest up
to 15% of its assets in foreign securities.
The Portfolios will hold foreign currency in connection with the purchase
or sale of securities on a foreign securities exchange. To the extent that
foreign currency is so held, there may be a risk due to foreign currency
exchange rate fluctuations. Such foreign currency and foreign securities will be
held by the Fund's custodian bank, or by a foreign branch of a U.S. bank, acting
as subcustodian, on behalf of the Portfolio. The custodian bank will hold such
foreign securities pursuant to such arrangements as are permitted by applicable
foreign and domestic law and custom.
Investments in foreign companies involve certain considerations which are
not typically associated with investing in domestic companies. An investment may
be affected by changes in currency rates and in exchange control regulations
(e.g. currency blockage). The Portfolios may bear a transaction charge in
connection with the exchange of currency. There may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies are generally not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. Most foreign stock markets have substantially less volume than the
New York Stock Exchange and securities of some foreign companies are less liquid
and more volatile than securities of comparable domestic companies. There is
generally less government regulation of foreign stock exchanges, brokers, and
listed companies than there is in the United States. In addition, with respect
to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments which could adversely affect investment in securities of issuers
located in those countries. Individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. If it should become
necessary, the Portfolios would normally encounter greater difficulties in
commencing a lawsuit against the issuer of a foreign security than it would
against a United States issuer.
Investments in Emerging Markets. Emerging and developing markets abroad
may offer special opportunities for investing but have greater risks than more
developed foreign markets, such as those in Europe, Canada, Australia, New
Zealand and Japan. There may be even less liquidity in their securities markets,
and settlements of purchases and sales of securities may be subject to
additional delays. They are subject to greater risks of limitations on the
repatriation of income and profits because of currency
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restrictions imposed by local governments. Those counties may also be subject to
the risk of greater political and economic instability, which can greatly affect
the volatility of prices of securities in those countries. The Manager will
consider these factors when evaluating securities in these markets.
Foreign Currency Transactions. The Blended Equity, Large Cap Growth, Small
Cap Growth, Target, Global Equity, Balanced, Equity, Mid Cap, Small Cap and
Managed Portfolios do not intend to create exposure in foreign currency. When a
Portfolio agrees to purchase or sell a security in a foreign market it will
generally be obligated to pay or entitled to receive a specified amount of
foreign currency and will then generally convert dollars to that currency in the
case of a purchase or that currency to dollars in the case of a sale. The
Blended Equity, Large Cap Growth, Small Cap Growth, Target, Global Equity,
Balanced, Mid Cap, Equity, Small Cap and Managed Portfolios intend to conduct
their foreign currency exchange transactions on a spot basis (i.e., cash) at the
spot rate prevailing in the foreign currency exchange market or through entering
into forward foreign currency contracts ("forward contracts") to purchase or
sell foreign currencies. Such Portfolios may enter into forward contracts in
order to lock in the U.S. dollar amount they must pay or expect to receive for a
security they have agreed to buy or sell or with respect to their positions when
the Portfolios believe that a particular currency may change unfavorably
compared to the U.S. dollar. A forward contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades.
The Fund's custodian bank will place cash, U.S. Government securities or
debt securities in separate accounts of the Portfolios in an amount equal to the
value of the Portfolios' total assets committed to the consummation of any such
contract in such account and if the value of the securities placed in the
separate accounts decline, additional cash or securities will be placed in the
accounts on a daily basis so that the value of the accounts will equal the
amount of the Portfolios' commitments with respect to such forward contracts.
If, rather than cash, portfolio securities are used to secure such a forward
contract, on the settlement of the forward contract for delivery by the
Portfolios of a foreign currency, the Portfolios may either sell the portfolio
security and make delivery of the foreign currency, or they may retain the
security and terminate their contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating them to purchase, on
the same settlement date, the same amount of foreign currency.
The Global Equity Portfolio may effect currency hedging transactions in
foreign currency futures contracts, exchange-listed and over-the-counter call
and put options on foreign currency futures contracts and on foreign currencies.
The use of forward futures or options contracts will not eliminate fluctuations
in the underlying prices of the securities which the Global Equity Portfolio
owns or intends to purchase or sell. They simply establish a rate of exchange
for a future point in time. Additionally, while these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
their use tends to limit any potential gain which might result from the increase
in value of such currency. In addition, such transactions involve costs and may
result in losses.
Although each Portfolio values its assets daily in terms of U.S. dollars,
it does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will, however, do so from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the spread between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Portfolio
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at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
Under Internal Revenue Code Section 988, special rules are provided for
certain transactions in a currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from forward contracts,
futures contracts that are not "regulated futures contracts," and from unlisted
options will be treated as ordinary income or loss under Internal Revenue Code
Section 988. Also, certain foreign exchange gains or losses derived with respect
to fixed-income securities are also subject to Section 988 treatment. In
general, Internal Revenue Code Section 988 gains or losses will increase or
decrease the amount of the Portfolio's investment company taxable income
available to be distributed to shareholders as ordinary income, rather than
increasing or decreasing the amount of the Portfolio's net capital gain.
Additionally, if Internal Revenue Code Section 988 losses exceed other
investment company taxable income during a taxable year, the Portfolio would not
be able to make any ordinary income distributions.
Foreign Custody. Rules adopted under the 1940 Act permit the Portfolios to
maintain their securities and cash in the custody of certain eligible banks and
securities depositories. The Portfolios' holdings of securities of issuers
located outside of the U.S. will be held by the Fund's sub-custodians who will
be approved by the trustees or by the trustees' delegate in accordance with such
Rules. The trustees or their delegate will determine that the Portfolios' assets
will be subject to reasonable care, based on standards applicable to custodians
in the relevant market, after considering all factors relevant to the
safekeeping of such assets including but not limited to, the custodian's
practices, procedures and internal controls; the custodian's general reputation;
and whether the Portfolios will have jurisdiction against the custodian.
However, no assurances can be given that the trustees' or their delegates'
appraisal of the risks in connection with foreign custodial arrangements will
always be correct or that expropriation, nationalization, freezes (including
currency blockage), confiscations or any other loss of assets that would affect
assets of the Portfolio will not occur, and shareholders bear the risk of losses
arising from those or other similar events.
Convertible Securities. As specified in the Prospectus, certain of the
Portfolios may invest in fixed-income securities which are convertible into
common stock. Convertible securities rank senior to common stocks in a
corporation's capital structure and, therefore, entail less risk than the
corporation's common stock. The value of a convertible security is a function of
its "investment value" (its value as if it did not have a conversion privilege),
and its "conversion value" (the security's worth if it were to be exchanged for
the underlying security, at market value, pursuant to its conversion privilege).
To the extent that a convertible security's investment value is greater
than its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, the convertible security will sell at some premium over
its conversion value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.) At such
times the price of the convertible security will tend to fluctuate directly with
the price of the underlying equity security. Convertible securities may be
purchased by the Portfolios at varying price levels above their investment
values and/or their conversion values in keeping with the Portfolios'
objectives.
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Foreign and Domestic Security Selection Process. The allocation of assets
between U.S. and foreign markets for the Global Equity Portfolio in particular,
as well as all other Portfolios which invest in foreign securities in general,
will vary from time to time as deemed appropriate by the Manager. It is a
dynamic process based on an on-going analysis of economic and political
conditions, the growth potential of the securities markets throughout the world,
currency exchange considerations and the availability of attractively priced
securities within the respective markets. In all markets, security selection is
designed to reduce risk through a value oriented approach in which emphasis is
placed on identifying well-managed companies which, in the case of the Global
Equity Portfolio, represent exceptional values in terms of such factors as
assets, earnings and growth potential.
