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EUCLID [LOGO] MARKET NEUTRAL FUND
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OCTOBER 31, 1998 ANNUAL REPORT
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<PAGE>
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CONTENTS
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1 Letter to Shareholders
3 An Interview with David Katzen
5 Schedule of Investments and Securities Sold Short
13 Statement of Assets and Liabilities
14 Statement of Operations
15 Statement of Changes in Net Assets
16 Notes to Financial Statements
18 Financial Highlights
19 Report of Independent Accountants
This report has been prepared for the information of shareholders of Euclid
Market Neutral Fund and is not authorized for use unless preceded or accompanied
by a current prospectus. The prospectus includes information regarding the
fund's sales charges, expenses, objectives, policies, management, performance
and other information. Please read it carefully before you invest or send money.
Call your financial advisor or Zweig Securities at 1-800-272-2700 to obtain a
copy of the prospectus.
The performance data quoted represent past performance, which is no guarantee of
future results, and does not take into account sales charges. Investment return
and principal value will fluctuate so that your shares, when redeemed, may be
worth more or less than their original cost. The shorter the time period of your
investment, the greater the possibility of loss. Fund shares are not deposits or
obligations of, or insured or guaranteed by, the U.S. government, any financial
institution, the Federal Deposit Insurance Corporation, or any other agency,
entity or person.
<PAGE>
[PHOTO]
DAVID KATZEN
Portfolio Manager
DEAR FELLOW SHAREHOLDER,
For its first six months of operation, the fund's Class A Shares declined 4.4%,
compared to the 2.5% return of three-month Treasury bills. Class B and C Shares
(which have no initial sales charge, but bear higher expenses) declined 4.7% and
4.8%, respectively.
Euclid Market Neutral Fund is designed to generate capital appreciation
independent of the direction of the overall stock market and the direction of
interest rates. We aim to achieve our objective by investing in stocks that we
believe are undervalued (the "long portfolio") and by selling short a different
group of stocks we believe to be overvalued (the "short portfolio"). The fund
can earn positive returns from superior performance of the stocks we own and
inferior performance of the stocks we have sold short.
Unlike a traditional stock fund--which depends primarily on the direction of the
market to generate positive returns--a market neutral fund relies on stock
selection. The models we use to select long and short candidates rank stocks on
the basis of various growth and value characteristics, including earnings growth
and price-earnings ratios. The following table shows growth and value
characteristics for Euclid Market Neutral Fund's long and short portfolios.
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EUCLID MARKET NEUTRAL PORTFOLIO CHARACTERISTICS
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LONG PORTFOLIO SHORT PORTFOLIO
- --------------------------------------------------------------------------------
------------------------------------------
35.5% 1-YEAR EARNINGS GROWTH 8.6%
18.0% AVERAGE FORECASTED 1-YEAR EARNINGS CHANGE 4.5%
3.6x PRICE-TO-BOOK RATIO 4.2x
18.0x PRICE-EARNINGS (P/E) RATIO 21.4x
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Sources of data: IBES, Compustat and FactSet. The above data pertain to the
stocks in the Euclid Market Neutral Fund, not the fund as a whole. P/E ratio is
the price of a stock divided by its trailing four quarters' earnings per share.
Price-to-book ratio is the price of a stock divided by the stock's book value.
One-year earnings growth is based on the most recent trailing four quarters.
History has shown that focusing on the fundamentals works well over time. It
does not, however, work all the time. During Euclid's initial six months of
operation, for example, investors valued market capitalization above all else.
The "bigger is better" sentiment was further fueled by Russia's economic
turmoil, Japan's deepening recession, the unwinding of some highly leveraged
hedge funds and presidential scandal. The pessimism created by these events
resulted in a flight to very large, well-known stocks, though they lacked both
compelling earnings growth and attractive value. As you can see from the table
below, the largest of the 1,400 stocks we screen for the fund posted strong
returns compared to the smallest stocks in the universe, despite lower earnings
growth and higher price-earnings ratios. The market's lack of focus on
fundamentals made it difficult for us to execute the market neutral strategy.
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EUCLID STOCK UNIVERSE
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1,400 MOST LIQUID STOCKS
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100 LARGEST STOCKS 100 SMALLEST STOCKS
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28.8x P/E RATIO 20.1x
6.9% 1-YEAR EARNINGS GROWTH 13.6%
4.0% 6-MONTH TOTAL RETURN -24.3%
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Sources of data: FactSet and Compustat. Total return is based on the six-month
period from 4/30/98 to 10/31/98.
1
<PAGE>
For managers who rely on quantitative methods to evaluate growth and value
characteristics, as we do, the recent six months have been unforgiving. But our
performance for the period is not unprecedented. During the more than eight
years in which we managed market neutral private accounts, we experienced
intervals when our approach was not rewarded by particular market conditions. In
fact, the Euclid Private Accounts declined 3% to 5% in four other six-month
periods since 1990.*
Though the recent market environment has punished value-conscious investors,
history shows that ignoring the fundamentals will result in only fleeting
success. We remain confident that, over time, our reliance on the fundamentals
will generate favorable results for our shareholders. The key is patience and
perspective. We thank you for continuing to support our efforts.
Sincerely,
/s/ DAVID KATZEN
DAVID KATZEN
Executive Vice President
November 10, 1998
*Past performance of the Private Accounts is no guarantee of future results of
the mutual fund.
2
<PAGE>
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An interview with DAVID KATZEN
- --------------------------------------------------------------------------------
WHAT IS THE KEY DETERMINANT OF SUCCESS IN A MARKET NEUTRAL PORTFOLIO?
Stock selection. The market neutral strategy attempts to cancel out market risk
so that the fund's returns are not dependent on the direction of the stock
market. The fund's ability to generate attractive returns depends on the
manager's ability to select a long portfolio that outperforms the short
portfolio. It's not necessary that the long portfolio increase in value or that
the short portfolio decline in value. The key is how the long portfolio does
relative to the short portfolio. For success, the stocks held long must either
appreciate more, or decline less, than the short portfolio.
HOW DO YOU CHOOSE STOCKS FOR THE EUCLID MARKET NEUTRAL FUND?
We believe that stocks of companies with improving fundamentals will, over time,
outperform stocks of companies with deteriorating fundamentals. Fundamental data
include earnings, dividends, cash flow, revenues and book value. We also believe
that stocks with low valuations relative to their historical norms will
outperform stocks with high valuations relative to their historical norms,
though this may not hold true in the short term. Valuation measures include
price-to-earnings ratio, price-to-cash flow ratio, price-to-book value ratio and
dividend yield. Stocks that combine favorable growth and value attributes are
stocks we want to own in the fund's long portfolio. Stocks with unfavorable
growth and value characteristics are stocks we would sell short in the fund's
short portfolio.
HOW DO YOU ATTEMPT TO CONTROL RISK IN THE FUND?
Through broad diversification and a careful balance between the characteristics
of the long and short portfolios. The fund does not simply consist of half of
our top-ranked stocks and half of our bottom-ranked stocks. Such an approach
could still have excessive exposure to a particular industry or to external
factors, such as interest rates or economic activity. We do choose a long
portfolio from among our better-ranked stocks and a short portfolio from among
our lower-ranked stocks. But the primary objective is to construct a portfolio
that is not dependent on the direction of the overall stock market, the
direction of interest rates or the direction of the economy.
The whole point of diversification is risk control. The more stocks and
industries we are exposed to, the less likely it is that a single position will
make or break fund performance. So we analyze a broad universe of the 1,400 most
liquid stocks and aim to have multiple industries represented. That way, we
avoid making big sector bets, and we can minimize the impact of certain market
conditions on specific industries. The following list shows how Euclid is
diversified:
<TABLE>
------------------------------------------------------
<S> <C>
BROAD INDUSTRY REPRESENTATION 83 of the 87 S&P industry groups are represented
- ------------------------------------
DIVERSE PORTFOLIO OF LONG POSITIONS 287 long positions
- ------------------------------------
DIVERSE PORTFOLIO OF SHORT POSITIONS 331 short positions
- ------------------------------------
NO BIG LONG POSITION BETS top 10 longs account for only 9% of total fund assets
- ------------------------------------
NO BIG SHORT POSITION BETS top 10 shorts account for only 7% of total fund assets
------------------------------------------------------
</TABLE>
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3
<PAGE>
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HOW WOULD YOU ASSESS THE FUND'S FIRST SIX MONTHS OF PERFORMANCE?
