<PAGE>
Registration Nos. 33-50434 and 811-7084
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. ___ [_]
Post-Effective Amendment No. 7 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 8 [X]
THE LEGENDS FUND, INC.
(Exact Name of Registrant as Specified in Charter)
200 East Wilson Bridge Road
Worthington, Ohio 43085
(Address of Registrant's Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-325-8583
Copies to:
Kevin L. Howard, Esq. Joel H. Goldberg, Esq.
239 S. Fifth Street, 12th floor Shereff, Friedman, Hoffman & Goodman, LLP
Louisville, KY 40202-3271 919 Third Avenue
(Name and Address of Agent for Service) New York, New York 10022
-------------------
It is proposed that this filing will become effective (check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[X] on November 1, 1996 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940, the
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933. The Registrant has filed a notice under such Rule
for its fiscal year ended June 30, 1996 within 60 days of such date.
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
N-IA Item No.
- -------------
<C> <S>
Part A
Item 1. Cover Page ............................................................................................. Cover Page
Item 2. Synopsis ...................................................... Shareholder Transaction and Operating Expense Table
Item 3. Condensed Financial Information .............................................................. Financial Highlights
Item 4. General Description of Registrant ................................. Cover Page; The Fund; Investment Objectives and
Policies; Description of Various Securities
and Investment Techniques
Item 5. Management of the Fund ............................................. Management of the Fund; Portfolio Transactions
and Brokerage; Other Information
Item 5A Management's Discussion of Fund Performance ................................................................... N/A
Item 6. Capital Stock and Other Securities ......................................... The Fund; Dividends, Distributions and
Federal Income Taxes; Purchases and Redemptions
Item 7. Purchase of Securities Being Offered ............................................ The Fund; Management of the Fund;
Valuation of Shares; Purchases
and Redemptions
Item 8. Redemption of Repurchase ................................................................ Purchases and Redemptions
Item 9. Legal Proceedings ............................................................................................. N/A
Part B
Item 10. Cover Page ............................................................................................. Cover Page
Item 11. Table of Contents ............................................................................... Table of Contents
Item 12. General Information and History ................................................................. Other Information
Item 13. Investment Objectives and Policies ........................................... Investment Policies and Limitations;
Options, Futures and Other Hedging
Strategies; Portfolio Transactions
Item 14. Management of the Registrant ............................................................... Directors and Officers
Item 15. Control Persons and Principal Holders of Securities ............................................. Other Information
Item 16. Investment Advisory and Other Services ......................................... Directors and Officers; Investment
Management Services; Other Information
Item 17. Brokerage Allocation ....................................................................... Portfolio Transactions
Item 18. Capital Stock and Other Securities .............................................................. Other Information
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ................... Additional Purchase and Redemption
Information; Valuation of Shares
Item 20. Tax Status .................................................................................................. Taxes
Item 21. Underwriters .................................................................................................. N/A
Item 22. Calculation of Performance Data ................................................. Yield and Performance Information
Item 23. Financial Statements ......................................................................... Financial Statements
Part C
Information required to be included is set forth under the appropriate Item, so numbered, in Part C to this Registration
Statement.
</TABLE>
<PAGE>
PROSPECTUS
THE LEGENDS FUND, INC./TM/
200 EAST WILSON BRIDGE ROAD
WORTHINGTON, OHIO 43085
TELEPHONE: 1-800-325-8583
The Legends Fund, Inc. (Fund) is an open-end management investment company with
multiple portfolios available for investment. Shares of the Portfolios are
currently sold only to separate accounts of Integrity Life Insurance Company and
National Integrity Life Insurance Company as an investment medium for variable
annuity certificates and contracts they issue. The Fund's current portfolios and
their investment objectives are:
- MORGAN STANLEY ASIAN GROWTH PORTFOLIO seeks long-term capital appreciation.
It invests primarily in the common stocks of Asian issuers, excluding
Japan.
- MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO seeks high current income
consistent with relative stability of principal and, secondarily, capital
appreciation. It invests primarily in a portfolio of high yielding fixed
income securities of issuers located throughout the world.
- RENAISSANCE BALANCED PORTFOLIO seeks capital appreciation and income in
rising markets and capital preservation in declining markets. Its assets
are allocated among equity issues, United States Government and agency
issues (including mortgage-backed securities), investment grade/dollar
denominated bonds, and investment grade cash equivalent issues.
- ZWEIG ASSET ALLOCATION PORTFOLIO seeks long-term capital appreciation. It
invests primarily in stocks which are comparable to Blue Chip Stocks (as
defined in "Investment Objectives and Policies").
- NICHOLAS-APPLEGATE BALANCED PORTFOLIO seeks maximum total return in both
the equity and fixed income portion of its investments. It generally
allocates 60%-65% of assets to equity securities and 35%-40% of assets to
U.S. Government securities and cash equivalent issues.
- HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It invests primarily in stocks of established
companies with proven records of superior and consistent growth.
- DREMAN VALUE PORTFOLIO seeks primarily long-term capital appreciation with
a secondary objective of current income. It invests primarily in equity
securities considered by the Sub-Adviser to be undervalued.
- ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in Small Company Stocks (as defined in "Investment
Objectives and Policies").
- PINNACLE FIXED INCOME PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital. It invests primarily in
corporate debt securities, U.S. Government securities (including mortgage-
backed securities issued by GNMA, FNMA and FHLMC) and asset-backed
securities. The Pinnacle Fixed Income Portfolio is advised by J.P. Morgan
Investment Management Inc.
- ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO seeks maximum current income
consistent with liquidity and conservation of capital. It invests in high
grade money market instruments with remaining maturities of 13 months or
less, and repurchase agreements secured by such instruments. While the
Portfolio seeks to maintain a stable net asset value of $1.00 per share,
there is no assurance that it will be able to do so. An investment in the
Portfolio is neither insured nor guaranteed by the U.S. Government.
Morgan Stanley Worldwide High Income Portfolio invests predominantly in lower
rated and unrated bonds, commonly referred to as "junk bonds." Bonds of this
type are considered to be speculative with regard to the payment of interest and
return of principal and are subject to greater risk of loss of principal and
interest. Purchasers should carefully assess the risks associated with an
investment in this Portfolio. See "Description of Various Securities and
Investment Techniques -- Debt Securities."
This Prospectus sets forth information about the Fund that a prospective
investor should know before investing. Please read this Prospectus and retain it
for future reference. A Statement of Additional Information (SAI) dated November
1, 1996 (which is incorporated by reference herein) has been filed with the
Securities and Exchange Commission and is available upon request and without
charge. You can obtain a copy by calling or writing to the Fund at the telephone
number and address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated November 1, 1996
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights presented for the three years ended June 30, 1996, 1995
and 1994 (the period from June 15, 1994, commencement of operations, to June 30,
1994 for the Morgan Stanley Asian Growth and Morgan Stanley Worldwide High
Income Portfolios) have been audited by Ernst & Young LLP, independent auditors
for the Fund, and the financial statements of the Fund, along with the report of
Ernst & Young LLP thereon, are set forth in the SAI. The financial highlights
presented for the fiscal period from commencement of operations through June 30,
1993 have been audited by other independent auditors. Per share information is
for a share of capital stock outstanding throughout the respective fiscal
period. Further performance information is contained in the Fund's annual report
which may be obtained without charge by calling or writing to the Fund at the
address listed on the first page of this prospectus.
The financial highlights information pertains to the Portfolios of the Fund and
does not reflect charges related to Integrity Life Insurance Company Separate
Account II or National Integrity Life Insurance Company Separate Account II. You
should refer to the appropriate Separate Account prospectus for additional
information regarding such charges.
ii
<PAGE>
Renaissance Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
Year Ended June 30, 1992
------------------- (commencement
of operations)
through
June 30,
through
June 30,
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of $ 11.61 $ 10.40 $ 10.42 $ 10.00
period
Income from investment operations:
Net investment income .36 0.42 0.20 0.13
Net realized and unrealized gain
(loss) on investments 1.10 0.99 (0.11) 0.29
----------- ----------- ----------- ---------
Total from investment operations 1.46 1.41 0.09 0.42
Less distributions:
From net investment income (.40) (0.17) (0.11) --
From net realized gain -- (0.03) -- --
----------- ----------- ----------- ----------
Total distributions (.40) (0.20) (0.11) --
----------- ----------- ----------- ----------
Net asset value, end of period $12.67 $ 11.61 $ 10.40 $ 10.42
=========== =========== =========== ==========
TOTAL RETURN(A) 12.68% 13.71% 0.73% 7.70%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $27,103,353 $27,032,195 $25,046,394 $7,798,672
Ratio of expenses to average net assets 1.01% 0.96% 1.06% 1.24%
Ratio of net investment income to average
net assets 2.69% 3.53% 2.72% 2.36%
Ratio of expenses to average net assets
before voluntary expense reimbursement 1.01% .96% 1.06% 2.95%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 2.69% 3.53% 2.72% 0.65%
Portfolio turnover rate 107% 71% 85% 29%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
iii
<PAGE>
<TABLE>
<CAPTION>
Zweig Asset Allocation Portfolio
Financial Highlights
Year Ended June 30, December 14,
-------------------- 1992
(commencement
of operations)
through June
30,
1993
---------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of $13.02 $11.44 $10.81 $10.00
period
Income from investment operations: .21 0.33 0.10 0.08
Net investment income
Net realized and unrealized gain 1.21 1.33 0.58 0.73
on investments ------ ------- ------- -------
Total from investment operations 1.42 1.66 0.68 0.81
Less distributions:
From net investment income (.33) (0.08) (0.05) --
------ ------- ------- -------
Net asset value, end of period $14.11 $13.02 $11.44 $10.81
====== ======= ======= =======
TOTAL RETURN (A) 11.06% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (B) $40,221,898 $36,736,161 $31,563,173 $3,855,544
Net assets, end of period
Ratio of expenses to average net 1.25% 1.20% 1.39% 1.51%
assets
Ratio of net investment income to average net 1.55% 2.73% 1.67% 1.40%
assets
Ratio of expenses to average net assets before 1.25% 1.20% 1.39% 4.87%
voluntary expense reimbursement
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.55% 2.73% 1.67% (1.17%)
Portfolio turnover rate 105% 45% 101% 12%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
iv
<PAGE>
Nicholas-Applegate Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 3,
Year Ended June 30, 1992
------------------- (commencement
of operations)
through June 30,
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 13.17 $ 11.27 $ 11.50 $ 10.00
Income from investment operations:
Net investment income .27 0.27 0.09 0.11
Net realized and unrealized gain 1.49 1.74 (0.29) 1.39
(loss) on investments ------------ ----------- ----------- ----------
Total from investment operations 1.76 2.01 (0.20) 1.50
Less distributions:
From net investment income (.27) (0.11) (0.03) --
------------ ----------- ----------- ----------
Net asset value, end of period $ 14.66 $ 13.17 $ 11.27 $ 11.50
============ =========== =========== ==========
TOTAL RETURN(A) 13.53% 17.92% (1.70%) 26.07%
RATIOS AND SUPPLEMENTAL DATA(B)
Net assets, end of period $49,462,777 $45,780,611 $39,357,996 $5,567,264
Ratio of expenses to average net
assets .98% 0.94% 1.03% 1.25%
Ratio of net investment income
to average net assets 1.92% 2.20% 1.69% 1.70%
Ratio of expenses to average net assets
before voluntary expense reimbursement 0.98% 0.94% 1.03% 3.87%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.92% 2.20% 1.69% (.72%)
Portfolio turnover rate 127% 108% 56% 21%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
v
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Year Ended June 30, December 8,
----------------------------------------- 1992
(commencement
of operations)
through June 30,
1996 1995 1994 1993
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 12.85 $ 9.36 $ 9.71 $ 10.00
Income from investment operations:
Net investment income (loss) -- (D) 0.01 (0.02)(C) --
Net realized and unrealized gain
(loss) on investments 1.74 3.48 (0.33) (0.29)
----------- ----------- ----------- ----------
Total from investment operations 1.74 3.49 (0.35) (0.29)
Less distributions:
From net investment income (.01) -- -- --
From net realized gain (.09) -- -- --
----------- ----------- ----------- ----------
Total distributions (.10) -- -- --
----------- ----------- ----------- ----------
Net asset value, end of period $ 14.49 $ 12.85 $ 9.36 $ 9.71
=========== =========== =========== ==========
TOTAL RETURN(A) 13.59 % 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA(B)
Net assets, end of period $23,810,409 $16,393,276 $10,693,027 $5,143,365
Ratio of expenses to average net assets 1.04% 1.05% 1.29% 1.34%
Ratio of net investment income
(loss) to average net assets 0.03% 0.13% (0.17%) (0.06%)
Ratio of expenses to average net assets before
voluntary expense reimbursement 1.04% 1.05% 1.29% 3.52%
Ratio of net investment income (loss)
to average net assets before 0.03% 0.13% (0.17%) (1.94%)
voluntary expense reimbursement
Portfolio turnover rate 58% 31% 38% 6%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Net investment income (loss) per share has been calculated using the
weighted monthly average number of shares outstanding.
(D) Less than $0.01 per share.
vi
<PAGE>
Dreman Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
December 14,
1992
Year Ended June 30, (commencement
-------------------- of operations)
through June 30,
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 12.59 $ 10.66 $ 10.45 $ 10.00
Income from investment operations:
Net investment income .18 0.26 0.12 0.11
Net realized and unrealized gain
on investments 3.70 1.85 0.17 0.34
----------- ----------- ---------- -----------
Total from investment operations 3.88 2.11 0.29 0.45
Less distributions:
From net investment income (.19) (0.14) (0.08) --
From net realized gain (.11) (0.04) -- --
----------- ----------- ---------- -----------
Total distributions (.30) (0.18) (0.08) --
----------- ----------- ---------- -----------
Net asset value, end of period $ 16.17 $ 12.59 $ 10.66 $ 10.45
=========== =========== ========== ==========
TOTAL RETURN (A) 31.22% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $19,704,710 $10,876,910 $8,952,174 $1,671,220
Ratio of expenses to average net
assets 1.06% 1.13% 1.40% 1.24%
Ratio of net investment income
to average net assets 1.65% 1.98% 1.98% 2.00%
Ratio of expenses to average net assets
before voluntary expense reimbursement 1.07% 1.13% 1.61% 8.43%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 1.64% 1.98% 1.76% (1.49%)
Portfolio turnover rate 18% 29% 9% 5%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
vii
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
Year Ended June 30, December 14,
------------------- 1992
(commencement
of operations)
through June 30,
1996 1995 1994 1993
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net Asset value, beginning of period $ 11.62 $ 10.65 $ 10.11 $ 10.00
Income from investment operations:
Net investment income .11 0.17 0.15 0.05
Net realized and unrealized gain on investments 2.04 0.93 0.50 0.06
----------- ---------- ---------- ----------
Total from investment operations 2.15 1.10 0.65 0.11
Less Distributions:
From net investment income (.16) (0.06) (0.11) --
From net realized gain -- (0.07) -- --
----------- ---------- ---------- ----------
Total distributions (.16) (0.13) (0.11) --
----------- ---------- ----------- ----------
Net asset value, end of period $ 13.61 $ 11.62 $ 10.65 $ 10.11
=========== ========== =========== ==========
TOTAL RETURN (A) 18.69% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (B)
Net Assets, end of period $11,698,119 $8,033,792 $ 7,590,947 $2,115,634
Ratio of expenses to average net assets 1.55% 1.55% 1.72% 1.61%
Ratio of net investment income to
average net assets 1.06% 1.54% 1.75% 0.84%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.83% 1.59% 2.14% 7.29%
Ratio of net investment income
(loss) to average net assets before
voluntary expense reimbursement 0.78% 1.50% 1.32% (1.80%)
Portfolio turnover rate 101% 67% 249% 15%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
viii
<PAGE>
<TABLE>
<CAPTION>
Pinnacle Fixed Income Portfolio (formerly the Mitchell Hutchins Fixed Income Portfolio)*
Financial Highlights
Year Ended June 30, January 5, 1993
------------------- (commencement
of operations)
through June 30,
1996 1995 1996 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.88 $10.00 $10.43 $10.00
Income from investment operations:
Net investment income 0.39 0.56 0.20 0.19
Net realized and unrealized gain
(loss) on investments (0.03) 0.53 (0.52) 0.24
------ ------ ------ ------
Total from investment operations 0.36 1.09 (0.32) 0.43
Less distributions:
From net investment income (0.58) (0.21) (0.11) --
------ ------ ------ ------
Net asset value, end of period $10.66 $10.88 $10.00 $10.43
====== ====== ====== ======
TOTAL RETURN (A) 3.29% 11.08% (3.06%) 8.67%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $10,028,122 $5,415,497 $4,860,499 $905,836
Ratio of expenses to average net assets 1.32% 1.40% 1.56% 1.56%
Ratio of net investment income to average net assets 5.18% 5.41% 3.62% 3.86%
Ratio of expenses to average net assets before
voluntary expense reimbursement 1.94% 1.59% 2.49% 15.72%
Ratio of net investment income (loss) to average
net assets before voluntary expense reimbursement 4.56% 5.22% 2.68% (1.64%)
Portfolio turnover rate 392% 432% 527% 103%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
* J.P. Morgan Investment Management Inc. began managing the investment
operations of the Portfolio on April 1, 1996.
ix
<PAGE>
<TABLE>
<CAPTION>
ARM Capital Advisors Money Market Portfolio (formerly the Mitchell Hutchins Money Market Portfolio)*
Financial Highlights
Year Ended June 30, January 12, 1993
------------------- (commencement
of operations)
through June 30,
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income .05 0.04 0.02 0.01
Less distributions:
From net investment income (0.05) (0.04) (0.02) (0.01)
---------- ---------- ---------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========
TOTAL RETURN (A) 4.55% 4.30% 2.04% 1.66%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $8,855,847 $6,753,095 $5,452,417 $753,585
Ratio of expenses to average net
assets 1.12% 1.15% 1.29% 1.34%
Ratio of net investment income to
average net assets 4.67% 4.31% 2.19% 1.67%
Ratio of expenses to average net
assets before voluntary expense
reimbursement 1.46% 1.27% 2.08% 22.41%
Ratio of net investment income (loss) to
average net assets before voluntary
expense reimbursement 4.33% 4.20% 1.40% (2.05%)
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
* ARM Capital Advisors, Inc. began managing the investment operations of the
Portfolio directly without a Sub-adviser on April 1, 1996.
x
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Asian Growth Portfolio
Financial Highlights
Year Ended June 30,
-------------------
January 12, 1994
(commencement
of operations)
through June 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 10.18 $ 10.00 $ 10.00
Income from investment operations:
Net investment income (.01) 0.01 0.00 (C)
Net realized and unrealized gain
on investments .74 0.17 --
----------- ----------- ----------
Total from investment operations .73 0.18 --
Less distributions:
From net investment income (.04) 0.00(C) --
From net realized gain (.01) -- --
----------- ----------- ----------
Total distributions (.05) -- --
----------- ----------- ----------
Net asset value, end of period $ 10.86 $ 10.18 $ 10.00
=========== =========== ==========
TOTAL RETURN (A) 7.19% 1.80% 0.52%
RATIOS AND SUPPLEMENTAL DATA (b)
Net assets, end of period $14,952,095 $12,824,663 $1,905,357
Ratio of expenses to average net
assets 2.00% 1.92% 0.75%
Ratio of net investment income to
average net assets (.13%) 0.76% 0.59%
Ratio of expenses to average net assets before 2.21% 1.92% 9.79%
voluntary expense reimbursement
Ratio of net investment income (loss) (0.34)% 0.76% (8.44%)
to average net assets before
voluntary expense reimbursement
Portfolio turnover rate 51% 30% --
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Less than $0.01 per share.
xi
<PAGE>
<TABLE>
<CAPTION>
Morgan Stanley Worldwide High Income Portfolio
Financial Highlights
Year Ended June 30,
-------------------
January 15, 1994
(commencement
of operations)
through June 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of
period $ 10.40 $ 10.00 $ 10.00
Income from investment operations:
Net investment income 1.25 0.89 0.00 (C)
Net realized and unrealized gain
(loss) on investments .54 (0.49) --
---------- ---------- --------
Total from investment operations 1.79 0.40 --
Less distributions:
From net investment income (.94) 0.00 (C) --
From net realized gain on investments (.01) -- --
---------- ---------- --------
Total distributions (.95) -- --
---------- ---------- --------
Net asset value, end of period $ 11.24 $ 10.40 $ 10.00
---------- ---------- --------
TOTAL RETURN (A) 18.41% 4.00% 0.79%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period $5,789,468 $6,241,897 $687,484
Ratio of expenses to average net
assets 1.85% 1.61% 0.85%
Ratio of net investment income to
average net assets 10.04% 9.28% 0.80%
Ratio of expenses to average net assets before
voluntary expense reimbursement 2.06% 1.61% 24.78%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement 9.83% 9.28% (23.13%)
Portfolio turnover rate 122% 142% --
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Less than $0.01 per share.
xii
<PAGE>
THE FUND
The Legends Fund, Inc. (Fund) was incorporated in Maryland on July 22, 1992
under the name "Integrity Series Fund, Inc." and is an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the 1940 Act). It is a series-type investment company consisting of
multiple portfolios. The Board of Directors of the Fund may establish additional
Portfolios at any time.
ARM Capital Advisors, Inc. (Manager) serves as investment manager to all the
Portfolios of the Fund and has entered into a sub-advisory agreement with a
professional adviser for each Portfolio except for the ARM Capital Advisors
Money Market Portfolio (also referred to herein as the Money Market Portfolio).
Such advisers are individually called a Sub-Adviser, and collectively, the Sub-
Advisers (which term when applied to the Money Market Portfolio includes the
Manager). The Manager provides the Fund with supervisory and management
services. ARM Financial Group, Inc. (ARM) is the parent of the Manager. See
"Management of the Fund."
Shares of the Portfolios are offered to separate accounts of Integrity Life
Insurance Company (Integrity) and National Integrity Life Insurance Company
(National Integrity) to serve as an investment vehicle for contributions under
certain variable annuity contracts and certificates (certificates) issued by the
companies. See "Purchases and Redemptions."
Shareholders have the right to vote on the election of members of the Board of
Directors of the Fund, on any other matters on which by law they may be entitled
to vote, and on any other business which may properly come before a meeting of
shareholders. On any matters affecting only one Portfolio, only the shareholders
of that Portfolio are entitled to vote. On matters relating to all the
Portfolios, but affecting the Portfolios differently, separate votes by
Portfolio are required. The Fund does not hold annual meetings of shareholders.
Each share of a Portfolio has equal voting, dividend and liquidation rights.
INVESTMENT OBJECTIVES AND POLICIES
Set forth below is a description of the investment objectives and policies of
each Portfolio. The SAI describes specific investment restrictions which govern
each Portfolio's investments. The objectives, and the policies and restrictions
specifically cited as fundamental in this Prospectus and the SAI, are
fundamental and may not be changed with respect to any Portfolio without a
majority vote of shareholders of that Portfolio. Other investment policies and
practices described in this Prospectus and in the SAI are not fundamental, and
the Board of Directors of the Fund may change them without shareholder approval.
Each Portfolio has its own investment objectives and policies. There is no
assurance that a Portfolio will achieve its investment objectives.
MORGAN STANLEY ASIAN GROWTH PORTFOLIO seeks long-term capital appreciation
through investment primarily in common stocks of Asian issuers, excluding Japan.
The production of any current income is incidental to this objective. The
Portfolio seeks to achieve its objective by investing under normal market
conditions at least 65% of the value of its total assets in common stocks which
are traded on recognized stock exchanges of the countries in Asia described
below and in common stocks of companies organized under the laws of an Asian
country whose business is conducted principally in Asia. The Portfolio does not
intend to invest in securities which are traded in markets in Japan or in
companies organized under the laws of Japan. The Portfolio may also invest in
sponsored or unsponsored American Depositary Receipts (ADRs) of Asian issuers
that are traded on stock exchanges in the United States. See "Description of
Various Securities and Investment Techniques." Morgan Stanley Asset Management
Inc. (MSAM) is the Sub-Adviser for the Portfolio. For more information about
MSAM, see "Management of the Fund."
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The Portfolio will invest in countries having more established markets in the
region. The Asian countries to be represented in the Portfolio will consist of
three or more of the following countries: Hong Kong, Singapore, Malaysia,
Thailand, the Philippines and Indonesia. The Portfolio may also invest in common
stocks traded on markets in China, Taiwan, South Korea, India, Pakistan, Sri
Lanka and other developing markets that are open to foreign investment. There is
no requirement that the Portfolio, at any given time, invest in any one
particular country or in all of the countries listed above or in any other Asian
countries. The Portfolio has no set policy for allocating investments among the
several Asian countries. Allocation of investments among the various countries
will depend on the relative attractiveness of the stocks of issuers in the
respective countries. Government regulation and restrictions in many of the
countries of interest may limit the amount, mode and extent of investment in
companies in such countries.
As stated above, at least 65% of the total assets of the Portfolio will be
invested in common stocks of issuers in Asian countries under normal
circumstances. The remaining portion of the Portfolio will be kept in any
combination of debt instruments, bills and bonds of governmental entities in
Asia and the United States, in notes, debentures, and bonds of companies in Asia
and in money market instruments of the United States. Common stocks for this
purpose include common stocks and equivalents, such as securities convertible
into common stocks and securities having common stock characteristics, such as
rights and warrants to purchase common stocks. Debt securities convertible into
common stocks will be investment grade (rated in one of the four highest rating
categories by a nationally recognized statistical rating organization (NRSRO))
or, if unrated, will be of comparable quality as determined by the Sub-Adviser.
See Appendix A.
The Sub-Adviser's approach in selecting investments for the Portfolio is
oriented to individual stock selection and is value driven. In selecting stocks
for the Portfolio, the Sub-Adviser initially identifies those stocks which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues, and then evaluates the future value of such stocks by
running the results of an in-depth study of the issuer through a dividend
discount model. The Sub-Adviser utilizes the research of a number of sources,
including its affiliate in Geneva, Morgan Stanley Capital International, in
identifying attractive securities, and applies a number of proprietary screening
criteria to identify those securities it believes to be undervalued. Portfolio
holdings are regularly reviewed and subjected to fundamental analysis to
determine whether they continue to conform to the Sub-Adviser's value criteria.
Those which no longer conform are sold. The Sub-Adviser will analyze assets,
revenues and earnings of an issuer. In selecting industries and particular
issuers, the Sub-Adviser will evaluate costs of labor and raw materials, access
to technology, export of products and government regulation. Although the
Portfolio seeks to invest in larger companies, it may invest in small- and
medium-sized companies that, in the Sub-Adviser's view, have potential for
growth.
The Portfolio may invest in equity securities of smaller capitalized companies,
which are more vulnerable to financial and other risks than larger companies.
Investment in securities of smaller companies may involve a higher degree of
risk and price volatility than in securities of larger companies. The
Portfolio's investments will include securities of issuers located in developing
countries and traded in emerging markets. These securities pose greater
liquidity risks and other risks than securities of companies located in
developed countries and traded in more established markets. For a description of
special considerations and certain risks associated with investment in foreign
issuers, see "Description of Various Securities and Investment Techniques."
Although the Portfolio intends to invest primarily in securities listed on stock
exchanges, it will also invest in securities traded in over-the-counter markets
and, to a limited extent, in non-publicity traded securities. Securities traded
in over-the-counter markets and non-publicly traded securities pose liquidity
risks.
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Pending investment or settlement, and for liquidity purposes, the Portfolio may
invest in domestic, Eurodollar and foreign short-term money market instruments.
As determined by the Sub-Adviser, the Portfolio may also purchase such
instruments to temporarily reduce the Portfolio's equity holdings for defensive
purposes in response to adverse market conditions.
Because of the lack of hedging facilities in the currency markets of Asia, no
active currency hedging strategy is anticipated currently. Instead, each
investment will be considered on a total currency adjusted basis with the United
States dollar as a base currency. The Portfolio may engage in foreign currency
exchange contracts. See "Description of Various Securities and Investment
Techniques."
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO seeks high current income
consistent with relative stability of principal and, secondarily, capital
appreciation, through investing primarily in a portfolio of high yielding fixed
income securities of issuers located throughout the world. The Portfolio seeks
to achieve its investment objective by allocating its assets among any or all of
three investment sectors: U.S. corporate lower rated and unrated debt
securities, emerging country debt securities and global fixed income securities
offering high real yields. The types of securities within each investment sector
in which the Portfolio may invest are described below. MSAM is the Sub-Adviser
for the Portfolio. For more information about MSAM, see "Management of the
Fund."
In selecting U.S. corporate lower rated and unrated debt securities for the
Portfolio, the Sub-Adviser will consider, among other things, the price of the
security, and the financial history, condition, prospects and management of an
issuer. The Sub-Adviser intends to invest a portion of the Portfolio's assets in
emerging country debt securities that provide a high level of current income,
while at the same time holding the potential for capital appreciation if the
perceived creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which the
issuer is located. In addition, the Sub-Adviser will attempt to invest a portion
of the Portfolio's assets in fixed income securities of issuers in global fixed
income markets displaying high real (inflation adjusted) yields. Under normal
conditions, the Portfolio intends to invest between 80% and 100% of its total
assets in some or all of these three categories of higher yielding securities,
some of which may entail increased credit and market risk. See "Description of
Various Securities and Investment Techniques -- Debt Securities."
The Sub-Adviser's approach to multicurrency fixed-income management is strategic
and value-based and designed to produce an attractive real rate of return. The
Sub-Adviser's assessment of the bond markets and currencies is based on an
analysis of real interest rates. Current nominal yields of securities are
adjusted for inflation prevailing in each currency sector using an analysis of
past and projected inflation rates. The Portfolio's aim is to invest in bond
markets which offer the most attractive real returns relative to inflation.
A portion of the Portfolio's investments, which may be up to 100% of the
Portfolio's investments, may be considered to have credit quality below
investment grade as determined by internationally recognized credit rating
agency organizations, such as Moody's Investors Service, Inc. (Moody's) and
Standard & Poor's Ratings Group (S&P), or be unrated but determined to be of
comparable quality by the Sub-Adviser. Such lower rated bonds are commonly
referred to as "junk bonds." Securities in the lowest rating categories may have
predominantly speculative characteristics or may be in default. See Appendix A
for a description of Moody's and S&P's corporate bond ratings. Ratings represent
the opinions of rating agencies as to the quality of bonds and other debt
securities they undertake to rate at the time of issuance. However, ratings are
not absolute standards of quality and may not reflect changes in an issuer's
creditworthiness. Accordingly, while the Sub-Adviser will consider ratings, it
will perform its own analysis and will not rely principally on ratings. Emerging
country debt securities in which the Portfolio may invest will be subject to
high risk and will
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not be required to meet a minimum rating standard and may not be rated for
creditworthiness by any internationally recognized credit rating organizations.
The Portfolio's investments in U.S. corporate lower rated and unrated debt
securities and emerging country debt securities are expected to be rated in the
lower and lowest rating categories of internationally recognized credit rating
organizations or to be unrated securities of comparable quality. Ratings of a
non-U.S. debt instrument, to the extent that those ratings are undertaken, are
related to evaluations of the country in which the issuer of the instrument is
located. Ratings generally take into account the currency in which a non-U.S.
debt instrument is denominated; instruments issued by a foreign government in
other than the local currency, for example, typically have a lower rating than
local currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer. To mitigate the risks associated with
investments in such lower rated securities, the Portfolio will diversify its
holdings by market, issuer, industry and credit quality. Investors should
carefully read "Description of Various Securities and Investment Techniques --
Debt Securities."
The Portfolio may invest in or own securities of companies in various stages of
financial restructuring, bankruptcy or reorganization which are not currently
paying interest or dividends, provided that the total value, at time of
purchase, of all such securities will not exceed 10% of the value of the
Portfolio's total assets. The Portfolio may have limited recourse in the event
of default on such debt instruments. The Portfolio may invest in loans,
assignments of loans and participations in loans. The Portfolio may also invest
in depositary receipts issued by U.S. or foreign financial institutions. See
"Description of Various Securities and Investment Techniques."
The Portfolio is not restricted in the portion of its assets which may be
invested in securities denominated in a particular currency and a substantial
portion of the Portfolio's assets may be invested in non-U.S. dollar-denominated
securities. The portion of the Portfolio's assets invested in securities
denominated in currencies other than the U.S. dollar will vary depending on
market conditions. The analysis of currencies is made independent of the
analysis of markets. Value in foreign exchange is determined by relative
purchasing power parity of a given currency. The Portfolio seeks to invest in
currencies currently undervalued based on purchasing power parity. The Sub-
Adviser analyzes current account and capital account performance and real
interest rates to adjust for shorter-term currency flows. Although the Portfolio
is permitted to engage in a wide variety of investment practices designed to
hedge against currency exchange rate risks with respect to its holdings of non-
U.S. dollar-denominated debt securities, the Portfolio may be limited in its
ability to hedge against these risks. The Portfolio may also write (i.e., sell)
covered call options and may enter into futures contracts and options on futures
and sell indexed financial futures contracts. See "Description of Various
Securities and Investment Techniques."
The Portfolio may also invest in zero coupon, pay-in-kind or deferred payment
securities, and in securities that may be collateralized by zero coupon
securities (such as Brady Bonds). Zero coupon securities are securities sold at
a discount to par value and are not entitled to interest payments during the
life of the security. Upon maturity, the holder is entitled to receive the par
value of the security. While interest payments are not made on such securities,
holders of such securities are deemed to receive "phantom income," which the
Portfolio will accrue prior to the receipt of cash payments. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. Deferred payment securities are securities that remain
zero coupon securities until a predetermined date, at which time the stated
coupon rate becomes effective and interest becomes payable at regular intervals.
Zero coupon, pay-in-
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kind and deferred payment securities may be subject to greater fluctuation in
value and lesser liquidity in the event of adverse market conditions than
comparably rated securities paying cash interest at regular interest payment
periods.
The Portfolio is authorized to borrow in an amount up to 33-1/3% of its total
assets (including the amount borrowed), less all liabilities and indebtedness
other than the borrowing, for investment purposes to increase the opportunity
for greater return and for payment of dividends. Such borrowings would
constitute leverage, which is a speculative characteristic. Leveraging will
magnify declines as well as increases in the net asset value of the Portfolio's
shares and in the yield on the Portfolio's investments. See "Description of
Various Securities and Investment Techniques."
The average time to maturity of the Portfolio's securities will vary depending
upon the Sub-Adviser's perception of market conditions. The Sub-Adviser invests
in medium-term securities (i.e., those with a remaining maturity of
approximately five years) in a market neutral environment. When the Sub-Adviser
believes that real yields are high, the Sub-Adviser lengthens the remaining
maturities of securities held by the Portfolio and, conversely, when the Sub-
Adviser believes real yields are low, it shortens the remaining maturities.
Thus, the Portfolio is not subject to any restrictions on the maturities of the
debt securities it holds, and the Sub-Adviser may vary the average maturity of
the securities held by the Portfolio without limit.
The Portfolio may, to a limited extent, invest in non-publicly traded
securities, private placements and restricted securities.
For temporary defensive purposes, the Portfolio may invest part or all of its
total assets in cash or in short-term securities, including certificates of
deposit, commercial paper, notes, obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities, and repurchase
agreements involving such government securities.
U.S. Corporate High Yield Fixed Income Securities. A portion of the Portfolio's
assets will be invested in U.S. corporate high yield fixed income securities,
which offer a yield above that generally available on U.S. corporate debt
securities in the three highest rating categories of NRSROs and which are
commonly referred to as "junk bonds." The Portfolio may buy unrated securities
that the Sub-Adviser believes are comparable to rated securities that are
consistent with the Portfolio's objectives and policies. The Portfolio may
acquire fixed income securities of U.S. issuers, including debt obligations
(e.g., bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts and commercial paper and obligations)
and preferred stock. These fixed income securities may have equity features,
such as conversion rights or warrants, and the Portfolio may invest up to 10% of
its total assets in equity securities other than preferred stock (common stocks,
warrants and rights and limited partnership interests). The Portfolio may not
invest more than 5% of its total assets at time of acquisition in either of (1)
equipment lease certificates, equipment trust certificates and conditional sales
contracts or (2) limited partnership interests.
Emerging Country Fixed Income Securities. A portion of the Portfolio's assets
will be invested in emerging country fixed income securities, which are debt
securities of government and government-related issuers located in emerging
countries (including participations in loans between governments and financial
institutions), and of entities organized to restructure outstanding debt of such
issuers, and debt securities of corporate issuers located in or organized under
the laws of emerging countries. As used in this Prospectus, an emerging country
is any country that the International Bank for Reconstruction and Development
(more commonly known as the World Bank) has determined to have a low or middle
income economy. There are currently over 130 countries which are considered to
be emerging countries, approximately 40 of which currently have established
securities markets. These
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countries generally include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe.
In selecting emerging country debt securities for investment by the Portfolio,
the Sub-Adviser will apply a market risk analysis contemplating assessment of
factors such as liquidity, volatility, tax implications, interest rate
sensitivity, counterparty risks and technical market considerations. Currently,
investing in many emerging country securities is not feasible or may involve
unacceptable political risks. Initially, the Portfolio expects that its
investments in emerging country debt securities will be made primarily in some
or all of the following emerging countries:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Algeria Egypt Nicaragua Slovakia
Argentina Greece Nigeria South Africa
Brazil Hungary Pakistan Thailand
Bulgaria India Panama Trinidad & Tobago
Chile Indonesia Paraguay Tunisia
China Ivory Coast Peru Turkey
Colombia Jamaica Philippines Uruguay
Costa Rica Jordan Poland Venezuela
Czech Republic Malaysia Portugal Zaire
Dominican Republic Mexico Russia
Ecuador Morocco Singapore
</TABLE>
As opportunities to invest in debt securities in emerging countries develop, the
Portfolio expects to expand and further diversify the emerging countries in
which it invests. While the Portfolio generally is not restricted in the portion
of its assets which may be invested in a single country or region, it is
anticipated that, under normal circumstances, the Portfolio's assets will be
invested in at least three countries.
The Portfolio's investments in government and government-related and
restructured debt securities will consist of (i) debt securities or obligations
issued or guaranteed by governments, governmental agencies or instrumentalities
and political subdivisions located in emerging countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging countries, and (iii) interests in issuers
organized and operated for the purpose of restructuring the investment
characteristics of instruments issued by any of the entities described above.
Such type of restructuring involves the deposit with or purchase by an entity of
specific instruments and the issuance by that entity of one or more classes of
securities backed by, or representing interests in, the underlying instruments.
Certain issuers of such structured securities may be deemed to be "investment
companies" as defined in the 1940 Act. As a result, the Portfolio's investment
in such securities may be limited by certain investment restrictions contained
in the 1940 Act.
The Portfolio's investments in debt securities of corporate issuers in emerging
countries may include debt securities or obligations issued (i) by banks located
in emerging countries or by branches of emerging country banks located outside
the country or (ii) by companies
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organized under the laws of an emerging country. Determinations as to
eligibility will be made by the Sub-Adviser based on publicly available
information and inquiries made to the issuer. The Portfolio may also invest in
certain debt obligations customarily referred to as "Brady Bonds," which are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructurings under a plan
introduced by former U.S. Secretary of the Treasury Nicholas F. Brady. See
"Investment Policies and Limitations -- Brady Bonds" in the SAI for further
information about Brady Bonds. The Portfolio's investments in government and
government-related and restructured debt instruments are subject to special
risks, including the inability or unwillingness to repay principal and interest,
requests to reschedule or restructure outstanding debt and requests to extend
additional loan amounts. See "Description of Various Securities and Investment
Techniques -- Debt Securities" and "-- Foreign Government Securities."
Emerging country debt securities held by the Portfolio will take the form of
bonds, notes, bills, debentures, convertible securities, warrants, bank debt
obligations, short-term paper, mortgage- and other asset-backed securities, loan
participations, loan assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging country issuers. U.S. dollar-denominated emerging
country debt securities held by the Portfolio will generally be listed but not
traded on a securities exchange, and non-U.S. dollar-denominated securities held
by the Portfolio may or may not be listed or traded on a securities exchange.
The Portfolio may invest in mortgage-backed securities and in other asset-backed
securities issued by non-governmental entities such as banks and other financial
institutions. Mortgage-backed securities include mortgage pass-through
securities and collateralized mortgage obligations (CMOs). Asset-backed
securities are collateralized by such assets as automobile or credit card
receivables and are securitized either in a pass-through structure or in a pay-
through structure similar to a CMO. Investments in emerging country debt
securities entail special investment risks. See "Description of Various
Securities and Investment Techniques -- Foreign Securities and Depositary
Receipts."
Global Fixed Income Securities. The global fixed income securities in which a
portion of the Portfolio's assets may be invested are debt securities
denominated in currencies of countries displaying high real yields. Such
securities include government obligations issued or guaranteed by U.S. or
foreign governments and their political subdivisions, authorities, agencies or
instrumentalities, and by supranational entities (such as the World Bank, The
European Economic Community, The Asian Development Bank and the European Coal
and Steel Community), Eurobonds, and corporate bonds with varying maturities
denominated in various currencies. In this portion of the Portfolio, the Sub-
Adviser seeks to minimize investment risk by investing in a high quality
portfolio of debt securities, the majority of which will be rated in one of the
two highest rating categories by an NRSRO or, if unrated, will be of comparable
quality, as determined by the Sub-Adviser. U.S. Government securities in which
the Portfolio may invest include obligations issued or guaranteed by the U.S.
Government, such as U.S. Treasury securities, as well as those backed by the
full faith and credit of the United States, such as obligations of the
Government National Mortgage Association and the Export-Import Bank. The
Portfolio may also invest in obligations issued or guaranteed by U.S. Government
agencies or instrumentalities where the Portfolio must look principally to the
issuing or guaranteeing agency for ultimate repayment. Investment in foreign
government securities for this portion of the Portfolio will be limited to those
of developed nations which the Sub-Adviser believes pose limited credit risk.
These countries currently include Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands,
New Zealand, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. Corporate and supranational obligations in which the Portfolio will
invest for this portion of its portfolio will be limited to those rated "A" or
better by Moody's, S&P or IBCA Ltd. or, if unrated, determined to be of
comparable quality by the Sub-Adviser.
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In selecting securities for this portion of the Portfolio, the Sub-Adviser
evaluates the currency, market, and individual features of the securities being
considered for investment. The Sub-Adviser believes that countries displaying
the highest real yields will over time generate a high total return and,
accordingly, the Sub-Adviser's focus for this portion of the Portfolio will be
to analyze the relative rates of real yield of twenty global fixed income
markets. In selecting securities, the Sub-Adviser will first identify the global
markets in which the Portfolio's assets will be invested by ranking such
countries in order of highest real yield. In this portion of the Portfolio, the
Portfolio will invest its assets primarily in fixed income securities
denominated in the currencies of countries within the top quartile of the Sub-
Adviser's ranking.
The Sub-Adviser's assessment of the global fixed income markets is based on an
analysis of real interest rates. The Sub-Adviser calculates real yield for each
global market by adjusting current nominal yields of securities in each such
market for inflation prevailing in each country using an analysis of past and
projected (one-year) inflation rates for that country. The Sub-Adviser expects
to review and update on a regular basis its real yield ranking of countries and
market sectors and alter the allocation of this portion of the Portfolio's
investments among markets as necessary when changes to real yields and inflation
estimates significantly alter the relative rankings of the countries and market
sectors.
RENAISSANCE BALANCED PORTFOLIO seeks income and capital appreciation in rising
markets and the preservation of capital in adverse market environments by
allocating assets among common stocks of issuers with large capitalizations,
United States Government and agency issues (including mortgage-backed
securities), investment grade/dollar denominated bonds, and investment grade
cash equivalent issues such as commercial paper. Renaissance Investment
Management (Renaissance) is the Sub-Adviser for the Portfolio. For more
information about Renaissance, see "Management of the Fund."
The Portfolio is managed by means of an asset allocation process developed by
Renaissance that utilizes the basic asset classes of stocks, bonds and cash
equivalents. The asset allocation process is a quantitative, value-oriented
process that results in periodic asset allocation shifts to reduce risk and/or
increase return. However, under normal market conditions, at least 25% of the
Portfolio will be invested in fixed income securities.
The Renaissance Balanced Strategy is based upon the premise that asset classes
within the financial markets periodically become mispriced relative to one
another. The Sub-Adviser systematically measures the potential returns from each
asset class and continually shifts away from overvalued assets and toward
undervalued assets. The attractiveness of each asset class is expressed in terms
of a payback methodology, which continually calculates the holding period
required for a given asset to return to the investor its current price in the
form of future earnings, dividends, and/or interest payments.
The period of time for the cumulative return to equal the initial investment is
called the Capital Return Time (CRT). Logically, investment funds should flow
toward those alternatives (assets) with shorter CRTs and away from assets with
longer CRTs. In the capital markets, this means that the prices of assets with
relatively low CRTs tend to rise, and the prices of assets with relatively high
CRTs tend to fall as equilibrium is restored. Measuring and exploiting the
difference in CRTs among asset classes are the objectives of the Renaissance
Balanced Strategy.
Equity commitments will generally range from 10% to 75% of the total assets of
the Portfolio. The equity portion of the Portfolio will be well-diversified,
with sector and industry weightings similar to those of the Standard & Poor's
500 Index (S&P 500). Selection of individual common stock issues is based upon a
three-part quantitative process which continually evaluates the large
capitalization stocks in the S&P 500. As a result of these
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selection procedures, the equity portion of the Portfolio will have a bias
toward high quality, liquid issues. The value characteristics of the equity
portion of the Portfolio, such as price/earnings ratios, price/book value ratios
and yield, will generally be more favorable than the characteristics of the
market as a whole. The investment objective of the equity portion of the
Portfolio is to achieve moderately better performance than the S&P 500 without
incurring excessive risk.
The fixed income Asset class will consist of U.S. Treasury and agency issues
and/or investment grade/dollar denominated bonds, and the cash equivalent class
will consist of investment grade money market securities, including 90-day U.S.
Treasury bills. See "ARM Capital Advisors Money Market Portfolio" for a
description of the type of money market securities in which the Portfolio may
invest. The commercial paper in which the Portfolio will invest will generally
be rated in the highest category by S&P or Moody's or, if unrated, of comparable
quality as determined by the Sub-Adviser. See Appendix A. The Portfolio may
invest up to 10% of its total assets in foreign government securities. The
Portfolio also may invest in mortgage-backed and asset-backed securities. See
"Description of Various Securities and Investment Techniques."
The Portfolio periodically may invest in listed options and futures contracts
and related options. These transactions would be made for the purpose of hedging
the portfolio against the possibility of a general market decline, or for the
purpose of increasing market exposure at minimal cost. See "Description of
Various Securities and Investment Techniques."
ZWEIG ASSET ALLOCATION PORTFOLIO seeks long-term capital appreciation through
investment primarily in Blue Chip Stocks, consistent with preservation of
capital and the reduction of portfolio exposure to market risk, as determined by
Zweig/Glaser Advisers (Zweig/Glaser), the Sub-Adviser. Blue Chip Stocks are
stocks which the Sub-Adviser considers comparable to the stocks included in the
S&P 500 that have a minimum of $400 million market capitalization, average daily
trading volume of 50,000 shares or $425 million in total assets, and which are
traded on the New York Stock Exchange (NYSE), American Stock Exchange (AMEX),
over-the-counter (OTC) or on foreign exchanges. For more information about
Zweig/Glaser, see "Management of the Fund."
The extent of the Portfolio's investment in Blue Chip Stocks and the selection
of particular securities are determined primarily on the basis of risk
management strategies and stock selection techniques developed by Dr. Martin
Zweig and his staff. In an effort to meet its investment objective, the
Portfolio will use certain specialized techniques. See "Description of Various
Securities and Investment Techniques." The Fund will use stock index futures
and/or options to increase or decrease market exposure, or to entirely eliminate
market exposure, and invest in high quality money market securities and
repurchase agreements in accordance with the Sub-Adviser's risk management
strategies.
The Sub-Adviser uses a computer-driven stock selection model currently employed
by Dr. Zweig and his staff. The model ranks approximately 1,400 of the most
liquid stocks as determined by the Sub-Adviser by various measures such as
earnings momentum, relative valuation, changes in analysts' earnings estimates
and price momentum, and, based on the rankings, selects up to 300 stocks for the
Portfolio. The stock selection model used may evolve or be replaced by other
stock selection techniques intended to achieve the Portfolio's investment
objective. Shareholders will be notified in the event of any material change to
the stock selection model.
The Portfolio may invest in foreign securities publicly traded in the United
States and in ADRs, which are U.S. dollar denominated receipts issued generally
by domestic banks and representing the deposit of a foreign issuer. For a
discussion of limitations on, and certain
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risks involved in, investments in foreign securities, see "Description of
Various Securities and Investment Techniques."
NICHOLAS-APPLEGATE BALANCED PORTFOLIO seeks maximum total return in both the
equity and fixed income portions of its investments. Under normal market
conditions, the Portfolio will have 60% to 65% of its assets invested in equity
securities, including common stocks and securities convertible into or
exchangeable for common stocks (such as convertible preferred stocks and
convertible debentures). The remaining 35% to 40% will be invested in U.S.
Government securities or cash equivalent issues. For information about Nicholas-
Applegate Capital Management (Nicholas-Applegate), the Sub-Adviser to the
Portfolio, see "Management of the Fund."
The Sub-Adviser follows a growth investment philosophy for equity securities. It
engages in fundamental analysis of companies which it considers to have strong
possibilities for long-term capital appreciation. Equity securities purchased
will generally have the following characteristics: (1) market capitalization in
excess of $500 million, (2) increasing earnings, (3) sustainable growth, and (4)
positive relative price momentum. The Sub-Adviser uses a computer system that
includes a proprietary research and verification system to analyze and rank more
than 3,500 stocks by these characteristics. It is anticipated that the Portfolio
will maintain an equity portfolio of between 75 and 100 issues.
The equity portion of the Portfolio will be diversified and consist of equity
securities such as common stocks, preferred stocks and convertible preferred
stocks, which the Sub-Adviser believes have above-average earnings growth
prospects based on a company-by-company analysis (rather than on broader
analyses of specific industries or sectors of the economy). The Sub-Adviser
seeks to identify stocks of companies which it expects to enter into an
accelerating earnings period, to attract increasing institutional sponsorship or
to demonstrate strong price appreciation relative to their industries and to
broad market averages. The companies in which the Portfolio invests do not
necessarily have records of past high growth. Examples of possible investments
include companies with increasing earnings, companies with new and innovative
products or services, companies facing a changed economic, competitive or
regulatory environment, companies with a new or different management approach
and initial public offerings of companies which the Sub-Adviser believes offer
above-average growth potential.
The Sub-Adviser utilizes an internal research system to systematically
integrate, weight and evaluate 3,500 companies based upon earnings acceleration,
earnings sustainability and relative price strength. The result is portfolios of
equity securities which the Sub-Adviser believes have above-average earnings
growth prospects. Investments are closely monitored with a view to the sale of
portfolio securities when the reasons for the initial purchases are no longer
valid.
The Portfolio may invest up to 20% of its total assets in securities of foreign
issuers and ADRs. See "Description of Various Securities and Investment
Techniques."
The fixed income securities in which the Portfolio will invest are U.S.
Government securities. Generally, such securities will have remaining terms to
maturity of approximately 10 years. The Sub-Adviser uses a statistical model
that identifies significant interest rate trends in the bond market. The
Portfolio will react to changes in the trend of interest rates by purchasing or
shifting to longer-term securities when the rates are declining and to shorter-
term securities when the rates are rising. The Sub-Adviser also will consider
such factors as Gross National Product, the inflation rate, fiscal policy and
the currency market in determining maturities to be purchased.
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The Portfolio may attempt to reduce the overall risk of its investments (hedge)
by investing in options. See "Description of Various Securities and Investment
Techniques."
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term capital
appreciation. The Portfolio primarily invests in stocks of established companies
with proven records of superior and consistent earnings growth. The Portfolio
may invest all or a portion of its assets in cash and cash equivalents if the
Sub-Adviser considers the securities markets to be overvalued. The Portfolio may
invest in U.S. Government securities when this appears desirable in light of the
Portfolio's investment objective or when market conditions warrant. For more
information about Harris Bretall Sullivan & Smith, Inc. (Harris Bretall Sullivan
& Smith), the Sub-Adviser, see "Management of the Fund."
The Sub-Adviser selects growth stocks by ascertaining that the issuing company
has (i) a track record of superior and consistent growth in revenues and
earnings; (ii) management that has successfully brought the company through a
variety of business conditions and business cycles; (iii) product lines,
technologies or franchises that are leaders in their fields; and (iv) a
financial structure that is stronger than average.
The Sub-Adviser applies qualitative and quantitative screens, using several on-
line databases to 5,000 publicly-held companies and develops a select universe
of approximately 300 stocks that meet its criteria. The Sub-Adviser's stock
selection process is centered on a proprietary multi-factor model which looks at
the individual companies in the universe from three points of view. First,
companies are ranked based on their intrinsic present value using the Sub-
Adviser's earnings and growth rate outlook. Second, their recent quarterly
earnings are reviewed and individual companies are ranked. Finally, based on
their relative price performance against the universe and the general market, a
third score is calculated. The strategy committee, composed of the principals
and senior portfolio managers of the Sub-Adviser, provide the security analysis
to input the earnings estimates, growth rates and risk factors into the model.
The stocks in the universe are then ranked to determine the most attractive,
undervalued companies in the universe. The Portfolio will purchase the top 40 to
50 stocks (Quintile 1), which are the most undervalued, and will continue to
hold them even if their ranking changes. Stocks are sold when they are ranked in
Quintiles 3, 4 and 5 and replaced by an equal number of Quintile 1 stocks.
Stocks are continuously monitored and rotated so the Portfolio will always be
invested in stocks which show the greatest appreciation potential. Industry
sectors expected to be represented in the Portfolio include technology, capital
goods, basic industry, consumer, energy, health care, media, interest sensitive,
utilities and transportation.
When the Sub-Adviser believes unusual circumstances warrant a defensive posture,
the Portfolio temporarily may commit all or a portion of its assets to cash,
U.S. Government securities or money market instruments, including repurchase
agreements.
DREMAN VALUE PORTFOLIO seeks primarily long-term capital appreciation with a
secondary objective of current income. The Portfolio will invest principally in
a diversified portfolio of securities believed by Dreman Value Advisors, Inc.
(Dreman), the Sub-Adviser for the Portfolio, to be undervalued. The Sub-
Adviser's philosophy centers on identifying stocks of large, well-known
companies with solid financial strength and generous dividend yields that have
low price-earnings ratios (P/E ratios) and have been generally overlooked by the
market. For more information about Dreman, see "Management of the Fund."
The Sub-Adviser's strategy reflects a contrarian approach, in that the potential
for superior relative performance is highest during down markets when investment
risks are greatest and protecting capital becomes of paramount importance. The
Sub-Adviser seeks to outperform
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the S&P 500 over a market cycle. There is, of course, no assurance that this
goal will be realized.
The Sub-Adviser's basic strategy is to buy low P/E stocks. In addition, the Sub-
Adviser seeks to identify financially strong companies paying above-average
dividends but which are currently out of favor. The Portfolio will normally be
invested in approximately 35 to 45 stocks divided among 16 to 20 industries. The
Sub-Adviser believes that diversification is essential to the low P/E strategy.
After having refined the portfolio candidate universe to a manageable group of
promising stocks, the Sub-Adviser then applies a proprietary fundamental
analysis. Qualifying stocks must generally satisfy certain requirements,
including: a strong financial position, favorable operating and financial
ratios, accelerating earnings growth, and a high dividend yield which a company
can sustain and probably increase.
The next factor considered by the Sub-Adviser is the price-to-book value
relationship. The Portfolio's investments will be principally in companies whose
market prices are low in relation to book value, as the Sub-Adviser seeks solid
assets and value rather than paying a high price for a concept or fad. Another
characteristic sought by the Sub-Adviser is low or sharply declining
institutional ownership. The Sub-Adviser believes that this is a sign of a stock
that is falling out of favor from Wall Street's point of view and becoming
relatively cheap.
The Sub-Adviser also analyzes debt-to-equity ratios to confirm that there is a
manageable amount of debt on a company's balance sheet, usually no more than
40%. The Sub-Adviser devotes attention to reviewing cash and current ratios to
be certain that the Portfolio's potential investments have strong staying power
and can self-finance should the need arise.
Generally, the Sub-Adviser seeks companies with better than average growth rates
in the last five and ten-year periods for both earnings and dividends. Most
investments will be in securities of domestic companies; however, the Portfolio
may also invest in securities of foreign companies through the acquisition of
ADRs.
In order to conserve assets during periods when the Sub-Adviser believes that
the market for equity securities is unduly speculative or when interest rates
are abnormally high, the Portfolio may invest in U.S. Government securities and
other high-grade, short-term money market instruments, including repurchase
agreements with respect to such instruments. The Portfolio may also purchase and
sell stock index futures contracts and index options. The Portfolio will invest
in stock index futures contracts and index options solely for the purpose of
hedging against changes resulting from market conditions in the values of the
securities held by the Portfolio or securities which it intends to purchase or
sell where such transactions are economically appropriate for the reduction of
risks inherent in the ongoing management of the Portfolio. See "Description of
Various Securities and Investment Techniques."
ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation through
investment primarily in Small Company Stocks, consistent with preservation of
capital and reduction of portfolio exposure to market risk, as determined by
Zweig/Glaser, the Sub-Adviser. Current income is not an objective. Small Company
Stocks are the 2,500 stocks positioned immediately after the 500 largest stocks
ranked in terms of market capitalization and/or trading volume, and which are
traded on the NYSE, AMEX or OTC. Currently, the market capitalization of the
2,500 stocks ranges between $3.8 billion and $239 million. Trading volume is
determined by multiplying a stock's average daily shares traded over the last
year by the average price of the stock for that same period. Currently, Small
Company Stocks have an average daily trading volume of approximately $3.2
million. For more information about Zweig/Glaser, see "Management of the Fund."
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The extent of the Portfolio's investment in Small Company Stocks and the
selection of particular securities are to be determined primarily on the basis
of risk management strategies and stock selection techniques developed by Dr.