Investing in Small and Medium Capitalization Companies. Investing in the
equity securities of small and medium capitalization companies involve
additional risks compared to investing in large capitalization companies.
Compared to large companies, these companies may:
o Have more limited product lines and capital resources
o Have less established markets for their products
o Have earnings that are more sensitive to changes in the economy,
competition and technology
o Be more dependent upon key members of management.
The market value of the common stock of small and medium capitalization
companies may:
o Be more volatile, particularly in response to company announcements
or industry events
o Have less active trading markets
o Be harder to sell at the time and prices that the adviser considers
appropriate.
When-Issued, Delayed Delivery and Forward Commitment Securities. The
Blended Equity, Large Cap Growth, Small Cap Growth and Target Portfolios may
purchase or sell securities in a transaction where the payment obligation and
interest rate on the securities are fixed at the time the Portfolio enters into
the commitment, but interest will not accrue to the Portfolio until delivery of
and payment for the securities. Securities purchased or sold in this way,
alternatively referred to as "when issued", "delayed delivery' or `forward
commitment" securities, may have a market value on delivery which is less than
the amount paid by the Portfolio. Although the Portfolio will only make
commitments to purchase securities on a forward commitment basis with the
intention of actually acquiring the securities, the Portfolio may sell the
securities before the settlement date if deemed advisable by the adviser. Unless
the Portfolio has entered into an offsetting agreement to sell the securities
purchased on a forward commitment basis, it will maintain a segregated account
consisting of cash or liquid securities with a value equal to the Portfolio's
purchase commitment. The assets in this account must be adjusted daily to
compensate for any decline in the value of the segregated assets.
Investment in Other Investment Companies. Each Portfolio also may purchase
shares of investment companies or trusts which invest principally in securities
in which the Portfolio is authorized to invest. The return on a Portfolio's
investments in investment companies will be reduced by the operating expenses,
including investment advisory and administrative fees, of such companies. A
Portfolio's investment in an investment company may require the payment of a
premium above the net asset value of the investment company's shares, and the
market price of the investment company thereafter may decline without any change
in the value of the investment company's assets. The Portfolio will invest in an
investment company only if it is believed that the potential benefits of such
investment are sufficient to
17
<PAGE>
warrant the payment of any such premium. Under the 1940 Act, the Portfolios
cannot invest more than 10% of their assets, respectively, in investment
companies or more than 5% of their total assets, respectively, in the securities
of any one investment company, nor may they own more than 3% of the outstanding
voting securities of any such company, respectively, except that these limits do
not apply if a portfolio is acquiring securities of an investment company in the
same group of investment companies, the portfolio only invests in securities of
other investment companies that are part of the same group, government
securities and short-term paper; sales or distribution charges are charged only
at one of the acquired or acquiring investment companies and the acquired
company has a policy restricting it from investing in securities of other
investment companies under these exceptions. To the extent a Portfolio invests
in securities in bearer form it may be more difficult to recover securities in
the event such securities are lost or stolen.
Passive Foreign Investment Company Income. If a Portfolio invests in an
entity which is classified as a "passive foreign investment company" ("PFIC")
for U.S. tax purposes, the application of certain technical tax provisions
applying to such companies could result in the imposition of federal income tax
with respect to such investments at the Portfolio level which could not be
eliminated by distributions to shareholders. Under the Taxpayer Relief Act of
1997, a mark-to-market regime was established that allows a regulated investment
company ("RIC") to avoid most, if not all, of the difficulties posed by the PFIC
rules. In any event, it is not anticipated that any taxes on a Portfolio with
respect to investments in PFIC's would be significant.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Fund as
fundamental policies which cannot be changed without the vote of a majority of
the outstanding voting securities of that Portfolio. Such a majority is defined
as the lesser of (a) 67% or more of the shares of the Portfolio present at the
meeting of shareholders of the Fund, if the holders of more than 50% of the
outstanding shares of the Portfolio are present or represented by proxy or (b)
more than 50% of the outstanding shares of the Portfolio. For the purposes of
the following restrictions and those contained in the Prospectus: (i) all
percentage limitations apply immediately after a purchase or initial investment,
unless specifically stated otherwise; and (ii) any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in the
amount of total assets does not require elimination of any security from the
Portfolio. The restrictions in 1, 2, and 3 do not apply to U.S. Government
securities.
Additional Restrictions Applicable to All Portfolios. Each Portfolio of
the Fund may not:
1. Invest more than 5 percent of the value of its total assets in the
securities of any one issuer, or purchase more than 10 percent of
the voting securities, or more than 10 percent of any class of
security, of any issuer (for this purpose all outstanding debt
securities of an issuer are considered as one class and all
preferred stock of an issuer are considered as one class).
2. Concentrate its investments in any particular industry, but if
deemed appropriate for attaining its investment objective, a
Portfolio may invest up to 25 percent of its total assets (valued at
the time of investment) in any one industry classification used by
that Portfolio for investment purposes.
3. Except for the Small Cap Growth Portfolio, invest more than 5
percent of the value of its total assets in securities of issuers
having a record, together with predecessors, of less than three
years of continuous operation.
18
<PAGE>
4. Borrow money in excess of 10 percent of the value of its total
assets. It may borrow only as a temporary measure for extraordinary
or emergency purposes and will make no additional investments while
such borrowings exceed 5 percent of the total assets. Such
prohibition against borrowing does not prohibit escrow or other
collateral or making arrangements in connection with the hedging
instruments which a Portfolio is permitted to use by any of its
other fundamental policies.
5. Invest more than 15 percent of its assets in illiquid securities
(securities for which market quotations are not readily available)
and repurchase agreements which have a maturity of longer than seven
days.
6. Make loans of money or securities, except (a) by the purchase of
debt obligations in which the Portfolio may invest consistent with
its investment objectives and policies; (b) by investing in
repurchase agreements; or (c) by lending its portfolio securities,
not in excess of 33% of the value of a Portfolio's total assets,
made in accordance with guidelines adopted by the Fund's Board of
Trustees, including maintaining collateral from the borrower equal
at all times to the current market value of the securities loaned.
7. Invest in securities of any issuer if, to the knowledge of the Fund,
any officer or trustee of the Fund or any officer or director of the
Manager owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers, trustees and directors who own more
than 1/2 of 1% own in the aggregate more than 5% of the outstanding
voting securities of such issuer.
8. Pledge its assets or assign or otherwise encumber them in excess of
10% of its net assets (taken at market value at the time of
pledging) and then only to secure borrowings effected within the
limitations set forth in the Prospectus.
9. Purchase or sell real estate; however, the Portfolios may purchase
marketable securities of issuers which engage in real estate
operations or which invest in real estate or interests therein, and
securities which are secured by real estate or interests therein.
10. Purchase securities on margin (except for such short-term loans as
are necessary for the clearance of purchases of portfolio
securities) or sell securities short except "against the box."
(Collateral arrangements in connection with transactions in options
and futures are not deemed to be margin transactions.)
11. Invest in oil, gas or mineral exploration or developmental programs,
except that a Portfolio may invest in the securities of companies
which operate, invest in, or sponsor such programs.
12. Engage in the underwriting of securities except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
13. Invest for the purposes of exercising control or management of
another company.
14. Issue senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of:
(a) entering into any repurchase agreement; (b) borrowing money in
accordance with restrictions described above; or (c) lending
portfolio securities.