Disappointing, but not unprecedented. If you examined every six-month period
combining both our Private Account record (which began January 1, 1990 and ended
April 30, 1998) with the fund's first six months, you'd see that we had positive
six-month returns in 87 of the 101 possible six-month periods. Conversely, you'd
also see that we have had negative six-month returns in 14 of these periods, or
about one out of every seven of the periods. Twelve of the 14 periods occurred
prior to the fund's inception. So we're not in uncharted waters.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
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EUCLID PRIVATE ACCOUNTS & EUCLID MARKET NEUTRAL FUND, 1/1/90-10/31/98*
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Returns of 101 6-month periods*
NUMBER OF TIMES
---------------
- -5% to -3% 5
- -3% to -1% 7
- -1% to 1% 9
1% to 3% 11
3% to 5% 19
5% to 7% 15
7% to 9% 9
9% to 11% 10
11% to 13% 7
13% to 15% 4
15% to 30% 5
* The data above includes the 95 six-month periods for the Euclid Private
Accounts, plus the six periods since the mutual fund commenced operations.
Returns assume that all dividends and capital gains are reinvested. The
performance stated adjusts the performance of the Private Accounts for the
2.34% (annualized) Class A Share expense ratio for the Fund's initial six
months of operation. Performance does not reflect any initial sales charge,
which would reduce returns. These data represent past performance,
including past performance of the Private Accounts, which is no guarantee
of future results for the Fund.
We would have preferred to generate stronger returns during the fund's first six
months. But this year, market capitalization has been the primary determinant of
performance, not fundamentals. When earnings growth and value take a back seat
to size and name recognition, we will have a tough time adding value through
stock selection. But history shows that stocks with above-average earnings and
below-average prices offer the best potential risk-adjusted returns over time.
We remain confident that focusing on the fundamentals will produce the strongest
results for our long-term shareholders.
WHY DO PEOPLE INVEST IN MARKET NEUTRAL FUNDS?
Primarily for diversification. Market neutral investors are usually interested
in de-linking a portion of their overall portfolios from the direction of both
the stock market and interest rates. Most portfolios are comprised of stocks and
bonds. Consequently, these portfolios would be negatively affected by a major
stock market decline or a rising interest rate environment (rising interest
rates decrease the value of outstanding bonds). While it is impossible to
predict when these events will occur, there's no getting around the fact that
we've been in one of the longest and strongest bull markets this century, and
long-term interest rates are at or near 30-year lows. Market neutral investing
offers people a way to pursue a return in excess of Treasury bills, regardless
of the direction of the stock market and the direction of interest rates.
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4
<PAGE>
SCHEDULE OF INVESTMENTS AND SECURITIES SOLD SHORT
OCTOBER 31, 1998
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
COMMON STOCKS: 77.18%
Aerospace: 2.77%
* BE Aerospace Inc. 16,300 $ 350,450
Cordant Technologies Inc. 24,100 980,569
General Dynamics Corp. 21,800 1,290,288
* Gulfstream Aerospace Inc. 28,500 1,261,125
Northrop Grumman Corp. 6,100 486,475
Precision Castparts Corp. 4,600 202,400
----------
4,571,307
----------
Apparel and Textiles: 1.00%
* Burlington Industries Inc. 22,000 203,500
Kellwood Co. 6,000 163,500
* Mohawk Industries Inc. 11,700 353,194
VF Corp. 17,700 740,081
Warnaco Group Inc., Class A 7,600 194,275
----------
1,654,550
----------
Automobiles: 0.11%
Ford Motor Co. 3,408 184,884
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Automotive Parts and
Equipment: 0.44%
Arvin Industries Inc. 18,413 729,615
----------
Banks: 0.97%
Banc One Corp. 8,200 400,775
Chase Manhattan Corp. 3,600 204,525
Commercial Federal Corp. 9,800 222,337
Corporacion Bancaria
De Espana, S.A 700 30,625
First Hawaiian Inc. 1,000 39,875
National Westminster Bank, Plc 200 20,012
SunTrust Banks Inc. 3,800 264,812
UnionBancal Corp. 1,800 166,500
United Bankshares Inc. 900 24,075
Wells Fargo & Co. 600 222,000
----------
1,595,536
----------
Building Materials and Products: 0.19%
Southdown Inc. 5,600 304,850
----------
Chemicals: 1.84%
A. Schulman, Inc. 24,200 480,975
Air Products & Chemicals Inc. 4,600 173,650
BOC Group plc 2,000 58,500
Dow Chemical Co. 800 74,900
Eastman Chemical Co. 8,000 470,000
Olin Corp. 33,200 919,225
Phosphate Res Partners LP 5,800 59,813
Rhone-Poulenc SA 17,100 798,356
----------
3,035,419
----------
Commercial Services: 1.01%
Central Parking Corp. 5,800 243,238
* Modis Professional Services Inc. 16,300 287,287
* Nielsen Media Research Inc. 37,200 527,775
Ogden Corp. 19,700 529,438
* Romac International Inc. 4,600 80,500
----------
1,668,238
----------
Computer Hardware: 1.80%
* Apple Computer Inc. 23,100 857,587
* EMC Corp. 7,600 489,250
* Lexmark International Group Inc.,
Class A 4,100 286,744
* Micron Electronics Inc. 22,900 479,469
* Micros Systems Inc. 5,500 121,344
* NCR Corp. 7,900 265,637
* Sun Microsystems Inc. 8,400 489,300
----------
2,989,331
----------
Computer Services: 2.04%
* Affiliated Computer Services, Inc.,
Class A 3,300 122,100
* Ciber Inc. 16,300 319,888
Computer Task Group Inc. 6,200 189,875
* CSG Systems International Inc. 8,300 452,350
* Envoy Corp. 15,600 460,200
* HNC Software Inc. 7,500 252,188
* International Network
Services Corp. 11,500 488,750
* Keane Inc. 9,300 309,225
* Sabre Group Holdings Inc.,
Class A 3,700 139,444
* Sykes Enterprises Inc. 8,200 160,925
* Whittman- Hart Inc. 23,600 469,050
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3,363,995
---------
Computer Software: 4.29%
* American Management
Systems Inc. 4,800 147,300
* BMC Software Inc. 9,400 451,788
* Cadence Design Systems Inc. 24,500 523,687
* Citrix Systems Inc. 7,000 496,125
Computer Associates
International Inc. 12,200 480,375
* Compuware Corp. 7,100 384,731
HBO & Co. 35,000 918,750
* Legato Systems Inc. 12,800 500,800
* LHS Group Inc. 6,000 242,250
* Microsoft Corp. 4,500 476,438
* Oracle Corp. 16,900 499,606
* PLATINUM Technology Inc. 14,500 238,344
* Rational Software Corp. 16,800 375,900
* Siebel Systems Inc. 16,700 341,306
* Sterling Software Inc. 16,700 437,331
* Synopsys Inc. 9,300 420,825
* Veritas Software Co. 2,700 135,338
---------
7,070,894
---------
Containers and Packaging: 0.50%
Ball Corp. 19,500 822,656
---------
Electronics: 1.08%
* Flextronics International Inc. 9,900 514,181