Martin Zweig and his staff. In an effort to meets its investment objective, the
Portfolio will use certain specialized techniques. See "Description of Various
Securities and Investment Techniques." The Portfolio will use stock index
futures and/or options to increase or decrease market exposure, or to entirely
eliminate market exposure, and will invest in high quality money market
securities, repurchase agreements, and U.S. Government securities with remaining
maturities of 5 years or less, in accordance with the Sub-Adviser's risk
management strategies.
The Sub-Adviser will use a computer-driven stock selection model developed by
Dr. Zweig and his staff that evaluates approximately 3,000 stocks for their
attractiveness by various measures such as earnings momentum, relative
valuation, changes in analysts' earnings estimates and price momentum. Small
Company Stocks may present greater opportunities for capital appreciation and
greater risk; and they tend to be more volatile than stocks of larger, more
established companies.
Although the Portfolio will invest primarily in Small Company Stocks, it may
invest up to 35% of its total assets in stocks that rank among the 500 largest
in terms of market capitalization and/or trading volume. The stock selection
model and risk management strategies used by the Sub-Adviser may evolve or be
replaced by other stock selection techniques or risk management strategies
intended to achieve the Portfolio's investment objective. Shareholders will be
notified in advance of any such material change.
Under normal circumstances, the Portfolio will invest between 50% and 65% of its
net assets in Small Company Stocks.
The Portfolio may invest in foreign securities publicly traded in the U.S. and
in ADRs. For a discussion of limitations on, and certain risks involved in,
investments in foreign securities, see "Descriptions of Various Securities and
Investment Techniques."
PINNACLE FIXED INCOME PORTFOLIO seeks as high a level of current income as is
consistent with the preservation of capital. The Portfolio invests primarily in
corporate debt securities; U.S. Government securities (including mortgage-backed
securities issued by the Government National Mortgage Association, the Federal
National Mortgage Association, and the Federal Home Loan Mortgage Corporation);
obligations of other governmental issuers such as the Federal Farm Credit System
and the Federal Home Loan Banks; asset-backed securities; repurchase agreements
with respect to securities in which the Portfolio may invest; and instruments
used in certain hedging and related income strategies. The Portfolio may also
invest in certain private placements and in debt securities of foreign
governments and governmental entities. See "Description of Various Securities
and Investment Techniques." The Portfolio will principally invest in securities
rated at least investment grade, or, if not rated, determined by the Sub-Adviser
to be of comparable quality. However, the Portfolio may invest up to 15% of its
total assets in securities rated below investment grade or of equivalent
quality, if not rated, including defaulted securities. Lower rated securities
involve greater risks than do higher rated securities, in that they are
especially subject to adverse changes in general conditions and in the
industries in which the issuers are engaged, to changes in the financial
condition of the issuers and to price fluctuation in response to changes in
interest rates. For a more in-depth discussion of the risks inherent in
investing in lower quality debt securities, see "Description of Various
Securities and Investment Techniques --Debt Securities." J.P. Morgan Investment
Management Inc. (J.P. Morgan) is the Sub-Adviser to the Portfolio. For more
information about J.P. Morgan, see "Management of the Fund."
The Sub-Adviser may purchase money market instruments as part of its management
of the Portfolio's duration, to invest temporary cash balances or to maintain
liquidity to meet
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redemptions. However, the Portfolio may also invest in money market instruments
without limitation as a temporary defensive measure taken in the Sub-Adviser's
judgment during, or in anticipation of, adverse market conditions. These money
market investments include obligations of the U.S. Government and its agencies
and instrumentalities, other debt securities, commercial paper, bank obligations
and repurchase agreements.
The Portfolio may engage in certain strategies involving options (both exchange-
traded and OTC) to attempt to enhance income. The Portfolio also may attempt to
reduce the overall risk of its investments (hedge) by using options and futures
contracts. The Portfolio also may use forward currency contracts and foreign
currency options, futures contracts and options thereon to attempt to hedge
against movements in exchange rates. The Portfolio's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations. For more information about these investment techniques and the
special risks related thereto, see "Description of Various Securities and
Investment Techniques."
J.P. Morgan uses a sophisticated, disciplined, collaborative process for
managing all asset classes. For fixed income portfolios, this process focuses on
systematic analysis of real interest rates, sector diversification, and
quantitative and credit analysis.
J.P. Morgan actively manages the Portfolio's duration, the allocation of
securities across market sectors, and the selection of specific securities
within sectors. Based on fundamental, economic and capital markets research,
J.P. Morgan adjusts the duration of the Portfolio in light of market conditions
and J.P. Morgan's interest rate outlook. For example, if interest rates are
expected to fall, the duration may be lengthened to take advantage of the
expected associated increase in bond prices. J.P. Morgan also actively allocates
the Portfolio's assets among the broad sectors of the fixed income market
including, but not limited to, U.S. Government and agency securities, corporate
securities, private placements, asset-backed and mortgage-related securities.
Specific securities which J.P. MORGAN believes are undervalued are selected for
purchase within the sectors using advanced quantitative tools, analysis of
credit risk, the expertise of a dedicated trading desk, and the judgment of
fixed income portfolio managers and analysts. Under normal circumstances, J.P.
Morgan intends to keep the Portfolio essentially fully invested with at least
65% of the Portfolio's assets invested in fixed income securities.
Duration is a measure of the weighted average maturity of the bonds held in the
Portfolio and can be used as a measure of the sensitivity of the Portfolio's
market value to changes in interest rates. Generally, the longer the duration of
the Portfolio, the more sensitive its market value will be to changes in
interest rates. Under normal market conditions the Portfolio's duration will
range between one year shorter and one year longer than the duration of the U.S.
investment grade fixed income universe, as represented by Salomon Brothers Broad
Investment-Grade Bond Index. Currently, the index's duration is approximately
4.6 years. The maturities of the individual securities in the Portfolio may vary
widely, however.
J.P. Morgan intends to manage the Portfolio actively in pursuit of the
Portfolio's investment objective. Portfolio transactions are undertaken
principally to accomplish the Portfolio's objective in relation to expected
movements in the general level of interest rates, but the Portfolio may also
engage in short-term trading consistent with its objective. To the extent the
Portfolio engages in short-term trading, it may realize short-term capital gains
or losses and incur increased transaction costs.
ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO seeks maximum current income
consistent with liquidity and conservation of capital. The Portfolio invests in
high grade money market instruments, with remaining maturities of 13 months or
less, and repurchase agreements secured by such instruments, and maintains a
dollar-weighted average portfolio maturity of 90 days or less. These instruments
include (1) U.S. Government securities (which may or may
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not be backed by the full faith and credit of the United States), (2)
obligations (including certificates of deposit, bankers' acceptances and similar
obligations) of U.S. banks, including foreign branches of domestic banks and
domestic branches of foreign banks, having total assets in excess of $1.5
billion at the time of purchase, (3) interest-bearing savings deposits in U.S.
commercial and savings banks having total assets of $1.5 billion or less,
provided that the principal amounts at each such bank are fully insured by the
Federal Deposit Insurance Corporation and the aggregate amount of such deposits
(plus interest earned) does not exceed 5% of the Portfolio's asset value, and
(4) commercial paper and other short-term corporate obligations, corporate bonds
and notes with remaining maturities of 13 months or less, variable and floating
rate securities and participation interests (pro rata interests in securities
held by others) or repurchase agreements involving any of the foregoing
securities. The Manager is the sole investment adviser for the Money Market
Portfolio. See "Management of the Fund."
The commercial paper and other short-term corporate obligations purchased by the
Portfolio consist only of obligations that the Sub-Adviser determines, pursuant
to procedures adopted by the Fund's Board of Directors, present minimal credit
risks and are either (1) rated in the highest short-term rating category by at
least two NRSROs, (2) rated in the highest short-term rating category by a
single NRSRO if only that NRSRO has assigned the obligations a short-term rating
or (3) unrated, but determined by the Sub-Adviser to be of comparable quality
(First Tier Securities). The Portfolio generally may invest no more than 5% of
its total assets in the securities of a single issuer (other than securities
issued by the U.S. Government, its agencies or instrumentalities). For a
discussion of U.S. Government securities and repurchase agreements, see
"Description of Various Securities and Investment Techniques."
AN INVESTMENT IN THE ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE
THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
DESCRIPTION OF VARIOUS SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES: Each Portfolio may purchase U.S. Government
securities, which are obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities. These include direct obligations of the U.S.
Treasury (such as Treasury bills, notes and bonds) and obligations issued by
U.S. Government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association certificates) and securities supported primarily
or solely by the creditworthiness of the issuer (such as securities of the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Tennessee Valley Authority). See "Mortgage-Backed
Securities" below.
MORTGAGE-BACKED SECURITIES: Morgan Stanley Worldwide High Income Portfolio,
Renaissance Balanced Portfolio and Pinnacle Fixed Income Portfolio may invest in
mortgage-backed securities, some of which are also considered to be U.S.
Government securities. Mortgage-backed securities include:
. Ginnie Maes -- Ginnie Maes are debt securities issued by a mortgage banker
or other mortgagee and represent an interest in a pool of mortgages insured
by the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. The Government National Mortgage
Association (GNMA) guarantees the timely payment of principal and interest.
The GNMA guarantee is backed by the full faith and credit of the U.S.
Government.
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. Fannie Maes -- The Federal National Mortgage Association (FNMA) is a
government-sponsored corporation owned entirely by private stockholders
that purchases residential mortgages from a list of approved
seller/servicers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by
the full faith and credit of the U.S. Government.
. Freddie Macs -- The Federal Home Loan Mortgage Corporation (FHLMC), a
corporate instrumentality of the U.S. Government, issues participation
certificates (PCs) which represent an interest in residential mortgages
from FHLMC's National Portfolio. FHLMC guarantees the timely payment of
interest (and, under certain circumstances, principal) and ultimate
collection of principal, but PCs are not backed by the full faith and
credit of the U.S. Government.
. Government Collateralized Mortgage Obligations -- These are securities
issued by a U.S. Government instrumentality or agency which are backed by a
portfolio of mortgages or mortgage-backed securities held under an
indenture. CMOs are described more fully below.
Interest and principal payments (including prepayments) on the mortgages
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed security. Prepayments occur when the mortgagor on an individual
mortgage prepays all or a portion of the remaining principal before the
mortgage's scheduled maturity date. As a result of the pass-through of
prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayments of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgages vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayments are important because of their effect on the yield and price of the
securities. During periods of declining interest rates, such prepayments can be
expected to accelerate and a Portfolio might have to reinvest the proceeds at
the lower interest rates then available. In addition, prepayments of mortgages
which underlie securities purchased at a premium could result in capital losses
because the premium may not have been fully amortized at the time the obligation
is repaid. As a result of these principal payment features, mortgage-backed
securities are generally more volatile investments than other U.S. Government
securities.
A CMO is a security issued by a private corporation or a U.S. Government
instrumentality which is backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. The issuer's obligation to make interest and
principal payments is secured by the underlying portfolio of mortgages or
mortgage-backed securities. CMOs are issued with a number of classes or series
which have different maturities and which may represent interests in some or all
of the interest or principal on the underlying collateral or a combination
thereof. CMOs of different classes are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. In the event of
sufficient early prepayments on such mortgages, the class or series of CMO first
to mature generally will be retired prior to its maturity. Thus, the early
retirement of a particular class or series of CMO held by a Portfolio would have
the same effect as the prepayment of mortgages underlying a mortgage-backed
pass-through security. Except as described below, the Portfolios may invest in
only those privately-issued CMOs which are collateralized by mortgage-backed
securities issued by GNMA, FHLMC or FNMA, and in CMOs issued by a U.S.
Government agency or instrumentality.
Certain issuers of CMOs may be deemed to be investment companies under the 1940
Act. The Portfolios intend to conduct their operations in a manner consistent
with this view, and therefore generally may not invest more than 10% of their
respective total assets in such issuers without obtaining appropriate regulatory
relief. In reliance on recent Securities and
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Exchange Commission (SEC) staff interpretations, the Portfolios may invest in
those CMOs and other mortgage-backed securities that are not by definition
excluded from the provisions of the 1940 Act, but have obtained exemptive orders
from the SEC from such provisions.
Morgan Stanley Worldwide High Income Portfolio and Pinnacle Fixed Income
Portfolio may also invest in a type of mortgage-backed security issued by a real
estate mortgage investment conduit (REMIC), which is a private entity formed for
the purpose of holding a fixed pool of mortgages secured by an interest in real
property and of issuing multiple classes of interests therein to investors such
as the Portfolios.
Morgan Stanley Worldwide High Income Portfolio and Pinnacle Fixed Income
Portfolio may also invest in zero coupon U.S. Government securities which have
been stripped of their unmatured interest coupons and receipts or in
certificates representing undivided interests in such stripped U.S. Government
securities and coupons. Pinnacle Fixed Income Portfolio may also invest in
certificates representing rights to receive payments of the interest only or
principal only of mortgage-backed securities (IO/PO Strips). Such securities may
also be referred to as derivatives. These securities tend to be more volatile
than other types of U.S. Government securities. IO Strips involve the additional
risk of loss of the entire value of the investment if the underlying mortgages
are prepaid.
REPURCHASE AGREEMENTS: Each Portfolio may enter into repurchase agreements. When
a Portfolio acquires a security from a bank or securities broker-dealer, it may
simultaneously enter into a repurchase agreement, wherein the seller agrees to
repurchase the security at a mutually agreed-upon time (generally within seven
days) and price. The repurchase price is in excess of the purchase price by an
amount which reflects an agreed-upon market rate of return, which is not tied to
the coupon rate on the underlying security. Repurchase agreements will be fully
collateralized. If, however, the seller defaults on its obligation to repurchase
the underlying security, the Portfolio may experience delay or difficulty in
exercising its rights to realize upon the security and might incur a loss if the
value of the security has declined. The Portfolio might also incur disposition
costs in liquidating the security.
LOANS OF PORTFOLIO SECURITIES: Each Portfolio, other than the Money Market
Portfolio, may lend its portfolio securities, provided: (1) such loans are
secured continuously by collateral consisting of U.S. Government securities or
cash or cash equivalents maintained on a daily marked-to-market basis in an
amount at least equal to the current market value of the securities loaned; (2)
the Portfolio may at any time call such loans and obtain the return of the
securities loaned; (3) the Portfolio will receive an amount in cash at least
equal to any interest or dividends paid on the loaned securities; and (4) the
aggregate market value of securities loaned will not at any time exceed 10% (33-
1/3% in the case of Morgan Stanley Asian Growth Portfolio, Morgan Stanley
Worldwide High Income Portfolio, Zweig Asset Allocation Portfolio, Zweig Equity
(Small Cap) Portfolio and Pinnacle Fixed Income Portfolio) of the total assets
of the Portfolio.
BORROWING: Each of the Morgan Stanley Asian Growth Portfolio, Renaissance
Balanced Portfolio, Nicholas-Applegate Balanced Portfolio, Harris Bretall
Sullivan & Smith Equity Growth Portfolio, Dreman Value Portfolio, Pinnacle Fixed
Income Portfolio and the Money Market Portfolio may borrow in an amount up to
10% (33-1/3% in the case of Pinnacle Fixed Income Portfolio) of its respective
total assets from banks for extraordinary or emergency purposes such as meeting
anticipated redemptions, and may pledge assets in connection with such
borrowing. Morgan Stanley Worldwide High Income Portfolio may borrow from banks,
and engage in transactions deemed to be borrowings from other entities, in an
amount up to 33-1/3% of its total assets (including the amount borrowed), less
all liabilities and indebtedness other than the borrowing, for extraordinary or
emergency purposes such as meeting anticipated redemptions, as well as for
investment purposes and to pay dividends, and it is expected that all of such
borrowings will be made on a secured basis. Zweig Asset
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Allocation Portfolio and Zweig Equity (Small Cap) Portfolio may borrow money
from banks on an unsecured basis and may pay interest thereon in order to raise
additional cash for investment or to meet redemption requests. These two
Portfolios may borrow money if immediately after such borrowing, the amount of
all borrowing is not more than 20% of the market value of the respective
Portfolio's assets (including the proceeds of the borrowing), less liabilities.
Each Portfolio is required to maintain continuous asset coverage of 300% with
respect to such borrowings, and to sell (within three days) sufficient portfolio
holdings to restore such coverage if it should decline to less than 300% due to
market fluctuations or otherwise, even if disadvantageous from an investment
standpoint. Leveraging will exaggerate the effect of any increase or decrease in
the value of portfolio securities on the Portfolios' net asset value, and money
borrowed will be subject to interest costs (which may include commitment fees
and/or the cost of maintaining balances) which may or may not exceed the
interest and option premiums received from the securities purchased with
borrowed funds. This restriction does not prohibit entry into reverse repurchase
agreements by Morgan Stanley Worldwide High Income Portfolio, Renaissance
Balanced Portfolio, Pinnacle Fixed Income Portfolio and the Money Market
Portfolio; provided that Renaissance Balanced Portfolio, Pinnacle Fixed Income
Portfolio and the Money Market Portfolio may not enter into a reverse repurchase
agreement if as a result its current obligations under such agreements would
exceed 5% of the current market value of the Portfolio's total assets (less its
liabilities other than obligations under such agreements). The borrowing
restriction also does not apply to the entry into interest rate protection
transactions by Pinnacle Fixed Income Portfolio. The borrowing policy is a
fundamental policy.
IN ADDITION TO THE ABOVE-REFERENCED LIMITATIONS, PINNACLE FIXED INCOME PORTFOLIO
HAS AGREED WITH THE CALIFORNIA DEPARTMENT OF INSURANCE TO LIMIT BORROWINGS AS
DESCRIBED ABOVE SO THAT AT ALL TIMES BORROWINGS OUTSTANDING WILL NOT EXCEED 25%
OF THE PORTFOLIO'S NET ASSET VALUE.
PUT, CALL AND INDEX OPTIONS: Morgan Stanley Worldwide High Income Portfolio,
Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio, Nicholas-
Applegate Balanced Portfolio, Dreman Value Portfolio, Zweig Equity (Small Cap)
Portfolio and Pinnacle Fixed Income Portfolio may purchase put and call options
listed on a national securities exchange. Put and call options are traded on the
AMEX, Chicago Board Options Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange and NYSE.
A Portfolio may purchase a call on securities to effect a closing purchase
transaction, which is the purchase of a call covering the same underlying
security and having the same exercise price and expiration date as a call
previously written by the Portfolio on which it wishes to terminate its
obligations. If the Portfolio is unable to effect a closing purchase
transaction, it will not be able to sell the underlying security until the call
previously written by the Portfolio expires (or until the call is exercised and
the Portfolio delivers the underlying security).
Morgan Stanley Worldwide High Income Portfolio, Renaissance Balanced Portfolio,
Zweig Asset Allocation Portfolio, Zweig Equity (Small Cap) Portfolio and
Pinnacle Fixed Income Portfolio may write call options if the calls written by
any of the Portfolios are covered throughout the life of the option. A call is
covered if a Portfolio (i) owns the optioned securities, (ii) has an immediate
right to acquire such securities, without additional consideration, upon
conversion or exchange of securities currently held in the Portfolio or (iii) in
the case of options on certain U.S. Government securities or which are settled
in cash, the Portfolio maintains, in a segregated account with the custodian,
cash or U.S. Government securities or other appropriate high-grade debt
obligations with a value sufficient to meet its obligations under the call. When
a Portfolio writes a call on a security, it receives a premium and gives the
purchaser the right to buy the underlying security at any time during the call
period at a fixed exercise price regardless of market price changes during the
call period. If the call is exercised, the Portfolio loses the opportunity for
any gain from an increase in the market price of the underlying security over
the exercise price.
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Morgan Stanley Worldwide High Income Portfolio, Renaissance Balanced Portfolio,
Zweig Asset Allocation Portfolio, Zweig Equity (Small Cap) Portfolio and
Pinnacle Fixed Income Portfolio also may write listed put options. A Portfolio
may write puts only if they are secured. Zweig Equity (Small Cap) Portfolio also
may write OTC put options. A put is secured if a Portfolio (i) maintains in a
segregated account with the custodian, cash or U.S. Government securities or
other appropriate high-grade debt obligations with a value equal to the exercise
price or (ii) holds a put on the same underlying security at an equal or greater
exercise price. When a Portfolio writes a put, it receives a premium and gives
the purchaser of the put the right to sell the underlying security to the
Portfolio at the exercise price at any time during the option period. The
Portfolio may purchase a put on the underlying security to effect a closing
purchase transaction, except in those circumstances, which are believed by the
Sub-Adviser to be rare, when it is unable to do so.
A Portfolio will realize a gain (or loss) on a closing purchase transaction with
respect to a call or put previously written by the Portfolio if the premium,
plus commission costs, paid by it to purchase the call or put is less (or
greater) than the premium, less commission costs, received by it on the sale of
a call or put. A gain will be realized if a call or a put which the Portfolio
has written lapses unexercised, because the Portfolio would retain the premium.
Morgan Stanley Worldwide High Income Portfolio, Renaissance Balanced Portfolio,
Zweig Asset Allocation Portfolio, Dreman Value Portfolio, Zweig Equity (Small
Cap) Portfolio and Pinnacle Fixed Income Portfolio may purchase and sell
securities index options. One effect of such transactions is to hedge all or
part of the Portfolio's securities holdings against a general decline in the
securities market or a segment of the securities market. Options on securities
indexes are similar to options on stock except that, rather than the right to
take or make delivery of stock at a specified price, an option on a securities
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon which the
option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.
A Portfolio's successful use of options on indexes depends upon its ability to
predict the direction of the market and is subject to various additional risks.
The correlation between movements in the index and the price of the securities
being hedged against is imperfect and the risk from imperfect correlation
increases as the composition of the Portfolio diverges from the composition of
the relevant index. Accordingly, a decrease in the value of the securities being
hedged against may not be wholly offset by a gain on the exercise or sale of a
securities index put option held by the Portfolio. For additional discussion of
risks associated with these transactions, see the Statement of Additional
Information.
Morgan Stanley Worldwide High Income Portfolio, Zweig Equity (Small Cap)
Portfolio and Pinnacle Fixed Income Portfolio may purchase and write options on
the OTC market (OTC options). The staff of the SEC has taken the position that
OTC options that are purchased and the assets used as cover for written OTC
options should generally be treated as illiquid securities. However, if a dealer
recognized by the Federal Reserve Bank as a primary dealer in U.S. Government
securities is the other party to an option contract written by a Portfolio and
that Portfolio has the absolute right to repurchase the option from the dealer
at a formula price established in a contract with the dealer, the SEC staff has
agreed that the Portfolio needs to treat as illiquid only that amount of the
cover assets equal to the formula price less the amount by which the market
value of the security subject to the option exceeds the exercise price of the
option (the amount by which the option is in-the-money). Although the Sub-
Advisers do not believe that OTC options are generally illiquid, pending
resolution of this issue, the Portfolios will conduct their operations in
conformity with the views of the SEC staff.
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New forms of option instruments are continuing to evolve and each of the
Portfolios named above may invest in such new option instruments and variations
of existing option instruments, subject to such Portfolio's investment
restrictions. Each of Morgan Stanley Worldwide High Income Portfolio,
Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio, Nicholas-
Applegate Balanced Portfolio, Dreman Value Portfolio, Zweig Equity (Small Cap)
Portfolio and Pinnacle Fixed Income Portfolio may purchase a put or call option,
including any straddles or spreads, only if the value of its premium, when
aggregated with the premiums on all other options held by the Portfolio, does
not exceed 5% of the Portfolio's total assets. Zweig Asset Allocation Portfolio
and Zweig Equity (Small Cap) Portfolio will each attempt to limit losses from
all options transactions to 5% of its average net assets per year, or cease
options transactions until in compliance with the 5% limitation, but there can
be no absolute assurance of adherence to these limits. The extent to which each
Portfolio may purchase options may be limited by the requirements for
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the Code), and the Portfolio's intention to qualify as
such.
The Fund's custodian, or a securities depository acting for it, will act as
escrow agent as to the securities on which a Portfolio has written puts or
calls, or as to other securities acceptable for such escrow, so that no margin
deposit will be required of the Portfolio. Until the underlying securities are
released from escrow, they cannot be sold by the Portfolio.
FUTURES CONTRACTS AND RELATED OPTIONS: Morgan Stanley Worldwide High Income
Portfolio, Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio,
Dreman Value Portfolio, Zweig Equity (Small Cap) Portfolio and Pinnacle Fixed
Income Portfolio may purchase and sell interest rate futures contracts as a
hedge against changes in interest rates. Morgan Stanley Worldwide High Income
Portfolio, Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio,
Dreman Value Portfolio, Zweig Equity (Small Cap) Portfolio and Pinnacle Fixed
Income Portfolio may purchase and sell stock index futures contracts and Morgan
Stanley Worldwide High Income Portfolio, Renaissance Balanced Portfolio, Zweig
Asset Allocation Portfolio, Zweig Equity (Small Cap) Portfolio and Pinnacle
Fixed Income Portfolio may purchase options on such contracts solely for the
purpose of hedging against the effect that changes in general market conditions,
interest rates and conditions affecting particular industries may have on the
values of securities held in each such Portfolio's portfolio, or which it
intends to purchase, and not for the purpose of speculation.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into a futures contract for the
sale of securities has an effect similar to the actual sale of securities,
although sale of the futures contract might be accomplished more easily and
quickly. For example, if a Portfolio holds long-term U.S. Government securities
and the Sub-Adviser anticipates a rise in long-term interest rates, it could, in
lieu of disposing of its portfolio securities, enter into futures contracts for
the sale of similar long-term securities. If rates increased and the value of
the Portfolio's securities declined, the value of the Portfolio's futures
contracts would increase, thereby protecting the Portfolio by preventing the net
asset value from declining as much as it otherwise would have. Similarly,
entering into futures contracts for the purchase of securities has an effect
similar to the actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For
example, if the Sub-Adviser expects long-term interest rates to decline, the
Sub-Adviser might enter into futures contracts for the purchase of long-term
securities so that it could gain rapid market exposure that may offset
anticipated increases in the costs of securities it intends to purchase, while
continuing to hold higher-yielding short-term securities or waiting for the
long-term market to stabilize.
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount
multiplied by the difference between the value of a specific stock index at the
close of the last trading day of the contract and the
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price at which the agreement is made. No physical delivery of securities is
made. The writing of a put option on a futures contract is similar to the
purchase of the futures contract, except that, if the market price declines, the
Portfolio would pay more than the market price for the underlying securities.
The net cost to the Portfolio would be reduced, however, by the premium received
on the sale of the put, less any transaction costs.
There is no assurance that it will be possible, at any particular time, to close
a futures position. In the event that a Portfolio could not close a futures
position and the value of the position declined, the Portfolio would be required
to continue to make daily cash payments of maintenance margin. There can be no
assurance that hedging transactions will be successful, as there may be an
imperfect correlation (or no correlation) between movements in the prices of the
futures contracts and of the securities being hedged, or price distortions due
to conditions in the futures markets because futures markets may have daily
market price movement limits for futures contracts. Where futures contracts are
purchased to hedge against an increase in the price of long-term securities, but
the long-term market declines and a Portfolio does not invest in long-term
securities, the Portfolio would realize a loss on the futures contracts, which
would not be offset by a reduction in the price of securities purchased. Where
futures contracts are sold to hedge against a decline in the price of long-term
securities in a Portfolio, but the long-term market advances, the Portfolio
would lose part or all of the benefit of the advance due to offsetting losses in
its futures positions. Successful use of futures contracts by a Portfolio is
subject to the Sub-Adviser's ability to predict correctly movements in the
direction of interest rates, currency exchange rates, market prices and other
factors affecting markets for debt securities.
A Portfolio may not enter into futures contracts or purchase or write related
options unless it complies with rules and interpretations of the Commodity
Futures Trading Commission (CFTC) which require, among other things, that
futures and related options be used solely for bona fide hedging purposes, as
defined in CFTC regulations or, alternatively, that the Portfolio will not enter
into futures and related options transactions if the sum of the aggregate
initial margin deposits on futures contracts and premiums paid for related
options exceeds 5% of the market value of the Portfolio's total assets
(calculated in accordance with CFTC regulations).
ILLIQUID SECURITIES: Each Portfolio may invest up to 10% (15% in the case of
Morgan Stanley Asian Growth Portfolio, Morgan Stanley Worldwide High Income
Portfolio, Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio and
Zweig Equity (Small Cap) Portfolio) of its net assets in illiquid securities,
including securities the disposition of which is restricted under Federal
securities laws, securities which are not readily marketable, OTC options,
repurchase agreements which have a maturity of longer than seven days and, in
the case of Morgan Stanley Worldwide High Income Portfolio, certain loan
participations and assignments and structured financings. Securities that are
freely marketable in the countries where they are principally traded, but that
would not be freely marketable in the United States, will not be considered
illiquid. The Portfolios will not include, for purposes of the percentage
restrictions on illiquid investments described above, securities sold pursuant
to Rule 144A under the Securities Act of 1933 (Rule 144A Securities) so long as
such securities meet liquidity guidelines established by the Fund's Board of
Directors.
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FOREIGN SECURITIES AND DEPOSITARY RECEIPTS: Morgan Stanley Asian Growth
Portfolio and Morgan Stanley Worldwide High Income Portfolio may each invest
substantially all of their assets in securities of foreign issuers. Zweig Asset
Allocation Portfolio and Zweig Equity (Small Cap) Portfolio may invest up to 15%
of the value of their net assets in securities of foreign issuers. Nicholas-
Applegate Balanced Portfolio may invest up to 20% of its total assets in
securities of foreign issuers. Pinnacle Fixed Income Portfolio may invest up to
10% of its net assets in securities of foreign issuers.
Each Portfolio named above and Dreman Value Portfolio may purchase ADRs, which
are dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are not subject to the above percentage limitations. Morgan Stanley Worldwide
High Income Portfolio may also invest in Global Depositary Receipts (GDRs),
European Depositary Receipts (EDRs) and other Depositary Receipts (which,
together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as
Depositary Receipts), to the extent that such Depositary Receipts become
available. GDRs, EDRs and other types of Depositary Receipts (except ADRs) are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. ADRs are publicly
traded on exchanges or over-the-counter in the United States. ADRs include
American Depositary Shares and New York Shares. Depositary Receipts may be
"sponsored" or "unsponsored." Sponsored Depositary Receipts are established
jointly by a depositary and the underlying issuer, whereas unsponsored
Depositary Receipts may be established by a depositary without participation by
the underlying issuer. Holders of unsponsored Depositary Receipts generally bear
all the costs associated with establishing the unsponsored Depositary Receipts.
The depositary of an unsponsored Depositary Receipt is under no obligation to
distribute shareholder communications received from the underlying issuer or to
pass through to the holders of the unsponsored Depositary Receipt voting rights
with respect to the deposited securities or pool of securities. The Portfolios
may invest in sponsored and unsponsored Depositary Receipts. For purposes of
Morgan Stanley Asian Growth and Morgan Stanley Worldwide High Income Portfolios'
investment policies, the Portfolios' investments in Depositary Receipts will be
deemed to be investments in the underlying securities.
Investing in the securities of foreign companies, foreign branches of domestic
banks and foreign governments (see "Foreign Government Securities" and "Foreign
Bank and Foreign Branch Instruments" below) involves special risks and
considerations not typically associated with investing in the United States.
These include differences in accounting, auditing and financial reporting
standards, limited publicly available information with respect to foreign
issuers, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries, and potential restrictions on the
flow of international capital. There may also be less government supervision and
regulation of foreign securities exchanges, brokers and listed companies than in
the United States. Additionally, dividends payable on foreign securities may be
subject to foreign taxes withheld prior to distribution. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar.
Investing in securities of issuers in emerging countries, including certain
Asian countries, involves certain considerations not typically associated with
investing in securities of U.S. companies, including (1) restrictions on foreign
investment and on repatriation of capital, (2) currency fluctuations, (3) the
cost of converting foreign currency into U.S. dollars, (4) potential price
volatility and lesser liquidity of shares traded on emerging country securities
markets and (5) political and economic risks, including the risk of
nationalization or
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expropriation of assets and the risk of war. In addition, accounting, auditing,
financial and other reporting standards in emerging countries may not be
equivalent to U.S. standards, and therefore disclosure of certain material
information may not be made and less information may be available to investors
investing in emerging countries than in the United States. There is also
generally less governmental regulation of the securities industry in emerging
countries than in the United States. Many of these countries may have less
stable political environments than western democracies. Moreover, it may be more
difficult to obtain a judgment in a court outside the United States. For further
information concerning emerging country securities, see "Foreign Government
Securities" and "Asian and Emerging Country Debt Securities" below and
"Investment Policies and Limitations -- Brady Bonds" in the SAI.
FOREIGN GOVERNMENT SECURITIES. Morgan Stanley Asian Growth Portfolio and Morgan
Stanley Worldwide High Income Portfolio may each invest without limit, and
Renaissance Balanced Portfolio and Pinnacle Fixed Income Portfolio may invest up
to 10% of their respective total assets, in obligations supported by national,
state or provincial governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational entities,
which include international organizations designated or supported by
governmental entities to promote economic reconstruction or development,
international banking institutions and related government agencies. Examples
include the World Bank, the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
Foreign government securities also include debt securities of quasi-governmental
agencies and debt securities denominated in multinational currency units of an
issuer (including supranational issuers). An example of a multinational currency
unit is the European Currency Unit. A European Currency Unit represents
specified amounts of the currencies of certain member states of the European
Economic Community. Debt securities of quasi-governmental agencies are issued by
entities owned by either a national, state or equivalent government or are
obligations of a political unit that is not backed by the national government's
full faith and credit and general taxing powers. Foreign government securities
also include mortgage-related securities issued or guaranteed by national, state
or equivalent governmental instrumentalities, including quasi-governmental
agencies.
Investments in emerging country government debt securities involve special
risks. Certain emerging countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. The issuer or governmental
authority that controls the repayment of an emerging country's debt may not be
able or willing to repay the principal and/or interest when due in accordance
with the terms of such debt. As a result of the foregoing, a government obligor
may default on its obligations. If such an event occurs, the Portfolio may have
limited legal recourse against the issuer and/or guarantor. Remedies must, in
some cases, be pursued in the courts of the defaulting party itself, and the
ability of the holder of foreign government debt securities to obtain recourse
may be subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not contest
payments to the holders of other foreign government debt obligations in the
event of default under their commercial bank loan agreements.
See "Foreign Securities and Depositary Receipts" above for a discussion of
additional risks of investing in foreign government securities.
FOREIGN BANK AND FOREIGN BRANCH INSTRUMENTS. Morgan Stanley Asian Growth
Portfolio, Morgan Stanley Worldwide High Income Portfolio and the Money Market
Portfolio may invest in obligations of domestic branches of foreign banks and
foreign branches of domestic banks. Such investments may involve risks that are
different from investments in obligations of U.S. branches of domestic banks.
These risks may include future unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits, currency controls,
interest limitations or other governmental restrictions that might affect the
payment of principal or interest on the securities held by the Portfolio.
Additionally, there may be less publicly available information about foreign
banks and foreign branches of U.S. banks, as these institutions may not be
subject to the same regulatory requirements as domestic banks.
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FOREIGN CURRENCY TRANSACTIONS: Morgan Stanley Asian Growth Portfolio may enter
into foreign currency forward contracts. Morgan Stanley Worldwide High Income
Portfolio and Pinnacle Fixed Income Portfolio may enter into foreign currency
forward contracts, foreign currency futures contracts and foreign currency
options (as described in additional detail below). These contracts are used to
minimize the risk to the Portfolio from unfavorable changes in the relationship
between the U.S. dollar and foreign currencies.
The Portfolios may engage in foreign currency exchange transactions in
connection with the purchase and sale of portfolio securities (transaction
hedging), and to protect the value of specific portfolio positions (position
hedging). They also may engage in cross-hedging by using forward contracts in
one currency to hedge against fluctuations in the value of securities
denominated in a different currency if the Sub-Adviser anticipates that there
will be a correlation between the two currencies.
If conditions warrant, all of the Portfolios named above may enter into
contracts to purchase or sell foreign currencies at a future date (forward
contracts) and Morgan Stanley Worldwide High Income Portfolio and Pinnacle Fixed
Income Portfolio may purchase and sell foreign currency futures contracts as a
hedge against changes in foreign currency exchange rates between the trade and
settlement dates on particular transactions and not for speculation. A foreign
currency forward contract is a negotiated agreement to exchange currency at a
future time at a rate or rates that may be higher or lower than the spot (i.e.
cash) rate. Foreign currency futures contracts are standardized exchange-traded
contracts and have margin requirements.
For hedging purposes, Morgan Stanley Worldwide High Income Portfolio and
Pinnacle Fixed Income Portfolio may also purchase exchange-listed and OTC call
and put options on foreign currency futures contracts and on foreign currencies.
A put option on a foreign currency futures contract gives the Portfolio the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Portfolio the right to sell a
currency at an exercise price until the expiration of the option. A call option
on a foreign currency futures contract gives the Portfolio the right to assume a
long position in the futures contract until the expiration of the option. A call
option on a currency gives the Portfolio the right to purchase a currency at the
exercise price until the expiration of the option.
There can be no assurance that any of these strategies, including cross-hedging
techniques, if used by a Portfolio, will be successful. The strategies entail
special risks, including that (1) the skills needed by the Sub-Adviser to employ
hedging instruments are different from those needed to select the Portfolio's
securities, (2) there may not be any correlation, or an imperfect one, between
price movements of hedging instruments and price movements of the securities
being hedged, (3) while hedging strategies may reduce the risk of loss, they
offset favorable price movements in hedged investments, thereby reducing the
opportunity for gain or even resulting in losses, and (4) the Portfolio may be
unable to sell a security at an opportune time, or may be required to sell a
security at a disadvantageous time, due to the need for the Portfolio to
maintain cover or to segregate securities for hedging transactions or to the
inability of the Portfolio to close out its hedged position.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED PURCHASES: Morgan Stanley Asian
Growth Portfolio, Morgan Stanley Worldwide High Income Portfolio, Renaissance
Balanced Portfolio and Pinnacle Fixed Income Portfolio may purchase securities
under a firm commitment agreement or on a when-issued basis. Firm commitment
agreements and when-issued purchases call for the purchase of securities at an
agreed-upon price on a specified future date, and would be used, for example,
when a decline in the yield of securities of a given issuer is anticipated. The
Portfolio as purchaser assumes the risk of any decline in value of the security
beginning on the date of the agreement or purchase. A Portfolio will not enter
into such transactions for the purpose of leveraging, and accordingly will
segregate U.S.
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Government securities, cash or cash equivalents with its custodian equal (on a
daily marked-to-market basis) to the amount of its commitment to purchase the
when-issued securities and securities subject to the firm commitment agreement.
DEBT SECURITIES: Renaissance Balanced Portfolio, Nicholas-Applegate Balanced
Portfolio and Pinnacle Fixed Income Portfolio may invest a substantial portion
of their assets in investment grade debt securities, which are debt securities
rated in one of the four highest grades assigned by S&P or Moody's or, if
unrated, determined by the Sub-Adviser to be of comparable quality to securities
having such a rating. Debt securities rated BBB or higher by S&P or Baa or
higher by Moody's are investment grade, although Moody's considers debt
securities rated Baa to have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
for issuers of securities rated BBB or Baa to make principal and interest
payments than issuers of higher rated securities. See Appendix A for a
description of ratings assigned by S&P and Moody's.
Morgan Stanley Worldwide High Income Portfolio may invest without limit, and
Pinnacle Fixed Income Portfolio may invest up to 15% of its total assets, in
securities rated below investment grade, including securities rated in the
lowest grades of S&P (D) or Moody's (C) or in unrated securities of comparable
quality. Securities rated BB or Ba or lower (and comparable unrated securities)
are commonly referred to as junk bonds. Securities rated D by S&P are in
default.
Debt securities rated below investment grade are considered by the rating
agencies to be predominantly speculative regarding the issuer's ability to pay
interest and repay principal and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk).
Ratings of debt securities represent the rating agency's opinion regarding
quality of the securities, but are not a guarantee of quality and may be reduced
after a Portfolio has acquired the security. The Sub-Adviser will consider such
an event in determining whether the Portfolio should continue to hold the
security. Also, rating agencies may fail to make timely changes in response to
subsequent events, so that an issuer's financial condition may be better or
worse than the rating indicates. Lower rated debt securities generally offer a
higher current yield than that available from higher grade issues. However,
lower rated securities involve higher risks, in that they are especially subject
to adverse changes in general conditions and in the industries in which the
issuers are engaged, to changes in the financial condition of the issuers and to
price fluctuation in response to changes in interest rates. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and interest and increase the possibility of default. In
addition, the market for lower rated securities has expanded rapidly in recent
years, and its growth paralleled a long economic expansion. Recently, the prices
of many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. As a result, the yields on lower rated debt securities rose
dramatically, but such higher yields did not reflect the value of the income
stream that holders of such securities expected, but rather the risk that
holders of such securities could lose a substantial portion of their value as a
result of the issuers' financial restructuring or default. There can be no
assurance that such declines will not recur. The market for lower rated debt
securities may be thinner and less active than that for higher quality
securities, which may limit a Portfolio's ability to sell such securities at
fair value in response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower rated securities,
especially in a thinly traded market. In addition, the prices for lower rated
debt securities may be affected by legislative and regulatory developments.
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ASIAN AND EMERGING COUNTRY SECURITIES: Morgan Stanley Asian Growth Portfolio and
Morgan Stanley Worldwide High Income Portfolio define Asian securities and
emerging country securities, respectively, to include securities of companies
that may have characteristics and business relationships common to companies in
a country or countries other than an Asian or emerging country. As a result, the
value of the securities of such companies may reflect economic and market forces
applicable to other countries, as well as to an Asian or emerging country. Each
Portfolio may invest in companies organized and located in countries other than
an Asian or emerging country, respectively, including companies having their
entire production facilities outside of an Asian or emerging country when
securities of such companies meet one or more elements of the Portfolio's
definition of an Asian or emerging country security and so long as the Sub-
Adviser believes at the time of investment that the value of the company's
securities will reflect principally conditions in such Asian or emerging
country.
SHORT SALES: Morgan Stanley Worldwide High Income Portfolio, Renaissance
Balanced Portfolio, Zweig Asset Allocation Portfolio, Nicholas-Applegate
Balanced Portfolio and Zweig Equity (Small Cap) Portfolio may engage in short
sales. When a Portfolio makes a short sale, it sells a security it does not own
in anticipation of a decline in market price. The proceeds from the sale are
retained by the broker until the Portfolio replaces the borrowed security. To
deliver the security to the buyer, the Portfolio must arrange through a broker
to borrow the security and, in so doing, the Portfolio will become obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the security. The Portfolio may, but will not necessarily, receive interest on
such proceeds. The Portfolio must pay to the broker any dividends or interest
payable on the security until it replaces the security.
The Portfolio's obligation to replace the security borrowed will be secured by
collateral deposited with the broker, consisting of cash or U.S. Government
securities or other securities acceptable to the broker. In addition, the
Portfolio will be required to deposit cash or U.S. Government securities as
collateral in a segregated account with its custodian in an amount such that the
value of both collateral deposits is at all times equal to at least 100% of the
current market value of the securities sold short. The Portfolio will receive
the interest accruing on any U.S. Government securities held as collateral in
the segregated account with the custodian. The deposits do not necessarily limit
the Portfolio's potential loss on a short sale, which may exceed the entire
amount of the collateral deposits.
If the price of a security sold short increases between the time of the short
sale and the time the Portfolio replaces the borrowed security, the Portfolio
will incur a loss, and if the price declines during this period, the Portfolio
will realize a capital gain. Any realized capital gain will be decreased, and
any incurred loss increased, by the amount of transaction costs and any premium,
dividend, or interest which the Portfolio may have to pay in connection with
such short sale.
The Portfolios may enter into short sales against the box. A short sale is
against the box when, at all times during which a short position is open, the
Portfolio owns an equal amount of such securities, or owns securities giving it
the right, without payment of future consideration, to obtain an equal amount of
securities sold short.
WARRANTS: Morgan Stanley Asian Growth Portfolio, Morgan Stanley Worldwide High
Income Portfolio, Renaissance Balanced Portfolio, Zweig Asset Allocation
Portfolio, Nicholas-Applegate Balanced Portfolio and Zweig Equity (Small Cap)
Portfolio may invest in warrants, which are basically an option to purchase
securities at a specific price valid for a specific period of time. Warrants
have no voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. It should also be noted that the prices
of warrants do not necessarily move parallel to the prices of the underlying
securities.
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A Portfolio may not invest more than 5% of its net assets (at the time of
investment) in warrants (other than those attached to other securities). It
should be noted that if the market price of the underlying security never
exceeds the exercise price, the Portfolio will lose the entire investment in the
warrant. Moreover, if a warrant is not exercised within the specified time
period, it will become worthless and the Portfolio will lose the purchase price
and the right to purchase the underlying security.
REVERSE REPURCHASE AGREEMENTS: Morgan Stanley Worldwide High Income Portfolio,
Renaissance Balanced Portfolio, Pinnacle Fixed Income Portfolio and the Money
Market Portfolio may enter into reverse repurchase agreements. A reverse
repurchase agreement involves the sale of a money market instrument by the
Portfolio, coupled with its agreement to repurchase the instrument at a
specified time and price. The Portfolio will maintain a segregated account with
its custodian consisting of U.S. Government securities or cash or cash
equivalents equal (on a daily marked-to-market basis) to its obligations under
reverse repurchase agreements with broker-dealers (but not banks). The Portfolio
will invest the proceeds in other money market instruments or repurchase
agreements maturing simultaneously with or prior to the expiration of the
reverse repurchase agreement or which are held under an agreement to resell
maturing as of that time. However, reverse repurchase agreements involve the
risk that the market value of securities retained by the Portfolio may decline
below the repurchase price of the securities sold by the Portfolio which it is
obligated to repurchase. Under the 1940 Act, reverse repurchase agreements may
be considered to be borrowings by the seller. Renaissance Balanced Portfolio,
Pinnacle Fixed Income Portfolio and the Money Market Portfolio may not enter
into a reverse repurchase agreement if as a result its current obligations under
such agreements would exceed 5% of the current market value of the Portfolio's
total assets (less its liabilities other than obligations under such
agreements).
CONVERTIBLE SECURITIES: Morgan Stanley Asian Growth Portfolio, Morgan Stanley
Worldwide High Income Portfolio, Renaissance Balanced Portfolio and Pinnacle
Fixed Income Portfolio may invest in convertible securities. These securities
normally provide a higher yield than the underlying stock but lower than a
fixed-income security without the convertibility feature. Also, the price of the
convertible security will normally vary to some degree with changes in the price
of the underlying stock although the higher yield tends to make the convertible
security less volatile than the underlying common stock. In addition, the price
of the convertible security will also vary to some degree inversely with
interest rates. Convertible securities that are rated below BBB by S&P or Baa by
Moody's or comparable unrated securities as determined by the Sub-Adviser may
share some or all of the risks of debt securities rated below investment grade.
For a description of these risks, see "Debt Securities" above.
INTEREST RATE PROTECTION TRANSACTIONS: Pinnacle Fixed Income Portfolio may enter
into interest rate protection transactions, including interest rate swaps and
interest rate caps, collars and floors. Interest rate swap transactions involve
an agreement between two parties to exchange payments that are based,
respectively, on variable and fixed rates of interest and that are calculated on
the basis of a specified amount of principal (the notional principal amount) for
a specified period of time. Interest rate cap and floor transactions involve an
agreement between two parties in which the first party agrees to make payments
to the counterparty when a designated market interest rate goes above (in the
case of a cap) or below (in the case of a floor) a designated level on
predetermined dates or during a specified time period. Interest rate collar
transactions involve an agreement between two parties in which the first party
makes payments to the counterparty when a designated market interest rate goes
above a designated level of predetermined dates or during a specified time
period, and the counterparty makes payments to the first party when a designated
market interest rate goes below a designated level on predetermined dates or
during a specified time period.
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The Portfolio expects to enter into interest rate protection transactions to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the
Portfolio anticipates purchasing at a later date. The Portfolio intends to use
these transactions as a hedge and not as a speculative investment. There can be
no assurance that the objective of these strategies and techniques will be
achieved.
The Portfolio may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these interest rate protection transactions are
entered into for good faith hedging purposes, and inasmuch as segregated
accounts will be established with respect to such transactions, the Sub-Adviser
and the Portfolio believe such obligations do not constitute senior securities
and accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash, U.S. Government securities or
other liquid high grade debt obligations having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
a custodian that satisfies the requirements of the 1940 Act. The Portfolio also
will establish and maintain such segregated accounts with respect to its total
obligations under any interest rate swaps that are not entered into on a net
basis and with respect to any interest rate caps, collars and floors that are
written by the Portfolio.
The Portfolio will enter into interest rate protection transactions only with
banks and recognized securities dealers believed by the Sub-Adviser to present
minimal credit risks in accordance with guidelines established by the Fund's
Board of Directors. If there is a default by the other party to such a
transaction, the Portfolio will have to rely on its contractual remedies (which
may be limited by bankruptcy, insolvency or similar laws) pursuant to the
agreements related to the transaction. There can be no assurance that the
objective of these strategies and techniques will be achieved.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agent
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
ASSET-BACKED SECURITIES: Morgan Stanley Worldwide High Income Portfolio,
Renaissance Balanced Portfolio and Pinnacle Fixed Income Portfolio may invest in
asset-backed securities (unrelated to first mortgage loans) which represent
fractional interests in pools of leases, retail installment loans or revolving
credit receivables, both secured (such as Certificates for Automobile
Receivables or CARS) and unsecured (such as Credit Card Receivable Securities or
CARDS). These assets are generally held by a trust and payments of principal and
interest or interest only are passed through monthly or quarterly to certificate
holders and may be guaranteed up to certain amounts by letters of credit issued
by a financial institution affiliated or unaffiliated with the trustee or
originator of the trust.
Like mortgages underlying mortgage-backed securities (see "Mortgage-Backed
Securities" above), underlying automobile sales contracts or credit card
receivables are subject to the risk of prepayment, which may reduce the overall
return to certificate holders. Nevertheless, principal repayment rates tend not
to vary much with interest rates and the short-term nature of the underlying car
loans or other receivables tends to dampen the impact of any change in the
prepayment level. Certificate holders may also experience delays in payment on
the certificates if the full amounts due on underlying sales contracts or
receivables are not realized by the trust because of unanticipated legal or
administrative costs of enforcing the contracts or
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because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors.
If consistent with their investment objective and policies, the Portfolios
indicated above may invest in other asset-backed securities that may be
developed in the future.
Certain asset-backed securities may be deemed to constitute investment companies
under the 1940 Act. Pinnacle Fixed Income Portfolio intends to conduct its
operations in a manner consistent with this view, and therefore the Portfolio
generally may not invest more than 10% of its total assets in such securities
without obtaining appropriate regulatory relief.
LOAN PARTICIPATIONS AND ASSIGNMENTS: Morgan Stanley Worldwide High Income
Portfolio may invest in fixed and floating rate loans (Loans) arranged through
private negotiations between an issuer of sovereign or corporate debt
obligations and one or more financial institutions (Lenders). The Portfolio's
investments in Loans are expected in most instances to be in the form of
participations in Loans (Participations) and assignments of all or a portion of
Loans (Assignments) from third parties. In the case of Participations, the
Portfolio will have the right to receive payments of principal, interest and any
fees to which it is entitled only from the Lender selling the Participation and
only upon receipt by the Lender of the payments from the borrower. In the event
of the insolvency of the Lender selling a Participation, the Portfolio may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. The Portfolio will acquire Participations
only if the Lender interpositioned between the Portfolio and the borrower is
determined by the Sub-Adviser to be creditworthy. When the Portfolio purchases
Assignments from Lenders it will acquire direct rights against the borrower on
the Loan. Because Assignments are arranged through private negotiations between
potential assignees and potential assignors, however, the rights and obligations
acquired by the Portfolio as the purchaser of an Assignment may differ from, and
be more limited than, those held by the assigning Lender. The lack of a liquid
secondary market may have an adverse impact on the value of such securities and
the Portfolio's ability to dispose of particular Assignments or Participations
when necessary to meet the Portfolio's liquidity needs or in response to a
specific economic event such as a deterioration in the creditworthiness of the
borrower. The lack of a liquid secondary market for Assignments and
Participations also may make it more difficult for the Portfolio to assign a
value to these securities for purposes of valuing the Portfolio and calculating
its net asset value.
STRUCTURED INVESTMENTS: Morgan Stanley Worldwide High Income Portfolio may
invest a portion of its assets in entities organized and operated solely for the
purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with or purchase by
an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities (Structured Securities) backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which the Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. The Portfolio is permitted to
invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated Structured
Securities typically have higher yields and present greater risks than
unsubordinated Structured Securities. Structured Securities are typically sold
in private placement transactions, and there currently is no active trading
market for Structured Securities.
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DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES
Net investment income from interest and dividends and substantially all of any
net realized capital gains (which are not offset or eliminated for Federal
income tax purposes) will be declared and paid annually by each Portfolio, other
than the Money Market Portfolio, when results for the fiscal year are known. Net
realized short-term capital gains may be paid annually or more frequently.
The Money Market Portfolio declares as dividends on each Business Day on which
the NYSE is open for business all of its net investment income. Such dividends
are payable to shareholders of record as of the close of regular trading on the
NYSE on the preceding Business Day and are paid monthly. A Business Day is any
weekday on which the NYSE is open for business. Net investment income of the
Portfolio is accrued interest and earned discount, inclusive of both original
issue and market discounts, minus amortization of market premium and applicable
expenses. Net investment income is determined and dividends declared immediately
before the calculation of net asset value per share. The Portfolio normally will
distribute annually any net short-term capital gain when results from the
previous fiscal year are known, but it may make more frequent distributions of
such gain to maintain its net asset value per share at $1.00 or to avoid income
or excise taxes. The Portfolio does not expect to realize any long-term capital
gain.
Dividends from net investment income and net realized capital gains will be
distributed in additional shares of the Portfolio making the distribution.
Dividends or distributions by a Portfolio other than the Money Market Portfolio
(which attempts to maintain a constant $1.00 per share net asset value) reduce
the per share net asset value by the per share amount so paid.
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Code. In order to qualify as a regulated investment company,
each Portfolio must, among other things, meet certain source of income and
diversification of asset tests. In any fiscal year in which a Portfolio so
qualifies and distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and net short-term
capital gain in excess of net long-term capital losses), the Portfolio generally
will be relieved of Federal income tax on amounts distributed to shareholders.
See the Statement of Additional Information for more information about this tax
and its applicability to each Portfolio. The tax implications of an investment
in a certificate are described in the prospectus for the certificates.
VALUATION OF SHARES
The net asset value for the shares of each Portfolio will be determined on each
day the NYSE is open for trading. The net assets of each Portfolio are valued as
of the close of business on the NYSE, which currently is 4:00 P.M., New York
City time. Each Portfolio's net asset value per share is calculated separately.
For all Portfolios other than the Money Market Portfolio, the net asset value
per share is computed by dividing the value of the securities held by the
Portfolio plus any cash or other assets, less its liabilities, by the number of
outstanding shares of the Portfolio. Securities holdings which are traded on a
U.S. or foreign securities exchange are valued at the last sale price on the
exchange where they are primarily traded or, if there has been no sale since the
previous valuation, at the mean between the current bid and asked prices. OTC
securities for which market quotations are readily available are valued at the
mean between the current bid and asked prices. Any securities or other assets
for which market quotations are not readily available are valued at fair market
value under the direction of the Board of Directors. Notwithstanding the above,
bonds and other fixed-income securities are valued using market quotations
provided by dealers, including the Sub-Advisers and their affiliates, and also
may
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be valued on the basis of prices provided by a pricing service when the Board of
Directors believes that such prices reflect the fair market value of such
securities. Money market instruments are valued at market value, except that
instruments maturing in sixty days or less are valued using the amortized cost
method of valuation described below with respect to the Money Market Portfolio.
For the Money Market Portfolio, net asset value is computed by dividing the
value of the investments and other assets minus liabilities by the number of
shares outstanding. Securities are valued using the amortized cost method of
valuation, which approximates market value. Under this method of valuation, the
difference between the acquisition cost and value at maturity is amortized by
assuming a constant (straight-line) accretion of a discount or amortization of a
premium to maturity. Cash, receivables and current payables are generally
carried at their face value. See the Statement of Additional Information for a
description of certain conditions and procedures followed by the Portfolio in
connection with amortized cost valuation.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolio's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by a Portfolio is recorded
as an asset and subsequently adjusted to market value.
PURCHASES AND REDEMPTIONS
Shares of Portfolios of the Fund are offered to separate accounts of Integrity
and National Integrity in connection with certain certificates they issue. Some
Portfolios may not be available in certain states due to applicable state
insurance law and regulations, and not all Portfolios may be available for all
certificates issued by Integrity and National Integrity.
The separate accounts purchase shares of the Portfolios without a sales charge
at the net asset value per share next determined after receipt of the complete
purchase order. Shares of each Portfolio are redeemed at net asset value without
any redemption charge. Payment upon redemption of Fund shares is normally made
within seven days of receipt of such request (unless redemption is suspended or
payment is delayed as permitted in accordance with SEC regulations).
MANAGEMENT OF THE FUND
THE MANAGER, SUB-ADVISERS AND DISTRIBUTOR
Under Maryland law and the Fund's Articles of Incorporation and By-Laws, the
business and affairs of the Fund are managed under the direction of the Fund's
Board of Directors.
ARM CAPITAL ADVISORS, INC., 200 Park Avenue, 20th Floor, New York, New York
10166, serves as investment manager to all the Portfolios of the Fund. ARM, the
parent of the Manager, is a financial services company providing retail and
institutional products and services to the long-term savings and retirement
market. The Morgan Stanley Leveraged Equity Fund II, L.P., Morgan Stanley
Capital Partners III, L.P., Morgan Stanley Capital Investors, L.P. and MSCP III
892 Investors, L.P., investment funds sponsored by Morgan Stanley Group, Inc.
(Morgan Stanley), own approximately 91% of the outstanding shares of voting
stock of ARM. The address of ARM is 515 West Market Street, Louisville,
Kentucky 40202. The address of each of Morgan Stanley and the investment funds
sponsored by it is 1221 Avenue of the Americas, New York, New York 10020. At
June 30, 1996, the Manager had investments totalling approximately $5.7 billion
under management and fiduciary control.