19
<PAGE>
15. Invest in physical commodities or physical commodity contracts.
However, the Fund may buy and sell hedging instruments to the extent
specified in its Prospectus or Statement of Additional Information
from time to time. The Fund can also buy and sell options, futures,
securities or other instruments backed by, or the investment return
from which is linked to, changes in the price of physical
commodities.
All percentage limitations apply immediately after a purchase or initial
investment and any subsequent change in any applicable percentage resulting from
market fluctuations or other changes in the amount of total assets does not
require elimination of any security from a Portfolio.
Restrictions Applicable to the Equity, Mid Cap, Managed, Global Equity,
Balanced and Small Cap Portfolios Only. Each of the above Portfolios may not:
1. Invest more than 5% of the value of its total assets in warrants not
listed on either the New York or American Stock Exchange. However,
the acquisition of warrants attached to other securities is not
subject to this restriction.
2. Invest more than 5% of its total assets in securities which are
restricted as to disposition under the federal securities laws or
otherwise. This restriction shall not apply to securities received
as a result of a corporate reorganization or similar transaction
affecting readily marketable securities already held by the Equity,
Mid Cap, Managed, Global Equity, Balanced and/or Small Cap
Portfolios; however, each Portfolio will attempt to dispose in an
orderly fashion of any securities received under these circumstances
to the extent that such securities, together with other unmarketable
securities, exceed 15% of that Portfolio's total assets.
Restrictions Applicable to the Blended Equity, Large Cap Growth, Small Cap
Growth and Target Portfolios Only. Each of the above Portfolios may not:
1. Invest more than 15 % f its total assets in securities the
disposition of which is restricted under the federal securities laws
(excluding securities offered and sold under Rule 144A of the
Securities Act of 1933 (the "1933 Act") and commercial paper offered
and sold under Section 4(2) of the 1933 Act, OTC Options and initial
offerings and private offerings of SMBs.
2. Engage in short sales of securities or maintain a short position for
the account of a Portfolio unless the Portfolios owns an equal
amount of the securities or own the right to acquire securities of
the same issue as the securities sold short without the payment of
further consideration.
3. With respect to 75% of a Portfolio's total assets, invest more than
5% of the assets in the securities of any one issuer (This
limitation does not apply to bank certificates of deposit or
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.).
4. Write (sell) or purchase options except that each Portfolio may (a)
write covered call options or covered put options on securities that
it is eligible to purchase and enter into closing purchase
transactions for those options, and (b) purchase put and call
options on securities indexes, options on foreign currencies,
options on futures contracts, and options on other financial
instruments or
20
<PAGE>
one or more groups of instruments, provided that the premiums paid
by each Portfolio on all outstanding options it has purchased do not
exceed 5% of its total assets. Each Portfolio may enter into closing
sale transactions for options it purchases.
TRUSTEES AND OFFICERS
The Fund is governed by a Board of Trustees, which is responsible for
protecting the interests of shareholders under Massachusetts law. The Trustees
meet periodically throughout the year to oversee the Fund's activities, review
its performance, and review the actions of OpCap Advisors. Although the Fund
will not normally hold annual meetings of its shareholders, it may hold
shareholder meetings from time to time on important matters, and shareholders
have the right to call a meeting to remove a Trustee or to take other action
described in the Fund's Declaration of Trust. The trustees and officers of the
Fund, and their principal occupations during the past five years, are set forth
below. The Trustee who is an "interested person," as defined in the 1940 Act, is
denoted by an asterisk. The address of the officers and trustees is 1345 Avenue
of the Americas, New York, New York 10105-4800, except as noted. As of February
1, 2000, the trustees and officers of the Fund as a group owned none of its
outstanding shares.
Joseph M. La Motta, Chairman of the Board of Trustees & President*
Age: 67
Chairman Emeritus of Oppenheimer Capital, a registered investment adviser and
Chairman of the Board and President of OCC Cash Reserves, Inc., an open-end
investment company.
Paul Y. Clinton, Trustee
39 Blossom Avenue
Osterville, Massachusetts 02655
Age: 69
Principal of Clinton Management Associates, a financial and venture capital
consulting firm; formerly Director, External Affairs, Kravco Corporation, a
national real estate owner and property management corporation; Trustee of
Capital Cash Management Trust, a money-market fund and Director of Narragansett
Tax-Free Fund, a tax-exempt bond fund; Director of Oppenheimer Quest Value Fund,
Inc., Oppenheimer Quest Global Value Fund, Inc., Oppenheimer Quest Capital Value
Fund, Inc., Rochester Fund Municipals, Rochester Portfolio Series Limited Term
New York Municipals and Bond Fund Series, Oppenheimer Convertible Securities
Fund, Oppenheimer Mid Cap Fund, and OCC Cash Reserves, Inc.; Trustee of
Oppenheimer Quest for Value Funds which is an open-end investment company.
Thomas W. Courtney, C.F.A., Trustee
833 Wyndemere Way
Naples, Florida 34105
Age: 66
Principal of Courtney Associates, Inc., a venture capital business; former
General Partner of Trivest Venture Fund; former President of Federated
Investment Counseling, Inc.; Director of Oppenheimer Quest Value Fund, Inc.,
Oppenheimer Quest Global Value Fund, Inc., Oppenheimer Quest Capital Value Fund,
Inc., Rochester Fund Municipals, Rochester Portfolio Series Limited Term New
York Municipals and Bond Fund Series, Oppenheimer Convertible Securities Fund,
Oppenheimer Mid Cap Fund, OCC Cash Reserves, Inc., and Trustee of Oppenheimer
Quest for Value Funds, Cash Assets Trust, Hawaiian Tax-Free Trust and Tax Free
Trust of Arizona, each of which is an open-end investment company; former
Director of The Financial Analysts Federation.
21
<PAGE>
Lacy B. Herrmann, Trustee
380 Madison Avenue, Suite 2300
New York, New York 10017
Age: 70
Chairman of the Board and Chief Executive Officer of Aquila Management
Corporation (since 1984) and Chairman of the Board of Trustees and President of
seven single state tax exempt bond funds, five money market funds and two equity
funds in the Aquila fund complex; Vice President, Director, Secretary, and
formerly Treasurer of Aquila Distributors, Inc. (since 1981), distributor of the
funds in the Aquila fund complex; Director, Oppenheimer Quest Value Fund, Inc.,
Oppenheimer Quest Global Value Fund, Inc., Oppenheimer Quest Capital Value Fund,
Inc., Rochester Fund Municipals, Rochester Portfolio Series Limited Term New
York Municipals and Bond Fund Series, Oppenheimer Convertible Securities Fund,
Oppenheimer Mid Cap Fund, OCC Cash Reserves, Inc., Trustee of Oppenheimer Quest
for Value Funds, each of which is an open-end investment company; Trustee
Emeritus of Brown University since 1996; Trustee of the Hopkins School since
1993.
V. Lee Barnes, Director
185 Clapboard Ridge Road
Greenwich, Connecticut 06831
Age: 64
President and Chief Executive Officer of Net Learning Inc. since January 1999;
Director of Davis International Banking Consultants since July 1993; previously
a consultant and acting Executive Vice President of Smyth, Sanford & Gerard
L.L.C., an insurance underwriting agency; Trustee of OCC Accumulation Trust
since January 2000.