General Motors Corp., Class H 10,500 401,625
Kyocera Corp., ADR 600 26,100
* Nichols Research Corp. 23,800 484,925
* Waters Corp. 4,800 352,800
---------
1,779,631
---------
Engineering: 0.54%
Fluor Corp. 9,700 376,481
Granite Construction Inc. 3,600 119,925
* Jacobs Engineering Group Inc. 6,224 203,058
McDermott International Inc. 6,300 184,669
---------
884,133
---------
5
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
Finance: 1.14%
Capital One Financial Corp. 5,100 $ 518,925
Countrywide Credit Industries Inc. 4,500 194,344
* Healthcare Financial Partners Inc. 18,500 566,562
TrizecHahn Corp. 30,900 592,894
----------
1,872,725
----------
Food and Beverages: 2.91%
Adolph Coors Co., Class B 6,900 345,000
* Canandaigua Brands Co., Class A 5,400 270,675
ConAgra Inc. 15,900 483,956
Earthgrains Co. 9,000 270,000
IBP Inc. 42,700 1,155,569
Interstate Bakeries Co. 26,380 661,149
Michael Foods Inc. 11,400 273,600
* Ralcorp Holdings Inc. 8,200 144,525
RJR Nabisco Holdings Corp. 41,584 1,187,743
----------
4,792,217
----------
Forest and Paper Products: 1.42%
Boise Cascade Corp. 21,200 593,600
Champion International Corp. 6,800 217,175
Chesapeake Corp. 15,800 553,000
Louisiana-Pacific Corp. 11,400 202,350
Mead Corp. 17,700 559,762
Potlatch Corp. 5,800 211,700
----------
2,337,587
----------
Healthcare Facilities and
Products: 4.79%
Abbott Laboratories Inc. 10,900 511,619
* Arterial Vascular Energy Inc. 23,600 725,700
Bristol-Myers Squibb Inc. 9,000 995,063
Eli Lilly & Co. 7,200 582,750
Guidant Corp. 10,100 772,650
IVAX Corp. 3,000 28,500
Jones Pharma Inc. 11,800 381,287
* Lincare Holdings Inc. 6,500 259,594
* Medimmune, Inc. 7,100 477,475
Merck & Co., Inc. 3,500 473,375
Mylan Laboratories Inc. 13,200 454,575
* Pacificare Health Systems Inc.,
Class B 6,400 504,000
* Total Renal Care Holding Corp.,
Class A 23,400 573,300
* VISX Inc. 12,000 601,500
* Wellpoint Health Networks Inc.,
Class A 7,500 552,188
----------
7,893,576
----------
Homebuilding and Land
Development: 1.10%
* Champion Enterprises Inc. 9,800 194,775
Del Webb Corp. 7,360 172,960
Kaufman & Broad Home Corp. 9,000 257,062
Pulte Corp. 9,700 249,775
Ryland Group Inc. 37,500 932,813
----------
1,807,385
----------
Hotels and Gaming: 0.61%
Hilton Hotels Corp. 9,800 196,613
* Host Marriott Corp. 21,400 310,300
International Game Technology 10,300 232,394
* Sun International Hotels Ltd. 6,600 264,000
----------
1,003,307
----------
Household Furnishings
and Products: 1.12%
* Blyth Industries Inc. 12,200 337,025
Fortune Brands Inc. 28,900 955,506
Maytag Corp. 11,300 558,644
----------
1,851,175
----------
Insurance: 4.39%
Allmerica Financial Corp. 6,300 315,000
Allstate Corp. 4,520 194,643
Ambac Financial Group, Inc. 8,200 477,137
American General Corp. 13,000 890,500
American International
Group, Inc. 2,300 196,075
* AXA-UAP S.A., ADR 1,900 108,063
Commerce Group Inc. 800 27,700
Conseco Inc. 17,000 589,687
First American Financial Corp. 6,400 200,400
Loews Corp. 18,800 1,766,025
PMI Group Inc. 4,500 226,969
Progressive Corp. 3,400 500,650
Provident Companies Inc. 9,100 264,469
SunAmerica Inc. 8,258 582,189
Transamerica Corp. 8,600 894,400
----------
7,233,907
----------
Investment Banking and
Brokerage: 0.03%
* Legg Mason Inc. 1,700 45,156
----------
Investment Management: 0.02%
Federated Investors Inc. 2,100 37,669
----------
Machinery: 1.57%
Applied Power Inc., Class A 6,936 191,173
Ingersoll-Rand Co. 16,400 828,200
Inland Steel Industries Inc. 13,100 239,075
Tecumseh Products Co., Class A 19,100 993,200
Varlen Corp. 11,200 334,600
----------
2,586,248
----------
Manufacturing: 2.09%
Canadian Pacific Ltd. 32,100 726,262
Harsco Corp. 18,900 618,975
Pentair Inc. 9,300 349,913
Premark International Inc. 19,809 627,697
Tyco International Ltd. 11,352 703,115
* U.S. Filter Corp. 19,700 417,394
----------
3,443,356
----------
Metals and Mining: 1.13%
Alcan Aluminium Ltd. 13,200 334,125
ASARCO Inc. 10,400 222,950
Reynolds Metals Co. 21,400 1,282,662
Southern Peru Copper Co. 1,600 19,100
----------
1,858,837
----------
6
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
Networking and Communication
Equipment: 3.29%
* 3Com Corp. 14,100 $ 508,481
* Cabletron Systems Inc. 23,800 270,725
* Comverse Technology Inc. 5,400 248,400
ECI Telecom Ltd. 20,600 682,375
* Excite Inc. 12,400 478,175
Motorola Inc. 25,200 1,310,400
* Nokia Corp. 5,400 502,537
* Realnetworks Inc. 13,700 461,519
Telabs Inc. 8,800 484,000
* Yahoo Inc. 3,700 484,123
----------
5,430,735
----------
Office Automation and Equipment: 1.04%
Herman Miller Inc. 35,510 783,439
* Knoll Inc. 24,600 664,200
Reynolds and Reynolds Co.,
Class A 14,700 264,600
----------
1,712,239
----------
Oil and Gas: 4.14%
Amerada Hess Corp. 4,200 232,050
Coastal Corp. 15,418 543,484
El Paso Energy Corp. 13,000 460,688
Elf Aquitaine Ltd., ADR 12,600 730,800
Equitable Resources Inc. 25,600 712,000
Exxon Corp. 3,000 213,750
MDU Resources Group Inc. 2,200 58,437
Murphy Oil Corp. 4,000 165,250
Northern Border Partners Inc. 1,000 35,000
* Oryx Energy Co. 19,300 270,200
Repsol S.A., ADR 15,500 775,000
Royal Dutch Petroleum Co. 16,800 827,400
Schlumberger Ltd. 9,200 483,000
TOTAL S.A., ADR 1,000 58,500
Valero Energy Corp. 30,200 755,000
YPF Sociedad Anonima, ADR 17,200 497,725
----------
6,818,284
----------
Photographic Products: 0.23%
* Imation Corp. 21,900 387,356
----------
Printing and Forms: 0.32%
Banta Corp. 13,200 328,350
* Valassis Communications Inc. 5,100 203,362
----------
531,712
----------
Publishing: 0.49%
Harte-Hanks
Communications, Inc. 11,800 286,888
Houghton Mifflin Co. 3,700 144,300
McClatchy Co., Class A 900 30,544
News Corp Ltd., ADR 11,400 311,362
* Petersen Publishing Co., Class A 1,200 31,875
----------
804,969
----------
Real Estate Investment Trusts: 2.15%
Apartment Investment &
Management Corp., Class A 7,800 272,513
Arden Realty Inc. 11,300 244,362
Camden Property Trust Inc. 14,000 376,250
Colonial Properties Trust Inc. 9,200 253,000
Duke Realty Investments Inc. 13,400 319,925
Equity Office Properties Trust Inc. 9,900 237,600
Highwoods Properties Inc. 6,900 192,769
HRPT Properties Trust Inc. 30,800 490,875
Kimco Realty Corp. 7,800 310,537
Liberty Property Trust 25,200 579,600
Post Properties Inc. 6,700 259,206
----------
3,536,637
----------
Recreational Products: 0.38%
Brunswick Corp. 10,600 206,037
Coachmen Industries Inc. 18,400 425,500
----------
631,537
----------
Restaurants: 1.76%
Bob Evans Farms, Inc. 27,200 535,500
* Brinker International Inc. 40,400 977,175
* CEC Entertainment Inc. 3,400 96,050
CKE Restaurants Inc. 19,942 524,724
Darden Restaurants Inc. 17,500 288,750
* Tricon Global Restaurants Inc. 10,900 474,150
----------
2,896,349
----------
Retail Trade: 2.94%
* Abercrombie & Fitch Inc.,
Class A 12,600 500,063
* Ann Taylor Stores Corp. 20,100 582,900