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The Manager assumed the duties and responsibilities of Integrity as investment
manager to the Fund on February 1, 1996, following an internal reorganization.
Both the Manager and Integrity are wholly-owned subsidiaries of ARM. The
transaction involving the transfer of duties and responsibilities to the Manager
did not result in a change in the actual management or control of the investment
manager of the Fund; there was no change in the management or personnel actually
providing advisory services to the Fund; and there was no change in the terms of
the Fund's management agreement, including no change in the compensation
received by the investment manager. The Manager commenced investment advisory
operations on January 5, 1995, on which date it acquired the domestic fixed
income unit of Kleinwort Benson Investment Management Americas Inc. The Manager
is also the investment adviser to the mutual funds comprising the State Bond
Group.
On August 25, 1994, Integrity purchased for its own account approximately
450,000 shares of the Morgan Stanley Worldwide High Income Portfolio, at net
asset value, for an aggregate purchase price of $4.5 million. Integrity has
indicated that it will vote all of the shares that it owns for its own account
in the Portfolio on any matter requiring the vote of shareholders in the same
proportion as votes are cast by certificate holders relating to the Portfolio.
Integrity has also indicated that it intends to redeem its shares on a dollar-
for-dollar basis to the extent, and at the same time as, the Portfolio has sales
in respect of certificate holders. As of September 30, 1996, approximately
13,686 shares, having a fair value of approximately $0.2 million and
constituting approximately 2.8% of the outstanding shares of the Portfolio,
were held by Integrity for its own account.
On April 1, 1996, Integrity purchased for its own account 478,905 shares of the
Pinnacle Fixed Income Portfolio, at net asset value, for an aggregate purchase
price of $5.1 million. As Integrity owned approximately 49.7% of the shares of
the Portfolio as of that date, Integrity may be deemed to control the portfolio
within the meaning of the 1940 Act. Integrity has indicated that it will vote
all of the shares that it owns for its own account in the Portfolio on any
matter requiring the vote of shareholders in the same proportion as votes are
cast by certificate holders relating to the Portfolio. Integrity has also
indicated that it intends to redeem its shares on a dollar-for-dollar basis to
the extent, and at the same time as, the Portfolio has sales in respect of
certificate holders. As of September 30, 1996, approximately 454,466 shares,
having a fair value of approximately $4.9 million and constituting approximately
49.4% of the outstanding shares of the Portfolio, were held by Integrity for its
own account.
MORGAN STANLEY ASSET MANAGEMENT INC., 1221 Avenue of the Americas, New York, New
York 10020, serves as the Sub-Adviser to Morgan Stanley Asian Growth Portfolio
and Morgan Stanley Worldwide High Income Portfolio. MSAM, a wholly-owned
subsidiary of Morgan Stanley Group, Inc., conducts a worldwide portfolio
management business. It provides a broad range of portfolio management services
to customers in the United States and abroad. At June 30, 1996, MSAM had
investments totaling approximately $103.5 billion under management and
fiduciary advisory control.
Ean Wah Chin, Kiat Seng Seah, Joseph Tern Yuh Sheng and Richard Toh Boon Hwee
have primary responsibility for the Morgan Stanley Asian Growth Portfolio. Ean
Wah Chin is a Managing Director of Morgan Stanley & Co. Incorporated, and is
responsible for MSAM's regional Asian ex-Japan operations based in Singapore.
Prior to joining Morgan Stanley in 1986, Ms. Chin spent eight years with the
Monetary Authority of Singapore and the Government of Singapore Investment
Corporation, where she was a portfolio manager of one of the largest portfolios
in Asia. Ms. Chin was an ASEAN scholar educated at the University of Singapore.
Kiat Seng joined MSAM Singapore in September 1990 as a portfolio manager/analyst
specializing in the Southeast Asian markets and is now a Principal of the firm.
He is currently responsible for investing in China, Hong Kong, Taiwan and Korea.
He came from Barclays de Zoete Wedd (BZW), where he was a senior investment
analyst who
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helped pioneer BZW's research effort in Singapore. Kiat Seng is a Chartered
Financial Analyst and a qualified real estate valuer who has also worked for the
Singapore Ministry of Finance. He was a Colombo Plan Scholar educated in New
Zealand. Joseph Tern joined MSAM Singapore as a portfolio manager specializing
in Singapore and Malaysian stock markets. He is currently a Vice President and
is also responsible for the Indonesian market. Prior to joining Morgan Stanley,
he spent four and a half years with UOB Asset Management where he managed unit
trusts and institutional accounts. He also spent one year as an auditor with
Deloitte, Haskins and Sells. He is a Chartered Financial Analyst. He received an
undergraduate degree (hons) in Accounting from the National University of
Singapore. Richard Toh joined MSAM Singapore in 1993. He is a Vice President of
the firm and is currently responsible for investments in Thailand, Philippines,
India, Australia and New Zealand. Prior to joining MSAM, he spent four years at
DBS Asset Management managing fixed income currency portfolios as well as
international equity portfolios invested in Taiwan, Korea and Japan. He
graduated in 1989 from the National University of Singapore, where he studied
Business Administration.
Robert Angevine and Paul Ghaffari have primary responsibility for the Morgan
Stanley Worldwide High Income Portfolio. Robert Angevine is a Principal of
Morgan Stanley & Co. Incorporated and the portfolio manager for high yield
investments. Prior to joining Morgan Stanley in October 1988, he spent over
eight years at Prudential Insurance, where he was responsible for the largest
open-end high yield mutual fund in the country. Mr. Angevine also manages high
yield assets for one of the largest corporate pension funds in the country. His
other experience includes international treasury operations at a major
pharmaceutical company and commercial banking. Mr. Angevine received an M.B.A.
from Fairleigh Dickinson University and a B.A. in Economics from Lafayette
College. He served two years as a Lieutenant in the U.S. Army. Paul Ghaffari is
a Principal of Morgan Stanley & Co. Incorporated and portfolio manager for
Morgan Stanley Emerging Markets Debt Fund (a closed-end investment company).
Prior to joining MSAM, he was a Vice President in the Fixed Income Division of
the Emerging Markets Sales and Trading Department at Morgan Stanley. From 1983
to 1992, Mr. Ghaffari worked in the LDC Sales and Trading Department and the
Mortgage-Backed Securities Department at J.P. Morgan & Co., Inc. and worked in
the Treasury department at the Morgan Guaranty Trust Co. He holds a B.A. in
International Relations from Pomona College and a M.S. in Foreign Service from
Georgetown University.
RENAISSANCE INVESTMENT MANAGEMENT, 1700 Young Street, Cincinnati, Ohio 45210,
serves as the Sub-Adviser to the Renaissance Balanced Portfolio. Renaissance is
a recognized leader in providing quantitatively-based investment management
strategies to individual and institutional clients of all types, including
corporate, endowment, religious, foundation, public and Taft-Hartley funds. As
of June 30, 1996, the firm managed in excess of $1.5 billion in assets.
Michael E. Schroer, Managing Director, is responsible for the day-to-day
management of the Renaissance Balanced Portfolio and has been since the
Portfolio's inception. Mr. Schroer has served as Director of Research and as a
portfolio manager at Renaissance since January 1984.
Affiliated Managers Group, Inc. (AMG), a Delaware corporation, is the Managing
General Partner of Renaissance and may be deemed the parent of Renaissance. AMG
was established in December 1993 to obtain investment interests in high quality
investment management firms. AMG may be deemed to be controlled by Advent VII,
L.P., a Delaware limited partnership which is the largest single stockholder of
AMG. The sole general partner of Advent VII, L.P. is TA Associates VII, L.P., a
Delaware limited partnership, and the sole general partner of TA Associates VII,
L.P. is TA Associates, Inc., a Delaware corporation which, together with its
predecessors, has directly or indirectly invested in more than 200 enterprises
prior to its investment in AMG.
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ZWEIG/GLASER ADVISERS, 5 Hanover Square, New York, New York 10004, serves as the
Sub-Adviser for the Zweig Asset Allocation Portfolio and Zweig Equity (Small
Cap) Portfolio. Glaser Corp., a Delaware corporation formed by Eugene J. Glaser,
and Zweig Management Corp., a Delaware corporation controlled by Dr. Martin E.
Zweig, are the general partners of Zweig/Glaser. Dr. Zweig is also Chairman of
Zweig/Glaser. He has provided investment advisory and portfolio management
services for 24 years and is currently affiliated with investment advisers,
which, as of June 30, 1996 managed over $10 billion in assets, including Avatar
Associates, manager of over $4 billion of institutional and pension accounts, of
which Dr. Zweig is Research Co-Chairman. Dr. Zweig is also President and
Director of The Zweig Fund, Inc. and the Zweig Total Return Fund, Inc., closed-
end funds traded on the NYSE with combined assets of over $1 billion. He is also
author of various investment advisory newsletters, including The Zweig Forecast,
a regular panelist on PBS' television program Wall Street Week with Louis
Rukeyser for Over 23 years, and an author of three books: Winning on Wall
Street, The ABC's of Market Forecasting, and Winning with New IRAs. Zweig/Glaser
also manages Zweig Series Trust, an open-end investment company with aggregate
assets as of June 30, 1996 of $2.5 billion (consisting of Zweig Strategy Fund,
Zweig Appreciation Fund, Zweig Managed Assets, Zweig Government Fund and Zweig
Cash Fund, Inc.).
Dr. Zweig, who determines the asset allocation strategy for each Portfolio, and
David Katzen, who serves as portfolio manager for each Portfolio, are primarily
responsible for the day-to-day management of the Zweig Asset Allocation
Portfolio and Zweig Equity (Small Cap) Portfolio. Dr. Zweig and Mr. Katzen have
managed the Portfolios since inception. Mr. Katzen is First Vice President of
Zweig/Glaser Advisers and has held various positions with the Zweig organization
during the past eight years.
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, 600 West Broadway, 30th Floor, San Diego,
California 92101, serves as Sub-Adviser to the Nicholas-Applegate Balanced
Portfolio. Founded in 1984, Nicholas-Applegate is a California limited
partnership. The general partner of Nicholas-Applegate is Nicholas-Applegate
Capital Management Holdings, L.P., a California limited partnership controlled
by Arthur E. Nicholas. Nicholas-Applegate provides investment management
services to institutional and individual clients. It serves as sub-adviser for
Nicholas-Applegate Growth Equity Fund and Harbor Growth Fund and as adviser of
Nicholas-Applegate Mutual Funds, open-end investment companies. At June 30,
1996, Nicholas-Applegate had assets under management of $31 billion.
The Nicholas-Applegate Balanced Portfolio is managed primarily by John Wylie,
Partner, and Nicholas-Applegate's systems-driven management team. Mr. Wylie
joined Nicholas-Applegate as head of institutional marketing activities in 1987
and has managed fixed income and convertible securities since 1989. He has been
responsible for the management of the fixed income portion of the Portfolio
since its inception. The systems-driven investment management team which manages
the equity portion of the Portfolio has been under the supervision of Lawrence
S. Speidell since March 1994. In overseeing the activities of the entire
Global/Systematic team, Mr. Speidell is responsible for portfolio management and
the development, enhancement and application of the firm's quantitative
disciplines. He also guides the firm's international, domestic and global
research efforts. Prior to joining Nicholas-Applegate in 1994, Mr. Speidell
spent ten years with Batterymarch Financial Management, where his wide-ranging
responsibilities for portfolio management included development of domestic and
international portfolio strategies, portfolio optimization, trading techniques
and client relationships. Mr. Speidell was also Senior Vice President and
Portfolio Manager at Putnam Management Company from 1971 to 1983, and served as
a member of that firm's Investment Policy Committee. He is a past president of
the Boston Securities Analysts Society and a past director of the Investor
Responsibility Research Center in Washington, D.C. Mr. Speidell earned his B.E.
in Mechanical Engineering from Yale University and his M.B.A. from Harvard
University.
34
<PAGE>
HARRIS BRETALL SULLIVAN & SMITH, INC., One Sansome Street, Suite 3300, San
Francisco, California 94104, serves as the Sub-Adviser to the Harris Bretall
Sullivan & Smith Equity Growth Portfolio. Harris Bretall Sullivan & Smith was
founded in 1971 and is owned equally by W. Graeme Bretall, President, John J.
Sullivan, Treasurer, and Henry B. Dunlap Smith. The firm provides investment
management services to institutions and individuals, and at June 30, 1996, had
assets under management of approximately $2.74 billion.
W. Graeme Bretall, CFA, a Principal of Harris Bretall Sullivan & Smith, is the
Partner in charge of the Portfolio. Joseph Calderazzo, Vice President, Portfolio
Manager and Co-Chair of the Investment Committee, is the portfolio manager who
is primarily responsible for the day-to-day management of the assets in the
Harris Bretall Sullivan & Smith Equity Growth Portfolio, and has served in this
function since 1994. During the past five year period, Mr. Bretall has served as
President of Harris Bretall Sullivan & Smith. Mr. Calderazzo joined Harris
Bretall Sullivan & Smith as a Portfolio Manager in 1990, and also serves as the
firm's analyst for Political and Governmental Affairs. While Mr. Calderazzo will
make the final investment buy and sell decisions for the Portfolio, there are
never any deviations from the firm's strategic guidelines. A team approach is
utilized at Harris Bretall Sullivan & Smith so that the consensus decisions made
in the firm's weekly Investment Committee meeting are simultaneously implemented
in all tax-exempt and fully discretionary portfolios.
DREMAN VALUE ADVISORS, INC., 280 PARK AVENUE, 40TH FLOOR, NEW YORK, NEW YORK
10017, serves as the Sub-Adviser to the Dreman Value Portfolio. As of June 30,
1996, Dreman managed over $2.46 billion. Clients include public funds, corporate
benefit funds, college endowments and foundations, Taft-Hartley funds, and other
institutional accounts. In addition, Dreman serves as investment adviser to the
Kemper-Dreman Mutual Group, Inc., which consists of three portfolios, Kemper-
Dreman Contrarian Fund, Kemper-Dreman High Return Fund, and Kemper-Dreman Small
Cap Fund.
All investment decisions by Dreman for the Dreman Value Portfolio are made by an
investment committee, which includes a group of senior investment professionals.
Dreman, a Delaware corporation, an indirect wholly owned subsidiary of Zurich
Insurance Company (Zurich), was formed in August, 1995 in order to purchase
substantially all of the assets of Dreman Value Management, L.P., Dreman's
predecessor organization. Founded in 1872, Zurich is a multinational, public
corporation organized under the laws of Switzerland. Zurich's primary business
is as an insurer. Together with its predecessor organizations, Dreman has been
in the investment management business since 1977.
J.P. Morgan Investment Management Inc., 522 Fifth Avenue, New York, New York
10036, serves as the Sub-Adviser for the Pinnacle Fixed Income Portfolio. J.P.
Morgan is a wholly owned subsidiary of J.P. Morgan & Co. Incorporated, a bank
holding company organized under the laws of Delaware. J.P. Morgan offers a wide
range of investment management services and acts as investment adviser to
corporate and institutional clients. As of June 30, 1996, J.P. Morgan had
assets under management of over $151 billion.
The following persons are primarily responsible for the day-to-day management
and implementation of J.P. Morgan's process for Pinnacle Fixed Income Portfolio
(their business experience for the past five years is indicated
parenthetically): Ronald Arons, Vice President (employed by J.P. Morgan since
September 1994, previously a portfolio manager with MetLife Investment
Management Corp.) and Arun Lyng, Vice President (employed BY J.P. Morgan since
March 1992, previously a portfolio manager with Aetna Capital Markets).
Prior to April 1, 1996, Pinnacle Fixed Income Portfolio (formerly called
Mitchell Hutchins Fixed Income PortfoliO) had as its Sub-Adviser Mitchell
Hutchins Institutional Investors, Inc.
35
<PAGE>
Each Portfolio pays the Manager a fee based on an annual percentage of the
average daily net assets of such Portfolio. The management fees are deducted
from the assets of each Portfolio and paid monthly, but are accrued daily for
purposes of determining the value of a share of each Portfolio on each day the
NYSE is open for trading. (See "Valuation of Shares".) For the services provided
to each of the Portfolios, the Manager (and not the Fund) pays each Sub-Adviser
a monthly fee based on an annual percentage of the average daily net assets of
the respective Portfolio. The annual percentage of average daily net assets
payable by each Portfolio to the Manger and by the Manager to each Sub-Adviser
is set forth below. The fees paid by certain of the Portfolios may be higher
than those paid by other investment companies.
<TABLE>
<CAPTION>
Annual Percentage of Annual Percentage
Average Net Assets Paid of Average Net
By Portfolio to the Manager Assets Paid By
the Manager to Sub-Adviser
<S> <C> <C>
Morgan Stanley Asian Growth Portfolio 1.00% .85%
Morgan Stanley Worldwide High Income
Portfolio .85% .70%
Renaissance Balanced Portfolio .65% .50%
Zweig Asset Allocation Portfolio .90% .75%
Nicholas-Applegate Balanced Portfolio .65% .50%
Harris Bretall Sullivan & Smith Equity
Growth Portfolio .65% .50%
Dreman Value Portfolio .65% .50%
Zweig Equity (Small Cap) Portfolio 1.05% .90%
Pinnacle Fixed Income Portfolio .70% .50%
ARM Capital Advisors Money .50% --
Market Portfolio
</TABLE>
SBM Financial Services, Inc. (SBMFS), a wholly-owned subsidiary of ARM, acts as
Distributor of the Portfolios' shares without remuneration from the Fund or the
Portfolios. SBMFS is registered with the SEC as a broker-dealer and is a member
of the National Association of Securities Dealers, Inc. SBMFS's address is 100
North Minnesota Street, P.O. Box 69, New Ulm, Minnesota 56073-0069.
EXPENSES
The Fund bears all expenses of its operations other than those borne by the
Manager or SBMFS as distributor. In particular, the Fund pays (and allocates
among the respective Portfolios): investment management fees; transaction costs,
including brokerage commissions; record keeping agent fees; custodian fees;
legal fees; audit fees; shareholder reports expenses; registration fees; proxy
and shareholder meeting expenses; and the fees and expenses of Directors who are
not interested persons of the Fund, within the meaning of the 1940 Act. In
addition, a portion of the expenses of organizing the Fund and of the initial
registration of its shares under federal securities laws will be charged to the
Fund's operations, as an expense, over a period not exceeding five years.
36
<PAGE>
The Manager has agreed to reimburse the respective Portfolios on a pro rata
basis up to the amount of their respective fees to the extent that the total
expenses of a Portfolio in a given year (excluding interest, taxes, brokerage
commissions, and extraordinary expenses) exceed any applicable state expense
limitations.
The Manager voluntarily limits the expenses of each Portfolio, other than for
brokerage commissions and the management fee, to .50% of average net assets on
an annualized basis, except that the Manager voluntarily limits the expenses of
Morgan Stanley Asian Growth Portfolio and Morgan Stanley Worldwide High Income
Portfolio, other than for brokerage commissions and the management fee, to 1.00%
of average net assets on an annualized basis. The Manager's reimbursement of
Portfolio expenses results in an increase to each Portfolio's yield or total
return. The Manager has reserved the right to withdraw or modify its policy of
expense reimbursement for the Portfolios.
SPECIAL MEETINGS OF SHAREHOLDERS
- --------------------------------
On November 7, 1995, a special meeting of shareholders of the Renaissance
Balanced portfolio was held to consider approval of a new sub-advisory agreement
between Integrity as investment manager and Renaissance as sub-adviser for the
Portfolio. There were 500,352.348 votes cast for the proposal, 11,942.092 votes
cast against the proposal, and 20,326.125 abstentions.
On November 7, 1995, a special meeting of shareholders of the Dreman Value
Portfolio was held to consider (1) approval of an interim sub-advisory agreement
between Integrity as investment manager and Dreman as sub-adviser for the
Portfolio; and (2) approval of a new sub-advisory agreement between Integrity as
investment manager and Dreman as sub-adviser for the Portfolio, to become
effective upon the purchase by Zurich of a controlling interest in the parent
company of Dreman. With respect to proposal 1, there were 204,613.58 votes cast
for the proposal, 9,107.476 votes cast against the proposal, and 16,456.702
abstentions. With respect to proposal 2, there were 204,853.232 votes cast for
the proposal, 9,107.476 votes cast against the proposal, and 16,217.05
abstentions.
On May 17, 1996, a special meeting of shareholders of the ARM Capital Advisors
Money Market Portfolio was held to consider approval of amendments to the
Management Agreement between the Fund and the Manager, including a reduction of
the investment advisory fee for the Portfolio. There were 314,998.33 votes cast
for the proposal, no votes cast against the proposal, and 1,555.29 abstentions.
On May 17, 1996, a special meeting of shareholders of the Pinnacle Fixed Income
Portfolio was held to consider (1) approval of amendments to the Management
Agreement between the Fund and the Manager, including a reduction of the
investment advisory fee for the Portfolio; and (2) approval of a new sub-
advisory agreement between the Manager and J.P. Morgan as sub-adviser for the
Portfolio. With respect to proposal 1, there were 153,924.241 votes cast for the
proposal, no votes cast against the proposal, and 1,541.941 abstentions. with
respect to proposal 2, there were 149,686.124 votes cast for the proposal,
4,238.117 votes cast against the proposal, and 1,541.941 abstentions.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As a general matter, each Sub-Adviser arranges for the purchase and sale of the
respective Portfolio's securities and selects broker-dealers which, in its best
judgment, provide prompt and reliable execution at favorable security prices and
reasonable commission rates. The Sub-Advisers may select broker-dealers which
provide them with research services and may cause a Portfolio to pay such
broker-dealers commissions which exceed those other
37
<PAGE>
broker-dealers may have charged if, in their view, the commissions are
reasonable in relation to the value of the brokerage and/or research services
provided by the broker-dealer. Brokerage arrangements may take into account the
distribution of certificates by broker-dealers, subject to best price and
execution.
Brokerage arrangements with affiliates of the Manager or the Sub-Advisers, if
any, will be in accordance with the 1940 Act and the rules and regulations
promulgated thereunder. No transactions may be effected by a Portfolio with an
affiliate of the Manager or a Sub-Adviser acting as principal for its own
account, except to the extent permitted by law.
Transactions in money market securities, other government securities and most
other fixed income securities are principal transactions, on which no brokerage
commission is paid. These transactions are normally effected with major dealers
in money market instruments, government securities or such fixed income
securities. Purchases from or sales to dealers serving as market-makers include
the spread between the bid and asked prices. OTC purchases and sales are
normally made with principal market-makers, except where, in the opinion of the
Sub-Adviser, the best executions are available elsewhere.
The Portfolios described in "Description of Various Securities and Investment
Techniques--Futures Contracts and Related Options" may incur transaction costs
in connection with the acquisition of futures contracts and options thereon.
For reporting purposes, a Portfolio's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of the portfolio securities owned by
the Portfolio during the fiscal year. In determining such portfolio turnover,
securities whose maturities at the time of acquisition were one year or less are
excluded. Each Sub-Adviser will adjust the Portfolio's assets as it deems
advisable in view of current or anticipated market conditions, and portfolio
turnover will not be a limiting factor should the Sub-Adviser deem it advisable
for a Portfolio to purchase or sell securities. Options activities may increase
the turnover rate for a Portfolio, because the exercise of calls written by the
Portfolio and puts owned by the Portfolio would cause the Portfolio to sell the
underlying securities. Increased portfolio turnover may result in greater
brokerage commissions. See "Financial Highlights" for information as to the
Portfolios' portfolio turnover rates for the periods from commencement of
operations through June 30, 1993 and the fiscal years ended June 30, 1994,
1995 and 1996.
OTHER INFORMATION
CUSTODIAN: Investors Fiduciary Trust Company, 127 West 10th Street, Kansas
City, Missouri 64105, acts as custodian of the assets of all of the Portfolios
and may employ sub-custodians approved by the Board of Directors of the Fund in
accordance with the regulations of the Securities and Exchange Commission.
TRANSFER AGENT, DIVIDEND AGENT AND RECORDKEEPING AGENT: Investors Fiduciary
Trust Company also acts as transfer agent, dividend disbursing agent and
recordkeeping agent.
PERFORMANCE INFORMATION: The Fund may, from time to time, calculate the yield
and effective yield of the Money Market Portfolio, the yield of other Portfolios
or total return of all Portfolios and may include such information in reports to
shareholders. Performance information should be considered in light of the
Portfolio's investment objectives and policies, characteristics and quality of
the portfolios, and the market conditions during the given time period, and
should not be considered as a representation of what may be achieved in the
future.
38
<PAGE>
Performance information for the Portfolios is contained in the Fund's annual
reports to shareholders, which may be obtained without charge.
Current yield for the Money Market Portfolio will be based on income received by
a hypothetical investment over a given 7-day period (less expenses accrued
during the period), and then annualized (i.e., assuming that the 7-day yield
would be received for 52 weeks, stated in terms of an annual percentage return
on the investment). Effective yield for the Money Market Portfolio is calculated
in a manner similar to that used to calculate yield, but reflects the
compounding effect of earnings on reinvested dividends. For the remaining
Portfolios, any quotations of yield will be based on all investment income per
share earned during a given 30-day period (including dividends and interest),
less expenses accrued during the period (net investment income), and will be
computed by dividing net investment income by the maximum public offering price
per share on the last day of the period. Quotations of average annual total
return for a Portfolio will be expressed in terms of the average annual
compounded rate of return on a hypothetical investment in the Portfolio over
certain periods that will include periods of 1, 5, and 10 years (up to the life
of the Portfolio), will reflect the deduction of a proportional share of
Portfolio expenses (on an annual basis), and will assume that all dividends and
distributions are reinvested when paid.
For a description of the methods used to determine yield and total return for
the Portfolios, see the Statement of Additional Information.
39
<PAGE>
Appendix A
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
COMMERCIAL PAPER
Description of relevant commercial paper ratings of Standard & Poor's Ratings
Group ("S&P") are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3: Issues carrying this designation have an adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
Description of the relevant commercial paper ratings of Moody's Investors
Service, Inc. ("Moody's") are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced by
many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market
compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt
protection measurement and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
A-1
<PAGE>
CORPORATE BONDS
Descriptions of the bond ratings of S&P are:
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small
degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher rated categories.
BB, B, CCC, CC or C--Debt rated BB, B, CCC, CC or C is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse debt
conditions.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating categories.
Descriptions of the bond ratings of Moody's are as follows:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin, and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are more unlikely to impair the fundamentally strong
position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-
term risks appear somewhat greater than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
some time in the future.
A-2
<PAGE>
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
to a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates that
the issue ranks in the lower end of its rating category.
A-3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
===================================
THE LEGENDS FUND, INC.(TM) 200 East Wilson Bridge Road
Worthington, Ohio 43085
Telephone: 1-800-325-8583
The Legends Fund, Inc. (Fund) is an open-end management investment company with
multiple portfolios available for investment. Shares of the Portfolios are
currently sold only to separate accounts of Integrity Life Insurance Company
(Integrity) and National Integrity Life Insurance Company (National Integrity)
as an investment medium for variable annuity certificates and contracts
(certificates) they issue. The Fund's current portfolios and their investment
objectives are:
. MORGAN STANLEY ASIAN GROWTH PORTFOLIO seeks long-term capital appreciation.
It invests primarily in the common stocks of Asian issuers, excluding
Japan.
. MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO seeks high current income
consistent with relative stability of principal and, secondarily, capital
appreciation. It invests primarily in a portfolio of high yielding fixed
income securities of issuers located throughout the world.
. RENAISSANCE BALANCED PORTFOLIO seeks capital appreciation and income in
rising markets and capital preservation in declining markets. Its assets
are allocated among equity issues, United States Government and agency
issues (including mortgage-backed securities), investment grade/dollar
denominated bonds, and investment grade cash equivalent issues.
. ZWEIG ASSET ALLOCATION PORTFOLIO seeks long-term capital appreciation. It
invests primarily in stocks which are comparable to Blue Chip Stocks (as
defined in "Investment Objective and Policies" in the Fund's Prospectus).
. NICHOLAS-APPLEGATE BALANCED PORTFOLIO seeks maximum total return in both
the equity and fixed income portion of its investments. It generally
allocates 60%-65% of assets to equity securities and 35%-40% of assets to
U.S. government securities and cash equivalent issues.
. HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO seeks long-term
capital appreciation. It invests primarily in stocks of established
companies with proven records of superior and consistent growth.
. DREMAN VALUE PORTFOLIO seeks primarily long-term capital appreciation with
a secondary objective of current income. It invests primarily in equity
securities considered by the Sub-Adviser to be undervalued.
. ZWEIG EQUITY (SMALL CAP) PORTFOLIO seeks long-term capital appreciation. It
invests primarily in Small Company Stocks (as defined in "Investment
Objective and Policies" in the Fund's Prospectus).
. PINNACLE FIXED INCOME PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital. It invests primarily in
corporate debt securities, U.S. Government securities (including mortgage-
backed securities issued by GNMA, FNMA and FHLMC) and asset-backed
securities. Pinnacle Fixed Income Portfolio is advised by J.P. Morgan
Investment Management Inc.
. ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO seeks maximum current income
consistent with liquidity and conservation of capital. It invests in high-
grade money market instruments with remaining maturities of 13 months or
less, and repurchase agreements secured by such instruments. While the
Portfolio seeks to maintain a stable net asset value of $1.00 per share,
there is no assurance that it will be able to do so. AN INVESTMENT IN THE
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
Morgan Stanley Worldwide High Income Portfolio invests predominately in lower
rated and unrated bonds, commonly referred to as "junk bonds." Bonds of this
type are considered to be speculative with regard to the payment of interest and
return of principal and are subject to greater risk of loss of principal and
interest. Purchasers should carefully assess the risks associated with an
investment in this Portfolio. See "Description of Various Securities and
Investment Techniques -- Debt Securities" in the Fund's Prospectus.
This Statement of Additional Information (SAI) is not a prospectus and should be
read only in conjunction with the Fund's current Prospectus, dated November 1,
1996. A copy of the Prospectus may be obtained by calling or writing to the
Fund at the telephone number or address shown above. This SAI is incorporated
by reference into the Prospectus.
Statement of Additional Information dated November 1, 1996
<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES AND LIMITATIONS..................................... B-3
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES........................... B-10
DIRECTORS AND OFFICERS.................................................. B-16
INVESTMENT MANAGEMENT SERVICES.......................................... B-18
PORTFOLIO TRANSACTIONS.................................................. B-22
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.......................... B-25
VALUATION OF SHARES..................................................... B-25
TAXES................................................................... B-26
YIELD AND PERFORMANCE INFORMATION....................................... B-27
OTHER INFORMATION....................................................... B-31
FINANCIAL STATEMENTS OF THE FUND........................................ B-32
OPTIONS AND FUTURES..................................................... A-1
B-2
<PAGE>
INVESTMENT POLICIES AND LIMITATIONS
The following supplements the information contained in the Fund's Prospectus
concerning the investment policies and limitations of its ten Portfolios. For
information relating to the Manager and the respective Sub-Advisers (each, a
Sub-Adviser, and collectively, the Sub-Advisers) to each Portfolio other than
ARM Capital Advisors Money Market Portfolio (sometimes referred to herein as the
Money Market Portfolio), see "Management of the Fund" in the Prospectus and
"Investment Management Services" in this Statement of Additional Information.
The term Sub-Adviser, when applicable to the Money Market Portfolio, includes
the Manager. For information relating to the use of options, futures and other
hedging strategies, see "Description of Various Securities and Investment
Techniques -- Put, Call and Index Options; Futures Contracts and Related
Options" in the Prospectus and "Options, Futures and Other Hedging Strategies"
in this Statement of Additional Information.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES AND DEPOSITORY RECEIPTS.
As noted in the Prospectus, Morgan Stanley Asian Growth Portfolio and Morgan
Stanley Worldwide High Income Portfolio each may invest substantially all of its
assets in securities of foreign issuers. Zweig Asset Allocation Portfolio and
Zweig Equity (Small Cap) Portfolio each may invest up to 15% of its net assets
in securities of foreign issuers. Nicholas-Applegate Balanced Portfolio may
invest up to 20% of its total assets in securities of foreign issuers. Pinnacle
Fixed Income Portfolio may invest up to 10% of its net assets in securities
issued by foreign issuers. Many of the foreign securities held by these
Portfolios are not registered with the Securities and Exchange Commission (SEC),
nor are the issuers thereof subject to its reporting requirements. Accordingly,
there may be less publicly available information concerning foreign issuers of
securities held by these Portfolios than is available concerning U.S. companies.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to U.S. companies.
Each of the Portfolios named above and Dreman Value Portfolio may invest in
American Depository Receipts (ADRs). Generally, ADRs, in registered form, are
denominated in U.S. dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. For purposes of the Fund's
investment policies, ADRs are deemed to have the same classification as the
underlying securities they represent. Thus, an ADR evidencing ownership of
common stock will be treated as common stock.
Investment income on certain foreign securities may be subject to foreign
withholding or other taxes that could reduce the return on these securities. Tax
treaties between the United States and foreign countries, however, may reduce or
eliminate the amount of foreign taxes to which a Portfolio would be subject.
SOVEREIGN DEBT. Morgan Stanley Asian Growth Portfolio and Morgan Stanley
Worldwide High Income Portfolio each may invest without limit, and Renaissance
Balanced Portfolio and Pinnacle Fixed Income Portfolio may invest up to 10% of
their respective total assets, in obligations supported by national, state or
provincial governments or similar political subdivisions. Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designated or supported by government
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. These obligations are
hereinafter referred to as Sovereign Debt. Investment by a Portfolio in
Sovereign Debt involves special risks. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal and/or interest when due in accordance with the
terms of such debt, and the Portfolio may have limited legal recourse in the
event of a default.
Sovereign Debt differs from debt obligations issued by private entities in that,
generally, remedies for defaults must be pursued in the courts of the defaulting
party. Legal recourse is therefore somewhat diminished. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank debt issued by the same sovereign entity may
not contest payments to the holders of Sovereign Debt in the event of default
under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability
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of sufficient foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints to
which a sovereign debtor may be subject. Increased protectionism on the part of
a country's trading partners, or political changes in those countries, could
also adversely affect its exports. Such events could diminish a country's trade
account surplus, if any, or the credit standing of a particular local government
or agency.
The occurrence of political, social or diplomatic changes in one or more of the
countries issuing Sovereign Debt could adversely affect a Portfolio's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While the Sub-Adviser manages the respective Portfolio's
investments in a manner that is intended to minimize the exposure to such risks,
there can be no assurance that adverse political changes will not cause a
Portfolio to suffer a loss of interest or principal on any of its holdings.
BRADY BONDS. Morgan Stanley Worldwide High Income Portfolio and, consistent
with other applicable investment limitations, Pinnacle Fixed Income Portfolio
may invest in certain debt obligations customarily referred to as "Brady Bonds,"
which are created through the exchange of existing commercial bank loans to
foreign entities for new obligations in connection with debt restructurings
under a plan introduced by former U.S. Secretary of the Treasury Nicholas F.
Brady (the "Brady Plan"). Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. The Portfolio may purchase Brady Bonds either in the primary
or secondary markets. The price and yield of Brady Bonds purchased in the
secondary market will reflect the market conditions at the time of purchase,
regardless of the stated face amount and the stated interest rate. With respect
to Brady Bonds with no or limited collateralization, the Portfolio will rely for
payment of interest and principal primarily on the willingness and ability of
the issuing government to make payment in accordance with the terms of the
bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
FOREIGN CURRENCY TRANSACTIONS. Although Morgan Stanley Asian Growth Portfolio,
Morgan Stanley Worldwide High Income Portfolio and Pinnacle Fixed Income
Portfolio value their assets daily in U.S. dollars, they do not intend to
convert their holdings of foreign currencies to U.S. dollars on a daily basis.
The Portfolios' foreign currencies may be held as foreign currency call accounts
at foreign branches of foreign or domestic banks. These accounts bear interest
at negotiated rates and are payable upon relatively short demand periods. If a
bank became insolvent, the Portfolios could suffer a loss of some or all of the
amounts deposited. The Portfolios may convert foreign currency to U.S. dollars
from time to time. Although foreign exchange dealers generally do not charge a
stated commission or fee for conversion, the prices posted generally include a
spread which is the difference between the prices at which the dealers are
buying and selling foreign currencies.
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ILLIQUID SECURITIES. Each Portfolio may invest up to 10% (15% in the case of
Morgan Stanley Asian Growth Portfolio, Morgan Stanley Worldwide High Income
Portfolio, Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio and
Zweig Equity (Small Cap) Portfolio) of its net assets in illiquid securities.
The term illiquid securities for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a Portfolio has valued the securities and
includes, among other things, purchased over-the-counter (OTC) options,
repurchase agreements maturing in more than seven days and restricted securities
other than Rule 144A securities (see below) that the respective Sub-Adviser has
determined are liquid pursuant to guidelines established by the Fund's Board of
Directors. The assets used as cover for OTC options written by a Portfolio will
be considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Portfolio may repurchase any OTC option it writes at a maximum
price to be calculated by a formula set forth in the option agreement. The cover
for an OTC option written subject to this procedure will be considered illiquid
only to the extent that the maximum repurchase price under the option formula
exceeds the intrinsic value of the option. Restricted securities may be sold
only in privately negotiated transactions or in public offerings with respect to
which a registration statement is in effect under the Securities Act of 1933
(1933 Act). Restricted securities acquired by a Portfolio include those that are
subject to restrictions contained in the securities laws of other countries.
Securities that are freely marketable in the country where they are principally
traded, but that would not be freely marketable in the United States, will not
be considered illiquid. Where registration is required, a Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Portfolio might obtain a less favorable price than prevailed when it decided
to sell.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not dispositive of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities that might
develop as a result of Rule 144A could provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc. (NASD). An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by a
Portfolio, however, could affect adversely the marketability of such portfolio
securities and a Portfolio might be unable to dispose of such securities
promptly or at favorable prices.
The Board of Directors has delegated the function of making day-to-day
determinations of liquidity to each Sub-Adviser pursuant to guidelines approved
by the Board. Each Sub-Adviser takes into account a number of factors in
reaching liquidity decisions, including but not limited to (1) the frequency of
trades for the security, (2) the number of dealers that make quotes for the
security, (3) the number of dealers that have undertaken to make a market in the
security, (4) the number of other potential purchasers and (5) the nature of the
security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). Each Sub-
Adviser monitors the liquidity of restricted securities in each Portfolio and
reports periodically on such decisions to the Board of Directors.
SECTION 4(2) PAPER. Commercial paper issues in which the Portfolios may invest
include securities issued by major corporations without registration under the
1933 Act in reliance on the exemption from such registration afforded by Section
3(a)(3) thereof, and commercial paper issued in reliance on the so-called
private placement exemption from registration which is afforded by Section 4(2)
of the 1933 Act (Section 4(2) paper). Section 4(2) paper is restricted as to
disposition under the federal securities laws in that any resale must similarly
be made in an exempt transaction. Section 4(2) paper is normally resold to other
institutional investors through or with the assistance of investment dealers who
make a market in Section
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4(2) paper, thus providing liquidity. Section 4(2) paper that is issued by a
company that files reports under the Securities Exchange Act of 1934 is
generally eligible to be sold in reliance on the safe harbor of Rule 144A
described under "Illiquid Securities" above. The Portfolios' percentage
limitations on investments in illiquid securities include Section 4(2) paper
other than Section 4(2) paper that the Sub-Adviser has determined to be liquid
pursuant to guidelines established by the Fund's Board of Directors. The Board
has delegated to the Sub-Advisers the function of making day-to-day
determinations of liquidity with respect to Section 4(2) paper, pursuant to
guidelines approved by the Board that require the Sub-Advisers to take into
account the same factors described under "Illiquid Securities" above for other
restricted securities and require the Sub-Advisers to perform the same
monitoring and reporting functions.
GNMA, FNMA AND FHLMC certificates. As described in the Prospectus, certain
Portfolios may invest in mortgage-backed securities, such as GNMA, FNMA and
FHLMC certificates (as defined below), which represent an undivided ownership
interest in a pool of mortgages. The mortgages backing these securities include
conventional thirty-year fixed-rate mortgages, fifteen-year fixed-rate
mortgages, graduated payment mortgages and adjustable rate mortgages. These
certificates are in most cases pass-through instruments, through which the
holder receives a share of all interest and principal payments, including
prepayments, on the mortgages underlying the certificate, net of certain fees.
Prepayments on mortgages underlying mortgage-backed securities occur when a
mortgagor prepays the remaining principal before the mortgage's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying mortgages, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate. In
general, prepayments on mortgage-backed securities will be a function of the
relative coupon of the mortgages, the age of the mortgages, and the general
level of interest rates in the market. To a limited extent, prepayment rates
and, consequently, the average life of an anticipated yield to be realized from
a mortgage-backed security can be estimated using statistical models. However,
because the actual prepayments of the underlying mortgages vary, it is
impossible to predict exactly the yield and average life of a mortgage-backed
security.
During periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. When a Portfolio
receives prepayments on mortgage-backed securities, it may reinvest the prepaid
amounts in securities the yields of which will reflect interest rates prevailing
at the time. Therefore, a Portfolio's ability to maintain a portfolio of high-
yielding mortgage-backed securities will be adversely affected to the extent
that prepayments of mortgages must be reinvested in securities which have lower
yields than the mortgage-backed security on which the prepayment is received. In
addition, since payments on the underlying mortgages are passed through to the
holders of the mortgage-backed securities, if a Portfolio purchases mortgage-
backed securities at a premium or a discount, unless it makes certain elections,
it will recognize a capital loss or gain when payments of principal are passed
through to the Portfolio as a result of regular payments or prepayments on the
mortgages in the underlying pool.
The following is a description of GNMA, FHLMC and FNMA certificates, the most
widely available mortgage-backed securities:
GNMA certificates. Certificates of the Government National Mortgage Association
(GNMA Certificates) are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Portfolios
may purchase are the modified pass-through type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the issuer and GNMA, regardless of whether or
not the mortgagor actually makes the payment.
GNMA guarantees the timely payment of principal and interest on securities
backed by a pool of mortgages insured by the Federal Housing Administration
(FHA) or the Farmers' Home Administration (FMHA), or guaranteed by the Veterans
Administration (VA). The GNMA guarantee is authorized by the National Housing
Act and is backed by the full faith and credit of the United States. The GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially shorter
than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosure will usually
result in the return of the greater part of principal investment long before the
maturity of the
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mortgages in the pool. Foreclosures impose no risk to principal investment
because of the GNMA guarantee, except to the extent that the Portfolio has
purchased the certificates above par in the secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation (FHLMC) was
created in 1970 through enactment of Title III of the Emergency Home Finance Act
of 1970. Its purpose is to promote development of a nationwide secondary market
in conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities: mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made and owed on the underlying pool. The
FHMLC guarantees timely monthly payment of interest (and, under certain
circumstances, principal) of PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association (FNMA) was
established in 1938 to create a secondary market in mortgages insured by the
FHA.
FNMA issues guaranteed mortgage pass-through certificates (FNMA Certificates).
FNMA Certificates represent a pro rata share of all interest and principal
payments made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates.
REPURCHASE AGREEMENTS. Repurchase agreements carry certain risks not associated
with direct investments in securities, including possible declines in the market
value of the underlying securities and delays and costs to a Portfolio if the
other party to a repurchase agreement becomes bankrupt. Each Portfolio intends
to enter into repurchase agreements only with banks and dealers in transactions
believed by the Sub-Adviser to present minimum credit risks in accordance with
guidelines established by the Fund's Board of Directors. The Sub-Adviser will
review and monitor the creditworthiness of those institutions under the Board's
general supervision.
LENDING OF PORTFOLIO SECURITIES. Each Portfolio (other than the Money Market
Portfolio) is authorized to lend up to 10% (33-1/3% in the case of Morgan
Stanley Asian Growth Portfolio, Morgan Stanley Worldwide High Income Portfolio,
Zweig Asset Allocation Portfolio, Zweig Equity (Small Cap) Portfolio and
Pinnacle Fixed Income Portfolio) of the value of its total assets to broker-
dealers or institutional investors that the Sub-Adviser deems qualified, but
only when the borrower maintains with the Portfolio's custodian bank collateral
either in cash or money market instruments in an amount at least equal to the
market value of the securities loaned, plus accrued interest and dividends,
determined on a daily basis and adjusted accordingly. There may be risks of
delay in recovery of the securities or even loss of rights in the collateral
should the borrower of the securities fail financially. However, loans will only
be made to borrowers deemed by the Sub-Adviser to be of good standing and when,
in the judgment of the Sub-Adviser, the consideration which can be earned
currently from such securities loans justifies the attendant risk. All relevant
facts and circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Directors. During the
period of the loan the Sub-Adviser will monitor all relevant facts and
circumstances, including the creditworthiness of the borrower. The Portfolio
will retain authority to terminate any loan at any time. A Portfolio may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. A Portfolio
will receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. A Portfolio will regain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and rights
to dividends, interest or other distributions, when regaining such rights is
considered to be in the Portfolio's interest.
MORTGAGE DOLLAR ROLL TRANSACTIONS. Pinnacle Fixed Income Portfolio may engage
in mortgage dollar roll transactions with respect to mortgage securities issued
by the Government National Mortgage Association, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. In a
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mortgage dollar roll transaction, the Portfolio sells a mortgage-backed security
and simultaneously agrees to repurchase a similar security on a specified future
date at an agreed upon price. During the roll period, the Portfolio will not be
entitled to receive any interest or principal paid on the securities sold. The
Portfolio is compensated for the lost interest on the securities sold by the
difference between the sales price and the lower price for the future repurchase
as well as by the interest earned on the reinvestment of the sale proceeds. The
Portfolio may also be compensated by receipt of a commitment fee. When the
Portfolio enters into a mortgage dollar roll transaction, liquid assets in an
amount sufficient to pay for the future repurchase are segregated with the
Fund's custodian. Mortgage dollar roll transactions are considered reverse
repurchase agreements for purposes of the Portfolio's investment restrictions.
INVESTMENT LIMITATIONS. The investment restrictions set forth below are
fundamental policies of each Portfolio, which cannot be changed with respect to
a Portfolio without the approval of the holders of a majority of the outstanding
voting securities of that Portfolio, as defined in the Investment Company Act of
1940, as amended (the 1940 Act), as the lesser of: (1) 67% or more of the
Portfolio's voting securities present at a meeting of shareholders, if the
holders of more than 50% of the Portfolio's outstanding shares are present in
person or by proxy, or (2) more than 50% of the outstanding shares. Unless
otherwise indicated, all percentage limitations apply to each Portfolio on an
individual basis, and apply only at the time an investment is made; a later
increase or decrease in percentage resulting from changes in values or net
assets will not be deemed to be an investment that is contrary to these
restrictions. Pursuant to such restrictions and policies, no Portfolio may:
(1) make an investment in any one industry if the investment would cause
the aggregate value of the Portfolio's investment in such industry to
exceed 25% of the Portfolio's total assets, except that this policy
does not apply to obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities (U.S. Government
securities), certificates of deposit and bankers' acceptances. This
limitation does not apply to investments by the Money Market Portfolio
in certificates of deposit or banker's acceptances issued by domestic
branches of U.S. banks. In addition, for the Money Market Portfolio,
gas, electric, water and telephone companies are considered separate
industries, and with respect to finance companies, the following
categories are considered separate industries: (a) captive automotive
finance; (b) captive equipment finance; (c) retail finance; (d)
consumer loan; and (e) diversified finance;
(2) purchase securities of any one issuer (except U.S. Government
securities), if as a result at the time of purchase more than 5% of
the Portfolio's total assets would be invested in such issuer, or the
Portfolio would own or hold 10% or more of the outstanding voting
securities of that issuer, except that 25% of the total assets of the
Portfolio may be invested without regard to this limitation;
(3) purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that a Portfolio
that may use options or futures strategies and may make margin
deposits in connection with its use of options, futures contracts and
options on futures contracts;
(4) mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Portfolio except
as may be necessary in connection with permitted borrowings and then
not in excess of 5% of the Portfolio's total assets taken at cost (10%
in the case of Morgan Stanley Asian Growth Portfolio, Zweig Asset
Allocation Portfolio and Zweig Equity (Small Cap) Portfolio and
33-1/3% in the case of Morgan Stanley Worldwide High Income
Portfolio), provided that this does not prohibit escrow, collateral or
margin arrangements in connection with the use of options, futures
contracts and options on futures contracts by a Portfolio that may use
options or futures strategies;
(5) make short sales of securities or maintain a short position, except to
the extent described in the Prospectus;
(6) purchase or sell real estate, provided that a Portfolio may invest in
securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein;
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(7) purchase or sell commodities or commodity contracts, except to the
extent described in the Prospectus and this Statement of Additional
Information with respect to futures and related options;
(8) invest in oil, gas or mineral-related programs or leases;
(9) make loans, except through loans of portfolio securities and
repurchase agreements, provided that for purposes of this restriction
the acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, short-term
commercial paper, certificates of deposit, bankers' acceptances and
other fixed income securities as described in the Prospectus and
Statement of Additional Information shall not be deemed to be the
making of a loan;
(10) purchase any securities issued by any other investment company except
(i) by purchase in the open market where no commission or profit,
other than a customary broker's commission, is earned by any sponsor
or dealer associated with the investment company whose shares are
acquired as a result of such purchase, (ii) in connection with the
merger, consolidation or acquisition of all the securities or assets
of another investment company and (iii) purchases of collateralized
mortgage obligations or asset-backed securities, the issuers of which
are investment companies; or
(11) borrow money or issue senior securities, except that each of Morgan
Stanley Asian Growth Portfolio, Renaissance Balanced Portfolio, Harris
Bretall Sullivan & Smith Equity Growth Portfolio, Dreman Value
Portfolio, Pinnacle Fixed Income Portfolio and the Money Market
Portfolio may borrow in an amount up to 10% (33-1/3% in the case of
Pinnacle Fixed Income Portfolio) of its respective total assets from
banks for extraordinary or emergency purposes such as meeting
anticipated redemptions, and may pledge its assets in connection with
such borrowing. Morgan Stanley Worldwide High Income Portfolio may
borrow from banks, and engage in transactions deemed to be borrowings
from other entities, in an amount up to 33-1/3% of its total assets
(including the amount borrowed), less all liabilities and indebtedness
other than the borrowing, for extraordinary or emergency purposes such
as meeting anticipated redemptions as well as for investment purposes
and to pay dividends. Zweig Asset Allocation Portfolio and Zweig
Equity (Small Cap) Portfolio may borrow money from banks on an
unsecured basis and may pay interest thereon in order to raise
additional cash for investment or to meet redemption requests. Each of
these two Portfolios may not borrow amounts in excess of 20% of its
total assets taken at cost or at market value, whichever is lower, and
then only from banks as a temporary measure for extraordinary or
emergency purposes. If such borrowings exceed 5% of a Portfolio's
total assets, the Portfolio will make no further investments until
such borrowing is repaid. It is the current intention of each of these
two Portfolios not to borrow money in excess of 5% of its assets. A
Portfolio may pledge up to 5% (10% in the case of Morgan Stanley Asian
Growth Portfolio, Zweig Asset Allocation Portfolio and Zweig Equity
(Small Cap) Portfolio and 33-1/3% in the case of Morgan Stanley
Worldwide High Income Portfolio) of its total assets as security for
such borrowing. For purposes of this restriction, the deposit of
initial or maintenance margin in connection with futures contracts
will not be deemed to be a pledge of the assets of a Portfolio. This
restriction does not prohibit entry into reverse repurchase agreements
by the Morgan Stanley Worldwide High Income Portfolio, Renaissance
Balanced Portfolio, Pinnacle Fixed Income Portfolio and the Money
Market Portfolio, provided that Renaissance Balanced Portfolio,
Pinnacle Fixed Income Portfolio and the Money Market Portfolio may not
enter into a reverse repurchase agreement if as a result its current
obligations under such agreements would exceed 5% of the current
market value of the Portfolio's total assets (less its liabilities
other than obligations under such agreements). The borrowing
restriction also does not apply to the entry into interest rate
protection transactions by Pinnacle Fixed Income Portfolio.
The following investment restriction may be changed by the vote of the Fund's
Board of Directors without shareholder approval:
No Portfolio will hold assets of any issuers, at the end of any
calendar quarter (or within 30 days thereafter), to the extent such
holdings would cause the Portfolio to fail to comply with the
diversification requirements imposed by Section 817(h) of the Internal
Revenue Code of 1986,
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as amended (the Code), and the Treasury regulations issued thereunder,
on segregated asset accounts used to fund variable annuity contracts.
In addition to the above-referenced limitations, Pinnacle Fixed Income Portfolio
has agreed with the California Department of Insurance to limit borrowings under
paragraph (11) above so that at all times borrowings outstanding will not exceed
25% of the Portfolio's net asset value.
OPTIONS, FUTURES AND OTHER HEDGING STRATEGIES
As discussed in the Prospectus, each of Morgan Stanley Worldwide High Income
Portfolio, Renaissance Balanced Portfolio, Zweig Asset Allocation Portfolio,
Dreman Value Portfolio, Zweig Equity (Small Cap) Portfolio and Pinnacle Fixed
Income Portfolio may use a variety of financial instruments (Hedging
Instruments), including certain options, futures contracts (sometimes referred
to as futures) and options on futures contracts, to attempt to hedge the
Portfolio's investments or attempt to enhance the Portfolio's income. Nicholas-
Applegate Balanced Portfolio may purchase listed put and call options. Pinnacle
Fixed Income Portfolio and Morgan Stanley Worldwide High Income Portfolio also
may use foreign currency forward contracts, foreign currency futures contracts
and foreign currency options, and Morgan Stanley Asian Growth Portfolio may use
foreign currency forward contracts, for hedging purposes. The particular
Hedging Instruments are described in Appendix A to this Statement of Additional
Information.
Hedging strategies can be broadly categorized as short hedges and long hedges.
A short hedge is a purchase or sale of a Hedging Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held by a Portfolio. Thus, in a short hedge a Portfolio takes a position in a
Hedging Instrument whose price is expected to move in the opposite direction of
the price of the investment being hedged. For example, a Portfolio might
purchase a put option on a security to hedge against a potential decline in the
value of that security. If the price of the security declined below the
exercise price of the put, the Portfolio could exercise the put and thus limit
its loss below the exercise price to the premium paid plus transaction costs.
In the alternative, because the value of the put option can be expected to
increase as the value of the underlying security declines, the Portfolio might
be able to close out the put option and realize a gain to offset the decline in
the value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument intended
partially or fully to offset potential increases in the acquisition cost of one
or more investments that a Portfolio intends to acquire. Thus, in a long hedge a
Portfolio takes a position in a Hedging Instrument whose price is expected to
move in the same direction as the price of the prospective investment being
hedged. For example, a Portfolio might purchase a call option on a security it
intends to purchase in order to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of
the call, the Portfolio could exercise the call and thus limit its acquisition
cost to the exercise price plus the premium paid and transaction costs.
Alternatively, the Portfolio might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Portfolio owns
or intends to acquire. Hedging Instruments on stock indices, in contrast,
generally are used to hedge against price movements in broad equity market
sectors in which the Portfolio has invested or expects to invest. Hedging
Instruments on debt securities may be used to hedge either individual securities
or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the SEC,
the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission (CFTC) and various state regulatory
authorities. In addition, a Portfolio's ability to use Hedging Instruments will
be limited by tax considerations. See "Taxes."
In addition to the products, strategies and risks described below and in the
Prospectus, the Sub-Advisers that utilize these techniques expect to discover
additional opportunities in connection with options, future contracts, foreign
currency forward contracts and other hedging techniques. These new
opportunities may become available as a particular Sub-Adviser develops new
techniques, as regulatory authorities broaden the range of permitted
transactions and as new options, futures contracts, foreign currency forward
contracts
B-10
<PAGE>
or other techniques are developed. The Sub-Advisers may utilize these
opportunities to the extent that they are consistent with the respective
Portfolio's investment objectives and permitted by the respective Portfolio's
investment limitations and applicable regulatory authorities. The Fund's
Prospectus or Statement of Additional Information will be supplemented to the
extent that new products or techniques involve materially different risks than
those described below or in the Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of Hedging Instruments involves
special considerations and risks, as described below. Risks pertaining to
particular Hedging Instruments are described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the Sub-
Adviser's ability to predict movements of the overall securities,
currency and interest rate markets, which requires different skills
than predicting changes in the price of individual securities. While
the Sub-Advisers that utilize these techniques are experienced in the
use of Hedging Instruments, there can be no assurance that any
particular hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the
investments being hedged. For example, if the value of a Hedging
Instrument used in a short hedge increased by less than the decline in
value of the hedged investment, the hedge would not be fully
successful. Such a lack of correlation might occur due to factors
unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging
Instruments are traded. The effectiveness of hedges using Hedging
Instruments on indices will depend on the degree of correlation
between price movements in the index and price movements in the
securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly
or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies
can also reduce opportunity for gain by offsetting the positive effect
of favorable price movements in the hedged investments. For example,
if a Portfolio entered into a short hedge because the Sub-Adviser
projected a decline in the price of a security held by a Portfolio,
and the price of that security increased instead, the gain from that
increase might be wholly or partially offset by a decline in the price
of the Hedging Instrument. Moreover, if the price of the Hedging
Instrument declined by more than the increase in the price of the
security, the Portfolio could suffer a loss. In either such case, the
Portfolio would have been in a better position had it not hedged at
all.
(4) As described below, a Portfolio might be required to maintain assets
as cover, maintain segregated accounts or make margin payments when it
takes positions in Hedging Instruments involving obligations to third
parties (i.e., Hedging Instruments other than purchased options). If a
Portfolio were unable to close out its positions in such Hedging
Instruments, it might be required to continue to maintain such assets
or accounts or make such payments until the position expired or
matured. These requirements might impair a Portfolio's ability to sell
a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that a Portfolio sell a
portfolio security at a disadvantageous time. A Portfolio's ability to
close out a position in a Hedging Instrument prior to expiration or
maturity depends on the existence of a liquid secondary market or, in
the absence of such a market, the ability and willingness of a contra
party to enter into a transaction closing out the position. Therefore,
there is no assurance that any hedging position can be closed out at a
time and price that is favorable to the Portfolio.