Theodore T. Mason, Director
26 Circle Drive
Hastings-On-Hudson, New York 10706
Age: 64
Executive Director of Louisiana Power Partners, LLC since 1999 and of East Wind
Power Partners since 1994; Second Vice President of the Alumni Association of
SUNY Maritime College since 1998 and Director for the same organization since
1997; Director of Cogeneration Development of Willamette Industries, Inc., a
forest products company, 1991-1993; Vice Chairman of the Board of Trustees of
CCMT since 1981; Vice Chairman of the Board of Trustees and Trustee of Prime
Cash Fund (which is inactive) since 1982; Trustee of Short Term Asset Reserves,
1984-1986 and 1988-1996, of Hawaiian Tax-Free Trust and Pacific Capital Cash
Assets Trust since 1984, of Churchill Cash Reserves Trust since 1985, of Pacific
Capital Tax-Free Cash Assets Trust and Pacific Capital U.S. Government
Securities Cash Assets Trust since 1988 and of Churchill Tax-Free Fund of
Kentucky since 1992; Trustee of OCC Accumulation Trust since January 2000.
Brian Shlissel, Treasurer
Age: 36
Vice President of PIMCO Advisors since July 1999; Vice President of Mitchell
Hutchins Asset Management, Inc. from 1993 to 1999. Treasurer of OCC Cash
Reserves, Inc. and the Municipal Advantage Fund, Inc. and Assistant Treasurer of
The Central European Value Fund, Inc. since August 1999; Treasurer and
Secretary, Jardine Fleming India Fund from 1997 to 1998; Assistant Treasurer of
PaineWebber PACE Select Advisors Trust from 1998 to 1999.
22
<PAGE>
Colin Glinsman, Vice President & Portfolio Manager
Age: 42
Chief Investment Officer and Managing Director of Oppenheimer Capital; joined
the Firm in 1989.
Mark Degenhart, Vice President & Portfolio Manager
Age: 36
Vice President of Oppenheimer Capital since January 1999; previously, Director
of Research and Portfolio Manager of Palisades Capital Management, which he
joined in 1993.
Bernard H. Garil, Vice President
Age: 59
Vice President of OCC Cash Reserves, Inc., an open-end investment company.
Richard Glasebrook, Vice President & Portfolio Manager
Age: 51
Managing Director, Oppenheimer Capital; formerly Partner and Portfolio Manager
of Delafield Asset Management.
Louis Goldstein, Vice President & Portfolio Manager
Age: 39
Senior Vice President, Oppenheimer Capital since 1998; joined Oppenheimer
Capital as Vice President and security analyst in 1991.
Vikki Hanges, Vice President & Portfolio Manager
Age: 40
Senior Vice President, Oppenheimer Capital since 1998; joined Oppenheimer
Capital in 1987.
Elisa Amitay Mazen, Vice President & Portfolio Manager
Age: 39
Senior Vice President with Oppenheimer Capital since 1994; formerly a Portfolio
Manager/Analyst at Clemente Capital, Inc.
Elliot M. Weiss, Secretary
Age: 38
Vice President of OpCap Advisors since March 1996; joined Oppenheimer Capital in
1991. Secretary of the Municipal Advantage Fund. and OCC Cash Reserves, Inc.
Assistant Secretary of Fixed Income Shares since March 2000.
Timothy McCormack, Vice President & Portfolio Manager
Age: 35
Senior Vice President, Oppenheimer Capital since 1998; joined Oppenheimer
Capital in 1994.
Maria Camacho, Assistant Secretary
Age: 46
Vice President, OpCap Advisors. Joined Oppenheimer Capital in 1987.
23
<PAGE>
Kenneth W. Corba, Vice President & Portfolio Manager
Age: 47
Chief Investment Officer and Managing Director of PIMCO Equity Advisors since
January, 1999; formerly, Chief Investment Officer for Eagle Asset Management
from March 1995 and Director of the Capital Management Group at Stein Roe &
Farnham from June 1984 to February 1995.
Michael F. Gaffney, Vice President & Portfolio Manager
Age: 38
Managing Director of PIMCO Equity Advisors since January 1999; Senior Vice
President and Portfolio Manager for Alliance Capital Management from September
1987 to January 1999.
Jeffrey D. Parker, Vice President & Portfolio Manager
Age: 32
Senior portfolio manager of PIMCO Equity Advisors since January 1999; formerly,
Assistant Portfolio Manager for Eagle Asset Management from July 1996 to
December 1998 and a Senior Consultant specializing in health care and technology
for Andersen Consulting from February 1991 to May 1994.
William H. Gross, Vice President & Portfolio Manager
Age: 56
Managing Director and Chief Investment Officer of PIMCO; joined PIMCO in June
1971; founding partner of PIMCO.
Remuneration of Officers and Trustees. No officer of the Fund will receive
a salary or fee from the Fund. The following table sets forth the aggregate
compensation paid by the Fund to each of the Trustees during its fiscal year
ended December 31, 1999 and the aggregate compensation paid to each of the
Trustees by OCC Cash Reserves, Inc., a fund managed by OpCap Advisors, and by
six funds for which OpCap Advisors serves as sub-adviser during each such fund's
1999 calendar year.
For the Year ended December 31, 1999
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from the Fund, OCC
Name of Trustee Compensation as Part of Fund Benefits upon Cash Reserves and Six
of the Fund from the Fund Expenses Retirement Oppenheimer Quest Funds
<S> <C> <C> <C> <C>
Paul Clinton 32,438 23,827 0 $200,812
Thomas Courtney 32,428 23,827 0 $176,230
Lacy Herrmann 32,038 23,827 0 $214,284
Joseph La Motta 0 0 0
</TABLE>
For the purpose of the chart above, "Fund Complex" includes the Fund,
other funds advised by the Advisor and the Oppenheimer Quest Funds for which the
Advisor serves as subadviser.
24
<PAGE>
Total compensation includes accrued retirement benefits and fees paid by
the Oppenheimer Quest Funds for which OpCap Advisors acts as subadviser. The
Oppenheimer Quest Funds are not affiliated with OpCap Advisors. The amount of
total compensation in fees paid to the independent Trustees by the Oppenheimer
Quest Funds during the 1999 calendar year was as follows: Mr. Clinton: $135,337;
Mr. Courtney: $110,755; and Mr. Herrmann: $149,709.
On October 19, 1998 the Fund adopted a retirement plan (to become
effective January 1, 1999) that provides for payment to a retired Trustee of up
to 80% of the average compensation paid during that Trustee's five years of
service in which the highest compensation was received. A Trustee must serve in
that capacity for the Fund or OCC Cash Reserves, Inc. for at least 15 years to
be eligible for the maximum payment. Because each Trustee's retirement benefit
will depend on the amount of the Trustee's future compensation and length of
service, the amount of those benefits cannot be determined as of this time nor
can the Fund estimate the number of years of credited service that will be used
to determine those benefits.
CONTROL PERSONS
As of December 31, 1999, shares of the Portfolios were held by Oppenheimer
Capital and the Variable Accounts of the following insurance companies, with the
figures beneath each Portfolio representing that company's holdings as a
percentage of each Portfolio's total outstanding shares.
25
<PAGE>
Portfolio Shareholders of Record as of December 31, 1999(1)
<TABLE>
<CAPTION>
====================================================================================================================================
Portfolios
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Govt.
Shareholders Income Global Equity Equity Small Cap Managed Mid Cap Balanced
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Mutual Life 10.87% 3.22% 1.41% 3.71%
Insurance Company of New 106,786.251 60,470.577 94,706.587 684,217.255
York (New York, NY) & Shares Shares Shares Shares
The MONY Life Insurance
Company of America
1740 Broadway
NY, NY 10019
- ------------------------------------------------------------------------------------------------------------------------------------
Provident Mutual Life 36.58% 10.33% 7.14%
Insurance Company & 686,972.406 693,829.502 1,315,887.026
Providentmutual Life and Shares Shares
Annuity Company of
America
1600 Market St.
Philadelphia, PA 19103
- ------------------------------------------------------------------------------------------------------------------------------------
Connecticut General Life .37% 4.45% 2.70%
Insurance Company & 6,883.065 298,978.079 496,719.652
CIGNA Life Insurance Shares Shares Shares
Company
350 Church Street
MLW 1, 12th Flr.