* CDW Computer Centers Inc. 6,400 479,600
Dillards Inc., Class A 6,800 211,225
Gap Inc. 8,600 517,075
* Just For Feet Inc. 36,000 609,750
* Kroger Co. 9,200 510,600
* Linens N Things Inc. 6,800 210,375
* Pacific Sunwear of California, Inc. 7,300 157,862
* Tech Data Corp. 22,500 885,937
Wal-Mart Stores, Inc. 2,700 186,300
----------
4,851,687
----------
Savings and Loan Associations: 1.09%
BSB Bancorp 12,600 352,800
Charter One Financial Inc. 13,800 378,638
* Golden State Bancorp Inc. 23,700 454,744
Washington Mutual Inc. 10,972 410,764
Webster Financial Corp. 8,100 199,969
----------
1,796,915
----------
Semiconductor Equipment: 1.22%
* Advanced Micro Devices, Inc. 25,300 570,831
Intel Corp. 5,300 472,694
* Jabil Circuit Inc. 10,100 467,756
Micron Technology Inc. 13,300 505,400
----------
2,016,681
----------
Shoes: 0.15%
Brown Group Inc. 15,300 243,844
----------
Steel: 0.29%
* Bethlehem Steel Corp. 25,366 228,294
Cleveland-Cliffs Inc. 5,400 214,312
Quanex Corp. 2,000 33,750
----------
476,356
----------
Supermarket Chains: 0.21%
Supervalu Inc. 14,600 350,400
----------
7
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
Telecommunications: 2.65%
* Airtouch Communications Inc. 5,700 $ 319,200
AT&T Corp. 3,700 230,325
Bell Atlantic Corp. 8,400 446,250
BellSouth Corp. 5,900 470,894
Century Telephone
Enterprise Corp. 3,900 221,569
Magyar Tavkozlesi, ADR 1,600 43,000
P T Telekomunikasi
Industries, ADR 20,400 102,000
Perusahaan Indo Sat, ADR 11,000 114,813
Tele Danmark, ADR 13,200 721,875
Telefonos De Mexico, ADR 9,900 522,844
U S West Inc. 5,000 286,875
* U.S. Cellular Corp. 24,300 889,987
-----------
4,369,632
-----------
Tobacco: 0.58%
Universal Corp. 25,731 960,088
-----------
Transportation: 3.14%
* America West Holding Corp.,
Class B 17,800 273,675
* AMR Corp. 12,800 857,600
Burlington Northern
Santa Fe Corp. 42,600 1,315,275
Canadian National Railway Co. 10,500 529,594
Comair Holdings Inc. 11,500 378,062
Delta Air Lines Inc. 3,600 380,025
Hertz Corp., Class A 4,700 168,319
JB Hunt Transportation
Services Inc. 17,700 296,475
* SEACOR Smit Inc. 6,100 291,656
Southwest Airlines Co. 17,048 361,205
* Swift Transportation
Company Inc. 14,700 324,778
-----------
5,176,664
-----------
Trucks: 0.20%
* Navistar International Corp. 15,900 331,913
-----------
Utilities: 8.99%
Baltimore Gas & Electric Co. 33,800 1,060,475
Central & South West Corp. 41,600 1,157,000
Dominion Resources Inc. 35,100 1,621,181
DTE Energy Co. 30,200 1,287,275
Energy East Corp. 9,000 439,875
Florida Progress Corp. 28,000 1,174,250
GPU Inc. 12,200 526,125
Kansas City Power & Light Co. 13,800 397,612
* Niagara Mohawk Power Co. 18,200 266,175
OGE Energy Corp. 23,900 634,844
PG&E Corp. 64,400 1,960,175
Potomac Electric Power Co. 20,700 542,081
PP&L Resources Inc. 31,500 854,437
Public Service Co. of New Mexico 12,057 266,008
Public Service Enterprise
Group Inc. 44,000 1,672,000
Southern Co. 7,400 208,588
Unicom Corp. 19,800 746,212
-----------
14,814,313
-----------
Number of
Shares or
Principal Value
Amount (Note 2)
- --------------------------------------------------------------------------------
Waste Management: 0.26%
* Allied Waste Industries Inc. 19,500 421,688
-----------
Wholesale Distributors: 0.76%
Bergen Brunswig Corp., Class A 8,400 410,025
Cardinal Health Inc. 5,300 501,181
* Corporate Express Inc. 28,700 335,431
-----------
1,246,637
-----------
Total Common Stocks
(Cost $123,451,440) 127,224,820
-----------
SHORT-TERM OBLIGATIONS: 18.45%
Federal Home Loan Mortgage Corp.,
Discount Notes: 18.15%
4.86%, 11/6/98 $ 5,000,000 4,995,950
5.10%, 11/17/98 15,000,000 14,963,874
5.10%, 11/30/98 10,000,000 9,957,499
-----------
29,917,323
-----------
United States Treasury Bills: 0.30%
4.00%, 1/14/99 500,000 495,894
-----------
Total Short-Term Obligations
(Cost $30,417,431) 30,413,217
-----------
REPURCHASE AGREEMENT: 6.06%
With Morgan Stanley & Co., Inc.,
(dated 10/30/98), 5.55%, due 11/2/98
(Repurchase proceeds $9,994,620);
collateralized by: $10,068,149
Federal National Mortgage
Association Bonds, 6.00% - 6.50%,
11/1/2000 - 7/1/2024
(Market value $10,194,956) 9,990,000 9,990,000
-----------
Total Repurchase Agreement
(Cost $9,990,000) 9,990,000
-----------
Total Investments
(Cost $163,858,871) 101.69% 167,628,037
Other Assets 99.87 164,625,830
------ -----------
Total Assets 201.56 332,253,867
------ -----------
Securities Sold Short
(Proceeds $127,218,804) (78.22) (128,934,456)
Other Liabilities (23.34) (38,474,798)
------ -----------
Total Liabilities (101.56) (167,409,254)
------ -----------
Net Assets 100.00% $ 164,844,613
====== ===========
* Non-income producing security.
For Federal income tax purposes, the tax basis of investments owned at October
31, 1998 was $165,827,861 and net unrealized appreciation on investments
consisted of:
Gross unrealized appreciation $ 4,786,400
Gross unrealized depreciation (2,986,224)
-----------
Net unrealized appreciation
$ 1,800,176
===========
8
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
SECURITIES SOLD SHORT: 78.22%
Aerospace: 0.35%
Boeing Co. 9,314 $ 349,275
Wyman-Gordon Co. 15,500 222,812
-----------
572,087
-----------
Agricultural Products: 0.67%
Delta & Pine Land Co. 12,300 410,513
Pioneer Hi-Bred International Co. 24,493 685,804
-----------
1,096,317
-----------
Air Freight: 0.20%
FedEx Corp. 6,200 325,888
-----------
Apparel and Textiles: 0.10%
St. John Knits Inc. 1,900 38,356
Unifi Inc. 7,600 128,250
-----------
166,606
-----------
Automobiles: 0.15%
General Motors Corp. 3,700 233,331
Nissan Motor Co., Ltd. 3,000 16,312
-----------
249,643
-----------
Automotive Parts and Equipment: 1.61%
Genuine Parts Co. 34,300 1,080,450
ITT Industries Inc. 8,200 293,150
Lear Corp. 10,500 337,312
Lucasvarity Plc., ADR 16,700 584,500
Magna International Inc., Class A 5,700 353,756
-----------
2,649,168
-----------
Banks: 6.28%
Australia & New Zealand
Bank, ADR 10,000 285,000
BankAmerica Corp. 12,121 696,200
Bankers Trust Corp. 5,600 351,750
BB&T Corp. 13,900 496,056
First Virginia Banks Inc. 14,870 678,444
HUBCO Inc. 7,555 203,985
Huntington Bancshares Inc. 26,530 762,738
J.P. Morgan & Co., Inc. 4,232 398,866
KeyCorp 15,942 483,242
Mellon Bank Corp. 6,200 372,775
Mercantile Bancorporation 14,400 657,900
National Australia Bank, ADR 200 13,325
National City Corp. 10,078 648,141
National Commercial Bancorp 14,400 255,600
Northern Trust Corp. 15,400 1,135,750
State Street Boston Corp. 13,400 835,825
Summit Bancorp 11,700 443,869
Synovus Financial Corp. 23,800 551,862
U.S. Bancorp 8,500 310,250
Union Planters Corp. 4,114 191,044
Wachovia Corp. 6,349 576,965
-----------
10,349,587
-----------
Broadcasting and Entertainment: 2.03%
Clear Channel
Communications Corp. 5,100 232,369
Emmis Communications
Corp., Class A 13,300 435,575