COVER FOR HEDGING STRATEGIES. Transactions using Hedging Instruments, other
than purchased options, expose a Portfolio to an obligation to another party. A
Portfolio will not enter into any such transactions unless it owns either (1) an
offsetting covered position in securities, currencies or other options or
futures contracts or (2) cash, receivables and short-term debt securities, with
a value sufficient at all times to cover its potential obligations to the extent
not covered as provided in (1) above. Each Portfolio will comply with SEC
guidelines regarding cover for hedging transactions and will, if the guidelines
so require, set aside cash,
B-11
<PAGE>
U.S. Government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while the
position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
a Portfolio's assets to cover or segregated accounts could impede portfolio
management or the Portfolio's ability to meet redemption requests or other
current obligations.
OPTIONS. The Portfolios that may use options may purchase put and/or call
options, and write (sell) covered put and call options on equity and debt
securities, stock indices, and/or foreign currencies are identified in the
Prospectus. The purchase of call options serves as a long hedge, and the
purchase of put options serves as a short hedge. Writing covered put or call
options can enable a Portfolio to enhance income by reason of the premiums paid
by the purchasers of such options. However, if the market price of the security
underlying a covered put option declines to less than the exercise price of the
option, minus the premium received, the Portfolio would expect to suffer a loss.
Writing covered call options serves as a limited short hedge, because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates
to a price higher than the exercise price of the call option, it can be expected
that the option will be exercised and the Portfolio will be obligated to sell
the security at less than its market value. If the covered call option is an
OTC option, the securities or other assets used as cover would be considered
illiquid to the extent described under "Investment Policies and Restrictions --
Illiquid Securities."
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the historical price volatility of the underlying investment and
general market conditions. Options normally have expiration dates of up to nine
months. Options that expire unexercised have no value.
A Portfolio may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, a Portfolio may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, a
Portfolio may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction.
The Portfolios identified in the Prospectus may purchase or write exchange-
traded and/or OTC options. Currently, many options on equity securities are
exchange-traded. Exchange markets for options on debt securities and foreign
currencies exist but are relatively new, and these instruments are primarily
traded on the OTC market. Exchange-traded options in the United States are
issued by a clearing organization affiliated with the exchange on which the
option is listed which, in effect, guarantees completion of every exchange-
traded option transaction. In contrast, OTC options are contracts between the
Portfolio and its contra party (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when the Portfolio purchases or writes
an OTC option, it relies on the party from whom it purchased the option or to
whom it has written the option (the contra party) to make or take delivery of
the underlying investment upon exercise of the option. Failure by the contra
party to do so would result in the loss of any premium paid by the Portfolio as
well as the loss of any expected benefits of the transaction.
Generally, the OTC debt and foreign currency options used by the Portfolios are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
A Portfolio's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. Each Portfolio intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although a
Portfolio will enter into OTC options only with contra parties that are expected
to be capable of entering into closing transactions with the Portfolio, there is
no assurance that the Portfolio will in fact be able to close
B-12
<PAGE>
out an OTC option position at a favorable price prior to expiration. In the
event of insolvency of the contra party, the Portfolio might be unable to close
out an OTC option position at any time prior to its expiration.
If the Portfolio were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Portfolio could cause material losses because the Portfolio would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
LIMITATIONS ON THE USE OF OPTIONS. The Portfolios' use of options is governed
by the following guidelines, which can be changed by the Fund's Board of
Directors without shareholder vote:
(1) Morgan Stanley Worldwide High Income Portfolio, Renaissance Balanced
Portfolio, Zweig Asset Allocation Portfolio, Nicholas-Applegate
Balanced Portfolio, Dreman Value Portfolio, Zweig Equity (Small Cap)
Portfolio and Pinnacle Fixed Income Portfolio may purchase a put or
call option, including any straddles or spreads, only if the value of
its premium, when aggregated with the premiums on all other options
held by the Portfolio, does not exceed 5% of the Portfolio's total
assets; and
(2) Zweig Asset Allocation Portfolio and Zweig Equity (Small Cap)
Portfolio will attempt to limit losses from all options transactions
to 5% of its average net assets per year, or cease options
transactions until in compliance with the 5% limitation, but there can
be no absolute assurance of adherence to these limits.
FUTURES. The purchase of futures or call options thereon can serve as a long
hedge, and the sale of futures or the purchase of put options thereon can serve
as a short hedge. Writing covered call options on futures contracts can serve
as a limited short hedge, using a strategy similar to that used for writing
covered call options on securities and indices.
Futures strategies also can be used to manage the average duration of a
Portfolio. If the Sub-Adviser wishes to shorten the average duration of a
Portfolio, the Portfolio may sell a futures contract or a call option thereon,
or purchase a put option on that futures contract. If the Sub-Adviser wishes to
lengthen the average duration of a Portfolio, the Portfolio may buy a futures
contract or a call option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract a Portfolio is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, initial margin consisting of cash, U.S.
Government securities or other liquid, high-grade debt securities, in an amount
generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the
Portfolio at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, a Portfolio may be required by an exchange to increase the level of
its initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent variation margin payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as marking to
market. Variation margin does not involve borrowing, but rather represents a
daily settlement of the Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when a Portfolio
purchases or sells a futures contract or writes a call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Portfolio has insufficient cash to meet
daily variation margin requirements, it might need to sell securities at a time
when such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter into
offsetting closing transactions, similar to closing transactions on options, by
selling or purchasing, respectively, an instrument identical to the instrument
held or written. Positions in futures and options on futures may be closed only
on an exchange or board of trade that provides a secondary market. Each
Portfolio intends to enter into futures
B-13
<PAGE>
transactions only on exchanges or boards of trade where there appears to be a
liquid secondary market. However, there can be no assurance that such a market
will exist for a particular contract at a particular time. Secondary markets for
options on futures are currently in the development stage, and no Portfolio will
trade options on futures on any exchange or board of trade unless, in the Sub-
Adviser's opinion, the markets for such options have developed sufficiently that
the liquidity risks for such options are not greater than the corresponding
risks for futures.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or related option can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Portfolio would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Portfolio would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options
markets are subject to daily variation margin calls and might be compelled to
liquidate futures or related options positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are less
onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, program trading and other investment strategies might result in
temporary price distortions.
LIMITATIONS ON THE USE OF FUTURES. A Portfolio will not purchase or sell
futures contracts or related options if, immediately thereafter, the sum of the
amount of initial margin deposits on the Portfolio's existing futures positions
and margin and premiums paid for related options would exceed 5% of the market
value of the Portfolio's total assets. This guideline can be changed by the
Fund's Board of Directors without shareholder vote. This guideline does not
limit to 5% the percentage of the Portfolio's assets that are at risk in futures
and related options transactions. For purposes of this guideline, options on
futures contracts and foreign currency options traded on a commodities exchange
will be considered related options.
In addition, the Fund has represented to the CFTC that it: (1) will use future
contracts, options thereon and foreign currency options traded on a commodities
exchange solely in bona fide hedging transactions or, alternatively (2) will not
enter into futures contracts, options thereon or foreign currency options traded
on a commodities exchange for which the aggregate initial margin and premiums
exceed 5% of a Portfolio's total assets (calculated in accordance with CFTC
regulations).
FOREIGN CURRENCY HEDGING STRATEGIES -- SPECIAL CONSIDERATIONS. The Portfolios
noted in the Prospectus may use options and futures on foreign currencies, and
foreign currency forward contracts as described below to hedge against movements
in the values of the foreign currencies in which the Portfolios' securities are
denominated. Such currency hedges can protect against price movements in a
security that a Portfolio owns or intends to acquire that are attributable to
changes in the value of the currency in which it is denominated. Such hedges do
not, however, protect against price movements in the securities that are
attributable to other causes.
The Portfolios might seek to hedge against changes in the value of a particular
currency when no Hedging Instruments on that currency are available or such
Hedging Instruments are more expensive than certain other Hedging Instruments.
In such cases, a Portfolio may hedge against price movements in that currency by
entering into transactions using Hedging Instruments on other currencies, the
values of which the Sub-
B-14
<PAGE>
Adviser believes will have a high degree of positive correlation to the value of
the currency being hedged. The risk that movements in the price of the Hedging
Instrument will not correlate perfectly with movements in the price of the
currency being hedged is magnified when this strategy is used.
The value of Hedging Instruments on foreign currencies depends on the value of
the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such Hedging Instruments, the
Portfolios could be disadvantaged by having to deal in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global, round-the-
clock market. To the extent the U.S. options or futures markets are closed
while the markets for the underlying currencies remain open, significant price
and rate movements might take place in the underlying markets that cannot be
reflected in the markets for the Hedging Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency.
Thus, a Portfolio might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FOREIGN CURRENCY FORWARD CONTRACTS. The Portfolios noted in the Prospectus may
enter into foreign currency forward contracts to purchase or sell foreign
currencies for a fixed amount of U.S. dollars or another foreign currency.
These Portfolios also may use foreign currency forward contracts for cross-
hedging. Under this strategy, a Portfolio would increase its exposure to
foreign currencies that the Sub-Adviser believes might rise in value relative to
the U.S. dollar, or shift its exposure to foreign currency fluctuations from one
country to another. For example, if a Portfolio owned securities denominated in
a foreign currency and the Sub-Adviser believed that currency would decline
relative to another currency, it might enter into a forward contract to sell an
appropriate amount of the first foreign currency, with payment to be made in the
second foreign currency.
The cost to the Portfolios engaging in foreign currency forward contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because foreign currency forward
contracts are usually entered into on a principal basis, no fees or commissions
are involved. When a Portfolio enters into a foreign currency forward contract,
it relies on the contra party to make or take delivery of the underlying
currency at the maturity of the contract. Failure by the contra party to do so
would result in the loss of any expected benefit of the transaction.
As is the case with futures contracts, holders and writers of foreign currency
forward contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument held or written. Secondary markets
generally do not exist for foreign currency forward contracts, with the result
that closing transactions generally can be made for foreign currency forward
contracts only by negotiating directly with the contra party. Thus, there can
be no assurance that a Portfolio will in fact be able to close out a foreign
currency forward contract at a favorable price prior to maturity. In addition,
in the event of insolvency of the contra party, the Portfolio might be unable to
close out a foreign currency forward contract at any time prior to maturity. In
either event, the Portfolio would continue to be subject to market risk with
respect to the position, and would continue to be required to maintain a
position in securities denominated in the foreign currency or to maintain cash
or securities in a segregated account.
The precise matching of foreign currency forward contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the foreign
currency forward contract has been established. Thus, a Portfolio might need to
B-15
<PAGE>
purchase or sell foreign currencies in the spot (cash) market to the extent such
foreign currencies are not covered by forward contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
LIMITATIONS ON THE USE OF FOREIGN CURRENCY FORWARD CONTRACTS. A Portfolio may
enter into foreign currency forward contracts or maintain a net exposure to such
contracts only if (1) the consummation of the contracts would not obligate the
Portfolio to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency or (2) the
Portfolio maintains cash, U.S. Government securities or liquid, high-grade debt
securities in a segregated account in an amount not less than the value of its
total assets committed to the consummation of the contract and not covered as
provided in (1) above, as marked to market daily. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, the respective Sub-Advisers of the Portfolios that engage
in these strategies believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
a Portfolio will be served.
DIRECTORS AND OFFICERS
The Directors and officers of the Fund, their business addresses and principal
occupations during the past five years are listed below. Unless otherwise
indicated, each person's address is 515 West Market Street, Louisville, KY.
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
John R. Lindholm (47)* Director President of Integrity and Vice President-
Chief Marketing Officer of National
Integrity since November 26, 1993;
Executive Vice President-Chief Marketing
Officer of ARM Financial Group, Inc. since
July 27, 1993; since March 1992 Chief
Marketing Officer of Analytical Risk
Management, L.P. From June 1990 to
February 1992, Chief Marketing Officer
and a Managing Director of the ICH Capital
Management Group, ICH Corporation,
Louisville, Kentucky; prior thereto, Chief
Marketing Officer and Managing Director
for Capital Holding Corporation's
Accumulation and Investment Group.
Director of the mutual funds in the State
Bond Group of mutual funds.
John Katz (57) Director Investment banker since January 1991;
10 Hemlock Road Chairman and Chief Executive Officer, Sam's
Hartsdale, NY Restaurant Group, Inc. (a restaurant holding
company), from June 1991 to August 1992;
Executive Vice President (from January 1989
to January 1991) and Senior Vice President
(from December 1985 to January 1989),
Equitable Investment Corporation (an
indirect wholly-owned subsidiary of The
Equitable Life Assurance Society of the
United States, through which it owns and
manages its investment operations). Director
of the mutual funds in the State Bond Group
of mutual funds.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Address Position with the Fund Other Business Activities in Past 5 Years
- --------------------- ---------------------- -----------------------------------------
<S> <C> <C>
Theodore S. Rosky (58) Director Retired since April 1992; Executive Vice
2304 Speed Avenue President, Capital Holding Corporation (from
Louisville, KY December 1991 to April 1992); prior thereto,
Executive Vice President and Chief Financial
Officer, Capital Holding Corporation.
Director of the mutual funds in the State
Bond Group of mutual funds.
William B. Faulkner (68) Director Director since November 1996. President,
240 East Plato Blvd. William Faulkner & Associates, business
St. Paul, Minnesota 55107 and institutional adviser since 1986;
Consultant to American Hoist & Derrick
Company, construction equipment
manufacturer, from 1986 to 1989; prior
thereto, Vice President and Assistant to the
President, American Hoist & Derrick
Company. Director of the mutual funds in
the State Bond Group of mutual funds.
Edward J. Haines (49) President Vice President, Marketing of ARM Financial
Group, Inc. since December 16, 1993;
Director of Retail Marketing and Vice
President of the National Home Life
Assurance Company subsidiary of Capital
Holding Corporation from 1987 to December
1993.
Barry G. Ward (35) Controller Controller of ARM Financial Group, Inc.
since April 1996. From October 1993 to
April 1996, Mr. Ward was directly
responsible for the Company's financial
reporting function. From January 1989
to October 1993, Mr. Ward served in
various positions within Ernst & Young
LLP's Insurance Industry Accounting and
Auditing Practice, the last of which was
Manager. Controller of the mutual funds in
the State Bond Group of mutual funds.
Peter S. Resnik (35) Treasurer Treasurer of ARM Financial Group, Inc.,
Integrity and National Integrity since
December 1993; employed in various
financial and operational capacities by
Analytical Risk Management Ltd. since
December 14, 1992; Assistant Vice President
of the Commonwealth Life Insurance
Company subsidiary of Capital Holding
Corporation from 1986 to December 1992.
Treasurer of the mutual funds in the State
Bond Group of mutual funds.
Kevin L. Howard (32) Secretary Assistant General Counsel of ARM Financial
Group, Inc. since January 31, 1994; Assistant
General Counsel of Capital Holding
Corporation from April 1992 to January
1994; Attorney Greenebaum Doll &
McDonald, 1989 to April 1992. Vice
President and Secretary of the mutual funds
in the State Bond Group of mutual funds.
</TABLE>
- --------------
* Mr. Lindholm is an interested person, as defined in the 1940 Act, by virtue
of his positions with ARM Financial Group, Inc.
B-17
<PAGE>
The Fund pays Directors who are not interested persons of the Fund fees for
serving as Directors. During the fiscal year ended June 30, 1996 the Fund payed
the Directors who are not interested persons of the Fund $35,250 exclusive of
expenses. Because the Manager and the Sub-Advisers perform substantially all of
the services necessary for the operation of the Fund, the Fund requires no
employees. No officer, director or employee of the Manager, Integrity, National
Integrity or a Sub-Adviser receives any compensation from the Fund for acting as
a Director or officer.
The following table sets forth for the fiscal year ended June 30, 1996,
compensation paid by the Fund to the non-interested Directors and, for the 1995
calendar year, the aggregate compensation paid by the Fund and the six funds in
the State Bond Group of mutual funds to the non-interested Directors. Directors
who are interested persons, as defined in the 1940 Act, receive no compensation
from the fund.
<TABLE>
<CAPTION>
Aggregate Compensation from Total Compensation from
Name of Director Fund* fund Complex
---------------- ---- ------------
<S> <C> <C>
William B. Faulkner $ 9,750 $5,778
Arthur J. Gartland, Jr.* $ 2,500 $6,900
John Katz $11,500 $9,264
Theodore S. Rosky $11,500 $9,264
</TABLE>
*Mr. Gartland resigned effective November 3, 1995.
On August 25, 1994, Integrity purchased for its own account approximately
450,000 shares of the Morgan Stanley Worldwide High Income Portfolio, at net
asset value, for an aggregate purchase price of $4.5 million. Integrity has
indicated that it will vote all of the shares that it owns for its own account
in the Portfolio on any matter requiring the vote of shareholders in the same
proportion as votes are cast by certificate holders relating to the Portfolio.
Integrity has also indicated that it intends to redeem its shares on a dollar-
for-dollar basis to the extent, and at the same time as, the Portfolio has sales
in respect of certificate holders. As of September 30, 1996, approximately
13,686 shares, having a fair value of approximately $0.2 million and
constituting approximately 2.8% of the outstanding shares of the Portfolio, were
held by Integrity for its own account.
On April 1, 1996, Integrity purchased for its own account 478,905 shares of the
Pinnacle Fixed Income Portfolio, at net asset value, for an aggregate purchase
price of $5.1 million. As Integrity owned approximately 49.7% of the shares of
the Portfolio as of that date, Integrity may be deemed to control the Portfolio
within the meaning of the 1940 Act. Integrity has indicated that it will vote
all of the shares that it owns for its own account in the Portfolio on any
matter requiring the vote of shareholders in the same proportion as votes are
cast by certificate holders relating to the Portfolio. Integrity has also
indicated that it intends to redeem its shares on a dollar-for-dollar basis to
the extent, and at the same time as, the Portfolio has sales in respect of
certificate holders. As of September 30, 1996, approximately 454,466 shares,
having a fair value of approximately $4.9 million and constituting 49.4% of the
outstanding shares of the Portfolio, were held by Integrity for its own account.
INVESTMENT MANAGEMENT SERVICES
The Manager, as successor to Integrity, acts as the investment manager of each
Portfolio pursuant to a management agreement with the Fund dated as of November
26, 1993 (Management Agreement). The Management Agreement was amended on March
31, 1994 to provide for management services for Morgan Stanley Asian Growth
Portfolio and Morgan Stanley Worldwide High Income Portfolio. Under the
Management Agreement, the Fund pays the Manager a fee for each Portfolio,
computed daily and payable monthly, according to the schedule set forth in the
Prospectus. The Manager is then responsible under the Management Agreement for
paying each Sub-Adviser the sub-advisory fees payable. For the fiscal years
B-18
<PAGE>
ended June 30, 1994, 1995 AND 1996, each Portfolio paid the Manager* management
fees in the amounts set forth below:
<TABLE>
<CAPTION>
Management Fee for Fiscal Year Ended
------------------------------------
Portfolio June 30, 1994 June 30, 1995 June 30, 1996
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $114,543 $167,365 $183,375
Zweig Asset Allocation Portfolio 161,251 312,227 355,357
Nicholas-Applegate Balanced Portfolio 166,007 276,766 312,334
Harris Bretall Sullivan & Smith Equity
Growth Portfolio 57,483 86,434 143,566
Dreman Value Portfolio 40,945 62,310 85,287
Zweig Equity (Small Cap) Portfolio 57,434 81,405 102,926
Pinnacle Fixed Income Portfolio** 27,836 45,180 52,456
ARM Capital Advisors Money Market
Portfolio** 22,086 40,612 54,685
Morgan Stanley Asian Growth
Portfolio** 295 97,281 133,310
Morgan Stanley Worldwide High Income
Portfolio** 111 48,816 52,196
</TABLE>
- ------------
* The Manager assumed the duties and responsibilities of Integrity as the
Fund's manager on February 1, 1996.
** On April 1, 1996, J.P. Morgan Investment Management Inc. began managing the
Pinnacle Fixed Income Portfolio and ARM Capital Advisors, Inc. began
managing the ARM Capital Advisors Money Market Portfolio without the use of
any Sub-Adviser. Morgan Stanley Asian Growth Portfolio and Morgan Stanley
Worldwide High Income Portfolio commenced operations on June 15, 1994.
Pursuant to the Management Agreement with the Fund, the Manager is responsible
for general supervision of the Sub-Advisers, subject to general oversight by the
Fund's Board of Directors. In addition, the Manager is obligated to keep certain
books and records of the Fund and administers the Fund's corporate affairs. In
connection therewith, the Manager furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by the Fund's custodians or transfer and dividend disbursing
agent.
Under the terms of the Management Agreement, each Portfolio bears all expenses
incurred in its operation that are not specifically assumed by the Manager or
SBM Financial Services, Inc., the Fund's distributor. General expenses of the
Fund not readily identifiable as belonging to one of the Portfolios are
allocated among the Portfolios by or under the direction of the Fund's Board of
Directors in such manner as the Board determines to be fair and equitable.
Expenses borne by each Portfolio include, but are not limited to, the following
(or the Portfolio's allocated share of the following): (1) the cost (including
brokerage commissions, if any) of securities purchased or sold by the Portfolio
and any losses incurred in connection therewith; (2) investment management fees;
(3) organizational expenses; (4) filing fees and expenses relating to the
registration and qualification of the Fund or the shares of a Portfolio under
federal or state securities laws and maintenance of such registrations and
qualifications; (5) fees and expenses payable to the Directors who
B-19
<PAGE>
are not interested persons of the Fund or the Manager, Integrity, National
Integrity or any Sub-Adviser; (6) taxes (including any income or franchise
taxes) and governmental fees; (7) costs of any liability, directors' and
officers' uncollectible items of deposit and other insurance and fidelity bonds;
(8) legal, accounting and auditing expenses; (9) charges of custodians, transfer
agents and other agents; (10) expenses of setting in type and providing a
camera-ready copy of prospectuses and supplements thereto, expenses of setting
in type and printing or otherwise reproducing statements of additional
information and supplements thereto and reports and proxy materials for existing
shareholders; (11) any extraordinary expenses (including fees and disbursements
of counsel) incurred by the Fund or Portfolio; (12) fees, voluntary assessments
and other expenses incurred in connection with membership in investment company
organizations; and (13) costs of meetings of shareholders.
The Manager voluntarily limits the expenses of each Portfolio, other than for
brokerage commissions and the investment management fee, to .50% of average net
assets on an annualized basis, except that the Manager voluntarily limits the
expenses of Morgan Stanley Asian Growth Portfolio and Morgan Stanley Worldwide
High Income Portfolio, other than for brokerage commissions and the investment
management fee, to 1.00% of average net assets on an annualized basis. The
Manager's reimbursement of Portfolio expenses results in an increase to each
Portfolio's yield or total return. The Manager has reserved the right to
withdraw or modify its policy of expense reimbursement for the Portfolios. For
the fiscal years ended June 30, 1994 , 1995 and 1996, the Manager or its
predecessor reimbursed the Portfolios' expenses in the amounts indicated:
<TABLE>
<CAPTION>
Amount Reimbursed for Fiscal Year Ended
---------------------------------------
Portfolio June 30, 1994 June 30, 1995 June 30, 1996
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $ -- $ -- $ --
Zweig Asset Allocation Portfolio -- -- --
Nicholas-Applegate Balanced Portfolio -- -- --
Harris Bretall Sullivan & Smith Equity
Growth Portfolio -- -- --
Dreman Value Portfolio 13,413 -- 902
Zweig Equity (Small Cap) Portfolio 22,832 2,773 26,989
Pinnacle Fixed Income Portfolio* 28,698 9,482 39,568
ARM Capital Advisors Money Market
Portfolio* 26,954 6,639 29,263
Morgan Stanley Asian Growth Portfolio* 7,074 -- 28,405
Morgan Stanley Worldwide High Income
Portfolio* 6,760 -- 12,689
</TABLE>
- -------------
* On April 1, 1996, J.P. Morgan Investment Management Inc. began managing the
Pinnacle Fixed Income Portfolio and ARM Capital Advisors, Inc. began
managing the ARM Capital Advisors Money Market Portfolio without the use of
any Sub-Adviser. Morgan Stanley Asian Growth Portfolio and Morgan Stanley
Worldwide High Income Portfolio commenced operations on June 15, 1994.
Under the Management Agreement, the Manager will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the performance of the Management Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Manager in
the performance of its duties or from reckless disregard of its duties and
obligations thereunder.
B-20
<PAGE>
The Management Agreement may be renewed from year to year so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the 1940 Act. The Management Agreement provides that it will
terminate in the event of its assignment (as defined in the 1940 Act). The
Management Agreement may be terminated by the Fund or the Manager upon 60 days'
prior written notice.
The Manager has entered into a Sub-Advisory Agreement with Sub-Advisers for each
Portfolio except the Money Market Portfolio. A description of each Sub-Adviser
is included in the Prospectus. See "Management of the Fund -- The Manager, Sub-
Advisers and Distributor." Each Sub-Advisory Agreement provides that the Sub-
Adviser will furnish investment advisory services in connection with the
management of the Portfolio. In connection therewith, the Sub-Adviser is
obligated to keep certain books and records of the Fund. The Manager supervises
each Sub-Adviser's performance of such services. Each Sub-Adviser is paid by
the Manager and not the Fund in accordance with the schedule set forth in the
Prospectus. For the fiscal years ended June 30, 1994, 1995 and 1996, the
Manager or its predecessor paid the Sub-Advisers sub-advisory fees in respect of
each Portfolio in the amounts set forth below:
<TABLE>
<CAPTION>
Amount of Sub-Advisory Fee for Fiscal Year Ended
------------------------------------------------
Portfolio June 30, 1994 June 30, 1995 June 30, 1996
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $88,110 $128,742 $141,058
Zweig Asset Allocation Portfolio 134,376 260,189 296,131
Nicholas-Applegate Balanced Portfolio 127,698 212,897 240,257
Harris Bretall Sullivan & Smith Equity 44,218 66,488 110,436
Growth Portfolio
Dreman Value Portfolio 31,496 47,931 62,332
Zweig Equity (Small Cap) Portfolio 49,323 69,776 88,222
Pinnacle Fixed Income Portfolio* 23,197 37,650 42,204
ARM Capital Advisors Money Market 16,989 31,240 34,063
Portfolio*
Morgan Stanley Asian Growth Portfolio* 251 82,689 113,314
Morgan Stanley Worldwide High Income 20 40,201 42,985
Portfolio*
</TABLE>
- ----------------
* On April 1, 1996, J.P. Morgan Investment Management Inc. began managing the
Pinnacle Fixed Income Portfolio and ARM Capital Advisors, Inc. began managing
the ARM Capital Advisors Money Market Portfolio without the use of any Sub-
Adviser. Morgan Stanley Asian Growth Portfolio and Morgan Stanley Worldwide
High Income Portfolio commenced operations on June 15, 1994.
Each Sub-Advisory Agreement may be renewed from year to year, so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the 1940 Act. Each Sub-Advisory Agreement provides that it will
terminate in the event of its assignment (as defined in the 1940 Act) or upon
the termination of the Management Agreement. Each Sub-Advisory Agreement may be
terminated by the Fund, the Manager or the respective Sub-Adviser upon 60 days'
prior written notice.
B-21
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policies established by the Fund's Board of Directors, each Sub-
Adviser is responsible for the execution of portfolio transactions and the
allocation of brokerage transactions for the respective Portfolio. As a general
matter in executing portfolio transactions, each Sub-Adviser may employ or deal
with such brokers or dealers as may, in the Sub-Adviser's best judgment, provide
prompt and reliable execution of the transaction at favorable security prices
and reasonable commission rates. In selecting brokers or dealers, the Sub-
Adviser will consider all relevant factors, including the price (including the
applicable brokerage commission or dealer spread), size of the order, nature of
the market for the security, timing of the transaction, the reputation,
experience and financial stability of the broker-dealer, the quality of service,
difficulty of execution and operational facilities of the firm involved and in
the case of securities, the firm's risk in positioning a block of securities.
Prices paid to dealers in principal transactions through which most debt
securities and some equity securities are traded generally include a spread,
which is the difference between the prices at which the dealer is willing to
purchase and sell a specific security at that time. Each Portfolio that invests
in securities traded in the OTC markets will engage primarily in transactions
with the dealers who make markets in such securities, unless a better price or
execution could be obtained by using a broker. The Fund has no obligation to
deal with any broker or group of brokers in the execution of portfolio
transactions. Brokerage arrangements may take into account the distribution of
certificates by broker-dealers, subject to best price and execution.
The Manager and certain of the Sub-Advisers are affiliated with registered
broker-dealers, including Morgan Stanley & Co. Incorporated, Zweig Securities
Corp. and J.P. Morgan Securities Inc. From time to time, a portion of one or
more Portfolios' brokerage transactions may be conducted with such broker-
dealers, subject to the criteria for allocation of brokerage described above.
The Fund's Board of Directors has adopted procedures pursuant to Rule 17e-1
under the 1940 Act to ensure that all brokerage commissions paid to such broker-
dealers by any Portfolio with which they are affiliated are fair and reasonable.
Also, due to securities law limitations, the Portfolios will limit purchases of
securities in a public offering if an affiliated broker-dealer is a member of
the syndicate for that offering. No transactions may be effected by a Portfolio
with an affiliate of the Manager, Integrity, National Integrity or a Sub-Adviser
acting as principal for its own account.
For the fiscal years ended June 30, 1994, 1995 and 1996, the Fund paid the
following brokerage commissions with respect to each of the Portfolios:
<TABLE>
<CAPTION>
Brokerage Commissions Paid During the Fiscal Year Ended
-------------------------------------------------------
Portfolio June 30, 1994 June 30, 1995 June 30, 1996
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Renaissance Balanced Portfolio $41,548 $37,905 $53,482
Zweig Asset Allocation Portfolio 24,573 25,232 73,378
Nicholas-Applegate Balanced Portfolio 75,213 105,607 108,122
Harris Bretall Sullivan & Smith Equity 21,448 13,202 31,182
Growth Portfolio
Dreman Value Portfolio 13,413 8,300 15,056
Zweig Equity (Small Cap) Portfolio 18,081 14,849 21,869
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
Brokerage Commissions Paid During the Fiscal Year Ended
-------------------------------------------------------
Portfolio June 30, 1994 June 30, 1995 June 30, 1996
- --------- ------------- ------------- -------------
<S> <C> <C> <C>
Morgan Stanley Asian Growth -- 96,653 75,228
Portfolio*
</TABLE>
- -----------
* Morgan Stanley Asian Growth Portfolio commenced operations on June 15, 1994.
For the fiscal years ended June 30, 1994, 1995 and 1996, the Fund paid the
following brokerage commissions with respect to each of the Portfolios to
broker-dealers who are affiliated persons of such Portfolios. Also presented
below for the fiscal year ended June 30, 1996 are the brokerage commissions
paid to such broker-dealers as a percentage of the aggregate brokerage
commissions paid by each Portfolio and as a percentage of the aggregate dollar
amount of portfolio transactions involving the payment of commissions engaged in
by such Portfolio.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1996
---------------------------------------
Brokerage Commissions
---------------------------------------
Brokerage Brokerage
Commissions Commissions As a
Paid During Paid During Percentage
the Fiscal the Fiscal As a of Portfolio
Year Ended Year Ended Percentage of Transactions
Affiliated June 30, June 30, Aggregate Involving
Broker-Dealer Portfolio 1994 ($) 1995 ($) Paid ($) Commissions Commissions
- ------------- --------- ------------- ----------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paine Webber Harris 609 9,924 5,952 19% 21%
Bretall
Sullivan &
Smith
Equity
Growth
Portfolio
Renaissance 35,977 20,241 22,836 43% 49%
Balanced
Portfolio
Dreman 12,301 7,115 4,174 28% 38%
Value
Portfolio
Zweig Asset 52 -- -- -- --
Allocation
Portfolio
Morgan Zweig Asset 18,868 16,394 51,370 70% 79%
Stanley Allocation
Portfolio
Zweig 13,079 7,589 63% 74%
Equity 13,825
(Small Cap)
Portfolio
Morgan 8,453 4,644 6% 4%
Stanley
Asian
Growth
Portfolio
Zweig Zweig Asset 1,156 594 1,199 2% 1%
Securities Allocation
Corporation Portfolio
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended June 30, 1996
---------------------------------------
Brokerage Commissions
---------------------------------------
Brokerage Brokerage
Commissions Commissions As a
Paid During Paid During Percentage
the Fiscal the Fiscal As a of Portfolio
Year Ended Year Ended Percentage of Transactions
Affiliated June 30, June 30, Aggregate Involving
Broker-Dealer Portfolio 1994 ($) 1995 ($) Paid ($) Commissions Commissions
- ------------- --------- ------------- ----------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Zweig 407 537 403 2% **
Equity
(Small Cap)
Portfolio
</TABLE>
- -----------
* Morgan Stanley did not become an affiliated person of the Fund until November
1993.
** Less than 1%
Transactions in futures contracts are executed through futures commission
merchants (FCMs) who receive brokerage commissions for their services. The
procedures in selecting FCMs to execute the Portfolios' transactions in futures
contracts, including procedures permitting the use of certain broker-dealers
that are affiliated with the Sub-Advisers, are similar to those in effect with
respect to brokerage transactions in securities.
The Sub-Advisers may select broker-dealers which provide them with research
services and may cause a Portfolio to pay such broker-dealers commissions which
exceed those other broker-dealers may have charged, if in their view the
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by the broker-dealer. Research services furnished by
brokers through which a Portfolio effects securities transactions may be used by
the Sub-Adviser in advising other funds or accounts and, conversely, research
services furnished to the Sub-Adviser by brokers in connection with other funds
or accounts the Sub-Adviser advises may be used by the Sub-Adviser in advising
such Portfolio. Information and research received from such brokers will be in
addition to, and not in lieu of, the services required to be performed by each
Sub-Adviser under the Sub-Advisory Contracts. The Portfolios may purchase and
sell portfolio securities to and from dealers who provide the Portfolio with
research services. Portfolio transactions will not be directed to dealers
solely on the basis of research services provided.
Investment decisions for each Portfolio and for other investment accounts
managed by each Sub-Adviser are made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may be made for a Portfolio and one or more of such accounts. In such
cases, simultaneous transactions are inevitable. Purchases or sales are then
allocated between the Portfolio and such other account(s) as to amount according
to a formula deemed equitable to the Portfolio and such account(s). While in
some cases this practice could have a detrimental effect upon the price or value
of the security as far as a Portfolio is concerned, or upon its ability to
complete its entire order, in other cases it is believed that coordination and
the ability to participate in volume transactions will be beneficial to the
Portfolio.
PORTFOLIO TURNOVER. For reporting purposes, a Portfolio's portfolio turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the fiscal year by the monthly average of the value of the
portfolio securities owned by the Portfolio during the fiscal year. In
determining such portfolio turnover, securities with maturities at the time of
acquisition of one year or less are excluded. Each Sub-Adviser will adjust the
Portfolio's assets as it deems advisable in view of current or anticipated
market conditions, and portfolio turnover will not be a limiting factor should
the Sub-Adviser deem it advisable for a Portfolio to purchase or sell
securities.
The options activities of a Portfolio may affect its turnover rate, the amount
of brokerage commissions paid by a Portfolio and the realization of net short-
term capital gains. High portfolio turnover involves correspondingly greater
brokerage commissions, other transaction costs, and a possible increase in
short-term capital gains or losses. See "Valuation of Shares" and "Taxes."
B-24
<PAGE>
The exercise of calls written by a Portfolio may cause the Portfolio to sell
portfolio securities, thus increasing its turnover rate. The exercise of puts
also may cause a sale of securities and increase turnover; although such
exercise is within the Portfolio's control, holding a protective put might cause
the Portfolio to sell the underlying securities for reasons which would not
exist in the absence of the put. A Portfolio will pay a brokerage commission
each time it buys or sells a security in connection with the exercise of a put
or call. Some commissions may be higher than those which would apply to direct
purchases or sales of portfolio securities.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The separate accounts of Integrity and National Integrity purchase and redeem
shares of each Portfolio on each day on which the New York Stock Exchange, Inc.
(NYSE) is open for trading (Business Day) based on, among other things, the
amount of premium payments to be invested and surrendered and transfer requests
to be effected on that day pursuant to the contracts. Currently, the NYSE is
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Such purchases
and redemptions of the shares of each Portfolio are effected at their respective
net asset values per share determined as of the close of trading (currently 4:00
p.m., New York City time) on that Business Day. Payment for redemptions is made
by the Fund within seven days thereafter. No fee is charged the separate
accounts when they purchase or redeem Portfolio shares.
The Fund may suspend redemption privileges of shares of any Portfolio or
postpone the date of payment during any period (1) when the NYSE is closed or
trading on the NYSE is restricted as determined by the SEC, (2) when an
emergency exists, as defined by the SEC, that makes it not reasonably
practicable for the Fund to dispose of securities owned by it or fairly to
determine the value of its assets or (3) as the SEC may otherwise permit. The
redemption price may be more or less than the shareholder's cost, depending on
the market value of the Portfolio's securities at the time.
VALUATION OF SHARES
The net asset value for the shares of each Portfolio will be determined on each
day the NYSE is open for trading. The net assets of each Portfolio are valued as
of the close of the NYSE, which currently is 4:00 P.M., New York City time, on
each Business Day. Each Portfolio's net asset value per share is calculated
separately.
For all Portfolios other than the Money Market Portfolio, the net asset value
per share is computed by dividing the value of the securities held by the
Portfolio plus any cash or other assets, less its liabilities, by the number of
outstanding shares of the Portfolio. Securities holdings which are traded on a
U.S. or foreign securities exchange are valued at the last sale price on the
exchange where they are primarily traded or, if there has been no sale since the
previous valuation, at the mean between the current bid and asked prices. OTC
securities for which market quotations are readily available are valued at the
mean between the current bid and asked prices. Bonds and other fixed-income
securities are valued using market quotations provided by dealers, including the
Sub-Advisers and their affiliates, and also may be valued on the basis of prices
provided by a pricing service when the Board of Directors believes that such
prices reflect the fair market value of such securities. Money market
instruments are valued at market value, except that instruments maturing in
sixty days or less are valued using the amortized cost method of valuation
described below with respect to the Money Market Portfolio. When market
quotations for options and futures positions held by the Portfolios are readily
available, those positions are valued based upon such quotations. Market
quotations are not generally available for options traded in the OTC market.
When market quotations for options and futures positions, or any other
securities or assets of the Portfolios, are not available, they are valued at
fair value as determined in good faith by or under the direction of the Fund's
Board of Directors. When practicable, such determinations are based upon
appraisals received from a pricing service using a computerized matrix system or
appraisals derived from information concerning the security or similar
securities received from recognized dealers in those securities.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolio's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by a Portfolio is recorded
as an asset and subsequently adjusted to market value.
B-25
<PAGE>
All securities quoted in foreign currencies are valued daily in U.S. dollars on
the basis of the foreign currency exchange rates prevailing at the time such
valuation is determined. Foreign currency exchange rates generally are
determined prior to the close of the NYSE. Occasionally, events affecting the
value of foreign securities and such exchange rates occur between the time at
which they are determined and the close of the NYSE, which events would not be
reflected in the computation of a Portfolio's net asset value. If events
materially affecting the value of such securities or currency exchange rates
occurred during such time period, the securities will be valued at their fair
value as determined in good faith by or under the direction of the Board of
Directors. The foreign currency exchange transactions of Morgan Stanley Asian
Growth Portfolio, Morgan Stanley Worldwide High Income Portfolio and Pinnacle
Fixed Income Portfolio conducted on a spot (i.e., cash) basis are valued at the
spot rate for purchasing or selling currency prevailing on the foreign exchange
market. This rate under normal market conditions differs from the prevailing
exchange rate in an amount generally less than one-tenth of one percent due to
the costs of converting from one currency to another.
For the Money Market Portfolio, net asset value is computed by dividing the
value of the investments and other assets minus liabilities by the number of
shares outstanding. Securities are valued using the amortized cost method of
valuation, pursuant to Rule 2a-7 under the 1940 Act. To use amortized cost to
value its portfolio securities, the Portfolio must adhere to certain conditions
under that Rule relating to its investments, some of which are discussed in the
Prospectus. Amortized cost is an approximation of market value, whereby the
difference between acquisition cost and value at maturity is amortized on a
straight-line basis over the remaining life of the instrument. The effect of
changes in the market value of a security as a result of fluctuating interest
rates is not taken into account and thus the amortized cost method of valuation
may result in the value of a security being higher or lower than its actual
market value. In the event that a large number of redemptions take place at a
time when interest rates have increased, the Portfolio might have to sell
portfolio securities prior to maturity and at a price that might not be as
desirable as the value at maturity. Cash, receivables and current payables are
generally carried at their face value.
The Fund's Board of Directors has established procedures for the purpose of
maintaining a constant net asset value of $1.00 per share for the Money Market
Portfolio, which include a review of the extent of any deviation of net asset
value per share, based on available market quotations, from the $1.00 amortized
cost per share. Should that deviation exceed 1/2 of 1%, the Directors will
promptly consider whether any action should be initiated to eliminate or reduce
material dilution or other unfair results to shareholders. Such action may
include redeeming shares in kind, selling portfolio securities prior to
maturity, reducing or withholding dividends and utilizing a net asset value per
share as determined by using available market quotations. The Money Market
Portfolio will maintain a DOLLARWEIGHTED average portfolio maturity of 90 days
or less and will not purchase any instrument with a remaining maturity greater
than 13 months, will limit portfolio investments, including repurchase
agreements, to those U.S. dollar-denominated instruments that are of high
quality and that the Directors determine present minimal credit risks as advised
by the Sub-Adviser and will comply with certain reporting and recordkeeping
procedures. There is no assurance that constant net asset per share value will
be maintained. In the event amortized cost ceases to represent fair value, the
Board will take appropriate action.
TAXES
Shares of the Portfolios are currently offered only to Integrity and National
Integrity separate accounts that fund variable annuity contracts. See the
Prospectus for the certificates for a discussion of the special taxation of
insurance companies with respect to such accounts and of the contract holders.
Each Portfolio is treated as a separate corporation for federal income tax
purposes. In order to qualify (or to continue to qualify) for treatment as a
regulated investment company (RIC) under the Code, each Portfolio must
distribute to its shareholders each taxable year at least 90% of its investment
company taxable income (consisting generally of net investment income, net
short-term capital gain and net gains from certain foreign currency
transactions) for such taxable year and must meet several additional
requirements. With respect to each Portfolio, these requirements include the
following: (1) the Portfolio must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in stock or
securities or those currencies (Income Requirement); (2) the Portfolio must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of stock or securities, or any of the following, that were
held for less than three months --options, futures or forward contracts (other
than those on foreign currencies), or foreign currencies (or options,
B-26
<PAGE>
futures or forward contracts thereon) that are not directly related to the
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) (Short-Short Limitation); (3) at the close
of each quarter of the Portfolio's taxable year, at least 50% of the value of
its total assets must be represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with these other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Portfolio's total assets and that does not
represent more than 10% of the outstanding voting securities of the issuer; (4)
at the close of each quarter of the Portfolio's taxable year, not more than 25%
of the value of its total assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer; and
(5) the Portfolio must distribute during its taxable year at least 90% of its
investment company taxable income plus 90% of its net tax-exempt interest
income, if any.
The use of hedging and related income strategies, such as writing and purchasing
options and futures contracts and entering into forward contracts, involves
complex rules that will determine for income tax purposes the character and
timing of recognition of the income received in connection therewith by each
Portfolio eligible to use such strategies. Income from the disposition of
foreign currencies (except certain gains therefrom that may be excluded by
future regulations), and income from transactions in options, futures and
forward contracts derived by a Portfolio with respect to its business of
investing in securities or foreign currencies, will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures contracts (other than those on foreign currencies) will be
subject to the Short-Short Limitation if they are held for less than three
months. Income from the disposition of foreign currencies, and options, futures
and forward contracts on foreign currencies, that are not directly related to a
Portfolio's principal business of investing in securities (or options and
futures with respect to securities) also will be subject to the Short-Short
Limitation if they are held for less than three months.
If a Portfolio satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Portfolio satisfies
the Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that Limitation. Each
Portfolio will consider whether it should seek to qualify for this treatment for
its hedging transactions. To the extent a Portfolio does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures contracts beyond the time when it otherwise would be advantageous to do
so, in order for the Portfolio to qualify or continue to qualify as a RIC.
Dividends and interest received by a Portfolio may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on that Portfolio's securities. Tax conventions
between certain countries and the United States may reduce or eliminate these
foreign taxes, however, and foreign countries generally do not impose taxes on
capital gains in respect of investments by foreign investors.
The foregoing is only a general summary of some of the important federal income
tax considerations generally affecting the Portfolios and their shareholders. No
attempt is made to present a complete explanation of the federal tax treatment
of the Portfolios' activities. See the Prospectus for the certificates for
further tax information.
YIELD AND PERFORMANCE INFORMATION
Performance information is computed separately for each Portfolio in accordance
with the formulas described below. At any time in the future, total return and
yields may be higher or lower than in the past and there can be no assurance
that any historical results will continue.
CALCULATION OF TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN. Total Return with
respect to the shares of a Portfolio is a measure of the change in value of an
investment in a Portfolio over the period covered, which assumes that any
dividends or capital gains distributions are reinvested in that Portfolio's
shares immediately rather than paid to the investor in cash. The formula for
Total Return with respect to a Portfolio's shares used herein includes four
steps: (1) adding to the total number of shares purchased by a hypothetical
$1,000 investment the number of shares which would have been purchased if all
dividends and distributions paid or distributed during the period had been
immediately reinvested; (2) calculating the value of the hypothetical initial
investment of $1,000 as of the end of the period by multiplying the total number
of shares on the last trading day of the period by the net asset value per share
on the last trading day of the period; (3) assuming redemption at the end of the
B-27
<PAGE>
period; and (4) dividing this account value for the hypothetical investor by the
initial $1,000 investment. Average Annual Total Return is measured by
annualizing Total Return over the period.
YIELD OF MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO AND PINNACLE FIXED
INCOME PORTFOLIO. Yield of the shares of each Portfolio will be computed by
annualizing net investment income, as determined by the SEC's formula,
calculated on a per share basis, for a recent 30-day period and dividing that
amount by the net asset value per share of the Portfolio on the last trading day
of that period. Net investment income will reflect amortization of any market
value premium or discount of fixed income securities (except for obligations
backed by mortgages or other assets) over such period and may include
recognition of a pro rata portion of the stated dividend rate of dividend paying
portfolio securities. The Yield of the Portfolio will vary from time to time
depending upon market conditions, the composition of the portfolio and operating
expenses allocated to the Portfolio.
YIELD OF THE MONEY MARKET PORTFOLIO. The Money Market Portfolio's Yield
quotation is based on a seven-day period and is computed by determining the net
change, exclusive of capital changes, in the value of a hypothetical account
having a balance of one share at the beginning of the period, subtracting a
hypothetical charge reflecting deductions from shareholder accounts, and
dividing the difference by the value of the account at the beginning of the base
period. The result is a base period return, which is then annualized. That is,
the amount of income generated during the seven-day period is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment.
The Effective Yield of the Money Market Portfolio is calculated similarly, but
the base period return is assumed to be reinvested. The assumed reinvestment is
calculated by adding 1 to the base period return, raising the sum to a power
equal to 365 divided by 7 and subtracting 1 from the result, according to the
following formula: Effective Yield = [(Base Period Return + 1)365/7] - 1. The
Portfolio's yield figures will be based on historical earnings and are not
intended to indicate future performance.
PERFORMANCE COMPARISONS. Each Portfolio may from time to time include the Total
Return, the Average Annual Total Return and Yield of its shares in
advertisements or in information furnished to shareholders. The Money Market
Portfolio may also from time to time include the Yield and Effective Yield of
its shares in information furnished to shareholders. Any statements of a
Portfolio's performance will also disclose the performance of the respective
separate account issuing the certificates.
Each Portfolio may from time to time also include the ranking of its performance
figures relative to such figures for groups of mutual funds categorized by
Lipper Analytical Services (Lipper) as having the same or similar investment
objectives or by similar services that monitor the performance of mutual funds.
Each Portfolio may also from time to time compare its performance to average
mutual fund performance figures compiled by Lipper in Lipper Performance
Analysis. Advertisements or information furnished to present shareholders or
prospective investors may also include evaluations of a Portfolio published by
nationally recognized ranking services and by financial publications that are
nationally recognized such as Barron's, Business Week, CDA Technologies, Inc.,
Changing Times, Consumer's Digest, Dow Jones Industrial Average, Financial
Planning, Financial Times, Financial World, Forbes, Fortune, Global Investor,
Hulbert's Financial Digest, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Funds, The New York Times, Personal Investor, Stanger's
Investment Adviser, Value Line, The Wall Street Journal, Wiesenberger Investment
Company Service and USA Today.
The performance figures described above may also be used to compare the
performance of a Portfolio's shares against certain widely recognized standards
or indices for stock and bond market performance. The following are the indices
against which the Portfolios may compare performance:
The Standard & Poor's Composite Index of 500 Stocks (the S&P 500 Index) is a
market value-weighted and unmanaged index showing the changes in the aggregate
market value of 500 stocks relative to the base period 1941-43. The S&P 500
Index is composed almost entirely of common stocks of companies listed on the
NYSE, although the common stocks of a few companies listed on the American Stock
Exchange or traded OTC are included. The 500 companies represented include 400
industrial, 60 transportation and 50 financial services concerns. The S&P 500
Index represents about 80% of the market value of all issues traded on the NYSE.
The Dow Jones Composite Average (or its component averages) is an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
B-28
<PAGE>
The New York Stock Exchange composite or component indices are unmanaged indices
of all industrial, utilities, transportation and finance company stocks listed
on the New York Stock Exchange.
The Wilshire 5000 Equity Index (or its component indices) represents the return
on the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
The Morgan Stanley Capital International EAFE Index is an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
The Morgan Stanley Capital International World Index - An arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
The Goldman Sachs 100 Convertible Bond Index currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
The Lehman Brothers Government Bond Index (the Lehman Government Index) is a
measure of the market value of all public obligations of the U.S. Treasury; all
publicly issued debt of all agencies of the U.S. Government and all quasi-
federal corporations; and all corporate debt guaranteed by the U.S. Government.
Mortgage-backed securities, flower bonds and foreign targeted issues are not
included in the Lehman Government Index.
The Lehman Brothers Government/Corporate Bond Index (the Lehman
Government/Corporate Index) is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1 million, which have at
least one year to maturity and are rated "Baa" or higher (investment grade) by a
nationally recognized statistical rating agency.
The Lehman Brothers Government/Corporate Intermediate Bond Index (the Lehman
Government/Corporate Intermediate Index) is composed of all bonds covered by the
Lehman Brothers Government/Corporate Bond Index with maturities between one and
9.99 years. Total return comprises price appreciation/depreciation and income
as a percentage of the original investment. Indexes are rebalanced monthly by
market capitalization.
The Lehman Brothers Intermediate Treasury Bond Index includes bonds with
maturities between one and ten years with a face value currently in excess of $1
million, that are rated investment grade or higher by a nationally recognized
statistical rating agency.
The Shearson Lehman Long-Term Treasury Bond Index is composed of all bonds
covered by the Shearson Lehman Hutton Treasury Bond Index with maturities of 10
years or greater.
The National Association of Securities Dealers Automated Quotation System
(NASDAQ) Composite Index covers 4,500 stocks traded over the counter. It
represents many small company stocks but is heavily influenced by about 100 of
the largest NASDAQ stocks. It is a value-weighted index calculated on price
change only and does not include income.
The NASDAQ Industrial Index is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not
include income.
The Value Line (Geometric) Index is an unweighted index of the approximately
1,700 stocks followed by the Value Line Investment Survey.
The Salomon Brothers GNMA Index includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
The Salomon Brothers' World Market Index is a measure of the return of an
equally weighted basket of short-term (three month U.S. Government securities
and bank deposits) investments in eight major currencies: the U.S. dollar,
British pound, Canadian dollar, Japanese yen, Swiss franc, French franc,
Deutsche mark and Dutch guilder.
B-29
<PAGE>
The Salomon Brothers Broad Investment-Grade Bond Index contains approximately
3,800 Treasury and agency, corporate and mortgage bonds with a rating of BBB or
higher, a stated maturity of at least one year, and a par value outstanding of
$25 million or more. The index is weighted according to the market value of all
bond issues included in the index.
The Salomon Brothers High Grade Corporate Bond Index consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
The Salomon Brothers World Bond Index measures the total return performance of
high-quality securities in major sectors of the international bond market. The
index covers approximately 600 bonds from 10 currencies: Australian dollars,
Canadian dollars, European Currency Units, French francs, Japanese yen,
Netherlands guilder, Swiss francs, UK pounds sterling, U.S. dollars, and German
deutsche marks.
The J.P. Morgan Global Government Bond Index is a total return, market
capitalization weighted index, rebalanced monthly consisting of the following
countries: Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
Netherlands, Spain, Sweden, United Kingdom and United States.
The 50/50 Index assumes a static mix of 50% of the S&P 500 Index and 50% of the
Lehman Government Corporate Index.
Other Composite Indices: 70% S&P 500 Index and 30% NASDAQ Industrial Index; 35%
S&P 500 Index and 65% Salomon Brothers High Grade Bond Index; 65% S&P Index and
35% Salomon Brothers High Grade Bond Index; 60% of the S&P 500, 30% of Lehman
Brothers Government/Corporate Bond Index, and 10% of 90-Day Treasury Bill Yield;
60% of the S&P 500 and 40% of Lehman Brothers Intermediate Treasury Bond Index;
and 50% J.P. Morgan Emerging Market Bond Index and 50% of Lehman Brothers
Aggregate Bond Index.
The SEI Median Balanced Fund Universe measures a group of funds with an average
annual equity commitment and an average annual bond - plus - private - placement
commitment greater than 5% each year. SEI must have at least two years of data
for a fund to be considered for the population.
The Russell 2000/Small Stock Index comprises the smallest 2000 stocks in the
Russell 3000 Index, and represents approximately 11% of the total U.S. equity
market capitalization. The Russell 3000 Index comprises the 3,000 largest U.S.
companies by market capitalization. The smallest company has a market value of
roughly $20 million.
The Russell 2500 Index is comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately 1.3
billion.
The Consumer Price Index (or Cost of Living Index), published by the United
States Bureau of Labor Statistics is a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
J.P. Morgan Emerging Markets Bond Index is a market weighted index composed of
all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico,
Nigeria, the Philippines, Poland and Venezuela.
Stocks, Bonds, Bills and Inflation, published by Hobson Associates, presents a
historical measure of yield, price and total return for common and small company
stocks, long-term government bonds, Treasury bills and inflation.
Savings and Loan Historical Interest Rates as published in the United States
Savings & Loan League Fact Book.
Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Shearson Lehman Hutton and Bloomberg L.P.
The MSCI Combined Far East Free ex Japan Index is a market-capitalization
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore and Thailand. Korea is included in the MSCI Combined Far
East Free ex Japan Index at 20% of its market capitalization.
B-30
<PAGE>
The First Boston High Yield Index generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
90-Day Treasury Bill Yield
In reports or other communications to shareholders, the Fund may also describe
general economic and market conditions affecting the Portfolios and may compare
the performance of the Portfolios with (1) that of mutual funds included in the
rankings prepared by Lipper or similar investment services that monitor the
performance of insurance company separate accounts or mutual funds, (2)
IBC/Donoghue's Money Fund Report, (3) other appropriate indices of investment
securities and averages for peer universe of funds which are described in this
Statement of Additional Information, or (4) data developed by the Manager or any
of the Sub-Advisers derived from such indices or averages.
OTHER INFORMATION
The Portfolios are organized as separate series of the Fund, a Maryland
corporation which was incorporated on July 22, 1992 under the name "Integrity
Series Fund, Inc."
The Fund's Articles of Incorporation authorize the Board of Directors to
classify and reclassify any and all shares which are then unissued into any
number of classes, each class consisting of such number of shares and having
such designations, powers, preferences, rights, qualifications, limitations, and
restrictions, as shall be determined by the Board, subject to the 1940 Act and
other applicable law, and provided that the authorized shares of any class shall
not be decreased below the number then outstanding and the authorized shares of
all classes shall not exceed the amount set forth in the Articles of
Incorporation, as in effect from time to time.
All of the outstanding shares of common stock of each Portfolio are owned by
Integrity's Separate Account II and by National Integrity's Separate Account II.
REGISTRATION STATEMENT. This Statement of Additional Information and the
Prospectus do not contain all the information included in the Registration
Statement filed with the Commission under the 1933 Act with respect to the
securities offered by the Prospectus. The Registration Statement, including the
exhibits filed therewith, may be examined at the office of the Commission in
Washington, D.C.
Statements contained in this Statement of Additional Information and the
Prospectus as to the contents of any contract or other document are not complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of which this
Statement of Additional Information and the Prospectus form a part, each such
statement being qualified in all respects by such reference.
COUNSEL. The law firm of Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third
Avenue, New York, New York 10022, counsel to the Fund, has passed upon the
legality of the shares offered by the Fund's Prospectus.
AUDITORS. Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas
City, Missouri 64105, serves as independent auditors for the Fund.
B-31
<PAGE>
FINANCIAL STATEMENTS OF THE FUND
Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas City,
Missouri 64105, serves as independent auditors of the Fund. Ernst & Young LLP
on an annual basis audits the financial statements prepared by Fund management
and expresses an opinion on such financial statements based on their audits.
The financial statements for the fiscal year ended June 30, 1996 included in
this SAI have been audited by Ernst & Young LLP independent auditors as stated
in their report appearing herein, and are included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
Report of Ernst & Young LLP, independent auditors B-33
Financial Statements, Financial Highlights, and Schedules of
Investments:
Statements of Assets and Liabilities as of June 30, 1996
Statements of Operations for the fiscal year ended June 30, 1996
Statements of Changes in Net Assets for the fiscal periods ended
June 30, 1996 and 1995
Financial Highlights for fiscal periods since 1993
Schedules of Investments as of June 30, 1996
Renaissance Balanced Portfolio B-34
Zweig Asset Allocation Portfolio B-42
Nicholas-Applegate Balanced Portfolio B-60
Harris Bretall Sullivan & Smith Equity Growth Portfolio B-73
Dreman Value Portfolio B-82
Zweig Equity (Small Cap) Portfolio B-95
Pinnacle (formerly Mitchell Hutchins) Fixed Income
Portfolio B-126
ARM Capital Advisors (formerly Mitchell Hutchins) Money
Market Portfolio B-134
Morgan Stanley Asian Growth Portfolio B-141
Morgan Stanley Worldwide High Income Portfolio B-152
Notes to Financial Statements B-162
B-32
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
The Legends Fund, Inc.