Hartford, CT 06103-1106
- ------------------------------------------------------------------------------------------------------------------------------------
American Enterprise Life 72.88% 3.05% 1.81% 1.68%
Insurance Company and 710,185.896 57,209.024 121,748.133 310,411.283
American Centurion Life Shares Shares Shares Shares
====================================================================================================================================
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Portfolios
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Govt.
Shareholders Income Global Equity Equity Small Cap Managed Mid Cap Balanced
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Insurance Company
80 South Eighth Street,
Minneapolis, MN 55402
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Capital 22.13%
1345 Avenue of the 103,390.456
Americas, New York, NY Shares
10105-4800
- ------------------------------------------------------------------------------------------------------------------------------------
IL Annuity and Insurance 2.69% 2.71%
Company 2960 North 180,685.460 499,956.962
Meridian Street, Shares Shares
Indianapolis, IN46208
- ------------------------------------------------------------------------------------------------------------------------------------
PRUCO Life Insurance 57.32% 59.55%
Company of New Jersey 3,849,707.173 10,976,784.582
and PRUCO Life Insurance Shares Shares
Company
751 Broad
Street, Newark, NJ 07102
- ------------------------------------------------------------------------------------------------------------------------------------
Transamerica Life 0.93% 0.68%
Companies 62,746.238 124,722.204
Transamerica Center Shares Shares
1150 Olive Street, Los
Angeles, CA 90015
====================================================================================================================================
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Portfolios
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Govt.
Shareholders Income Global Equity Equity Small Cap Managed Mid Cap Balanced
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ReliaStar Life Insurance 4.34% 8.36% 5.28% 3.08%
Company 113,785.414 156,861.280 355,082.973 566,947.221
20 Washington Avenue Shares Shares Shares Shares
South, Route 1237,
Minneapolis, MN 55401
- ------------------------------------------------------------------------------------------------------------------------------------
AEGON Insurance Group 16.85% 4.85% 1.94%
400 West Market Street 165,600.540 326,161.499 357,294.988
Louisville, KY 40202 Shares Shares Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Sun Life of Canada (U.S.) 17.69% 1.87% 0.31% 77.87%
Copley Place, Suite 200, 332,077.646 125,841.935 56,784.085 360,280.293
Boston, MA 02117 Shares Shares Shares Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Travelers Insurance 25.90%
Company 486,298.334
One Tower Square, Shares
Hartford, CT 06183
- ------------------------------------------------------------------------------------------------------------------------------------
Lincoln Life Insurance 93.03% 7.25% 10.22%
Company 2,438,249.791 487,402.714 1,883,187.082
1300 South Clinton Street Shares Shares Shares
Fort Wayne, IN 46802
- ------------------------------------------------------------------------------------------------------------------------------------
Northern Life 2.63% 4.74% 1.81% 2.19%
20 Washington Avenue 69,918.783 89,009.992 121,880.614 403,497.512
South, Route 1237, Shares Shares Shares
Minneapolis, MN 55401
====================================================================================================================================
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Portfolios
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Govt.
Shareholders Income Global Equity Equity Small Cap Managed Mid Cap Balanced
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lincoln Benefit Life 0.09%
Company 1,634.982
206 South 13th Street, Shares
Suite 100, Lincoln, NE
68508
- ------------------------------------------------------------------------------------------------------------------------------------
AGA Series Trust 4.09%
American General Annuity 752,925.088
Insurance Company Shares
2929 Allen Parkway
Houston, TX 77019
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This chart lists all Variable Account shareholders of record of the
Portfolios as of December 31, 1999, and all holdings of shares of the
Portfolios by Oppenheimer Capital, the parent of the Manager. To the best
knowledge of the Fund, no Contractowner held units equivalent to 5% or
more of the shares of any Portfolio of the Fund as of December 31, 1999.
Shares of the Mid Cap Portfolio were acquired by Oppenheimer Capital to
provide capital for the Portfolio so that the Manager could commence a
meaningful investment program for the Portfolios, pending the acquisition of
shares of the Portfolios by Variable Accounts. The shares held by the Variable
Accounts generally will be voted in accordance with instructions of
Contractowners. Under certain circumstances however, the insurance companies, on
behalf of their respective Variable Accounts, may disregard voting instructions
received from Contractowners. The shares held by Oppenheimer Capital will be
voted in the same proportions as those voted by the insurance companies which
are held in their respective Variable Accounts. Any shareholder of record listed
in the above chart beneficially owning more than 25% of a particular Portfolio's
shares may be considered to be a "controlling person" of that Portfolio by
virtue of the definitions contained in the 1940 Act. The vote of such
shareholder of record could have a more significant effect on matters presented
to shareholders for approval than the votes of the Fund's other shareholders.
29
<PAGE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Investment Adviser. OpCap Advisors (the "Advisor" or the "Manager")
acts as investment adviser to the Portfolios of the Fund. The PIMCO Equity
Advisors Division of PIMCO Advisors L.P. ("PIMCO Advisors") acts as investment
sub-adviser to the Blended Equity, Large Cap Growth, Small Cap Growth and Target
Portfolios. Pacific Investment Management Company ("PIMCO") acts as investment
sub-advisor to the Managed Portfolio.
OpCap Advisors, the investment adviser to the Fund, is a majority owned
subsidiary of Oppenheimer Capital, a registered investment adviser whose
employees perform all investment advisory and management services provided to
the Fund by the Advisor. Oppenheimer Capital is an indirect wholly owned
subsidiary of PIMCO Advisors L.P., a registered investment adviser. The general
partners of PIMCO Advisors are PIMCO Partners G.P. and PIMCO Advisors Holdings
L.P. PIMCO Partners, G.P. is a general partnership between PIMCO Holdings LLC, a
Delaware limited liability company and an indirect wholly-owned subsidiary of
Pacific Life Insurance Company, and PIMCO Partners LLC, a California limited
liability company controlled by the current Managing Directors and two former
Managing Directors of Pacific Investment Management Company, a subsidiary of
PIMCO Advisors. PIMCO Partners, G.P. is the sole general partner of PIMCO
Advisors Holdings L.P.
The Advisory Agreement. OpCap Advisors provides investment advisory and
management services to the Fund pursuant to an Advisory Agreement dated November
5, 1997. The OpCap Advisory Agreement was amended on February 1, 1998 to limit
the total operating expenses of the Small Cap, Global Equity, Managed, Balanced
and U.S. Government Income Portfolios to 1.00% (net of any expense offsets) of
their respective average daily net assets and that the Adviser will limit total
operating expenses of the Global Equity Portfolio to 1.25% (net of any expense
offsets) of its average daily net assets.
PIMCO Advisors provides investment advisory and management services to the
Blended Equity, Large Cap Growth, Small Cap Growth and Target Portfolios of the
Fund pursuant to a Sub-Advisory Agreement with OpCap Advisors dated March 1,
2000. PIMCO provides similar services to the Managed Portfolio of the Fund
pursuant to a Sub-Advisory Agreement with OpCap Advisors dated March 1, 2000.