Grupo Televisa, ADR 23,200 629,300
King World Productions Inc. 15,300 401,625
Sinclair Broadcast Group, Class A 17,900 232,700
TCA Cable T.V. Inc. 20,800 575,900
Walt Disney Co. 19,901 536,083
Westwood One Inc. 17,100 307,800
-----------
3,351,352
-----------
Building Materials and Products: 0.15%
Apogee Enterprises Inc. 23,600 247,800
-----------
Chemicals: 5.14%
Airgas Inc. 16,351 188,036
Cabot Corp. 8,600 241,337
Cytec Industries Inc. 4,600 110,400
E.I. Dupont deNemours & Co. 20,700 1,190,250
Ferro Corp. 3,500 89,250
FMC Corp. 16,200 827,213
Georgia Gulf Corp. 16,200 276,413
H. B. Fuller Co. 11,400 468,825
Hercules Inc. 23,714 789,973
International Flavors &
Fragrances Corp. 20,900 782,444
Lubrizol Corp. 10,300 287,113
Lyondell Chemical Co. 34,400 580,500
Monsanto Co. 6,314 256,506
Norsk Hydro, ADR 1,400 60,812
PPG Industries Inc. 12,800 732,000
Rohm & Haas Co. 13,300 448,875
Sigma-Aldrich Co. 12,300 380,147
Union Carbide Corp. 15,900 612,150
Witco Corp. 8,400 158,025
-----------
8,480,269
-----------
Commercial Services: 1.35%
Cendant Corp. 31,900 364,856
H & R Block Inc. 3,800 170,288
Interpublic Group of
Companies, Inc. 13,394 783,549
Manpower Inc. 16,614 400,813
Sotheby's Holdings, Inc., Class A 23,600 510,350
-----------
2,229,856
-----------
Computer Hardware: 1.48%
Compaq Computer Corp. 5,500 173,937
Creative Technology Ltd. 39,100 549,844
Filenet Corp. 29,100 269,175
Gateway 2000 Inc. 8,600 479,987
Quantum Corp. 54,700 960,669
-----------
2,433,612
-----------
Computer Services: 1.54%
Automatic Data Processing Corp. 4,722 367,431
Bea Systems Inc. 25,800 505,519
Cambridge Technology
Partner Inc. 21,300 471,262
Electronic Data Systems Corp. 6,600 268,538
Equifax Inc. 9,300 359,794
First Data Corp. 6,600 174,900
Wang Laboratories, Inc. 18,300 391,162
-----------
2,538,606
-----------
Computer Software: 1.49%
Baan Company NV 32,800 360,800
JDA Software Group Inc. 33,300 316,350
Networks Associates Inc. 9,900 420,750
9
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
Computer Software: (continued)
Parametric Technology Corp. 33,700 $ 560,263
Peoplesoft Inc. 20,500 434,344
Remedy Corp. 19,900 174,125
Vantive Corp. 25,600 187,200
----------
2,453,832
----------
Consumer Products and Services: 0.35%
Lancaster Colony Corp. 19,100 573,000
----------
Containers and Packaging: 0.91%
Bemis Co. 6,400 237,600
Owens-Illinois Inc. 15,600 476,775
Sonoco Products Co. 4,700 133,362
Stone Container Corp. 400 3,825
Temple-Inland Inc. 4,900 237,956
Union Camp Corp. 9,600 412,800
----------
1,502,318
----------
Electrical Products: 1.44%
Emerson Electric Co. 9,500 627,000
Hubbell Inc., Class B 10,000 398,750
Philips Electronics, NV 8,700 477,412
Raychem Corp. 23,400 715,162
SCI Systems Inc. 4,100 161,950
----------
2,380,274
----------
Electronics: 1.24%
Adaptec Inc. 19,300 312,419
Artesyn Technologies Inc. 16,300 235,331
AVX Corp. 4,400 78,100
DII Group Inc. 52,200 766,688
Hitachi Ltd., ADR 2,500 127,500
Matsushita Electric
Industrial Co. Ltd., ADR 900 132,750
W.W. Grainger Inc. 8,400 386,925
----------
2,039,713
----------
Finance: 0.61%
Household International Inc. 16,270 594,872
Providian Financial Corp. 3,200 254,000
SLM Holding Corp. 3,700 148,231
----------
997,103
----------
Food and Beverages: 4.58%
Anheuser-Busch Co., Inc. 4,700 279,356
Bestfoods Corp. 8,400 457,800
Campbell Soup Co. 15,600 831,675
Coca-Cola Co. 2,800 189,350
Embotelladora Andina,
Class A, ADR 1,100 14,644
General Mills Inc. 5,772 424,242
H.J. Heinz Co. 8,000 465,000
Kellogg Co. 17,700 584,100
McCormick & Co., Inc. 25,000 776,562
Nabisco Holdings Corp., Class A 8,900 335,975
Pepsico Inc. 15,928 537,570
Ralston Purina Co. 14,196 473,791
Seagram Co., Ltd. 7,900 259,713
Smithfield Foods Inc. 18,400 361,100
Unilever NV 8,800 662,200
Wm. Wrigley Jr. Co. 10,979 888,613
----------
7,541,691
----------
Forest and Paper Products: 0.77%
Caraustar Industries Inc. 8,100 192,375
International Paper Co. 7,400 343,637
Plum Creek Timber Co. 1,600 44,800
Rayonier Inc. 3,000 117,562
Weyerhaeuser Co. 12,200 571,112
----------
1,269,486
----------
Healthcare Facilities and
Products: 3.08%
ALZA Corp. 3,700 177,137
American Home Products Corp. 6,228 303,615
Baxter International Inc. 14,064 842,961
Beckman Coulter Inc. 6,100 286,700
Boston Scientific Corp. 3,164 172,240
C.R. Bard Inc. 9,400 401,263
Dura Pharmaceuticals Inc. 35,700 430,631
Forest Laboratories, Inc., Class A 6,400 267,600
Glaxo Wellcome Plc., ADR 5,500 342,375
Johnson & Johnson 6,468 527,142
Magellan Health Services Inc. 7,500 67,969
Pfizer Inc. 4,200 450,713
SmithKline Beecham Plc., ADR 9,400 599,250
Teva Pharmaceuticals
Industries, ADR 5,300 209,019
----------
5,078,615
----------
Homebuilding and Land
Development: 0.14%
Lennar Corp. 11,300 228,825
----------
Hotels and Gaming: 0.35%
Mirage Resorts Inc. 33,800 572,487
----------
Household Furnishings and
Products: 1.88%
Colgate-Palmolive Co. 8,335 736,606
Estee Lauder Companies Inc.,
Class A 5,600 367,150
Kimberly-Clark Corp. 11,714 565,200
Leggett & Platt Inc. 7,300 170,638
Libbey Inc. 3,700 114,700
Newell Companies Inc. 14,331 630,564
Oakley Inc. 2,900 25,556
Revlon Inc., Class A 5,300 100,369
Rubbermaid Inc. 11,800 391,612
----------
3,102,395
----------
Insurance: 1.75%
AEGON NV, ADR 8,500 742,687
AFLAC Inc. 7,000 266,875
CNA Financial Corp. 4,100 170,663
EXEL Ltd. 3,100 236,956
General Re Corp. 1,000 219,688
Horace Mann Educators Corp. 5,400 154,575
Marsh & McLennan Co. 6,600 366,300
Ohio Casualty Corp. 7,300 275,575
Torchmark Corp. 10,200 446,250
Unitrin Inc. 100 7,113
----------
2,886,682
----------
10
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
Investment Management: 1.15%
Alliance Capital Management LP 1,900 $ 47,144
Franklin Resources, Inc. 17,800 673,063
T. Rowe Price Associates, Inc. 28,600 1,017,087
United Asset Management Corp. 6,600 160,050
----------
1,897,344
----------
Machinery: 0.91%
Case Corp. 16,100 354,200
Caterpillar Inc. 11,900 535,500
Dover Corp. 19,200 609,600
----------
1,499,300
----------
Manufacturing: 3.50%
AMETEK Inc. 5,200 110,175
Avery Dennison Corp. 4,900 203,044
Briggs & Stratton Corp. 5,400 253,800
Cognex Corp. 41,000 635,500
Diebold Inc. 11,200 349,300
Eaton Corp. 6,300 426,431
Federal Signal Corp. 24,600 591,938
Illinois Tool Works Inc. 4,700 301,388
Ionics Inc. 8,200 254,200
Lindsay Manufacturing Co. 13,900 225,875
Millipore Corp. 14,600 359,525
Minnesota Mining &
Manufacturing Co. 11,200 896,000
National Service Industries Inc. 6,400 229,600
Parker-Hannifin Corp. 9,400 336,050
Roper Industries Inc. 7,900 140,719
Sealed Air Corp. 12,700 450,056
----------
5,763,601
----------
Metals and Mining: 0.57%
De Beers Consolidated
Mines, ADR 12,600 181,125
Freeport-McMoRan Copper &
Gold Inc., Class B 20,400 251,175