We have audited the accompanying statements of assets and liabilities of The
Legends Fund, Inc. (the Fund) (comprised of the Renaissance Balanced, Zweig
Asset Allocation, Nicholas Applegate Balanced, Harris Bretall Sullivan & Smith
Equity Growth, Dreman Value, Zweig Equity (Small Cap), Pinnacle Fixed Income,
ARM Capital Advisors Money Market, Morgan Stanley Asian Growth and Morgan
Stanley Worldwide High Income portfolios), including the schedules of
investments, as of June 30, 1996, the related statements of operations for the
year then ended and statements of changes in net assets for each of the two
years in the period then ended and financial highlights for the periods since
June 30, 1993. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the period ended June 30, 1993 were audited
by other auditors whose report thereon dated August 30, 1993 expressed an
unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1996, by correspondence with the custodian. As to incompleted securities
transactions, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above and financial
highlights for the periods since June 30, 1993 present fairly, in all material
respects, the financial position of each of the portfolios constituting The
Legends Fund, Inc. at June 30, 1996 and the results of their operations for the
year then ended, changes in their net assets for each of the two years in the
period then ended, and financial highlights for the periods since June 30, 1993,
in conformity with generally accepted accounting principles.
/s/Ernst & Young LLP
Kansas City, Missouri
August 16, 1996
2
<PAGE>
Renaissance Balanced Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $25,714,901)
(Note l)-See accompanying schedule $26,983,102
Dividends and interest receivable 168,760
-----------
TOTAL ASSETS 27,151,862
LIABILITIES
Cash overdraft 11,251
Accounts payable and accrued expenses 37,258
-----------
TOTAL LIABILITIES 48,509
-----------
NET ASSETS $27,103,353
===========
Net Assets consist of:
Paid-in capital $22,403,239
Undistributed net investment income 758,801
Accumulated undistributed net realized gain on investments 2,673,112
Net unrealized appreciation on investment securities 1,268,201
-----------
NET ASSETS, for 2,139,600 shares outstanding $27,103,353
===========
NET ASSET VALUE, offering and redemption price per share $ 12.67
===========
</TABLE>
See accompanying notes.
3
<PAGE>
Renaissance Balanced Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 217,318
Interest 825,185
----------
Total investment income 1,042,503
EXPENSES (Note 2)
Investment advisory and management fees 183,375
Custody and accounting fees 74,036
Professional fees 15,859
Directors' fees and expenses 6,000
Other expenses 4,432
----------
Total expenses 283,702
----------
Net investment income 758,801
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 2,972,263
Change in unrealized appreciation on investment securities (423,724)
----------
Net gain on investments 2,548,539
----------
Net increase in net assets resulting from operations $3,307,340
==========
</TABLE>
See accompanying notes.
4
<PAGE>
Renaissance Balanced Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 758,801 $ 915,608
Net realized gain (loss) on investments 2,972,263 (299,151)
Change in net unrealized appreciation (423,724) 2,638,834
--------------------------
Net increase in net assets resulting from
operations 3,307,340 3,255,291
Distributions to shareholders from:
Net investment income (914,654) (423,397)
Net realized gain -- (82,603)
--------------------------
Total distributions to shareholders (914,654) (506,000)
Capital share transactions:
Proceeds from sales of shares 3,559,180 6,487,456
Proceeds from reinvested distributions 914,654 506,000
Cost of shares redeemed (6,795,362) (7,756,946)
--------------------------
Net decrease in net assets resulting from
share transactions (2,321,528) (763,490)
--------------------------
Total increase in net assets 71,158 1,985,801
NET ASSETS
Beginning of period 27,032,195 25,046,394
--------------------------
End of period (including undistributed net
investment income of $758,801 and
$914,654, respectively) $27,103,353 $27,032,195
==========================
OTHER INFORMATION
Shares:
Sold 286,131 603,427
Issued through reinvestment of distributions 74,583 47,019
Redeemed (548,725) (731,529)
--------------------------
Net decrease (188,011) (81,083)
==========================
</TABLE>
See accompanying notes.
5
<PAGE>
Renaissance Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
----------------------------- THROUGH JUNE 30,
1996 1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 11.61 $ 10.40 $ 10.42 $10.00
Income from investment operations:
Net investment income 0.36 0.42 0.20 0.13
Net realized and unrealized gain
(loss) on investments 1.10 0.99 (0.11) 0.29
-------------------------------------------------
Total from investment operations 1.46 1.41 0.09 0.42
Less distributions:
From net investment income (0.40) (.17) (0.11) -
From net realized gain - (.03) - -
-------------------------------------------------
Total distributions (0.40) (.20) (0.11) -
-------------------------------------------------
Net asset value, end of period $ 12.67 $ 11.61 $ 10.40 $10.42
=================================================
TOTAL RETURN (A) 12.68% 13.71% 0.73% 7.70%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in
thousands) $27,103 $27,032 $25,046 $7,799
Ratio of expenses to average net
assets (C) 1.01% 0.96% 1.06% 1.24%
Ratio of net investment income to
average net assets (C) 2.69% 3.53% 2.72% 2.36%
Portfolio turnover rate 107% 71% 85% 29%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 2.95% and 0.65%, respectively,
for the period December 14, 1992 (commencement of operations) through June
30, 1993. (Note 2)
6
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (40.4%)
APPAREL & OTHER TEXTILE PRODUCTS (2.0%)
Liz Claiborne, Inc. 15,300 $ 529,763
BUSINESS SERVICES (2.0%)
HBO & Company 8,000 541,000
CHEMICALS & ALLIED PRODUCTS (6.1%)
Bristol-Meyers Squibb Company 6,500 585,000
Morton International, Inc. 15,800 588,550
Rohm & Haas Company 7,600 476,900
---------
1,650,450
DEPOSITORY INSTITUTIONS (1.9%)
First Chicago NBD Corporation 12,985 508,038
EATING & DRINKING PLACES (2.4%)
Pepsico, Inc. 18,200 643,822
ELECTRIC, GAS & SANITARY SERVICES (2.1%)
Williams Companies, Inc. 11,300 559,350
ENGINEERING & MANAGEMENT SERVICES (2.0%)
Halliburton Company 9,900 549,450
FURNITURE & FIXTURES (2.0%)
Leggett & Platt, Inc. 19,300 535,575
HOTELS & OTHER LODGING PLACES (2.5%)
Hilton Hotels Corporation 6,000 675,000
</TABLE>
7
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINE & EQUIPMENT (3.8%)
Ingersoll-Rand Company 13,000 $ 568,750
Seagate Technology, Inc.* 10,400 468,000
----------
1,036,750
INSTRUMENTS & RELATED PRODUCTS (1.6%)
KLA Instruments Corporation* 18,600 431,288
INSURANCE CARRIERS (4.4%)
Lowes Corporation 7,700 607,338
Travelers Group, Inc. 12,950 590,844
----------
1,198,182
MISCELLANEOUS RETAIL (2.0%)
Staples, Inc.* 28,000 544,250
TRANSPORTATION BY AIR (1.8%)
Northwest Airlines Corporation* 12,200 481,138
WHOLESALE TRADE - DURABLE GOODS (1.6%)
Arrow Electronics, Inc.* 10,200 439,875
WHOLESALE TRADE - NONDURABLE GOODS (2.2%)
Nike, Inc. 5,700 585,675
----------
TOTAL COMMON STOCKS (Cost $9,826,898) 10,909,606
</TABLE>
8
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------------------------
<S> <C> <C>
LONG-TERM DEBT SECURITIES (40.2%)
U.S. GOVERNMENT OBLIGATIONS (40.2%)
U.S. Treasury Notes, 5.75%, due 8/15/2003 $ 535,000 $ 509,502
U.S. Treasury Notes, 5.875%, due 2/15/2004 1,035,000 989,232
U.S. Treasury Notes, 6.50%, due 5/15/2005 700,000 690,809
U.S. Treasury Notes, 6.875%, due 5/15/2006 3,350,000 3,387,152
U.S. Treasury Notes, 7.25%, due 5/15/2004 1,835,000 1,901,225
U.S. Treasury Notes, 7.25%, due 8/15/2004 2,475,000 2,563,556
U.S. Treasury Notes, 7.875%, due 11/15/2004 745,000 800,756
TOTAL LONG-TERM DEBT SECURITIES (Cost $10,656,739) 10,842,232
SHORT-TERM SECURITIES (19.4%)
REPURCHASE AGREEMENT (1.0%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $281,875) 273,401 273,401
U.S. GOVERNMENT AGENCY-COLLATERALIZED MORTGAGE
OBLIGATIONS (3.3%)
Federal Home Loan Mortgage Corp., 5.85%, due
8/26/1996 910,000 902,710
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (4.0%)
Federal National Mortgage Assoc., 5.25%,
due 7/02/1996 1,070,000 1,069,845
</TABLE>
9
<PAGE>
Renaissance Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (CONTINUED)
U.S. GOVERNMENT OBLIGATIONS (11.1%)
Federal Home Loan Bank Disc. Note, 6.00%,
due 11/25/1996 $1,525,000 $ 1,491,747
U.S. Treasury Bills, 5.01%, due 8/1/1996 1,500,000 1,493,561
-----------
2,985,308
TOTAL SHORT-TERM SECURITIES (Cost $5,231,264) 5,231,264
-----------
TOTAL INVESTMENTS (100.00%) (Cost $25,714,901) $26,983,102
===========
</TABLE>
*Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $27,265,594 and $31,988,479 respectively.
Net unrealized appreciation for tax purposes aggregated $1,268,201, of which
$1,892,231 related to appreciated investment securities and $624,030 related
to depreciated investment securities. The aggregate cost of securities is the
same for book and tax purposes.
See accompanying notes.
10
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $37,251,772)
(Note l)-See accompanying schedule $40,232,663
Cash 16,217
Dividends, interest and other receivables 31,782
-----------
TOTAL ASSETS 40,280,662
LIABILITIES
Accounts payable and accrued expenses 58,764
-----------
TOTAL LIABILITIES 58,764
-----------
NET ASSETS $40,221,898
===========
Net Assets consist of:
Paid-in capital $32,264,100
Undistributed net investment income 610,426
Accumulated undistributed net realized gain on investment
securities and futures contracts 4,447,909
Net unrealized appreciation on investment securities and
futures contracts 2,899,463
-----------
NET ASSETS, for 2,850,008 shares outstanding $40,221,898
===========
NET ASSET VALUE, offering and redemption price per share $14.11
===========
</TABLE>
See accompanying notes.
11
<PAGE>
Zweig Asset Allocation Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 683,324
Interest 421,989
-----------
Total investment income 1,105,313
EXPENSES (Note 2)
Investment advisory and management fees 355,357
Custody and accounting fees 103,664
Professional fees 15,859
Directors' fees and expenses 6,000
Other expenses 14,007
-----------
Total expenses 494,887
-----------
Net investment income 610,426
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized gain (loss) on:
Investment securities 4,727,851
Futures contracts (35,836)
-----------
Net realized gain 4,692,015
Change in unrealized appreciation (depreciation) on:
Investment securities (1,195,635)
Futures contracts (85,708)
-----------
Change in unrealized appreciation (1,281,343)
-----------
Net gain on investments 3,410,672
-----------
Net increase in net assets resulting from operations $ 4,021,098
===========
</TABLE>
See accompanying notes.
12
<PAGE>
<TABLE>
<CAPTION>
Zweig Asset Allocation Portfolio
Statement of Changes in Net Assets
YEAR ENDED JUNE 30,
1996 1995
-------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 610,426 $ 947,151
Net realized gain (loss) on investments 4,692,015 (80,477)
Change in net unrealized appreciation (1,281,343) 3,944,541
------------------------
Net increase in net assets resulting from
operations 4,021,098 4,811,215
Distributions to shareholders from:
Net investment income (946,985) (248,100)
Capital share transactions:
Proceeds from sales of shares 4,764,144 7,443,090
Proceeds from reinvested distributions 946,985 248,100
Cost of shares redeemed (5,299,505) (7,081,317)
------------------------
Net increase in net assets resulting from share
transactions 411,624 609,873
------------------------
Total increase in net assets 3,485,737 5,172,988
NET ASSETS
Beginning of period 36,736,161 31,563,173
------------------------
End of period (including undistributed net investment
income of $610,426 and $946,985, respectively) $40,221,898 $36,736,161
========================
OTHER INFORMATION
Shares:
Sold 345,159 640,047
Issued through reinvestment of distributions 71,107 21,399
Redeemed (386,701) (598,871)
------------------------
Net increase 29,565 62,575
========================
</TABLE>
See accompanying notes.
13
<PAGE>
Zweig Asset Allocation Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------------------- THROUGH JUNE 30,
1996 1995 1994 1993
------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 13.02 $ 11.44 $ 10.81 $10.00
Income from investment operations:
Net investment income 0.21 0.33 0.10 0.08
Net realized and unrealized gain on
investments 1.21 1.33 0.58 0.73
------------------------------------------------
Total from investment operations 1.42 1.66 0.68 0.81
Less distributions:
From net investment income (0.33) (0.08) (0.05) -
------------------------------------------------
Net asset value, end of period $ 14.11 $ 13.02 $ 11.44 $10.81
================================================
TOTAL RETURN (A) 11.06% 14.57% 6.27% 14.86%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in
thousands) $40,222 $36,736 $31,563 $3,856
Ratio of expenses to average net
assets (C) 1.25% 1.20% 1.39% 1.51%
Ratio of net investment income to
average net assets (C) 1.55% 2.73% 1.67% 1.40%
Portfolio turnover rate 105% 45% 101% 12%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 4.87% and (1.17%), respectively,
for the period December 14, 1992 (commencement of operations) through June
30, 1993. (Note 2)
14
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (87.8%)
AGRICULTURAL PRODUCTION-CROPS (0.5%)
RJR Nabisco Holdings Corporation 6,200 $ 192,200
APPAREL AND ACCESSORY STORES (1.0%)
Ross Stores, Inc. 11,200 389,900
BUSINESS SERVICES (0.7%)
Comdisco, Inc. 5,600 149,100
Computervision Corporation* 5,000 50,000
Radius, Inc.* 45 121
Teradyne, Inc.* 4,200 72,450
----------
271,671
CHEMICALS AND ALLIED PRODUCTS (4.4%)
Albemarle Corporation 7,200 131,400
B.F. Goodrich Company 3,500 130,813
Cabot Corporation 1,000 24,500
Cytec Industries, Inc.* 2,200 188,100
Imperial Chemical Industries Plc 3,800 186,675
International Specialty Products, Inc. 4,500 49,500
Norsk Hydro 2,600 127,075
Olin Corporation 3,100 276,675
Rohm & Haas Company 2,800 175,700
Terra Industries, Inc. 13,800 170,775
Union Carbide Corporation 7,900 314,025
----------
1,775,238
</TABLE>
15
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COAL MINING (0.1%)
Zeigler Coal Holding Company 2,500 $ 40,000
COMMUNICATIONS (1.4%)
Sprint Corporation 5,100 214,200
Tele Danmark 6,800 172,550
Telefonica de Espana 2,900 159,863
--------
546,613
DEPOSITORY INSTITUTIONS (12.9%)
Ahmanson (H.F.) & Company 6,900 186,300
Allied Irish Banks 100 3,113
Bank of Boston Corporation 9,200 455,400
Bankamerica Corporation 2,900 219,675
Bankunited Financial Corporation* 5,200 39,000
Cal Fed Bancorp, Inc.* 7,300 133,225
Chase Manhattan Corporation 8,104 572,345
City National Corporation 13,500 212,625
Coast Savings Financial* 1,500 49,125
Crestar Financial Corporation 400 21,350
Dime Bancorp, Inc.* 7,500 97,500
First American Corporation 3,800 160,312
First Union Corporation 4,600 280,025
Great Western Financial 7,300 174,287
Hibernia Corporation 3,500 38,063
Imperial Bancorp* 8,000 193,000
Leader Financial Corporation 3,600 160,200
Long Island Bancorp, Inc. 6,800 207,825
Nationsbank Corporation 1,800 148,725
</TABLE>
16
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (12.9%)(CONTINUED)
North Fork Bancorporation 1,700 $ 44,413
Peoples Bank Bridgeport 8,300 185,194
Peoples Heritage Financial Group, Inc. 7,900 161,456
RCSB Financial, Inc. 8,000 206,500
Republic New York Corporation 2,600 161,850
Riggs National Corporation 13,300 162,094
TCF Financial Corporation 5,200 172,900
T R Financial Corporation 6,100 166,606
Unionbancal Corporation 4,600 242,650
Wells Fargo & Company 500 119,437
Zions Bancorporation 2,700 197,269
----------
5,172,464
EATING AND DRINKING PLACES (0.5%)
Foodmaker, Inc.* 23,100 199,238
ELECTRIC, GAS AND SANITARY SERVICES (18.4%)
Allegheny Power System, Inc. 5,400 166,725
American Electric Power 4,000 170,500
American Water Works, Inc. 3,000 120,750
Atlantic Energy, Inc. 4,000 73,000
Baltimore Gas & Electric 6,100 173,087
Boston Edison Company 5,800 147,900
Central Maine Power 7,200 104,400
Columbia Gas System 10,500 547,312
DTE Energy Company 5,600 172,900
Dominion Resources, Inc. 4,500 180,000
Eastern Enterprises 4,500 149,625
</TABLE>
17
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS AND SANITARY SERVICES (18.4%)(CONTINUED)
Edison International 9,500 $167,437
E1 Paso Natural Gas Company 4,900 188,650
Entergy Corporation 7,700 218,488
General Public Utilities Corporation 5,800 204,450
Idaho Power Company 5,400 168,075
Illinova Corporation 10,900 313,375
IPALCO Enterprises, Inc. 7,200 189,000
Long Island Lighting Company 10,800 180,900
MCN Corporation 8,200 199,875
MidAmerican Energy Company 10,200 175,950
New England Electric System 3,300 120,037
New York State Electric & Gas 5,400 131,625
Noram Energy Corporation 15,100 164,213
Northern States Power 3,300 162,937
Oneok, Inc. 2,700 67,500
Pacific Gas & Electric 6,300 146,475
Peoples Energy Corporation 6,000 201,000
Pinnacle West Corporation 16,800 510,300
Portland General Corporation 4,900 151,288
PowerGen Plc 5,800 172,550
Public Service Company of Colorado 3,300 121,275
Public Service Company of New Mexico* 8,700 178,350
Rochester Gas & Electric 3,700 79,550
Texas Utilities Company 4,000 171,000
Tucson Electric Power Company* 6,000 81,000
Unicom Corporation 8,800 245,300
United Illuminating Company 4,500 168,188
Utilicorp United, Inc. 5,600 154,700
</TABLE>
18
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS AND SANITARY SERVICES (18.4%)(CONTINUED)
Washington Water Power Company 1,900 $ 35,388
Westcoast Energy, Inc. 9,300 139,500
Western Resource 6,200 185,225
---------
7,399,800
ELECTRONIC AND OTHER ELECTRIC EQUIPMENT (2.2%)
Advanced Semiconductor* 9,300 99,975
Ameridata Technologies, Inc.* 10,600 168,275
Burr-Brown Corporation* 7,600 132,050
Cypress Semiconductor Corporation* 5,000 60,000
Electro Scientific Industries, Inc.* 4,100 84,562
Hadco Corporation* 8,200 174,250
Silicon Valley Group, Inc.* 7,900 148,619
---------
867,731
ENGINEERING AND MANAGEMENT SERVICES (0.03%)
Bet Plc 900 12,712
FABRICATED METAL PRODUCTS (0.4%)
Wyman-Gordon Company* 8,200 145,037
FOOD AND KINDRED PRODUCTS (1.8%)
Archer Daniels Midland Company 7,792 149,022
IBP,Inc. 20,600 569,075
---------
718,097
</TABLE>
19
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD STORES (0.3%)
Great Atlantic & Pacific Tea Company 1,100 $ 36,163
Smith's Food & Drug Centers 2,959 70,646
--------
106,809
FORESTRY (0.5%)
Rayonier, Inc. 5,200 197,600
GENERAL BUILDING CONTRACTORS (0.7%)
Empresas ICA Sociedad Controladora 14,300 198,412
U.S. Home Corporation* 3,600 88,650
--------
287,062
GENERAL MERCHANDISE STORES (1.1%)
Carson Pirie Scott & Company* 1,000 26,750
Equitable of Iowa Companies 1,600 56,800
Mercantile Stores Company, Inc. 2,600 152,425
Shopko Stores, Inc. 1,700 27,413
Waban, Inc.* 7,600 181,450
--------
444,838
HEALTH SERVICES (1.3%)
Maxicare Health Plans, Inc.* 7,600 144,875
Ornda Healthcorp* 9,700 232,800
Universal Health Services* 6,200 161,975
--------
539,650
</TABLE>
20
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOLDING AND OTHER INVESTMENT OFFICES (0.7%)
CWM Mortgage Holdings, Inc. 10,100 $ 171,700
Thornburg Mortgage Asset Corporation 6,800 110,500
---------
282,200
INDUSTRIAL MACHINERY AND EQUIPMENT (5.5%)
Agco Corporation 11,200 310,800
Applied Magnetics Corporation* 8,300 87,150
Case Corporation 6,400 307,200
Data General Corporation* 11,100 144,300
Digital Equipment* 2,000 90,000
Global Industries Technology, Inc.* 5,200 83,200
Harris Corporation 4,100 250,100
Innovex, Inc. 12,200 211,975
International Business Machines Corporation 3,900 386,100
Kulicke & Soffa Industries* 2,900 42,050
Parker Hannifin Corporation 3,800 161,025
Tecumseh Products Company 800 43,200
Toro Company 2,700 89,437
---------
2,206,537
INSTRUMENTS AND RELATED PRODUCTS (1.0%)
ICN Pharmaceuticals 7,800 181,350
Measurex Corporation 6,700 195,975
---------
377,325
</TABLE>
21
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (7.2%)
Ace, Ltd. 4,300 $ 202,100
Ambac, Inc. 2,200 114,675
American Bankers Insurance Group, Inc. 4,000 175,000
American Financial Group, Inc. 3,100 93,388
Arbatax International, Inc.* 4,750 24,047
Capital Re Corporation 600 22,050
Conseco, Inc. 4,800 192,000
Delphi Financial Group, Inc.* 5,800 155,150
Exel Limited 2,400 169,200
Equitable Companies, Inc. 6,900 171,638
Fremont General Corporation 3,800 87,400
Loews Corporation 4,200 331,275
Old Republic International 600 12,900
Penncorp Financial Group, Inc. 3,200 101,600
Pioneer Financial Services, Inc. 2,400 39,900
Presidential Life Corporation 6,700 69,094
Providian Corporation 4,000 171,500
Reliance Group Holdings, Inc. 15,400 115,500
Reliastar Financial Corporation 700 30,187
Safeco Corporation 4,800 170,100
TIG Holdings, Inc. 5,500 159,500
Travelers Group, Inc. 2,400 109,500
Twentieth Century Industries 3,500 58,187
United Insurance Companies 4,600 104,362
Vesta Insurance Group, Inc. 2,800 93,450
---------
2,973,703
</TABLE>
22
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
METAL MINING (1.6%)
Asarco, Inc. 5,400 $149,175
Cyprus Amax Minerals Company 4,800 108,600
Freeport McMoran, Inc. 4,800 170,400
Phelps Dodge 3,200 199,600
--------
627,775
MISCELLANEOUS RETAIL (0.8%)
Jack Eckerd Corporation* 7,800 176,475
Revco Drug Stores, Inc.* 6,900 164,738
--------
341,213
NONDEPOSITORY INSTITUTIONS (0.8%)
AT&T Capital Corporation 3,900 170,625
Finova Group, Inc. 300 14,625
Textron, Inc. 1,500 119,812
--------
305,062
OIL & GAS DISTRACTION (0.09%)
BJ Services Company Warrants* 340 4,505
USX-Marathon Group, Inc. 1,500 30,188
--------
34,693
PAPER AND ALLIED PRODUCTS (3.3%)
Abitibi Price, Inc. 4,900 66,762
Boise Cascade Corporation 6,300 230,738
Bowater, Inc. 4,500 169,312
Consolidated Papers, Inc. 3,400 176,800
International Paper Company 10,677 393,714
</TABLE>
23
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PAPER AND ALLIED PRODUCTS (3.3%)(CONTINUED)
Longview Fibre Company 1,300 $ 22,100
Mercer International, Inc.* 6,300 84,263
Westvaco Corporation 6,400 191,200
----------
1,334,889
PETROLEUM AND COAL PRODUCTS (2.8%)
Coastal Corporation 8,700 363,225
Elf Aquitane 3,400 124,950
Repsol S.A. 8,100 281,475
Tesoro Petroleum Corporation* 5,800 66,700
Texaco, Inc. 2,000 167,750
Valero Energy Corporation 4,300 107,500
----------
1,111,600
PRIMARY METAL INDUSTRIES (2.4%)
AK Steel Holding Corporation 3,300 129,112
Alumax, Inc.* 8,400 255,150
British Steel Plc 4,600 116,725
Mueller Industries, Inc.* 800 33,200
Quanex Corporation 3,600 85,050
Reynolds Metals Company 4,800 250,200
USX-U.S. Steel Company 3,800 107,825
----------
977,262
RAILROAD TRANSPORTATION (0.4%)
Canadian Pacific, Ltd. 7,800 171,600
</TABLE>
24
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS (0.4%)
Goodyear Tire & Rubber Company 3,500 $ 168,875
SECURITY AND COMMODITY BROKERS (3.4%)
AG Edwards, Inc. 5,100 138,338
Alex Brown, Inc. 3,600 203,400
Bear Stearns Companies, Inc. 6,615 156,279
BHC Financial, Inc. 8,100 112,388
Lehman Brothers Holdings 9,500 235,125
Morgan Stanley Group 3,400 167,025
Quick & Reilly Group, Inc. 5,000 162,500
Salomon, Inc. 4,700 206,800
----------
1,381,855
STONE, CLAY & GLASS PRODUCTS (1.4%)
Hanson Plc 11,800 168,150
LaFarge Corporation 3,000 60,750
Lone Star Industries* 3,300 110,963
Owens-Illinois, Inc.* 4,600 73,600
Schuller Corporation* 14,900 154,587
----------
568,050
TRANSPORATION EQUIPMENT (0.9%)
Chrysler Corporation 1,901 117,862
Dana Corporation 1,700 52,700
Volvo AB 8,800 199,100
----------
369,662
</TABLE>
25
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION BY AIR (4.6%)
AMR Corporation* 2,400 $ 218,400
Alaska Airgroup, Inc.* 9,100 249,112
America West Airlines, Inc.* 10,700 235,400
British Airways Plc 1,700 145,775
Continental Airlines* 4,100 253,175
Delta Airlines 3,600 298,800
KLM Royal Dutch Air 3,900 123,825
Northwest Airlines Corporation* 4,000 157,750
US Air Group, Inc.* 9,500 171,000
-----------
1,853,237
WATER TRANSPORTATION (0.6%)
Stolt-Nielsen S.A. 9,200 165,025
Transportacion Maritima Mexicana S.A. 9,000 66,375
-----------
231,400
WHOLESALE TRADE-DURABLE GOODS (0.9%)
Arrow Electronics, Inc.* 3,200 138,000
Avnet, Inc. 3,000 126,375
Marshall Industries* 2,000 56,000
Wyle Electronics 1,000 33,125
-----------
353,500
WHOLESALE TRADE-NONDURABLE GOODS (0.8%)
Caraustar Industries, Inc. 6,200 165,850
Foxmeyer Health Corporation* 10,200 151,725
Swedish Match AB* 580 17,980
-----------
335,555
-----------
TOTAL COMMON STOCKS (Cost $32,331,762) 35,312,653
</TABLE>
26
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (12.2%)
U.S. GOVERNMENT AGENCY (5.1%)
Federal National Mortgage Assoc. Discount Note,
5.28%, due 7/30/1996 $ 2,050,000 $ 2,041,281
U.S. GOVERNMENT AGENCY-COLLATERALIZED MORTGAGE
OBLIGATIONS (5.2%)
Fed. Home Loan Mort. Corp., 5.26%, due 7/15/1996 2,100,000 2,095,704
U.S. GOVERNMENT OBLIGATIONS (1.3%)
U.S. Treasury Bills, 4.85%, due 7/5/1996 50,000 49,973
U.S. Treasury Bills, 4.89%, due 7/5/1996 25,000 24,986
U.S. Treasury Bills, 4.91%, due 7/5/1996 50,000 49,973
U.S. Treasury Bills, 4.935%, due 7/5/1996 85,000 84,953
U.S. Treasury Bills, 5.045%, due 8/29/1996 300,000 297,520
-----------
507,405
REPURCHASE AGREEMENT (0.6%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $281,875) 275,620 275,620
-----------
TOTAL SHORT-TERM SECURITIES (Cost $4,920,010) 4,920,010
-----------
TOTAL INVESTMENTS (100.0%) (Cost $37,251,772) $40,232,663
===========
</TABLE>
27
<PAGE>
Zweig Asset Allocation Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
FUTURES CONTRACTS
CONTRACT
EXPIRATION AMOUNT AT UNREALIZED
DATE VALUE LOSS
------------------------------------
<S> <C> <C> <C>
28 S&P 500 Futures
Contracts-Short+ 9/19/96 $9,475,200 $ (81,428)
========================
</TABLE>
+ The above futures contracts are collateralized by a U.S. Treasury Bill at
$210,000 par value, due 7/5/96 and a U.S. Treasury Bill at $300,000 par value,
due 8/29/96.
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $40,041,080 and $33,306,468, respectively.
Net unrealized appreciation for tax purposes aggregated $2,973,912 of which
$4,054,379 related to appreciated investment securities and $1,080,467 related
to depreciated investment securities. The aggregate cost of securities is
$37,258,751 for tax purposes.
See accompanying notes.
28
<PAGE>
<TABLE>
Nicholas-Applegate Balanced Portfolio
Statement of Assets and Liabilities
June 30, 1996
ASSETS
<S> <C>
Investment in securities, at value (cost $44,832,576)
(Note l)-See accompanying schedule $49,827,401
Cash 38,746
Receivable for investment securities sold 348,151
Dividends, interest and other receivables 256,368
-----------
TOTAL ASSETS 50,470,666
LIABILITIES
Payable for investment securities purchased 948,639
Accounts payable and accrued expenses 59,250
-----------
TOTAL LIABILITIES 1,007,889
-----------
NET ASSETS $49,462,777
===========
Net Assets consist of:
Paid-in capital $39,069,844
Undistributed net investment income 924,428
Accumulated undistributed net realized gain on investments 4,473,680
Net unrealized appreciation on investment securities 4,994,825
-----------
NET ASSETS, for 3,374,014 shares outstanding $49,462,777
===========
NET ASSET VALUE, offering and redemption price per share $ 14.66
===========
</TABLE>
See accompanying notes.
29
<PAGE>
<TABLE>
<CAPTION>
Nicholas-Applegate Balanced Portfolio
Statement of Operations
Year Ended June 30, 1996
<S> <C>
INVESTMENT INCOME
Dividends $ 275,313
Interest 1,119,604
----------
Total investment income 1,394,917
EXPENSES (Note 2)
Investment advisory and management fees 312,334
Custody and accounting fees 126,094
Professional fees 15,859
Directors' fees and expenses 6,000
Other expenses 10,202
----------
Total expenses 470,489
----------
Net investment income 924,428
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 6,092,935
Change in unrealized appreciation on investment securities (1,004,611)
----------
Net gain on investments 5,088,324
----------
Net increase in net assets resulting from operations $6,012,752
==========
</TABLE>
See accompanying notes.
30
<PAGE>
Nicholas-Applegate Balanced Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 924,428 $ 936,566
Net realized gain (loss) on investments 6,092,935 (283,310)
Change in net unrealized appreciation
(depreciation) (1,004,611) 6,479,460
--------------------------
Net increase in net assets resulting from
operations 6,012,752 7,132,716
Distributions to shareholders from:
Net investment income (935,896) (386,000)
Capital share transactions:
Proceeds from sales of shares 5,298,577 7,522,637
Proceeds from reinvested distributions 935,896 386,000
Cost of shares redeemed (7,629,163) (8,232,738)
--------------------------
Net decrease in net assets resulting from share
transactions (1,394,690) (324,101)
--------------------------
Total increase in net assets 3,682,166 6,422,615
NET ASSETS
Beginning of period 45,780,611 39,357,996
--------------------------
End of period (including undistributed net investment
income of $924,428 and $935,896, respectively) $49,462,777 $45,780,611
==========================
OTHER INFORMATION
Shares:
Sold 380,150 641,113
Issued through reinvestment of distributions 68,284 32,590
Redeemed (550,111) (689,568)
--------------------------
Net decrease (101,677) (15,865)
==========================
</TABLE>
See accompanying notes.
31
<PAGE>
Nicholas-Applegate Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 3,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
----------------------------- THROUGH JUNE 30,
1996 1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 13.17 $ 11.27 $ 11.50 $10.00
Income from investment operations:
Net investment income 0.27 0.27 0.09 0.11
Net realized and unrealized gain
(loss) on investments 1.49 1.74 (0.29) 1.39
-------------------------------------------------
Total from investment operations 1.76 2.01 (0.20) 1.50
Less distributions:
From net investment income (0.27) (0.11) (0.03) --
-------------------------------------------------
Net asset value, end of period $ 14.66 $ 13.17 $ 11.27 $11.50
=================================================
TOTAL RETURN (A) 13.53% 17.92% (1.70%) 26.07%
RATIOS AND SUPPLEMENTAL DATA (B)
Net Assets, end of period (in
thousands) $49,463 $45,781 $39,358 $5,567
Ratio of expenses to average net
assets (C) 0.98% 0.94% 1.03% 1.25%
Ratio of net investment income to
average net assets (C) 1.92% 2.20% 1.69% 1.70%
Portfolio turnover rate 127% 108% 56% 21%
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 3.87% and (0.72%), respectively,
for the period December 3, 1992 (commencement of operations) through June
30, 1993. (Note 2)
32
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (63.5%)
AMUSEMENT & RECREATION SERVICES (0.5%)
Grand Casinos, Inc.* 8,850 $ 227,888
APPAREL & ACCESSORY STORES (1.3%)
Gap, Inc. 10,900 350,163
Ross Stores, Inc. 9,200 320,275
----------
670,438
APPAREL & OTHER TEXTILE PRODUCTS (0.7%)
Liz Claiborne, Inc. 10,500 363,563
BUSINESS SERVICES (12.9%)
Adaptec, Inc.* 7,200 340,650
America Online, Inc.* 5,700 248,663
BMC Software, Inc.* 5,800 345,825
Cadence Design Systems, Inc.* 11,550 389,813
Cisco Systems, Inc.* 9,000 510,188
Computer Associates International, Inc. 5,760 410,400
GTECH Holdings Corporation* 9,700 287,363
HBO & Company 7,400 500,425
McAfee Associated, Inc.* 9,300 456,281
Microsoft Corporation* 3,200 384,200
Oracle Corporation 8,300 327,331
Parametric Technologies, Inc.* 6,700 290,194
Peoplesoft, Inc.* 6,000 426,750
</TABLE>
33
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES (12.9%)(CONTINUED)
Primark Corporation 6,700 $ 218,588
Rational Software Corporation* 5,700 307,444
Structural Dynamics Research* 11,400 249,375
Sun Microsystems, Inc.* 12,400 730,050
----------
6,423,540
CHEMICALS & ALLIED PRODUCTS (1.7%)
Jones Medical Industries, Inc. 8,850 292,603
Medeva Plc 18,500 286,750
Watson Pharmaceutical, Inc.* 7,700 291,638
----------
870,991
COMMUNICATIONS (0.7%)
LCI International, Inc.* 10,500 329,438
DEPOSITORY INSTITUTIONS (2.4%)
MBNA Corporation 10,100 287,850
Nationsbank Corporation 1,700 140,463
Standard Federal Bancorporation 3,300 127,050
TCF Financial Corporation 9,600 319,200
Zions Bancorporation 4,100 299,556
----------
1,174,119
EATING & DRINKING PLACES (0.6%)
Outback Steakhouse, Inc.* 8,000 275,000
</TABLE>
34
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS, & SANITARY (2.6%)
Noram Energy Corporation 38,000 $ 413,250
USA Waste Services, Inc.* 16,300 482,888
Williams Companies, Inc. 7,800 386,100
----------
1,282,238
ELECTRICAL & ELECTRONIC MACHINERY EQUIPMENT (4.6%)
Ascend Communications, Inc.* 9,700 545,019
C-Cube Microsystems, Inc.* 5,000 165,313
Cascade Communications Corporation* 9,400 639,775
Maxim Integrated Products* 8,800 240,350
PairGain Technologies, Inc.* 11,600 719,925
----------
2,310,382
ENGINEERING & MANAGEMENT SERVICES (3.0%)
Corrections Corporation of America* 7,300 511,000
Gartner Group, Inc.* 7,200 264,150
Paychex, Inc. 6,200 297,988
Quintiles Transnational Corporation* 6,200 406,100
---------
1,479,238
FOOD STORES (0.6%)
Vons Companies, Inc.* 8,400 313,950
FURNITURE & FIXTURES (0.6%)
Herman Miller, Inc. 9,400 287,288
</TABLE>
35
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FURNITURE & HOMEFURNISHINGS STORES (0.6%)
CompUSA, Inc.* 8,500 $ 290,063
GENERAL MERCHANDISE STORES (0.6%)
TJX Companies, Inc. 8,900 300,375
HEALTH SERVICES (0.8%)
Health Management Associates, Inc.* 11,500 232,875
Idexx Laboratories, Inc.* 3,700 144,763
----------
377,638
HOTELS & OTHER LODGING PLACES (2.8%)
HFS, Inc.* 7,200 504,000
Hilton Hotels Corporation 2,200 247,500
La Quinta Inns, Inc. 9,600 321,600
Marriott International, Inc. 6,300 338,625
----------
1,411,725
INDUSTRIAL MACHINERY & EQUIPMENT (3.4%)
Iomega Corporation* 12,500 360,156
Komag, Inc.* 10,600 278,250
US Robotics Corporation* 8,800 751,300
Western Digital Corporation* 12,100 316,113
----------
1,705,819
INSTRUMENTS & RELATED PRODUCTS (3.2%)
Becton Dickinson & Company 4,000 321,000
Luxottica Group 3,900 286,163
</TABLE>
36
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSTRUMENTS & RELATED PRODUCTS (3.2%)(CONTINUED)
Medtronic, Inc. 6,200 $ 347,200
Sci Systems, Inc.* 9,400 382,463
Target Therapeutics, Inc.* 5,900 241,900
----------
1,578,726
INSURANCE CARRIERS (1.1%)
Conseco, Inc. 7,400 296,000
Oxford Health Plans* 6,700 275,119
----------
571,119
METAL MINING (0.5%)
Getchell Gold Corporation* 8,300 273,900
MISCELLANEOUS MANUFACTURING INDUSTRIES (1.5%)
Callaway Golf Company 11,800 392,350
Tiffany & Company 5,000 365,000
----------
757,350
MISCELLANEOUS RETAIL (2.1%)
Bed, Bath & Beyond, Inc.* 12,400 329,375
Jack Eckerd Corporation * 13,400 303,175
Longs Drug Stores, Inc. 2,600 116,025
Staples, Inc.* 15,100 293,506
----------
1,042,081
</TABLE>
37
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
NONDEPOSITORY INSTITUTIONS (0.9%)
Green Tree Financial Corporation 9,800 $ 306,250
The Money Store, Inc. 5,800 127,238
----------
433,488
OIL & GAS EXTRACTION (3.3%)
Parker & Parsley Petroleum Company 12,800 355,200
Phillips Petroleum Company 7,800 326,625
Reading & Bates Corporation* 24,700 546,488
Sonat Offshore Drilling, Inc. 8,100 409,050
----------
1,637,363
PAPER & ALLIED PRODUCTS (0.6%)
Avery Dennison Corporation 5,700 312,788
PETROLEUM & COAL PRODUCTS (0.4%)
Valero Energy Corporation 7,600 190,000
PRINTING & PUBLISHING (0.3%)
Meredith Corporation 3,600 150,300
RAILROAD TRANSPORTATION (0.2%)
Canadian Pacific, Ltd. 5,500 121,000
SECURITY & COMMODITY BROKERS (2.7%)
Bear Stearns Companies, Inc. 10,375 245,109
Lehman Brothers Holdings, Inc. 11,000 272,250
Morgan Stanley Group, Inc. 4,600 225,975
</TABLE>
38
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SECURITY & COMMODITY BROKERS
(2.7%)(CONTINUED)
Paine Webber Group, Inc. 14,100 $ 334,875
Salomon, Inc. 5,900 259,600
-----------
1,337,809
TRANSPORTATION BY AIR (2.4%)
AMR Corporation* 3,500 318,500
America West Airlines, Inc.* 15,700 345,400
Continental Airlines* 5,900 364,325
Northwest Airlines Corporation* 4,600 181,413
-----------
1,209,638
TRANSPORTATION EQUIPMENT (1.8%)
Chrysler Corporation 4,900 303,800
Gentex Corporation* 14,200 275,125
Harsco Corporation 4,600 309,350
-----------
888,275
WATER TRANSPORTATION (0.9%)
Tidewater, Inc. 9,700 425,588
WHOLESALE TRADE - DURABLE GOODS (0.7%)
Omnicare, Inc. 13,600 360,400
WHOLESALE TRADE - NONDURABLE GOODS (0.5%)
Phillip Morris Company, Inc. 2,300 239,200
-----------
TOTAL COMMON STOCK (Cost $26,393,484) 31,622,718
</TABLE>
39
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------------------
<S> <C> <C>
LONG-TERM DEBT SECURITIES (32.1%)
U.S. GOVERNMENT OBLIGATIONS (32.1%)
Tennessee Valley Authority, 6.375%, due 6/15/2005 $3,750,000 $ 3,604,088
U.S. Treasury Note, 6.25%, due 2/15/2003 1,890,000 1,856,623
U.S. Treasury Note, 7.25%, due 5/15/2004 3,800,000 3,937,142
U.S. Treasury Note, 7.50%, due 5/15/2002 3,210,000 3,360,453
U.S. Treasury Note, 8.25%, due 7/15/1998 3,120,000 3,243,334
-----------
TOTAL LONG-TERM DEBT SECURITIES (Cost $16,236,049) 16,001,640
-----------
SHORT-TERM SECURITIES (4.4%)
REPURCHASE AGREEMENT (4.4%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $2,248,594) 2,203,043 2,203,043
-----------
TOTAL SHORT-TERM SECURITIES (Cost $2,203,043) 2,203,043
-----------
TOTAL INVESTMENTS (100.0%) (Cost $44,832,576) $49,827,401
===========
</TABLE>
*Non-income producing
40
<PAGE>
Nicholas-Applegate Balanced Portfolio
Schedule of Investments (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $58,118,518 and $59,765,188, respectively.
Net unrealized appreciation for tax purposes aggregated $4,994,825, of which
$6,455,631 related to appreciated investment securities and $1,460,806 related
to depreciated investment securities. The aggregate cost of securities is the
same for book and tax purposes.
See accompanying notes.
41
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $19,365,268)
(Note l)-See accompanying schedule $23,814,826
Cash 6,912
Dividends and interest receivable 24,532
-----------
TOTAL ASSETS 23,846,270
LIABILITIES
Accounts payable and accrued expenses 35,861
-----------
TOTAL LIABILITIES 35,861
-----------
NET ASSETS $23,810,409
===========
Net Assets consist of:
Paid-in capital $17,617,592
Undistributed net investment income 5,649
Accumulated undistributed net realized gain on investments 1,737,610
Net unrealized appreciation on investment securities 4,449,558
-----------
NET ASSETS, for 1,643,237 shares outstanding $23,810,409
===========
NET ASSET VALUE, offering and redemption price per share $14.49
===========
</TABLE>
See accompanying notes.
42
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 179,605
Interest 56,689
----------
Total investment income 236,294
EXPENSES (Note 2)
Investment advisory and management fees 143,566
Custody and accounting fees 58,243
Professional fees 15,859
Directors' fees and expenses 6,000
Regulatory fees 1,747
Other expenses 5,230
----------
Total expenses 230,645
----------
Net investment income 5,649
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 1,737,610
Change in unrealized appreciation on investment securities 778,867
----------
Net gain on investments 2,516,477
----------
Net increase in net assets resulting from operations $2,522,126
==========
</TABLE>
See accompanying notes.
43
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 5,649 $ 17,603
Net realized gain on investments 1,737,610 311,876
Change in net unrealized appreciation (depreciation) 778,867 3,972,691
-----------------------------
Net increase in net assets resulting from operations 2,522,126 4,302,170
Distributions to shareholders from:
Net investment income (17,603) -
Net realized gain (152,435) -
-----------------------------
Total distributions to shareholders (170,038) -
Capital share transactions:
Proceeds from sales of shares 10,057,765 5,228,036
Proceeds from reinvested distributions 170,038 -
Cost of shares redeemed (5,162,758) (3,829,957)
-----------------------------
Net increase in net assets resulting from share
transactions 5,065,045 1,398,079
-----------------------------
Total increase in net assets 7,417,133 5,700,249
NET ASSETS
Beginning of period 16,393,276 10,693,027
-----------------------------
End of period (including undistributed net investment
income of $5,649 and $17,603, respectively) $23,810,409 $16,393,276
=============================
OTHER INFORMATION
Shares:
Sold 726,912 485,092
Issued through reinvestment of distributions 12,192 -
Redeemed (371,133) (352,447)
-----------------------------
Net increase 367,971 132,645
=============================
</TABLE>
See accompanying notes.
44
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 8,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------------------------ THROUGH JUNE 30,
1996 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 12.85 $ 9.36 $ 9.71 $10.00
Income from investment operations:
Net investment income (loss) - (E) 0.01 (0.02)(C) -
Net realized and unrealized gain
(loss) on investments 1.74 3.48 (0.33) (0.29)
--------------------------------------------------------
Total from investment operations 1.74 3.49 (0.35) (0.29)
Less distributions:
From net investment income (0.01) - - -
From net realized gain (0.09) - - -
--------------------------------------------------------
Total distributions (0.10) - - -
--------------------------------------------------------
Net asset value, end of period $ 14.49 $ 12.85 $ 9.36 $ 9.71
========================================================
TOTAL RETURN (A) 13.59% 37.29% (3.60%) (5.16%)
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in
thousands) $23,810 $16,393 $10,693 $5,143
Ratio of expenses to average net
assets (D) 1.04% 1.05% 1.29% 1.34%
Ratio of net investment income (loss)
to average net assets (D) 0.03% 0.13% (0.17%) (0.06%)
Portfolio turnover rate 58% 31% 38% 6%
</TABLE>
(A) Total returns for periods of less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Net investment loss per share has been calculated using the weighted monthly
average number of shares outstanding.
(D) The ratios of expenses and net investment income to average net assets
before voluntary expense reimbursement were 3.52% and (1.94%), respectively,
for the period ended December 8, 1992 (commencement of operations) through
June 30, 1993. (Note 2)
(E) Less than $0.01 per share.
45
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (98.3%)
BUILDING MATERIALS & GARDEN SUPPLIES (2.3%)
Home Depot, Inc. 10,000 $ 540,000
BUSINESS SERVICES (17.7%)
Adobe Systems, Inc. 9,700 346,169
Autodesk, Inc. 14,900 444,206
Automatic Data Processing 13,800 533,025
Cisco Systems, Inc.* 9,000 510,188
Electronic Arts* 13,800 367,425
First Data Corporation 6,200 493,675
Interpublic Group of Companies, Inc. 10,000 468,750
Microsoft Corporation* 3,900 468,244
Oracle Corporation* 14,850 585,644
----------
4,217,326
CHEMICALS & ALLIED PRODUCTS (14.1%)
Abott Laboratories 11,200 487,200
American Home Products Corporation 8,600 517,075
Amgen, Inc.* 7,900 425,613
Colgate-Palmolive Company 5,900 500,025
Du Pont (E.I.) De Nemours 5,900 466,838
Great Lakes Chemical Corporation 7,600 473,100
Merck & Company, Inc. 7,500 484,688
----------
3,354,539
COMMUNICATIONS (2.1%)
AT&T Corporation 8,000 496,000
</TABLE>
46
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (6.1%)
Bankamerica Corporation 6,500 $ 492,375
Norwest Corporation 14,000 488,250
Wells Fargo & Company 1,933 461,745
----------
1,442,370
EATING & DRINKING PLACES (2.1%)
Pepsico, Inc. 14,300 505,863
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (12.6%)
General Electric Company 6,000 519,000
General Instrument Corporation* 18,400 531,300
Intel Corporation 6,500 477,344
Kemet Corporation* 22,450 451,806
Lucent Technologies, Inc. 13,000 492,375
Tellabs, Inc.* 8,000 535,000
----------
3,006,825
ENGINEERING & MANAGEMENT (2.0%)
Fluor Corporation 7,200 470,700
FABRICATED METAL PRODUCTS (2.1%)
Illinois Tool Works, Inc. 7,500 507,187
FOOD & KINDRED PRODUCTS (2.0%)
General Mills, Inc. 8,700 474,150
</TABLE>
47
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FURNITURE & HOMEFURNISHINGS STORES (1.9%)
Circuit City Stores, Inc. 12,800 $ 462,400
GENERAL MERCHANDISE STORES (2.1%)
Wal-Mart Stores, Inc. 19,600 497,350
INDUSTRIAL MACHINERY & EQUIPMENT (5.3%)
Applied Materials, Inc.* 10,500 319,594
Hewlett-Packard Company 5,000 498,125
Silicon Graphics, Inc.* 18,900 453,600
----------
1,271,319
INSURANCE CARRIERS (3.7%)
American International Group 5,150 507,919
United Healthcare Corporation 7,600 383,800
----------
891,719
MISCELLANEOUS MANUFACTURING INDUSTRIES (4.2%)
Mattel, Inc. 16,800 480,900
Tyco International Limited 13,000 529,750
----------
1,010,650
MOTION PICTURES (2.1%)
Walt Disney Company 7,800 490,425
NONDEPOSITORY INSTITUTIONS (1.9%)
Dean Witter Discover & Company 8,000 458,000
</TABLE>
48
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
OIL & GAS EXTRACTION (2.0%)
Schlumberger, Ltd. 5,600 $ 471,800
PRIMARY METAL INDUSTRIES (1.8%)
Nucor Corporation 8,600 435,375
RAILROAD TRANSPORTATION (2.0%)
Union Pacific Corporation 6,800 475,150
SECURITY & COMMODITY BROKERS (2.0%)
Charles Schwab Corporation 19,000 465,500
WHOLESALE TRADE - Durable Goods (4.1%)
Johnson & Johnson 10,000 495,000
Motorola, Inc. 7,600 477,850
-----------
972,850
WHOLESALE TRADE - Nondurable Goods (2.1%)
Gillette Company 8,100 505,238
-----------
TOTAL COMMON STOCK (Cost $18,973,178) 23,422,736
</TABLE>
49
<PAGE>
Harris Bretall Sullivan & Smith Equity Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-----------------------
<S> <C> <C>
SHORT-TERM SECURITIES (1.7%)
REPURCHASE AGREEMENT (1.7%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $403,594) $ 392,090 $ 392,090
-----------
TOTAL SHORT-TERM SECURITIES (Cost $392,090) 392,090
-----------
TOTAL INVESTMENTS (100.0%) (Cost $19,365,268) $23,814,826
===========
</TABLE>
*Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $16,903,094 and $12,021,598,
respectively. Net unrealized appreciation for tax purposes aggregated
$4,449,558, of which $4,669,279 related to appreciated investment securities
and $219,721 related to depreciated investment securities. The aggregate cost
of securities is the same for book and tax purposes.
See accompanying notes.
50
<PAGE>
Dreman Value Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $15,366,085)
(Note l)-See accompanying schedule $19,624,155
Cash 117,963
Dividends, interest and other receivables 55,022
-----------
TOTAL ASSETS 19,797,140
LIABILITIES
Accounts payable and accrued expenses 92,430
-----------
TOTAL LIABILITIES 92,430
-----------
NET ASSETS $19,704,710
===========
Net Assets consist of:
Paid-in capital $14,331,632
Undistributed net investment income 252,188
Accumulated undistributed net realized gain on investments 862,820
Net unrealized appreciation on investment securities 4,258,070
-----------
NET ASSETS, for 1,218,326 shares outstanding $19,704,710
===========
NET ASSET VALUE, offering and redemption price per share $16.17
===========
</TABLE>
See accompanying notes.
51
<PAGE>
Dreman Value Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 387,786
Interest 26,750
----------
Total investment income 414,536
EXPENSES (Note 2)
Investment advisory and management fees 85,287
Custody and accounting fees 46,697
Professional fees 15,859
Directors' fees and expenses 6,000
Regulatory fees 1,657
Foreign tax expense 2,399
Other expenses 5,351
----------
Total expenses before reimbursement 163,250
Less: expense reimbursement (Note 2) (902)
----------
Net expenses 162,348
----------
Net investment income 252,188
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 862,820
Change in unrealized appreciation on investment securities 2,857,141
----------
Net gain on investments 3,719,961
----------
Net increase in net assets resulting from operations $3,972,149
==========
</TABLE>
See accompanying notes.
52
<PAGE>
Dreman Value Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
-----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 252,188 $ 190,518
Net realized gain on investments 862,820 110,922
Change in net unrealized appreciation (depreciation) 2,857,141 1,497,538
-----------------------------
Net increase in net assets resulting from operations 3,972,149 1,798,978
Distributions to shareholders from:
Net investment income (190,236) (115,316)
Net realized gain (110,864) (33,184)
-----------------------------
Total distributions to shareholders (301,100) (148,500)
Capital share transactions:
Proceeds from sales of shares 7,569,421 2,443,372
Proceeds from reinvested distributions 301,100 148,500
Cost of shares redeemed (2,713,770) (2,317,614)
-----------------------------
Net increase in net assets resulting from share
transactions 5,156,751 274,258
-----------------------------
Total increase in net assets 8,827,800 1,924,736
NET ASSETS
Beginning of period 10,876,910 8,952,174
-----------------------------
End of period (including undistributed net investment
income of $252,188 and $190,236, respectively) $19,704,710 $10,876,910
=============================
OTHER INFORMATION
Shares:
Sold 517,405 218,818
Issued through reinvestment of distributions 21,840 13,171
Redeemed (184,651) (208,122)
-----------------------------
Net increase 354,594 23,867
=============================
</TABLE>
See accompanying notes.