Under the Advisory Agreement and Sub-Advisory Agreements, each adviser is
required to: (i) regularly provide investment advice and recommendations to each
Portfolio of the Fund with respect to its investments, investment policies and
the purchase and sale of securities; (ii) supervise continuously and determine
the securities to be purchased or sold by the Fund and the portion, if any, of
the assets of each Portfolio of the Fund to be held uninvested; and (iii)
arrange for the purchase of securities and other investments by each Portfolio
it manages and the sale of securities and other investments held by the
Portfolio.
The Advisory Agreement also requires the Manager to provide administrative
services for the Fund, including (1) coordination of the functions of
accountants, counsel and other parties performing services for the Fund and (2)
preparation and filing of reports required by federal securities and "blue sky"
laws, shareholder reports and proxy materials.
Expenses not expressly assumed by OpCap Advisors under the Advisory
Agreement or by OCC Distributors (the "Distributor") are paid by the Fund. The
Advisory Agreement lists examples of expenses
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<PAGE>
paid by the Fund, of which the major categories relate to interest, taxes, fees
to non-interested trustees, legal and audit expenses, custodian and transfer
agent expenses, stock issuance costs, certain printing and registration costs,
and non-recurring expenses, including litigation.
The Distributor is located at 1345 Avenue of the Americas, New York, New
York 10105-4800 and serves as the general distributor for the Fund pursuant to a
General Distributors Agreement dated November 5, 1997.
The Distributor acts as the exclusive agent for the sale of Fund shares in
a continuous public offering. Shares of the Fund are sold by the Distributor at
net asset value. The Distributor does not receive any compensation from the Fund
for acting as the Fund's general distributor.
For the fiscal year ended December 31, 1997, the total advisory fees
accrued or paid by the Equity, Managed, Small Cap, U.S. Government Income and
Global Equity Portfolios were $199,896, $2,321,835, $498,382, $35,757 and
$184,504, respectively, of which $8,028 and $2,537 was waived by the Adviser
with respect to the U.S. Government Income Portfolio, and the Global Equity
Portfolio, respectively. For the fiscal year ended December 31, 1998, the total
advisory fees accrued or paid by the Equity, Managed, Small Cap, U.S. Government
Income, Global Equity and Mid Cap Portfolios were $291,218, $5,140,492,
$1,089,755 $49,774, $ 247,144 and $9,473, respectively, of which $16,027, and
$9,473 was waived by the Adviser with respect to the U.S. Government Income
Portfolio and the Mid Cap Portfolio. For the fiscal year ended December 31,
1999, the total advisory fees accrued or paid by the Equity, Managed, Small Cap,
Balanced, U.S. Government Income, Global Equity and Mid Cap Portfolios were
$498,512, $6,116,104 $1,206,779, $0, $63,217, $302,528 and $27,810,
respectively, of which $24,246 was waived by the Adviser with respect to the Mid
Cap Portfolio.
The advisory fee for the Equity, Global Equity, Managed, Small Cap, Mid
Cap, Balanced, Blended Equity, Large Cap Growth, Small Cap Growth and Target
Portfolios is at the annual rate of .80% of the first $400 million of average
daily net assets, .75% on the next $400 million of average daily net assets and
.70% of average daily net assets in excess of $800 million. With regard to the
Managed portfolio, OpCap Advisors pays PIMCO a fee equal to .25% of the average
daily net assets of the Portfolio on an annual basis. OpCap Advisors pays PIMCO
Advisors fees at the annual rate of .40% of the first $400 million of average
net assets, .375% on the next $400 million of average net assets and .35% of
assets in excess of $800 million with respect to the Blended Equity, Large Cap
Growth, Small Cap Growth and Target Portfolios for investment advisory services
PIMCO Advisors renders to those Portfolios. The advisory fee for the U.S.
Government Income Portfolio is at the annual rate of .60% of average daily net
assets.
The Advisory Agreement and each Sub-Advisory Agreement provides that in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard for its obligations thereunder, the Adviser or Sub Adviser, as
applicable is not liable for any act or omission in the course of, or in
connection with, the rendition of services thereunder. The Agreement permits the
Manager to act as investment advisor for any other person, firm, or corporation.
Portfolio Transactions. Portfolio decisions are based upon recommendations
of the Adviser, the sub-advisors and the judgment of the portfolio managers. As
most, if not all, purchases made by the U.S. Government Income Portfolio will be
principal transactions at net prices, the Portfolio pays no brokerage
commissions; however prices of debt obligations reflect mark-ups and mark-downs
which constitute
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<PAGE>
compensation to the executing dealer. The Portfolios will pay brokerage
commissions on transactions in listed options and equity securities. Prices of
securities purchased from underwriters of new issues include a commission or
concession paid by the issuer to the underwriter, and prices of debt securities
purchased from dealers include a spread between the bid and asked prices. The
Fund seeks to obtain prompt execution of orders at the most favorable net price.
Transactions may be directed to dealers during the course of an underwriting in
return for their brokerage and research services, which are intangible and on
which no dollar value can be placed. There is no formula for such allocation.
The research information may or may not be useful to the Fund and/or other
accounts of the Adviser and the sub-advisers; information received in connection
with directed orders of other accounts managed by the Adviser, the sub-advisers
or their affiliates may or may not be useful to the Fund. Such information may
be in written or oral form and includes information on particular companies and
industries as well as market, economic or institutional activity areas. It
serves to broaden the scope and supplement the research activities of the
Adviser, the sub-advisers, to make available additional views for consideration
and comparison, and to enable the Adviser and each sub-advisers to obtain market
information for the valuation of securities held by the Fund. For the year ended
December 31, 1999, the aggregate dollar amount involved in such transactions was
$83,421,335 with related commissions of $173,551. For the year ended December
31, 1998, the aggregate dollar amount involved in such transactions was
$68,855,295 with related commissions of $100,584. For the year ended December
31, 1997, the aggregate dollar amount involved in such transactions was
$338,184,986 with related commissions of $509,497.
The Adviser, the sub-advisers and Oppenheimer Capital currently serve as
investment manager to a number of clients, including other investment companies,
and may in the future act as investment manager or advisor to others. It is the
practice of the Adviser and each sub-adviser to cause purchase or sale
transactions to be allocated among the Fund and others whose assets it or
Oppenheimer Capital manages in such manner as it deems equitable. In making such
allocations among the Fund and other client accounts, the main factors
considered are the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and the
opinions of the persons responsible for managing the Portfolios of the Fund and
other client accounts. When orders to purchase or sell the same security on
identical terms are placed by more than one of the funds and/or other advisory
accounts managed by the Adviser, a sub-adviser or its affiliates, the
transactions are generally executed as received, although a fund or advisory
account that does not direct trades to a specific broker ("free trades") usually
will have its order executed first. Purchases are combined where possible for
the purpose of negotiating brokerage commissions, which in some cases might have
a detrimental effect on the price or volume of the security in a particular
transaction as far as the Fund is concerned. Orders placed by accounts that
direct trades to a specific broker will generally be executed after the free
trades. All orders placed on behalf of the Fund are considered free trades.
However, having an order placed first in the market does not necessarily
guarantee the most favorable price.
DETERMINATION OF NET ASSET VALUE
Shares of the Portfolios of the Fund are sold in a continuous offering to
variable accounts of participating life insurance companies to support their
variable annuity and variable life insurance contracts ("Variable Contracts").
Net purchase payments under the Variable Contracts are placed in one or more
subaccounts of the participating life insurance company's variable account, and
the assets of each such subaccount are invested in the shares of the Portfolio
corresponding to that subaccount. The variable accounts purchase and redeem
shares of the Portfolios for their subaccounts at net asset value without sales
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<PAGE>
or redemption charges.