Homestake Mining Co. 28,800 342,000
Inco Ltd. 16,194 173,073
----------
947,373
----------
Networking and Communication
Equipment: 2.24%
Advanced Fibre
Communications, Inc. 32,100 310,969
Andrew Corp. 16,900 276,738
CIENA Corp. 36,000 618,750
Digital Microwave Corp. 64,100 280,438
FORE Systems Inc. 31,500 492,188
L. M. Ericsson Telephone Co., ADR 28,700 649,338
Newbridge Networks Corp. 31,531 646,385
P-Com Inc. 60,300 192,206
Scientific-Atlanta Inc. 15,500 231,531
----------
3,698,543
----------
Office Automation and Equipment: 0.24%
Moore Corp. Ltd. 35,228 398,517
----------
Oil and Gas: 6.34%
Apache Corp. 13,400 379,388
Atlantic Richfield Co. 7,400 509,675
Barrett Resources Corp. 6,900 162,581
British Petroleum Plc., ADR 6,600 583,688
Cabot Oil & Gas Corp., Class A 1,800 30,600
Chevron Corp. 5,400 440,100
Cooper Cameron Corp. 9,800 340,550
Cross Timbers Oil Co. 11,000 158,125
Devon Energy Corp. 5,000 169,375
ENI Spa, ADR 7,300 443,475
Enron Corp. 3,900 205,725
Forcenergy Inc. 500 2,969
Global Industries Ltd. 4,900 47,163
Gulf Canada Resources Ltd. 26,600 99,750
K N Energy Inc. 6,400 318,000
Kerr-McGee Corp. 8,200 326,975
Mobil Corp. 5,400 408,712
Nabors Industries Inc. 4,700 86,950
NICOR Inc. 10,200 432,225
Noble Drilling Corp. 20,300 348,906
Occidental Petroleum Corp. 14,700 292,163
ONEOK Inc. 11,000 376,750
Peoples Energy Corp. 5,100 188,063
Petro-Canada Inc. 26,200 334,050
Phillips Petroleum Co. 19,400 839,050
Seagull Energy Corp. 27,400 327,088
Smith International Inc. 10,100 362,969
Sun Company, Inc. 19,200 658,800
Texaco Inc. 5,300 314,356
Union Pacific Resources
Group Inc. 29,600 384,800
Unocal Corp. 7,942 269,532
Vintage Petroleum Inc. 13,000 169,000
Weatherford International Inc. 3,200 87,000
Williams Companies Inc. 13,000 356,687
-----------
10,455,240
-----------
Personal Care Products: 1.13%
Avon Products, Inc. 21,840 866,775
Gillette Co. 22,036 990,243
-----------
1,857,018
-----------
Photographic Products: 0.36%
Polaroid Corp. 9,214 244,747
Xerox Corp. 3,600 348,750
-----------
593,497
-----------
Publishing: 2.72%
A. H. Belo Corp., Class A 13,000 236,438
Dow Jones & Co. Inc. 6,600 302,362
E.W. Scripps Co., Class A 11,000 486,750
Readers Digest
Association, Inc., Class A 24,200 526,350
Reuters Group Plc., ADR 14,700 891,187
Times Mirror Co., Class A 9,600 532,200
Tribune Co. 15,900 916,238
Washington Post Co., Class B 1,100 584,100
-----------
4,475,625
-----------
Real Estate Investment Trusts: 3.31%
Equity Residential Properties Trust 9,408 395,136
Federal Realty Investors Trust 15,673 354,602
General Growth Properties Inc. 8,100 288,056
Health Care Properties
Investors Inc. 23,800 800,275
Manufactured Home
Communities Inc. 7,500 187,031
Meditrust Companies Inc. 11,500 186,875
11
<PAGE>
Number Value
of Shares (Note 2)
- --------------------------------------------------------------------------------
Real Estate Investment Trusts: (continued)
Nationwide Health Properties Inc. 14,600 $ 336,712
Omega Healthcare Investors Inc. 10,700 331,700
Simon Property Group Inc. 12,714 380,625
Spieker Properties Inc. 11,200 386,400
Storage USA Inc. 11,500 350,031
Taubman Centers Inc. 22,900 313,444
Vornado Realty Trust 5,000 168,437
Weingarten Realty Investors 21,802 968,826
------------
5,448,150
------------
Recreational Products: 0.92%
Callaway Golf Co. 15,600 169,650
Hasbro Inc. 9,900 347,119
Mattel Inc. 27,700 993,737
------------
1,510,506
------------
Retail Trade: 2.57%
Albertsons Inc. 5,100 283,369
Barnes & Noble Inc. 11,900 388,237
Consolidated Stores Corp. 32,828 539,610
General Nutrition Co., Class A 31,200 454,350
J. C. Penney Company, Inc. 4,900 232,750
Officemax Inc. 8,200 74,825
Sherwin-Williams Co. 20,800 523,900
Shopko Stores Inc. 10,700 335,044
Stage Stores Inc. 19,300 255,725
Stein Mart Inc. 28,100 221,288
Tiffany & Co. 10,300 332,819
Venator Group Inc. 38,600 325,687
Winn-Dixie Stores Inc. 8,000 271,500
------------
4,239,104
------------
Semiconductor Equipment: 2.67%
Analog Devices, Inc. 49,900 991,762
ASM Lithography Holding NV 19,700 502,350
Asyst Technologies Inc. 44,600 532,413
Burr-Brown Corp. 14,900 276,581
Cirrus Logic Inc. 23,700 230,334
Dallas Semiconductor Corp. 8,400 310,800
Etec Systems Inc. 7,300 247,287
Lattice Semiconductor Corp. 12,400 421,600
Linear Technology Corp. 3,300 196,763
S T Microelectronics NV 10,500 638,531
Unitrode Corp. 4,800 60,300
------------
4,408,721
------------
Shoes: 0.79%
Nike Inc., Class B 12,014 524,862
Reebok International Ltd. 46,800 778,050
------------
1,302,912
------------
Steel: 0.55%
Allegheny Teledyne Inc. 38,100 783,431
Lone Star Technologies, Inc. 12,200 129,625
------------
913,056
------------
Telecommunications: 2.24%
ALLTEL Corp. 7,100 332,369
Ameritech Corp. 7,700 415,319
British Telecommunications
Plc., ADR 2,900 377,363
Frontier Corp. 15,100 453,944
GTE Corp. 8,800 516,450
NEXTEL Communications Corp. 17,500 317,188
Philippine Long Distance
Telephone Co., ADR 3,000 73,125
Sprint Corp. 3,200 245,600
Telephone & Data Co. 4,800 191,400
Vodafone Group Plc., ADR 5,700 767,362
------------
3,690,120
------------
Tobacco: 0.11%
Gallaher Group Plc., ADR 6,800 185,300
------------
Tools: 0.25%
The Stanley Works 14,000 420,000
------------
Transportation: 0.84%
Northwest Airlines Corp. 13,000 340,844
US Airways Group Inc. 4,700 265,844
Wisconsin Central
Transportation Corp. 23,100 349,387
Yellow Corp. 26,900 432,081
------------
1,388,156
------------
Trucks: 0.10%
Kubota Corp., ADR 3,000 130,125
New Holland NV 2,700 34,087
------------
164,212
------------
Utilities: 4.86%
Allegheny Energy Inc. 13,800 424,350
Ameren Corp. 5,800 231,637
American Electric Power Co. 3,300 161,494
CalEnergy Inc. 9,000 246,375
Carolina Power & Light Co. 3,800 174,325
CINergy Corp. 9,600 331,200
DPL Inc. 12,800 242,400
DQE Inc. 7,400 291,837
FirstEnergy Corp. 12,600 378,000
Illinova Corp. 49,100 1,242,844
IPALCO Enterprises Inc. 23,000 1,055,125
New Century Energies Inc. 6,700 323,694
Northern States Power Co. 7,600 205,200
Pinnacle West Capital Corp. 7,100 311,069
Puget Sound Energy Inc. 21,631 584,037
SCANA Corp. 6,300 213,019
Texas Utilities Co. 3,500 153,125
Western Resources Inc. 8,900 311,500
Wisconsin Energy Corp. 36,831 1,127,949
------------
8,009,180
------------
Waste Management: 0.21%
Republic Industries Inc. 21,900 351,769
------------
Total Securities Sold Short
(Proceeds $127,218,804) $128,934,456
============
For Federal income tax purposes, the tax basis of proceeds for securities sold
short on October 31, 1998 was $126,522,136 and net unrealized depreciation on
securities sold short consisted of:
Gross unrealized appreciation $ 2,567,096
Gross unrealized depreciation (4,979,416)
------------
Net unrealized depreciation $(2,412,320)
============
See notes to financial statements.