53
<PAGE>
Dreman Value Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------------------- THROUGH JUNE 30,
1996 1995 1994 1993
------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 12.59 $ 10.66 $10.45 $10.00
Income from investment operations:
Net investment income 0.18 0.26 0.12 0.11
Net realized and unrealized gain on investments 3.70 1.85 0.17 0.34
------------------------------------------
Total from investment operations 3.88 2.11 0.29 0.45
Less distributions:
From net investment income (0.19) (0.14) (0.08) -
From net realized gain (0.11) (0.04) - -
------------------------------------------
Total distributions (0.30) (0.18) (0.08) -
------------------------------------------
Net asset value, end of period $ 16.17 $ 12.59 $10.66 $10.45
==========================================
TOTAL RETURN (A) 31.22% 19.98% 2.80% 8.25%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in thousands) $19,705 $10,877 $8,952 $1,671
Ratio of expenses to average net assets 1.06% 1.13% 1.40% 1.24%
Ratio of net investment income to average net assets 1.65% 1.98% 1.98% 2.00%
Ratio of expenses to average net assets before voluntary expense
reimbursement (Note 2) 1.07% 1.13% 1.61% 8.43%
Ratio of net investment income to average net assets before voluntary
expense reimbursement (Note 2) 1.64% 1.98% 1.76% (1.49%)
Portfolio turnover rate 18% 29% 9% 5%
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
54
<PAGE>
Dreman Value Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (99.8%)
APPAREL & ACCESSORY STORES (0.6%)
Cato Corporation* 7,400 $ 43,938
J. Baker, Inc. 7,300 56,119
Payless Shoesource Inc.* 560 17,780
-------
117,837
APPAREL & OTHER TEXTILE PRODUCTS (4.8%)
Haggar Corporation 3,800 50,588
Liz Claiborne, Inc. 11,400 394,725
VF Corporation 8,200 488,925
-------
934,238
AUTO REPAIR, SERVICES, & PARKING (0.7%)
PHH Corporation 2,300 131,100
BUSINESS SERVICES (1.1%)
Insurance Auto Auctions, Inc.* 6,000 58,875
Pitney Bowes, Inc. 3,400 162,350
-------
221,225
CHEMICALS & ALLIED PRODUCTS (4.2%)
Bristol-Meyers Squibb Company 1,000 90,000
Eli Lilly & Company 2,500 162,500
Glaxo Holdings 5,200 139,100
Jean Philippe Fragrances, Inc. 8,500 71,719
Merck & Company, Inc. 1,600 103,400
Rexene Corporation 6,800 67,150
Pharmacia & Upjohn, Inc. 4,265 189,259
-------
823,128
</TABLE>
55
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
COMMUNICATIONS (0.8%)
Atlantic Tele-Network, Inc.* 6,500 $ 154,375
DEPOSITORY INSTITUTIONS (20.3%)
Ahmanson (H.F.) & Company 10,000 270,000
Bankamerica Corporation 4,000 303,000
Bankers Trust New York Corporation 5,300 391,538
Compass Bancshares, Inc. 2,500 82,188
Cullen/Frost Bankers, Inc. 1,600 44,600
First Chicago NBD Corporation 8,326 325,755
First Commerce Corporation 1,800 63,900
First Financial Corporation 1,800 40,725
First Union Corporation 3,800 231,325
Fleet Financial Group, Inc. 1,700 73,950
Great Western Financial 11,000 262,625
J.P. Morgan & Company 1,500 126,938
Keycorp 6,000 232,500
Liberty Bancorp, Inc. 1,400 50,138
Long Island Bancorp, Inc. 3,000 91,688
Nationsbank Corporation 2,500 206,563
North Side Savings Bank 1,600 55,300
PNC Bank Corporation 26,510 788,673
Roosevelt Financial Group, Inc. 3,700 71,456
T R Financial Corporation 2,300 62,819
Wells Fargo & Company 900 214,988
----------
3,990,669
</TABLE>
56
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS & SANITARY SERVICE (5.9%)
Columbia Gas System 18,100 $ 943,463
KCS Energy, Inc. 7,400 212,750
-------
1,156,213
ELECTRONIC & OTHER ELECTRIC EQUIPMENT (5.8%)
Burr-Brown Corporation* 2,000 34,750
Exar Corporation* 5,500 70,813
General Electric Company 7,200 622,800
Intel Corporation 2,800 205,625
Read-Rite Corporation* 4,100 57,656
Texas Instruments, Inc. 3,100 154,613
-------
1,146,257
ENGINEERING & MANAGEMENT SERVICES (1.1%)
Blount International, Inc. 6,700 211,050
FABRICATED METAL PRODUCTS (0.1%)
Sturm Ruger & Company 400 18,600
FOOD & KINDRED PRODUCTS (0.9%)
Nestle SA 3,000 171,000
FOOD STORES (0.5%)
Giant Food, Inc. 3,000 107,625
GENERAL BUILDING CONTRACTORS (0.5%)
Del E. Webb Corporation 5,300 106,000
</TABLE>
57
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GENERAL MERCHANDISE STORES (5.7%)
Dayton-Hudson Corporation 5,000 $ 515,625
May Department Stores Company 3,500 153,125
TJX Companies, Inc. 13,300 448,875
---------
1,117,625
HEALTH SERVICES (1.5%)
Tenet Healthcare Corporation* 13,400 286,425
HOLDING COMPANIES & OTHER INVESTMENT OFFICES (0.1%)
U.S. Industries, Inc.* 450 10,856
HOTELS & OTHER LODGING PLACES (1.0%)
Bally Entertainment Corporation 7,100 195,250
INDUSTRIAL MACHINERY & EQUIPMENT (1.8%)
Apple Computer 5,300 110,969
Asyst Technologies, Inc.* 2,400 42,900
Diamond Multimedia Systems* 2,300 21,706
Proxima Corporation* 3,300 39,600
Stewart & Stevenson 3,700 83,250
Western Digital Corporation* 2,400 62,700
-------
361,125
INSTRUMENTS & RELATED PRODUCTS (1.9%)
Baxter International, Inc. 1,500 70,875
Becton Dickinson & Company 2,500 200,625
Electroglas, Inc.* 4,400 62,425
</TABLE>
58
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSTRUMENTS & RELATED PRODUCTS (1.9%)(CONTINUED)
Sofamor Danek Group, Inc.* 600 $ 16,650
Tech-Sym Corporation* 600 17,850
----------
368,425
INSURANCE AGENTS, BROKERS & SERVICES (1.6%)
Humana, Inc.* 17,800 318,175
INSURANCE CARRIERS (6.5%)
American General Corporation 6,800 247,350
American International Group 2,250 221,906
Arbatax International, Inc.* 3,650 18,478
Guaranty National Corporation 3,400 61,200
Integon Corporation 3,800 76,475
Lawyers Title Corporation 2,100 37,800
Ohio Causalty Corporation 3,000 105,000
Travelers Group, Inc. 1,800 82,125
US Healthcare, Inc. 7,800 428,502
----------
1,278,836
LUMBER & WOOD PRODUCTS (1.8%)
Louisiana-Pacific Corporation 15,800 349,575
MISCELLANEOUS RETAIL (0.5%)
Sports & Recreation, Inc.* 11,400 104,025
</TABLE>
59
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
NONDEPOSITORY INSTITUTION (10.0%)
Federal Home Loan Mortgage Corporation 10,100 $ 863,550
Federal National Mortgage Association 26,800 897,800
First Financial Carribean 3,700 74,463
Imperial Credit Industries* 4,400 134,475
----------
1,970,288
NONMETALLIC MINERALS, EXCEPT FUELS (0.3%)
Amcol International Corporation 3,500 52,719
OIL & GAS EXTRACTION (1.4%)
Atlantic Richfield Company 1,500 177,750
Giant Industries, Inc. 5,200 75,400
Seitel, Inc.* 500 13,688
----------
266,838
PAPER & ALLIED PRODUCTS (0.5%)
Mercer International, Inc.* 7,300 97,638
PETROLEUM & COAL PRODUCTS (1.8%)
Amoco Corporation 3,500 253,313
Tesoro Petroleum Corporation* 7,900 90,850
----------
344,163
PRIMARY METAL INDUSTRIES (1.3%)
AK Steel Holding Corporation 2,100 82,163
Mueller Industries, Inc.* 2,900 120,350
Quanex Corporation 1,900 44,888
----------
247,401
</TABLE>
60
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RAILROAD TRANSPORTATION (0.8%)
Burlington Northern Santa Fe 1,900 $ 153,663
SPECIAL TRADE CONTRACTORS (0.2%)
Fedders Corporation* 6,000 42,750
STONE, CLAY, & GLASS PRODUCTS (0.7%)
Hanson Plc 9,000 128,250
TEXTILE MILL PRODUCTS (2.5%)
Fruit of the Loom, Inc.* 19,000 484,500
TOBACCO PRODUCTS (0.8%)
UST, Inc. 4,400 150,700
TRANSPORTATION BY AIR (1.3%)
Airborne Freight Corporation 3,200 83,200
Federal Express Corporation* 2,100 172,200
----------
255,400
TRANSPORTATION EQUIPMENT (4.1%)
Fleetwood Enterprises 4,000 124,000
Ford Motor Company 19,900 644,263
Simpson Industries 4,600 42,263
----------
810,526
</TABLE>
61
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR
PRINCIPAL
AMOUNT VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WHOLESALE TRADE - DURABLE GOODS (0.3%)
Heilig-Meyers Company 2,400 $ 57,600
WHOLESALE TRADE - NONDURABLE GOODS (4.3%)
Burlington Coat Factory Warehouse* 8,500 89,250
Phillip Morris Company, Inc. 7,200 748,800
-----------
838,050
TOTAL COMMON STOCKS (Cost $15,322,109) 19,580,120
CORPORATE BONDS (0.0%)
SECURITIES & COMMODITY BROKERS (0.0%)
Everen Capital Corporation, 13.5%, due 9/15/2007 $ 3,400 3,655
-----------
TOTAL CORPORATE BONDS (Cost $3,596) 3,655
SHORT-TERM SECURITIES (0.2%)
REPURCHASE AGREEMENT (0.2%)
State Street Bank, 4.00%, due 7/1/1996 (Dated
6/28/96, collateralized by U.S. Treasury Bond,
9.25%, due 2/15/2016, value $450,756) 40,380 40,380
-----------
TOTAL SHORT-TERM SECURITIES (Cost $40,380) 40,380
-----------
TOTAL INVESTMENTS (100.0%) (Cost $15,366,085) $19,624,155
===========
</TABLE>
62
<PAGE>
Dreman Value Portfolio
Schedule of Investments (continued)
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $7,794,228 and $2,717,434,
respectively. Net unrealized appreciation for tax purposes aggregated
$4,256,770, of which $4,724,855 related to appreciated investment securities
and $468,085 related to depreciated investment securities The aggregate cost
of securities is $15,367,385 for tax purposes.
See accompanying notes.
63
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<S> <C>
ASSETS
Investment in securities, at value (cost $10,365,111)
(Note l)-See accompanying schedule $11,697,568
Dividends, interest and other receivables 36,919
-----------
TOTAL ASSETS 11,734,487
LIABILITIES
Cash overdraft 6,887
Accounts payable and accrued expenses 29,481
-----------
TOTAL LIABILITIES 36,368
-----------
NET ASSETS $11,698,119
===========
Net Assets consist of:
Paid-in capital $ 9,400,588
Undistributed net investment income 103,880
Accumulated undistributed net realized gain on
investment securities and futures contracts 884,252
Net unrealized appreciation on investment securities
and futures contracts 1,309,399
-----------
NET ASSETS, for 859,408 shares outstanding $11,698,119
===========
NET ASSET VALUE, offering and redemption price per share $ 13.61
===========
</TABLE>
See accompanying notes.
64
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends $ 181,268
Interest 74,550
----------
Total investment income 255,818
EXPENSES (Note 2)
Investment advisory and management fees 102,926
Custody and accounting fees 44,735
Professional fees 15,859
Directors' fees and expenses 6,000
Other expenses 9,407
----------
Total expenses before reimbursement 178,927
Less: expense reimbursement (Note 2) (26,989)
----------
Net expenses 151,938
----------
Net investment income 103,880
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note 1)
Net realized gain (loss) on:
Investment securities 1,556,551
Futures contracts (211,249)
----------
Net realized gain 1,345,302
Change in unrealized appreciation (depreciation) on:
Investment securities 197,814
Futures contracts (7,229)
----------
Change in unrealized appreciation 190,585
----------
Net gain on investments 1,535,887
----------
Net increase in net assets resulting from operations $1,639,767
==========
</TABLE>
See accompanying notes.
65
<PAGE>
Zweig Equity (Small Cap) Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 103,880 $ 119,424
Net realized gain (loss) on investments 1,345,302 (389,775)
Change in net unrealized appreciation 190,585 1,043,789
--------------------------
Net increase in net assets resulting from operations 1,639,767 773,438
Distributions to shareholders from:
Net investment income (119,225) (40,100)
Net realized gains - (50,400)
--------------------------
Total distributions to shareholders (119,225) (90,500)
Capital share transactions:
Proceeds from sales of shares 4,407,015 1,913,641
Proceeds from reinvested distributions 119,225 90,500
Cost of shares redeemed (2,382,455) (2,244,234)
--------------------------
Net increase (decrease) in net assets resulting
from share transactions 2,143,785 (240,093)
--------------------------
Total increase in net assets 3,664,327 442,845
NET ASSETS
Beginning of period 8,033,792 7,590,947
--------------------------
End of period (including undistributed net investment
income of $103,880 and $119,325, respectively) $11,698,119 $ 8,033,792
==========================
OTHER INFORMATION
Shares:
Sold 343,946 178,821
Issued through reinvestment of distributions 9,733 8,378
Redeemed (185,655) (208,320)
--------------------------
Net increase (decrease) 168,024 (21,121)
==========================
</TABLE>
See accompanying notes.
66
<PAGE>
Zweig Equity (Small Cap) Portfolio
Financial Highlights
<TABLE>
<CAPTION>
DECEMBER 14,
1992
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
--------------------------- THROUGH JUNE 30,
1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 11.62 $10.65 $10.11 $ 10.00
Income from investment operations:
Net investment income 0.11 0.17 0.15 0.05
Net realized and unrealized gain on investments 2.04 0.93 0.50 0.06
-----------------------------------------------
Total from investment operations 2.15 1.10 0.65 0.11
Less distributions:
From net investment income (0.16) (0.06) (0.11) --
From net realized gain -- (0.07) -- --
-----------------------------------------------
Total distributions (0.16) (0.13) (0.11) --
-----------------------------------------------
Net asset value, end of period $ 13.61 $11.62 $10.65 $ 10.11
===============================================
TOTAL RETURN (A) 18.69% 10.39% 6.53% 2.02%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in thousands) $11,698 $8,034 $7,591 $ 2,116
Ratio of expenses to average net assets 1.55% 1.55% 1.72% 1.61%
Ratio of net investment income to average net assets 1.06% 1.54% 1.75% 0.84%
Ratio of expenses to average net assets before
voluntary expense reimbursement (Note 2) 1.83% 1.59% 2.14% 7.29%
Ratio of net investment income (loss) to average net
assets before voluntary expense reimbursement (Note 2) 0.78% 1.50% 1.32% (1.80%)
Portfolio turnover rate 101% 67% 249% 15%
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
67
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------
<S> <C> <C>
COMMON STOCKS (83.7%)
AGRICULTURAL PRODUCTION-CROPS (0.4%)
RJR Nabisco Holdings Corporation 1,600 $49,600
AGRICULTURAL PRODUCTION-LIVESTOCK (0.1%)
Golden Poultry Company, Inc. 1,200 11,625
APPAREL AND ACCESSORY STORES (0.3%)
Claire's Stores, Inc. 650 17,956
Ross Stores,Inc. 600 20,888
-------
38,844
AUTO REPAIR, SERVICES AND PARKING (.05%)
PHH Corporation 100 5,700
BUILDING MATERIALS & GARDEN SUPPLIES (0.1%)
Shelter Components Corporation 950 16,031
BUSINESS SERVICES (2.1%)
Aaron Rents, Inc. 1,400 18,288
ADT, Ltd.* 1,200 22,650
Advanced Technology Labs, Inc.* 400 14,650
Comdisco, Inc. 550 14,644
Computer Data Systems, Inc. 600 13,538
Computervision Corporation* 1,900 19,000
Electro Rent Corporations* 2,200 53,350
Norstan, Inc.* 900 33,975
</TABLE>
68
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUSINESS SERVICES (2.1%)(CONTINUED)
Orbotech, Ltd.* 1,200 $ 15,600
PCI Services, Inc.* 1,000 19,250
Pinkertons, Inc.* 100 2,312
Radius, Inc.* 16 43
Teradyne, Inc.* 300 5,175
Volt Information Sciences, Inc.* 400 17,650
---------
250,125
CHEMICALS AND ALLIED PRODUCTS (3.2%)
Albemarle Corporation 700 12,775
Bio-Rad Laboratories* 750 26,906
Cabot Corporation 400 9,800
Collagen Corporation 100 1,913
Cytec Industries* 200 17,100
Desc. S.A.-Spons ADR* 800 16,800
Electrochemical Industries Frutar* 200 250
Goodrich (B.F.) Company 400 14,950
Imperial Chemical Industries Plc 1,000 49,125
Incstar Corporation* 400 2,150
International Specialty Products, Inc. 1,400 15,400
Macdermid, Inc. 300 21,075
Medeva Plc 700 10,850
Montedison S.P.A. 5,500 33,000
Olin Corporation 200 17,850
Rohm & Haas Company 800 50,200
Shanghai Petro-ADR 600 17,100
Stepan Company 100 1,813
</TABLE>
69
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
CHEMICALS AND ALLIED PRODUCTS (3.2%)(CONTINUED)
Terra Industries, Inc. 1,600 $ 19,800
Union Carbide Corporation 900 35,775
---------
374,632
COAL MINING (0.1%)
Ziegler Coal Holding Company 1,000 16,000
COMMUNICATIONS (1.9%)
Atlantic Tele-Network, Inc.* 600 14,250
Sprint Corporation 1,300 54,600
Tele Danmark A/S 2,900 73,588
Telefonica De Espana 1,500 82,687
---------
225,125
DEPOSITORY INSTITUTIONS (11.3%)
Ahmanson (H.F.) & Company 500 13,500
Allied Irish Banks 300 9,338
Astoria Financial 600 16,313
Banco Coml Portugues 900 10,350
Banco Latinoamericano de Exportaciones, S.A. 300 16,875
Bank of Boston Corporation 1,500 74,250
Bank of Montreal 600 14,700
Bankamerica Corporation 1,100 83,318
Banknorth Group, Inc. 400 13,850
Banponce Corporation 800 36,050
Barclays Plc 400 19,000
Boston Bancorp 300 13,013
</TABLE>
70
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (11.3%)(CONTINUED)
Cal Fed Bancorp, Inc.* 1,700 $ 31,025
Chase Manhattan Corporation 612 43,223
City National Corporation 900 14,175
Coast Savings Financial, Inc.* 600 19,650
Colonial Bancgroup, Inc. 300 10,050
Comerica, Inc. 301 13,432
Commercial Federal Corporation 300 11,475
Community First Bankshares 500 11,750
Corus Bankshares, Inc. 200 6,075
Crestar Financial Corporation 300 16,013
Cullen/Frost Bankers, Inc. 200 5,575
CVB Financial Corporation 2 34
Eagle Financial Corporation 210 5,224
First American Corporation* 300 12,656
First Citizens Bancshares 200 12,550
First Empire State Corporation 100 24,100
First Union Corporation 300 18,263
Firstbank Puerto Rico 800 18,400
Great Western Financial Corporation 1,100 26,263
Hibernia Corporation 1,600 17,400
Hubco, Inc. 450 9,534
Imperial Bancorp* 432 10,422
Investors Financial Services Corporation 32 738
Leader Financial Corporation 300 13,350
Long Island Bancorp, Inc. 300 9,169
National Australia Bank 100 4,638
National Westminster Bank Plc 1,300 74,750
</TABLE>
71
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
DEPOSITORY INSTITUTIONS (11.3%)(CONTINUED)
Nationsbank Corporation 1,000 $ 82,625
New York Bancorp, Inc. 500 12,750
North Fork Bancorporation 1,046 27,327
Peoples Bank Bridgeport 800 17,850
Peoples Heritage Financial Group 800 16,350
Provident Bancorp, Inc. 150 5,306
RCSB Financial, Inc. 700 18,069
Republic New York Corporation 1,200 74,700
Riggs National Corporation 2,300 28,031
Santa Monica Bank 900 11,475
Silicon Valley Bancshares* 500 12,937
Sovereign Bancorp, Inc. 1,400 14,087
Sterling Bancorp-NY 1,400 15,400
T R Financial Corporation 600 16,388
TCF Financial Corporation 400 13,300
Unionbancal Corporation 600 31,650
UST Corporation* 1,100 16,500
Washington Mutual, Inc. 400 12,000
Wells Fargo & Company 200 47,775
Westamerica Bankcorporation 200 10,125
Westcorp 561 9,958
Westpac Banking 2,100 47,250
Zions Bankcorporation 300 21,919
---------
1,324,263
</TABLE>
72
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
EATING AND DRINKING PLACES (0.4%)
CKE Restaurants, Inc. 700 $17,850
Darden Restaurants, Inc. 1,100 11,825
Foodmaker, Inc.* 1,900 16,388
NPC International, Inc.* 600 6,000
-------
52,063
Electric & Other Electric Equipment (4.0%)
Advanced Semiconductor Materials International N.V.* 600 6,450
Bairnco Corporation 1,000 7,250
Bel Fuse, Inc.* 600 10,013
Burr-Brown Corporation* 550 9,556
Charter Power Systems 700 24,150
Chips & Technologies, Inc.* 1,000 9,688
Computer Products, Inc.* 2,400 40,800
CTS Corporation 400 18,800
Cypress Semiconductor Corporation* 900 10,800
Electro Scientific Industries, Inc.* 300 6,187
Electroulux AB 900 45,338
Genlyte Group, Inc.* 2,300 17,538
Hadco Corporation* 1,000 21,250
Harman International 415 20,439
Helen of Troy, Ltd.* 800 22,500
Kollmorgen Corporation 800 11,800
Lamson & Sessions Company* 2,200 26,125
Moog, Inc.* 500 12,250
Park Electrochemical Corporation 800 16,000
Powell Industries, Inc.* 300 3,506
</TABLE>
73
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC & OTHER ELECTRIC EQUIPMENT (4.0%)(CONTINUED)
Richardson Electronics, Ltd. 300 $ 3,000
Silicon Valley Group, Inc.* 600 11,287
Siliconix, Inc.* 1,700 37,825
Standard Microsystems Corporation* 700 10,631
Tadiran Ltd. 500 13,500
Technitrol, Inc. 600 23,775
Thomas Industries, Inc. 500 9,562
Watkins-Johnson Company 300 8,212
Xicor, Inc.* 1,100 12,856
--------
471,088
ELECTRIC, GAS AND SANITARY SERVICES (11.5%)
Allegheny Power System 600 18,525
American Electric Power 300 12,787
American Water Works, Inc. 200 8,050
Atlantic Energy, Inc. 1,000 18,250
Atmos Energy Corporation 600 18,375
Baltimore Gas & Electric 1,200 34,050
Bay State Gas 400 11,150
Boston Edison Company 500 12,750
Centerior Energy Corporation 1,500 11,062
Central Louisiana Electric, Inc. 300 7,988
Central Maine Power 800 11,600
Cipsco, Inc. 300 11,587
CMS Energy Corporation 300 9,262
Columbia Gas System 500 26,063
Commonwealth Energy System 700 18,025
</TABLE>
74
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS AND SANITARY SERVICES (11.5%)(CONTINUED)
Dominion Resources, Inc. 600 $24,000
DQE, Inc. 200 5,500
DTE Energy Company 600 18,525
Eastern Enterprises 300 9,975
Edison International 3,500 61,688
E1 Paso Natural Gas 400 15,400
Empresa Nacional Electric 200 12,525
Energynorth, Inc. 100 1,950
Entergy Corporation 2,800 79,450
General Public Utilities 1,800 63,450
Idaho Power Company 400 12,450
IES Industries, Inc. 500 14,938
Illinova Corporation 800 23,000
Indiana Energy, Inc. 700 20,038
Interstate Power Company 800 25,700
Ipalco Enterprises, Inc. 600 15,750
Laclede Gas Company 700 15,663
Long Island Lighting 1,100 18,425
MCN Corporation 500 12,188
Midamerican Energy Company 800 13,800
National Fuel Gas Company 400 14,400
New England Electric System 400 14,550
New York State Electric & Gas 800 19,500
Noram Energy Corporation 1,300 14,137
Northern States Power 700 34,562
Northwestern Public Service Company 900 24,187
NUI Corporation 600 10,725
</TABLE>
75
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS AND SANITARY SERVICES (11.5%)(CONTINUED)
Oneok, Inc. 600 $15,000
Pacific Gas & Electric 1,400 32,550
Peoples Energy Corporation 400 13,400
Piedmont Natural Gas Company 600 13,875
Pinnacle West Corporation 900 27,338
Portland General Corporation 800 24,700
Powergen Plc 500 14,875
Providence Energy Corporation 300 5,175
Public Service Company of Colorado 400 14,700
Public Service Company of New Mexico* 900 18,450
Rochester Gas & Electric 600 12,900
Shandong Huaneng Power 1,500 12,375
South Jersey Industries 700 14,875
Southern Union Company* 573 12,606
Texas Utilities Company 500 21,375
TNP Enterprises 1,300 36,887
Tucson Electric Power Company* 620 8,370
Unicom Corporation 2,700 75,263
United Illuminating Company 400 14,950
Utilicorp United, Inc. 500 13,812
Washington Gas Light Company 800 17,600
Washington Water Power 1,000 18,625
Westcoast Energy, Inc. 900 13,500
Western Resource 400 11,950
Wicor, Inc. 400 15,100
WPL Holdings, Inc. 400 13,150
</TABLE>
76
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRIC, GAS AND SANITARY SERVICES (11.5%)(CONTINUED)
Yankee Energy Systems, Inc. 600 $ 13,050
York Research Corporation* 1,300 13,812
----------
1,346,263
ENGINEERING AND MANAGEMENT SERVICES (0.3%)
Bet Plc 2,100 29,663
Blount International, Inc. 300 9,450
----------
39,113
FABRICATED METAL PRODUCTS (0.5%)
Ameron International Corporation 500 19,750
Butler Manufacturing, Inc. 150 5,100
Nortek, Inc.* 800 9,300
Shiloh Industries, Inc.* 100 1,588
United Dominion Industries 200 4,600
Wyman-Gordon Company* 1,100 19,456
----------
59,794
FOOD AND KINDRED PRODUCTS (0.7%)
Archer-Daniels-Midland 1,905 36,433
IBP, Inc. 1,000 27,625
Morningstar Group, Inc.* 500 5,625
Orange Company, Inc. 1,200 9,600
----------
79,283
</TABLE>
77
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
FOOD STORES (0.6%)
Great Atlantic & Pacific Tea Company 400 $13,150
Riser Foods, Inc. 1,600 38,400
Schultz Sav O Stores, Inc. 700 9,012
Smith's Food & Drug Centers 243 5,802
-------
66,364
FORESTRY (0.5%)
Rayonier, Inc. 600 22,800
Weyerhaeuser Company 800 34,000
-------
56,800
FURNITURE AND FIXTURES (0.3%)
Bush Industries 400 13,600
Chromcraft Revington, Inc.* 100 2,338
Falcon Products, Inc. 160 2,300
Kinetic Concepts 1,300 20,312
-------
38,550
FURNITURE AND HOMEFURNISHINGS STORES (0.2%)
Inacom Corporation* 600 11,287
Pier 1 Imports, Inc. 800 11,900
-------
23,187
GENERAL BUILDING CONTRACTORS (0.7%)
Continental Homes Holding Corporation 900 19,350
Empresas ICA S.A. 1,300 18,038
Lennar Corporation 400 10,000
</TABLE>
78
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
GENERAL BUILDING CONTRACTORS (0.7%)(CONTINUED)
MDC Holdings, Inc 1,600 $10,800
Redman Industries, Inc.* 800 16,300
U.S. Home Corporation* 500 12,312
-------
86,800
GENERAL MERCHANDISE STORES (0.5%)
Carson Pirie Scott & Company* 500 13,375
Mercantile Stores Company, Inc 200 11,725
Shopko Stores, Inc 1,000 16,125
Waban, Inc.* 700 16,712
-------
57,937
HEALTH SERVICES (0.4%)
Health Images, Inc 900 10,462
Maxicare Health Plans* 600 11,438
Ornda Healthcorp* 300 7,200
Universal Health Services* 500 13,063
-------
42,163
HEAVY CONSTRUCTION, EXCEPT BUILDING (0.1%)
Granite Construction, Inc 750 17,438
HOLDING AND OTHER INVESTMENT OFFICES (0.6%)
Asset Investors Corporation 4,500 15,750
CWM Mortgage Holdings, Inc. 1,300 22,100
HRE Properties 200 3,050
Koger Equity, Inc.* 800 10,700
</TABLE>
79
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HOLDING AND OTHER INVESTMENT OFFICES (0.6%)(CONTINUED)
MGI Properties, Inc. 600 $10,275
Thornburg Mortgage Asset Corporation 800 13,000
-------
74,875
INDUSTRIAL MACHINERY AND EQUIPMENT (5.7%)
Advanced Logic Research, Inc.* 1,600 13,100
Agco Corporation 1,500 41,625
Ampco-Pittsburgh 1,200 13,950
Applied Magnetics Corporation* 1,100 11,550
Applied Power, Inc. 400 11,200
BHA Group,Inc. 660 9,075
Cascade Corporation 1,000 13,125
Case Corporation 1,100 52,800
Commercial Intertech Corporation 400 10,300
Data General Corporation* 700 9,100
Digital Equipment* 800 36,000
Fedders Corporation* 2,400 17,100
Gardner Denver Machinery* 700 18,462
Gleason Corporation 600 23,400
Global Industrial Technologies, Inc.* 1,900 30,400
Harris Corporation 100 6,100
Innovex, Inc. 1,100 19,112
Intergraph Corporation* 700 8,575
International Business Machines Corporation 700 69,300
Katy Industries 400 6,000
Kaydon Corporation 200 8,600
Komag, Inc.* 700 18,375
</TABLE>
80
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL MACHINERY AND EQUIPMENT (5.7%)(CONTINUED)
Kulicke & Soffa Industries* 700 $ 10,150
Kysor Industrial Corporation 500 12,125
Lindsay Manufacturing Company 300 11,963
Lufkin Industries, Inc. 900 18,338
Mestek Inc.* 800 11,900
Met-Pro Corporation 100 1,862
Nam Tai Electronics 300 3,319
Parker Hannifin Corporation 600 25,425
Robbins & Myers, Inc. 400 18,100
SPS Technologies, Inc.* 600 42,300
Tecumseh Products Company 300 16,200
Timken Company 300 11,625
Toro Company 600 19,875
Trident Microsystems, Inc.* 700 8,881
Twin Disc, Inc. 100 2,338
Valmont Industries 300 10,088
-------
671,738
INSTRUMENTS AND RELATED PRODUCTS (1.5%)
Amcast Industrial Corporation 700 14,175
Coherent, Inc.* 300 15,712
Conmed Corporation* 500 13,281
Cooper Companies, Inc.* 1,400 16,450
Core Industries, Inc. 300 4,313
Electroglas, Inc.* 400 5,675
Esterline Technologies Corporation* 1,400 35,000
Fluke Corporation 300 12,113
</TABLE>
81
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------- -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSTRUMENTS AND RELATED PRODUCTS (1.5%)(CONTINUED)
Galileo Electro-Optics Corporation* 1,300 $ 31,119
ICN Pharmaceuticals 600 13,950
LTX Corporation* 300 1,856
Measurex Corporation 400 11,700
Starrett (L.S.) Company 200 5,200
--------
180,544
INSURANCE CARRIERS (6.3%)
20th Century Industries 700 11,638
Ace, Ltd. 400 18,800
Allied Group, Inc. 400 17,350
Ambac, Inc. 300 15,637
American Annuity Group, Inc. 1,620 21,060
American Bankers Insurance Group 400 17,500
American Financial Group, Inc. 400 12,050
American Travellers Corporation* 600 13,762
Arbatax International, Inc.* 700 3,544
Bankers Life Holding Corporation 800 17,700
Capital Re Corporation 400 14,700
CNA Financial Corporation* 100 10,300
Conseco, Inc. 400 16,000
Enhance Financial Services Group 600 16,800
Equitable Companies, Inc. 800 19,900
Equitable of Iowa Companies 700 24,850
Exel Limited 800 56,400
First American Financial Corporation 500 16,875
First Colony Corporation 500 15,500
</TABLE>
82
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INSURANCE CARRIERS (6.3%)(CONTINUED)
Fremont General Corporation 700 $ 16,100
Gainsco, Inc. 1,000 9,875
Liberty Financial Companies 400 13,550
Life Re Corporation 600 18,525
Loews Corporation 900 70,987
MAIC Holdings, Inc.* 100 3,763
MMI Companies, Inc. 500 15,438
NAC Re Corporation 100 3,350
National Re Corporation 300 11,325
Nymagic,Inc. 200 3,775
Old Republic International Corporation 1,500 32,250
Orion Capital Corporation 200 10,200
Penncorp Financial Group, Inc. 600 19,050
Pioneer Financial Services, Inc. 1,200 19,950
Presidential Life Corporation 400 4,125
Providian Corporation 300 12,863
Pxre Corporation 300 7,312
Reliance Group Holdings 1,800 13,500
Reliastar Financial Corporation 314 13,541
Sierra Health Services* 400 12,600
TIG Holdings, Inc. 400 11,600
Transatlantic Holdings 200 14,025
Travelers Group, Inc. 1,350 61,594
United Fire & Casualty Company 100 3,300
United Insurance Companies 300 6,806
Vesta Insurance Group 400 13,350
-------
763,120
</TABLE>
83
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
LEATHER AND LEATHER PRODUCTS (0.1%)
Weyco Group, Inc. 200 $ 8,150
LUMBER AND WOOD PRODUCTS (0.4%)
Champion Enterprises, Inc.* 600 12,525
Macmillan Bloedel 1,800 23,850
Skyline Corporation 400 10,000
--------
46,375
METAL MINING (0.9%)
Asarco, Inc. 600 16,575
Cleveland-Cliffs, Inc. 500 19,563
Cyprus Amax Minerals Company 1,200 27,150
Freeport McMoran, Inc. 400 14,200
Phelps Dodge 500 31,187
--------
108,675
MISCELLANEOUS MANUFACTURING INDUSTRIES (0.7%)
Hexcel Corporation* 1,400 21,350
Nacco Industries 500 27,688
Oneida, Ltd. 1,200 22,500
Schuller Corporation* 1,300 13,487
--------
85,025
MISCELLANEOUS RETAIL (0.2%)
Jack Eckerd Corporation* 600 13,575
National Media Corporation* 700 12,338
--------
25,913
</TABLE>
84
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
NONDEPOSITORY INSTITUTIONS (1.1%)
Aames Financial Corporation 450 $ 16,144
AT&T Capital Corporation 400 17,500
Finova Group, Inc. 200 9,750
First Financial Caribbean Corporation 800 16,100
Fund American Enterprise, Inc. 300 24,300
Textron, Inc. 400 31,950
United Companies Financial Corporation 330 11,261
--------
127,005
NONMETALLIC MINERALS, EXCEPT FUELS (0.2%)
Florida Rock Industries 200 5,175
Vulcan Materials Company 300 17,812
--------
22,987
OIL & GAS EXTRACTION (1.0%)
Belden & Blake Corporation* 700 14,787
BJ Service Warrants* 120 1,590
Cliffs Drilling Company* 700 23,538
Digicon, Inc.* 1,700 28,475
Mitchell Energy & Development Corporation 700 13,475
RPC Energy Services, Inc.* 700 8,050
Tetra Technologies, Inc.* 400 7,000
Tuboscope Vetco International Corporation* 1,200 13,500
USX-Marathon Group, Inc. 700 14,088
--------
124,503
</TABLE>
85
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PAPER AND ALLIED PRODUCTS (2.5%)
Abitibi Price, Inc. 800 $ 10,900
Boise Cascade Corporation 600 21,975
Bowater, Inc. 500 18,812
Consolidated Papers, Inc. 300 15,600
International Paper Company 1,207 44,508
Interpool, Inc. 800 14,600
James River Corporation of Virginia 400 10,550
Longview Fibre Company 700 11,900
Mercer International, Inc.* 800 10,700
Mosinee Paper Corporation 133 3,608
P.H. Glatfelter Company 500 9,188
Potlatch Corporation 500 19,562
Republic Group, Inc. 800 11,400
Temple-Inland, Inc. 600 28,050
Westvaco Corporation 2,050 61,244
--------
292,597
PERSONAL SERVICES (0.2%)
Jenny Craig, Inc.* 1,100 19,662
PCA International, Inc. 200 3,300
--------
22,962
PETROLEUM AND COAL PRODUCTS (1.8%)
Coastal Corporation 1,800 75,150
Elf Aquitane 600 22,050
Fina, Inc. 500 27,625
Repsol 1,000 34,750
</TABLE>
86
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
--------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PETROLEUM AND COAL PRODUCTS (1.8%)(CONTINUED)
Sasol, Ltd. 2,300 $ 24,581
Tesoro Petroleum Corporation* 1,000 11,500
Valero Energy Corporation 500 12,500
--------
208,156
PRIMARY METAL INDUSTRIES (3.8%)
AK Steel Holding Corporation 500 19,562
Alumax Inc.* 700 21,263
British Steel Plc 2,400 60,900
Carpenter Technology 700 22,400
Chaparral Steel Company 1,400 18,375
Lone Star Technologies* 900 10,013
Maxxam, Inc.* 300 11,775
Mueller Industries, Inc.* 800 33,200
Pitt-Des Moines, Inc. 100 4,250
Quanex Corporation 900 21,263
Reynolds Metals Company 700 36,487
RMI Titanium Company* 900 21,150
Roanoke Electric Steel Corporation 1,600 22,000
Steel of West Virginia, Inc.* 300 2,625
Texas Industries, Inc. 700 48,037
Tredegar Industries, Inc. 1,250 37,813
Tremont Corporation* 400 14,450
Tubos De Acero De Mexico* 2,600 24,537
USX-U.S. Steel Company 400 11,350
--------
441,450
</TABLE>
87
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
PRINTING AND PUBLISHING (0.3%)
Devon Group, Inc.* 300 $ 9,675
Graphic Industries 1,700 16,787
Quebecor Inc. 900 14,288
--------
40,750
RAILROAD TRANSPORTATION (0.1%)
Canadian Pacific Ltd. 700 15,400
RUBBER AND MISCELLANEOUS PLASTICS PRODUCTS (0.7%)
AEP Industries, Inc. 480 20,160
American Filtrona Corporation 300 9,338
Furon Company 800 19,800
Goodyear Tire & Rubber Company 300 14,475
Gundle/SLT Environmental, Inc.* 500 3,125
Spartech Corporation 1,400 14,875
--------
81,773
SECURITY AND COMMODITY BROKERS (2.8%)
A.G. Edwards, Inc. 500 13,562
Alex Brown, Inc. 400 22,600
Atalanta Sosnoff Capital* 700 6,869
Bear Stearns Companies, Inc. 730 17,246
Fahnestock Viner Holdings, Inc. 1,900 24,819
Inter-regional Financial Group 300 7,800
Jefferies Group 800 24,800
Lehman Brothers Holdings, Inc. 900 22,275
McDonald & Company Investments 500 9,875
</TABLE>
88
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SECURITY AND COMMODITY BROKERS (2.8%)(CONTINUED)
Morgan Keegan, Inc. 400 $ 5,300
Morgan Stanley Group, Inc. 600 29,475
Quick & Reilly Group, Inc. 872 28,340
Raymond, James Financial Corporation 700 15,838
Salomon, Inc 1,400 61,600
Sherwood Group, Inc.* 300 3,413
Value Line, Inc. 500 17,562
Waterhouse Investor Services* 300 11,137
----------
322,511
SPECIAL TRADE CONTRACTORS (0.3%)
Apogee Enterprises, Inc. 600 20,475
Layne Christensen Company* 800 10,200
----------
30,675
STONE, CLAY & GLASS PRODUCTS (1.5%)
Centex Construction Products 1,200 16,950
Hanson Plc 1,000 14,250
Intermet Corporation* 1,900 26,481
LaFarge Corporation 1,000 20,250
Lone Star Industries* 900 30,262
Medusa Corporation 1,100 34,100
Owens-Illinois, Inc.* 700 11,200
Puerto Rican Cement Company, Inc. 500 15,563
Southdown, Inc. 700 16,450
----------
185,506
</TABLE>
89
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
---------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TEXTILE MILL PRODUCTS (0.3%)
Chemfab Corporation* 900 $ 12,938
Culp, Inc. 987 13,571
Springs Industries, Inc. 400 20,200
----------
46,709
TOBACCO PRODUCTS (0.02%)
Swedish Match AB* 80 2,480
TRANSPORATION EQUIPMENT (2.4%)
A.O. Smith Corporation 100 2,500
Avondale Industries, Inc.* 1,000 17,938
Chrysler Corporation 500 31,000
Coachmen Industries, Inc. 1,100 38,500
Dana Corporation 500 15,500
Greenbrier Companies, Inc. 700 9,713
Harsco Corporation 200 13,450
Northrop Grumman Corporation 200 13,625
Oshkosh Truck Corporation 1,000 14,312
Regal Beloit 1,000 19,750
Sequa Corporation* 500 21,562
Teledyne, Inc. 500 18,062
Todd Shipyards Corporation* 500 3,750
Transtechnology Corporation 600 10,650
Trinity Industries 100 3,400
Varlen Corporation 753 15,918
Volvo AB 1,800 40,725
----------
290,355
</TABLE>
90
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION SERVICES (0.3%)
CSX Corporation 400 $ 19,300
PS Group Holdings, Inc.* 1,200 16,500
------------
35,800
TRANSPORTATION BY AIR (3.3%)
Alaska Airgroup, Inc.* 800 21,900
America West Airlines* 1,000 22,000
AMR Corporation* 1,000 91,000
British Airways Plc 900 77,175
Continental Airlines* 400 24,700
Delta Air Lines Inc. 1,100 91,300
KLM Royal Dutch Airlines, N.V. 810 25,718
Northwest Airlines* 400 15,775
US Air Group, Inc.* 1,000 18,000
------------
387,568
WATER TRANSPORTATION (0.5%)
Oglebay Norton Company 700 32,462
Stolt-Nielsen, S.A. 900 16,144
Transportacions Maritima Mexicana, S.A. 1,400 10,325
------------
58,931
WHOLESALE TRADE-DURABLE GOODS (2.1%)
Arrow Electronics, Inc.* 300 12,937
Avnet, Inc. 300 12,637
Barnes Group, Inc. 300 15,338
Bearings, Inc. 700 18,900
</TABLE>
91
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
WHOLESALE TRADE-DURABLE GOODS (2.1%)(CONTINUED)
Bell Industries, Inc.* 895 $ 14,991
Castle (A.M.) & Company 1,250 29,531
Commercial Metals Company 33 1,097
Hughes Supply, Inc. 900 31,275
Marshall Industries* 400 11,200
Reliance Steel & Aluminum 600 21,900
Rexel, Inc.* 1,700 24,013
United Industrial Corporation 600 3,675
Wyle Electronics 400 13,250
Wynn's International, Inc. 1,375 38,844
------------
249,588
WHOLESALE TRADE-NONDURABLE GOODS (0.8%)
Bindley Western Industries 400 6,700
Caraustar Industries, Inc. 600 16,050
Culbro Corporation* 300 17,888
Donnkenny, Inc.* 600 11,662
Foxmeyer Health Corporation* 800 11,900
Howell Corporation 300 4,069
United Stationers, Inc.* 800 18,900
World Fuel Services Corporation 350 6,344
------------
93,513
------------
TOTAL COMMON STOCKS (Cost $8,461,965) 9,794,422
</TABLE>
92
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (16.3%)
U.S. GOVERNMENT AGENCY (8.1%)
Federal National Mortgage Assoc., Discount Note,
5.28%, due 7/30/1996 $ 950,000 $ 945,959
U.S. GOVERNMENT AGENCY-COLLATERALIZED MORTGAGE
OBLIGATIONS (6.3%)
Fed. Home Loan Mort. Corp., 5.26%, due 7/15/1996 735,000 733,497
U.S. GOVERNMENT OBLIGATIONS (1.1%)
U.S. Treasury Bills, 4.93%, due 7/5/1996 25,000 24,986
U.S. Treasury Bills, 4.95%, due 7/5/1996 50,000 49,973
U.S. Treasury Bills, 4.97%, due 7/5/1996 50,000 49,972
-----------
124,931
REPURCHASE AGREEMENT (0.8%)
State Street Bank, 4%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond 9.25%, due 2/15/2016, value $450,756) 98,759 98,759
-----------
TOTAL SHORT-TERM SECURITIES (Cost $1,903,146) 1,903,146
-----------
TOTAL INVESTMENTS (100.0%) (Cost $10,365,111) $11,697,568
===========
</TABLE>
93
<PAGE>
Zweig Equity (Small Cap) Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
FUTURES CONTRACTS
CONTRACT
EXPIRATION AMOUNT AT UNREALIZED
DATE VALUE LOSS
---------------------------------------
<S> <C> <C> <C>
7 S&P 500 Futures
Contracts-Short+ 9/19/96 $2,368,800 $(23,058)
=======================
</TABLE>
+The above futures contracts are collateralized by a U.S. Treasury Bill at
$125,000 par value, due 7/5/96.
*Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $9,601,882 and $8,556,713, respectively.
Net unrealized appreciation for tax purposes aggregated $1,331,128, of which
$1,489,004 related to appreciated investment securities and $157,876 related to
depreciated investment securities. The aggregate cost of securities is
$10,366,439 for tax purposes.
See accompanying notes.
94
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $10,405,473)
(Note l)-See accompanying schedule $10,329,106
Receivable for investment securities sold 247,018
Interest and other receivables 150,149
-----------
TOTAL ASSETS 10,726,273
LIABILITIES
Payable for investment securities purchased 672,514
Accounts payable and accrued expenses 25,637
-----------
TOTAL LIABILITIES 698,151
-----------
NET ASSETS $10,028,122
===========
Net Assets consist of:
Paid-in capital $ 9,874,934
Undistributed net investment income 328,028
Accumulated undistributed net realized loss on investments (98,473)
Net unrealized depreciation on investment securities (76,367)
-----------
NET ASSETS, for 940,767 shares outstanding $10,028,122
===========
NET ASSET VALUE, offering and redemption price per share $ 10.66
===========
</TABLE>
See accompanying notes.
95
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest $ 416,344
EXPENSES (Note 2)
Investment advisory and management fees 52,456
Custody and accounting fees 42,940
Professional fees 15,859
Directors' fees and expenses 6,000
Other expenses 6,849
----------
Total expenses before reimbursement 124,104
Less: expense reimbursement (Note 2) (39,568)
----------
Net expenses 84,536
----------
Net investment income 331,808
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (Note l)
Net realized gain on investments 39,828
Change in unrealized appreciation on investment securities (188,379)
----------
Net loss on investments (148,551)
----------
Net increase in net assets resulting from operations $ 183,257
==========
</TABLE>
See accompanying notes.
96
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
-------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 331,808 $ 272,169
Net realized gain on investments 39,828 32,319
Change in net unrealized appreciation
(depreciation) (188,379) 253,467
-------------------------
Net increase in net assets resulting from
operations 183,257 557,955
Distributions to shareholders from:
Net investment income (268,795) (98,000)
Capital share transactions:
Proceeds from sales of shares 5,775,502 2,673,991
Proceeds from reinvested dividends 268,795 98,000
Cost of shares redeemed (1,346,134) (2,676,948)
-------------------------
Net increase in net assets resulting from share
transactions 4,698,163 95,043
-------------------------
Total increase in net assets 4,612,625 554,998
NET ASSETS
Beginning of period 5,415,497 4,860,499
-------------------------
End of period (including undistributed net
investment income of $328,028 and $268,795,
respectively) $10,028,122 $ 5,415,497
=========================
OTHER INFORMATION
Shares:
Sold 541,094 263,300
Issued through reinvestment of dividends 25,172 9,744
Redeemed (123,043) (261,523)
-------------------------
Net increase 443,223 11,521
=========================
</TABLE>
See accompanying notes.
97
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Financial Highlights
<TABLE>
<CAPTION>
JANUARY 5, 1993
(COMMENCEMENT)
YEAR ENDED JUNE 30, OF OPERATIONS
----------------------- THROUGH JUNE 30,
1996 1995 1994 1993
-----------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.88 $10.00 $10.43 $ 10.00
Income from investment operations:
Net investment income 0.39 0.56 0.20 0.19
Net realized and unrealized gain
(loss) on investments (0.03) 0.53 (0.52) 0.24
-----------------------------------------
Total from investment operations 0.36 1.09 (0.32) 0.43
Less distributions:
From net investment income (0.58) (0.21) (0.11) -
-----------------------------------------
Net asset value, end of period $ 10.66 $10.88 $10.00 $ 10.43
=========================================
TOTAL RETURN (A) 3.29% 11.08% (3.06%) 8.67%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in
thousands) $10,028 $5,415 $4,861 $ 906
Ratio of expenses to average net
assets 1.32% 1.40% 1.56% 1.56%
Ratio of net investment income to
average net assets 5.18% 5.41% 3.62% 3.86%
Ratio of expenses to average net
assets before voluntary expense
reimbursement (Note 2) 1.94% 1.59% 2.49% 15.72%
Ratio of net investment income
(loss) to average net assets
before voluntary expense
reimbursement (Note 2) 4.56% 5.22% 2.68% (1.64%)
Portfolio turnover rate 392% 432% 527% 103%
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
J.P. Morgan Investment Management, Inc. became sub-adviser of the Portfolio
effective April 1, 1996 (see note 2).
98
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-----------------------
<S> <C> <C>
CORPORATE BONDS (23.0%)
AUTO REPAIR, SERVICES, & PARKING (1.9%)
World Omni Automobile Lease Securitization Trust
Series 96-A, Class 1A, 6.30%, due 6/25/2002 $200,000 $ 199,531
DEPOSITORY INSTITUTIONS (3.4%)
Midland Bank PLC, 7.625% due 11/28/2025 200,000 202,628
Trans Financial Bank N.A., 6.320%, due 10/17/1997 150,000 149,525
----------
352,153
ELECTRIC, GAS, & SANITARY SERVICES (1.8%)
Columbia Gas System, 7.620%, due 11/28/2025 200,000 188,034
NONDEPOSITORY INSTITUTIONS (12.5%)
Caterpillar Financial Asset Trust, Series 96, Class A3,
6.30%, due 2/15/2005 250,000 249,766
Chase Manhattan Credit Card Master Trust, Series 96-3,
Class A, 7.04%, due 2/15/2005 200,000 202,312
First Omni Bank Credit Card Master Trust 96, Class A,
6.65%, due 9/15/2003 200,000 199,500
Ford Motor Credit Corporation, 5.750%, due 01/25/2001 135,000 128,863
Ford Motor Credit Corporation, 7.470%, due 7/29/1999 300,000 306,624
Sears Credit Account Master Trust, Series 96, Class A,
6.50%, due 10/15/2003 200,000 199,938
----------
1,287,003
</TABLE>
99
<PAGE>
Pinnacle Fixed Income Ponfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-----------------------
<S> <C> <C>
TRANSPORTATION EQUIPMENT (3.4%)
Premier Auto Trust 95, Class A5, 6.150%, due 3/6/2000 $350,000 $ 347,071
----------
TOTAL CORPORATE BONDS (Cost $2,380,840) 2,373,792
GOVERNMENT SECURITIES (72.6%)
U.S. GOVERNMENT AGENCY - COLLATERALIZED MORTGAGE
OBLIGATIONS (10.1%)
Fed. Home Loan Mort. Corp., Gold, 6.00% due 4/1/2011 150,517 142,568
Fed. Home Loan Mort. Corp., Remic Series 1694, 6.50%,
due 9/15/2023 310,000 293,917
Fed. Home Loan Mort. Corp., Gold, 6.50% due 3/1/2026 201,374 188,599
Fed. Home Loan Mort. Corp., Gold, 7.00% due 4/1/2026 151,249 145,624
Fed. Home Loan Mort. Corp., 8.00% due 5/1/2014 64,451 65,937
Fed. Home Loan Mort. Corp., 8.50% due 8/1/2026* 200,000 204,969
----------
1,041,614
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (32.1%)
Federal National Mortgage Assoc., 6.00%, due 4/1/2026 201,507 183,244
Federal National Mortgage Assoc., Class G, 6.50%,
due 11/25/2007 300,000 289,125
Federal National Mortgage Assoc., 7.00%, due 1/1/2026 351,294 337,899
Federal National Mortgage Assoc., 7.00%, due 4/1/2026 137,487 132,459
Federal National Mortgage Assoc., 7.50%, due 1/1/2026 246,101 242,793
Federal National Mortgage Assoc., 7.50%, due 5/1/2026 131,892 130,119
Federal National Mortgage Assoc., 7.50%, due 7/1/2026* 270,000 266,876
Federal National Mortgage Assoc., 7.50%, due 11/1/2025 303,000 298,928
</TABLE>
100
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------
<S> <C> <C>
GOVERNMENT SECURITIES (CONTINUED)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (32.1%)(CONTINUED)
Federal National Mortgage Assoc., 8.00%, due 4/1/2026 $ 141,711 $ 142,774
Federal National Mortgage Assoc., 8.50%, due 5/1/2009 130,238 132,680
Federal National Mortgage Assoc., 9.00%, due 5/1/2025 190,350 198,617
Govt. National Mortgage Assoc., 7.00%, due 3/15/2026 201,414 193,106
Govt. National Mortgage Assoc., 7.50%, due 1/15/2026 254,208 250,553
Govt. National Mortgage Assoc., 8.00%, due 11/15/2006 21,343 21,906
Govt. National Mortgage Assoc., 8.00%, due 11/15/2006 31,210 32,107
Govt. National Mortgage Assoc., 8.00%, due 4/15/2022 255,045 258,233
Govt. National Mortgage Assoc., 8.00%, due 8/1/2026* 200,000 201,468
----------
3,312,887
U.S. GOVERNMENT OBLIGATIONS (26.9%)
U.S. Treasury Bond, 7.125%, due 2/15/2023 100,000 101,078
U.S. Treasury Bond, 8.50%, due 2/15/2020 240,000 279,862
U.S. Treasury Note, 5.625%, due 1/31/1998 510,000 506,894
U.S. Treasury Note, 5.75%, due 9/30/1997 360,000 359,323
U.S. Treasury Note, 5.75%, due 8/15/2003 90,000 85,711
U.S. Treasury Note, 6.25%, due 2/15/2003 250,000 245,585
U.S. Treasury Note, 6.37%, due 3/31/2001 540,000 537,635
U.S. Treasury Note, 6.50%, due 5/15/2005 100,000 98,687
U.S. Treasury Note, 6.875%, due 3/31/2000 185,000 187,688
U.S. Treasury Note, 7.25%, due 5/15/2004 100,000 103,609
U.S. Treasury Note, 7.625%, due 2/15/2025 45,000 48,488
U.S. Treasury Note, 8.125%, due 8/15/2019 200,000 224,500
----------
2,779,060
</TABLE>
101
<PAGE>
Pinnacle Fixed Income Portfolio
(formerly Mitchell Hutchins Fixed Income Portfolio)
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------
<S> <C> <C>
FOREIGN GOVERNMENT OBLIGATIONS (3.5%)
Quebec Province, 7.125%, due 2/9/2024 $ 300,000 $ 274,131
Republic of Italy, 6.875%, due 9/27/2023 100,000 90,172
------------
364,303
TOTAL GOVERNMENT SECURITIES (Cost $7,567,183) 7,497,864
SHORT-TERM SECURITIES (4.4%)
REPURCHASE AGREEMENT (4.4%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $467,656) 457,450 457,450
------------
TOTAL SHORT-TERM SECURITIES (Cost $457,450) 457,450
------------
TOTAL INVESTMENTS (100.00%) (Cost $10,405,473) $ 10,329,106
============
</TABLE>
* Security purchased on a delayed delivery basis. (Note 1)
OTHER INFORMATION:
Purchases and sales of securities excluding short-term securities, for the year
ended June 30, 1996, aggregated $29,279,979 and $24,403,861, respectively. Net
unrealized depreciation for tax purposes aggregated $78,692, of which $97,623
related to depreciated investment securities and $18,931 related to appreciated
investment securities. The aggregate cost of securities for tax purposes is
$10,407,798.
See accompanying notes.
102
<PAGE>
ARM Capital Advisors Money Market Portfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at amortized cost
(Note 1)-See accompanying schedule $ 8,833,114
Interest and other receivables 58,404
-----------
TOTAL ASSETS 8,891,518
LIABILITIES
Cash overdraft 14,149
Accounts payable and accrued expenses 21,522
-----------
TOTAL LIABILITIES 35,671
-----------
NET ASSETS, for 8,855,847 shares outstanding $ 8,855,847
===========
NET ASSET VALUE, offering and redemption price per share $ 1.00
===========
</TABLE>
See accompanying notes.
103
<PAGE>
ARM Capital Advisors Money Market Portfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest $ 504,693
EXPENSES (Note 2)
Investment advisory and management fees 54,685
Custody and accounting fees 44,614
Professional fees 15,859
Directors' fees and expenses 6,000
Regulatory fees 1,850
Other expenses 3,934
---------
Total expenses before reimbursement 126,942
Less: expense reimbursement (Note 2) (29,263)
---------
Net expenses 97,679
---------
Net investment income 407,014
---------
Net increase in net assets resulting from operations $ 407,014
=========
</TABLE>
See accompanying notes.
104
<PAGE>
ARM Capital Advisors Money Market Portfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
----------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 407,014 $ 267,641
Distributions to shareholders from:
Net investment income (407,014) (267,641)
Capital share transactions:
Proceeds from sales of shares 18,569,332 11,346,439
Proceeds from reinvested distributions 407,014 267,641
Cost of shares redeemed (16,873,594) (10,313,402)
---------------------------
Net increase in net assets resulting from share
transactions 2,102,752 1,300,678
---------------------------
Total increase in net assets 2,102,752 1,300,678
NET ASSETS
Beginning of period 6,753,095 5,452,417
---------------------------
End of period $ 8,855,847 $ 6,753,095
===========================
OTHER INFORMATION
Shares:
Sold 18,569,332 11,346,439
Issued through reinvestment of distributions 407,014 267,641
Redeemed (16,873,594) (10,313,402)
---------------------------
Net increase 2,102,752 1,300,678
===========================
</TABLE>
See accompanying notes.
105
<PAGE>
ARM Capital Advisors Money Market Portfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Financial Highlights
<TABLE>
<CAPTION>
JANUARY 12, 1993
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
---------------------------------------- THROUGH JUNE 30,
1996 1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.05 0.04 0.02 0.01
Less distributions:
From net investment income (0.05) (0.04) (0.02) (0.01)
---------------------------------------------------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========================================================
TOTAL RETURN (A) 4.55% 4.30% 2.04% 1.66%
RATIOS AND SUPPLEMENTAL DATA (B)
Net Assets, end of period (in
thousands) $ 8,856 $ 6,753 $ 5,452 $ 754
Ratio of expenses to average net
assets 1.12% 1.15% 1.29% 1.34%
Ratio of net investment income to
average net assets 4.67% 4.31% 2.19% 1.67%
Ratio of expenses to average net
assets before voluntary expense
reimbursement (Note 2) 1.46% 1.27% 2.08% 22.41%
Ratio of net investment income (loss)
to average net assets before
voluntary expense reimbursement
(Note 2) 4.33% 4.20% 1.40% (2.05%)
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
ARM Capital Advisors, Inc. began managing the Portfolio directly without a
sub-adviser effective April 1, 1996 (see note 2).