The net asset value per share of each of the Portfolios of the Fund is
determined each day the New York Stock Exchange (the "NYSE") is open, at the
close of the regular trading session of the NYSE that day, by dividing the value
of the Fund's net assets by the number of shares outstanding. The NYSE's most
recent annual announcement (which is subject to change) states that it will
close on New Year's Day, Presidents' Day, Martin Luther King's Birthday, Good
Friday, Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas Day. It
may also close on other days. Participating life insurance company variable
accounts purchase and redeem shares of each Portfolio at the Portfolio's net
asset value per share determined after receipt of the order for purchase or
redemption.
Securities listed on a national securities exchange or designated national
market system securities are valued at the last reported sale price on that day,
or, if there has been no sale on such day or on the previous day on which the
Exchange was open (if a week has not elapsed between such days), then the value
of such security is taken to be the reported bid price at the time as of which
the value is being ascertained. Securities actively traded in the
over-the-counter market but not designated as national market system securities
are valued at the last quoted bid price. Any securities or other assets for
which current market quotations are not readily available are valued at their
fair value as determined in good faith under procedures established by and under
the general supervision and responsibility of the Fund's Board of Trustees. The
value of a foreign security is determined in its national currency and that
value is then converted into its U.S. dollar equivalent at the foreign exchange
rate in effect on the date of valuation.
The Fund's Board of Trustees has approved the use of nationally recognized
bond pricing services for the valuation of each Portfolio's debt securities. The
service selected by the Manager creates and maintains price matrices of U.S.
Government and other securities from which individual holdings are valued
shortly after the close of business each trading day. Debt securities not
covered by the pricing service are valued based upon bid prices obtained from
dealers who maintain an active market therein or, if no readily available market
quotations are available from dealers, such securities (including restricted
securities and OTC options) are valued at fair value under the Board of
Trustees' procedures. Short-term (having a remaining maturity of more than sixty
days) debt securities are valued on a "marked-to-market" basis, that is, at
prices based upon market quotations for securities of similar type, yield,
quality and maturity. Short-term (having a maturity of 60 days or less) debt
securities are valued at amortized cost or value.
Puts and calls are valued at the last sales price therefor, or, if there
are no transactions, at the last reported sales price that is within the spread
between the closing bid and asked prices on the valuation date. Futures are
valued based on their daily settlement value. When a Portfolio writes a call, an
amount equal to the premium received is included in the Portfolio's Statement of
Assets and Liabilities as an asset, and an equivalent credit is included in the
liability section. The credit is adjusted ("marked-to-market") to reflect the
current market value of the call. If a call written by a Portfolio is exercised,
the proceeds on the sale of the underlying securities are increased by the
premium received. If a call or put written by a Portfolio expires on its
stipulated expiration date the Portfolio will realize a gain equal to the amount
of the premium received. If a Portfolio enters into a closing transaction, it
will realize a gain or loss depending on whether the premium was more or less
than the transaction costs, without regard to unrealized appreciation or
depreciation on the underlying securities. If a put held by a Portfolio is
exercised by it, the amount the Portfolio receives on its sale of the underlying
investment is reduced by the amount of the premium paid by the Portfolio.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The dividend policies of the Portfolios are discussed in the Prospectus.
In computing interest income, these Portfolios will accrete any discount or
amortize any premium resulting from the purchase of debt securities except for
mortgage or other receivables-backed obligations subject to monthly payment of
principal and interest.
Capital Gains and Losses. Gains or losses on the sales of securities by
the Fund will be long-term capital gains or losses if the securities have been
held by the Fund for more than twelve months, regardless of how long you have
held your shares. Gains or losses on the sale of securities held for twelve
months or less will be short-term capital gains or losses.
Sources of Gross Income. To qualify for treatment as a regulated
investment company, a Portfolio must, among other things, derive its income from
certain sources. Specifically, in each taxable year, a Portfolio must generally
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities or foreign currencies, or other income derived with respect to its
business of investing in securities or currencies.
Diversification of Assets. To qualify for treatment as a regulated
investment company, a Portfolio must also satisfy certain requirements with
respect to the diversification of its assets: A Portfolio must have, at the
close of each quarter of the taxable year, at least 50% of the value of its
total assets represented by cash, cash items, U.S. Government Securities,
securities of other regulated investment companies, and other securities which
in respect of any one issuer, do not represent more than 5% of the value of the
assets of the Portfolio nor more than 10% of the voting securities of that
Portfolio's assets may be invested in securities (other than U.S. Government
Securities or the securities of other regulated investment companies) of any one
issuer, or of two or more issuers which the Portfolio controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses. For purposes of a Portfolio's requirements to maintain
diversification for tax purposes, the issuer of a loan participation will
generally be the underlying borrower. However, in cases where the Portfolio does
not have recourse directly against the borrower, both the borrower and each
agent bank and co-lender interposed between the Portfolio and the borrower will
be deemed issuers of the loan participation for tax diversification purposes. A
Portfolio's investments in U.S. Government Securities are not subject to these
limitations. The foregoing diversification requirements are in addition to those
imposed by the 1940 Act.
Because the Fund is established as an investment medium for variable
annuity contracts and variable life insurance contracts, Section 817(h) of the
Code imposes additional diversification requirements on each Portfolio. These
requirements generally are that no more than 55% of the value of the assets of a
Portfolio may be represented by any one investment; no more than 70% by any two
investments; not more than 80% by any three investments; and no more than 90% by
any four investments. For these purposes, all securities of the same issuer are
treated as a single investment and each U.S. Government agency or
instrumentality is treated as a separate issuer.
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<PAGE>
PORTFOLIO YIELD AND TOTAL RETURN INFORMATION
The performance information shown below reflects deductions for all
charges, expenses and fees of the Fund but does not reflect charges and
deductions which are, or may be, imposed under the Contracts.
Yield information may be useful to investors in reviewing the Fund's
performance. However, a number of factors should be considered before using
yield information as a basis for comparison with other investments. An
investment in any of the Portfolios of the Fund is not insured; its yield is not
guaranteed and normally will fluctuate on a daily basis. The yield for any given
past period is not an indication or representation by the Fund of future yields
or rates of return on its shares. The Fund's yield is affected by portfolio
quality, portfolio maturity, type of instruments held, and operating expenses.
When comparing a Portfolio's yield with that of other investments, investors
should understand that certain other investment alternatives such as money
market instruments or bank accounts provide fixed yields and also that bank
accounts may be insured.
Yield for 30-day Period ended December 31, 1999 for
U.S. Government Income Portfolio of OCC Accumulation Trust
Yield
U.S. Government Income Portfolio 5.38%
Current yield is calculated according to the following formula:
x
YIELD = 2(-- + 1)^6-1
cd
Where:
x = daily net investment income, based upon the subtraction of daily accrued
expenses from daily accrued income of the portfolio. Income is accrued
daily for each day of the indicated period based upon yield-to-maturity of
each obligation held in the portfolio as of the day before the beginning
of any thirty-day period or as of contractual settlement date for
securities acquired during the period. Mortgage and other
receivables-backed securities calculate income using coupon rate and
outstanding principal amount.
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield does not reflect capital gains or losses, non-recurring or irregular
income. Gain or loss attributable to actual monthly paydowns on mortgage or
other receivables-backed obligations purchased at a discount or premium is
reflected as an increase or decrease in interest income during the period.