12
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at value (identified cost $163,858,871) .................. $ 167,628,037
Cash .................................................................. 31,079
Deposits with broker for securities sold short ........................ 127,218,804
Receivables
Investments sold .................................................... 36,040,137
Capital shares sold ................................................. 719,854
Dividends and interest .............................................. 508,571
Prepaid expenses ...................................................... 47,934
Deferred organization expenses ........................................ 59,451
-------------
Total Assets ..................................................... 332,253,867
-------------
LIABILITIES
Securities sold short, at value (proceeds $127,218,804) ............... 128,934,456
Payables
Investments purchased .............................................. 37,633,743
Capital shares redeemed ............................................ 324,180
Advisory fee ....................................................... 21,698
Distribution fees .................................................. 99,037
Dividends on short sales ........................................... 180,763
Accrued expenses and other payables ................................ 215,377
-------------
Total liabilities ................................................ 167,409,254
-------------
Net Assets ............................................................ $ 164,844,613
=============
Net assets consist of
Capital paid-in ....................................................... $ 173,679,125
Undistributed net investment income ................................... 1,169,245
Accumulated net realized loss on investments and futures .............. (22,193,991)
Undistributed net realized gain on securities sold short .............. 10,136,720
Net unrealized appreciation on investments ............................ 3,769,166
Net unrealized depreciation on securities sold short .................. (1,715,652)
-------------
Net Assets ............................................................ $ 164,844,613
=============
Class A Shares
Net asset value ("NAV") and redemption price per share
($39,331,034/3,629,012 shares). ..................................... $ 10.84
=============
Maximum public offering price per share-NAV/
(1-maximum sales charge)($10.84/.945) .... .......................... $ 11.47
=============
Class B Shares
Net asset value and offering price per share
($47,793,807/4,422,683 shares) ........... ......................... $ 10.81
=============
Redemption price per share ............................................ *
=============
Class C Shares
Net asset value and offering price per share
($56,873,617/5,268,306 shares) ........... ........................ $ 10.80
=============
Redemption price per share ............................................ *
=============
Class I Shares
Net asset value, offering and redemption price per share
($20,846,155/1,922,176 shares) ...................................... $ 10.85
=============
</TABLE>
* Varies by length of time shares are held. (Note 3b)
See notes to financial statements.
13
<PAGE>
STATEMENT OF OPERATIONS
FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
INVESTMENT INCOME
Income
Dividends* ............................................. $ 781,624
Interest ............................................... 2,750,905
------------
Total income ......................................... 3,532,529
------------
Expenses (Note 2)
Advisory fees (Note 3) ................................. 883,943
Distribution fees, Class A (Note 3) .................... 43,240
Distribution fees, Class B (Note 3) .................... 146,745
Distribution fees, Class C (Note 3) .................... 193,313
Transfer agent fees .................................... 41,059
Amortization of organization expenses .................. 5,613
Custodian fees ......................................... 70,486
Portfolio accounting fees .............................. 46,407
Professional fees ...................................... 32,563
Reports to shareholders ................................ 20,056
Registration fees ...................................... 107,543
Insurance .............................................. 8,901
Trustees' fees ......................................... 16,530
Miscellaneous .......................................... 1,399
------------
Expenses before dividends on short sales .................. 1,617,798
Dividends on short sales ............................... 797,676
------------
Total expenses ............................................ 2,415,474
Less: Expenses reimbursed by investment
adviser (Note 3) ................................... (52,190)
------------
Net expenses ....................................... 2,363,284
------------
Net investment income ..................................... 1,169,245
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on
Investments ............................................ (25,966,504)
Securities sold short .................................. 10,136,720
Futures ................................................ 3,772,513
------------
Net realized loss ......................................... (12,057,271)
------------
Unrealized appreciation (depreciation) on
Investments ............................................ 3,769,166
Securities sold short .................................. (1,715,652)
------------
Net unrealized appreciation ............................... 2,053,514
------------
Net realized and unrealized loss on investments,
securities sold short and futures ...................... (10,003,757)
------------
Net decrease in net assets resulting from operations ...... $ (8,834,512)
============
* Net of taxes withheld on foreign dividends of $1,535.
See notes to financial statements.
14
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD MAY 1, 1998 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1998
INCREASE (DECREASE) IN NET ASSETS
<TABLE>
<CAPTION>
Operations
<S> <C>
Net investment income ............................................. $ 1,169,245
Net realized loss on investments, securities sold
short and futures ................................................ (12,057,271)
Unrealized appreciation on investments and
securities sold short ............................................ 2,053,514
-------------
Net decrease in net assets resulting from operations ................. (8,834,512)
-------------
Capital share transactions (Note 5)
Net proceeds from sale of shares
Class A ........................................................ 49,826,479
Class B ........................................................ 51,623,271
Class C ........................................................ 64,615,080
Class I ........................................................ 24,024,074
-------------
190,088,904
-------------
Cost of shares redeemed
Class A ........................................................ (8,317,141)
Class B ........................................................ (1,267,242)
Class C ........................................................ (4,613,114)
Class I ........................................................ (2,212,282)
-------------
(16,409,779)
-------------
Increase in net assets derived from capital share transactions ....... 173,679,125
-------------
Net increase in net assets ........................................... 164,844,613
NET ASSETS
Beginning of period ............................................ --
-------------
End of period .................................................. $ 164,844,613
=============
Undistributed net investment income .................................. $ 1,169,245
=============
</TABLE>
See notes to financial statements.
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 1 -- ORGANIZATION
Euclid Mutual Funds (the "Trust"), organized as a Delaware business trust on
February 3, 1998, is registered under the Investment Company Act of 1940 (the
"Act") as a diversified, open-end management investment company. The Trust
presently consists of one investment portfolio ("Series"): Euclid Market Neutral
Fund (the "Fund"), which offers Class A, Class B, Class C and Class I Shares. On
April 22, 1998, the Trust sold $100,000 of shares of beneficial interest of the
Fund to Euclid Advisors LLC, the Fund's investment manager (the "Manager"). The
Fund commenced operations on May 1, 1998.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
(a) General: Investment transactions and securities sold short are recorded on
trade date. Realized gains and losses on sales of investments and securities
sold short are determined on the identified cost basis for both financial
reporting and income tax purposes. Distributions to shareholders and dividend
income are recorded on the ex-dividend date. Interest income is recorded on the
accrual basis. Direct expenses are charged to each class and general expenses
are allocated in proportion to net assets. Organization expenses are amortized
on a straight-line basis over the first 60 months of operations of the Fund. In
the event that any of the initial shares of the Fund are redeemed during this
period, the Fund will be reimbursed by the Manager for any unamortized
organization expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares outstanding at the time of redemption. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
(b) Portfolio Valuation: Stocks and futures are valued at the closing prices
reported on recognized securities exchanges or if no sale was reported, and for
unlisted securities, at the mean between the last-reported bid and asked prices.
Securities for which market quotations are not readily available (of which there
were none at October 31, 1998) are valued at fair value as determined by the
Board of Trustees. Short-term obligations having a remaining maturity of 60 days
or less are valued at amortized cost (which approximates market value).
(c) Futures Contracts and Option Accounting Principles: Initial margin deposits
on futures contracts are recorded as assets. The value of such contracts are
"marked to market" daily and changes are recognized as unrealized gains or
losses. Variation margin payments are recognized as assets or liabilities,
depending upon whether unrealized gains or losses are incurred. When a futures
contract is closed, the Fund realizes a gain or loss equal to the difference
between the proceeds from (or cost of) the closing transaction and its basis in
the contract. When the Fund writes an option, an amount equal to the premium
received is recorded as an asset and a corresponding liability. The liability is
subsequently "marked to market" daily. When an option written is exercised, the
proceeds of sale of the underlying security are increased by the premium
originally received and the Fund realizes a gain or loss. When an option written
expires or the Fund enters into a closing purchase transaction, the liability is
extinguished and the Fund realizes a gain or loss.
(d) Short Sales: A short sale is a transaction in which the Fund sells a
security it does not own in anticipation of a decline in market price. To sell a
security short, the Fund must borrow the security. The Fund's obligation to
replace the security borrowed and sold short will be fully collateralized at all
times by the proceeds from the short sale retained by the broker and by cash and
securities deposited in a segregated account with the Fund's custodian. If the
price of the security sold short increases between the time of the short sale
and the time the Fund replaces the borrowed security, the Fund will realize a
loss, and if the price declines during the period, the Fund will realize a gain.
Any realized gain will be decreased, and any realized loss increased, by the
amount of transaction costs. Dividends paid by the Fund in connection with such
short sales are recorded as expenses. At October 31, 1998, the value of
securities sold short amounted to $128,934,456 against which collateral of
$264,433,624 was held. The collateral includes the deposit with broker for
securities sold short, the repurchase agreement, and the common stocks held
long, as shown in the Schedule of Investments and Securities Sold Short.
(e) Off-Balance-Sheet Risk, Repurchase Agreements and Derivatives: With respect
to repurchase agreements, losses may arise if the counterparty does not perform
under the contract or agreement. The Fund's investment manager monitors the
requirement that the market value of the securities used to collateralize a
repurchase agreement exceed the dollar amount of the counterparty's obligation
to repurchase. The Fund's use of futures contracts and options involves, to
varying degrees, elements of market risk in excess of the amount recognized in
the investment portfolio. These derivative financial instruments ("derivatives")
are used to adjust the risk and return characteristics of the Fund's portfolio.