106
<PAGE>
ARM Capital Advisors Money Market Porfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (100.0%)
CORPORATE BONDS (94.7%)
AUTO REPAIR, SERVICES, & PARKING (6.8%)
Hertz Corporation, 5.36%, due 7/12/1996 $ 400,000 $ 399,345
PHH Corporation, 5.79%, due 9/16/1996* 200,000 199,980
---------
599,325
DEPOSITORY INSTITUTIONS (7.7%)
Bankers Trust New York Corporation, 5.3%, due 7/3/1996 328,000 327,903
Nationsbank Corporation, 4.75%, due 8/15/1996 100,000 99,879
Wachovia Bank & Trust Co., 5.8125%, due 1/3/1997* 250,000 249,858
---------
677,640
ELECTRIC, GAS, & SANITARY SERVICES (2.8%)
WMX Technologies Inc., 5.37%, due 8/12/1996 250,000 248,434
GENERAL MERCHANDISE STORES(5.0%)
Sears Roebuck Acceptance Corporation, 5.38%,
due 7/18/1996 442,000 440,877
INSURANCE CARRIERS (4.5%)
American General Finance Corporation, 5.42%, due 10/9/1996 405,000 398,903
NONDEPOSITORY INSTITUTIONS (66.3%)
American Express Credit Corporation, 5.28%, due 7/2/1996 404,000 403,941
Associate Corporation, 5.29%, due 7/1/1996 405,000 405,000
Avco Financial Services Inc., 5.37%, due 8/12/1996 404,000 401,466
Beneficial Corporation, 5.31%, due 7/9/1996 409,000 408,517
Chevron Corporation, 5.25%, due 7/5/1996 415,000 414,758
</TABLE>
107
<PAGE>
ARM Capital Advisors Money Market Portfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
NONDEPOSITORY INSTITUTIONS (66.3%)(CONTINUED)
CIT Group Holdings, 5.38, due 7/26/1996 $ 230,000 $ 229,141
CIT Group Holdings, 7.125%, due 11/15/1996 200,000 201,138
Ford Motor Credit Corporation, 5.37%, due 7/16/1996 425,000 424,049
General Electric Capital Corporation, 5.37%, due
7/17/1996 432,000 430,969
General Motors Acceptance Corporation, 5.32%, due
7/15/1996 200,000 199,586
General Motors Acceptance Corporation, 5.34%, due
7/15/1996 205,000 204,574
Household Finance Corporation, 5.31%, due 7/8/1996 410,000 409,577
IBM Credit Corporation, 5.35%, due 7/11/1996 406,000 405,397
John Deere Capital Corporation, 5.42%, due 10/11/1996 395,000 388,934
Morgan Guaranty Trust Company, 5.25%, due 1/15/1997 200,000 200,097
Norwest Bancorp, 7.875%, due 1/30/1997 400,000 405,753
Prudential Funding Corporation, 5.31%, due 7/10/1996 320,000 319,575
----------
5,852,472
SECURITY & COMMODITY BROKERS (1.7%)
Merrill Lynch and Company, Inc., 4.9%, due 10/28/1996 150,000 147,546
----------
TOTAL CORPORATE BONDS (Cost $8,365,197) 8,365,197
</TABLE>
108
<PAGE>
ARM Capital Advisors Money Market Portfolio
(formerly Mitchell Hutchins Money Market Portfolio)
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-----------------------------
<S> <C> <C>
GOVERNMENT SECURITIES (5.3%)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES (2.3%)
Federal National Mortgage Assoc., 5.68%,
due 10/7/1996 $ 200,000 $ 200,075
U.S. GOVERNMENT OBLIGATIONS (3.0%)
U.S. Treasury Bills, 4.88%, due 8/29/1996 270,000 267,842
---------
TOTAL GOVERNMENT SECURITIES (Cost $468,020) 467,917
---------
TOTAL SHORT-TERM SECURITIES (100.0%) (Cost $8,833,114) $8,833,114
==========
* Variable rate note or floating note; rate shown effective at 6/30/96.
See accompanying notes.
</TABLE>
109
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $13,775,095)
(Note 1)-See accompanying schedule $14,825,464
Cash 56,019
Receivable for investment securities sold 138,030
Dividends, interest and other assets 71,647
-----------
TOTAL ASSETS 15,091,160
LIABILITIES
Payable for investment securities purchased 96,750
Accounts payable and accrued expenses 42,315
-----------
TOTAL LIABILITIES 139,065
-----------
NET ASSETS $14,952,095
===========
Net Assets consist of:
Paid-in capital $13,979,950
Accumulated undistributed net realized loss on investments and
foreign currency transactions (78,248)
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 1,050,393
-----------
NET ASSETS, for 1,377,245 shares outstanding $14,952,095
===========
NET ASSET VALUE, offering and redemption price per share $ 10.86
===========
See accompanying notes.
</TABLE>
110
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $16,511) $197,211
Interest 36,008
--------
Total investment income 233,219
EXPENSES (Note 2)
Investment advisory and management fees 133,310
Custody and accounting fees 115,178
Professional fees 15,861
Directors' fees and expenses 6,000
Other expenses 8,165
--------
Total expenses before reimbursement 278,514
Less: expense reimbursement (Note 2) (28,405)
--------
Net expenses 250,109
--------
Net investment loss (16,890)
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY (Note 1)
Net realized loss on:
Investment securities (21,414)
Foreign currency transactions (7,184)
--------
Net realized loss (28,598)
Change in unrealized appreciation on:
Investment securities 832,439
Translation of assets and liabilities in foreign currencies (325)
--------
Change in unrealized appreciation 832,114
--------
Net gain on investments and foreign currencies 803,516
--------
Net increase in net assets resulting from operations $786,626
========
</TABLE>
See accompanying notes.
111
<PAGE>
Morgan Stanley Asian Growth Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
--------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income (loss) $ (16,890) $ 72,537
Net realized loss on investments and foreign
currency transactions (28,598) (100,052)
Change in net unrealized appreciation on
investments and translation of assets and liabilities
in foreign currency 832,114 218,279
--------------------------
Net increase in net assets resulting from
operations 786,626 190,764
Distributions to shareholders from:
Net investment income (46,376) (500)
Net realized gain on investments (14,536) --
--------------------------
Total distributions (60,912) (500)
Capital share transactions:
Proceeds from sales of shares 5,146,338 12,547,902
Proceeds from reinvested distributions 60,912 500
Cost of shares redeemed (3,805,532) (1,819,360)
--------------------------
Net increase in net assets resulting from share
transactions 1,401,718 10,729,042
--------------------------
Total increase in net assets 2,127,432 10,919,306
NET ASSETS
Beginning of period 12,824,663 1,905,357
--------------------------
End of period (including undistributed net
investment income of $14,748 at June 30, 1995) $14,952,095 $12,824,663
==========================
OTHER INFORMATION
Shares:
Sold 482,863 1,262,727
Issued through reinvestment of distributions 6,543 49
Redeemed (371,590) (193,842)
--------------------------
Net increase 117,816 1,068,934
==========================
</TABLE>
See accompanying notes.
112
<PAGE>
Morgan Stanley Asian Growth Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
------------------- THROUGH JUNE 30,
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $ 10.18 $ 10.00 $10.00
Income from investment operations:
Net investment income (loss) (0.01) 0.01 0.00 (C)
Net realized and unrealized gain on
investments 0.74 0.17 --
--------------------------------------
Total from investment operations 0.73 0.18 --
Less distributions:
From net investment income (0.04) (0.00) (C) --
From net realized gain (0.01) -- --
--------------------------------------
Total distributions (0.05) -- --
--------------------------------------
Net asset value, end of period $ 10.86 $ 10.18 $10.00
======================================
TOTAL RETURN (A) 7.19% 1.80% 0.52%
RATIOS AND SUPPLEMENTAL DATA (B)
Net assets, end of period (in thousands) $14,952 $12,825 $1,905
Ratio of expenses to average net assets 2.00% 1.92% 0.75%
Ratio of net investment income to average
net assets (0.13%) 0.76% 0.59%
Ratio of expenses to average net assets
before voluntary expense
reimbursement (Note 2) 2.21% 1.92% 9.79%
Ratio of net investment income to average
net assets before voluntary expense
reimbursement (Note 2) (0.34%) 0.76% (8.44%)
Portfolio turnover rate 51% 30% --
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Less than $0.01 per share.
113
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-------------------------
<S> <C> <C>
COMMON STOCKS (91.9%)
CHINA (0.2%)
Yizheng Chemical Fibre Company 150,000 $ 33,137
HONG KONG (27.0%)
Asia Satellite Telecommunications Holdings, Ltd. 8,000 23,719
Cheung Kong Holdings, Ltd. 83,000 597,780
China Light & Power Company, Ltd. 23,000 104,293
Citic Pacific, Ltd. 52,000 210,265
CP Pokphand Company 119,000 47,273
Guangdong Investments 155,000 98,081
Hang Seng Bank, Ltd. 26,800 270,053
Harbin Power Equipment Company 97,000 14,536
Hong Kong Electric Holdings, Ltd. 22,000 67,074
Hong Kong Telecommunications, Ltd. 217,000 389,668
Hopewell Holdings 75,000 40,694
HSBC Holdings Plc. 29,855 451,256
Hutchison Whampoa, Ltd. 82,000 515,896
New World Infrastructure, Ltd. 63,000 292,183
Sun Hung Kai Properties 36,000 363,921
Swire Pacific, Ltd. 35,000 299,553
Varitronix International, Ltd. 35,000 73,023
Wharf Holdings, Ltd. 35,000 125,247
----------
3,984,515
INDIA (0.7%)
Graism Industries 1,000 18,630
Hindalco Industries, Ltd. 1,000 37,875
Mahindra & Mahindra, Ltd. 4,000 47,000
----------
103,505
</TABLE>
114
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INDONESIA (8.4%)
Binamtara Cita 26,500 $ 33,317
Private Astra International 51,000 73,985
Private Bank International Indonesia 16,500 81,560
Private Barito Pacific Timber 35,000 22,942
Private Gudang Garam 54,000 231,528
Private Hanjaya Mandala Sampoerna 13,000 148,077
Private Indah Kiat Pulp & Paper Corporation 105,000 102,676
Private Indocement 20,000 68,773
Private Kalbe Farma 16,500 36,879
Private Semen Gresik 11,000 32,033
Private Sorini Corporation 20,000 110,037
Private Suba Indah 10,000 7,737
Private Telekomunikasi Indonesia 198,500 300,758
---------
$1,250,302
MALAYSIA (21.5%)
Ammb Holdings Berhad 6,000 84,202
Edaran Otomobil Nasional 17,000 162,911
Genting Berhad 50,000 390,938
Industrial Oxygen Incorporated Berhad 50,000 69,366
Konsortium Perkapalan Berhad 3,000 24,791
Leader Universal Holdings Berhad 27,000 76,323
Magnum Corporation Berhad 22,000 37,225
Malayan Banking Berhad 39,000 375,301
Malaysian International Shipping Berhad 50,000 155,373
Petronas Gas Berhad 67,000 287,450
Public Bank Berhad 26,000 71,933
</TABLE>
115
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
MALAYSIA (21.5%) (CONTINUED)
Renong Berhad* 109,000 $ 173,945
Renong Berhad Warrants 13,625 3,824
Renong Berhad Rights* 21,800 9,877
Resorts World Berhad 50,000 286,688
Sime Darby Berhad 28,000 77,466
TA Enterprise Berhad 48,000 75,060
Telekom Malaysia Berhad 43,000 382,759
Tenaga Nasional Berhad 68,000 286,287
United Engineers, Ltd. 22,000 152,606
----------
3,184,325
PHILIPPINES (5.5%)
Ayala Corporation 23,800 46,624
Ayala Land, Inc. 29,000 52,043
C&P Homes, Inc. 92,100 80,003
DMCI Holdings, Inc. 63,300 45,318
JG Summit Holdings 476,700 178,376
Manila Electric Company 11,500 120,752
Petron Corporation 214,275 98,179
Philippine Long Distance Telephone Company 2,200 131,042
SM Prime Holdings, Ltd. 242,160 62,875
----------
815,212
SINGAPORE (13.5%)
City Developments, Ltd. 2,000 23,717
Comfort Group, Ltd. 84,000 83,333
CSA Holding, Ltd. 32,000 31,519
</TABLE>
116
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
-----------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
SINGAPORE (13.5%) (CONTINUED)
DBS Land,Ltd. 9,000 $ 29,549
Development Bank of Singapore 19,000 236,961
Fraser & Neave, Ltd. 7,200 74,490
Kay Hian James Capel Holdings, Ltd. 75,000 79,188
Keppel Corporation, Ltd. 27,000 225,765
Overseas Chinese Banking 23,000 268,920
Overseas Chinese Banking Rights 2,300 -
Sembawamg Corporation, Ltd. 11,000 54,563
Singapore Airlines, Ltd. 14,000 147,817
Singapore Press Holdings 7,200 141,327
Singapore Technologies 52,000 137,812
Straits Steamship Land 28,000 93,651
Straits Steamship Land Warrants 20,250 25,399
Straits Trading Company 20,000 52,438
Sunright, Ltd. 48,000 49,320
United Overseas Bank 26,000 248,724
----------
2,004,493
SOUTH KOREA (0.2%)
Samsung Electronics 687 35,552
TAIWAN (0.7%)
Want Want Holdings 40,000 107,600
THAILAND (11.6%)
Advanced Information Service 3,200 57,843
Bangkok Bank Company, Ltd. 23,700 321,065
</TABLE>
117
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
NUMBER
OF SHARES VALUE
------------------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
THAILAND (11.6%) (CONTINUED)
Finance One Company, Ltd. 29,600 $ 191,171
National Finance & Securities Company, Ltd. 31,000 137,951
Phantra Thanakit Company, Ltd. 11,000 76,675
Shinawatra Computer Company 3,500 75,808
Siam Cement Company 1,020 50,050
Siam Commercial Bank Company 20,600 298,539
Telecomasia Corporation* 65,900 144,683
Thai Farmers Bank 27,300 298,878
United Communication Industry 5,200 69,625
-----------
1,722,288
UNITED STATES (2.6%)
Guangshen Railway 1,000 19,125
Korea Electric Power Corporation 3,000 72,750
Korea Mobil Telecom 6,000 96,750
Pohang Iron & Steel 2,500 60,938
Samsung Electronics America 2,641 136,671
-----------
386,234
TOTAL COMMON STOCK (Cost $12,576,794) $13,627,163
</TABLE>
118
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------------------
<S> <C> <C>
SHORT-TERM SECURITIES (8.1%)
REPURCHASE AGREEMENT (8.1%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $1,223,594) $1,198,301 $ 1,198,301
-----------
TOTAL SHORT-TERM SECURITIES (Cost $1,198,301) 1,198,301
-----------
TOTAL INVESTMENTS (100.0%) (Cost $13,775,095) $14,825,464
===========
</TABLE>
* Non-income producing
OTHER INFORMATION:
Purchases and sales of securities, excluding short-term securities, for the
year ended June 30, 1996, aggregated $6,713,800 and $6,378,020, respectively.
Net unrealized appreciation for tax purposes aggregated $1,050,393, of which
$1,657,517 related to appreciated investment securities and $607,124 related
to depreciated investment securities. The aggregate cost of securities is
$13,775,094 for tax purposes.
119
<PAGE>
Morgan Stanley Asian Growth Portfolio
Schedule of Investments (continued)
As of June 30, 1996, the Portfolio had investments in the following industries.
The allocation is based on the percentage of total Portfolio investments.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
INDUSTRY
Agricultural Services 0.5%
Amusement & Recreation Services 4.8
Chemicals & Allied Products 0.5
Communications 8.3
Depository Institutions 21.7
Electric, Gas, & Sanitary Services 5.1
Electronic & Other Electric Equipment 4.2
Food & Kindred Products 1.6
Forestry 0.2
Furniture & Homefurnishings Stores 0.2
Government 8.5
Holding & Other Investment Offices 20.9
Hotels & Other Lodging Places 0.8
Industrial Machinery & Equipment 0.5
Miscellaneous Manufacturing Industries 0.5
Nondepository Institutions 0.5
Oil & Gas Extraction 1.9
Paper & Allied Products 0.7
Primary Metal Industries 0.8
Printing & Publishing 1.0
Railroad Transportation 0.1
Real Estate 4.6
Securities & Commodity Brokers 0.9
Stone, Clay, & Glass Products 1.0
Tobacco Products 2.6
Transportation by Air 3.0
Transportation Equipment 1.9
Water Transportation 1.3
Wholesale Trade - Durable Goods 1.4
-----------
100.0%
===========
</TABLE>
See accompanying notes.
120
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Assets and Liabilities
June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investment in securities, at value (cost $5,557,146)
(Note l)--See accompanying schedule $5,566,424
Cash 204
Receivable for investment securities sold 186,006
Interest and other assets 112,138
----------
TOTAL ASSETS 5,864,772
LIABILITIES
Payable for investment securities purchased 52,237
Accounts payable and accrued expenses 23,067
----------
TOTAL LIABILITIES 75,304
----------
NET ASSETS $5,789,468
==========
Net Assets consist of:
Paid-in capital $5,112,018
Undistributed net investment income 615,642
Accumulated undistributed net realized gain on investments 52,530
Net unrealized appreciation on investment securities 9,278
----------
NET ASSETS, for 515,009 shares outstanding $5,789,468
==========
NET ASSET VALUE, offering and redemption price per share $ 11.24
==========
</TABLE>
See accompanying notes.
121
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Operations
Year Ended June 30, 1996
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME
Dividends $ 1,726
Interest 728,096
----------
Total investment income 729,822
EXPENSES (Note 2)
Investment advisory and management fees 52,196
Custody and accounting fees 43,207
Professional fees 15,861
Directors' fees and expenses 6,000
Regulatory fees 1,135
Other expenses 7,893
----------
Total expenses before reimbursement 126,292
Less: expense reimbursement (Note 2) (12,689)
----------
Net expense 113,603
----------
Net investment income 616,219
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Note 1)
Net realized gain on investments 142,020
Change in unrealized depreciation on investment securities 276,653
----------
Net gain on investments 418,673
----------
Net increase in net assets resulting from operations $1,034,892
==========
</TABLE>
See accompanying notes.
122
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995
-------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 616,219 $ 533,032
Net realized gain (loss) on investments 142,020 (83,442)
Change in net unrealized depreciation 276,653 (267,375)
-------------------------
Net increase in net assets resulting from operations 1,034,892 182,215
Distributions to shareholders from:
Net investment income (532,957) (300)
Net realized gain on investments (6,625) -
-------------------------
Total distributions (539,582) (300)
Capital share transactions:
Proceeds from sales of shares 1,113,906 9,617,478
Proceeds from reinvested distributions 539,582 300
Cost of shares redeemed (2,601,227) (4,245,280)
-------------------------
Net increase (decrease) in net assets from share
transactions (947,739) 5,372,498
-------------------------
Total increase (decrease) in net assets (452,429) 5,554,413
NET ASSETS
Beginning of period 6,241,897 687,484
-------------------------
End of period (including undistributed net investment
income of $615,642 and $532,957, respectively) $ 5,789,468 $ 6,241,897
=========================
OTHER INFORMATION
Shares:
Sold 103,380 966,462
Issued through reinvestment of distributions 54,452 30
Redeemed (242,988) (435,053)
-------------------------
Net increase (decrease) (85,156) 531,439
=========================
</TABLE>
See accompanying notes.
123
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Financial Highlights
<TABLE>
<CAPTION>
JUNE 15, 1994
(COMMENCEMENT
YEAR ENDED JUNE 30, OF OPERATIONS)
--------------------- THROUGH JUNE 30,
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
SELECTED PER-SHARE DATA
Net asset value, beginning of period $10.40 $10.00 $10.00
Income from investment operations:
Net investment income 1.25 0.89 0.00(C)
Net realized and unrealized gain
(loss) on investments 0.54 (0.49) -
-------------------------------------
Total from investment operations 1.79 0.40 -
Less distributions:
From net investment income (0.94) (0.00)(C) -
From net realized gain on investments (0.01) - -
-------------------------------------
Total distributions (0.95) - -
-------------------------------------
Net asset value, end of period $11.24 $10.40 $10.00
=====================================
TOTAL RETURN(A) 18.41% 4.00% 0.79%
RATIOS AND SUPPLEMENTAL DATA(B)
Net assets, end of period (in
thousands) $5,789 $6,242 $ 687
Ratio of expenses to average net
assets 1.85% 1.61% 0.85%
Ratio of net investment income to
average net assets 10.04% 9.28% 0.80%
Ratio of expenses to average net
assets before voluntary expense
reimbursement (Note 2) 2.06% 1.61% 24.78%
Ratio of net investment income to
average net assets before voluntary
expense reimbursement (Note 2) 9.83% 9.28% (23.13%)
Portfolio turnover rate 122% 142% -
</TABLE>
(A) Total returns for periods less than one year are not annualized.
(B) Data expressed as a percentage are annualized as appropriate.
(C) Less than $0.01 per share.
124
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments
June 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
--------------------------
<S> <C> <C>
CORPORATE BONDS (89.8%)
ARGENTINA (4.9%)
Banco De Galicia, 9.00%, due 11/1/2003 $300,000 $270,000
BRAZIL (8.5%)
Iochpe-Maxion S.A., 12.375%, due ll/8/2002(a) 500,000 472,500
MEXICO (5.2%)
Cemex SA de C.V., 9.50%, due 9/20/2001 300,000 289,875
UNITED STATES (71.2%)
Algoma Steel Inc. 130,000 126,100
Aircraft Lease Portfolio Securitization, 12.75%,
due 6/15/2006(a) 50,000 49,875
Asia Pulp and Paper International Finance, Ltd., 11.75%,
due 10/1/2005 55,000 56,375
Big V Supermarkets, 11.00%, due 2/15/2004 20,000 18,675
Cablevision Systems, 9.875%, due 5/15/2006 45,000 43,425
Collins & Aikman, 11.50%, due 4/15/2006 20,000 20,250
Comcast Cellular, 0.0%, due 3/5/2000(b) 40,000 27,400
Comcast Corporation, 9.375%, due 5/15/2005 30,000 28,875
Contintental Cablevision, 9.50%, due 8/1/2013 45,000 48,600
Courtyard by Marriott, 10.75%, due 2/1/2008 50,000 49,000
Crown Paper Company, 11.00%, due 9/1/2005 55,000 52,388
DR Structured Finance (Kmart), 7.60%, due 8/15/2007 92,205 78,520
Echostar Satellite Broadcasting, 13.125%, due 3/15/2004(a) 100,000 61,750
Exide Corporation, 2.90%, due 12/15/2005 5,000 2,725
G-1 Holdings, 0.0%, due 10/1/1998(b) 30,000 24,075
Gaylord Container, 11.50%, due 5/15/2001 15,000 15,338
Gaylord Container, 12.75%, due 5/15/2005(c) 15,000 15,806
</TABLE>
125
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UNITED STATES (71.2%)(CONTINUED)
Grand Casinos, Inc., 10.125%, due 12/1/2003 $ 10,000 $ 10,250
HMC Acquisition Properties, 9.00%, due 12/15/2007 35,000 31,850
Home Holdings, 8.625%, due 12/15/2003 35,000 21,264
Homeside Inc., 11.25%, due 5/15/2003(a) 15,000 15,450
Host Marriott Travel Plaza, 9.50%, due 5/15/2005 50,000 47,750
Industrias Metallurgicas Pescarmona S.A., 11.75%,
due 3/27/1998(a) 250,000 253,125
Iochpe-Maxion S.A., 12.375%, due 11/8/2002(a) 250,000 236,250
La Quinta Inns Inc., 9.25%, due 5/15/2003 25,000 25,438
Lenfest Communications, 10.50%, due 6/15/2006(a) 90,000 82,125
Lenfest Communications, 8.375%, due 11/1/2005 10,000 10,115
Marcus Cable Company, 14.25%, due 12/15/2005(c) 85,000 52,275
MDC Holdings, 11.125%, due 12/15/2003 15,000 14,325
MFS Communications Company Inc., 8.875%,
due 1/15/2006(c) 115,000 69,575
Midland Cogeneration Venture, 10.33%, due 7/23/2002 7,715 8,130
Midland Cogeneration Venture, 10.33%, due 7/23/2002 12,461 13,131
Midland Funding II, 11.75%, due 7/23/2005 15,000 15,669
Nextel Communications, 9.75%, due 8/15/2004(c) 175,000 102,813
Norcal Waste System, 12.75%, due 11/15/2005 (a) 35,000 36,400
Nuevo Energy Company, 9.50%, due 4/15/2006 35,000 34,475
Occidente Y Caribe Cel, 0.0%, due 3/15/2004(a),(b) 75,000 38,250
Owens-Illinois Inc., 11.00%, due 12/1/2003 30,000 32,250
Philippine Long Distance Telephone, 9.25%, due 6/30/2006 15,000 15,174
Reliance Group Holdings, 9.00%, due 11/15/2000 55,000 54,450
Revlon Worldwide, 0.0%, due 3/15/1998(b) 55,000 45,719
RJR Nabisco Inc., 8.75%, due 8/15/2005 20,000 19,790
</TABLE>
126
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
------------------------
<S> <C> <C>
CORPORATE BONDS (CONTINUED)
UNITED STATES (71.2%)(CONTINUED)
Rogers Cablesystems, 10.00%, due 3/15/2005 $ 50,000 $ 49,250
Ministry Finance Russia, 3.00%, due 5/14/2003(a) 2,620,000 1,120,047
SD Warren Company, 12.00%, due 12/15/2004 45,000 47,475
Six Flags Theme Parks, 12.25%, due 6/15/2005(c) 150,000 127,875
Smiths Food & Drug Centers, 11.25%, due 5/15/2007 40,000 40,300
Southland Corporation, 5.00%, due 12/15/2003 45,000 35,100
Stone Container, 10.75%, due 10/1/2002 100,000 101,000
TCI Communications Inc., 7.875%, due 2/15/2026 70,000 61,652
Telewest Plc., 0.0%, due 10/1/2007(c) 60,000 35,400
Time Warner Inc., 10.25%, due 7/1/2006(a) 70 67,690
TLC Beatrice International Holdings, 11.50%, due
10/1/2005 30,000 30,300
Trump Atlantic City, 11.25%, due 5/1/2006 30,000 30,150
Unisys Corporation, 12.00%, due 4/15/2003(a) 70,000 71,575
Viacom International, 8.00%, due 7/7/2006 75,000 68,625
Westpoint Stevens, 9.375%, due 12/15/2005 75,000 72,375
----------
3,964,034
TOTAL CORPORATE BONDS (Cost $4,987,131) 4,996,409
</TABLE>
127
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
-----------------------
<S> <C> <C>
SHORT-TERM SECURITIES (10.2%)
REPURCHASE AGREEMENT (10.2%)
State Street Bank, 4.00%, due 7/1/1996
(Dated 6/28/96, collateralized by U.S. Treasury
Bond, 9.25%, due 2/15/2016, value $582,969) $570,015 $ 570,015
----------
TOTAL SHORT-TERM SECURITIES (Cost $570,015) 570,015
----------
TOTAL INVESTMENTS (100.0%) (Cost $5,557,146) $5,566,424
==========
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities excluding short-term securities, for the year
ended June 30, 1996, aggregated $6,713,800 and $8,634,617, respectively. Net
unrealized appreciation for tax purposes aggregated $5,477, of which $65,841
related to appreciated investment securities and $60,364 related to depreciated
investment securities. The aggregate cost of securities is $5,560,947 for tax
purposes.
128
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
As of June 30,1996, the Portfolio had investments in the following industries.
The allocation is based on the percentage of total Portfolio investments.
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
INVESTMENTS
-----------
<S> <C>
INDUSTRY
Agricultural Production - Crops 0.4%
Amusement & Recreation Services 2.5%
Apparel & Other Textile Products 1.3%
Business Services 1.3%
Chemicals & Allied Products 0.8%
Communications 10.8%
Depository Institutions 4.9%
Electric, Gas, & Sanitary Services 1.3%
Electronic & Other Electric Equipment 1.1%
Finance, Taxation & Monetary Policy 20.5%
Food Stores 1.4%
General Building Contractors 0.3%
Government 10.2%
Holding & Other Investment Offices 2.2%
Hotels & Other Lodging Places 2.2%
Industrial Machinery & Equipment 12.7%
Insurance Carriers 0.4%
Motion Pictures 1.2%
Nondepository Institutions 4.0%
Oil & Gas Extraction 0.6%
Paper & Allied Products 2.7%
Primary Metal Industries 2.3%
Printing & Publishing 1.2%
Stone, Clay, & Glass Products 5.8%
Textile Mill Products 0.4%
Wholesale Trade - Durable Goods 6.0%
Wholesale Trade - Nondurable Goods 1.5%
-----
100.0%
=====
</TABLE>
129
<PAGE>
Morgan Stanley Worldwide High Income Portfolio
Schedule of Investments (continued)
(a) Security exempt from registration under Rule 144a of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(b) Deferred interest obligation; currently zero coupon under terms of initial
offering.
(c) Variable rate note or floating note; rate shown effective at 6/30/96.
See accompanying notes.
130
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements
June 30, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Legends Fund, Inc. (the "Fund") was formed as a Maryland corporation on July
22, 1992. The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Fund has ten
investment portfolios (the "Portfolios"): Renaissance Balanced, Zweig Asset
Allocation, Nicholas-Applegate Balanced, Harris Bretall Sullivan & Smith Equity
Growth, Dreman Value, Zweig Equity (Small Cap), Pinnacle Fixed Income (formerly
known as Mitchell Hutchins Fixed Income), ARM Capital Advisors Money Market
(formerly known as Mitchell Hutchins Money Market), Morgan Stanley Asian Growth,
and Morgan Stanley Worldwide High Income. SBM Financial Services, Inc. ("SBM
Financial Services"), a registered broker-dealer under the Securities Exchange
Act of 1934 and a member of the National Association of Securities Dealers,
Inc., distributes shares of the Fund to the variable annuity separate accounts
of Integrity Life Insurance Company ("Integrity") and its wholly owned
subsidiary, National Integrity Life Insurance Company ("National Integrity").
ARM Capital Advisors, Inc. ("ARM Capital Advisors") a SEC-registered investment
adviser, provides management services to the Fund pursuant to a Management
Agreement (the "Management Agreement") effective February 1, 1996. Integrity
previously served in this capacity for the Fund.
ARM Financial Group, Inc. ("ARM") is the ultimate parent of ARM Capital
Advisors, Integrity, National Integrity, and SBM Financial Services. ARM
specializes in the asset accumulation business, providing retail and
institutional customers with products designed to serve the growing retirement
and long-term savings markets as well as providing other asset management
services. At June 30, 1996, ARM had approximately $6.6 billion of assets under
management.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for investment companies.
131
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITY VALUATION
Stocks that are traded on a national exchange are valued at the last sale price
on the exchange on which they are primarily traded, or, it there is no sale, at
the mean between the current bid and asked prices. Over-the-counter securities
for which market quotations are readily available are valued at the mean of the
current bid and asked prices.
Short-term debt securities with remaining maturities of 61 days or more for
which reliable quotations are readily available are valued at current market
quotations. Short-term investments with remaining maturities of 60 days or less
are valued using the amortized cost method of valuation, which approximates
market value. For the ARM Capital Advisors Money Market Portfolio ("Money Market
Portfolio"), portfolio securities are valued using the amortized cost method of
valuation. Bonds and other fixed-income securities (other than short-term
securities described above) are valued using market quotations provided by a
pricing service under procedures approved by the Fund's Board of Directors.
Futures contracts and options thereon and option contracts traded on a
commodities exchange or board of trade are valued at the closing settlement
price. Futures and option positions or any other securities or assets for which
reliable market quotations are not readily available or for which valuation
cannot be provided by a pricing service approved by the Board of Directors of
the Fund are valued at fair value as determined in good faith by the Board of
Directors.
SECURITY TRANSACTIONS
Securities transactions are accounted for as of trade date net of brokerage
fees, commissions, and transfer fees. Interest income is accrued daily. Dividend
income is recorded on the ex-dividend date. Premiums and discounts on securities
purchased are amortized using the effective interest method. Realized gains and
losses on sales of investments are determined on the basis of nearest average
for all of the portfolios except Zweig Asset Allocation Portfolio, which uses
the first-in-first-out method.
Securities purchased on a when-issued or delayed-delivery basis may be settled
a month or more after the trade date. Securities purchased on a when-issued
basis are included in the portfolio and are subject to market value fluctuations
during the period. At June 30,
132
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1996, the Pinnacle Fixed Income Portfolio had segregated specific assets to be
utilized to settle its outstanding commitments related to securities purchased
on a delayed-delivery basis.
FEDERAL INCOME TAX MATTERS
The Fund complied with the requirements of the Internal Revenue Code applicable
to regulated investment companies and distributed its taxable net investment
income and net realized gains. Therefore, no provision for federal or state
income tax is required.
At June 30, 1996, the Pinnacle Fixed Income Portfolio and the Morgan Stanley
Asian Growth Portfolio have accumulated net realized capital loss carryovers of
$96,149 (expiring in 2003 and 2004) and $78,248 (expiring in 2004),
respectively.
DIVIDEND DISTRIBUTIONS
Dividends from net investment income and distributions from net realized gains
are declared and distributed annually, except that the Money Market Portfolio
declares dividends from net investment income each business day and distributes
them monthly. Dividends and distributions are recorded on the ex-dividend date.
All dividends are reinvested in additional full and fractional shares of the
related Portfolios.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for foreign currency transactions, futures
transactions, passive foreign investment companies, capital losses, and losses
deferred due to wash sales.
FUTURES CONTRACTS
Certain Portfolios may enter into futures contracts to protect against adverse
movement in the price of securities in the Portfolio or to enhance investment
performance. When entering into a futures contract, changes in the market price
of the contracts are recognized as unrealized gains or losses by marking each
contract to market at the end of each trading day through a variation margin
account. When a futures contract is closed, the Portfolios record a gain or loss
equal to the difference between the value of the
133
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
contract at the time it was opened and the value at the time it was closed. The
face amount of the futures contracts shown in the Schedule of Investments
reflects each contract's value at June 30, 1996.
The use of futures contracts involves, to varying degrees, elements of market
risk in excess of the amount recognized in the statement of assets and
liabilities. The Portfolios bear the market risk which arises from any changes
in contract values.
FOREIGN CURRENCY TRANSLATION
Investment securities and other assets and liabilities denominated in a foreign
currency are translated into U.S. dollars based upon current exchange rates at
year end. Purchases and sales of securities, income receipts, and expense
payments are translated into U.S. dollars at the prevailing rate on the
respective dates of the transactions. The effects of changes in foreign currency
exchange rates on investments in securities are included in net realized and
unrealized gain or loss on investments in the Statement of Operations.
The Morgan Stanley Asian Growth, the Morgan Stanley Worldwide High Income, and
the Pinnacle Fixed Income Portfolios may engage in forward foreign currency
exchange transactions in connection with the purchase and sale of portfolio
securities, and to protect the value of specific portfolio positions. Forward
foreign currency exchange contracts involve elements of market risk in excess of
the amount reflected in the statement of assets and liabilities. The Portfolios
bear the risk of an unfavorable change in the foreign exchange rate underlying
the forward contract. Additionally, losses may arise if the counterparties do
not perform under the contracts' terms.
Morgan Stanley Asian Growth Portfolio has open forward foreign exchange
contracts at June 30, 1996 to hedge against changes in the foreign currency
exchange rates between the trade and settlement dates.
134
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Morgan Stanley Asian Growth and Morgan Stanley Worldwide High Income
Portfolios have relatively large investments in countries with limited or
developing capital markets that may involve greater risk than investments in
more developed markets and as a result the prices of such investments may be
volatile. The consequences of political, social, or economic changes in these
markets may have disruptive effects on the market prices of the Portfolios'
investments and the income they generate.
OTHER
Organization costs of $11,416 incurred during 1994 were deferred and are being
amortized over five years by both the Morgan Stanley Asian Growth and Morgan
Stanley Worldwide High Income Portfolios.
On August 25, 1994, Integrity purchased for its own account approximately
450,000 shares of the Morgan Stanley Worldwide High Income Portfolio, at the net
asset value on such date, for an aggregate purchase price of $4.5 million. As of
June 30, 1996, approximately 73,000 shares, having a fair value of $800,000 and
constituting 14.1% of the outstanding shares of the Portfolio, were held by
Integrity for its own account.
On April 2, 1996, Integrity purchased for its own account approximately 479,000
shares of the Pinnacle Fixed Income Portfolio, at the net asset value on such
date, for an aggregate purchase price of $5.1 million. As of June 30, 1996,
approximately 478,000 shares, having a fair value of approximately $5.1 million
and constituting 50.8% of the outstanding shares of the Portfolio were held by
Integrity for its own account.
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES
ARM Capital Advisors entered into a sub-advisory agreement with a registered
investment adviser ("Sub-Adviser") for each of the Portfolios. ARM Capital
Advisors, not the Fund, pays the sub-advisory fee to each of the Sub-Advisers.
On February 16, 1996, the Board of Directors of the Fund voted to terminate the
sub-advisory agreements with Mitchell Hutchins Asset Management, Inc., the Sub-
Adviser to the Mitchell Hutchins Fixed Income Portfolio and the Mitchell
Hutchins Money Market Portfolio, respectively. The two sub-advisory agreements
were terminated effective March 31, 1996. ARM Capital Advisors entered into a
sub-advisory contract with J.P. Morgan Investment Management, Inc. to serve as
Sub-Adviser to the Pinnacle Fixed Income Portfolio ("Fixed Income Portfolio")
(formerly known as Mitchell Hutchins Fixed
135
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
Income Portfolio) effective April 1, 1996. The Board of Directors also voted to
reduce the annual advisory fees relating to the Fixed Income Portfolio from .90%
to .70% of average net assets, effective as of April 1, 1996. ARM Capital
Advisors will compensate the Sub-Adviser of the Fixed Income Portfolio at the
annual rate of .50% of average net assets of the Portfolio. As of April 1, 1996,
ARM Capital Advisors became the sole investment manager of the Money Market
Portfolio (formerly known as the Mitchell Hutchins Money Market Portfolio). The
Board of Directors also voted to reduce the annual advisory fee relating to the
Money Market Portfolio from .65% to .50% of average net assets, effective as of
April 1, 1996.
Following a change of control at Dreman Value Management, L.P., ("DVM, L.P.")
the sub-advisory agreement between the Fund's manager and DVM, L.P.
automatically terminated. Dreman Value Advisors, Inc., as successor to DVM,
L.P., agreed with the Fund's manager to continue to provide sub-advisory
services to the Portfolio on an interim basis without compensation until such
time as a sub-advisory agreement was approved by the Portfolio's shareholders.
Sub-advisory fees, therefore, were not paid or accrued from September 1, 1995
through November 6, 1995 for the Dreman Value Portfolio.
Listed below are management and sub-advisory fees payable as a percentage of
average net assets.
<TABLE>
<CAPTION>
MANAGEMENT SUB-ADVISORY
PORTFOLIO FEE FEE
---------------------------------------------------------------------------
<S> <C> <C>
Renaissance Balanced 0.65% 0.50%
Zweig Asset Allocation 0.90 0.75
Nicholas-Applegate Balanced 0.65 0.50
Harris Bretall Sullivan & Smith Equity Growth 0.65 0.50
Dreman Value 0.65 0.50
Zweig Equity (Small Cap) 1.05 0.90
Pinnacle Fixed Income 0.70 0.50
ARM Capital Advisors Money Market 0.50 --
Morgan Stanley Asian Growth 1.00 0.85
Morgan Stanley Worldwide High Income 0.85 0.70
</TABLE>
136
<PAGE>
The Legends Fund, Inc.
Notes to Financial Statements (continued)
2. INVESTMENT ADVISORY AGREEMENTS AND PAYMENTS TO RELATED PARTIES (CONTINUED)
Under the Management Agreement, ARM Capital Advisors provides certain management
services to the Fund, and the Fund is responsible for certain of its direct
operating expenses. ARM Capital Advisors has voluntarily agreed to reimburse
each of the Portfolios for operating expenses (excluding management fees) above
an annual rate of 0.5% of average net assets, with the exception of the two
Morgan Stanley Portfolios, for which the annual voluntary expense limitation
(excluding management fees) is 1.0% of average net assets. ARM Capital Advisors
has reserved the right to withdraw or modify its policy of expense reimbursement
for the Portfolios.
The Renaissance Balanced, Zweig Asset Allocation, Nicholas-Applegate Balanced,
Harris Bretall Sullivan & Smith Equity Growth, Dreman Value, Morgan Stanley
Asian Growth and Zweig Equity (Small Cap) Portfolios placed a portion of their
transactions with brokerage firms which may be considered affiliates of the Fund
under the Investment Company Act of 1940. The commissions paid to these firms
were approximately $104,000 in the aggregate during the fiscal year ended June
30, 1996.
Certain officers and directors of the Fund are also officers of ARM, SBM
Financial Services, ARM Capital Advisors, Integrity and National Integrity. The
Fund does not pay any amounts to compensate these individuals.
3. CAPITAL SHARES
At June 30, 1996, the Fund had authority to issue one billion (1,000,000,000)
shares of common stock, $.001 par value each, in any class or classes as
determined by the Board of Directors. At such date, the Board of Directors had
authorized ten classes of shares, as follows: 55,000,000 shares each for the
Renaissance Balanced, Zweig Asset Allocation, Nicholas-Applegate Balanced,
Harris Bretall Sullivan & Smith Equity Growth, Dreman Value, Zweig Equity (Small
Cap), Pinnacle Fixed Income, Morgan Stanley Asian Growth, and Morgan Stanley
Worldwide High Income Portfolios and 100,000,000 shares for the Money Market
Portfolio.
At June 30, 1996, Integrity, through its Separate Account II, and National
Integrity, through its Separate Account II, were the record owners of all the
outstanding shares of the Fund.
137
<PAGE>
The Legends Fund, Inc.
Portfolio Performance
June 30, 1996
RENAISSANCE BALANCED PORTFOLIO
Comparison of change in value of $10,000 investment in
Renaissance Balanced Portfolio, the S&P 500, and a composite index
consisting of 60% of the S&P 500, 30% of Lehman Brothers
Government/Corporate Bond Index, and 10% of 90-day Treasury Bill Yield
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
60% S&P 500
30% Lehman
Renaissance Balanced 10% 90-Day Treasury S&P
Date Portfolio Bill Yield 500
- -------- -------------------- ------------------- -------
<S> <C> <C> <C>
12/14/92 $10,000 $10,000 $10,000
Dec 92 $ 9,930 $10,085 $10,088
Jun 93 $10,420 $10,629 $10,579
Dec 93 $10,985 $11,058 $11,102
Jun 94 $10,501 $10,709 $10,727
Dec 94 $10,604 $11,076 $11,248
Jun 95 $11,941 $12,832 $13,519
Dec 95 $13,135 $14,230 $15,471
Jun 96 $13,454 $15,036 $17,032
</TABLE>
. Average annual total return since inception: 8.72%.
. Total return for the fiscal year ended June 30, 1996: 12.68%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on December 14, 1992. Index performances
for the month of December 1992 have been prorated to conform to the
commencement date of the Portfolio (except for the S&P 500).
. Past performance is not predictive of future performance.
Stocks moved higher during the second quarter, as the S&P 500 posted all-time
highs during May 1996. Inflows into stock mutual funds totaled $122 billion in
the first five months of 1996 (compared to $128 billion during all of 1995) and
helped push stocks to all-time highs.
138
<PAGE>
The Legends Fund,Inc.
Portfolio Performance (continued)
June 30, 1996
RENAISSANCE BALANCED PORTFOLIO (CONTINUED)
Bond yields moved higher as well, with long-term Treasury yields rising above
7%, their highest level since August 1995. The bond market fears excessive
economic growth, since it raises the possibility of the Federal Reserve acting
to raise interest rates. News of strong retail and auto sales helped to send
bond yields higher. By contrast, inflation remained contained, with the core
rate of inflation (the Consumer Price Index, less food and energy components)
rising at only a 2.67% rate through the end of May 1996. Real bond yields (bond
yields minus inflation) now stand at unusually high levels.
Funds were shifted out of the stock market in the Portfolio during May 1996 as a
result of the strength in stock prices and increases in interest rates.
Capturing these gains was prudent since stocks historically struggled during
periods of rising interest rates, and the rise in bond yields this year has
increased the level of competition for the stock market. In contrast, bond
yields now look very attractive, and the Portfolio acted to increase the bond
allocation to 40% during the second quarter of the calendar year, focusing on
Treasury issues with about 10 years to maturity.
From a relative standpoint, bonds appear equally attractive in price relative to
stocks. With today's 10-year Treasury note yield of 6.71% and an S&P 500
dividend yield of 2.20%, the ratio of 10-year Treasury note yields to the S&P
500 now stands at 3.05%, its highest level since 1987. Historically, this yield
ratio has been a reasonably good predictor of subsequent relative performance
between stocks and bonds. As the ratio rises, the likelihood of bonds
outperforming stocks rises as well. At today's levels, the ratio suggests a good
investment opportunity in bonds.
The Portfolio is now allocated approximately 40/40/20 among stocks, bonds and
cash equivalents. Stock positions remain focused on issues selling at attractive
valuations with strong prospects for increased earnings. The Treasury note
positions are poised to capture the benefit of any future rate declines while
still providing an attractive level of yield "compensation." The defensive cash
allocation will be used to capture the benefits of any possible stock or bond
market decline.
139
<PAGE>
The Legends Fund, Inc.
Portoflio Peformance (continued)
June 30, 1996
ZWEIG ASSET ALLOCATION PORTFOLIO
Comparison of change in value of $10,000 investment in
Zweig Asset Allocation Portfolio and the S&P 500
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date Zweig Asset Allocation Portfolio S&P 500
- ---- -------------------------------- -------
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,000 $10,088
Jun 93 $10,810 $10,579
Dec 93 $11,495 $11,102
Jun 94 $11,485 $10,727
Dec 94 $11,536 $11,248
Jun 95 $13,164 $13,519
Dec 95 $14,009 $15,471
Jun 96 $14,620 $17,032
</TABLE>
. Average annual total return since inception: 11.31%.
. Total return for the fiscal year ended June 30, 1996: 11.06%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on December 14, 1992.
. Past performance is not predictive of future performance.
140
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
ZWEIG ASSET ALLOCATION PORTFOLIO (CONTINUED)
For the twelve months ended June 30, 1996, the Portfolio returned 11.06%, versus
25.98% for the S&P 500.
Our research has deteriorated to a low-neutral reading as our models have
indicated rising risk. Due to the strengthening U.S. economy and the increased
threat of inflation, bonds have not been performing well. This usually affects
the stock market adversely. Investor sentiment is poor as public optimism
continues to rise. There are signs of excessive speculation in everything from
the number of investment clubs to the low percentage of cash held by most mutual
funds. Market momentum indicators have turned negative as well.
Due to a stock market that favored high-flying stocks, the Portfolio's results
lagged the benchmarks. Our stock selection process, which pays equal homage to
growth and value factors, would not allow us to buy what our model considered to
be risky stocks, yet these stocks have led the market so far this year. Though
not necessarily predictive, this is often the case during the latter stages of a
bull market.
The outperformance by the less stable segments of the market is illustrated by
the performance of the retail sector (excluding grocery stores) of the S&P 500.
This sector gained 30% during the first half of 1996. The average price/earnings
ratio of these stocks is 29, while their average earnings growth rate is only
4.1%. In other words, one of the strongest performing sectors in the market cost
an average 17% more than the S&P 500, yet grew less than half as much. Simply
put, people are paying a lot for these stocks, given the stocks' earnings
trends.
It is instructive of the portfolio style to note the structure of the Portfolio
today compared with a year ago, and how it got from there to here. Though the
Portfolio's actual market exposure is not much different now than a year ago,
how it got to the respective mid-year points could not be more different. A year
ago, bonds were rallying and the supply of stock was rapidly shrinking. We
systematically increased the Portfolio's market exposure through the first half
of 1995. This year, however, we have been steadily reducing its market exposure.
The character of the Portfolio's equity exposure is also quite different from a
year ago. At June 30, 1995, we heavily favored technology stocks. At June 30,
1996, technology holdings are well below
141
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
ZWEIG ASSET ALLOCATION PORTFOLIO (CONTINUED)
the market's weighting. We have also increased investment in defensive industry
groups, such as utilities, a sector which made up less than 5% of the Portfolio
a year ago.
The point of all this is the Portfolio's flexibility. It is evident in both our
asset allocation and our stock selection. Personal comfort is not an issue in
determining the asset mix or industry exposure. This is one of the benefits of a
quantitative style. If our indicators warn that risk levels are rising, we will
cut back. If our stock selection model signals that utility stocks have the best
combination of growth and value characteristics, we will invest there.
NICHOLAS-APPLEGATE BALANCED PORTFOLIO
Comparison of change in value of $10,000 investment in Nicholas-Applegate
Balanced Portfolio, the S&P 500, and a composite index consisting of
60% of the S&P 500 and 40% of Lehman Brothers Intermediate Treasury Bond Index.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
60% S&P 500
Nicholas-Applegate 40% Lehman Intermediate
Date Balanced Portfolio Treasury Bond Index S&P 500
- ---- ------------------ ----------------------- ---------
<S> <C> <C> <C>
12/3/92 $10,000 $10,000 $10,000
Dec 92 $10,300 $10,143 $10,088
Jun 93 $11,500 $10,676 $10,579
Dec 93 $11,772 $11,089 $11,102
Jun 94 $11,301 $10,723 $10,727
Dec 94 $11,738 $11,063 $11,248
Jun 95 $13,326 $12,795 $13,519
Dec 95 $14,087 $14,151 $15,471
Jun 96 $15,129 $14,997 $17,032
</TABLE>
142
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
NICHOLAS-APPLEGATE BALANCED PORTFOLIO (CONTINUED)
. Average annual total return since inception: 12.28%.
. Total return for the fiscal year ended June 30, 1996: 13.53%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on December 14, 1992.
. Past performance is not predictive of future performance.
Several forces which helped move stocks higher include stronger than expected
economic growth, strong cash flows into equity mutual funds and an overall
positive environment for corporate earnings and profit growth. Investors this
year have focused their attention on solid earnings growth. This was evident as
growth companies outperformed value companies. The Russell 1000 Growth Index
returned 6.4% and 12.1% for the quarter ended and six months ended June 30,
1996, respectively. This compared to value stocks, as evidenced by the Russell
1000 Value Index, which returned 1.8% and 7.8% for the same time periods,
respectively. This compares favorably to the broad equity market as illustrated
by the S&P 500 which returned 4.5% for the quarter ended June 30, 1996 and 10.2%
for the first six months of 1996. Some of the top performing sectors during the
quarter included retail, based on continued strong sales; utilities, which had a
strong June as the broad market weakened; and consumer non-durables. Technology
stocks also did well despite a difficult June, especially among software and
technology services-related companies. Some of the bottom performing sectors
included consumer durables and raw materials, both affected by rising interest
rates and inflation uncertainty.
For bond investors, the year has been much more difficult. 1996 began with
positive expectations--a slow growth economy, declining interest rates and
little inflation worry. Several developments, however, weakened these
expectations as well as bond market confidence. First, the failure of Congress
and the Clinton administration to reach an agreement on a seven year plan which
would have culminated in a balanced federal budget. Second, accelerating
economic growth, reflected in surprising employment gains began in February and
continued into April and May. Finally, due to bad winter weather, oil and
natural gas prices soared resulting in increased inflation fears. With this
backdrop, the 30-year U.S. government bond, which began the year yielding 5.9%,
rose to over 7% during March and April and closed June below that level. Lehman
Brothers Government/Corporate Index returned 0.5% during the second quarter
ended June 30, 1996 and -1.9% over the first six months of 1996. At the
beginning of May 1996, within our balanced portfolios, we shortened the average
duration of the U.S. Government Securities from 5.72 years to 4.91 years.
143
<PAGE>
The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
NICHOLAS-APPLEGATE BALANCED PORTFOLIO (CONTINUED)
At Nicholas-Applegate, we build portfolios one growth stock at a time. Our
philosophy focuses on identifying dynamic growth companies managing change and
growing their earnings and businesses today, not just the typical growers of the
past. Our disciplined approach systematically evaluates 4,000 domestic companies
based upon their earnings growth, sustainability of earnings growth and strong
relative price strength in order to identify the most attractive growth stocks.
As a result, at the end of June 1996, we continued to have a significant
technology weighting across all of our portfolios. We have sold, however,
several semi-conductor companies and purchased several software issues based
upon their strong earnings growth. Other areas where we continue to find good
growth opportunities are healthcare services and consumer services. Consistent
with our strategy, the Nicholas-Applegate Balanced Portfolio remained invested
approximately 60% in growth stocks, 37% U.S. Governments and the remainder in
cash.
As the equity market has continued to advance for the past seven quarters,
headlines are once again asking, "Have stock prices peaked?" For Americans
today, we believe the true risk is not the loss of principal but the loss of
purchasing power. "How will I send my child to college? Will I have enough money
to retire?" Stocks have historically been a powerful tool to increase purchasing
power over time. In the short term, we believe it is anyone's guess as to how
stock prices might perform. However, for the long-term investor concerned about
building wealth for the future, we are committed to identifying the most dynamic
growth companies we believe will help you achieve investment success.
144
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Portfolio Performance (continued)
June 30, 1996
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
Comparison of change in value of $10,000 investment in
Harris Bretall Sullivan & Smith Equity Growth Portfolio and the S&P 500
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
HARRIS BRETALL SULLIVAN &
DATE SMITH EQUITY GROWTH PORTFOLIO S&P 500
- ---- ----------------------------- -------
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,050 $10,088
Jun 93 $ 9,710 $10,579
Dec 93 $10,050 $11,102
Jun 94 $ 9,360 $10,727
Dec 94 $10,460 $11,248
Jun 95 $12,850 $13,519
Dec 95 $13,771 $15,471
Jun 96 $14,597 $17,032
</TABLE>
. Average annual total return since inception: 11.21%.
. Total return for the fiscal year ended June 30, 1996: 13.59%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on December 14, 1992.
. Past performance is not predictive of future performance.
For the fiscal year ended June 30, 1996, the Portfolio finished up 13.59%. This
follows the fiscal year ended June 30, 1995, when the Portfolio finished up
37.29%. Double digit returns, as we have enjoyed, occur most often during
economic periods we call "The Virtuous Cycle," a period of time when interest
rates are stable or declining, earnings are rising, and price/earnings ratios
are expanding. Our long-term forecast is for the Virtuous Cycle scenario, and
hence, we remain bullish for the long-term.
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Portfolio Performance (continued)
June 30, 1996
HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO (CONTINUED)
However, part of the reason performance eased from 37.29% to 13.59% for the
fiscal years ended June 30, 1995 and 1996, respectively, is the interruption of
the Virtuous Cycle scenario. Market forces drove interest rates higher during
the Fall of 1995 as the negotiations for the Federal Budget broke down.
Technology stocks, which led the Portfolio to the great return for 1995, came
under selling pressure in 1996. Corporate earnings continued on a positive
trend, but concerns have surfaced that the rate of growth will slow in the year
ahead. Presently, economists and market strategists are debating the future
growth of the economy.
While we remain confident in the Virtuous Cycle forecast, an economic slowdown
in the short-term seems likely. Over the last twelve months, stock prices, to
some degree, have reflected this economic slowdown. While this pattern could
persist over the short-term, our longer outlook suggests that stocks are fairly
priced now, and should they fall further, would represent an enticing long-term
opportunity.
Our commitment to the technology sector continues. Because of the fast-growing
nature of this sector, there exists an element of volatility to the prices of
these companies. Since our equity selection process seeks high-quality
companies, we invest in the better capitalized, more seasoned enterprises.
Moreover, we combined this quantitative analysis with qualitative conclusions
derived from the personal meetings held regularly between our analytical team
and the senior management of the companies in the technology industry.
Currently, the Portfolio is overweighted in technology relative to the S&P 500
index; we expect that to continue as a characteristic of the Portfolio. Indeed,
we contend that over the next decade, the technology sector will grow to become
20% to 25% of the U.S. Gross Domestic Product ("GDP").
We strongly encourage investors to take the long-term approach. We believe that
by the end of the decade, the Dow Jones Industrial Average will approach 10,000.
When that occurs, investors who bought high quality growth stock portfolios in
1996 and 1997 should be well rewarded.
146
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
DREMAN VALUE PORTFOLIO
Comparison of change in value of $10,000 investment in
Dreman Value Portfolio and the S&P 500
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Date DREMAN VALUE PORTFOLIO S&P 500
- ---- ----------------------- -------
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,180 $10,088
Jun 93 $10,450 $10,579
Dec 93 $10,820 $11,102
Jun 94 $10,740 $10,727
Dec 94 $10,736 $11,248
Jun 95 $12,886 $13,519
Dec 95 $15,622 $15,471
Jun 96 $16,909 $17,032
</TABLE>
. Average annual total return since inception: 15.97%.
. Total return for the fiscal year ended June 30, 1996: 31.22%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on December 14, 1992.
. Past performance is not predictive of future performance.
The second quarter of 1996 saw the U.S. equity market repeat its solid first
quarter performance, rising 4.5% for three months and 10.0% in the first half of
the year. Our equity portfolios have trailed the S&P 500 over the past six
months as growth stocks have outpaced their value stocks counterparts.
The most significant dynamics through June have occurred not in the equity
market, but in the bond market. Since December 31, 1995, yields on 30-year U.S.
Treasury Bonds have risen from 5.95% to 7.14% at June 30, 1996. To date, we
have seen little impact on the equity market from this increase in rates.
147
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Portfolio Performance (continued)
June 30, 1996
DREMAN VALUE PORTFOLIO (CONTINUED)
Over the balance of the year, we expect the Federal Reserve to possibly increase
short-term interest rates. We also anticipate solid economic growth, though not
at the same brisk pace that the first half has seen.
Specific to the Portfolio, we have been looking to reduce positions in the
pharmaceutical stocks. While earnings have increased in a familiar fashion, the
companies' respective stock prices have shot up dramatically. As such, most of
the stocks are selling at price-to-earnings multiples at or above the overall
market.
New portfolio additions have come from two areas. First, we purchased several
stocks that we categorize as "soft" cyclicals. These include Pitney Bowes,
Burlington Northern and Westinghouse. We expect these types of companies to
perform well in this expanding economy. The second area, is energy, where we
have increased our exposure especially to companies that have large natural gas
operations.
While we do not expect our equity portfolio to repeat its 30% plus gain of 1995,
we certainly expect the last half of 1996 (being an election year) to yield
solid equity market returns.
148
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
ZWEIG EQUITY (SMALL CAP) PORTFOLIO
Comparison of change in value of $10,000 investment in
Zweig Equity (Small Cap) Portfolio and the Value Line Geometric Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
ZWEIG EQUITY VALUE LINE
(SMALL CAP) GEOMETRIC
Date PORTFOLIO INDEX
- ---- ------------ ----------
<S> <C> <C>
12/14/92 $10,000 $10,000
Dec 92 $10,000 $10,106
Jun 93 $10,110 $10,611
Dec 93 $10,864 $11,260
Jun 94 $10,763 $10,482
Dec 94 $10,797 $10,582
Jun 95 $11,881 $11,862
Dec 95 $13,076 $12,624
Jun 96 $14,102 $13,509
</TABLE>
. Average annual total return since inception: 10.18%.
. Total return for the fiscal year ended June 30, 1996: 18.69%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on December 14, 1992.
. Past performance is not predictive of future performance.
For the twelve months ended June 30, 1996, the Portfolio returned 18.69% versus
13.80% for the Value Line Geometric Index.