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<PAGE>
A Portfolio's average annual total return represents an annualization of
the Portfolio's total return ("T" in the formula below), over a particular
period and is computed by finding the current percentage rate which will result
in the ending redeemable value ("ERV" in the formula below) of a $1,000
investment, ("P" in the formula below) made at the beginning of a one, five or
ten year period, or for the period from the date of commencement of the
Portfolio's operation, if shorter ("N" in the formula below). The following
formula will be used to compute the average annual total return for each
Portfolio (other than the Money Market Portfolio):
P (1 + T)^N = ERV
In addition to the foregoing, each Portfolio may advertise its total
return over different periods of time by means of aggregate, average, year by
year or other types of total return figures.
Total returns quoted in advertising reflect all aspects of a Portfolio's
return, including the effect of reinvesting dividends and capital gain
distributions, and any change in the Portfolio's net asset value per share over
the period. Average annual returns are calculated by determining the growth or
decline in value of a hypothetical investment in a fund over a stated period,
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. For example, a cumulative return of 100% over ten
years would produce an average annual return of 7.18%, which is the steady
annual return that would equal 100% growth on a compounded basis in ten years.
In addition to average annual returns, each Portfolio may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments and/or a series of redemptions over
any time period. Total returns and other performance information may be quoted
numerically or in a table, graph or similar illustration.
From time to time the Portfolios may refer in advertisements to rankings
and performance statistics published by (1) recognized mutual fund performance
rating services including but not limited to Lipper Analytical Services, Inc.
and Morningstar, Inc., (2) recognized indices including but not limited to the
S&P 500 Index, S&P Mid Cap Index, the Wilshire 750 Mid Cap Index, the Russell
Mid Cap Index, Dow Jones Industrial Average, Consumer Price Index, EAFE Index,
Russell 2000 Index, the Morgan Stanley Capital International (MSCI) World Index
and the Lehman Brothers US Government Bond Index and (3) Money Magazine and
other financial publications including but not limited to magazines, newspapers
and newsletters. Performance statistics may include total returns, measures of
volatility or other methods of portraying performance based on the method used
by the publishers of the information. In addition, comparisons may be made
between yields on certificates of deposit and U.S. government securities and
corporate bonds, and may refer to current or historic financial or economic
trends or conditions.
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<PAGE>
Average Annual Total Return of Equity, Mid Cap, Managed, Small Cap, U.S.
Government Income and Global Equity Portfolios of OCC Accumulation Trust(1),(2)
<TABLE>
<CAPTION>
For the one year For the five year For the period from
period ended period ended inception to
Portfolio December 31, 1999 December 31, 1999 December 31, 1999*
- --------- ----------------- ----------------- ------------------
<S> <C> <C> <C>
Equity 2.54% 19.98% 15.66%
Mid Cap 21.63% N/A 9.96%
Managed 5.00% 19.69% 17.70%
Small Cap (1.83)% 8.35% 11.48%
U.S. Government Income (1.88)% N/A 5.78%
Global Equity 26.53% N/A 18.06%
</TABLE>
(1) On September 16, 1994, an investment company then called Quest for
Value Accumulation Trust (the "Old Trust") was effectively divided into two
investment funds, the Old Trust and the Fund, at which time the Fund commenced
operations. The total net assets for each of the Equity, Small Cap and Managed
Portfolios immediately after the transaction were $86,789,755, $139,812,573 and
$682,601,380, respectively, with respect to the Old Trust and for each of the
Equity, Small Cap and Managed Portfolios, $3,764,598, $8,129,274 and
$51,345,102, respectively, with respect to the Fund.
For the period prior to September 16, 1994, the performance figures above
for each of the Equity, Small Cap and Managed Portfolios reflect the performance
of the corresponding Portfolios of the Old Trust.
(2) Reflects waiver of all or a portion of the advisory fees and the
assumption of other expenses for certain Portfolios by the Manager. Without such
waivers and assumptions, the average annual total return during the periods
would have been lower.
* Inception date of the Global Equity Portfolio is March 1, 1995; the
inception date of the U.S. Government Income Portfolio is January 3, 1995 and
the inception date of the Mid Cap Portfolio is February 9, 1998 and the
inception date of the Balanced Portfolio is May 1, 1999. The Equity, Managed and
Small Cap Portfolios commenced operations as part of the Fund on September 16,
1994. The Old Trust commenced operations on August 1, 1988.
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<PAGE>
ADDITIONAL INFORMATION
Description of the Trust. The Fund was formed under the laws of
Massachusetts as a business trust on May 12, 1994 under the name Quest for Value
Asset Builder Trust and is an open-end, diversified management investment
company. The name of the Fund was changed to Quest for Value Accumulation Trust
and then to OCC Accumulation Trust. It is not contemplated that share
certificates will be issued or regular annual meetings of the shareholders will
be held. The Fund will provide without charge to any shareholder, upon request
to the Secretary at the Fund's principal office, (a) a full statement of the
designations and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the shares of beneficial interest of each series
which the Fund is authorized to issue, (b) the differences in the relative
rights and preferences between the shares of each series to the extent they have
been set, and (c) the authority of the Board of Trustees to set the reliable
rights and preferences of subsequent series. Shareholders have the right, upon
the declaration in writing or vote of a majority of the outstanding shares of
the Fund, to remove a Trustee. The Trustees will call a meeting of shareholders
to vote on the removal of a Trustee upon written request of the record holders
(for at least six months) of 10% of its outstanding shares. In addition, 10
shareholders holding the lesser of $25,000 or 1% of the Fund's outstanding
shares may advise the Trustees in writing that they wish to communicate with
other shareholders for the purpose of requesting a meeting to remove a Trustee.
The Trustees will then either give the applicants access to the Fund's
shareholder list or mail the applicants' communication to all other shareholders
at the applicants' expense.
The Declaration of Trust contains an express disclaimer of shareholder
liability for the Fund's obligations, and provides that the Fund shall indemnify
any shareholder who is held personally liable for the obligations of the Fund.
It also provides that the Fund shall assume, upon request, the defense of any
claim made against any shareholder for any act or obligation of the Fund and
shall satisfy any judgment thereon. Thus, while Massachusetts law permits a
shareholder of a trust (such as the Fund) to be held personally liable as a
partner under certain circumstances, the risk of a shareholder incurring any
financial loss on account of shareholder liability is limited to the relatively
remote circumstance in which the Fund itself would be unable to meet the
obligations described above.
Possible Additional Portfolio Series. If additional Portfolios are created
by the Board of Trustees, shares of each such Portfolio will be entitled to vote
as a class only to the extent permitted by the 1940 Act (see below) or as
permitted by the Board of Trustees. Income and operating expenses would be
allocated fairly among two or more Portfolios by the Board of Trustees.
Under Rule 18f-2 of the 1940 Act, any matter required to be submitted to a
vote of shareholders of any investment company which has two or more series
outstanding is not deemed to have been effectively acted upon unless approved by
the holders of a "majority" (as defined in that Rule) of the voting securities
of each series affected by the matter. Such separate voting requirements do not
apply to the election of trustees or the ratification of the selection of
independent accountants. The Rule contains special provisions for cases in which
an advisory agreement is approved by one or more, but not all, series. A change
in investment policy may go into effect as to one or more series whose holders
so approve the change even though the required vote is not obtained as to the
holders of other affected series.
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<PAGE>
Distribution Agreement. Under the Distribution Agreement between each
Portfolio and the Distributor, the Distributor acts as the Portfolio's agent in
the continuous public offering of its shares. Expenses normally attributed to
sales, including advertising and the cost of printing and mailing prospectuses
other than those furnished to existing shareholders, are borne by the
Distributor.
Independent Accountants. PricewaterhouseCoopers LLP, 1177 Avenue of the
Americas, New York, New York 10036 serves as independent accountants of the
Fund; their services include auditing the annual financial statements of each
Portfolio as well as other related services.
39