Derivatives are not used for the purpose of leverage. The objective in buying or
selling a derivative instrument is to increase or decrease the Fund's exposure
to changing security prices or
16
<PAGE>
interest rates. If the Manager misjudges market conditions or employs a strategy
that does not correlate well with the Fund's other investments; use of these
derivatives could result in a loss, regardless of the Manager's original intent
to reduce risk.
(f) Federal Income Taxes: It is the intention of the Fund to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its net taxable income, including any net
realized gain on investments, to its shareholders; therefore, no provision for
federal income tax is required. At October 31, 1998 (the Fund's tax fiscal
year-end), the Fund had a capital loss carryforward of $9,391,613, expiring
October 31, 2006 and is available to offset any net capital gains subsequently
realized, subject to certain limitations.
(g) Dividends and Distributions to Shareholders: Dividends and distributions are
declared separately for each class of shares of the Fund. The character of
distributions made during the year from net investment income or net realized
gains might differ from their ultimate characterization for federal income tax
purposes due to differences in the recognition of income and expense items for
financial statement and federal income tax purposes.
NOTE 3 -- INVESTMENT ADVISORY FEES AND OTHER
TRANSACTIONS WITH AFFILIATES
(a) Investment Manager: The Fund's investments are managed by Euclid Advisors
LLC (the "Manager"), a wholly owned subsidiary of Zweig/Glaser Advisers. The
Manager's investment advisory fee is based on the average daily net assets of
the Fund at the annual rate of 1.50%. The fees are accrued daily and paid
monthly. Investment advisory fees for the period May 1, 1998 (commencement of
operations) to October 31, 1998 aggregated $883,943 before expense
reimbursements. The Manager has voluntarily undertaken to limit the expenses of
the Fund (exclusive of taxes, interest, dividends paid on securities sold short,
brokerage commissions, the distribution fees described below and extraordinary
expenses) until April 30, 1999 to 2.00% of its average daily net assets. During
the period May 1, 1998 (commencement of operations) to October 31, 1998, the
Manager's reimbursements to the Fund aggregated $52,190. The Manager reserves
the right to discontinue this expense limitation at any time after April 30,
1999.
(b) Principal Distributor: Zweig Securities Corp. (the "Distributor") serves as
principal distributor of shares of the Fund. The Fund's Class A Shares are sold
with an initial sales charge, Class B Shares and Class C Shares are sold without
an initial sales charge, but bear higher expenses and are subject to a
contingent deferred sales charge, and Class I Shares are sold without a sales
charge. During the period May 1, 1998 (commencement of operations) to October
31, 1998, the Distributor's share of the initial and contingent deferred sales
charges was $63,395 and $58,952, respectively.
Pursuant to a Rule 12b-1 plan of distribution, the Fund pays the Distributor a
combined service and distribution fee equal to an annual rate of 0.30% of
average daily net assets of Class A Shares, 1.00% for Class B Shares, and 1.00%
for Class C Shares. Class I Shares, which are available for purchase by
tax-exempt retirement plans of the Distributor and its affiliates and certain
institutional investors, do not have a Rule 12b-1 Plan.
During the period May 1, 1998 (commencement of operations) to October 31, 1998,
the Fund paid Zweig Securities Corp. brokerage commissions of $825 in connection
with portfolio transactions effected by it.
Two of the Trustees and all of the officers of the Trust are also officers of
the Manager and/or the Distributor.
NOTE 4 -- PURCHASES AND SALES OF INVESTMENTS
During the period May 1, 1998 (commencement of operations) to October 31, 1998,
purchase and sale transactions, excluding repurchase agreements, short-term
obligations held to maturity and futures contracts, were:
PURCHASES $368,508,127
SALES $219,090,322
SHORT SALES $355,994,330
PURCHASES TO COVER SHORT SALES $198,638,805
NOTE 5 -- CAPITAL SHARES
The Trust has unlimited authorized shares of beneficial interest, divided into
Series and issued in classes (see Note 1). Capital share transactions for the
period May 1, 1998 (commencement of operations) to October 31, 1998 are set
forth below.
- --------------------------------------------------------------------------------
Class A Class B Class C Class I
- --------------------------------------------------------------------------------
SOLD 4,380,167 4,536,939 5,680,328 2,125,730
REDEEMED (751,155) (114,256) (412,022) (203,554)
---------- ---------- ---------- ----------
NET INCREASE 3,629,012 4,422,683 5,268,306 1,922,176
========== ========== ========== ==========
17
<PAGE>
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout the period
May 1, 1998 (commencement of operations) to October 31, 1998.
<TABLE>
<CAPTION>
Class A Class B Class C Class I
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........................ $11.34 $11.34 $11.34 $11.34
Net Investment Income ....................................... 0.09 0.06 0.06 0.14
Net Realized and Unrealized Gains (Losses) .................. (0.59) (0.59) (0.60) (0.63)
------ ------ ------ ------
Total from Investment Operations ............................ (0.50) (0.53) (0.54) (0.49)
------ ------ ------ ------
Dividends from Investment Operations ........................ -- -- -- --
------ ------ ------ ------
Net Asset Value, End of Period .............................. $10.84 $10.81 $10.80 $10.85
====== ====== ====== ======
Total Return *** ............................................ (4.41)%** (4.67)%** (4.76)%** (4.32)%**
Ratios to Average Net Assets
Expenses (excluding dividends on short sales)
after expense reimbursement ................................ 2.30%* 3.00%* 3.00%* 2.00%*
Expenses (including dividends on short sales)
after expense reimbursement ................................ 3.65%* 4.35%* 4.35%* 3.35%*
Expenses (including dividends on short sales)
before expense reimbursement ............................... 3.69%* 4.39%* 4.39%* 3.39%*
Net Investment Income before
expense reimbursement ...................................... 2.29%* 1.59%* 1.59%* 2.59%*
Net Investment Income after
expense reimbursement ...................................... 2.33%* 1.63%* 1.63%* 2.63%*
Portfolio Turnover Rate ..................................... 431%* 431%* 431%* 431%*
Net Assets, End of Period (in thousands) .................... $39,331 $47,794 $56,874 $20,846
</TABLE>
During 1998, the Manager voluntarily reimbursed each Class $.003 per share
(0.04% ratio of expenses to average net assets).
* Annualized
** Not Annualized
*** Total Return does not consider the effect of any initial or contingent
deferred sales charge.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of Euclid Mutual Funds
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments and securities sold short, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Euclid Market Neutral Fund, the Series of Euclid Mutual Funds (the "Trust"), at
October 31, 1998, the results of its operations, the changes in its net assets
and the financial highlights for the period May 1, 1998 (commencement of
operations) through October 31, 1998, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at October 31, 1998 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
November 24, 1998
19
<PAGE>
TRUSTEES INVESTMENT MANAGER
James Balog Euclid Advisors LLC
Claire B. Benenson 900 Third Avenue--31st Floor
S. Leland Dill New York, NY 10022
Eugene J. Glaser
David Katzen PRINCIPAL DISTRIBUTOR
Donald B. Romans
Zweig Securities Corp.
900 Third Avenue--31st Floor
OFFICERS New York, NY 10022
Eugene J. Glaser
Chairman, President, CUSTODIAN
Chief Executive Officer & Trustee
The Bank of New York
David Katzen One Wall Street
Executive Vice President & Trustee New York, New York 10286
Barry M. Mandinach TRANSFER AGENT
First Vice President
State Street Bank & Trust Co.
225 Franklin Street
Boston, Massachusetts 02110
Alfred J. Ratcliffe
First Vice President & Treasurer
SERVICING AGENT
Charles I. Leone
First Vice President Boston Financial Data Services, Inc.
& Assistant Secretary Two Heritage Drive
Quincy, Massachusetts 02171
Annemarie Gilly
First Vice President COUNSEL
Marc Baltuch Shearman & Sterling
Secretary 599 Lexington Avenue
New York, New York 10022
Thomas Disbrow
Assistant Vice President INDEPENDENT ACCOUNTANTS
& Assistant Treasurer
PricewaterhouseCoopers LLP
Thomas Farrell 1301 Avenue of the Americas
Assistant Vice President New York, New York 10019
& Assistant Treasurer
Beth Abraham
Assistant Vice President
Rhonda Lee Berzner
Assistant Vice President
DESIGN: The Blank Page, Inc. New York, NY
20
<PAGE>
[LOGO]
EUCLID
MUTUAL FUNDS
900 Third Avenue-31st Floor
New York, NY 10022
- --------------------------------------------------------------------------------
For more information, contact your financial advisor or
call us at 1.800.272.2700.
- --------------------------------------------------------------------------------
----------------------------------------
Visit our website at www.euclidfunds.com
----------------------------------------
(C) Zweig Securities Corp. Member NASD.
[LOGO] Printed on recycled paper. E982 9811