Our research has deteriorated to a low-neutral reading as our models have
indicated rising risk. Due to the strengthening U.S. economy and the increased
threat of inflation, bonds have not been performing well. This usually affects
the stock market adversely. Investor sentiment is poor as public optimism
continues to rise. There are signs of excessive speculation in everything from
the number
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
ZWEIG EQUITY (SMALL CAP) PORTFOLIO (CONTINUED)
of investment clubs to the low percentage of cash held by most mutual funds.
Market momentum indicators have turned negative as well.
Part of the reason that the Portfolio's results lagged the benchmarks was that
the environment for selecting stocks was one of the least friendly, for our
style, that we have seen in some time.
We select stocks using a computer model that analyzes companies based on a
number of different growth and value criteria, and ranks them accordingly.
Simply put, we tend to favor lower price/earnings ratios (or the amount a stock
costs relative to its profits) and higher earnings growth rates. Obviously,
these extreme combinations rarely can be found in individual stocks, since
companies with strong growth rates generally command higher valuations. But by
focusing on stocks with favorable relationships between growth and value
characteristics, we are able to construct a portfolio which consistently has
higher growth than the market for a lower price--a much more favorable
risk/reward relationship.
The environment this year, unfortunately, has been characterized by
outperformance in the riskier and less fundamentally stable segments of the
market. For example, the Russell 2000, a widely used barometer of small-company
stock performance, can be broken down by industry group. Consider its Consumer
Discretionary and Service sector, which accounts for about 17% of the index and
was up approximately 23% through June. This sector's average price/earnings
ratio is almost twice that of the S&P 500, while its earnings growth is only 15%
to 20% better than that of the market. In other words, one of their strongest
performing sectors of the market had very little in the way of improving profits
to support investor enthusiasm. Needless to say, given our style, stocks with
this type of valuation and earnings growth will be unlikely to have significant
representation in the Portfolio. Though periods with this type of activity occur
from time to time, experience has shown that they are short-lived and that our
balanced, disciplined approach works well over time.
150
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
PINNACLE FIXED INCOME PORTFOLIO
Comparison of change in value of $10,000 investment in
Pinnacle Fixed Income Portfolio and the Salomon
Brothers Broad Investment-Grade Bond Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Salomon Bros.
Broad Investment-
Date Pinnacle Fixed Income Grade Bond Index
- ---- --------------------- -----------------
<S> <C> <C>
1/5/93 $ 10,000 $ 10,000
Jun 93 $ 10,430 $ 10,695
Dec 93 $ 10,564 $ 10,979
Jun 94 $ 10,109 $ 10,568
Dec 94 $ 10,156 $ 10,667
Jun 95 $ 11,229 $ 11,894
Dec 95 $ 11,893 $ 12,571
Jun 96 $ 11,599 $ 12,413
</TABLE>
. Average annual total return since inception: 4.34%.
. Total return for the fiscal year ended June 30, 1996: 3.29%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on January 5, 1993. Index performance has
been prorated to conform to the commencement date of the Portfolio.
. Past performance is not predictive of future performance.
Interest rates continued upward during the quarter as economic strength
generated uncertainty regarding Federal Reserve action. The March and May 1996
employment numbers showed that the economy added 140,000 and 348,000 new
positions, respectively--significantly more than expected in each instance. The
first quarter GDP report offered that the economy grew at a 2.8% pace during the
first three months of the year, although 1.7% was expected. Inflation data
remained benign throughout the period.
J.P. Morgan Investment Management assumed management of the Portfolio on April
1, 1996. Duration had a neutral effect on performance. In the beginning of the
quarter, the duration was
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
PINNACLE FIXED INCOME PORTFOLIO (CONTINUED)
longer than the benchmark. However, we scaled back to a neutral position in May
1996 and eventually ended the quarter slightly longer than the index. Emphasis
on yield-advantaged sectors of the market contributed to the portfolio's
performance.
We will maintain the Portfolio's overweight in mortgage-backed and asset-backed
securities based on expectations of stable spreads relative to U.S. Treasuries.
We expect a Federal Reserve interest rate increase over the next few months, and
we anticipate a flattening of the yield curve caused by rising short-term
interest rates. Thus, we plan to lengthen duration on further weakness and will
consider shortening duration if the market strengthens.
MORGAN STANLEY ASIAN GROWTH PORTFOLIO
Comparison of change in value of $10,000 investment in
Morgan Stanley Asian Growth Portfolio and the MSCI Combined
Far East Free Ex-Japan Index
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Morgan Stanley MSCI Combined
Asian Growth Far East Free
Portfolio Ex-Japan Index
-------------- --------------
<S> <C> <C>
6/15/94 $10,000 $10,000
Jun 94 $10,000 $ 9,754
Dec 94 $ 9,280 $ 9,772
Jun 95 $10,180 $10,456
Dec 95 $10,279 $10,437
Jun 96 $10,912 $11,310
</TABLE>
152
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
. Average annual total return since inception: 4.36%.
. Total return for the fiscal year ended June 30, 1996: 7.19%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on June 15, 1994.
. Past performance is not predictive of future performance.
The Hong Kong market rose over 6.6% and almost 11% during the first and second
half of the fiscal year, respectively. However, during the second quarter of
1996 the market faltered. Sentiment on Hong Kong continued to be weighed down by
fears of rising interest rates in the U.S. and by uncertainties associated with
the return of the territory to China next year. With 1997 approaching, the
stepping up of Chinese interests in Hong Kong becomes increasingly evident. This
was manifested in the restructuring of shareholdings in Dragonair and Cathay
Pacific with China National Aviation Corporation (CNAC) becoming the single
largest shareholder in Dragonair and Citi Pacific stepping up interest in Cathay
Pacific. The residential market recovered strongly with prices rising by 10-15%,
helped by lower mortgage rates. Capital values and rents of office properties
also appeared to have bottomed out. Hong Kong Telecom faced heavy selling
pressure due to uncertainties over possible regulatory changes and a more
competitive operating environment in the future.
After a decline of over 5.6% during the first half of the fiscal year, the
Malaysian market surprised many with a rally--the market advanced over 9% during
the second half. By June, the market in Malaysia and the surprise return of
Tengku Razzaleigh (former opposition rival to the Prime Minister) to the United
Malay National Organization have fortified Mahathir's stronghold on the dominant
political party and reassured him of an unassailable position in the upcoming
party elections at the end of the year. On the economic front, trade statistics
through the year to April 1996 appear to indicate a bottoming out of the current
account deficit. However, a more convincing reduction in the current account
from the present 8% to GDP is only expected in 1998. Loan growth remained
alarmingly high at above 30%, which prompted the Central Bank to raise the
Statutory Reserve Ratio twice this year to 13.5% (+2%). In addition, rising
interest rates, a crunch in margin financing for speculative shares combined
with an impending dilution in weighting in the rebalanced benchmark Morgan
Stanley Capital International ("MSCI") indices caused weakness in share prices
in June.
The Singapore market gained 6.71% in the first half of the fiscal year as a
result of solid economic growth, low inflation and a strong electronics sector.
During the second half of the fiscal year, the market was flat due to the
Government's announcement of anti-speculation measures in May to cool
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Portfolio Performance (continued)
June 30, 1996
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
the residential property market resulting in heavy selling of residential
property stocks. Meanwhile, stocks which were recently included in the MSCI
indices came under the spotlight, with Singapore Telecom and STIC (Singapore
Technologies) rising strongly before profit-taking pared their gains. Share
price performance of banks remained lackluster due to concerns over slow
earnings growth, while news from the marine section were still bleak.
Thailand was one of the worst performing markets--down 10.25%. The Thailand
market fell 2.4% for the quarter ended June 30, 1996 and remained one of the
worst performing markets in Asia. Rumors about bad debts in finance companies
and banks sparked panic selling. There was also talk of property companies not
being able to service their debt. On the macroeconomics front, the trade deficit
improved in May but loans growth, exports and FDI continued to slow. Fears that
the slowdown in the economy may accelerate prompted the central bank to allow
some commercial banks to lower lending rates. Lastly, there were major downward
earnings revisions in sectors like banks, finance companies and
telecommunications.
The Indonesian market was flat in the first half of the fiscal year but gained
over 16% during the second half of the fiscal year. However, political unrest
coupled with a reduction in the country weighting within the rebalanced MSCI
indices sparked off heavy institutional selling in the Indonesian market in
June. Rioting in the streets in support of the ousted Megawati Sukamo, former
chairperson of PDI (effectively the only opposition party) ignited fears among
investors. The continued weak performance in exports, which led to an upward
revision in the current account deficit for 1996 and a widening of the Rupiah
band to accelerate the currency depreciation, were factors that reduced
investors' enthusiasm towards the market. This, together with increased cash
calls, anticipation of a second tranche placement of PT Telkom's shares weighed
down investors' sentiment in the market.
The Korean market turned in one of the worst performances with a decline of 16%.
The Korean market was plagued by concerns over trade and current account
deficits, which arose from lower growth of such major exports as semiconductors,
textiles and automobiles. The government's planned W 2.5 trillion new equity
supply in the third quarter of the fiscal year ended June 30, 1996 also
discouraged stock investment. The persistent weakness of the market was also
attributable to the liquidation of close to W 1 trillion of outstanding margin
positions.
The Phillipines, on the other hand, was one of the best performers during the
second half of the fiscal year, with a 23% rise, and ended the fiscal year with
a net gain of over 10%. The market ended the year with a strong second quarter
1996 of more than 16%. Upward earnings revision continued in
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
MORGAN STANLEY ASIAN GROWTH PORTFOLIO (CONTINUED)
the second quarter 1996, making it the market with the strongest earnings
momentum in Asia. On the economic front, GNP grew to 6.2% in the first quarter
of 1996 versus 5.7% in the fourth quarter of 1995, and interest rates inched up
slightly on the T-bill auction. Moreover, index-linked buying helped the market,
led by Petron which rose 33% this quarter. Mid-cap and small-cap stocks took a
breather from the heavy rally over the last few months.
The Taiwan market suffered during the first half as a result of the tiff over
reunification with China. The Chinese missiles caused nervous selling. After the
elections in March 1996, reconciliation dominated the dialog between the two
countries. This "cooling off" brought confidence back to the market, which
surged over 36% during the second half of the fiscal year, ending the year with
a net gain of 24%. The Central Bank continued to ease monetary policy. Money
supply growth began to pick up after a period of contraction. The market
rebounded sharply in April following the easing of cross-strait tensions and on
news that MSCI was proposing to include Taiwan in its indices. The market saw
moderate profit-taking in May, before another wave of buying in June sent the
index up another 13% when Taiwan's weighting in the MSCI indices turned out to
be higher than what most investors had expected.
After a dismal 16% decline during the first half of the fiscal year, the Indian
market gained an impressive 24% as political succession became clearer.
Valuations became attractive after the earlier decline and the new government
promised further reforms. The market rally was encouraged by Prime Minister
Gowda's plans to continue with liberalization and reforms. The market was lifted
further by strong corporate results.
In China, earnings for 1995 were below analysts' expectations and austerity
measures were blamed for the earnings shortfall. Since then, the authorities
have selected 300 companies which will be given priority loans in the second
half of 1996, signifying a fiscal stimulus. In addition, news that the Guangdong
government wanted to revive the stock market led to further buying frenzy. The
MSCI China Free Index ended the quarter virtually unchanged, while the Shenzhen
and Shanghai Stock Indices rose 21% and 5%, respectively.
155
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO
Comparison of change in value of $10,000 investment in
Morgan Stanley Worldwide High Income Portfolio, the J.P. Morgan Emerging Market
Bond Index, and a composite index consisting of 50% of the J.P. Morgan
Emerging Market Bond Index and 50% of Lehman Brothers Aggregate Bond Index
[GRAPH APPEARS HERE]
50% JP Morgan
Emerging Mkt. Bond
JP Morgan 50% Lehman Bros.
Date Morgan Stanley Emerging Market Aggregate Bond
- ---- Worldwide High Income Bond Index Index
--------------------- --------------- ------------------
6/15/94 $10,000 $10,000 $10,000
Jun 94 $10,000 $ 9,580 $ 9,784
Dec 94 $ 9,500 $ 9,731 $ 9,909
Jun 95 $10,400 $10,628 $10,935
Dec 95 $11,461 $12,319 $12,143
Jun 96 $12,315 $14,225 $12,987
. Average annual total return since inception: 10.73%.
. Total return for the fiscal year ended June 30, 1996: 18.41%.
. Performance relates to the Portfolio and does not reflect separate account
charges applicable to variable annuity certificates.
. Portfolio commenced operations on June 15, 1994. Index performances for the
month of June 1994 have been prorated to conform to the commencement date
of the Portfolio.
. Past performance is not predictive of future performance.
The last twelve months in the emerging markets debt have been gratifying.
Following a period when default probabilities in emerging markets rose
considerably, bond markets were becalmed by U.S. Treasury, International
Monetary Fund ("IMF") and World Bank support for Mexico and Argentina.
Multilateral support not withstanding, governments irrespective of their
political complexions deepened their commitments to reform and deregulation
across the emerging market universe.
156
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Portfolio Performance (continued)
June 30, 1996
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
A slow down in growth and declining inflation prompted a rally in G7 fixed
income markets rallied in the second half of 1995. Markets, particularly in the
U.S., questioned the slowdown thesis in early 1996 and the yield curve moved up
120-150 basis points during the course of the first half of 1996. In what was to
become a regular feature of the market, any signs of growth in the economy
caused sharp sell-offs in the U.S. bond markets during 1996. Emerging markets
debt did not trend with the U.S. bond market in 1996. Improving credit stories
in emerging market countries successively counteracted the negative influence of
rising interest rates. Emerging market debt continues to be viewed with
skepticism and therefore remains mispriced and offers potential above average
risk adjusted returns. Its gradual acceptance by the mainstream institutional
investors should drive spreads lower as the market becomes more efficient.
The broadly diversified nature of the portfolio, both in terms of credit and
country risks, has reduced volatility and at the same time captured attractive
returns available in the market. The portfolio has been defensively positioned
to minimize the affect of rising rates.
The nonperforming loans of Russia, Panama and Peru and the high-yielding sector,
comprising of Venezuela and Ecuador, outperformed during 1996. Investors were
attracted by the possibility of dramatic spread tightening and high yields.
Among the major Latins, Brazil outperformed Argentina and Mexico on the back of
hopes that the politicians would deliver on constitutional and structural
reforms. The corporate Ecuador sector rallied as corporations regained access to
the capital markets and domestic economies bounced back from recessions in 1995.
Mexican external debt trailed the market despite being able to refinance its
1996 amortizations at very attractive terms. Lingering concerns over the fragile
economic recovery in the domestic non-tradable sector and the need for an
adjustment in the nominal value of the exchange rate made investors shy away
from Mexican bonds. The domestic political situation continues to warrant a
close watch as the investigation of various financial scandals could unearth all
kinds of skeletons in the cupboards of the ruling elites.
Based on the prospects of an economic rebound in 1996, Argentine assets rallied
in the last quarter of 1995 but underperformed the market in 1996, despite signs
that an economic recovery was underway. We reduced our allocation to Argentina
marginally in 1996 as tax receipts continued to stagnate and the fiscal targets
agreed to with the IMF continued to look ambitious. High unemployment and low
consumer confidence continue to be a drag on the recovery. Despite abundant
liquidity in the banking system, a consumption and trade led economic recovery
is taking
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The Legends Fund, Inc.
Portfolio Performance (continued)
June 30, 1996
MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO (CONTINUED)
a long time to take hold. Unless a durable and sustained recovery becomes a
reality in the second half of 1996, Argentina faces a difficult economic future
in the months ahead. Rising U.S. interest rates and a firm dollar will prove to
be a considerable headwind for the currency convertibility plan to weather. We
do not anticipate making any changes to our allocation to Argentina in the
immediate future.
Brazil came under close scrutiny as a leading academic questioned the
sustainability of the "Real Plan." (Brazil changed its currency to the Real in
late 1994.) Questions related to its burgeoning internal debt and overvalued
exchange rates led some to draw parallels with Mexico's situation in 1994. We do
not believe that Brazil and Mexico should be put in the same basket. Brazil's
economic performance is far less dependent on external capital, (in fact it
could be argued that a withdrawal of short-term capital will probably be of
benefit) and the overvaluation of its currency less significant, for any
comparisons to Mexico to setoff any alarm bells at this juncture. There is no
doubt that the long-run sustainability of the Real Plan requires a fiscal
adjustment. Political wrangling should not be allowed to derail the process of
stabilization. Progress towards implementing a fiscal adjustment remains one of
the elements that we would be watching for to justify maintaining our allocation
to Brazil. We increased our allocations toward the end of the quarter as the
Brazilian administration sought to counteract market pressure related to the
stagnation of its various reform proposals in the legislature by becoming more
ambitious in the fields of privatization and deregulation of the economy. Our
allocations to Brazil have remained largely unchanged for most of the year.
We increased exposure to Russian bonds because of expected economic
stabilization and relative political stability after a long period of economic
transition. To finance deficits and attract foreign capital, Russia would need
to normalize relations with its external creditors.
The high yielding markets of Ecuador and Bulgaria witnessed volatility as
Ecuador braced for the second round of its presidential elections and Bulgaria
coped with economic distress after swallowing the bitter pill of an IMF program.
Despite a negative U.S. rate environment in first half of 1996, emerging debt
has performed well. Improvement in economic fortunes of most of the countries
included in the universe has delivered handsome returns. What is underway is the
dramatic rerating of this asset class, a process that was interrupted by the
Mexican crisis of 1994. Barring changes in the economic outlook of the various
countries, this process has not yet been finished.
158
<PAGE>
Appendix A
OPTIONS AND FUTURES
Certain Portfolios may use the following Hedging Instruments:
Options on Equity and Debt Securities and Foreign Currencies -- A call option is
a short-term contract pursuant to which the purchaser of the option, in return
for a premium, has the right to buy the security or currency underlying the
option at a specified price at any time during the term of the option. The
writer of the call option, who receives the premium, has the obligation, upon
exercise of the option during the option term, to deliver the underlying
security or currency against payment of the exercise price. A put option is a
similar contact that gives its purchaser, in return for a premium, the right to
sell the underlying security or currency at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option during the option term, to buy the
underlying security or currency at the exercise price.
Options on Securities Indexes -- A securities index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of those securities. A securities index option operates in the same way
as a more traditional stock option, except that exercise of a securities index
option is effected with cash payment and does not involve delivery of
securities. Thus, upon exercise of a securities index option, the purchaser will
realize, and the writer will pay, an amount based on the difference between the
exercise price and the closing price of the securities index.
Stock Index Futures Contracts -- A stock index futures contract is a bilateral
agreement pursuant to which one party agrees to accept, and the other party
agrees to make, delivery of an amount of cash equal to a specified dollar amount
times the difference between the stock index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the stocks comprising the index is made. Generally,
contracts are closed out prior to the expiration date of the contract.
Interest Rate and Foreign Currency Futures Contracts -- Interest rates and
foreign currency futures contracts are bilateral agreements pursuant to which
one party agrees to make, and the other party agrees to accept, delivery of a
specified type of debt security or currency at a specified future time and at a
specified price. Although such futures contracts by their terms call for actual
delivery or acceptance of debt securities or currency, in most cases, the
contracts are closed out before the settlement date without the making or taking
of delivery.
A-1
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PART C
OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements and Report of Independent Auditors (included
in Part B of the Registration Statement):
Report of Ernst & Young LLP, independent auditors
Statements of Assets and Liabilities as of June 30, 1996
Statements of Operations for the fiscal year ended June 30, 1996
Statements of Changes in Net Assets for the fiscal periods ended
June 30, 1996 and 1995
Financial Highlights for fiscal periods since 1993*
Schedules of Investments as of June 30, 1996
Notes to Financial Statements
- -----------------------
* Also included in Part A of the Registration Statement
(b) Exhibits:
1.(a). Articles of Incorporation of The Legends Fund, Inc. (formerly
Integrity Series Fund, Inc.) (the Fund), the Registrant (1)
(b). Articles of Amendment (2)
(c). Articles Supplementary (2)
(d). Articles Supplementary filed as of June 14, 1994 (3)
(e). Articles of Amendment
2. By-Laws of the Fund (1)
3. Not applicable
4. See generally Articles V, VII, VIII and IX of the Articles of
Incorporation and Articles I, IV, VII and VIII of the Bylaws,
incorporated herein by reference.
5(a)(i) Management Agreement between the Fund and Integrity Life
Insurance Company (Integrity), assumed by ARM Capital
Advisors, Inc. (ARM Capital) on February 1, 1996. (3)
(a)(ii) Amendment to Management Agreement. (3)
(b)(i) Sub-Advisory Agreement between Integrity and Dreman Value
Advisors, Inc. (Dreman Value Portfolio) (5)
(b)(ii) Sub-Advisory Agreement between Integrity and Harris Bretall
Sullivan & Smith, Inc. (Harris Bretall Sullivan & Smith
Equity Growth Portfolio) (3)
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(b)(iii) Sub-Advisory Agreement between Integrity and Morgan Stanley Asset
Management Inc. (Morgan Stanley Asian Growth Portfolio) (3)
(b)(iv) Sub-Advisory Agreement between Integrity and Morgan Stanley Asset
Management Inc. (Morgan Stanley Worldwide High Income Portfolio)
(3)
(b)(v) Sub-Advisory Agreement between Integrity and Nicholas-Applegate
Capital Management (Nicholas-Applegate Balanced Portfolio) (3)
(b)(vi) Sub-Advisory Agreement between Integrity and Renaissance
Investment Management (Renaissance Balanced Portfolio) (3)
(b)(vii) Sub-Advisory Agreement between Integrity and Zweig/Glaser
Advisers (Zweig Asset Allocation Portfolio) (3)
(b)(viii) Sub-Advisory Agreement between Integrity and Zweig/Glaser
Advisers (Zweig Equity (Small Cap) Portfolio) (3)
(b)(ix) From of Sub-Advisory Agreement between ARM Capital and J.P.
Morgan Investment Management Inc. (Pinnacle Fixed Income
Portfolio) (5)
6. Distribution Agreement between the Fund and SBM Financial
Services, Inc. (SBMFS) (4)
7. Not applicable
8. (a). Custody, Recordkeeping and Agency Agreement between the Fund and
Investors Fiduciary Trust Company, as amended (3)
(b). Forms of Foreign Sub-Custody Agreement (2)
9. (a). Fund Participation Agreement with Integrity (3)
(b). Fund Participation Agreement with National Integrity Life
Insurance Company (National Integrity) (3)
10. Opinion and Consent of Shereff, Friedman, Hoffman & Goodman (2)
11. Consent of Ernst & Young LLP, Independent Auditors
12. Not applicable
13. Not applicable
14. Not applicable
15. Not applicable
16. Not applicable
17. Financial Data Schedule
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18. Powers of Attorney for Theodore S. Rosky and John Katz (3)
- -------------
(1) Incorporated by reference to the Fund's Registration Statement on Form
N-1A filed on August 4, 1992 (File Nos. 33-50434 and 811-7084).
(2) Incorporated by reference to the Fund's Pre-Effective Amendment No. 1
to the Registration Statement filed on November 12, 1992 (File Nos.
33-50434 and 811-7084).
(3) Incorporated by reference to the Fund's Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A filed on October 12, 1994
(File Nos. 33-50434 and 811-7084).
(4) Incorporated by reference to the Fund's Post-Effective Amendment No. 5
to the Registration Statement on Form N-1A filed on October 30, 1995
(File Nos. 33-50434 and 811-7084).
(5) Incorporated by reference to the Fund's Post-Effective Amendment No. 6
to the Registration Statement on Form N-1A filed on March 4, 1996
(File Nos. 33-50434 and 811-7084).
ITEM 25. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
Separate Account II of Integrity and Separate Account II of National
Integrity Life Insurance Company (National Integrity) own all of the outstanding
shares of common stock of Registrant. Fund shares are voted by Integrity and
National Integrity in accordance with instructions received from their
respective variable annuity contractowners who allocate contributions to the
Fund.
Integrity, an Ohio stock life corporation, owns 100% of the voting
securities of National Integrity, a New York stock life corporation. The voting
securities of Integrity are 100% owned by Integrity Holdings, Inc., a Delaware
corporation which is a holding company engaged in no active business. The voting
securities of Integrity Holdings, Inc. are 100% owned by ARM Financial Group,
Inc. (ARM Financial), a Delaware corporation which is a holding company. ARM
Financial also owns 100% of the voting stock of SBMFS, a Minnesota corporation
which is the Distributor of the Fund, and 100% of Integrity Financial Services,
Inc., a New York Corporation, both of which are registered with the SEC as a
broker-dealer and are members of the National Association of Securities Dealers,
Inc. In addition, ARM Financial owns 100% of the stock of ARM Capital Advisors,
Inc., a New York corporation registered with the SEC as an investment adviser;
100% of State Bond and Mortgage Life Insurance Company, a Minnesota stock life
corporation; 100% of SBM Certificate Company, a Minnesota corporation registered
with the SEC as a face amount certificate company; and 100% of ARM Transfer
Agency, Inc., a Delaware corporation. Approximately 90% of the common stock of
ARM Financial is owned by wholly-owned subsidiaries of Morgan Stanley Group Inc.
as follows: 52.06% by Morgan Stanley Leveraged Equity Fund II, L.P., the general
partner of which is Morgan Stanley Leveraged Equity Fund II, Inc.; 33.89% by
Morgan Stanley Capital Partners III, L.P., 1.0% by Morgan Stanley Capital
Investors, L.P., and 3.62% by MSCP III 892 Investors, L.P., the General Partner
for all of which is MSCP III, L.P. The General Partner of MSCP III, L.P. is
Morgan Stanley Capital Partners III, Inc. Certain persons who are affiliated
with Morgan Stanley & Co. Incorporated, a subsidiary of Morgan Stanley Group
Inc., constitute a majority of the directors of ARM Financial. Oldarm, L.P., a
Kentucky limited partnership, New Arm, LLC, a Kentucky limited liability
company, and certain employees and management of ARM Financial own in the
aggregate approximately 10% of the voting stock of ARM Financial.
No person has the direct or indirect power to control Morgan Stanley
Group Inc. except insofar as he or she may have such power by virtue of his or
her capacity as a director or executive officer thereof.
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Morgan Stanley Group Inc. is publicly held; no individual beneficially owns more
than 5% of the common shares; however, approximately 31% of such shares are
subject to a stockholders' agreement or voting agreement among certain current
and former principals and employees of Morgan Stanley and its predecessor.
The following list shows the subsidiaries of Morgan Stanley Group Inc. All
subsidiaries are wholly owned by their immediate parent company and are
incorporated in Delaware, except where noted otherwise in parentheses.
MORGAN STANLEY SUB LISTING
MORGAN STANLEY GROUP INC.
Fourth Street Development Co. Incorporated
Fourth Street Ltd.
Jolter Investments Inc.
Morgan Rundle Inc.
MR Ventures Inc.
Morgan Stanley Advisory Partnership Inc.
Morgan Stanley Asset Management Inc.
Morgan Stanley Baseball, Inc.
Morgan Stanley Capital Group Inc.
Morgan Stanley Capital I Inc.
Morgan Stanley Capital (Jersey) Limited
Morgan Stanley Capital Partners III, Inc.
Morgan Stanley Capital Services Inc.
Morgan Stanley Commercial Mortgage Capital, Inc.
Morgan Stanley Commodities Management, Inc.
Morgan Stanley Derivative Products Inc.
Morgan Stanley Developing Country Debt II, Inc.
Morgan Stanley Emerging Markets Inc.
Morgan Stanley Equity Investors Inc.
Morgan Stanley Finance (Jersey) Limited
Morgan Stanley Global Advisory Services Inc.
Morgan Stanley Global Securities Services Incorporated
Morgan Stanley Bank Luxembourg S.A.
Morgan Stanley Insurance Agency Inc.
Morgan Stanley (Jersey) Limited
Morgan Stanley LEF I, Inc.
Morgan Stanley Leveraged Capital Fund Inc.
Morgan Stanley Leveraged Equity Fund II, Inc.
Morgan Stanley Capital Partners Asia Limited
Morgan Stanley Leveraged Equity Holdings Inc.
Morgan Stanley Market Products Inc.
Morgan Stanley Mortgage Capital Inc.
Morgan Stanley Real Estate Holdings, Inc.
Morgan Stanley Real Estate Holdings II, Inc.
Morgan Stanley Real Estate Investment Management Inc.
Morgan Stanley Real Estate Fund, Inc.
Morgan Stanley Real Estate Investment Management II, Inc.
Morgan Stanley Realty Incorporated
Brooks Harvey & Co., Inc.
Morgan Stanley Realty of California Inc.
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Morgan Stanley Realty of Illinois Inc.
Brooks Harvey of Florida, Inc.
Brooks Harvey & Co. of Hawaii, Inc.
Morgan Stanley Realty Japan Ltd.
BH-MS Realty Inc.
BH-MS Leasing Inc.
BH-Sartell Inc.
The Morgan Stanley Scholarship Fund, Inc. (Not-for-Profit)
Morgan Stanley Services Inc.
Morgan Stanley Technical Services Inc.
Morgan Stanley Technical Services MB/VC Inc.
Morgan Stanley Trust Company
MS Prospect & Co.
Morgan Stanley Venture Capital Inc.
Morgan Stanley Venture Capital II, Inc.
Morgan Stanley Ventures Inc.
Morstan Development Company, Inc.
Moranta, Inc.
Porstan Development Company, Inc.
MS 10020, Inc.
MS Data Services, Inc.
MS Financing Inc.
Morgan Stanley 750 Building Corp.
MS Tokyo Properties Ltd.
MS Urban Horizons, Inc.
MS Venture Capital (Japan) Inc.
MSCP III Holdings, Inc.
MSPL Co. Inc.
MSREF II, Inc.
MS/USA Leasing Inc.
PG Holdings, Inc.
PG Investors, Inc.
Pierpont Power, Inc.
Romley Computer Leasing Inc.
THE MORGAN STANLEY LEVERAGED EQUITY FUND II, L.P.
(The general partner of which is Morgan Stanley Leveraged Equity Fund II, Inc.)
American Italian Pasta Company
Amerin Corporation
Amerin Guaranty Corporation
ARM Financial Group, Inc.
CIMIC Holdings Limited
Coho Energy, Inc.
Consolidated Hydro, Inc.
Fort Howard Corporation
PageMart, Inc.
PSF Finance L.P.
Premium Standard Farms, Inc.
Jefferson Smurfit Corporation (U.S.)
Container Corporation of America
Jefferson Smurfit Corporation
Silgan Holdings Inc.
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<PAGE>
Silgan Corporation
Stanklav Holdings, Inc.
Sullivan Holdings, Inc.
Sullivan Communications, Inc.
Sullivan Graphics, Inc.
Tennessee Valley Steel Corporation
Waterford Wedgwood
Waterford Wedgwood plc
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
(The general partner of which is MSCP III, L.P., the general partner of which is
Morgan Stanley Capital Partners III, Inc.)
Highlands Gas, Inc.
TNT Coust, Inc.
CSH Holdings, Inc.
Cable Services Group, Inc.
The Compucare Company
MORGAN STANLEY & CO. INCORPORATED
HRJ Corporation
Morgan Stanley Flexible Agreements Inc.
Morgan Stanley Securities Trading Inc.
Morgan Stanley Stock Loan Inc.
MS Securities Services Inc.
NRSD Corporation
MORGAN STANLEY INTERNATIONAL INCORPORATED
Bank Morgan Stanley AG (Switzerland)
Morgan Stanley & Co. (Pty) Limited
Morgan Stanley A02T
Morgan Stanley Asia (China) Limited
Morgan Stanley Asia Holdings I Inc.
Morgan Stanley Asia Holdings II Inc.
Morgan Stanley Asia Holdings III Inc.
Morgan Stanley Asia Holdings IV Inc.
Morgan Stanley Asia Holdings V Inc.
Morgan Stanley Asia Limited
Morgan Stanley Asia (Singapore) Pte Ltd
Morgan Stanley Asia (Taiwan) Ltd.
Morgan Stanley Asset Management Singapore Ltd
Morgan Stanley Australia Limited
Morgan Stanley Canada Limited
Morgan Stanley Capital SA
Morgan Stanley Capital Group (Singapore) Pte Ltd
Morgan Stanley Capital (Luxembourg) S.A.
Morgan Stanley Developing Country Debt, Ltd. (Bermuda)
Morgan Stanley Financial Services Beteiligungs GmbH
Morgan Stanley Futures (Hong Kong) Limited
Morgan Stanley Futures (Singapore) Pte Ltd
Morgan Stanley Group (Europe) Plc
Morgan Stanley Asset Management Limited
Morgan Stanley Capital Group Limited
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<PAGE>
Morgan Stanley (Europe) Limited
Morgan Stanley Finance plc
Morgan Stanley Properties Limited
Morgan Stanley Property Management (UK) Limited
Morgan Stanley Services (UK) Limited
Morgan Stanley UK Group
Morgan Stanley & Co. International Limited
Morgan Stanley International Nominees Limited
Morgan Stanley & Co. Limited
Morgan Stanley Securities Limited
Morstan Nominees Limited
MS Leasing UK Limited
MS Volatility Fund N.V.
Morgan Stanley Hong Kong Nominees Limited
Morgan Stanley Hong Kong Securities Limited
Morgan Stanley International Insurance Ltd.
Morgan Stanley Investment Advisory Co., Limited
Morgan Stanley Japan (Holdings) Ltd.
Morgan Stanley Japan Limited
Morgan Stanley Latin America Incorporated
MS Carbocol Advisors Inc.
Morgan Stanley Mauritius Company Limited
Morgan Stanley Asset Management India Private Limited
Morgan Stanley India Securities Private Limited
Morgan Stanley Offshore Investment Company Ltd. (Cayman Islands)
Morgan Stanley Overseas Services (Jersey) Limited
Morgan Stanley Pacific Limited (Hong Kong)
Morgan Stanley S.A. (France)
Morgan Stanley SICAV Management S.A. (Luxembourg)
Morgan Stanley (Structured Products) Jersey Limited
MS Italy (Holdings) Inc.
Banca Morgan Stanley S.p.A.
MS LDC, Ltd.
MSL Incorporated
ITEM 26. Number of Holders of Securities
-------------------------------
As of October 25, 1996 there were two record owners of securities registered
pursuant to this Registration Statement.
ITEM 27. Indemnification
---------------
Articles of Incorporation of the Fund. The Articles of Incorporation of the
Fund provide in substance that no director or officer of the Fund shall be
liable to the Fund or its shareholders for money damages, unless the director or
officer is subject to liability by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of duties in the conduct of his or her
office.
By-Laws of the Fund. The By-Laws of the Fund provide for the
indemnification of present and former officers and directors of the Fund against
liability by reason of service to the Fund, unless the officer or director is
subject to liability by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office (Disabling Conduct). No
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<PAGE>
indemnification shall be made to an officer or director unless there has been a
final adjudication on the merits, a dismissal of a proceeding for insufficiency
of evidence of Disabling Conduct, or a reasonable determination has been made
that no Disabling Conduct occurred. The Fund may advance payment of expenses
only if the officer or director to be indemnified undertakes to repay the
advance unless indemnification is made and if one of the following applies: the
officer or director provides a security for his or her undertaking, the Fund is
insured against losses from any lawful advances, or a reasonable determination
has been made that there is reason to believe the officer or director ultimately
will be entitled to indemnification.
Insurance. The directors and officers of the Fund, ARM Capital, as
investment adviser, and SBMFS, as distributor, are insured under a policy issued
by American International Specialty Lines Insurance Company. The annual limit on
such policy is $2 million.
By-Laws of ARM Capital. The By-Laws of ARM Capital provide for the
indemnification by ARM Capital of directors and officers of ARM Capital and of
any person serving at the request of ARM Capital as a director or officer of
another corporation and permits the payment of expenses for covered persons.
Thus, the officers and directors of the Fund, ARM Capital and SBMFS are
indemnified by ARM Capital for their services in connection with the Fund to the
extent set forth in the By-Laws.
ARM Capital's By-Laws provide, in Article IX, as follows:
Section 9.01 Indemnification. (a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, he had reasonable cause to believe
that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
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<PAGE>
fairly and reasonably entitled to indemnity for such expenses which Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Section 9.01(a) and (b) of
these By-laws, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
(d) Any indemnification under Section 9.01(a) and (b) of these By-laws
(unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section
9.01(a) and (b) of these By-laws. Such determination shall be made (i) by
the Board by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (iii) by
the stockholders of the Corporation.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of the action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation pursuant to this Article IX. Such expenses
(including attorneys' fees) incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the Board deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, other Sections of this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to
action in an official capacity and as to action in another capacity while
holding such office.
(g) For purpose of this Article IX, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers,
employees or agents so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, shall stand in the same position under the provisions
of this Article IX with respect to the resulting or surviving corporation
as he would have with respect to such constituent corporation if its
separate existence had continued.
(h) For purposes of this Article IX, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan; and references to "serving at the request of the Corporation" shall
include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves service by, such director,
officer,
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<PAGE>
employee or agent with respect to any employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article IX.
(i) In indemnification and advancement of expenses provided by, or granted
pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
Section 9.02 Insurance for Indemnification. The Corporation may purchase
and maintain insurance on behalf of or for any person who is or was a
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not
the Corporation would have the power to indemnify him against such
liability under the provisions of Section 145 of the General Corporation
Law.
By-Laws of SBMFS. The By-Laws of SBMFS, the principal underwriter for the
Fund, provide in Section 4 as follows:
Section 4.01 Indemnification. The corporation shall indemnify its
officers and directors for such expenses and liabilities, in such
manner, under such circumstances, and to such extent, as required or
permitted by Minnesota Statutes, Section 302A.521, as amended from
time to time, or as required or permitted by other provisions of law.
Agreements. The Fund and SBMFS, including each director, officer and
controlling person of the Fund and SBMFS, are entitled to indemnification
against certain liabilities as described in Article VIII of the Participation
Agreement filed as Exhibit 9(b) to this Registration Statement, except that the
Fund may not indemnify directors, officers and controlling persons who are its
Affiliated persons, as defined in Section 2(a)(3) of the 1940 Act. Certain
officers and directors of the Fund and SBMFS are officers and directors of
Integrity and National Integrity (see Item 28 of this Part C).
Undertaking
- -----------
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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ITEM 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
ARM Capital, the Fund's investment adviser, is a registered investment
adviser providing individual discretionary investment management services and
investment advisory services to various categories of institutional and
individual clients. The names of the officers and directors of ARM Capital, and
their business activities during the past two fiscal years, are set forth below.
The principal business address of ARM Financial, the parent of ARM Capital, is
515 W. Market Street, 8th Floor, Louisville, Kentucky 40202, the principal
business address of Morgan Stanley Group Inc., ARM Financial's ultimate parent,
is 1221 Avenue of the Americas, New York, New York 10020.
Name Business Activities in Past Two Fiscal Years
- ---- --------------------------------------------
John Franco Co-Chairman of the Board and Co-Chief Executive Officer of
ARM Capital since October 31, 1994; Co-Chief Executive
Officer and a director of ARM Financial since July 15,
1993; Chief Executive Officer of Franco Associates, Ltd.,
an affiliate of ARM Ltd. from its inception in March 1992
to its merger with ARM Ltd. on December 31, 1992; Chief
Executive Officer and a director of ICH Corporation,
Louisville, Kentucky from November 1989 to November 1991.
Martin H. Ruby Co-Chairman of the Board and Co-Chief Executive Officer of
ARM Capital since October 31, 1994; Co-Chief Executive
Officer and a director of ARM Financial since July 15,
1993; President and Managing Director of the ICH Capital
Management Group, ICH Corporation, Louisville, Kentucky
and the President of Constitution Life Insurance Co., the
accumulation product subsidiary of ICH Corporation from
May 1990 to January 1992.
Emad Zikry Director of ARM Capital since October 31, 1994; Executive
Vice President and Chief Investment Officer of ARM
Financial since December 1994; President of Kleinwort
Benson Investment Management from 1992 - 1994.
Peter S. Resnik Treasurer of ARM Capital since October, 1994; Treasurer of
ARM Financial since December 1993; worked in various
financial and operational capacities with ARM Ltd. from
1992 to December 1993.
Robert L. Maddox Chief Compliance Officer and Secretary of ARM Capital
since March 1996; Assistant General Counsel of ARM
Financial since October 1995; Legal Officer and Assistant
Counsel of Providian Corp. from 1994 - 1995.
Robert E. Mackey Chief Operating Officer of ARM Capital since March 1996;
Sr. Portfolio Manager and Client Services Manager of ARM
Capital since January 1995; Sr. Portfolio Manager, Client
Services Manager, and Managing Director of Kleinwort
Benson Investment Management from 1993 - 1994. Rose M.
Culbertson Tax Officer of ARM Capital since March 1996;
Tax Officer of ARM Financial since January 1993; Tax
Manager of Coopers & Lybrand from 1990 - 1993.
Barry G. Ward Chief Financial Officer and Controller of ARM Capital
since March 1996; Controller and Chief Financial Officer
of ARM Financial since October 1993; Audit Manager of
Ernst & Young LLP from 1989 - 1993.
Officers and Partners or Directors of the Sub-Advisers: The names of the
officers and partners or directors of the Sub-Advisers for the Portfolios of the
Fund, and their business activities during the past
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two fiscal years, are incorporated herein by reference to their respective Form
ADVs, as amended to the date of their most recent filing with the Securities and
Exchange Commission (SEC), as set forth below:
Morgan Stanley Asset Management Inc.: Form ADV dated June 2, 1995, SEC File No.
801-15757
Renaissance Investment Management: Form ADV dated September 8, 1995, SEC File
No. 801-50177
Zweig/Glaser Advisers: Form ADV dated July 31, 1995, SEC File No. 801-35094
Nicholas-Applegate Capital Management: Form ADV dated May 15, 1995, SEC File
No. 801-21442
Harris Bretall Sullivan & Smith, Inc.: Form ADV dated May 2, 1995, SEC File No.
801-7369
Dreman Value Advisors, Inc.: Form ADV dated September 21, 1995, SEC File No.
801-47879
J.P. Morgan Investment Management, Inc.: Form ADV dated December 26, 1995, SEC
File No. 801-21011
ARM Capital Advisors, Inc.: Form ADV dated June 19, 1995, SEC File No. 47942
ITEM 29. Principal Underwriters
(a) SBMFS is the principal underwriter for Fund shares.
(b) The names of the principal officers and directors of SBMFS, and their
positions with SBMFS and the Fund, are as follows:
<TABLE>
<CAPTION>
Name Position with SBMFS Position with the Fund
---- ------------------- ----------------------
<S> <C> <C>
Edward J. Haines President and Director President
*William Guth Operations Officer None
*David L. Anders Marketing Officer None
John R. McGeeney Compliance Officer, Secretary, None
General Counsel and Director
Barry G. Ward Controller Controller
Peter S. Resnik Treasurer Treasurer
Rose M. Culbertson Tax Officer Tax Officer
</TABLE>
The principal business address of each person listed above is 515 W. Market
Street, 8th Floor, Louisville, Kentucky 40202, except that the principal
business address of the persons marked with an asterisk is 200 E. Wilson Bridge
Road, Worthington, Ohio 43085.
(c) Not applicable.
C-12
<PAGE>
ITEM 30. Location of Accounts and Records
The records required to be maintained by Section 31 (a) of the Investment
Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder, will be
maintained by ARM Financial, parent of ARM Capital, at its offices at 515 W.
Market Street, 8th Floor, Louisville, Kentucky 40202, or with its custodian,
Investors Fiduciary Trust Company, at its offices at 127 West 10th Street,
Kansas City, Missouri 64105.
ITEM 31. Management Services
Not applicable.
ITEM 32. Undertakings
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this amendment to Registration Statement
pursuant to Rule 485(a) under the Securities Act of 1933 and has duly caused
this amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 29th day of October, 1996.
THE LEGENDS FUND, INC.
(Registrant)
By: /s/ Edward Haines
--------------------------------------
Edward Haines
Title: President
Pursuant to the requirement of the Securities Act of 1933, this amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Edward Haines
- ----------------------- President
Edward Haines (Principal Executive Officer) October 29, 1996
/s/ Peter Resnik
- ----------------------- Treasurer
Peter Resnik (Principal Financial Officer) October 29, 1996
/s/ Barry G. Ward
- ----------------------- Controller
Barry G. Ward (Principal Accounting Officer) October 29, 1996
* Director October 29, 1996
- -----------------------
John Katz
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ John R. Lindholm
- ----------------------- Director October 29, 1996
John R. Lindholm
* Director October 29, 1996
- -----------------------
Theodore S. Rosky
</TABLE>
*This Amendment has been signed by each of the persons so indicated by me the
undersigned as Attorney-in-Fact.
By /s/ Kevin L. Howard
-------------------------
Attorney-in-Fact
C-14
<PAGE>
EXHIBIT 1(e)
ARTICLES OF AMENDMENT
OF
THE LEGENDS FUND, INC.
THE LEGENDS FUND, INC., a Maryland corporation (the Corporation) registered
as an open-end investment company under the Investment Company Act of 1940,
having its principal office c/o CT Corporation System, 32 South Street,
Baltimore, Maryland 21202, hereby certifies to the State Department of
Assessments and Taxation of Maryland that:
FIRST: The total number of shares of capital stock of all classes that the
Corporation has authority to issue is one billion (1,000,000,000) shares of
common stock, par value $.001 per share, with an aggregate par value of one
million dollars ($1,000,000).
SECOND: Pursuant to authority vested in the Board of Directors of the
Corporation by Article V of the Articles of Incorporation of the Corporation
(the Articles), the Board of Directors, by Articles Supplementary filed on June
14, 1994, previously duly designated and established the following ten classes
of shares:
Renaissance Balanced 55,000,000 shares
Zweig Asset Allocation 55,000,000 shares
Nicholas-Applegate Balanced 55,000,000 shares
Harris Bretall Sullivan & Smith Equity Growth 55,000,000 shares
Dreman Value 55,000,000 shares
Zweig Equity (Small Cap) 55,000,000 shares
Mitchell Hutchins Fixed Income 55,000,000 shares
Mitchell Hutchins Money Market 100,000,000 shares
Morgan Stanley Asian Growth 55,000,000 shares
Morgan Stanley Worldwide High Income 55,000,000 shares
The relative preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of all such classes were designated to be as set forth
in paragraph (b) of Section 1 of Article V of the Articles.
THIRD: Pursuant to the authority vested in the Board of Directors of the
Corporation by Article V of the Articles, and in accordance with Sections 2-605
and 2-607 of the Maryland General Corporation Law, the Board of Directors hereby
amends the Charter of the Corporation to change the name of the Mitchell
Hutchins Fixed Income Portfolio to the Pinnacle Fixed Income Portfolio, and to
change the name of the Mitchell Hutchins Money Market Portfolio to the ARM
Capital Advisors Money Market Portfolio, at in each case to become effective on
April 1, 1996.
<PAGE>
FOURTH: Accordingly, the ten classes of shares currently duly designated
and established by the Board of Directors are as follows:
Renaissance Balanced 55,000,000 shares
Zweig Asset Allocation 55,000,000 shares
Nicholas-Applegate Balanced 55,000,000 shares
Harris Bretall Sullivan & Smith Equity Growth 55,000,000 shares
Dreman Value 55,000,000 shares
Zweig Equity (Small Cap) 55,000,000 shares
Pinnacle Fixed Income 55,000,000 shares
ARM Capital Advisors Money Market 100,000,000 shares
Morgan Stanley Asian Growth 55,000,000 shares
Morgan Stanley Worldwide High Income 55,000,000 shares
FIFTH: The foregoing amendment to the Charter of the Corporation has been
advised and approved by the Board of Directors of the Corporation and is limited
to changes expressly permitted by Section 2-605 of the business corporation laws
of Maryland. The Corporation is registered as an open-end investment company
under the Investment Company Act of 1940.
IN WITNESS WHEREOF, the undersigned has signed these Articles of Amendment
in the Corporation's name and on its behalf and acknowledges that these Articles
of Amendment are the act of the Corporation, and states that to the best of his
knowledge, information and belief all matters and facts set forth herein
relating to the authorization and approval of the Articles Amendment are true in
all material respects and the this statement is made under the penalties of
perjury.
ATTEST: THE LEGENDS FUND, INC.
By: /s/ Sheri L. Bean By: /s/ Kevin L. Howard
---------------------------------- --------------------------
Sheri L. Bean, Assistant Secretary Kevin L. Howard, Secretary
(SEAL)
<PAGE>
EXHIBIT 11
Consent of Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights," "Other Information" and "Financial Statements of Fund" and to the
use of our report dated August 16, 1996, in the Post-Effective Amendment No. 7
to the Registration Statement (Form N-1A) and related Prospectus of The Legends
Fund, Inc.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
October 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 1
<NAME> RENAISSANCE BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 25,714,901
<INVESTMENTS-AT-VALUE> 26,983,102
<RECEIVABLES> 168,760
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 27,151,862
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48,509
<TOTAL-LIABILITIES> 48,509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,403,239
<SHARES-COMMON-STOCK> 2,139,600
<SHARES-COMMON-PRIOR> 2,327,611
<ACCUMULATED-NII-CURRENT> 758,801
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,673,112
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,268,201
<NET-ASSETS> 27,103,353
<DIVIDEND-INCOME> 217,318
<INTEREST-INCOME> 825,185
<OTHER-INCOME> 0
<EXPENSES-NET> 283,702
<NET-INVESTMENT-INCOME> 758,801
<REALIZED-GAINS-CURRENT> 2,972,263
<APPREC-INCREASE-CURRENT> (423,724)
<NET-CHANGE-FROM-OPS> 3,307,340
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 914,654
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 286,131
<NUMBER-OF-SHARES-REDEEMED> 548,725
<SHARES-REINVESTED> 74,583
<NET-CHANGE-IN-ASSETS> 71,158
<ACCUMULATED-NII-PRIOR> 914,654
<ACCUMULATED-GAINS-PRIOR> (299,151)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 183,375
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 283,702
<AVERAGE-NET-ASSETS> 28,211,583
<PER-SHARE-NAV-BEGIN> 11.61
<PER-SHARE-NII> .36
<PER-SHARE-GAIN-APPREC> 1.10
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.67
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FROM THE
ANNUAL REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 2
<NAME> ZWEIG ASSET ALLOCATION PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 37,251,772
<INVESTMENTS-AT-VALUE> 40,232,663
<RECEIVABLES> 31,782
<ASSETS-OTHER> 16,217
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,280,662
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,764
<TOTAL-LIABILITIES> 58,764
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 32,264,100
<SHARES-COMMON-STOCK> 2,850,008
<SHARES-COMMON-PRIOR> 2,820,443
<ACCUMULATED-NII-CURRENT> 610,426
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,447,909
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,899,463
<NET-ASSETS> 40,221,898
<DIVIDEND-INCOME> 683,324
<INTEREST-INCOME> 421,989
<OTHER-INCOME> 0
<EXPENSES-NET> 494,887
<NET-INVESTMENT-INCOME> 610,426
<REALIZED-GAINS-CURRENT> 4,692,015
<APPREC-INCREASE-CURRENT> (1,281,343)
<NET-CHANGE-FROM-OPS> 4,021,098
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 946,985
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 345,159
<NUMBER-OF-SHARES-REDEEMED> 386,701
<SHARES-REINVESTED> 71,107
<NET-CHANGE-IN-ASSETS> 3,485,737
<ACCUMULATED-NII-PRIOR> 946,985
<ACCUMULATED-GAINS-PRIOR> (244,106)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 355,357
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 494,887
<AVERAGE-NET-ASSETS> 39,484,073
<PER-SHARE-NAV-BEGIN> 13.02
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 1.21
<PER-SHARE-DIVIDEND> .33
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.11
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 3
<NAME> NICHOLAS-APPLEGATE BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 44,832,576
<INVESTMENTS-AT-VALUE> 49,827,401
<RECEIVABLES> 604,519
<ASSETS-OTHER> 38,746
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 50,470,666
<PAYABLE-FOR-SECURITIES> 948,639
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59,250
<TOTAL-LIABILITIES> 1,007,889
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,069,844
<SHARES-COMMON-STOCK> 3,374,014
<SHARES-COMMON-PRIOR> 3,475,691
<ACCUMULATED-NII-CURRENT> 924,428
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,473,680
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,994,825
<NET-ASSETS> 49,462,777
<DIVIDEND-INCOME> 275,313
<INTEREST-INCOME> 1,119,604
<OTHER-INCOME> 0
<EXPENSES-NET> 470,489
<NET-INVESTMENT-INCOME> 924,428
<REALIZED-GAINS-CURRENT> 6,092,935
<APPREC-INCREASE-CURRENT> (1,004,611)
<NET-CHANGE-FROM-OPS> 6,012,752
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 935,896
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 380,150
<NUMBER-OF-SHARES-REDEEMED> 550,111
<SHARES-REINVESTED> 68,284
<NET-CHANGE-IN-ASSETS> 3,682,166
<ACCUMULATED-NII-PRIOR> 935,896
<ACCUMULATED-GAINS-PRIOR> (1,619,255)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 312,334
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 470,489
<AVERAGE-NET-ASSETS> 48,051,385
<PER-SHARE-NAV-BEGIN> 13.17
<PER-SHARE-NII> .27
<PER-SHARE-GAIN-APPREC> 1.49
<PER-SHARE-DIVIDEND> .27
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.66
<EXPENSE-RATIO> .98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 4
<NAME> HARRIS BRETALL SULLIVAN & SMITH EQUITY GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 19,365,268
<INVESTMENTS-AT-VALUE> 23,814,826
<RECEIVABLES> 24,532
<ASSETS-OTHER> 6,912
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,846,270
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35,861
<TOTAL-LIABILITIES> 35,861
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,617,592
<SHARES-COMMON-STOCK> 1,643,237
<SHARES-COMMON-PRIOR> 1,275,266
<ACCUMULATED-NII-CURRENT> 5,649
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,737,610
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,449,558
<NET-ASSETS> 23,810,409
<DIVIDEND-INCOME> 179,605
<INTEREST-INCOME> 56,689
<OTHER-INCOME> 0
<EXPENSES-NET> 230,645
<NET-INVESTMENT-INCOME> 5,649
<REALIZED-GAINS-CURRENT> 1,737,610
<APPREC-INCREASE-CURRENT> 778,867
<NET-CHANGE-FROM-OPS> 2,522,126
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 17,603
<DISTRIBUTIONS-OF-GAINS> 152,435
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 726,912
<NUMBER-OF-SHARES-REDEEMED> 371,133
<SHARES-REINVESTED> 12,192
<NET-CHANGE-IN-ASSETS> 7,417,133
<ACCUMULATED-NII-PRIOR> 17,603
<ACCUMULATED-GAINS-PRIOR> 152,435
<OVERDISTRIB-NII-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 230,645
<AVERAGE-NET-ASSETS> 22,087,077
<PER-SHARE-NAV-BEGIN> 12.85
<PER-SHARE-NII> 0
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<PER-SHARE-DIVIDEND> .01
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 5
<NAME> DREMAN VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 15,366,085
<INVESTMENTS-AT-VALUE> 19,624,155
<RECEIVABLES> 55,022
<ASSETS-OTHER> 117,963
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,797,140
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,430
<TOTAL-LIABILITIES> 92,430
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,331,632
<SHARES-COMMON-STOCK> 1,218,326
<SHARES-COMMON-PRIOR> 863,732
<ACCUMULATED-NII-CURRENT> 252,188
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 862,820
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,258,070
<NET-ASSETS> 19,704,710
<DIVIDEND-INCOME> 387,786
<INTEREST-INCOME> 26,750
<OTHER-INCOME> 0
<EXPENSES-NET> 162,348
<NET-INVESTMENT-INCOME> 252,188
<REALIZED-GAINS-CURRENT> 862,820
<APPREC-INCREASE-CURRENT> 2,857,141
<NET-CHANGE-FROM-OPS> 3,972,149
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 190,236
<DISTRIBUTIONS-OF-GAINS> 110,864
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 517,405
<NUMBER-OF-SHARES-REDEEMED> 184,651
<SHARES-REINVESTED> 21,840
<NET-CHANGE-IN-ASSETS> 8,827,800
<ACCUMULATED-NII-PRIOR> 190,236
<ACCUMULATED-GAINS-PRIOR> 110,864
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85,287
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 163,250
<AVERAGE-NET-ASSETS> 15,315,847
<PER-SHARE-NAV-BEGIN> 12.59
<PER-SHARE-NII> .18
<PER-SHARE-GAIN-APPREC> 3.70
<PER-SHARE-DIVIDEND> .19
<PER-SHARE-DISTRIBUTIONS> .11
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.17
<EXPENSE-RATIO> 1.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 6
<NAME> ZWEIG EQUITY (SMALL CAP) PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUN-30-1995
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 10,365,111
<INVESTMENTS-AT-VALUE> 11,697,568
<RECEIVABLES> 36,919
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,734,487
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 36,368
<TOTAL-LIABILITIES> 36,368
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 9,400,588
<SHARES-COMMON-STOCK> 859,408
<SHARES-COMMON-PRIOR> 691,384
<ACCUMULATED-NII-CURRENT> 103,880
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 884,252
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,309,399
<NET-ASSETS> 11,698,119
<DIVIDEND-INCOME> 181,268
<INTEREST-INCOME> 74,550
<OTHER-INCOME> 0
<EXPENSES-NET> 151,938
<NET-INVESTMENT-INCOME> 103,880
<REALIZED-GAINS-CURRENT> 1,345,302
<APPREC-INCREASE-CURRENT> 190,585
<NET-CHANGE-FROM-OPS> 1,639,767
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 119,225
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 343,946
<NUMBER-OF-SHARES-REDEEMED> 185,655
<SHARES-REINVESTED> 9,733
<NET-CHANGE-IN-ASSETS> 3,664,327
<ACCUMULATED-NII-PRIOR> 119,325
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<NAME> PINNACLE FIXED INCOME PORTFOLIO
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<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
<SERIES>
<NUMBER> 10
<NAME> ARM CAPITAL ADVISORS MONEY MARKET PORTFOLIO
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<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
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<NUMBER> 11
<NAME> MORGAN STANLEY ASIAN GROWTH PORTFOLIO
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT TO SHAREHOLDERS FOR THE LEGENDS FUND, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000890454
<NAME> THE LEGENDS FUND, INC.
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<NUMBER> 12
<NAME> MORGAN STANLEY WORLDWIDE HIGH INCOME PORTFOLIO
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